Cash Flow Statement

BY B.K.VASHISHTHA
 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 assets xxx
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