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Cash Flow Statement Accounting

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Ratikant Parida
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20 views

Cash Flow Statement Accounting

Uploaded by

Ratikant Parida
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Cash Flow

Statement
BY: S ANJUKTA MOHANTY
MEANING
Cash Flows are inflows and outflows, i.e., the movement of cash and cash equivalents.
Cash flow’ implies movement of cash in and cash out due to some non-cash items. Receipt of
cash from non-cash item is termed as cash inflow while cash payment in respect of such items as
cash outflow.
For example, purchase of machinery by paying cash is cash outflow, while sale proceeds
received from sale of machinery is cash inflow.
The Cash Flow Statement is prepared according to Revised Accounting Standard-3 on cash flow
statement. The standard requires that cash flow be classified and shown in the cash flow
statement under three heads, namely:
1. Cash Flow from Operating Activities
2. Cash Flow from Investing Activities ; and
3. Cash Flow from Financing Activities.
Cash flow is a statement which picturise the position of the changes in cash between one period
to another period. means cash flow statement describes the causes of change in cash in one
period to another period.
OBJECTIVES OF CASH FLOW
STATEMENT
The objectives of cash flow statement are:
To ascertain the sources from activities (i.e., operating/investing/financing activities) from
which cash and cash equivalents were generated by an enterprise.
To ascertain the uses by activities (i.e., operating/investing/financing activities) for which cash
and cash equivalents were used by an enterprise.
To ascertain the net change in cash or cash equivalents indicating the difference between
sources and uses from or by the three activities between the dates of two Balance Sheets.
ADVANTAGE OF CASH FLOW
STATEMENT
1. Ascertaining Liquidity and Profitability Positions:
Cash Flow Statement helps the management to ascertain the liquidity and profitability position of a
firm. Liquidity means one’s ability to pay the obligation as soon as it becomes due. Since Cash Flow
Statement presents the cash position of a firm at the time of making payment it directly helps to
ascertain the liquidity position, the same is also applicable in case of profitability.

2. Ascertaining Optimum Cash Balance:


Cash Flow Statement also helps to ascertain the optimum cash balance of a firm. If optimum cash
balance can be determined, it is possible for a firm to ascertain the idle and/or excess and/or
shortage of cash position. After ascertaining the cash position, the management can invest the
surplus cash, if any, or borrow funds from outside sources accordingly to meet the cash deficit.
3. Cash Management:
Proper management of cash is possible if Cash Flow Statement is properly prepared. The
management can prepare an estimate about the various inflows of cash and outflows of cash so
that it becomes very helpful for them to make plans for the future.
4. Movement of Cash:
A Cash Flow Statement presents the management the flows in and flows out of cash for various
purposes on the basis of which future estimated can be prepared.
5. Performance Appraisal:
By comparing the actual Cash Flow Statement with the projected Cash Flow Statements, the
management can evaluate or appraise the performances regarding cash. If any unfavorable
variance is found, the reason for such variation is located and rectified accordingly.
Disadvantage of cash flow
statement
1.Cash flow statement shows only cash inflow and cash outflow. But, the cash balance disclosed
by the statement cannot reveals the true liquid position of the business
2.Net Cash Flow disclosed by Cash Flow Statement does not necessarily mean net income of the
business because net income is determined by taking into account both cash and non-cash
items.
3. It does not give complete picture of the financial position of the business concern.
4. The preparation of cash flow statement is only postmortem analysis. There is no projection of
cash in future in this method.
5. It is not a substitute of Income Statement.
6. The accuracy of cash flow statement is based on the balance sheet. If balance sheet is wrong,
the cash flow statement is also wrong
Classification of cash flow
statement
A cash flow statement typically breaks out a company’s cash sources and uses for the period in
to three categories:
1. Cash flow from operating activities
2. Cash flow from investing activities
3. Cash flow from financial activities
INVESTING ACTIVITIES
Investing activities of an enterprise are acquisition and disposal of the long term assets and other
investments not included in cash equivalents. Accordingly, the cash inflow and outflow relating to
the fixed assets, shares and debt instruments of other enterprises, interests in joint ventures,
advances and loans to third parties and also their repayments are shown under investing activities
in the cash flow statement.
Cash flow from investing activities is ascertained by analyzing the changes in fixed assets and long
term investments in the beginning and at the end of the year.
The knowledge of cash flow from investment is essential because by these cash flows that limit time
is known by which the creation for future the income and cash flows the expenses are incurred.
Examples:--
1.Cash received on sale of fixed assets.
2.The amount received for loans and advances given to their party.
3. Collection of loans.
CASH FLOW FROM
FINANCING ACTIVITIES
Financing Activities of an enterprise are those activities that result in change in the size and
composition of owner’s capital and borrowing of the enterprise. It includes proceeds from issue
of shares or other similar instruments, issue of debentures, loans, bonds, other short-term loans
or long term borrowings and repayments of amounts borrowed. Accordingly, receipts and
payments on account of the above are disclosed in the cash flow statement as the cash flow
from financing activities.
Dividends paid (in all enterprises) and interest paid (in case of non-financing enterprise) is also
included in Financing Activities.
It is important to note that an increase in share capital due to bonus issue will not be shown in
the cash flow statement, since it is a capitalization of reserves.
Cash Flow from Operating
Activities
Operating Activities: The principal revenue-generating activities of an organization and other
activities that are not investing or financing; any cash flows from current assets and current
liabilities. In other words, it reflects how much cash is generated from a company’s products or
services.
This is the amount of cash that is generated by doing what you do. This is how much cash is
generated by making, selling or providing services or product to your customers. These are the
activities or accounts that you will find on your income statement. Add all the cash you received
from your customers, and subtract all your expenses for the month.

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