disadvantage of cash flow.docx

7/24/2019 disadvantage of cash flow.docx

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PROJECT REPORT

(Submitted for the degree of B.com Honours in Accounting &

Finance under the University of Calcutta)

itle of the !ro"ect

ACC#U$%$ SA$'A'()

SUB*%+' B,

$ame of the candidate - a"nandinia"a

egistration no - //01/22/13/451/

University oll $o - ///015/13300

College roll no - /33/

$ame of the college - Surendranath College for 6omen

SU!+7%S+' B,

$ame of the Su8erviser - !rof. SA*%A BA$+9++

$ame of the college - Surendranath College for 6omen

MONTH AND YEAR OF SUBMISSION

Feb, 2016


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A$$+:U+ ; /

SU!+7%S+ACCOUNTIN# STANDARD$%& CASH F'O() =hich she is

submitting? is her genuine and original =or to the best of myno=ledge.

!lace - Signature -

'ate - $ame - P*+. Sa-ia

Bae*jee

'egisnation -

$ame of the college -SU+$'A$AH C#@@++ F#

6#*+$


3/29


4/29

AC$#6@+'+*+$

% o=e my heart1felt gratitude? regard and res8ect to myever beloved su8ervisor? P*+ Sa-ia Bae*jee,'e8t. of commerce? Surendranath College for 6omen? for

his valuable guidance? generous hel8? co1o8eration and

constant ins8iration through out the =or of the 8ro"ect.

#n account of his timely su8ervision it =ould have been

8ossible on my 8art to com8lete the 8ro"ect =or =ith in

due course of time.

% most res8ectfully acno=ledge my dee8 sense of

gratitude to my hon


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CONTENTS

CHAPTER

HEADIN#S PA#E

NO.CHA!+ / I*+!i+

/1- Basic conce8t of the

8ro"ect

a)%ntroduction of

accounting standard

b)'enation of cash Io=

c)%m8ortance of the8ro"ect

/ ;

/

/

2 1

CHA!+ 2 Objei3es a!

Me4+!+5+7

a)#b"ectives of cash Io=b)*ethodology of the study

c)@imitations of cash Io=

J 1 K

J 1 5

5 1 0

0 1 K

CHA!+ C+e8a5

*a-e9+*"

a)Conce8t

b)Advantage of cash

Io=

c)'isadvantage of cash

Io=

d)Sco8e of cash Io=

e)y8es of cash Io=

L 1

/5

L

L 1 4

4

/3

/3 1

/5

CHA!+ J P*eseai+ + !aa,

aa57sis a! 8*+je

:!i

a)Analysis of An"u @td

/0 1 /4


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CHA!+ 5 C+5si+ a!

Re+--e!ai+

a)Conclusion

b)ecommendation

23 1 2/

CHA!+ 0 Bibi5i+*a847 a!

Ree*ees

22

INTRODUCTION

ACC#U$%$ SA$'A'

Indian Accounting Standards (abbreviated as India AS) in India accountingstandards were issued under the supervision and control of AccountingStandards Board (ASB), which was constituted in the year 1977 ASB is aco!!ittee under Institute of "harted Accountants of India(I"AI)

Accounting Standards is to re!ove variations in the treat!ent of severalaccounting aspects and to bring about standardi#ation in presentation

$here are %& Accounting standard in which I have choosen AccountingStandard (%) "AS' *+

.De:ai+ + Cas4 F5+9

%ncomings and outgoings of cash? re8resenting the o8eratingactivities of an organisation.

%n accounting? cash Io= is the diGerence in amountof cashavailable at the beginning of a 8eriod(o8ening balance) and theamount at the end of that 8eriod (closing balance). %tis called8ositive if the closing balance is higher than the o8ening

