Analysis of Cost Benefit and About Cost Benefits

Cost Benefit analysis is done for the public investment projects. This is used to judge the desirability of public investment of any public products or investment. In this, we don’t analyze the money cost and money benefit; but real cost and real benefit. Here it is concerned with social benefit and social cost. Cost benefit analysis is done for the public products to analysis the social benefits from the public investments. Let us take up an example of construction of a subway.

In the above figure, on the X axis we measure the number of journeys made per week and on Y axis cost per journey. DD shows the demand curve for the journey on that route.

If OP1 is the cost per journey, two wheelers are ready to pay OD as price. So, the consumer surplus is P1AD. This is the situation before the construction of a subway. Now, when a public investment on subway is decided, then the cost benefit analysis is done to see whether this particular investment is beneficial to the society. After the construction of the subway the price of the cost per journey will come to OP2 and the number of journeys will increase to OQ2 which shows that the consumer surplus will increase after the construction of the subway. Before the construction of subway consumer surplus is P1AD and after the subway it will be P2CD. This shows that there is increase in consumer surplus that will be P1ACP2.

There are two parts of the increase in consumer surplus P2 CAP1

P2BAP – increase surplus is due to decrease in the price of cost per journey.

ABC – the increase in consumer surplus due to the increase in number of journeys on that route.

The cost saving segment is the main component to the consumer surplus.

Cash Flow Analysis from Financial Books

About the cash analysis we can say that it is the lifeblood of any business. In an organization we can see many activities to get the cash from sales, debtors, sale of assets, investment etc. like this the company spend also the cash in some areas – payment to salaries, rent dividend, interest etc. Lastly, we can say that cash flow reveals the inflow and outflow of cash during a particular period.

Objectives of Cash Flow Analysis:

Meaning of Cash Flow Statement

Uses of Cash Flow Statement

Steps in Preparing Cash Flow Statement

Distinguish between Cash & Fund Flow Statement

Compute the Cash from Operations

I have already mentioned about the meaning of Cash Flow Statement that it reveals the inflow and outflow of cash during a particular period in a particular organization. From the management point of view it is also important tool of cash planning and controlling.

Main objectives of Cash Flow Statements (CFS):

To show the causes of changes in cash balance between the balance sheet dates.

To show the factors contributing to the reduction of cash balance in spite of increasing profit or decreasing profit

Now, after knowing about the CFS objectives we can discuss about the uses of CFS:

It is for explaining the reasons for low cash balance

CFS shows the major sources and uses of cash

It helps in short term financial decisions relating to liquidity

From the past year statements projections can be made for the future

It helps the management in planning the repayment of loans, credit arrangements etc

If you want to prepare CFS then use these:

Opening of accounts for non-current items

Preparation of adjusted P & L Account

Comparison of current items

Preparation of Cash Flow Statements

Cash Flow Statements Formula:

Net Profit + Decrease in Current Assets - Increase in Current Assets
Increase in Current Liabilities Decrease in Current Liabilities

A format of Cash Flow Statement:

In the summery I can say that CFS study in the chapter is not in more details but all the understanding, uses, steps and meaning are clear. For more example and definition I will let you know further.