FAQs on Preparation of Cash Flow Statement - Cash Flow Statements, Cost Accounting Video Lecture - Cost Accounting - B Com
|1. What is a cash flow statement and why is it important in cost accounting?
Ans. A cash flow statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents. It provides information about the cash inflows and outflows of a company over a specific period of time. In cost accounting, a cash flow statement is important as it helps in assessing the liquidity, solvency, and overall financial health of a company. It allows cost accountants to analyze the sources and uses of cash, identify potential cash flow problems, and make informed decisions regarding budgeting, investment, and financing.
|2. How is a cash flow statement prepared in cost accounting?
Ans. To prepare a cash flow statement in cost accounting, the following steps are generally followed:
1. Determine the cash inflows from operating activities: This includes cash received from customers, interest received, and dividends received.
2. Determine the cash outflows from operating activities: This includes cash paid to suppliers, cash paid for operating expenses, interest paid, and income taxes paid.
3. Determine the cash inflows and outflows from investing activities: This includes cash received from the sale of assets and investments, and cash paid for the purchase of assets and investments.
4. Determine the cash inflows and outflows from financing activities: This includes cash received from issuing shares or loans, and cash paid for dividends, loan repayments, and share repurchases.
5. Calculate the net increase or decrease in cash: This is done by subtracting the total cash outflows from the total cash inflows.
6. Determine the opening and closing cash balances: The opening cash balance is the cash balance at the beginning of the period, and the closing cash balance is the cash balance at the end of the period.
|3. What are the three categories of cash flows in a cash flow statement?
Ans. The three categories of cash flows in a cash flow statement are:
1. Operating activities: This category includes cash flows from the primary activities of a company, such as cash received from customers and cash paid to suppliers and employees. It also includes interest received and interest paid.
2. Investing activities: This category includes cash flows from the purchase and sale of long-term assets, such as property, plant, and equipment. It also includes cash flows from investments in securities and other financial instruments.
3. Financing activities: This category includes cash flows from the issuance and repayment of debt, such as loans and bonds. It also includes cash flows from the issuance and repurchase of equity, such as shares and dividends paid to shareholders.
|4. How does a cash flow statement differ from an income statement in cost accounting?
Ans. A cash flow statement and an income statement serve different purposes in cost accounting:
- A cash flow statement focuses on the cash inflows and outflows of a company, providing information about the liquidity and cash position. It shows how cash is generated and used by the company over a specific period of time.
- An income statement, on the other hand, focuses on the revenue, expenses, and net profit or loss of a company. It provides information about the profitability of the company but does not take into account the timing of cash flows.
While both statements are important in cost accounting, they provide different perspectives on the financial performance of a company. The cash flow statement helps in assessing the cash flow management and liquidity, while the income statement helps in evaluating the profitability and operational efficiency.
|5. How can a cash flow statement be used for financial analysis in cost accounting?
Ans. A cash flow statement is a valuable tool for financial analysis in cost accounting. It can be used in the following ways:
1. Assessing liquidity: By analyzing the cash flows from operating activities, cost accountants can determine the ability of a company to meet its short-term obligations and manage its day-to-day operations. They can identify any cash flow problems and take necessary measures to improve liquidity.
2. Evaluating solvency: The cash flow statement provides insights into the cash flows from investing and financing activities, which helps in assessing the long-term financial health and solvency of a company. Cost accountants can identify the sources of cash inflows and outflows and evaluate the company's ability to repay its debts and invest in future growth.
3. Making investment decisions: Cost accountants can use the cash flow statement to evaluate the cash flows from investing activities, which provide information about the company's investments in assets and projects. This helps in making informed investment decisions and assessing the potential returns on investment.
4. Budgeting and forecasting: The cash flow statement provides information about the timing and amount of cash inflows and outflows, which is essential for budgeting and forecasting. Cost accountants can use this information to develop realistic budgets and financial projections for the future.
5. Comparing performance: By comparing the cash flow statements of different periods, cost accountants can assess the changes in cash flows and identify any trends or patterns. This helps in evaluating the financial performance of a company over time and comparing it with industry benchmarks and competitors.