balance? other=ise called negative. Cash Io= is increased by(/)sellingmoregoodsor services? (2) selling anasset? ()reducing costs? (J) increasing the selling 8rice? (5) collectingfaster? (0)8ayingslo=er? (K) bringing in more eDuity? or (L) tainga loan.
http://www.businessdictionary.com/definition/accounting.htmlhttp://www.businessdictionary.com/definition/amount.htmlhttp://www.businessdictionary.com/definition/period.htmlhttp://www.businessdictionary.com/definition/opening-balance.htmlhttp://www.businessdictionary.com/definition/closing-balance.htmlhttp://www.businessdictionary.com/definition/call.htmlhttp://www.businessdictionary.com/definition/seller.htmlhttp://www.businessdictionary.com/definition/goods.htmlhttp://www.businessdictionary.com/definition/services.htmlhttp://www.businessdictionary.com/definition/asset.htmlhttp://www.businessdictionary.com/definition/costs.htmlhttp://www.businessdictionary.com/definition/selling-price.htmlhttp://www.businessdictionary.com/definition/payer.htmlhttp://www.businessdictionary.com/definition/equity.htmlhttp://www.businessdictionary.com/definition/loan.htmlhttp://www.businessdictionary.com/definition/amount.htmlhttp://www.businessdictionary.com/definition/period.htmlhttp://www.businessdictionary.com/definition/opening-balance.htmlhttp://www.businessdictionary.com/definition/closing-balance.htmlhttp://www.businessdictionary.com/definition/call.htmlhttp://www.businessdictionary.com/definition/seller.htmlhttp://www.businessdictionary.com/definition/goods.htmlhttp://www.businessdictionary.com/definition/services.htmlhttp://www.businessdictionary.com/definition/asset.htmlhttp://www.businessdictionary.com/definition/costs.htmlhttp://www.businessdictionary.com/definition/selling-price.htmlhttp://www.businessdictionary.com/definition/payer.htmlhttp://www.businessdictionary.com/definition/equity.htmlhttp://www.businessdictionary.com/definition/loan.htmlhttp://www.businessdictionary.com/definition/accounting.html


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A company can use a cash flow statement to predict future cash flow, which

helps with matters in budgeting. For investors, the cash flow reflects a

company's financial health: basically, the more cash available for business

operations, the better. However, this is not a hard and fast rule. Sometimes

a negative cash flow results from a company's growth strategy in the form

of expanding its operations.

By adjusting earnings, revenues, assets and liabilities, the investor can get

a very clear picture of what some people consider the most important

aspect of a company: Howmuchcash it generates and, particularly, howmuch of that cash stems from core operations.

I-8+*ae + 4e 8*+je

The statement of cash flows provides insight that the balance sheet and

income statement do not, particularly in regard to a company's cash

position.

M %nvestors? creditors? and managers use cash Io=

information to mae decisions about a com8any


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For example, a company may be profitable but generate little operational

cash (as may be the case for a company that barters its products rather

than selling for cash or when itsaccounts receivableturnoveris long).

In such cases if needed, the company may derive additional operating cash

by issuing shares, raising additionaldebtfinance, or selling itsassets. In

addition, cash flow can be used to evaluate the "quality"

ofincomegenerated by accrual accounting. Whennet incomeis

composed of large non-cash items, it is considered low quality.

#B9+C%7+S A$' *+H#'#@#,
https://www.boundless.com/accounting/definition/accounts-receivablehttps://www.boundless.com/accounting/definition/receivablehttps://www.boundless.com/accounting/definition/turnoverhttps://www.boundless.com/accounting/definition/debthttps://www.boundless.com/accounting/definition/assetshttps://www.boundless.com/accounting/definition/incomehttps://www.boundless.com/accounting/definition/net-incomehttps://www.boundless.com/accounting/definition/accounts-receivablehttps://www.boundless.com/accounting/definition/accounts-receivablehttps://www.boundless.com/accounting/definition/receivablehttps://www.boundless.com/accounting/definition/turnoverhttps://www.boundless.com/accounting/definition/debthttps://www.boundless.com/accounting/definition/assetshttps://www.boundless.com/accounting/definition/incomehttps://www.boundless.com/accounting/definition/net-income


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OBJECTI;ES OF CASH F'O(

he ob"ectives of cash Io= is given belo=-1

(a) Measurement of Cash:

Inflows of cash and outflows of cash can be !easured annually which arise

fro! operating activities, investing activities and financial activities

(b) Generating Inflow of Cash:

$i!ing and certainty of generating the inflow of cash can be nown which

directly helps the !anage!ent to tae financing decisions in future

(c) Classification of Activities:

