Cash payments of income taxes shall be considered as cash outflow on account of
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It can be argued that 'profit' does not always give a useful or meaningful picture of a company's operations. Readers of a company's financial statements might even be misled by a reported profit figure.
Shareholders might believe that if a company makes a profit after tax of say $100,000, then this is the amount which it could afford to pay as a dividend. Unless the company has sufficient cash available to stay in business and also to pay a dividend, the shareholders' expectations would be wrong. Survival of a business depends not only on profits but perhaps more on its ability to pay its debts when they fall due. Such payments might include 'profit and loss' items such as material purchases, wages, interest and taxation etc, but also capital payments for new fixed assets and the repayment of loan capital when this falls due (e.g. on the redemption of debentures).
Chapter objectives
This chapter is intended to provide an explanation of:
· The aim, use and construction of cash flow statements
· The meaning and calculation of the source and application of funds statement and their importance to business
· A discussion on credit and types of loans available to businesses
· An explanation of the cost of funds and capital
· The importance and calculation of ownership costs, including depreciation, interest, repair, taxes and insurance.
Structure of the chapter
"Cash flow" is one of the most vital elements in the survival of a business. It can be positive, or negative, which is obviously a most undesirable situation. The chapter develops the concept of cash flow and then shows how the funds can be used in the business. Funds are not only generated internally; they may be externally generated, and so the chapter finishes with a discussion of externally generated funds.
Aim of a cash flow statement
The aim of a cash flow statement should be to assist users:
· to assess the company's ability to generate positive cash flows in the future
· to assess its ability to meet its obligations to service loans, pay dividends etc
· to assess the reasons for differences between reported and related cash flows
· to assess the effect on its finances of major transactions in the year.
The statement therefore shows changes in cash and cash equivalents rather than working capital.
Shareholders might believe that if a company makes a profit after tax of say $100,000, then this is the amount which it could afford to pay as a dividend. Unless the company has sufficient cash available to stay in business and also to pay a dividend, the shareholders' expectations would be wrong. Survival of a business depends not only on profits but perhaps more on its ability to pay its debts when they fall due. Such payments might include 'profit and loss' items such as material purchases, wages, interest and taxation etc, but also capital payments for new fixed assets and the repayment of loan capital when this falls due (e.g. on the redemption of debentures).
Chapter objectives
This chapter is intended to provide an explanation of:
· The aim, use and construction of cash flow statements
· The meaning and calculation of the source and application of funds statement and their importance to business
· A discussion on credit and types of loans available to businesses
· An explanation of the cost of funds and capital
· The importance and calculation of ownership costs, including depreciation, interest, repair, taxes and insurance.
Structure of the chapter
"Cash flow" is one of the most vital elements in the survival of a business. It can be positive, or negative, which is obviously a most undesirable situation. The chapter develops the concept of cash flow and then shows how the funds can be used in the business. Funds are not only generated internally; they may be externally generated, and so the chapter finishes with a discussion of externally generated funds.
Aim of a cash flow statement
The aim of a cash flow statement should be to assist users:
· to assess the company's ability to generate positive cash flows in the future
· to assess its ability to meet its obligations to service loans, pay dividends etc
· to assess the reasons for differences between reported and related cash flows
· to assess the effect on its finances of major transactions in the year.
The statement therefore shows changes in cash and cash equivalents rather than working capital.
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CASH IN FLOW
- It means that cash is going into the company.
- E.g : Receipt of a bank loan, Interest on savings and Investments and Shareholder investments etc
CASH OUT FLOW
- It means cash is going out of the company.
- E.g: Purchase of stock, Raw materials or tools, Wages, Rents and Daily operating expenses, Dividend payments, Income tax etc
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