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Discuss the cash flow statement of an organization.



The cash flow position of an organization is very important like the profitability or the financial position. The cash flow position is a measure of the liquidity of the concern. Liquidity is the ability of the organization to meet its expenses on a day to day basis and honour its short term as well as long term commitments. Hence, even a very profitable organization can be dissolved or be pushed to the verge of bankruptcy for the want of liquidity. It is for this reason that the organizations should ensure that the liquidity position is stable and that it has the capability of honouring its liabilities. Plato Ltd is a leader in the regional computer market and mainly targets the students. The organization is known its use of cutting edge technology and providing easy payment plans to the students, a strategy which has enabled them to capture the market. However with the entry of any small firms in the market the market share of the organization has taken a hit and has been struggling to maintain the level of profits and the cash flow position. The main objective of this assignment is to analyze the cash flow statement and ascertain the cash flow position thereby recommending a set of actions for the smooth functioning of the concern. 


Cash flow statement as per IAS 7(Indirect method)

The cash flow statement of the organization has been prepared in accordance with the provisions of IAS7 (Indirect Method) below:

Plato Ltd

Statement of Cash Flows

For the Years Ending March 31, 2015 and March 31, 2014




Cash Flows from Operating Activities


  Net Income



  Add Expenses Not Requiring Cash:


Interest Expense






Loss on machinery



Revaluation Reserve



  Other Adjustments:


    Add Reduction in Accounts Receivable



    Add Reduction in Inventory



    Subtract Decrease in Accounts Payable



Increase in bank OD



    Subtract Increase in Prepaid Expenses






Cash Generated From Operations



Payment of income tax



Interest Paid



  Net Cash from Operating Activities



Cash Flows from Investing Activities


Reduction in marketable securities



  Sale of Fixed Assets



  Purchase of New Equipment



  Net Cash Used for Investing Activities



Cash Flows from Financing Activities


Issue of capital



Payment of Debentures



Payment of Dividend



Bank Overdraft



  Net Cash from Financing Activities













  • The cash and cash equivalents also include the bank overdrafts of the organization.
  • Also considering the facts there were no reportable segments the same have not been indicated in the report
  • The report has been prepared on the basis of information able as no report was provided in regards to the income statement of the organization.

Machinery Account






To Balance


By Sale of Machinery


To revaluation



To Purchases





By Balance







Tax Expense






To Bank


By Balance


To Balance









The current strategy that is being followed by the organization is to liquidate the current assets of the organization to keep the organization afloat. The organization currently is trying to generate as much cash as possible from the operations itself. As apart from the cash generated through operations the organization has not been able to generate cash from either investing activities or the financing activities (Kemp, 2003). The organization as is evident from the cash flow statement is trying to adopt a strategy or force a strategy aimed at the future. The excess cash available at the exposure of the organization is being used to reduce the long term debt of the concern which is evident from the reduction in debentures. The organization is also willing to improve the relationship with the creditors by paying them on time which has been witnessed through a reduction in the amount of trade payable however, the organization in attempt to be solvent had to procure a bank overdraft as has been mentioned by the Managing Director of the organization. The organization also has had to offload the current investments in order to stay afloat. A big machinery purchase has been made by the concern to be able to generate long term cash flows in the future and also with the objective of developing a core competency (Shim, Siegel, & Shim, 2012). The same has been done with the aim of improving the products being offered by the concern and renewing the interests of the buyers in the products of the organization. 


Role of Accounting

Managing Director

Plato Ltd

Dated: 6th of June 2016

Subject: Cash flow statement Analysis

Memo No: PL/204/2016

First of all I would like to take this opportunity to thank you for letting me take a look at the financial statements of Plato Ltd for the year ended 31st March 2015 and 2014. For the purpose of analyzing the same I had to look at the trends of financial performance and most importantly the cash position of the organization as it was a matter of concern since you had mentioned the same. A look at the liquidity position of the organization has pointed to the fact that the concern is finding it hard to stay afloat (Coyle, 2000). It has also been found that the concern does not have a system of internal control in place which would generally help an organization to control and monitor the performance.  Hence I have written this memo to analyze the importance of accounting as a function to control and monitor the performance of the organization.

The role of accounting in an organization can not be dispensed with. The accounting structure of an organization has a significant impact on the financial performance of the concern. Hence, one of the basic and primary roles played by the accountants of an organization include collection of data, classification of data and maintenance of accounting records with the help of the same. The accounting records thus prepared are useful in preparation of the final accounts of an organization (Mulford & Comiskey, 2005). Hence the biggest objective of the function of accounting is to ensure that he rules and regulation at the corporate and lower levels are complied by the organization. As a consequence the organization can save thousands of dollars or pounds in legal costs if the accounts of the concerned are maintained properly which comply with the legal requirements. Business decision making is an important function or a responsibility of a manager and the same needs to be taken in friendly environment as well as a hostile environment. The decisions taken by the manager in order to be fruitful need to be rational and based on solid facts and figures in addition to the experience (Robinson, 2009). Accounting as a function enables the managers to make informed decisions on the basis of facts and figures. For instance when trying to purchase machinery while comparing it with the previous model, accounting records can indicate the number of units produced and the number of units sold hence the productivity of the machinery.  This information can go a long way in making the right decision. Without the same the decisions would be made by the management on the basis of assumptions (Christy, 2009).

