(BQ) Part 2 book "Financial accounting" has contents: Cash flow statements; regulatory framework in the UK compared with European examples and the international framework, valuation and performance measurement, control of accounting systems, information technology and accounting, the finale,.and other contents. | 12/10/05 10:29 am Page 154 154 Financial Accounting 9 Cash flow statements Objectives By the end of this chapter you should be able to: ᭤ Explain the importance of cash flow within the business. ᭤ Identify cash flows within a business. ᭤ Prepare a cash flow statement. ᭤ Explain the relationship between the cash flow statement, income statement and balance sheet within a business. ᭤ Identify the difference between the indirect and direct method of preparing a cash flow statement. ᭤ Identify and calculate a simple cash flow ratio. ᭤ Explain the word ‘fund’ as used in accounting. Introduction In previous chapters we have concentrated on preparing financial information for a business based on the concept of profit. You should have already realised that profit does not equal cash and therefore it is quite possible for a business to be making reasonable profits but have very little cash. However, cash is vital to a business. Without it the business cannot purchase inventory, pay creditors, wages or any other expenses. Cash is quite often referred to as the ‘lifeblood’ of a business – without it it will not survive! A business therefore must pay attention to both its profit and cash position. Cash flows within a business At this point in your studies you should be able to complete the following activity quite quickly. If you do have problems return to Chapter 5 and consider the cash transactions that Mr Bean made. 12/10/05 10:29 am Page 155 9 · Cash flow statements Activity 155 Identify as many cash flows as you can for a business. Enter them in the table below. Two are already entered for you. CASH FLOWS Into the business ᭤ Capital contributed in the form of cash CASH FLOWS Into the business Out of the business ᭤ Capital contributed in cash ᭤ Wages paid in cash ᭤ Cash sales ᭤ Cash purchases ᭤ Receipts from debtors ᭤ Payments to creditors ᭤ Cash loans and debentures ᭤ .
