3. are as under: 1. Cash flow statement cannot be equated with the Income Statement. An Income Statement takes into account both cash as well as non-cash items and, therefore, net cash does not necessarily mean net income of the business. 2. The cash balance as disclosed by the cash flow statement may not represent the real liquid position of the business since it can be easily influenced by postponing purchases and other payments. Cash flow statement cannot replace the Income Statement or the Funds Flow Statement. Each of them has a separate function to perform. In spite of these limitations it can be said that cash flow statement is a useful supplementary instrument. It discloses the volume as well as the speed at which the cash flows in the different segments of the business. This helps the management in knowing the amount of capital tied up in a particular segment of the business. The technique of cash flow analysis, when used in conjunction with ratio analysis, serves as a barometer in measuring the profitability and financial position of the business. j64 The concept and technique of preparing a Cash Flow Statement will be clear with the help of illustrations given in the following pages. Cash from Operations From the following balances you are required to calculate cash from operations: 31 December 2003 2005 2 47,000 10,000 Debtors Bills Receivable Creditors Bills Payable Outstanding Expenses Prepaid Expenses Accrued Income Income received in advance Profit made durine the year 50,000 12,500 20,000 8.000 1.000 800 000 300 25.000 6.000 1.200 700 750 250 1,30,000 50 CASH FROM OPERATIONS Particulars Profit made during the year 1,30,000 Add: Decrease in Debtors 3.000 Increase in Creditors 5.000 Increase in Outstanding Expenses 200 Decrease in Prepaid Expenses 100 8,300 1,38,300 Less: Increase in Bills Receivable 2.500 Decrease in Bills Payable 2.000 Increase in Accrued Income 150 Decrease in Income received in Advance 4.700 Cash from Operations 1.33.600 Illustration 12.4. Statement of financial position of Mr. Arun is given below: Liabilities 1 Jan,2003 31 Dec, 2003 Assets Jan., 2003 31 Dec.2003 7 ? Accounts Payable 29,000 25.000 Cash 40.000 30.000 Capital 7.39,000 6.15.000 Debtors 20,000 17,000 Stock 8,000 13,000 Building 1.00.000 80,000 Other Fixed Assets 6,00.000 5,00,000 7.68,000 6,40.000 7.68,000 6,40.000 Additional Information (a) There were no drawings. (b) There were no purchases or sales of either building or other fixed assets. Prepare a Statement of Cash Flow