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BTEC Unit 6 Financial Accounting P4 (Pass)
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BTEC Unit 6 Financial Accounting P4 (Pass)
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P4:Explain the purpose of a limited companies cash flow statement and defining
the relationship between profit and loss.
In this assignment I will be explain the purpose of a limited companies cash flow
statement and defining the relationship between profit and loss.
Purpose cash flow statement
A cash flow statement shows how much cash the limited company has generated
and used during a period. It is one of the three statement models every company
must produce. The main parts on the cash flow are;
Operating activities: this part shows the cash in and outflows linked with
the company’s business activities. These activities include buying and
selling inventory, or buying and selling supplies and paying employees their
wages.
Investing activities: on this part the result of investment gains and losses
can be found. This section includes cash spent on; property, plant and
equipment.
Financing activities: this part provides an overview of cash used in the
companies financing. It measures the cash flow between the company’s
owners and its creditors and its source is normally from debt or equity.
One of the main reasons cash inflows and outflows are used is to compare the
cash from operations to income. Comparing these two helps the company’s
management, analysts and investors to see how well the company is running its
operations. The cash flow statement shows the amount of money the company
really receives from its operations. When making a cash flow statement the
accountant must make sure that the regulatory framework is complied with, so
for example the FRS 1 which sets out how the cash flow must be prepared and
what needs to be in it and what can be left out.
How does profit change assets and liabilities?
Owners equity will increase when there is a profit made
Accounts receivable will change with the amount of sales provided with
credit
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