All the activities are classified into- operating activities, investing activities

and financial activities which help a fir! to analy#e and interpret its various

inflows and outflows of cash

(d) Prediction of Future:

A "ash low State!ent, no doubt, forecasts the future cash flows which

helps the !anage!ent to tae various financing decisions since

synchroni#ation of cash is possible

(e) Assessing Liquidity and olvency Position:

Both the inflows and outflows of cash and cash e.uivalent can be nown,

and, as such, li.uidity and solvency position of a fir! can also be

!aintained as ti!ing and certainty of cash generation is nown, ie it helps

to assess the ability of a fir! to generate cash

(f) !valuation of Future Cash Flows:


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+hether the cash flow fro! operating activities are .uite sufficient in future

to !eet the various pay!ents eg pay!ent of e/penses

0debts0dividends0ta/es

(g) u""ly #ecessary Infor$ation to the %sers:

A Cash Flow Statement supplies various information relating to

inflows and outflows of cash to the users of accounting information in

the following ways:(i) $o assess the ability of a fir! to pay its obligations

(ii) $o analy#e and interpret the various transactions for future courses of

action

(iii) $o see the cash generation ability of a fir!

(iv) $o ascertain the cash and cash e.uivalent at the end of the period

(h) &el"s the 'anage$ent to Ascertain CashPlanning:

2o doubt a cash flow state!ent helps the !anage!ent to prepare its cash

planning for the future and thereby avoid any unnecessary trouble

*+H#'#@#, F# H%S SU',

The methodology that informed this secondary data analysis study drew on

Glasers writing in the area of classic grounded theory (Glaser, 1978, 1998, 2001,

2003, 200!" The grounded theory method offers a rigorous, orderly guide for

theory de#elo$ment" %lthough structured and systematic, it is designed to allow the

researcher to &e free of the structure of more forced methodologies" 'ts real

strength lies in its o$enended a$$roach to disco#ery"

The four techni)ues that lie at the heart of the classic grounded theory method are*

coding (o$en and theoretical!, constant com$arati#e analysis, theoretical sam$ling

and theoretical saturation" These techni)ues are used to guide the analytical $rocess

towards the de#elo$ment and refinement of a theory that is grounded in data"


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+owe#er, unlie )ualitati#e research which focuses on $roducing -thic

descri$tions of data, the grounded theorist focuses on organising ideas that emerge

from data, and conce$tually transcends the data and de#elo$s ideas on a le#el of

generality higher in conce$tual a&straction than the material &eing analysed

(Glaser, 2001!" .lassic grounded theory was chosen to conduct this secondary data

analysis in order to facilitate the first authors (/%! need to learn the $rinci$les and

$rocedures of classic grounded theory while actually conducting the secondary

data analysis"

'IMITATIONS + as4


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c5$his state!ent, since it does not cover non8cash ite!s, is not useful in

analysing changes in financial position of an enterprise "ash and changes

in cash are not ade.uate to !easure change in financial position or

instance, an enterprise !ay possess very satisfactory financial (cash)

position during a particular !onth But if the fir! has to pay "reditors ne/t

!onth, or !ae pay!ents for the plant purchased in the near future, the

cash position of the fir! will be adversely affected

5In this way state!ent of changes in financial position !easured through

cash only has drawbacs and does not indicate accurately the changes in

financial position $he state!ent has utility for !aing short ter! financial

planning but for long8ter! planning this state!ent would not be usefulBecause of the li!ited usefulness of state!ent of changes in cash, the

preparation of state!ent of changes in woring capital (popularly nown as

funds flow state!ent) has been suggested

C#$C+!UA@ FA*+6#

In order to understand the concepts of cash flow structures, it is essential tofirst understand what a cash flow state!ent is


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A cash flow state!ent is a!ong the !ost vital financial state!ents for abusiness or pro4ect $he cash flow state!ent can si!ply be one pageanalysis or !ay co!prise of several schedules that feed significantinfor!ation into a core or central state!ent It refers to a listing of the cashthat is brought in and out of the pro4ect or business $aing an e/a!ple of achecing account in a ban, the cash inflow is represented by depositswhile the cash outflows are represented by withdrawals that one !aes in aban $he balance in one3s checing account represents the net cash flowat a certain point of ti!e A cash flow state!ent !ay also be defined as alisting of cash flows, which occurred in the past accounting period (:ich,&;1;) A cash flow budget refers to a pro4ection of future cash flows Astate!ent of cash flow is concerned with the a!ount both the a!ount andti!ing of cash flows

