Cash Flow Statement

Dr. Ramanpreet Singh

Associate Professor,
School of Business Studies
Vivekananda Institute of Professional Studies
 Meaning of Cash
Cash plays a very important role. It is the life
blood of a business enterprise. Business needs
to meet day to day obligations like
purchasing raw material, payment to
suppliers, payment of wages, salaries,
interest, dividend etc.
 Definition of Cash as per AS3 revised
Following definetion are as per AS 3 revised
1. Cash comprise of cash in hand and demand deposit with
bank
2. Cash equivalent are short term, highly liquid investment
also known as marketable securities, that are readily
convertible converted into cash. It also includes bank
overdraft and cash credit.
3. Cash flows are inflows and outflows of cash and cash
equivalent.
4. Operating activities are the principal revenue producing
activities of the enterprise and other activities that are
not investing or financing activities.
5.Investing activities are the acquisition and
disposal of long term assets and other investment
not included in cash equivalent.
6. Financing activities: are activities that result in
changes in the size and composition of owners
capital and borrowing of the enterprise.
Meaning of Cash Flow
A Cash flow statement also known as statement of
cash flows is a financial statement that shows
how changes in balance sheet accounts and
income affect cash and cash equivalent and break
down the analysis down to operating, investing
and financing activity. The statement of cash flow
report the source and uses of cash by operating,
investment activity and financing activity and
certain supplemental information for the period
specified in the heading of the statement.
Objectives of Cash flow statements
 Cash flow statement highlight the liquidity position of
the firm. Bank rely on cash flow statement to know
about the liquidity of the firm.
 Cash flow statement calculate the cash received from
the operating activities.
 Cash flow statement helps in effective and efficient
management.
 It helps to know about the replacement of fixed assets.
 It helps in future projections of various financial
decision
 To know the various sources of cash and cash
equivalent.
 CASH FLOW FUND FLOW
BASIS
STATEMENT STATEMENT
Meaning A CFS is mainly A FFS is concerned with
concerned with changes in changes in working
cash position capital. And cash is only
one of the constituents of
working capital
Usefulness in short-term For short-term financial Less useful
financial analysis analysis, CFS is more
useful to management
Schedule of changes in CFS is not followed by FFS is generally followed
WC any other such statement by a schedule of changes
in WC.
Opening and Closing In CFS the opening and FFS does not contain any
balances closing balances of cash opening and closing
and cash equivalents are balances
given
Legal requirements CFS is to be prepared by There is no legal
every listed company as requirements to prepare
per AS-3, as required by FFS
SEBI.
Classification of Cash Flows
• Operating Activities
• Investing Activities
• Financing Activities
 Operating Activities
• Cash Flow from Operating Activities
– Cash receipt from sale of goods and the
rendering of services
– Cash receipts from royalties, fees,
commission and other revenue
– Cash payment to suppliers for goods and
services
– Cash payment of wages and salaries of
employees
– Cash payments and refunds of income tax
 Investing Activities
Cash Flow from Investing Activities
◦ Cash payments to acquire fixed assets
◦ Cash receipts for disposal of fixed assets
◦ Cash payments to acquire shares, warrants,
instruments of other enterprises
◦ Cash receipts from disposal of shares,
debentures of other enterprises.
◦ Cash advances and loans made to third parties
◦ Cash receipts from repayments of advances
and loans made to third parties
Cash inflow
Receipts from sale of fixed assets
Receipts from sale of investment

Cash outflow
Payment for purchase of fixed assets
Payment for acquiring shares etc., for
investment.
 Financing Activities
Cash Flow from Financing Activities
◦ Cash receipts from issuing shares or other
instruments
◦ Cash receipts from issuing debentures, loans
and other short term liabilities
◦ Cash repayments of amounts borrowed
◦ Payment of dividends
◦ Cash back on equity shares
Treatment of Other Items
1. Interest and Dividends
◦ In case of a financing enterprise, CF from
interest paid and interest and dividend
received-operating activities.
Dividends paid-financing activities
◦ In case of other enterprises, CF from interest
and dividend paid-financing activities.
Interest and dividend received-investing
activities.
Treatment of Other Items

2. Income tax:
CF from income tax should be classified as flows from
operating activities unless they can be specifically identified
with financing and investing activities. For e.g. Capital gain
tax on sale of land – investing activity.
3. Extraordinary items:
These should be classified as arising from operating,
investing or financing activities as appropriate and separately
disclosed. For e.g., legal claim, cost of winning a law suit,
receipt of claim from insurance co.,etc
4. Non-cash Transactions:
Which do not involve cash inflow or outflow. Should be
excluded. For e.g.:
 acquisition of assets by issue of shares/debentures
 conversion of convertible debentures into shares
 acquisition of fixed asset, on credit, etc.
Thank you