KAMPALA UNIVERSITY
JINJA CAMPUS
COURSE WORK
NAME : ISINGOMA CHARLES
REG. NO. : 22AU/KUJ/BBA/1378W
COURSE UNIT : ADVANCED ACCOUNTING
COURSE : BBA
SCHOOL : BUSINESS AND MANAGEMENT
SEMESTER : ONE
YEAR : THREE
PROGRAMME : WEEKEND
LECTURER : MR. KIZA BADIRU
Question
a) Distinguish between a cash flow statement and an income statement.
b) Why do most organizations in Uganda prepare cash flow statement?
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No. (a) A Cash flow statement and an income statement.
A cash flow statement and an income statement are both key financial statements used
by companies, but they serve different purposes and provide different information.
Here are the main distinctions between the two:
Cash Flow Statement
(i) Definition: A cash flow statement is one of the key financial statements used
by businesses to provide a detailed summary of the cash inflows and outflows
over a specific period, such as a quarter or a fiscal year. It helps stakeholders
understand how a company generates and uses its cash, which is vital for
assessing liquidity, solvency, and financial health.
(ii) Purpose: The cash flow statement provides a summary of the actual cash
that flows in and out of a business during a specific period. It is used to
assess the company’s liquidity, cash management, and financial viability.
(iii) Components: The cash flow statement is divided into three main sections:
• Operating Activities: Cash generated or used in the core business
operations, including receipts from customers and payments to
suppliers and employees.
• Investing Activities: Cash used for or generated from investments
in assets (e.g., purchases or sales of property, equipment, or
securities).
• Financing Activities: Cash flows resulting from transactions with
the company’s owners and creditors (e.g., issuing stock, borrowing
money, or repaying debts).
(iv) Basis of Accounting: The cash flow statement is based on cash accounting,
which means it records transactions when cash is actually received or paid.
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(v) Focus: It focuses on cash generation and usage, helping stakeholders
understand the company’s ability to generate cash to fund operations and
growth.
Income Statement
i. Definition: An income statement, also known as a profit and loss statement
(P&L), statement of earnings, or statement of operations, is a key financial
document that summarizes a company's revenues, expenses, and profits or
losses over a specific period, such as a quarter or a fiscal year. It provides
stakeholders with insights into the company’s operational performance and
profitability.
ii. Purpose: The income statement provides a summary of a company's revenues,
expenses, and profitability over a specific period. It is used to assess the
company's operational performance and profitability.
iii. Components: The income statement includes:
o Revenues: Income generated from the sale of goods or services.
o Expenses: Costs incurred to earn revenues (e.g., cost of goods sold,
operating expenses, taxes).
o Net Income: The difference between total revenues and total expenses,
representing the profit or loss for the period.
iv. Basis of Accounting: The income statement is typically based on accrual
accounting, which means it recognizes revenues when they are earned and
expenses when they are incurred, regardless of when cash is exchanged.
v. Focus: It focuses on profitability and operational efficiency, helping stakeholders
evaluate how well the company is performing in terms of generating profit from
its operations.
In summary, while both the cash flow statement and income statement provide valuable
insights into a company's financial health, the cash flow statement focuses on cash
movements, and the income statement focuses on profitability over a period.
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Understanding both statements is crucial for a comprehensive analysis of a company's
financial performance and position.
No. (b): The following are the reasons as to why most organizations in Uganda
prepare cash flow statements:
Liquidity Management: Cash flow statements provide insights into the actual cash
available at any given time, helping organizations like Mukwano Group of Industries
Limited monitor their liquidity status and ensure they can meet short-term obligations.
Operational Efficiency by identifying Cash Sources and Uses: Organizations can
pinpoint where cash is coming from and how it is being spent. This identification helps in
optimizing operations and reducing unnecessary expenditures.
Financial Planning in terms of budgeting and Forecasting: Analyzing past cash
flows allows organizations like Nile Breweries Limited to make more accurate
projections for future cash needs, aiding in effective budgeting and long-term financial
planning.
Performance Evaluation: Cash flow statements help stakeholders evaluate the
performance of the organization by comparing cash flows from operations against net
income, revealing how efficiently the company converts sales and profits into cash.
Helps to make Investment Decisions: Organizations especially profit-making
companies like Kakira Sugar Limited can assess their ability to fund new projects,
investments, or expansions based on their operating cash flows, guiding strategic
decision-making regarding capital investments.
Assessing Repayment Capability: Cash flow statements facilitate evaluation of an
organization’s ability to repay existing debts. Lenders often use cash flow data to assess
a business’s creditworthiness.
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Identifying Cash Shortfalls: By regularly reviewing cash flows, organizations can
identify potential cash shortages or concerns early and take proactive measures to
address them.
Building Trust: Transparency in cash flow management enhances stakeholder
confidence, including investors, creditors, and employees, as they see clear evidence of
cash generation and usage.
Compliance and Reporting in terms of Regulatory Requirements: Many
organizations, especially publicly traded companies or those seeking financing, are
required to prepare cash flow statements in accordance with accounting standards (e.g.,
IFRS, GAAP).
Comparative Analysis: Cash flow statements allow organizations in Uganda to
compare their cash management practices with industry peers, helping to identify areas
for improvement or best practices.
Understanding Cash vs. Accrual: Cash flow statements highlight the difference
between cash basis accounting and accrual accounting. Organizations in Uganda can
see how non-cash transactions affect their cash position, which is crucial for
comprehensive financial understanding.
Strategic Decision-Making: Organizations use cash flow information to guide strategic
choices, such as when to expand, cut costs, or adjust pricing, based on a clearer
understanding of cash availability.
In conclusion, cash flow statements are essential for effective financial management.
They provide valuable insights into liquidity, operational efficiency, and overall
organizational performance, facilitating better decision-making, compliance, and
stakeholder confidence. Regularly preparing and reviewing cash flow statements
enables organizations to navigate financial challenges proactively and strategically
allocate resources for future growth.
REFERENCES
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o Bragg, S. (2016). Cash Flow Management: A Practical Guide to Managing Cash
Flow in Your Business. Accounting Tools.
o Fraser, L. M., & Ormiston, A. (2018). Understanding Financial Statements.
Pearson. o Morrissey, S. (2018). “Managing Cash Flow: Top Tips to Improve
Your
Business.” Small Business Trends. Retrieved from
https://smallbiztrends.com/2018/12/manage-cash-flow.html
o Stice, E. K., & Stice, J. D. (2016). “Financial Statement Analysis.” Journal of
Accounting and Finance, 16(4), 21-28. Retrieved from
https://www.researchgate.net/publication/314015456_Financial_Statement_A
nalysis