A !a4ority of cash flows are constructed with !ultiple periods of ti!e ore/a!ple, the state!ent !ay list cash flows of each !onth over a ti!e ofone year It pro4ects the balance of cash re!aining at the end of each!onth and years

AD;ANTA#ES OF CAS4 F'O(

he advantage of cash Io= are given belo=-1

MIt shows the actual cash position available with the co!pany between thetwo balance sheet dates which funds flow and profit and loss account are

unable to show and therefore it is i!portant to !ae a cash flow report if

you want to now about the li.uidity position of the co!pany

5It helps the co!pany in !aing accurate pro4ections regarding the future

li.uidity position of the co!pany and hence arrange for any shortfall in

!oney by !aing arrange!ents in advance and if there is e/cess than it

can help the co!pany in earning e/tra return out if idle funds

5It acts lie a filter and is used by !any analyst and investors to 4udge

whether co!pany has prepared the financial state!ents properly or not

because if there is any discrepancy in the cash position as shown by

balance sheet with cash flow state!ent than it !eans that state!ents are

incorrect


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DISAD;ANTA#E OF CASH F'O(

5"o!panies often have an interest in !aing profits and generating cashfor future business operations +hile both activities typically have a close

relationship, one !ay do!inate the other +hile cash is ing in business,focusing solely on cash flow generation !ay be a disadvantage for abusiness $hese drawbacs often re.uire the business to balance its

operations

5"ash flow generation !ay lead to lower sales Selling goods and servicesinvolve cash receipts or allowing custo!ers to pay over ti!e, using anaccounts receivable setup Accounts receivable allow custo!ers to payoutstanding balances off over ti!e, such as %; or


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during the accounting period.

2. The purpose of cash flow statement is to provide information on sources

and uses of cash and cash equivalents during the period of accounting and

cash reconciliation at the beginning of the period with cash at the end of the

period plus the cash equivalent balances.

3. The general form of the cash flow statement shows cash receipts and

disbursements are divided into three categories, namely: cash flow from

operating activities, cash flows from investing activities and cash flows

arising from financing activities.

4. Operating activities are the principal revenue-producing activities of the

company (principal revenue producing activities) and other activities that

are not investing activities and financing activities. Cash flows from

operating activities can be reported with the use of two methods, either

directly or indirectly.

5. Investment activity is the acquisition and disposal of long-term assets

and other investments that do not include cash equivalents.

TYPES OF CASH F'O(

Cash Flo= statement also no=n as statement ofcash Io=s is a statement =hich sho=s the changesin the cash 8osition of an organiOation bet=een 28eriods. Along =ith sho=ing the changes in thecash 8osition of an organiOation? it also de8icts thereasons for such change during the 8eriod.


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PREPARATION OF CASH F'O( STATEMENT

Cash Io= statement is reDuired to be 8re8ared using%nternational Accounting Standard K (or using the AS in

%ndia)? =hile 8re8aring the cash Io= statement? the cashIo= during the 8eriod are classied into threecategories-1

A)Cash Io= from #8erating Activities('irect method%ndirect method)

B)Cash Io= from %nvesting ActivitiesC)Cash Io= from Financing Activities

Classication by activities 8rovides information that allo=users to assess the im8act of those activities on theFinancial 8osition of the enter8rise. his information alsohel8s in evaluation the inter1relationshi8 bet=een theseactivities.

CASH F'O(S FROM OPERATIN# ACTI;ITIES

Cash Io= from o8erating activities are 8rimarily derivedfrom the 8rinci8le evenue 8roducing activities of theenter8rise.

here are 2 methods of 8re8aring the cash Io=s from#8erating Activities-1

/)'irect *ethods

2)%ndirect *ethods/-1 Cas4


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Actual Cash !ayments for #8erating Activities arearranged and 8resenting in the cash Io=. he diGerencebet=een Cash ecei8ts and Cash !ayments is the $etcash Io= o8erating activities under the 'irect *ethod.

