Post on 30-May-2018
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FUNDS FLOW STATEMENT
PRESENTED BY :
V.PRASANTH
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AT A GLANCE
Meaning and Definition of Funds Flow Statement;
Importance of Funds Flow Statement
Limitations of Funds Flow StatementWay of preparing Funds Flow Statement
Precautions to be taken while preparing FundsFlow Statement
Few Numerical Questions
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PHILOSOPY OF FUNDS FLOWSTATEMENT
It is continuous process. The study andcontrol of this funds-flow process (i.e., The
uses and sources of funds) is the mainobjective of financial management toassess the soundness of the solvency of
the enterprise.
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FUNDS STATEMENT
The funds statement was also known as astatement of funds flow or a statement ofsources and applications of funds
This statement was deemed to be necessary asthe balance sheet and income statement did notpresent a complete picture of an entitys
economic activitiesThe statement was seen as necessary tosummarise investing and financing activities
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MEANING OF FUND FLOW
The term of Funds Flow has made up with the two
words Funds and Flow of funds. Let us first we
understand these meaning and then we see howfunds flow statement is prepared.
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THE TREM FUND IS USED IN THREE
SENSES
CASH -
In narrow sense, the term fund is used to meanonly the cash and bank balance. Therefore, inthis sense, funds flow statement is a statementreflecting the changes in cash and bank balancesonly. This concept is better for the preparing of
Cash Flow Statement Therefore, this term is notused in this sense.
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TOTAL RESOURCES -
In broader sense it includes all resources used in the
business whether in the form of men, material,machinery, money and methods etc.
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Working Capital
In popular sense, the term Fund is used to mean
working capital i.e. the excess of current assetsover current liabilities. Therefore, in this sense,
fund flow statement includes all the transactions
affecting current assets and current liabilities.
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MEANING OF FLOW IN FUNDS
Before understanding the meaning of flow infunds, it is necessary to classify the balance
sheet of a concern into four parts as shown
below-
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Balance Sheet
1. Non-Current Liability 3. Non-Current AssetsShare Capital Goodwill
Debentures Land & Buildings
Other Long-term loans Plant &Machinery
Reserve & Surplus Motor Vehicles
Security Premium Long-term InvestmentsCapital Redemption reserve Preliminary Expenses
General Reserve Discount on shares
Profit & Loss Account Miscellaneous Expenses
2. Current Liabilities 4. Current AssetsCreditors Debtors
Bills Payable Bills Receivable
Short-term loans Advances
Bank Overdraft Short-term investments
Advance Payment Received Stock in hand
Outstanding Expenses Cash in hand
Provision for taxation Cash at Bank
TOTAL TOTAL
The arrows explain when transaction will constitute flow of funds.
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COMPONENTS OF BALANCE-SHEET
1. NON-CURRENT LIABILITIESThese liabilities are not payable within a year andout of current assets. These liabilities are generally
payable either in the long-period or at the close ofthe business. For example, see item (1) in theabove balance-sheet.
Contd..
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2. CURRENT LIABILITIES
These liabilities are payable within a year and out
of current assets. The values of these liabilitiesgenerally changes within one year. For example,
see item (2) in the above balance sheet.
Contd
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3. NON-CURRENT ASSETS
Those assets which are obtained in business for
use over a long period of time for earningpurpose are called non-current assets. These
assets are not purchased for the purpose of
selling and include tangible, intangible andfictitious
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4. CURRENT ASSETS
These assets are equal to cash or reasonablyexpected to be realized in cash or sold orconsumed within one year or during the normal
operating cycle of the business are called currentassets. For example, see item (4) in the abovebalance-sheet.
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MEANING OF FLOW
The term Flow means changes incoming andoutgoing. When this term is used with funds, it
means the changes taking place in funds during a
certain period. Whenever there is change in thefunds, it is presume that flow in funds has taken
place. Transactions that bring working capital into
the firm are sources of funds and on the contrary,if the working capital decreases, it is an application
of funds.
