Cash Flow Statement

Meaning and Concept of Cash Flow Statement

The concept of cash flow statement has been developed to overcome the limitations of other financial statements such as income statement, balance sheet and funds flow statement. All other financial statements are prepared on accrual basis but cash flow statement is under cash basis. Other financial statement shows the profit ability or financial position of the organization, balance reports the cash balance at the end of the period. But cash flow statements shows, how the cash is generated there in the organization? By examining two consecutive balance sheets, we can tell whether cash is increased or decreased during a particular period. Cash flow statement is prepared for providing information related with receipt and payment of cash related to operating, financing and investing activities. It covers revenue items as well as capital items of the organization.

“Cash flow statement is a statement prepared to indicate the increased in the cash resources and the utilization of such resources of a business during the accounting period.”

Objective of Cash Flow Statement

The purposes of cash flow statement are as below: To provide information about the cash inflows

and cash outflows of the organization. To show the position of cash flow from operating,

financing and investing activities separately. To show the net change in cash position of the

organization. To explain the causes of changes in the cash

balance during an accounting period. To identify the financial needs and help in

forecasting future need.

Importance of Cash Flow Statement

The importance of cash flow statement is presented as below: Cash flow statement financial activities on cash basis so cash

flow statement is considered a better indicator of future cash inflows and outflows of the organization.

Cash flow statement discloses the cash position of the organization. Therefore, this statement is useful in short term financial planning, controlling and decision making.

Cash flow statement is a critical discloser to company’s investors and creditors. Company’s investors and creditors focus on cash flow rather than net income because they care about the company’s ability to pay bills rather than profit earned.

Cash flow statement provides valuable information to various groups of users for evaluating the company’s financial health. There groups pay special attention to the cash flow adequacy ratio and cash flow per share, which are based on net cash generated by a firm during a particular period of time.

Cash flow statement is useful in making investing and financing decision such as project expansion, replacement of projects, repayment short term and long term debt etc.

Preparation of Cash Flow Statement

Cash flow statement includes all the cash inflow and cash outflow during an accounting period. Cash flow statement is prepared combining the cash flows from operating activities, investing and financing activities. The main steps involved in the preparation of cash flow statement are as follows:

Cash flows(inflows & outflows

Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activities

Direct method

Indirect method

 1. Determination of Cash Flows from Operating ActivitiesThe cash receipt and cash payment foe the normal day to day activities of organization is called cash flow from operating activities. Cash flow from operating activities includes payment and receipt and receipt for revenues items as well as due to change in working capital. Operating activities show the cash effects of the revenues and expenses that are normally parts of income statement. Operating activities are related to acquiring and selling the merchandise goods and services reported, together with an increase or a decrease in the working capital except and cash equivalent activities.

Particular Amount AmountA) Cash sales and collection from customers: sales revenue decrease in sundry debtors, bills receivable and account receivable…… bad debts recovered..................................................................... increase in provision for bad/doubtful debts………………………………………..... increase in provision for discount on debtors…………………………………………… increase in sundry debtors, bills receivable and account receivable……….. discount allowed…………………………………………………………………………………………. bad debts written off during the year…………………. Decrease in provision for bad/doubtful debts……… decrease in provision for discount on debtors…..

xxxxxxxxxXxxXxx

(Xxx)(Xxx)(Xxx)(Xxx)(xxx)

xxx

B) Cash paid to suppliers for purchase: Cost of goods sold………………………………………. Decrease in closing stock/ inventory……………… Increase in sundry creditors/accounts payable and bills payable……………… Discount received from suppliers…………………. Increase in closing stock/inventory……………... Decrease in sundry creditors/accounts payable and bills payable… Alternative Purchase of raw material…… Increase in sundry creditors/account payable and bills payable….. Discount received from suppliers…… Decrease in sundry creditors/ accounts payable and bills payable…..

