Cash Flow Statement

Contents
Meaning

Classification

Objectives and uses

Limitations

Difference between Cash Flow and Fund Flow Statements

 Meaning
Cash: Cash means all cash + cash equitable + marketable
securities + bank balance .
Flow: Flow means flow of cash from business to economy and
economy to business i.e. cash inflows and cash outflows.
Statement : Statement is a performa prescribed by Charted
Accountant Act,1948.
Thus,
Cash Flow Statement is a statement o f inflows (sources)
and outflows (uses) of cash and cash equivalents in an
enterprise during a specified period of time.
 Continued…..

A cash flow statement summarizes the causes of changes in

cash position of a business enterprise between dates of
two balance sheets.

A statement a cash flows reveals the movements of cash of

a business enterprise for the given accounting period
indicating specifically how the cash was generated.

Statement of cash flow is required for short range financial

planning.
 Classification
As per Accounting Standard-3 (revised) the changes
resulting in cash inflows and cash outflows arise on
account of three types of activities –
 Cash Flow form Operating Activities:
Operating activities are the principle revenue
producing activities of the enterprise and other
activities that are not investing and financing activities.
Hence, these are the results of those transactions and
events that determines the net profit or loss.
 Continued….
Examples are:
a. Cash receipts from the sale of goods and the rendering of services
b. Cash receipts from royalties, fees, commissions and other revenues
c. Cash payments to suppliers of goods and services
d. Cash payments 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 with financing and investing activities
g. Cash receipts and payments relating to future contracts, forward
contracts, option contracts and swap contracts when the contracts
are held for dealing or trading purposes.
 Continued….

 Cash Flow from Investing Activities:

Investing activities include the acquisition and disposal of
long-term assets and other investments not included in cash
equivalents. The separate disclosure of cash flows arising
from investing activities is important.
Examples are:
 Cash payments to acquire fixed assets (including
intangibles)
 Cash receipts from disposal of fixed assets (including
intangibles)
Continued….

 Cash payments to acquire and cash receipts from

disposal of shares, warrants or debt instruments of
other enterprises and interests in joint ventures.
 Cash advances and loans made to 3rd parties
 Cash payments and receipts for future contracts,
forward contracts, option contracts and swap
contracts except when the contracts are held for
dealing or trading purposes, or the payments are
classified as financing activities
Continued….
 Cash Flow from Financing Activities:
The separate disclosure of cash flows arising from
financing activities is important because it is useful in
predicting claims of future cash flows by providers of
funds (both capital and loan)to the enterprise.
Financing activities are activities that result in changes
in the size and composition of the owners capital
(including preference share capital in the case of a
company) and borrowings of the enterprise.
Continued….

Examples are:
 Cash proceeds from issuing shares or other similar
instruments
 Cash proceeds from issuing debentures, loans, notes,
bonds and other short or long term borrowings, and
 Cash repayments of amounts borrowed such as
redemption of dentures, bonds, preference shares.
 Format of Cash Flow Statement
ABC Limited
For the year ended…………..
(A) Cash Flows from Operating Activities: Rs. Rs.

Net Profit before tax & extraordinary items

Adjustment 1:
Depreciation & Amortization xxx
Provision for Doubtful Debts xxx
Foreign Exchange gain/loss xxx
Dividend xxx
Interest xxx
Gain/ Loss on sale of fixed assets/investments xxx xxx
 Continued….
Rs. Rs.
Operating Profit before Working Cap. Changes xxx
Adjustment 2 for changes in working capital:
Bills Receivables xxx
Debtors xxx
Inventories xxx
Prepaid Expenses xxx
Bills Payable xxx
Creditors xxx xxx
Cash Generated from Operations xxx
Income tax paid xxx
Cash before Extraordinary Items xxx
 Continued….
Rs. Rs.
Extraordinary Items xxx
Net Cash from (used in) Operating Activities xxx

(B) Cash Flow from Investing Activities:

Purchase of Fixed Assets xxx
Proceeds from Sale of fixed assetsxxx
Purchase of Investments xxx
Proceeds from Sale of investments xxx
Interests received xxx
Dividend received xxx
Net Cash from (used in) Investing Activities xxx
 Continued….
Rs. Rs.
(C) Cash Flow from Financing Activities:
Proceeds from Issue of Shares/ Debentures xxx
Proceeds from Long-term debts xxx
Repayment of Long-term Debts xxx
Redemption of Debentures xxx
Redemption of Preference Shares xxx
Dividend paid xxx
Interest paid xxx
Net Cash from (used in) Financing Activities xxx
Net increase/decrease in cash and Cash Equivalents (A+B+C) xxx
Cash and Cash Equivalents at the beginning of the year xxx
Cash and Cash Equivalents at the end of the year xxx
 Objectives & Uses
The primary objective of CFS is to provide information regarding the
cash receipts and payments of an enterprise for an accounting period.
The secondary objective is to disclose information about the operating,
investing and financing activities of an enterprise during an
accounting period.

According to AS-3 (Revised), the objective of cash flow statement is

to provide information about the cash flows of an enterprise to
the users of financial statements with a basis to assess the ability
of the enterprise to generate cash and cash equivalents and the
needs of the enterprise to utilize those cash flows so that they
may know about the historical changes in cash and cash
equivalents.
Continued….
In brief, the cash flow statement serves the following purposes:

• Helpful in planning and Co-ordination

• Helpful in Control

• Useful in Internal Financial Management

• Knowledge of changes in Cash position

• Helpful in Short-term financial decisions

 Limitations
The cash flow statement has the following limitations:

Misleading Comparisons

Influenced by changes in Management Policies

Incomplete Substitutes
Difference b/w Cash Flow & Fund Flow
Cash Flow Statement
1. Meaning of fund: Funds means
only cash which is a component of
net current assets.
2. Objective: Its objective is to know
about the changes occurred in cash
position between two balance sheet
dates.
3. Basis of preparation: Increase in
current liability or decrease in
current asset (except cash) results
in an increase in cash or vice-versa.
Fund Flow Statement
Fund means net working capital
(i.e. current assets minus
current liabilities).
Its objective is to know about
the changes occurred in net
working capital between two
balance dates.
Increase in current liability and
decrease in current asset
results in a decrease in net
working capital or vice-versa.
Continued….
4. Effect of transaction: Effect of
a transaction on cash is
considered.
5. Utility: Cash flow statement is
useful for short-term analysis.
6. Statement of changes in
Working Capital: No such
statement is prepared separately
in cash flow statement.
7. Cash Balances: Opening and
closing balances of cash are
shown in cash flow statement.
Effect of a transaction on net
working capital is
considered.
Fund flow statement is useful
for long-term analysis.
A separate statement for
changes in working capital
is prepared in fund flow
statement or analysis.
Such balances of cash are
shown in statement of
changes in working capital.
Thank You