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Ch 7 Cash Flow Statement

Ch 7 Cash Flow Statement

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Published by: kulife on Dec 21, 2009
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11/07/2012

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CASH FLOW STATEMENT
MEANING
Cash plays very important role in entire economic life of a business. A firm needs cash tomake payments to its suppliers and meet day to day expenses. So it is very essential for a business to maintain an adequate balance of cash by taking in to account cash in flow andout flow. Cash flow statement is a statement which describes the inflows (sources) andoutflows (uses) of cash and cash equivalents in an enterprise during a specified period of time. Such a statement enumerates net effects of the various business transactions on cashand its equivalents and takes into account receipts and disbursement of cash. A cash flowstatement summarizes the causes of changes in cash position of a business enterprise between dates of two balance sheets.1. Cash comprises cash on hand and demand deposits with banks.2. Cash equivalents are short term, highly liquid investments that are readily convertibleinto known amounts of cash and which are subject to an insignificant risk of changes invalue.3. Cash flows are inflows and outflows of cash and cash equivalents. Flow of cash is said tohave taken place when any transaction makes changes in the amount of cash and cashequivalents available before happening of the transaction. If the effect of transactionresults in the increase of cash and its equivalents, it is called an inflow (source) and if itresults in the decrease of total cash, it is known as outflow (use) of cash.
CLASSIFICATION OF CASH FLOWS
1. Cash flows from operating activities.2. Cash flows from investing activities.3. Cash flows from financing activities.
 
 
Examples of cash flows from operating activities are:
(a) Cash receipts from the sale of goods and the rendering of services;(b) Cash receipts from royalties, fees, commission, and other revenue;(c) Cash payments to suppliers of goods and services;(d) Cash payment to and on behalf of employees;(e) Cash receipts and cash payments of an insurance enterprise for premiums and claims,annuities and other policy benefits;(f) Cash payments or refunds of income taxes unless they can be specifically identified withfinancing and investing activities; and(g) Cash receipts and payments relating to futures contracts, forward contracts, optioncontracts, and swap contracts when the contracts are held for dealing or trading purposes.
Examples of cash flows arising from investing activities are:
(a) Cash –payments to acquire fixed assets (including intangibles). These payments includethose relating to capitalized research & development costs and self constructed fixedassets;(b) Cash receipts from disposal of fixed assets (including intangibles);(c) Cash payments to acquire share, warrants, or debit instruments of other enterprises andinterests in joint ventures (other than payments for those instruments considered to becash equivalents and those held for dealing or trading purposes);(d) Cash receipts from disposal of shares, warrants, or debt instruments of other enterprisesand interests in joint venture (other than receipts from those instruments considered to becash equivalents and those held for dealing or trading purposes);
 
(e) Cash advances and loans made to third parties (other than advances and loans made by afinancial loans of a financial enterprise);(f) Cash receipts from the repayment of advances and loans made to third parties (other thanadvances and loans of a financial enterprise);(g) Cash payments for futures contracts, forward contracts, option contracts, and swapcontracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities.(h) Cash receipts from futures contracts, forward contracts, option contracts, and swapcontracts except when the contracts are held for dealing or trading purposes, or thereceipts are classified as financing activities.
Examples of cash flows arising from financing activities are:
(a) Cash proceeds from issuing share or other similar instruments:(b) Cash proceeds from issuing debentures, loans, notes, bonds, and other short-or long-term borrowings; and(c) Cash repayment of amounts borrowed such as redemption of debentures, bonds, preference shares.

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