Cash Flow Statement
Cash Flow Statement
Cash Flow Statement
Introduction
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 utilise the cash and cash equivalents generated It also assesses the liquidity and solvency of the enterprise.
Definitions
Cash comprises cash on hand and 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 revenueproducing 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.
Financing activities. Sum of these three types of cash flow reflect net increase or decrease of cash and cash equivalents.
Operating Activities
These are principal revenue producing activities of the enterprise. Examples:
Cash receipts from sale of goods / rendering services; Cash receipts from royalties, fees, commissions and other revenue; Cash payments to suppliers of goods and service; Cash payments to and on behalf of employees.
Operating Activities
Investment Activities
The activities of acquisition and disposal of long term assets and other investments not included in cash equivalent are investing activities. It includes making and collecting loans, acquiring and disposal of debt and equity instruments, property and fixed assets etc.
Investing Activities
Cash inflow:|
Sale of Fixed Assets Sale of Investments Interest Received Dividend Received
Cash Outflow:
Purchas of Investments
Financing Activities
Those activities that result in changes in size and composition of owners capital and borrowing of the organization. It includes receipts from issuing shares, debentures, bonds, borrowing and payment of borrowed amount, loan etc.
Sale of share Buy back of shares Redemption of preference shares
Indirect method:
In this method, profit and loss account is adjusted for the effects of transaction of non-cash nature.
Interest
Interest Received
Received from investment it is in investment activities Received from short term investment classified, as cash equivalents should be considered as cash inflows from operating activities. Received on trade advances and operating receivables should be in operating activities
Interest Paid
On loans / debts are in financing activities On working capital loan and any other loan taken to finance operating activities are in operating activities
Dividend
Dividend Received
For financial enterprises in operating activities
For other than financial enterprises in investing activities
Dividend Paid
Always classified as financing activities
Extraordinary items
The cash flows associated with extraordinary items should be classified as arising from:
Operating Investing or Financing activities
Treatment of tax
Cash flow for tax payments / refund should be classified as cash flow from operating activities. If cash flow can be specifically identified as cash flow from investment / financing activities, appropriate classification should be made.
Non-cash transactions
These should be excluded from the cash flow statement These transactions should be disclosed in the financial statements.
Examples
Acquisition of assets by assuming directly related liabilities Acquisition of an enterprise by means of issue of equity sshares