By: Sunay Khaire Shilpi Jajodia

Meaning Classification

Objectives
Limitations Difference

& Uses

between Cash Flow & Fund Flow Statements

Cash comprises cash in hand and on demand deposits with banks.

Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
Cash flows are inflows and outflows of cash and cash equivalents. Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. 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.

Cash flow statement is additional information to user of financial statement. This statement exhibits the flow of incoming and outgoing cash.

This statement assesses the ability of the enterprise to generate cash and cash equivalents.
It also assesses the needs of the enterprise to utilize the cash and cash equivalents generated. It also assesses the liquidity and solvency of the enterprise.

Cash: It means all cash + cash equitable + marketable securities + bank balance . Flow: Flow means flow of cash from business to economy & economy to business i.e. cash inflows and cash outflows. Statement : Statement is a Performa Act,1948. prescribed by Charted Accountant

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.

The cash flow statement should report cash flows during the period classified by :
Operating

It summarizes the causes of changes in cash position of a business enterprise between dates of two balance sheets.

Investing
Financing activities

Sum of these three types of cash flow reflect net increase or decrease of cash and cash equivalents.

It also reveals the movements of cash of a business enterprise for the given accounting period indicating specifically how the cash was generated.
And, it is required for short range financial planning.

 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.

Cash receipts from the sale of goods and the rendering of services Cash receipts from royalties, fees, commissions and other revenues Cash payments to suppliers of goods and services Cash payments to and on behalf of employees Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits

Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities
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.

 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.

Cash payments to acquire fixed assets (including intangibles) Cash receipts from disposal of fixed assets (including intangibles) 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

 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.

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.

ABC Limited For the year ending.

(A) Cash Flows from Operating Activities: Net Profit before tax & extraordinary items Adjustment 1: Depreciation & Amortization Provision for Doubtful Debts Foreign Exchange gain/loss Dividend Interest XX XX XX XX XX Rs. Rs.

Gain/ Loss on sale of fixed assets/investments

XX

XXX

ABC Limited For the year ending.

(A) Cash Flows from Operating Activities: Rs. Rs.

Operating Profit before Working Capital Changes

Adjustment 2: for changes in working capital Bills Receivables Debtors XX XX

Inventories
Prepaid Expenses Bills Payable Creditors

XX
XX XX XX XXX XXX XXX XXX

Cash Generated from Operations

Income Tax Paid Cash before extraordinary items Extraordinary Items

XXX

Net Cash from (used in) Operating Activities

XXX

ABC Limited For the year ending.

(B) Cash Flows from Investing Activities: Purchase of Fixed Assets Proceeds from Sale of fixed assets Purchase of Investments Rs. XX XX XX Rs.

Proceeds from Sale of investments

Interests received Dividend received Net Cash from (used in) Investing Activities

XX
XX XX XXX

ABC Limited For the year ending.

(C) Cash Flows from Financing Activities: Rs. XX XX XX Rs.

Proceeds from Issue of Shares/ Debentures Proceeds from Long-term debts Repayment of Long-term Debts

Redemption of Debentures
Redemption of Preference Shares Dividend paid Interest paid

XX
XX XX XX

Net Cash from (used in) Financing Activities

Net increase/decrease in cash and Cash Equivalents (A+B+C)

XXX
XXX XXX XXX

Cash and Cash Equivalents at the beginning of the year Cash and Cash Equivalents at the end of the year

You are required to prepare a Cash Flow Statement of the company for the period ended 31st March 2008 in accordance with AS-3 (Revised) by direct method.

Particulars Balance on 01-04-2007 Issue of Shares

Amt (RS.) 1000 6000

Particulars Payments to Suppliers Payments for Fixed Assets Payments for Overheads Wages & Salaries Taxation

Amt (RS.) 40000 4000 4000 2000 5000

Receipts from customers

Sale of Fixed Assets

56000
2000

Dividends
Repayment of Bank Loan Balance c/d 65000

1000
6000 3000 65000

In the Books of Long Ltd. Cash Flow Statement for the year ending 31st March 2008 Particulars (A) Cash Flow from Operating Activities: Cash receipts from customers Cash paid to Suppliers Cash paid to employees (Wages & Salaries) Cash paid for expenses (overheads) 56000 -40000 -2000 -4000 Amt (RS.) Amt (RS.)

Cash generated from operation Income-tax paid Net Cash flow from Operating Activities (i)

10000 -5000 5000

In the Books of Long Ltd. Cash Flow Statement for the year ending 31st March 2008 Particulars Amt (RS.) Amt (RS.)

(B) Cash Flow from Investing Activities : Cash reciepts on sale of fixed assets Cash paid for purchase of fixed assets 2000 -4000

Net Cash flow from Investing Activities (ii)

-2000

In the Books of Long Ltd. Cash Flow Statement for the year ending 31st March 2008 Particulars (C) Cash Flow from Financing Activities: Cash reciepts on issue of shares 6000 Amt (RS.) Amt (RS.)

Cash paid for dividend

Cash paid on repayment of bank loan Net Cash flow from Financing Activities (iii) Net increase in Cash and Cash Equivalents Cash and Cash Equivalents at the beginning of the period Cash and Cash Equivalents at the end of the period

-1000
-6000 -1000 2000

1000
3000

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.

In brief, the cash flow statement serves the following purposes:

Helpful

in planning and Co-ordination

Helpful
Useful

in Control

in Internal Financial Management of changes in Cash position

Knowledge Helpful

in Short-term financial decisions

The cash flow statement has the following limitations:

Misleading Influenced

Comparisons by changes in Management

Policies
Incomplete

Substitutes

CASH FLOW STATEMENT

FUND FLOW STATEMENT

Meaning of fund: Funds means only cash which is a component of net current assets. Objective: Its objective is to know about the changes occurred in cash position between two balance sheet dates. Basis of preparation: Increase in current liability or decrease in current asset (except cash) results in an increase in cash or vice-versa.

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.

CASH FLOW STATEMENT

FUND FLOW STATEMENT

Effect of transaction: Effect of a transaction on cash is considered. Utility: Cash flow statement is useful for short-term analysis. Statement of changes in Working Capital: No such statement is prepared separately in cash flow statement. 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.

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