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TRANSACTIONS THAT WILL AFFECT THE
FLOW OF FUNDS
The following transactions will bring the change in
the working capital
Current Assets and Non-Current Assets
Current Assets and Non-Current Liabilities Current Liabilities and Non-Current Liabilities
Current Liabilities and Non-Current Assets
In brief, it can be said that when one aspect is of
non-current category, and the other current
category, there will be flow in funds.
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TRANSACTIONS THAT WILL NOT
AFFECT THE FLOW OF FUNDS
1. Current Assets and Current Liabilities
2. Non-Current Assets and Non-Current Liabilities
3. Non-Current Liabilities or Non-Current Assets.
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MEANING OF FUNDS FLOW
STATEMENT
The Funds flow statement (FFS) is a financialstatement which reveals the methods by which
the business has been financed and how it has
used its funds between the opening and closingBalance-Sheet dates. It studies from where the
funds have been received and where the funds
have been used.
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TO CONCLUDE We shall include only those transactions in funds
flow which affect current assets or current
liabilities, on one hand, and a fixed asset or long-
term liabilities or owners equity on the other.
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Following questions are answered by Funds Flow
Statement -
1. Where the profit is put up?
2. Why net current assets are low even though
there is an increase in net profit? In other words,why cash balance has not increased.
3. Why excess dividend was distributed when there
were low profits?4. How is the amount realized from the sale of
assets used?
OBJECTS OF FUNDS STATEMENT
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Contd
5. How were the changes in Working Capital
6. How were the plant and machinery
expanded?
7. How was the amount received from the issueof shares of debentures used?
8. Why the funds were not available for the
purchase of machinery and plant?
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IMPORTANCE OF FUNDS FLOW
STATEMENT
1. Financial Analysis and Control2. Financial Planning and Budget preparation
3. Useful to Bankers and Money Lenders
4. Helpful in Comparative Study
5. Knowledge of Managerial Policies
6. Knowledge ofBusiness Problems
7. Dividend Policy
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LIMITATIONS OF FUNDS FLOW
STATEMENT1. Non-fund transactions and this is why it is less
popular than Balance-sheet and Profit & LossAccount;
2. It fails in the disclosure of all changes that
have taken place during the ordinary course ofbusiness;
3. It is not a substitute of Income Statement orBalance-sheet. It merely provides someadditional information relating to the financialposition of a firm;
contd..
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4. It is historical in nature and analyses past
events only;5. It gives only a view about the financial
position of business as it does not disclose all
the facts;
6. Changes in cash are more important than
changes in working capital which is notrevealed by fund flow statement.
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PREPARATION OF FUNDS FLOW
STATEMENTFunds flow statement can be prepared monthly butusually it is prepared for one, two, three, four ormore years. The data for the preparation of thisstatement are obtained form two balance sheetssupplemented by such other information from the
accounts as may be needed. It is customary foraccompany to use the figures of the balance sheetfor the latest year and those on the balance sheet asat the beginning of the period for which thisstatement is to be prepared.
contd.
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Preparation of funds flow statement is divided
into two parts.1. Schedule of Changes in Working Capital;
2. Funds from Operation;3. Funds Flow Statement
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STATEMENT OF CHANGES IN
WORKING CAPITAL
This statement is prepared from current assets
and current liabilities in order to calculate theincrease or decrease in working capital and is
prepared in the Performa given as under.
Contd
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STATEMENT OF CHANGES IN WORKING CAPITAL
Particulars PreviousYear Fig.
Rs.(2008)
Current
Year Fig.
Rs.(2009)
Changes
in current
assets
and
liabilities
Incr-
ease
Decre
-ase
Current Assets :Cash
Debtors
StocksBill Receivables
Advance payment
Accrued income
Marketable Securitiesor Short-term
Investment
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Contd..
PreviousYear Fig.
Rs.(2008)
CurrentYear Fig.