The accounting records help an organization to make decisions in regards to the number of people to be employed, allocation of useful resources etc. The same has proven to be useful in computing the trends in regards to the level of expenditure and the prospective levels of income. Based on the accounting records the organization can also keep a track of the discrepancies and the deviation from standards which can further by analyzed to single out the factors responsible for causing the same (Platt, 2010). The set of recommendations made the accounts department in regards to the same often include strategic solutions to financial problems of the organization.

Cash flow or the liquidity position of an organization as has been discussed previously is a very important aspect of the operations of the business. The accounting profits can significantly vary from the cash position of the organization (Donleavy, 1994). As is evident from the case above the profits of the organization for the financial year ended 2015 was £430,000 whereas the closing cash balance of the organization including the bank overdraft was £30,000. This goes to show the impact liquidity can have on the concern. The organization in the current case has found it seemingly hard to keep afloat, however had the organization had an active accounting function the same would have not posed to be a problem for the organization (Dickey, 2010). For instance, in this case the organization instead of purchasing the machinery on cash basis could have leased the same. The organization could have also procured the machinery through hire purchase. It is quite evident that the concern does not have a monthly cash budgeting system, hence there is not system of monitoring and control in place. Until standards are set and the performance of the organization is compared with the actual performance of the same. Hence there is not system of monitoring or control.

Through the preparation of accounts the organization can also understand the trends of performance. For instance if the COGS/Revenue ratio of the organization is greater or has been increasing year on year, the same is a matter of concern and the organization should look into the various processes to investigate into the costing patterns of the same.  Hence ratio analysis combined with other analysis can lead to singling out the factors responsible for bringing down the performance of the organization (Plewa & Friedlob, 1995). Ratios are prepared on the basis of financial statements and other figures and hence the same is assisted by the process of accounting. For instance by looking at the receivable turnover ratio and the payable turnover ratio the organization can analyze the cash collection and payments trends associated with the same. Also the process of accounting creates a proper trail, for instance with the correct methods and processes an organization can control the misappropriation of cash and other resources (Dayanada, 2002).


Mike Connery 


Monthly Cash Budgets

Quite often than not the function of cash budgeting is the reason of the differentiator between the successful and a unsuccessful organization. The cash position of an organization is very important as has already been stressed in the earlier parts of this report. Excess as well as negative or shortage of cash can be harmful for the organization. A situation of excess cash implies that the organization has a idle cash lying with it and is losing out on interest had it invested the money somewhere (MOSSO, 2006). On the other hand shortage of cash implies that the organization would have to let go of opportunities for the want of cash or it would have to borrow the funds and pay interest on the same (Steyn & Hamman, 2003). From the explanation above it can be assumed that both excess cash and negative cash has a cost associated with them and hence the importance of the function of budgeting. Cash budgeting should be done on a monthly basis to keep a track on the processes (Beutler & Mason, 1987).

Cash budgeting enables an organization to account for the inflow and the outflow of cash. The inflow of cash includes the collection made from the customers on account of the sales previously affected (Bhandari & Iyer, 2013). The same also includes the cash sales of the organization, interest income, dividend incomes, incomes from other sources etc. The cash outflow of the organization include the payments made to the suppliers on account of purchases previously or current cash purchases, purchase of machinery, payment of wages or salaries, office expenses etc. (Peter van der Hoek, 2005). Hence the cash budget enables the concern to examine the areas where the cash would come from or go to and the quantum. The same also enables the organization to understand the deficit or the surplus position in regards to the future. Based on the same the organization is able to arrange for cash in case of a prospective deficit. The preparation of the cash budget also enables the entity to compare the performance of the concern once the month has been completed thereby citing out the causes of difference. Not just that the same can be compared with the previous period estimates and actual to seek a trend (Apreda, n.d.).

