The Cash flow statement is a significant financial statement, as it reveals how much cash the company is actually generating
8.1 – Overview
Is this information not revealed in the P&L statement you may think? Well, the answer is both a yes and a no.
Assume a simple coffee shop selling coffee and short eats. All the shop’s sales are mostly on a cash basis, meaning if a customer wants to have a cup of coffee and a snack, he needs to have enough money to buy what he wants. On a particular day, assume the shop manages to sell Rs.2,500/- worth of coffee and Rs.3,000/- worth of snacks. The shop’s income is Rs.5,500/- for that day. Rs.5,500/- is reported as revenues in P&L, and there is no ambiguity with this.
Now think about another business that sells laptops. For the sake of simplicity, let us assume that the shop sells only 1 type of laptop at a standard fixed rate of Rs.25,000/- per laptop. Assume on a certain day; the shop manages to sell 20 such laptops. Clearly the revenue for the shop would be Rs.25,000 x 20 = Rs.500,000/-. But what if 5 of the 20 laptops were sold on credit? A credit sale is when the customer takes the product today but pays the cash at a later point in time. In this situation here is how the numbers would look:
If this shop were to show its total revenue in its P&L statement, you would see revenue of Rs.500,000/- which may seem good on the face of it. However, how much of this Rs.500,000/- is actually present in the company’s bank account is not clear. What if this company had a loan of Rs.400,000/- that had to be repaid urgently? Even though the company has a sale of Rs.500,000, it has only Rs.375,000/- in its account. This means the company has a cash crunch, as it cannot meet its debt obligations.
The cash flow statement captures this information. A statement of cash flows should be presented as an integral part of an entity’s financial statements. Hence in this context evaluation of the cash flow statement is highly critical as it reveals, amongst other things, the true cash position of the company. Continue Reading The Cash flow statement is a significant financial statement, as it reveals how much cash the company is actually generating