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Cash Flow

The document explains the differences between Actual and Proposed Cash Flow Statements, highlighting their purposes, data sources, and accuracy. An Actual Cash Flow Statement records historical cash inflows and outflows, while a Proposed Cash Flow Statement forecasts future cash needs and is based on estimates. It also includes an example of a Proposed Cash Flow Statement for a hypothetical company, emphasizing its importance for budgeting, planning, and stakeholder communication.

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7 views4 pages

Cash Flow

The document explains the differences between Actual and Proposed Cash Flow Statements, highlighting their purposes, data sources, and accuracy. An Actual Cash Flow Statement records historical cash inflows and outflows, while a Proposed Cash Flow Statement forecasts future cash needs and is based on estimates. It also includes an example of a Proposed Cash Flow Statement for a hypothetical company, emphasizing its importance for budgeting, planning, and stakeholder communication.

Uploaded by

Chala Mosisa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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The difference between an Actual Cash Flow Statement and a Proposed Cash Flow

Statement lies in their purpose, timing, and the nature of the data they present. Here's
a breakdown:

1. Actual Cash Flow Statement


 Definition: This is a financial statement that records the actual cash inflows
and outflows of a business over a specific period (e.g., monthly, quarterly, or
annually).
 Purpose: It provides a historical view of how cash was generated and used
during the period.
 Data Source: Based on real transactions that have already occurred.
 Use: Helps stakeholders assess the company's liquidity, cash management, and
financial health based on actual performance.
 Accuracy: Reflects real data, so it is precise and verifiable.

Example: A company's cash flow statement for the year 2022 showing actual cash
received from customers, cash paid to suppliers, and other cash activities.

2. Proposed Cash Flow Statement


 Definition: This is a projection or forecast of expected cash inflows and
outflows for a future period.
 Purpose: It is used for planning and decision-making, helping businesses
anticipate future cash needs, identify potential shortfalls, or plan for investments.
 Data Source: Based on estimates, assumptions, and projections about
future revenues, expenses, and other cash-related activities.
 Use: Often prepared for budgeting, securing loans, or presenting business plans
to investors.
 Accuracy: Subject to uncertainty and may differ from actual results due to
unforeseen events or changes in assumptions.

Example: A startup preparing a proposed cash flow statement for the next 12 months to
show investors how it plans to manage cash and achieve profitability.

Key Differences:

Aspect Actual Cash Flow Statement Proposed Cash Flow Statement


Time
Past (historical data) Future (projections)
Frame
Data Basis Real transactions Estimates and assumptions
Purpose Reporting and analysis Planning and forecasting
Accuracy Highly accurate Subject to uncertainty
Use Case Assessing past performance Preparing for future scenarios
Summary:
 Actual Cash Flow Statement is a record of what has already happened.
 Proposed Cash Flow Statement is a forecast of what is expected to
happen.

Both are essential for financial management, but they serve different purposes and are
used in different contexts.

A proposed cash flow statement is a financial document that outlines the


expected cash inflows and outflows for a future period. It is often used for
budgeting, planning, or presenting financial projections to stakeholders.
Below is an example of a proposed cash flow statement for a
hypothetical company, along with explanations.

Proposed Cash Flow Statement for ABC Company

For the Year Ending December 31, 2024

Amount
Category
(USD)
Cash Flows from Operating
Activities
Net Income $200,000
Adjustments for Non-Cash Items:
Depreciation $25,000
Increase in Accounts Receivable ($15,000)
Decrease in Inventory $10,000
Increase in Accounts Payable $20,000
Net Cash from Operating
$240,000
Activities
Cash Flows from Investing
Activities
Purchase of Machinery ($80,000)
Sale of Old Equipment $30,000
Net Cash from Investing
($50,000)
Activities
Cash Flows from Financing
Activities
Amount
Category
(USD)
Issuance of Bonds $100,000
Repayment of Bank Loan ($40,000)
Dividends Paid ($30,000)
Net Cash from Financing
$30,000
Activities
Net Increase in Cash $220,000
Cash at Beginning of Year $100,000
Cash at End of Year $320,000

Explanation of the Proposed Cash Flow Statement

1. Cash Flows from Operating Activities:


o This section reflects the cash generated or used in the
company's core business operations.
o Net Income: Starts with the projected net income of $200,000.
o Adjustments: Non-cash items like depreciation ($25,000) are
added back. Changes in working capital (e.g., accounts
receivable, inventory, accounts payable) are also adjusted.
o Net Cash from Operating Activities: $240,000 indicates
strong cash generation from operations.
2. Cash Flows from Investing Activities:
o This section includes cash flows related to the purchase or sale
of long-term assets.
o Purchase of Machinery: Cash outflow of $80,000 for new
machinery.
o Sale of Old Equipment: Cash inflow of $30,000 from selling old
equipment.
o Net Cash from Investing Activities: ($50,000) indicates the
company plans to invest more than it earns from asset sales.
3. Cash Flows from Financing Activities:
o This section shows cash flows related to borrowing, repaying
debt, issuing bonds, or paying dividends.
o Issuance of Bonds: Cash inflow of $100,000 from issuing
bonds.
o Repayment of Bank Loan: Cash outflow of $40,000 for loan
repayment.
o Dividends Paid: Cash outflow of $30,000 for shareholder
dividends.
o Net Cash from Financing Activities: $30,000 indicates a
small net inflow from financing.
4. Net Increase in Cash:
o The total net increase in cash for the year is $220,000,
calculated as:
 Operating Activities: $240,000
 Investing Activities: ($50,000)
 Financing Activities: $30,000
5. Cash at Beginning and End of Year:
o The company expects to start the year
with 100,000incashandendwith100,000incashandendwith320,0
00.

Key Takeaways

 The company projects strong cash flow from operations ($240,000),


which is a positive sign.
 It plans to invest in new machinery but will offset some of the cost by
selling old equipment.
 Financing activities include issuing bonds and repaying a bank loan,
resulting in a net inflow of $30,000.
 Overall, the company's cash position is expected to improve
significantly, ending the year with $320,000 in cash.

Why is a Proposed Cash Flow Statement Important?

1. Budgeting and Planning: Helps the company plan for future cash
needs and allocate resources effectively.
2. Stakeholder Communication: Provides transparency to investors,
lenders, and other stakeholders about the company's financial health
and future plans.
3. Decision-Making: Assists management in making informed decisions
about investments, financing, and operations.

This proposed cash flow statement is a forward-looking document and should


be reviewed and updated regularly to reflect changes in business conditions.

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