According to Nordmeyer “By creating a cash budget, a company can anticipate when a cash deficit might exist and the extent of that shortfall. In turn, the budget indicates when a difference between budgeted and actual values might need to be made up by borrowing. Short-term financing might be required to acquire inventory, promote products or pay monthly expenses. By predicting cash requirements, a company can also evaluate future business opportunities in part based on an opportunity’s probable financing needs and costs”. Another important function of cash budgeting is the differentiation of the long term and short term requirements related to cash of an organization. It is a matter of concern if the organization has to sell the long term assets to meet the short term cash requirements (KAHRAMAN, RUAN, & TOLGA, 2002). If an organization is able to plan for the short term and long term cash requirements beforehand the same would allow the concern to be better plans and make arrangements beforehand for instance, in the current scenario the organization did not plan for the purchase of machinery and hence made an outright purchase (Dimitrijevic, 2015). Had the organization planned in advance and had prepared monthly cash budgets the organization would have been able to foresee the cash shortage (Only 30000) as a consequence of the purchase and would have sought an alternative route for instance hire purchase or procuring the machinery on lease (Turner, 2016). By purchasing the machinery on hire purchase the organization would have been able to save at least 70% of the cash outflow associated with the same and hence would not have had to rely on bank overdraft and liquidating short term investments. For this reason the organization also has not been able to maintain adequate stock levels and would have to forgo an opportunity it were to arise in the near future. Instances like these indicate the importance of cash budgeting (LUFT, 2010).

Decision making is an important function of the managers of the organization. Decisions have to be made by the managers in regards to the credit policy of the organization, the credit policy allowed to the organization by the suppliers, recruitment of employees, payment of dividends etc. Without the existence of a proper system for cash budgeting these decisions can’t be made on the right ground (Giaccotto, 1990). The same was evident from the practice of the organization where it ended up paying a hefty dividend to the shareholders in spite of its weak cash position. The organization also has a high level of debt however the same could have been paid off with the excess cash available had the concern not made the purchase of machinery on an outright basis (Pavlovic & Bogdanovic, 2013). Hence it can be ascertained that without the presence of a monthly system of cash budgeting one wrong decision can result in making cumulative wrong decisions. The cash budgeting system is also important for the maintenance of the levels of stock as the same would allow the concern to maintain the levels of stock based on the levels of cash at the disposal of the organization (Francis, 2010).   



The discussion above has indicated the importance of liquidity and the requirement to keep a tab on the same. As has been mentioned previously that even a very profitable organization can be dissolved or be pushed to the verge of bankruptcy for the want of liquidity. It is for this reason that the organizations should ensure that the liquidity position is stable and that it has the capability of honouring its liabilities. It is for this reason that organizations should prepare cash budgets on a monthly basis to keep a tab on the cash inflow and outflow and make arrangements accordingly. The report above highlights the shortcomings of the cash budgeting functions of the organization. The organization has been struggling to meet its cash requirements for managing the day to day activities and hence has to rely on the short term investments and bank overdrafts. Had there been proper cash budgeting system in place the concern would have been able to command a better cash position or liquidity position.



Apreda, R. The Governance Slack Model: A Cash Flow Approach for the Budgeting and Accountability of Some Corporate Governance Issues.

Beutler, I. & Mason, J. (1987). Family Cash-Flow Budgeting. Home Economics Research Journal,16(1), 3-12. 

Bhandari, S. & Iyer, R. (2013). Predicting business failure using cash flow statement based measures.Managerial Finance, 39(7), 667-676. 

Christy, G. (2009). Free cash flow. Hoboken, N.J.: Wiley.

Coyle, B. (2000). Cash flow control. Chicago: Glenlake Pub. Co.

Dayanada, D. (2002). Capital budgeting. Cambridge, UK: Cambridge University Press.

Dickey, T. (2010). Basics of budgeting. [New York?]: Axzo Press.

Dimitrijevic, D. (2015). The detection and prevention of manipulations in the balance sheet and the cash flow statement. Ekon Horizonti, 17(2), 137-153. 

Donleavy, G. (1994). Cash flow accounting. London: Routledge.

Francis, R. (2010). The relative information content of operating and financing cash flow in the proposed cash flow statement. Accounting & Finance, 50(4), 829-851.

Giaccotto, C. (1990). Cash Flow Modelling and Forecasting in Capital Budgeting Under Uncertainty.Decision Sciences, 21(4), 825-841. 

KAHRAMAN, C., RUAN, D., & TOLGA, E. (2002). Capital budgeting techniques using discounted fuzzy versus probabilistic cash flows. Information Sciences, 142(1-4), 57-76. 

Kemp, S. (2003). Budgeting for managers. New York: McGraw-Hill.

LUFT, J. (2010). Discussion of “The Effects of Financial Statement Information Proximity and Feedback on Cash Flow Forecasts” *. Contemporary Accounting Research, 27(1), 135-142. 

MOSSO, D. (2006). Social Security: Reliance on Cash Flow Accounting and Projections Disguises an Inherent Upside Cash Flow Bias. Public Budgeting & Finance, 26(1), 143-156.

Mulford, C. & Comiskey, E. (2005). Creative cash flow reporting. Hoboken, N.J.: J. Wiley.

Pavlovic, M. & Bogdanovic, J. (2013). Cash flow statement. Skola Biznisa, (3-4), 129-147.


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