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File No. C 001 007 Cash Flow

The document discusses cash flow and provides examples of cash inflows and outflows. Cash flow is defined as the movement of cash, bank transactions, goods, and services. Examples given include receiving a loan, buying snacks, transferring money between pockets, setting aside money for future expenses, receiving additional loans to buy books, and gifting a book.

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Lalit mohan Pradhan
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34 views3 pages

File No. C 001 007 Cash Flow

The document discusses cash flow and provides examples of cash inflows and outflows. Cash flow is defined as the movement of cash, bank transactions, goods, and services. Examples given include receiving a loan, buying snacks, transferring money between pockets, setting aside money for future expenses, receiving additional loans to buy books, and gifting a book.

Uploaded by

Lalit mohan Pradhan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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SIMPLE ACCOUNTING-SECRETS – 6

CASH FLOW

Since BUCKS is common to all currencies, the same may have


been used. Please substitute the word with the currency of your
country

Regret, I am nor computer-savvy. Kindly excuse errors in


formatting.

Cash flow is simple to understand.

Cash flow is the inflow and outflow of cash, bank transactions, goods
and services. Mere adjustment entries like depreciation, transfer to
reserves, etc don’t form part of cash flow.

Let’s take an example.

A guy, let’s call him Mr. X, puts on his coat (which has four pockets and
none of the pockets has any money) and leaves home, Now, let us focus
only on the coat.

Going by the contents in the coat pockets, his coat is worth zero.

On the way, he drops in at his friend’s house. His friend, on coming to


know that X is broke, lends him 10,000 bucks. X keeps all that money in
one of the pockets.

There is an inflow of 10,000 bucks.

X thanks his friend and proceeds to wherever he wanted to go. On the


way, he stops by a hotel and has some snacks worth 100 bucks.

There is an outflow of cash of 100 bucks.


Then, he continues his journey. Suddenly, he realizes that it is not safe to
keep all the money in one pocket. He keeps part of the money in the
other three pockets.

Here, there is neither inflow nor outflow of cash. It is like depositing


into and withdrawing from the bank account. It is mere transferring of
money from one account (cash) to another account (bank). In our
example, it is from one pocket to another. Total of the cash in the coat
still remains the same.

On the way, he remembers that next month he has to visit the dentist and
dentist’s fees is 500 bucks. So he puts his hand in one of the pockets and
removes 500 bucks and keeps the money in a cover, seals the cover,
writes DENTIST on top of it and keeps back the cover in the same
pocket.

Here, he is setting aside some money for his healthcare. The money is
still not paid to the dentist. And, the coat is still having the same amount
as there is no cash inflow or outflow. This is similar to transfers to
reserves, depreciation, etc. which are either transfers within the firm or
mere book-entries. There are certain exceptions here in the sense that
sometimes statutory requirements make it mandatory to declare setting
aside of money for specific purposes (like income tax) as cash outflow.
This is a separate chapter.

He continues his journey. On the way he wishes to buy a book, costing,


say, 300 bucks. He approaches his friend, who is a bookseller and asks
for a loan of 300 bucks and promises to pay back the amount later. His
friend gives him a loan of 300 bucks which X puts in his pocket. There
is a cash inflow of 300 bucks. X, then, removes the same money out and
buys a book worth 300 bucks. There is the cash outflow.

He feels like buying another book worth 200 bucks. He asks his friend
one more loan of 200 bucks. His friend asks him the reason to which X
replies that he wants to buy another book. Friend laughs at him and
suggests that instead of taking and giving cash, he may take the book
directly and pay later. X is happy, thanks his friend and picks up a book
worth 200 bucks and puts it into his pocket. Now there is a cash inflow
in the form of a book (goods) worth 200 bucks for which source is the
bookseller (or creditor in business terms)

Continuing on his way, he meets a friend for whose birthday, he gifts


one of the books (he had bought) costing 300 bucks. Now, there is a
cash outflow (in the form of goods) to the tune of 300 bucks.

Same could be the examples for inflow and outflow of services


payments for which have to be made or received at a later date.

So, to repeat, cash flow is the inflow and outflow of cash, bank
transactions, goods and services. Mere adjustment entries like
depreciation, transfer to reserves, etc don’t form part of cash flow.

A summarized cash-flow statement looks like this.

A) Opening balances of cash


and bank accounts………………………….. xxxxx
B) All sources of inflows of cash,
bank, goods and services ……………………xxxxx
C) Total (A + B)………………………………….xxxxx
D) All recipients of outflows of cash,
bank, goods and services…………………….. xxxxx
E) Closing balances of cash
and bank accounts (C – D)…………………….xxxxx

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