Rs.(2009)
Change incurrent and
liabilities
Particulars
In.(+) Dec.(-)
Current
Liabilities:Creditors
Bills Payable
Bank Overdraft
OutstandingExpenses
Short-term
Loan etc.Increase or
Decrease in
Working Capital
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The following rules may be applied to current
assets and current liabilities for preparing this
statement:
1. An increase in current assets, increases working
capital
2. A decrease in current assets, decreases working
capital3. An increase in current liabilities, decreases working
capital
4. A decrease in current liabilities, increases workingcapital
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FUNDS FLOW STATEMENT
This statement is usually prepared in T form.Left-hand side is for sources of funds and right-
hand side for applications of funds. The items of
sources and applications are given as follows:
Contd.
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The following are the sources from which funds come:
1. Funds from operations
2. Income from investments
3. Issue of shares and debentures4. Raising a loan
5. Sale of fixed assets and long-term investments
6. Receipt of interest on non-trade investment,dividend, refund of tax etc.
7. Decrease in working capital etc.
Sources ofFunds:
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Uses (or Applications) offunds:
The following are the various purposes for which
funds can be used:
1. Funds lost in operations
2. Repayment of long-term loans
3. Redemption of preference shares and debentures
4. Purchase of fixed assets5. Purchase of long-term investments
Contd
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6. Payment of cash dividends
7. Payment of taxes
8. Drawing in case of proprietary or partnership
business9. Loss of cash by embezzlement
10. Increase in working capital etc.
USES OF FUNDS
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FUNDS FROM OPERATIONS
It can be calculated in two forms :
Particulars
Net Profit for Current Year
Add : Non fund itemsDepreciation
Goodwill, Patents
Preliminary Expenses Written
off
LESS : Non-fund Items andNon-trading Income ,already
Credited to P & L A/c.
Dividend Recevied
Profit on sale
Funds from operations
Amount
Rs.
Amount
Rs.
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Profit and Loss Adjustment A/c
To Depreciation
To Goodwill Written off
To preliminary Expenses
written off
To Transfer to sinking fundTo Loss on sale of fixed Assets
To Closing Balance of P&L
Appropriation A/c
By opening Balance ofP&LAppropriation A/c
By Dividend Received
By Over provisions WrittenBack
By Funds fromoperations
(Balancing Figure)
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PRECAUTIONS TO BE TAKEN WHILE
PREPARING FUNDS FLOW STATEMENT
Following points must be kept in mind while preparing funds flowstatement
1. Changes in fixed Accounts
2. Internal Reserves
3. Provision against current Assets
4. Changes in current Assets
5. Interim Dividend6. Investments
7. Provision for taxation
8. Proposed dividend
9. Profit or Loss on the Sales of Fixed Assets10. Dividend received
11. Goodwill and Preliminary Expenses written off
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IMPORTANT QUESTIONS
Short answer questions
1. State the meaning of Funds flow statement2. How is the schedule of changes in working capital
prepared?
3. Discuss the importance of funds flow statement .4. Explain the terms funds items and non funds
items. Give examples.
5. Write short notes on application of funds.6. How are the funds from operations calculated?
7. Distinguish between the funds flow statement andBalance-Sheet.
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Long Answer questions1. Explain the terms Funds and Flow in funds in
respect of funds flow statement
2. What is a Funds Flows statement? How is itprepared? What are the various sources and uses
of funds ?
3. How is a funds flow statement prepared ?Give aPerforma of schedule of changes in working
capital and funds flow statement.
Contd.
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Suggested readingsFundamentals of corporate Accounting By J. R.
Monga ( Mayoor Paper books , Noida)
Financial Accounting A Managerial Perspective By
Dinabandhu Mukhopadhyay (Asian Books Pvt. Ltd.,New Delhi)
Financial Accounting By S. N. Maheshwari & S. K.
Maheshwari (Vikas Publishing House, New Delhi)Financial Accounting By Ashish K. Bhattachary (
Printce Hall of India, New Delhi)
Contd..
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Accounting and Financial Analysis & Management By
Agarwal & Agarwal ( Pragati Prakashan, Meerut)
Financial Statement Analysis By John J Wild and
Robert F Halsey (Tata Mc Graw Hill, New Delhi)Management Accounting Theory and Practice By M.P.
