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Preparation of Cash flow Statement - Class 12, Accountancy Video Lecture | Accountancy Class 12 - Commerce

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FAQs on Preparation of Cash flow Statement - Class 12, Accountancy Video Lecture - Accountancy Class 12 - Commerce

1. What is a cash flow statement?
Ans. A cash flow statement is a financial statement that shows the inflows and outflows of cash in a business over a specific period of time. It provides information about where the cash is coming from (cash inflows) and where it is being used (cash outflows), including operating activities, investing activities, and financing activities.
2. How is a cash flow statement prepared?
Ans. To prepare a cash flow statement, the following steps are typically followed: 1. Start with the opening balance of cash and cash equivalents. 2. Identify the cash inflows from operating activities, such as sales revenue, interest received, and dividends received. 3. Determine the cash outflows from operating activities, such as payments to suppliers, salaries, and taxes. 4. Calculate the net cash flow from operating activities by subtracting the cash outflows from the cash inflows. 5. Identify the cash inflows and outflows from investing activities, such as the purchase or sale of assets or investments. 6. Identify the cash inflows and outflows from financing activities, such as issuing or repaying loans or issuing or buying back shares. 7. Calculate the net increase or decrease in cash and cash equivalents by summing the net cash flows from operating, investing, and financing activities. 8. Add the opening balance of cash and cash equivalents to the net increase or decrease to arrive at the closing balance of cash and cash equivalents.
3. Why is a cash flow statement important?
Ans. A cash flow statement is important because it provides insights into the liquidity and cash position of a business. It helps in assessing the ability of a company to generate cash, meet its financial obligations, and pursue its growth strategies. It also helps in identifying the sources and uses of cash, enabling management to make informed decisions regarding cash management, investment opportunities, and financing options.
4. What is the difference between cash flow and profit?
Ans. Cash flow and profit are two different financial metrics. Profit refers to the excess of revenue over expenses during a specific period, as calculated using the accrual basis of accounting. It represents the increase in the overall wealth of a company. On the other hand, cash flow refers to the actual inflow and outflow of cash in a business. It represents the liquidity and availability of cash to meet immediate financial obligations. While profit is important for measuring the long-term sustainability of a business, cash flow is crucial for its short-term financial health and operational capabilities.
5. How can a cash flow statement be used for decision making?
Ans. A cash flow statement can be used for decision making in the following ways: 1. Assessing liquidity: By analyzing the cash flow statement, management can determine the availability of cash to meet short-term obligations and make necessary adjustments to improve liquidity. 2. Evaluating investment opportunities: Cash flow from investing activities provides insights into the cash spent on acquiring or selling assets. This information helps in assessing the profitability and feasibility of investment opportunities. 3. Planning financing activities: Cash flow from financing activities highlights the cash generated or used for financing purposes. It helps in planning debt repayments, equity issuances, and dividend payments. 4. Identifying cash flow issues: By comparing cash flow from operating activities with net profit, management can identify any discrepancies that may indicate potential cash flow issues, such as slow collections from customers or excessive inventory. 5. Assessing cash generation capability: The overall cash flow pattern helps in evaluating the ability of a business to generate cash from its operations, providing insights into its financial sustainability and growth potential.
41 videos|106 docs|56 tests
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