CASH FLOW STATEMENTS

Cash flow statement reports the change in the amount of cash and cash equivalents held by the
entity during the financial period.
Cash:
Cash comprises cash on hand and demand deposits.
Cash Equivalents:
Cash equivalents are short term highly liquid investment that are readily convertible to known
amount of cash and which are subjected to a little risk of change in value.
OBJECTIVE OF CASH FLOW STATEMENTS
1. To ensure that all entities provide information about the historical changes in cash and
cash equivalents.
2. To classify cash flows (Inflows and outflows) of cash during the period between those
arising from operating investing and financing activities.
Usefulness of Cash Flow Statement
1. Users of Financial Statement need information on liquidity, reliability and financial
adoptability of entities. This information makes it easy for the user to assets future
Cash flows of the entity.
2. Future Cash Flow are regarded as prime determinant of the worth of business and this
is only possible through the analysis of cash flow statement.

Activities
1. Operating Activities:
Operating Activities are the principal revenue producing activities of the entity other
than investing or financing activities.
2. Investing Activities:
Investing Activities are the acquisition and disposal of long-term assets.
3. Financing Activities:
Financing Activities are the activities that result in changes in the size and
composition of contributed equity and borrowings of the entity.

Sources of Cash
1. Issue of shares/ Debenture and other long-term loans
2. Sale of investment and other fixed assets
3. Cash from operation
4. Decrease in cash

Application of Cash
1. Redemption of shares and debenture
2. Purchase of investment and other fixed assets
3. Payment of tax
4. Payment of dividend
5. Repayment of loan

Limitation of Cash
1. Cash flow statement are based on historical information which means they do not provide
complete information for assessing future cash flows.
2. There is some scope for manipulation of Cash Flow
3. Cash flow is necessary for survival in the short term

Usefulness
1. It may help users of financial statement in making judgment on the amount timing and
degree of certainty of future Cash flows. It gives an indication of the relationship between
profitability and cash generating ability and quality of the profit earned.

Method
1. The indirect method starts with gross income and adjust to cash flow from operation
while the direct method starts with gross profit and flows through income statement to
calculate cash flow from operation.
2. The direct method will result in a lower or higher cash flow figure for operating activities
while the indirect method uses only net income.

Format
Opening balance
 Operating Activities
 Investing Activities
 Financing Activities
+ Sources of Cash
-Application of Cash
Ending Balance (Equal to Balance Sheet)