Pandikumar (Excel Books, New Delhi)
Management Accounting By M. N. Arora (VikasPublishing House, New Delhi)
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THANK YOU
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CASH FLOW
STATEMENT
Presented By:
Niranjan Jha
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Concept
-A Cash Flow statement discloses net
increase (or decrease)in cash during an
accounting period.As per AS-3(Revised)theobjective of cash flow statement is to
provide information about cash flows of an
enterprise which is useful in providing the
users of financial statement a basis to
asses the ability of an enterprise togenerate cash and cash equivalents to
utilise those cash flows.
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Definitions in AS-3The following terms are used in this
statement which the meaning specified.Cash Flows are inflows and outflows of
cash and cash equivalents.
1.Cash comprises cash on hand anddemand deposits with banks.
2.Cash equivalent are short term highlyliquid investment that are readily
convertible in to known amounts of cash.
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Classification of cash inflows andoutflows.
A cash flow statement focuses on
various activities and items which
bring about changes in the cash
balance between two Balance Sheetdates.This statement covers all items
which increases or decrease the cashof a business enterprise.
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The ICAIs AS-3 cash flow
statementhas classified cash flows
into three categories-
(1)Operating Activities(or flows)
(2) Investing Activities(or flows)
(3) Financial Activities(or flows)
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(1) Operating Activities-Operating activities are
those transactions which are considered in the
determination of net income.Examples :
cash received from debtors for goods and
services,interest and dividend received on loans and
investment.
Out flows examples are cash payments for goodsand services; merchandise ;wages;interest;taxes;
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(2) Investing Activities-Investing
activities include acquisition of
long term or fixed assests disposal
of long term or fixed
assets,acquisition and disposal of
intangible assets,purchase and sale
of shares,debentures and other
securities,landing of money and its
subsequent collection.
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(3) Financing Activities-Financing activitiesrelates to long term liabilities and equity
capital.A firm engages in financing activities
when it obtains resources from owners,returnsresources to owners, borrows resources from
creditors and repays amounts borrowed.Here
cash inflows include proceeds from issue of
shares and short term and long term
borrowings.Cash outflows include repayment of
loans and payments to owners.
Cl ifi i f h i fl d fl l i
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Classification of cash inflows and outflows relating to
operating activities.
Cash Inflows
Cash received from debtorfor goods and services
Interest and dividends on
loans and investment
Cash outflows
Cash payment for goods andservices,merchandise
Cash payment for wages
Cash payment for interest
to creditors
Payment to Govt.for taxes
Payment to other for
expenses
C h I fl d O tfl l ti t I ti
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Cash Inflows and Outflows relating to Investing
Activities
Cash Inflows
Cash sales of property,plantequipment,other long term
assets.
Cash sales of Investment in
shares debenture and other
securities
Cash collection(loan
repayments) from browwrs
Cash Outflows
Purchase ofshares,debenture sand
securities of other
enterprise
Purchase of property,plant
,equipment and other long
term assest
Loan given to other firms
Cash Inflows and Outflows relating to Financing
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Cash Inflows and Outflows relating to Financing
activities
Cash Inflows
Proceeds from issue ofshare
Proceeds from short term
and long term debt
Cash Outflows
Repayment of loans Payment of loans
Payment to
owners,including cash
divident
Reacquiring preference or
equity share
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Presentation of cash flow statementsA Cash flow statement can be
presented in either the direct orindirect format.The investing and
financing sections will be the same
under either format.
(1) Direct Method
(2) Indirect Method
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(1) Direct Method-Direct Method is that methodwhereby major class of gross cash receipts and gross
Cash payments are disclosed.
Direct Method should report separately the followingclasses operating cash received and payments.
1.Cash collected from customers including
lessees,licensee and other similar items.2.Interest and dividents received
3.Other operating cash receipt ,if any .4.Cash paid to
emplyees and other suppliers of goods or services.
5.Interest paid ,Income taxes paid.
