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 CASH FLOW
 Meaning
 Applicability
 Cash and Cash equivalents
 Categories of Cash Flow Statement
 Methods
 Advantages
 Limitations
 Non-cash transactions

 FUND FLOW :

 Meaning
 Format
 Importance
 Limitations
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 Diff. between Cash Flow & Fund Flow
 CASH
 Cash in hand
 Demand Deposits in Banks
 Cash Equivalents

 Cash equivalents are short-term, highly liquid investments, readily convertible into cash
and which are subject to insignificant risk of changes in values.

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 Flow : flow means flow of cash from business to economy and economy to business.

 Statement : statement is a Performa prescribed by Charted Accountant Act,1948.

Thus,
cash flow statement is a statement of inflows(sources) and outflows(uses)
of cash and cash equivalents in an enterprise during a specified period of time.

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 This standard applies to the enterprises:
 Having turnover more than Rs. 50 Crores in a financial year;
 Listed companies :
 Cash flow statement of listed companies shall be presented only
under the indirect method as prescribed in AS 3

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 Cash Equivalents
 Held for meeting short term commitments
 It is readily convertible into known amounts of cash
 It has a very insignificant risk
 Short maturity (say 3 months maximum)
 Cash flows exclude
 Movements between cash and cash equivalents
 Cash management includes the investment of excess cash in cash
equivalents

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 Three main categories of cash inflows and cash outflows :
 Operating activities :
Operating activities are the principal revenue generating activities of the enterprise.
 Investing activities :
Include the acquisition and disposal of long-term assets and other investments
not included in cash equivalents.
 Financing activities :
Financing activities are activities that result in change in the size and composition
of the owner’s capital. 7
 Direct Method :
Income Statement items are converted to cash flows individually

 Indirect Method
Net income or loss is adjusted for accruals such as accounts
receivable and payable, and for non-cash expenses such as
depreciation reconciliation of the accrual based and cash based
accounting

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Cash flow statement provides
information about the changes Identifies cash generated from
in cash and cash equivalents trading operations
of an enterprise.

The operating cash surplus

which can be applied for Very useful tool of planning.
investment in fixed assets

Portion of cash from

operations is used to pay
dividend and tax and the other
portion is ploughed back.
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 Cash flow statement cannot be equated
with income statement.

Dividend payment is not a real barometer

of liquid position of business.

Cash flow statement is more comprehensive

than cash flow statement. Cash flow
statement cannot be equated with income
statement.

Dividend payment is not a real barometer

of liquid position of business.

Cash flow statement is more 10

comprehensive than cash flow statement.

 These should be excluded from the cash flow statement

 These transactions should be disclosed in the financial statements.

 Examples

 Acquisition of assets by assuming directly related liabilities

 Acquisition of an enterprise by means of issue of equity sshares

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 Conversion of debt to equity
 Fund means Working Capital.

Working Current
Capital Assets

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 Sources of Funds Amount Application of Funds Amount

Issue of share capital ……. Redemption of pref. share ……..

Issue of debenture ……. Redemption of debenture ……..

Raising of long term loan ……. Payment of long term loan ……..
Sales of fixed assets ……. Purchase of fixed assets ……..
Interest received ……. Interest paid ……..
Dividend received ……. Dividend paid .…….
Refund of Taxes ……. Payment of Taxes ……..
Decrease in working capital ……. Increase in working capital ……..
Fund from operation ……. Fund lost in operation .…….
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TOTAL …….. TOTAL ……..

 Statement of • Increase in Working Capital
Changes in
Working Capital • Decrease in working Capital

Adjusted Profit & • Funds from Operation (Profit)

Loss A/c • Funds lost in operation (Loss)

Fund Flow • Sources of Funds

Statement • Application of Funds
 Identification & Analysis of changes in working capital

 Evaluation of firm’s financing

 Knowing the overall creditworthiness of a firm

 An instrument for allocation of resources

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 Lacks originality because it is only rearrangement of data appearing in accounts books.
 Indicates only the past position and not future.
 Indicates fund flow only in a summary form and does not show various changes
which take place continuously.
 When both the aspects of a transaction are current, they are not considered.
 When both the aspects of a transaction are non-current, even then they are not
included in this statement.
 Not an ideal tool for financial analysis.

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