Cash Flow Statement

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This statement helps to show the flow of incoming and out going cash i.e. It helps to determine the ability of an enterprise to generate cash and to utilise the cash

A cash flow statement may be defined as a summary of receipts and payments, payments, reconciling the opening cash (cash and cash equivalents) balance with the closing balance of a given period with information about the sources (inflow) and application (outflow) from items appearing in the balance sheet and the P/L a/c of the enterprise. enterprise.

As per AS- 3 ASCASH FLOWS = inflows and outflows of cash and cash equivalent i.e. Historical changes that have taken place in the cash and bank accounts of the business. CASH = cash in hand and demand deposits with bank. CASH EQUIVALENT = short term, highly liquid investments that are readily convertible into known amount of cash and which are subject to an insignificant risk of changes in value.

Cash at the beginning = xxxx (+) Cash receipts = xxxx (- ) Cash payments = xxxx -----------------------------------------------------------Cash at the end of the period = xxxxx

Format of cash flow statement =
Cash flows from Operating activities =xxxx Cash flows from Investing activities =xxxx Cash flows from Financing activities =xxxx ---------------------------------------------------------Net cash movement for the year = xxxxx (+) Cash at the beginning of the yr = xxxx ---------------------------------------------------------Cash at the end of the year = xxxxxx ---------------------------------------------------------Where, Cash flows = inflows/ outflows

Operating Activities:Activities:It is a Principal revenue producing activities of the enterprises other than investing and financing activities.

Investing Activities:Activities:It includes transactions and events that involve the purchase and sale of longterm productive assets (machinery, land, building, etc.) not held for resale and other investments.

Financing Activities:Activities:It involves activities that results in changes in the size and composition of the owners· capital and borrowings of the enterprise ( including preference share capital).

Operating Activities:Activities:INFLOWS


Cash sales. Royalties, fees, commission and other revenue. Receipts for premiums and claims, annuities & other policy. Refund of income tax. Receipts relating to futures, forwards, options, swaps contracts when held for dealing or trading purpose. Interest received .

Suppliers for goods/ services. Payment to and on behalf of employees. Payments against premium and claims, annuities & other policy. Income tax (unless specified under investing or financing activities). Payments relating to futures, forwards, options, swaps contracts when held for dealing or trading purpose. Interest paid ( working capital loan or to finance operating activities).

Investing Activities:Activities:INFLOWS


Sale of Fixed Assets (including intangibles). Sale of investments, shares, warrants or debt instruments of other enterprises and interest in joint ventures (other than those involved in trading activities). Loans and advances from third parties (other than of a financial enterprise). Receipts relating to futures, forwards, options, swaps contracts except held for trading or classified as financing activities. Interest / dividend received .

Purchase of Fixed Assets (including intangibles). Payment for capitalized R&D cost. Purchase of investments, shares, warrants or debt instruments of other enterprises and interest in joint ventures (other than those held for trading purpose). Loans and advances from third parties (other than transactions made by a financial enterprise). Payments relating to futures, forwards, options, swaps contracts except held for trading or classified as financing activities.

Financing Activities:Activities:INFLOWS


Issue of shares in cash. Issue of debentures, loan- notes, bonds and other short term borrowing in cash. Proceeds from long ² term borrowings.

Payment of loans. Redemption of preference shares. Repayment of finance / lease liability. Interest paid. Payment of dividend.

Method of ascertaining cash flow from Operating activities ::DIRECT METHOD:In this method gross receipts and payments of cash are disclosed. INDIRECT METHOD:In this method, the P/L a/c is adjusted for the effects of transactions of noncash nature.

DIRECT METHOD:METHOD:CASH FLOW FROM OPERATING ACTIVITIES:Cash receipts from sales xxx commission & fees xxx interest received xxx B. Cash payments for purchases xxx payment to and for employees xxx operating expenses xxx interest payments xxx direct taxes paid xxx ---------------------------------------------------------------------------------------Net cash flow from operating activities xxxx

INDIRECT METHOD:METHOD:CASH FLOW FROM OPERATING ACTIVITIES:Net profit for the year xxx (+) Non ² cash expenses:depreciation, preliminary expenses w/off, shares discount w/off, goodwill w/off, loss on sale of fixed assets, proposed dividend, loss on revaluation, provision for taxations, etc. xxx (-) Non ² cash Incomes:profit on sale of fixed assets xxx -------------------------------------------------------------------------------------------------Operating profit before working capital changes:xxxx (+) Decrease in current assets xxx (+) Increase in current liabilities xxx (-) Increase in current assets xxx (-) Decrease in current liabilities xxx -------------------------------------------------------------------------------------------------Cash generated from operating activities xxxx (-) interest/ taxes paid xxx --------------------------------------------------------------------------------------------------Net cash flow from operating activities xxxxx

EXCLUSIVE TREATMENTS:TREATMENTS:INTEREST AND DIVIDEND:a. On the basis of nature of enterprise:financial enterprises:interest paid² operating activities. dividend paid ² financing activities. interest / dividend ² operating activities. other enterprises:interest / dividend paid² financing activities. interest / dividend received ² investment activities. b. Interest receivedinterest received from investment ² investment activities. interest received from short term investments ² operating activities. interest received on trade advances/ operating receivables ² operating activities.

c. Interest paid:on loans / debts ² financing activities. on working capital loan or any other loan taken to financial operating activities ² operating activities. TREATMENT OF TAX Cash flows by tax payment ² operating activities. Cash flows for tax refund ² operating activities. If transactions is related to investing/ financing then appropriate allocation should be done.

NON- CASH TRANSACTIONS Non ² cash transactions which is not having any influence on investing and financing activities should be excluded from cash flow statement and to be disclosed in financial statements. Transactions like* purchase of assets by issue of debentures; * purchase of an enterprise by means of issue of shares/ debentures; * conversion of debt to equity; etc. EXTRAORDINARY ITEMS Cash flows associated with extraordinary items should be classified as arising from operating, investing and financing activities as appropriate and disclosed accordingly.


+++ = co. using cash generated from
operations, from sale of assets and from financing to build up pile of cash ² very liquid co. possibly looking for acquisition.


= co. using cash from operations and from sale of fixed assets to pay down debt or to pay owners.


= co. is using cash from operations and from borrowing (or from owners investments) to expand.


= co. is using flows generated from operations to buy fixed assets and to pay down debts or to pay owners.


= co·s operating cash flow problems are covered by sale of fixed assets, by borrowing, or by stockholders contributions. = co. is financing operating cash flow shortages and payments to creditors and/or stockholders (owners) via sale of fixed assets.



= co. is growing rapidly, but has shortfall in cash flows from operations and purchase of fixed assets financed by long term debt or new investments.


= co. is using cash reserves to finance operation shortfall and pay long term creditors and/ or investors. ----------------------------------------------------------------

Where, + means inflows and ² means outflows of cash and cash equivalents

Tom Lee (1984) is of the opinion that cash flow statement or cash flow report is capable of providing the owners of the business with an in-depth disclosure of the profits and operating cash flow. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

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