(2) Indirect Method-Under the indirect method,
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the net cash flow from operating activities is
determined by adjusting net profit or loss for
the effects of ;
a.Changes during the period in inventories andoperating receivables and payables.
b.Non-cash items such as
depreciatons,provisions deferred taxes andunrealised excanges gains and losses;and
c.All other items for which the cash effects are
investing or financing cash flows.
The following summarizes the process
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The following summarizes the process.
Change
Decrease in a currentasset
Increase in a currentasset
Decrease incurrentliability
Increase in current
Adjustment to Net
income
Add
Subtract
Subtract
Add
P i C h l S
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Preparing Cash Flow Statement-
Before preparing cash flow statement the
following three steps have to be completed:-
(1) Determining cash flows from operating
activities
(2) Determining cash flows from investingactivities.
(3) Determining cash flows from financing
activities.After obtaining information regarding the above
a cash flow statement can be prepared.
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Cash Flow from Operations
The profit and loss account focuses on net income
determination from operating activities .However it does not
show cash inflow and outflow relating to operatng activitivities
because the profit and loss account is prepared on accrual basis.In preparing profit and loss account revenue
are recorded even though cash for them has not been received
.Similarly expenses are recorded even though they may not have
been paid . Therefore, to find cash flows fromoperations, one need to convert accrual basis income statement
figures to cash basis by making adjustments .By way of
adjustment,earned revenue will be converted into cash received
from sales and customers and incurred expenses will beconverted
into cash expended,i.e.,expenses actually paid in cash.
Accrual- Basis Net Income
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|Deduct increase in accounts account receivable (or Add
decrease in account receivable)
Deduct Increase in Merchandise Inventory (Add Decrease
in Merchandise Inventory)Deduct Increase in prepaid Expenses ( or Add decrease in
prepaid expenses)
Add increase in account payable (or Deduct Decrease in
account payable )Add increase in Accrued Expenses (or Deduct Decrease in
Accrued
Expenses)
Add Depreciation and amortization expenses for the year.|
Cash Basis Net Income
Symbolically, the real net cash flows in year(RNCF) ----
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RNCF=S-R+I-T+D+K+L+A+M
where
S=Actual and most-readily realizable cash inflows on account of
sale in a year.
R
= Actual and most readily payable cash outflows formaterial,wages and other expenses in year.
I= Real cash flows for loan interest in year.
T= Real cash outflows for taxation in year.
D= Real cash flows for dividend in year.K=Real cash flows issue/repayment of securities/debentures in
year
L= Real cash flows for long term (current portion) and short term
loans in yearA=Real cash flows for assets sold/purchased in year.
M= Real cash flows for miscellaneous items,e.g. subsidy and
other.
(1) It explains the nature of the financial events which
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have affected the cash positions.It explains the
reasons for the difference between opening and
closing balance.
(2) It is useful in financial planning purpose.
(3) It focuses the enterprises earning capacity with its
spending and operating activity.
(4) It provides an insight into the critical areas of
financial management by identifying two important
classes of cash flows operating and financing cash
flows.
(5) The significance of cash flow statement lies in the
increased complexity of business activity.This
complexity results in a greater disparity between the
time when income and expenses items are reported
s s a emen , s nce oes no cover non-cas
items, is not useful in analysing changes in financial
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position of an enterprise(2) Changes in financial position measured through
cash only
has drawbacks and does not indicate accurately the
changes in
financial position.
(3) It has utility for making short-term financial
planning but for long term planning this statement
would not be useful.
(4) There is no direct disclosure of the extend to
which the total resources of the firm have changed
during the period.
(5)Because of the limited usefulness of statement of
chan e in cash ,the re aration of statement of
C l i
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Conclusion-
Present historical cost accounting,which is based
on accruals and allocations,is not really helpful
in investment and other types of decisions. Ininvestment ,the primary factor is cash flow, but
the but the performance evaluation is done on
the basis of earning.This is inconsistent .Both the investment
decisions and the performance evaluation
should be on cash flow basis becausethe primary objective of an business enterprise
is cash flow.