CASH FLOW STATEMENT(AS – 3)
MEANING: Cash Flow Statement is a statement that shows flow of cash and cash equivalents during the period under report. The statement shows net increase or decrease of cash and cash equivalents under each activity separately (operating/ Investing/ Financing) and collectively.
Why Cash Flow Statement: It is possible for a firm to be highly profitable and not be able to pay dividends or invest in new equipment’s. It is possible for a firm to be highly profitable and not be able to service debt. It is also possible for a firm to be highly profitable and go bankrupt.
Consider the following Questions:
- You are a banker evaluating a loan request from a prospective customer. What is your primary concern when making a decision regarding approval or denial or the loan request?
- You are a wholesaler of goods and have been asked to sell your products on credit to a particular buyer. What is the major determining factor regarding approval or denial of the credit sale?
- You are an investor in a firm and rely on the receipt of regular cash dividends as part of your return on investment. What must the firm generate in order to pay dividends?
The answer of all the above questions is cash means whether the firm is able to generate so much of cash to pay its loan instalments, to pay the creditors and to pay dividends to the investors.
Types of Activities:
Lehman Brothers Holding Inc. is one of the oldest bank of USA. From the table it can find out that accounting income of the bank is increasing year by year but the cash income of the bank is decreasing year after year. It means that bank is earing profit in the books of accounts only but in actual, bank is not having any cash to pay its liabilities. So to pay its liabilities bank had to take loan year after year. And in 2007 due to non-generating of income in cash and due to heavy debts, the bank became insolvent.
Author:
Dr.Abhishek Maheswari
Assistant Professor (Accounting & Finance)
Asia-Pacific Institute of Management