Question

Outline the differences between of a cash flow statement and a cash budget and explain why a cash flow statement is important to the shareholders. Give reasons to support your answer

Answer 1

a) Difference between Cash flow statement and Cash budget

Cash flow statement

Cash budget

It is a statement which records the actual flows of cash and cash equivalents of a business. It reports both the inflows and outflows of cash and cash equivalents. All the transactions in a cash flow statement are grouped into three activities namely operating activities, investing activities and financial activities. Cash flow statement can be prepared in two methods, the direct method and the indirect method.

It is a statement which shows expected cash inflows and outflows over a budget period. It reports estimates of the anticipated inflows and outflows of cash. Cash budget can be prepared in three methods. the receipt & payment method, adjusted profit&loss method and the balance sheet method.

b) Importance of cash flow statement is as follows,

1. It is an important tool to handle cash management.
2. It helps to figure out the cash position of a business.
3. It also helps in decisions making and formulation of future business plans.
4. It projects the liquidity of a business.