Cash Flow Statement

When we compare two or more years total cash flow may be in three type of activities (i)In operating activities from one financial year to another financial year we can get cash from selling of goods , receiving the money or any other operating activities or we can outflow of cash in B/p , creditors or any buying of goods . So different can be said as net flow of operating activities .

(ii) Investing activities
You know very well that with two years any company can buy or sell any assets buying of fixed assets is outflow and selling any asset is inflow of cash difference of both is net cash flow from investing activities .
(iii) Financial activities
Financial activities are related to buying and selling of shares and debentures .Selling of shares and debenture is inflow of cash and opposite if company buys shares of other company , this is called outflow of shares .
After calculating all net inflow and this is called flow of cash and statement making for this is called cash flow statement .
Benefit is it only for cash management who wants to make different planning . An account manager easily calculate what is the real cash flow position . Company’s overall flow of cash is favorable or not . Some time cash book shows good current cash balance but a good account manager should investigate the overall flow of cash before buying high funded assets . This decision should be taken after complete analyzing of cash flow statement . Cash flow statement shows more outflow than inflow this is unbalanced situation .So be careful .

Q: Define inflation accounting or price level accounting ? what are the main method of price level accounting ? What are its main advantages and disadvantages ?

Ans : Definition of inflation

Inflation accounting is recording ,classifying and summarizing of all transaction on current or market cost and update recording amount according to time and changes .In price level accounting ,the value of money is changed , our balance sheet ‘s figure unit also changed .

Method of price level /Inflation accounting :-

1.Current purchasing power accounting

According to current purchasing power method , we calculate current cost with following method
I Take current price index

II Calculate

Current value of asset

= Value of asset (Actual basis ) X Current index / previous price index

For example

Record value of Rs. 40000 machine on inflation accounting basis if 2005 index 100 and 2006 price index =200
=40000x 200/180 =80000
B/S
Machine 80000

2. current cost accounting

In the current cost accounting following point must take in mind :-
1 value of fixed asset

Will be take on current cost
Not historical cost basis

2. stock will be taken on market cost basis

3. Transfer of difference between historical cost and current cost of asset to revaluation reserve account

4. Calculate current operating profit

3. Replacement cost accounting method

This method is just improvement of current purchasing price method .In replacement cost accounting , we calculate current value basis of respective asset price index
Suppose book value of machinery is 300000and price index of machinery is 2005 is 100 and 2006 is 300 then book value of furniture Rs. 200000 price index of furniture 2005=200 and 2006=400
Current value of machinery =300000x 300/100
Current value of furniture =200000x400/200
1. Current value accounting method
2. In current value accounting method , we take all asset of business in balance sheet on their current value

 Definition of current ratio

This ratio is a relationship of current asset and current liabilities . It states the business current position to pay the current liabilities in time as when due .
There are two components of this ratio
current assets

1.cash in hand
2.cash at bank
3.marketable securities
4.sundry debtors
5.bills receivable
6.stock in trade
7.prepaid exp.
current liabilities

1.sundry creditors
2.bill payable
3.outstanding bill
4.bank overdraft
current ratio = current assets /current liabilities