Cash flow statement gives details of Inflows and Outflows of cash during a particular period. It is also called statement of Receipts of Cash and Payments of Cash for a given period. Information about the cash flows of an enterprise is useful in providing the users of financial statements with a basis to assess the ability of enterprise to generate cash and the needs of the enterprise to utilize the cash. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of the generation. Cash is ready money on hand or in the bank. For the purpose of Cash flow statement, Cash includes cash and cash equivalents. Cash equivalents are readily marketable highly liquid securities, and which are subject to insignificant risks of changes in value. What is Cash Flow?

Cash flow refers to the flow of cash into and out of a business over a period of time. Cash coming into the business are termed as ‘ Cash Inflows’ and cash going out of the business are termed as ‘Cash Outflows’. Cash inflows are normally cash received by the enterprise from its customers (cash sales), debtors, lenders and investors and Cash outflows are normally the payments made for purchases, salaries, rent and other overheads. The cash flows may be either positive or negative cash flows. Whenever the cash inflows are more than the cash outflows the enterprise is said to have positive cash flows and conversely whenever the cash


It helps in preparation of cash flow forecast. Cash Budget helps the enterprise in knowing when. What are the advantages of Cash Flow analysis? 1. It helps the enterprise in short term planning and matching of inflows and outflows of cash during the period. 2 .outflows of the enterprise are more than the cash inflows it is said to have negative cash flows. A specimen of the Cash Budget is given in the annexure. 2. Both the revenue and capital items involving cash flows are taken into account while preparing the statement. What are the components of Cash Flow? The cash flow of an enterprise broadly consists of the cash flow from the following activities. normally called as Cash Budget. It helps the enterprise in parking temporary surplus funds in profitable avenues. 3. What is a Cash Budget? Cash Budget is nothing but a statement that gives details of Receipts and Expenditure of an enterprise over a period of time say one year on a month wise basis. 4. where and how the cash needs of the enterprise will occur.

loans borrowed etc. advance received from the customers etc. commission received on rendering services. Cash Out Flow from operating activity mainly refers to cash payments arising from purchases.• • • Operating Activities Investing Activities Financing Activities Cash In Flow from operating activities mainly refers to cash receipts arising from sales of goods. Cash In Flow from financing activities includes issue of shares/debentures. Cash In Flow from investing activities includes sale of assets/investments. interest and dividend income on investments. Cash Outflow from financing activities includes redemption of shares/debentures. cash receipts from royalties. repayment of loan. payment of interest/dividend etc. 3 . Cash Outflow from investing activities includes purchase of assets/investments or loan given etc. overheads payments. payments to suppliers of services. fees. interest expenses etc.

all other flows are ignored. 2. The difference between funds flow statement and cash flow statement are detailed as under. 4 . the cash is an item of funds CASH FLOW STATEMENT 1.The statement analyses the receipts and payments under certain specific heads to suit the requirement of the user.What are the differences between Fund Flow Statement and Cash Flow Statement? In a fund flow statement the focus is on changes in values of liabilities and assets to determine the flow of funds. The statement details flow of funds. Any increase in value of liabilities and decrease in value of assets of an enterprise are taken as ‘Sources of Funds’. The statement details flow of cash. Similarly. any decrease in value of liabilities and increase in value of assets are taken as ‘Uses of Funds’. The statement analyses the flow of fund under Long Term and Short Term funds. In a Cash Flow analysis the focus is only on changes in the amount of cash and its equivalent. FUNDS FLOW STATEMENT 1. Fund flow statement’s focus is more on working capital. where in ‘Cash’ is taken merely as an item of funds flow. 2.

Sound cash position does imply sound financial position normally.This statement is prepared as per Accounting Standard (AS) 3.Profit is not treated as a source of cash. No format is prescribed for 6. 7. This statement is prepared from net profit with depreciation added back. 5. unit to determine the financial strength of the unit in terms of ‘liquidity’ 6. Turnover Method. 4. 3. Presently more and more 5 . under any Statute in India How Does a Cash Flow Statement and Cash Budget helps a Banker? The banker can assess the working capital requirements of the borrower by various methods namely Tandon Committee Method or Methods of lending. 5. and Cash Budget Method. it is substituted by surplus or deficit of cash from operations. preparation of this statement. This statement is not compulsory 7. This statement is compulsory for all listed companies as AS 3.3. Cash flow statement helps the bankers generates to know and how uses the cash. Sound funds position does not mean sound cash position. Bankers use funds flow statement to explain the movement in net working capital and ascertain whether there is any application of short-term sources of funds for long term uses resulting in diversion of funds. 4. RBI permits the banker to adopt any method for assessing the working capital finance of the borrower.

• Projected cash flow statement enables the banker to fix different drawing limits for companies dealing in the seasonal products.bankers are resorting to Cash Flow Statements and Cash Budgets as tools of credit appraisal and credit monitoring in view of the following advantages: • The cash flow budget/cash flow statement enables the banker to judge the ability of the borrower to generate cash and cash equivalents. construction companies (contractors) etc. 6 . • It enables the banker to judge the ability of the borrower to meet its obligations on due dates under letters of credit/Bank guarantees. bonus etc. statutory obligations like income tax. its financial structure (including its liquidity and solvency) and its ability to affect amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. if there are negative flows in ‘Operating Activities’ the borrower shall be granted Working Capital Finance and if it is in the ‘ Investing Activities’ the banker shall sanction a Term Loan for purchase of assets. short adhoc commitments. Conclusion Cash flow statement and Cash Budget are good tools of financial analysis. • A disciplined Cash Budget management by the borrower helps the banker in their efficient management of Asset & Liabilities. That is. However a Banker should use this tool in conjunction with the other Financial Statements as the same provides information that enables the bankers to evaluate the changes in net assets of an unit. (ALM) • A properly presented Cash Flow /Cash Budget statement enables the banker to decide on the type of financing required by the borrower..

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