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Cash Flow Statement

Cash Flow Statement is a statement recording systematically all inflows and outflows of cash during an accounting period. Here the term cash includes cash and cash equivalents It is an important tool for short term planning. Cash Flow statement has to be prepared and presented as per the Performa given under AS3.

Uses of Cash Flow Statement

It helps to evaluate the current cash position. A projected cash flow statement can be prepared in order to know the future cash position of a concern to facilitate planning. In helps in taking loans from banks and other financial institutions. The statement explains the causes for poor cash position in spite of substantial profits in a firm.


Objective of preparing Cash Flow Statement

Objective of preparing cash flow statement is to provide information about cash flows to the users of financial statement so that they can assess the ability of the enterprise to generate cash and identify the pattern of cash utilization.


Cash Flow Statement

As per the format prescribed by AS3 for Cash Flow Statement, all the cash flows has been divided into three main parts: 1. Cash Flows from operating activities 2. Cash Flows from investing activities 3. Cash flows from financing activities


Cash Flow from Operating Activities

Cash flow here is derived primarily from the principal revenue producing activities of the enterprise. Therefore they generally result from the transactions that enter into determination of net profit or loss. Increase or decrease in current assets and current liability also reflects operating activity. For examples cash receipts from sale of goods and rendering of services, fees, commission and other revenue. 5 LECTURE 1

Cash Flow from Investing activity

Under this transactions resulting in long term investments in fixed assets and long term investments are reported. Acquisitions of these assets implies cash flows whereas their disposal means inflow of cash.


Cash Flow from Financing Activity

Under this Transactions that results from long term sources of finance are included. These mainly includes flow of cash relating to non current liabilities(long term Liabilities).Examples of cash flows arising from financing activities are: 1. Cash proceeds from issue of shares, debentures, bonds etc. 2.Cash repayment of the amounts borrowed. If the net value is positive, it is termed as cash flows generated from financing activities and if it is negative, it is cash used in financing activities.

AS-03 provides for two methods for preparing the statements: a. Direct method b. indirect method Direct and indirect is with reference to method for calculating cash flow from operating activity. Direct Method : Operating cash receipts and payments reported directly Indirect method : Cash flows from operating activities are reported by way of adjustment in net profit.

Direct Method
Cash receipts: a. Cash sales b. Cash collected from debtors c. Other operating cash receipts Less Cash payments a. Cash purchase b. Cash paid to creditors c. Other cash operating expenditures Cash flow from operating activities before taxes and extra ordinary items Less Taxes

Indirect method
Net profit for the year Add non cash operating and other non operating expenditures less Non cash non operating income Cash flow from operating activities before adjustment for working capital items Adjustment for Working capital items Cash flow from operating activities before taxes and extra ordinary items Less Income tax paid Add Income tax refund Net cash flow from operating activities LECTURE 1


Changes in B/S
Decrease in LL & CL Increase in LL & CL Decrease in LA & CA Increase in LA & CA

Impact on Cash
Outflow Inflow Inflow outflow