Sunday, August 10, 2014

AHSEC - 12: Cash Flow Statement Important Questions for Feb' 2017 Exam

Unit – 10: Cash Flow Statement
Q.1. What is Cash Flow Statement? What are its objectives? Mention its uses and Limitations.                2012, 2015, 2016
Ans: Cash Flow Statement:  Cash­ flow is made up of two words i.e. Cash and Flow, whereas Cash means cash balance in hand including cash at bank balance, and Flow means changes (which may be increase or decrease) in the cash movements of the business. Cash Flow Statement is simply a summary of cash receipts and payments whereby reconciling the opening cash balance with the closing cash including bank balances in done.
Objectives of Cash Flow Statement                         2013, 2016
The Cash Flow Statement is prepared because of number of merits, which are offered by it. Such merits are also termed as its objectives. The important objectives are as follows:
Ø  To Help the Management in Making Future Financial Policies: The management can make its future financial policies and is in a position to know about surplus or deficit of cash.
Ø  To Help in taking Dividend Decisions: Cash Flow Statement is very helpful in declaring dividends etc.
Ø  To Help in devising the cash requirement:  Cash flow statement is helpful in devising the cash requirement for repayment of liabilities and replacement of fixed assets.
Ø  To Helps in predicting sickness of the business:  Cash flow is helpful in predicting sickness of the business with the help of different ratios.
Ø  To test management efficiency: Comparison of actual and budgeted cash flow statement will disclose the failure or success of management in managing cash resources.

Uses of Cash Flow Statement                                                            2016
Ø   Helps in devising the cash requirement:  Cash flow statement is helpful in devising the cash requirement for repayment of liabilities and replacement of fixed assets.
Ø  Helps the Management in Making Future Financial Policies: The management can make its future financial policies and is in a position to know about surplus or deficit of cash with the help of projected cash flow statement.
Ø  Efficient Cash Management: It helps in efficient management of cash resources which helps a company to maintain adequate cash balance to meet its liabilities.
Ø  Supplement to funds flow statement: Cash flow statement supplements the analysis provided by the funds flow statement as cash is a part of the working capital.
Ø  Test for the Management Decisions: Comparison of actual and budgeted cash flow statement will disclose the failure or success of management in managing cash resources.
LIMITATIONS OF CASH STATEMENT
Ø  Misleading comparison over a period of time: Just because company’s cash flow has increased in the current year, a company may not be better off than the previous year. Thus a comparison over a period of time can be misleading.
Ø  Not a substitute for an Income Statement: Cash flow statement cannot be equated with income statement because it considers only cash items. All non-cash items are ignored.
Ø  Historical in Nature: It is only an analysis of past transactions and hence historical in natures.
Ø  Accrual concept ignored: In cash flow statement, only cash transactions are recorded and all non-cash items are ignored. It ignores basic accounting concept, i.e., accrual concept.
Ø  Misleading inter-industry comparison: Inter-industry comparison of cash flow statement may be misleading because company with heavy capital investment will have more cash inflow than company with small capital investments.
Q.2. Explain the following terms with reference to Accounting Standard 3.
Ans: Cash comprises cash on hand and demand deposits with banks.
Cash Equivalents are short-term, highly liquid investments that are readily convertible cash. Examples of cash equivalents are: (a) treasury bills, (b) commercial paper, (c) money market funds and (d) Investments in preference shares and redeemable within three months.
Cash Flows are inflows and outflows of cash and cash equivalents. AS-3 requires a Cash Flow Statement to be prepared and presented in a manner that it shows cash flows from business transactions during a period classifying them into:
Operating Activities; (ii) Investing Activities; and (iii) Financing Activities.
Operating Activities: Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities.
Investing Activities: Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
Financing Activities: Financing activities are the activities that result in change in the size and composition of the owners’ capital (including preference) share capital in the case of a company) and borrowing of the enterprise.
Q.3. What are various classification of Cash flows? Give four examples of each.                               2013
Ans: AS-3 requires a Cash Flow Statement to be prepared and presented in a manner that it shows cash flows from business transactions during a period classifying them into:
(i) Operating Activities; (ii) Investing Activities; and (iii) Financing Activities.
Examples of Operating Activities: 2013 (Sources of cash flow)
Ø  Cash receipts from the sale of goods and rendering of services.
Ø  Cash receipts from royalties, fees, commission and other revenue.
Ø  Cash payments to suppliers of goods and services.
Ø  Cash payments to and on behalf of employees for wages, etc.
Examples of Investing Activities: 2013 (Sources of cash flow)
Ø  Cash payments to acquire fixed assets.
Ø  Cash receipts from the disposal of fixed assets (including intangibles).
Ø  Cash flow from purchase or sale of shares, warrants, or debt instruments of other enterprises.
Ø  Cash receipts from repayments of advances and loans made to third parties.
Examples of Financing Activities: (Sources of cash flow)
Ø  Cash proceeds from the issue of shares or other similar instruments.
Ø  Cash proceeds from the issue of debentures, loan notes, bonds and other short term borrowings.
Ø  Buy-back of equity shares.
Ø  Cash repayments of the amounts borrowed including redemption of debentures.

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