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Final Accounts - Assignment 1, Task 2 - CASHFLOW Statement - Distinction
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Final Accounts - Assignment 1, Task 2
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Final Accounts for Public Limited CompaniesTask 2 – Cash Flow Statements
This report will include information about the purpose of a limited company’s cash flow
statement, as well as the completed cash flow statement of the Company A for this year.
Additionally, using the cash flow statement, the report will include an analysis of the
changes in the financial position of Company A, as well as an evaluation of the financial
position for the current and potential shareholders of the Company A.
The purpose of a limited company’s cash flow
statement
Cash Flow Statement is the third main document that the public limited companies need to
publish in their annual reports. It shows the actual finalized accounts - the cash position of
the business and its changes over the previous year, recording all the cash inflows and
outflows from the business in a period of time. Cash Flow Statement has a major impact on
decision making process (e.g. purchasing more stock; increasing the wages; reducing the
costs etc.). Cash Flow Statement is like a summary of the year, showing how the public
limited company generates and uses the cash inflows, as well as the cash outflows.
Cash is very important for a business, being the most liquid asset, because it does not need
to be converted (it is already cash). The company can use the cash (cash in hand/cash in the
bank accounts) immediately to buy goods and services or to settle the company’s
outstanding debts. Revenue means the total income of the business, generated by the sale
of goods and services (as well royalties, interest and other fees for certain companies). One
of the main benefits of a good revenue is that the business expands its market share.
Additionally, profit is essential for a company. Profit is obtained by subtracting the business
expanses from revenue. There are different types of profit: Gross Profit, Operating Profit
Net Profit. The profit is a crucial factor, because it leads to growth and survival of a
company.
Cash Flow Statement shows the historic cash flow position of the business for the last year.
It helps in creating the Cash Flow Forecast. Cash Flow Forecast is an assumption, a
prediction about the future and includes months, helping the business to identify and
prevent possible problems. Other difference between Cash Flow Statement and Cash Flow
Forecast is their structure. Cash Flow Statement has four main parts: Cash from Operating
Activities (e.g. sale of goods/rendering services; royalties, fees, commissions;
employees/suppliers etc.) , Cash from Investing Activities (e.g. PPE, intangibles; loans to
other parties; debt instruments etc.), Cash from Financing Activities (e.g. own shares; leases;
loans, notes etc.) , The Net Change in Cash. Instead, the Cash Flow Forecasts contains:
Inflows, Outflows, Opening Balance, Closing Balance.
1
, Cash Flow Statement is one of the main financial statements and complements the
Statement of Comprehensive Income and the Statement of Financial Position. For example,
everything included in Operating Activities is also included in the Statement of
Comprehensive Income. Instead, the Investing Activities and Financing Activities are found
in the Statement of Financial Position (e.g. trade receivables, trade payables, borrowing
etc.). Also, cash is included in Statement of Financial Position as an asset of the company.
Using a Cash Flow Statement, the businesses will know how to use the funds, to plan and
predict their budget in order to obtain a good financial performance for next period of time.
Also, the accountants will be able to analyse the liquidity and the ability of the company to
pay back its liabilities based on Cash Flow Statement and to compare operating, investing
and financing activities. It is essential for companies to analyse and compare their financial
performance to previous accounting periods in order to see the growth of the company, to
predict the next year and the stakeholders make decisions on potential operating activities,
investing activities, financing activities (e.g. the investors decide if they invest or not in the
company) being aware of both benefits and risks. Furthermore, the sources of finance such
as sale of assets, retained profit (internal), loans, grants, mortgages, venture capital,
owner’s capital, trade credit, crowd-funding etc. are found in the Financing Activities in the
Cash Flow Statement. The business cand make a decision about what sources of finance it
needs (e.g. in case of low liquidity, the company can make a short time loan in order to
increase the liquidity).
2
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