The liquidity of a business is explained by cash flow statement. Discuss


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In making plans for the more immediate future (short-range financial planning), the management is vitally concerned with a statement of cash flows, which provides more detailed information. Such a statement is useful for the management to assess its ability to meet obligations to trade creditors, to pay bank loans, to pay interest to debenture holders & dividend to its shareholders. Furthermore the projected cash flow statements prepared month-wise or so can be useful in presenting information of excess in some month & shortage of cash in others. By making available such information   in advance, the statement of cash flows enables the management to revise its plans. Cash flow statements summarize sources of cash inflows & uses of cash outflows of the firm during a particular period of time. In the preparation of cash flow statement all the item that increase /decrease cash are included but all those items which have no effect on cash are excluded. Hence, it is essentially a tool of short term financial planning. Cash flow information is useful in assessing the ability of the enterprise to generate cash & cash equivalent & enables users to develop models to assess & compare the present value of the future cash flows of different enterprises.

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