Cash Flow Statements Grade 12 PDF

# Management of Business - Grade 12 ## Cash Flow Statements ### 39.6 Where from: where to A cash flow statement shows where the cash resources have come from and where they have gone. Exhibit 39.1 shows details of such cash flows. ### Exhibit 39.1 | | Cash resources |...

# Management of Business - Grade 12 ## Cash Flow Statements ### 39.6 Where from: where to A cash flow statement shows where the cash resources have come from and where they have gone. Exhibit 39.1 shows details of such cash flows. ### Exhibit 39.1 | | Cash resources | | | :-------------------- | :--------------- | :-------------------- | | **Cash comes from** | **In** | **Cash goes to** | | 1. Profits | → | 1. Losses | | 2. Sales of Fixed Assets | → | 2. Purchase of Fixed Assets | | 3. Decrease in Stock | → | 3. Increase in Stock | | 4. Decrease in Debtors | → | 4. Increase in Debtors | | 5. Capital Introduced | → | 5. Drawings/Dividends | | 6. Loans Received | → | 6. Loans Repaid | | 7. Increase in Creditors | → | 7. Decrease in Creditors | ### Explanation: 1. Profits bring a flow of cash into the business. Losses take cash out of it. 2. The cash received from the sales of fixed assets comes into the business. A purchase of fixed assets takes it out 3. Reducing stock in the normal course of business means turning it into cash. An increase in stock ties up cash funds. 4. A reduction in debtors means that the extra amount paid comes into the business as cash. Letting debtors increase stops that extra amount of cash coming in. 5. An increase in a sole proprietor's capital, or issues of shares in a company, brings cash in. Drawings or dividends take it out. 6. Loans received bring in cash, while their repayment reduces cash. 7. An increase in creditors keeps the extra cash in the business. A decrease in creditors means that the extra payments take cash out. ### Summary of Cash Flow: Cash per balance sheet at the end of the previous period + Changes – which must be because of cash flows during the current period = Cash per balance sheet at the end of the current period. ## Relationship between statement of comprehensive income and statement of financial position The statement of comprehensive income records the changes to the business's net assets over a given period of time. It shows gains or losses that the business experienced during that time frame. The statement of financial position gives a snapshot of the business's assets and liabilities during a particular period of time. It shows all the assets and liabilities along with the equity of the business. ### Advantages of the cash flow statement * Fosters proper judgement on the amount, timing and degree of certainty of future cash inflows or outflows. * Provides information on the firm's liquidity and financial viability. * Is not easily manipulated and so is not affected by judgements or accounting policies. * Allows for comparison of the present and future values of fund passing through the business. * Shows the relationship between profitability of the firm and its ability to generate cash. ### Disadvantages of the cash flow statement * While cash flow is necessary for short-term operations, the firm needs profit in order to be viable in the long term. As a result, it may need to sacrifice cash flow for large investments. * Since they are based on past data, cash flow statements may not provide accurate information about future cash flow.