Cash Flow Management: A Case Study of Wadley's

This report discusses the relevance of cash flow statement and its impact on the status of the cash flow of the company. It also provides a cash flow statement for Wadley's and highlights the advantages and disadvantages of cash flow statement.

Interpret Financial
Information
Assignment

1
By student name
Professor
University
Date: 25 April 2018.
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Contents
Background and Abstract............................................................................................................................3
Introduction.................................................................................................................................................3
Conclusion and Recommendation...............................................................................................................4
References...................................................................................................................................................5
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Background and Abstract
A report has been prepared how the cash flow management can be one of the major issues for some of
the companies. The cash flow statement has been prepared for the given company Wadley’s using the
income statement and the balance sheet and the discussion on the relevance of cash flow statement has
been done.
Introduction
Cash flow statement which is also known as statement of changes in cash flow is one of the important
and significant financial statements which is being prepared by all the companies. It shows how the
changes in the income statement and balance sheet accounts has an impact on the status of the cash
flow of the company (Alexander, 2016). It is further broken down into 3 parts namely cash flow from
operating activities, financing activities and investing activities. Even though the company may be
profitable it may still become bankrupt due to the cash flow issues.
The cash flow statement of the given company Wadley’s has been shown below:
Cash Flow Statement
for the year ended 31st March 2015
Particulars Amount Amount
Net profit before Tax and extra ordinary Items 300
Less: Change in Retained Profit 40
340
Cash flow from Operating activities
Add: Non-cash and non-operating Items which have already been
debited to profit and Loss Account like;
Depreciation 100
Interest on Bank Loan 20
Operating profit before working Capital changes (A) 460
Changes in working capital:
Less: Increase in current assets (150)
Less: Decrease in current liabilities (60)
Net increase / decrease in working capital (B) (210)
Net cash flow from operating activities (C) = (A+B) 250
Cash flow from Investing activities
Net cash from investing activities (D) Nil
Cash flow from Financing activities
Issue of Equity Shares (180)
Payment of Dividend (40)
Net cash flow from financing activities (E) (220)
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Net increase in cash and cash equivalents (C+D+E) = (F) 30
Cash and cash equivalents and the beginning of the period (G) 50
Cash and cash equivalents and the end of the period (F+G) 80
The primary objective of cash flow statement is to disclose flow of cash in and out in business to
evaluate the change in assets, liabilities and equity of company. There are two method of making cash
flow statement direct method and indirect method. The major group of people who are interested in
cash flow statement are enlisted below:
 Lender who want to know whether company is able to pay the debt in future or not.
 Potential investor to take effective decision whether to invest in company or not.
 Accounting personnel to know whether company is able to pay payroll expenses within time.
 Shareholders of the company to know whether company is working effectively and efficiently or
not (Goldmann, 2016).
It has a number of advantages and disadvantages like that of:
Advantages of Cash Flow Statement:
 It reflects the liquidity position of the company between two balance sheet dates.
 It also helps the company in making future projection based on current figures so that company
can take effective decision on how to arrange the finance and what will be the source of finance.
 It also helps in judging whether the financial statements is prepared after considering the
accounting standard and financial rule and regulation because if there is any discrepancy and
excessive position as reflected by balance sheet with cash flow statement than it means that
statement not disclosing true position of cash (Choy, 2018).
Disadvantages of Cash Flow Statement:
 Since the cash flow statement shows only the cash position. So with the help it’s not possible to
determine actual profit & loss of the company.
 Isolated cash flow statement have no relevance in corporate world we need other statements
like balance sheet, profit & loss account to take efficient decision.
But at times, even though the entity has been profitable, it may still land up in liquidity issues. That’s
why monitoring the cash situation of the business is the key to every problem of the business. In spite of
all these we can also prepare cash flow statement in budgetary format and later compared to actual
figure. It help in calculating the variances and take the proper decision for the betterment of company.
There have been various companies in the past which became bankrupt due to non-payment of dues to
creditors and long term lenders like those banks and financial institutions (Jefferson, 2017).
Conclusion and Recommendation
In the given case, some of the ways to help the company overcome the cash flow woes are mentioned
below:
1. To pay off the debts and the creditors and reduce the burden of liability
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2. To improve the proportion of equity and decrease the proportion of debt in the debt equity
ratio.
3. To improve the cash position of the company.
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.
Ecological Economics, p. 145.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4(3), pp. 103-112.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland.
Technological Forecasting and Social Change, pp. 353-354.
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