Cash Flow Analysis
Cash flow analysis is another important technique of financial analysis. It involves preparation of Cash flow statement for identifying sources and applications of cash. A cash flow statement is a statement depicting change in cash position from one period to another. For example, if the cash balance of business is shown by its Balance sheet on 31st December, 1978 at Rs. 20,000 while the cash balance as per its balance sheet on 31st December, 1979 is Rs. 30,000. There has been an inflow of cash of Rs. 10,000 in the year 1979 as compared to the year 1978. The cash flow statement explains the reasons for such inflows or outflows of cash, as the case may be. It also helps management in making plans for the immediate future.
A cash flow statement can be prepared on the same pattern on which a funds flow statement is prepared. The change in the cash position from one period to another is computed by taking into account “Sources” and “Application” of cash.