Identify the Differences Between a Cash Flow Statement and a Profit and Loss Account. Which Statement Gives a Better View of Organisational Performance? Fully Explain Your Choice Essay Example
Accounting for Managers
Identify the differences between a cash flow statement and a profit and loss account. Which statement gives a better view of organisational performance? Fully explain your choice.
There is undoubtedly, a clear difference between what is termed “cash” and what “profit” is and by extension a cash flow statement and a profit and loss statements. Notwithstanding these differences, each statement gives a different yet important view of organisational performance.
Cash according to Holmes et al 2005:166 is “cash in hand and deposits repayable on demand less overdrafts repayable on demand; i.e. they can be withdrawn at any time without penalty. Cash includes cash and deposits denominated in foreign currency.”
Once, accounts were comprised of just the balance sheet and the profit and loss statements. However in the late 1960’s, a period characterised as a high inflationary period, it was felt that historical costing convention which is indicative of the profit and loss account, provided information that was outdated and as such provided little insight on the current market value of companies and by extensions their profits. Therefore, there became a need for an additional statement- the cash flow statement.
“A cash flow statement is a statement produced either for management or external reporting purposes showing, by broad categories cash receipts and payments in a period” (Leicester, 2001. 10.3), and is intended to supplement the profit and loss account and the balance sheet. The cash flow statement therefore, assists creditors, investors and generally all stakeholders in evaluating the liquidity and solvency of a business or rather, shows changes in cash be it negative or positive i.e. cash outflows and cash inflows.
The Cash flow statement is divided into three main sections:
1. Core operations (operating activities)
2. Investing
3. Financing
A typical cash flow statement can be seen in Appendix B.
Cash flows
Identify the differences between a cash flow statement and a profit and loss account. Which statement gives a better view of organisational performance? Fully explain your choice.
There is undoubtedly, a clear difference between what is termed “cash” and what “profit” is and by extension a cash flow statement and a profit and loss statements. Notwithstanding these differences, each statement gives a different yet important view of organisational performance.
Cash according to Holmes et al 2005:166 is “cash in hand and deposits repayable on demand less overdrafts repayable on demand; i.e. they can be withdrawn at any time without penalty. Cash includes cash and deposits denominated in foreign currency.”
Once, accounts were comprised of just the balance sheet and the profit and loss statements. However in the late 1960’s, a period characterised as a high inflationary period, it was felt that historical costing convention which is indicative of the profit and loss account, provided information that was outdated and as such provided little insight on the current market value of companies and by extensions their profits. Therefore, there became a need for an additional statement- the cash flow statement.
“A cash flow statement is a statement produced either for management or external reporting purposes showing, by broad categories cash receipts and payments in a period” (Leicester, 2001. 10.3), and is intended to supplement the profit and loss account and the balance sheet. The cash flow statement therefore, assists creditors, investors and generally all stakeholders in evaluating the liquidity and solvency of a business or rather, shows changes in cash be it negative or positive i.e. cash outflows and cash inflows.
The Cash flow statement is divided into three main sections:
1. Core operations (operating activities)
2. Investing
3. Financing
A typical cash flow statement can be seen in Appendix B.
Cash flows