6hile 8re8aring the cash Io= statement as 8er directmethod items lie de8reciation? amortiOation of intangibleassets? 8reliminary eE8enses? debenture discount etc. areignored from cash Io= statement since the direct methodincludes only cash transactions and non1cashtransactions are omitted.

Format for com8utation of cash Io= from o8eratingactivities as 8er 'irect *ethod-1

!articular Amounts

Cash ecei8ts from customer EEECash 8aid to su88liers and em8loyees EEECash generated from o8eration EEE%ncome aE !aid EEECash Io= before eEtra1ordinary items EEE+Etra1ordinary items EEE$et cash from #8erating Activities('irect*ethod)

EEE

2>= Cas4


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Io= statement is a 8artial conversion of accrual basis8rot to cash basis 8rot. Further necessary ad"ustmentsare made for increasedecrease in current assets andcurrent liabilities to obtain net cash Io=s from o8erating

activities as 8er the %ndirect method.

Format of cash Io= from #8erating Activities1%ndirect *ethod

!articular Amount

s$et 8rot before taE and eEtra1ordinary

itemsEEE

Ad"ustments For

1'e8reciation EEE

1foreign eEchange EEE

1%nvestments EEE

1%nterest dividend EEE

1ain or loss on sale of Eed assets EEE

#8erating !rot before =oring ca8ital

changesEEE

Ad"ustment for

1rade and other receivable EEE

1%nventories EEE

1rade !ayable EEE

Cash generated from #8erations EEE1%nterest 8aid (EEE)

1'irect taE (EEE)


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Cash before eEtra1ordinary items EEE

'eferred evenue EEE

$et cash Io= from #8erating

Activities(%ndirect *ethod)

EEE

CASH F'O( FROM IN;ESTIN# ACTI;ITIES

he activities of acDuisition and 'is8osal of

long term Assets and other %nvestment not

included in cash evaluation are %nvestingActivities.

F+*-a +* as4


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CASH F'O( FROM FINANCIN# ACTI;ITIES

Financing Activities are those activities =hich result

in a change in the siOe and com8osition of o=ner


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Add-1 #8ening Balance of cash & cash

eDuivalent

EEE

(P)Closing Balance of cash & cash

eDuivalent

EEE

PRESENTATION OF DATA,

ANA'YSIS AND PROJECT FINDIN#

Aa57sis + Aj '!@@@

!roblem-1 he follo=ing is the summary of cash transaction of

An"u @td for the year ended *arch /? 23//

Reei8s Rs. Pa7-es Rs.

Balance as on

/.3J.23/3

/53 !ayment to creditor 0333

%ssue of eDuity share 433 !urchase of Eed

assets

033

ecei8ts from

customer

LJ33 +E8enses 033

Sale of Eed assets 33 6ages and salaries 33

aE K53

'ividend /53

!ayment of ban loan 433

Balance as on

/.3.23//

J53


23/29

0 0

S+5i+>=

Pa*i5a* Rs Rs

1&Cas4


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/2

1J33

1233

3

233

J33

033

L33

he 8erformance evaluation can be eEamined =ith the

use of diGerent techniDues1accounting. All these

techniDues have certain limitations and merits. o come

to the reasonable conclusion a8art from accounting

analysis the use of. By cash Io= statement the trend andmeasurement of three activities to be done for evaluation

8ur8ose. his hel8s to no= variation of res8ective

activities for given 8eriod of time from its coverage. he

result is =e obtain the cash of the year.


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@%*%A%#$ F# H%S SU',

+very researcher tries to give "ustice to his research. ,et

there are some limitations to this ndings because =e

have to de8end on information given by some 8ublished

or un8ublished records and other sources. So? the further

research can be carried out by considering the as8ects

given belo=. his study is entirely based on the 8ublished

nancial statements of the com8any and other

information received from the com8any ocials. So? all

analysis is based on this data. S# it can be reliable to that

eEtent.

MAs the information is collected from limited sources? it is

not 8ossible to use diGerent tools and techniDues of.

