CASH FLOW STATEMENT

Cash Flow Statement



Cash Flow Statement

Task 1

The Importance of Cash

Cash is the lifeblood of any company. Companies need cash for multitude of purposes. It bought raw materials from this cash, pay to its suppliers, and pay the wages of its employees. No firm can operate without having appropriate cash reserve in hand. Economics define three reasons for holding cash:

Transactions Motives

Most common purpose for holding cash is economic transactions. Individuals and firms need money to make transactions so they endeavour to hold sufficient level of cash in hand at all times. It also meets your liquidity requirements.

Precautionary Motives

Apart from transaction motives, entities both individuals and firms hold cash for emergency needs. For instance, a sudden increase in prices of basic raw material will need extra cash to meet the additional cost. It may also include uncertain bills or contingencies which will require the individual or the company to spend some extra money. This amount is usually held in the bank accounts and withdrawn only as per need basis.

Speculative Motives

Firms have to make a decision how they want to hold their excessive cash. Off course, there are many diverse methods, which can in brief divide it into it interest and non interest bearing assets. Ease of access and the interest rate are perhaps two key factors which affects the firm's decision. The speculative demand for cash is the amount of money which is kept to make a potential gains by purchasing appropriate assets.

Differences between Cash & Profit

Many of the individuals think of cash as profit. It is quite possible that companies which are profitable on one hand ends up bankrupt on the other hand. This is because cash is not always in the form of profits. Cash often refers to liquidity and if the company is holding sufficient liquidity, it can still sustain even if it is not making sufficient profitability levels.

Profit is the difference amount/ excessive of amount when cost of doing business is subtracted from revenue generated from doing the same business.

Profit and cash both has distinctive positions in financial statements. Profit is shown in the profit and loss statement calculated during the year while cash is shown in cash flow statement or forecast.

Cash is only marked in the cash flow statement when it is actually transacted. In other words, actual cash inflow or cash outflow during the year while profit may be recorded on the expected or amount promised to be received later in the future. In simple words, cash is recorded when it changes ownership. Profit is recorded on accrual basis.

Profitable business can still run out of cash. For example in case, the company has purchased fixed assets (property, plant or equipment), it would have to give away lots of cash to acquire the asset. Another common example of short cash is over trading. Companies in the expectations of making profits gets overall engaged in trading activities which deprived them out of cash thus causing liquidity problems. Companies used cash to pay off its creditors and wages to its ...