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Cash Flow Statement

Meaning
a. Statement of cash inflows and outflows
b. statement of the changes in the financial position of a business on cash basis
Objectives
a. provides cash inflows and outflows
b. indicates historical changes in cash and cash equivalents by classifying cash flows
from operating, investing and financing activities
c. indicates ability of an enterprise to generate cash and cash equivalents
Classification
Operating activities
Cash inflows
Cash received from debtors
Cash sales
Professional fee received in cash
Trading commision received in cash
Royalty received
Cash Outflows
Cash paid to creditors for Goods/ Services
Wages/Salaries paid
Admin expenses / Other expenses incurred for trading
Income tax paid (pertaining to operating activities)
Investing activities
Cash Inflows
Sale of Fixed Tangible asset / investments
Loans and advances received back
Dividend received
Interest on investment received
Interest received on debentures held as investments
Cash Outflows
Purchase of Fixed assets
Loans given to outsiders
brokerage / commission paid on purchase of investments
Financing activities
cash inflow
Issue of shares / debentures / bonds for cash
short term borrowings / loans taken
interest received on calls in arrears

cash outflow
Redemption of preference shares / debentures
loan repaid
dividend paid
interest paid on loan / debentures
Significance
1. Helpful in assessing solvency and liquidity
2. Assess the ability of the enterprise to generate cash and cash equivalents
3. helps in short term planning
4. Managerial decision making
Limitations
1. Ignores non cash transactions
2. Window dressing
3. Historical in nature
Computation of cash flows
Cash flow from operating activities
Profit before tax and extraordinary items
Profit as per P & L statement (Cl. - Op.bal)
ADD: Transfer to reserve (cl.balance - op.bal)
ADD: proposed/interim dividend paid during the year
ADD: provision for tax made during the year
ADD: Deferred tax liabilities (op.-cl.bal)
LESS: Deferred tax assets (op.-cl.bal)
LESS: Refund of tax credited to P & L statement
ADD: Extraordinary item (loss) eg.floods, etc
LESS: Extraordinary item (income) eg.insurance claim
Non cash and non operating items
ADD:
Depreciation
Amortisation
Unamortised expenses and losses on fictitious assets
Non operating expenses eg. Interest paid on loans, debentures
loss on sale of fixed assets, investments
increase in provision for doubtful debts
LESS
non operating income eg. Rental income, interest on investment, dividend income
profit on sale of fixed assets/investments
decrease in provision for doubtful debts

Treatment of current assets and current liabilities

ADD
Increase in current liabilities eg. Trade payables, outstanding expenses, advance
incomes
Decrease in current assets eg.inventories, Trade receivables, prepaid expenses
LESS
Increase in current assets
Decrease in current liabilities
LESS: Income tax paid (excluding tax refund)
ADD Extraordinary credit items
LESS extraordinary debit items
Net cash from operating Activities