Mhe study is based on secondary data? the secondary

data has its o=n limitation.

MSome eEternal factors also could aGect directly orindirectly to the com8anies eciency. But it is not easy to

"udge com8letely right about then.

Mhe entire study is limited in com8any it can be carried

out by including industry.


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C#$C@US%#$ A$' +C#**+$'A%#$

he ob"ective of the statement of cash Io= is to facilitate anunderstanding of the nancial conseDuences of business activitiesby 8roviding detail 8ertaining to the sources and uses of acom8anyNs cash. 6hile the income statement and balance sheetare based on accrual

accounting? the statement of cash Io= is intended to re8resentthe cash1Io= conseDuences of business activities.

*ost of the challenge =ith 8re8aring? and ultimatelyunderstanding? the statement of cash Io= is due to a failure toa88reciate the relation bet=een the statement of cash Io= andother nancial statements.

he CFS 8rovides relevant nancial information about the

cash recei8ts and cash disbursements of a rm during a

scal year. his information is es8ecially im8ortant to

shareholders and creditors. As 8art of their investment

return? shareholders often eE8ect to receive dividends?

and the ability to 8ay cash dividends de8ends on the

availability of cash Io=s.

*ne of the !ost i!portant areas for any investor to loo when

researching a co!pany is the financial state!ents It is essential to

understand purpose of each part of the state!ent and how to interpret it


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inancial reports are re.uired by law and are published both .uarterly

and annually

6anage!ent discussion give investors a better understanding of what

the co!pany does and usuallypoints out so!e ey areas where they didwell

Audited financial reports have !uch !ore credibility than unaudited

ones

$he balance sheet lists the assets, liabilities, and shareholder=s e.uity

or all balance sheets- Assets = Liabilities + Euity $hese two sides

!ust always e.ual each other (balance)

$he inco!e state!ent includes figures such asrevenue, e/penses,

earnings, and earnings per share

or a co!pany, the top line is the revenue while the botto! line is net

inco!e

$he inco!e state!ent taes into account so!e non8cash ite!s such as

depreciation $he cash8flow state!ent strips away all non8cash ite!s

and tells you how !uch actual !oney the co!pany generated

$he cash8flow state!ent is divided into three parts- cash fro!

operations, financing, and investing

Always read the notes to the financial state!ents, they give you !ore in8

depth infor!ation on a wide range of figures reported in the % financial

state!ents


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B%B@%#A!H, A$' +F++$C+S

Anthony, Roberts N"* anagement %ccounting Taes and .ases +omewood

'llinois ichard " 'rwin, 1998"

Adesh Sharma,4'n#estment and 5inancing in 6esticides 'ndustry in 'ndia, 'ndianournal of 5inance and esearch, ol" " :o"2 uly 1999"

N.K" Agarwal* %nalysis of 5inancial anagement, :ew elhi, :ational

6u&lishing +ouse, 2001"

A.VijaykumarandA. Venkatachalam,4;oring .a$ital and 6rofita&ility < %n

=m$irical %nalysis, The anagement %ccountant in >uger mill of Tamilnadu,

?cto&er 199 ol"20, :o"@, ?cto&er 199, $" 2@A2@"

Bari R.R.* .ash 6lanning and anagement, elhi, Tri#eni 6u&lication, 2000"

Baranek William* ;oring .a$ital anagement, Belmont .alifornia ;orsho$

6u&lishing .om$any, 1998"

Bari R.R. !d."#>elected reading in cash management, elhi Tri#eni 6u&lication,

2000"

Brandit $.K.* %nalysis for 5inancial anagement, =nglewood .liffs :""*

6rentice +all, 199A"

Brandley %.&.#%dministrati#e 5inancial anagement, @th =d", :ew Cor, ruden

6ress, 199@

Brigham &. Biegene* 5undamental if 5inancial anagement, :ew Cor, The

ryden 6ress, 3rd =d" 1999"


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+F++$C+S

Financial *anagement heory and !ractice(Kthed.). $e= 'elhi?%ndia- ata *cra=1Hill +ducation !rivate @imited.

he %CFA% University (2335). Financial Accounting & FinancialStatement AnalysisQ Study uide. Hyderabad

.

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