(Xxx)XxxXxxXxx

(Xxx)(Xxx)

(Xxx)(Xxx)

(XXX)XxxXxx

(Xxx)

Cash from operating activities( under direct method

C) Cash paid to employ and operating: wages…. salary…… manufacturing expenses….. office and administrative expenses………………………………………. selling and distribution expenses………….. insurance premium…….. other operating expenses… decrease in outstanding expenses… increase in prepaid……. increase outstanding expenses…

(Xxx)(Xxx)(Xxx)(Xxx)(Xxx)(Xxx)(Xxx)(Xxx)Xxxxxx (xxx)

D) Cash paid for interest and tax: interest expenses… tax expenses…. decrease in interest and tax payable.. increase in prepaid interest and tax….

(Xxx)(Xxx)(Xxx)(Xxx) (Xxx)

E) Cash flow from extra ordinary items: decrease in short term loan and bank o/d… increase in short term investment and marketable security.. decrease in short term investment and marketable security.. interest on investment …. increase in short term loan …. dividend received ………………………. rent receipt………… compensation received………….. increase in rent receivable……………………………… decrease in rent receivable ……………………..

(Xxx)(Xxx)Xxx(Xxx)XxxXxxXxxXxx(Xxx)Xxx Xxx

Cash flow from operating activities (A+B+C+D+E) XXX

2. Cash Flow from investing activitiesInvesting activities are the purchase and sales of noncurrent assets (i.e. long term assets and other investments) which are not included in cash equivalent. It is the second step of cash flow statement. It is calculated from comparative Balance sheet. It is related to sale and purchase of fixed assets and investment. Increase in fixed assets will be considered as purchase (acquisition) where-as decrease in fixed assets will be considered as sale (disposal) of fixed assets as well as long term investment.

Purchase of fixed assets as well as long term investment indicates cash outflow whereas sale of fixed assets as well as long term investment indicates cash inflow. Intangible fixed assets like goodwill, trade mark, patent and franchise, if increase in intangible fixed assets, and then it is treated as purchase of intangible fixed assets. But decrease in intangible fixed assets is treated as non operating expenditure.

According to International Accounting Standards (IAS), “Investing activities are the acquisition and disposal of long term assets and investment not included in cash equivalent.”

Particular AmountIncrease or purchase of plant and machinery …….Increase or purchase of furniture and fixture…….Increase or purchase of land and building……Increase or purchase of other fixed assets ….Increase or purchase of long term investment…Decrease or sale of furniture and fixture……..Decrease or sale of plant and m/c….Decrease or sale of land and building …..Decrease or sale of other fixed assets…….Decrease or sale of long term investment………………

(Xxx)(Xxx)(Xxx)(Xxx)(Xxx)XxxXxxXxxXxxXxx

Cash flow from investing activities………………………………….

±xxx

Format of cash flow from investing activities

3. Cash flow from financing activitiesCash flow from financing activities includes following items: - Increase or issue of equity share capital (indicates cash inflow)- Increase or issue of preference share capital (indicates cash inflow)- Increase in share premium (indicates cash inflow)- Increase or issue of debenture and bonds (indicates cash inflow)- Increase in borrowed long term loan (indicates cash inflow)- Decrease or redemption of preference share capital (indicates cash inflow)- Decrease or redemption of bond and debenture (indicates cash inflow)- Decrease or repayment of long term loan (indicates cash inflow)- Dividend paid (indicates cash inflow)

Cash flow from financing activities can be calculated in the following form:

Particulars AmountIssue of equity share capital…………….Issue of preference share capital……………Issue of debentures and bonds…………Long term loan borrowed…….Increase in share premium…………….Repayment of long term of loan……..Redemption of debentures and bonds……..Redemption of preference share capital…….Dividend paid…………………..

XxxXxxXxxXxxXxx(xxx)(xxx)(xxx)(xxx)

Cash flow from financing activities………………………. ±xxx

Cash and Cash Equivalent Cash and cash equivalents includes cash in and, cash at bank and any cash invested in short-term and highly liquid financial instruments. Generally, marketable securities such as treasury bills, commercial paper, and money market funds are these examples of cash equivalents. Cash and cash equivalents are not included in the cash flows from operating activities. In other words, cash and cash equivalents are adjusted at the end of cash flow statements i.e. their opening balances are added with the net changes in cash balance to determine the ending cash balance.