The document discusses cash flow statements, including their meaning, objectives, importance and limitations. It explains that a cash flow statement shows inflows and outflows of cash from operating, investing and financing activities during a period. Operating activities relate to main revenue generation, investing activities relate to purchase/sale of long-term assets, and financing activities relate to changes in capital/borrowings. The document also provides examples and classifications of various cash inflows and outflows under each activity.

2. CASH FLOW
STATEMENT
-ACCOUNTANCY-

3. MEANING
A cash-flow statement is a statement showing inflows
(receipts) and outflows (payments) of cash during a
particular period. In other words, it is a summary of
sources and applications of cash during a particular
span of time. It analyses the reasons for changes in
balance of cash between the two balance sheet dates.
The term ‘cash’ here stands for cash and cash
equivalents. A cash-flow statement includes only those
items which affect cash.
A cash-flow statement can be for the past or can be
projected for a future period.

4. OBJECTIVES
 To ascertain the sources (receipts) of Cash and Cash
Equivalents from operation, investing and financing activities
of the enterprise.
 To ascertain the applications (payments) of Cash and Cash
Equivalents under operating, investing and financing activities
of the enterprise.
 To ascertain the net change in Cash and Cash Equivalents i.e.
the difference between sources and applications under the three
activities between the dates of two consecutive balance sheets.
 To highlight the major activities that have provided cash and
that have used cash during a particular period and to show their
effect on the overall cash balance.

5. IMPORTANCE OF CFS AND ITS LIMITATIONS
Importance
• Useful for Short-
term Financial
Planning
• Useful in preparing
the cash budget
• Comparison with
the cash budget
• Study of the trend
of Cash receipts and
payments
• Helpful in making
Dividend Decisions
• Useful for outsiders
• Explains the
deviations of cash
from earnings
Limitations
• Not suitable for
judging the
liquidity
• Possibility of
window-dressing
• It ignores non-
cash transactions
• It ignores the
accrual concept of
accounting
• No substitute for
an income
statement
• Historical in
nature

6. CASH
INFLOW OUTFLOW

7. OPERATING ACTIVITIES
Cash Inflows Cash Outflows
(i) Cash sales
(ii) Cash received from Royalty,
Fees and Commission
(iii) Cash received from debtors/
trade receivables
(i) Cash Purchases
(ii) Cash paid to Creditors
(iii) Payment of operating
expenses
(iv) Payment of Income Tax

8. INVESTING ACTIVITIES
Cash Inflows Cash Outflows
(i) Proceeds from sale of fixed
assets
(ii) Proceeds from sale of
Non-Current Investments
(iii) Interest received on
debentures
(iv) Dividend received on shares
(i) Purchase of fixed assets
(ii) Purchase of
Non-Current Investments

9. FINANCING ACTIVITIES
Cash Inflows Cash Outflows
(i) Proceeds from issue of
shares in cash
(ii) Proceeds from issue of
Debentures in cash
(iii) Loans raised ( Long-term
or Short-term)
(iv) Increase in Balance of Bank
Overdraft or Cash Credit
(i) Payment for Buy-back of Equity
Shares
(ii) Payment for redemption of
Preference Shares
(iii) Payment for redemption of
Debentures
(iv) Repayment of Loans (long-
term or short-term)
(v) Payment of interim dividend
and Previous Year’s Proposed
Dividend
(vi) Payment of interest on long-
term and short-term loans
No need of animation

11. CASH FLOWS FROM OPERATING ACTIVITIES
Operating activities are the main revenue generating activities of an
enterprise. As such, they include cash flows from those
transactions and events which enter into the ascertainment of net
profit or loss of the enterprise. Examples of Cash flows arising
from operating activities are :
(a) Cash receipts from sale of goods and rendering of services
(b) Cash receipts from royalties, fees, commissions and other
revenue
(c) Cash receipts from debtors and bills receivables
(d) Cash payments to creditors and bills payable
(e) Cash payments for purchase of goods and services
(f) Cash payment of wages, salaries and other payment to employees
(g) Cash payments or refunds of incomes taxes unless they can be
specifically identified with financing and investing activities.

12. CASH FLOWS FROM INVESTING ACTIVITIES
Investing activities include the purchase and sale of long-term assets
not held for resale. These activities also include the purchase and
sale of such investments which are not included in cash equivalents.
Examples of cash flows arising from investing activities are :
(a) Cash payments to acquire fixed assets (including intangibles)
(b) Cash receipts from sale of fixed assets (including intangibles)
(c) Cash payments to acquire shares, warrants or debt instruments of
other
enterprises
(d) Cash receipts from sale of shares, warrants or debt instruments of
other
enterprises
(e) Cash advances and loans made to third parties. In case of financial
enterprises
these will be treated as cash flows from operating activities
(f) Cash receipts from the repayment of advances and loans made to
third parties. In
case of financial enterprises these will be treated as cash flows
from operating

13. CASH FLOWS FROM FINANCING
ACTIVITIES
Financing activities are the activities that result in change in
capital and borrowings of the enterprise. Examples of cash flows
arising from financing activities are :
(a) Cash receipts from issuing shares or other similar instruments
(b) Cash receipts from short-term and long-term borrowings such
as issuing
debentures, bonds, loans
(c) Cash payment for buy-back of equity shares
(d) Cash payment of short-term and long-term borrowings including
redemption of debentures, bonds, preference shares and
loans
(e) Cash payment of interim dividend and previous year’s proposed
dividends
both on equity and preference shares
(f) Cash payments for interests on long-term and short-term
borrowings

14. FORMAT OF CASH FLOW STATEMENT

18. INTERESTS AND DIVIDENDS
NON-FINANCIAL ENTERPRISE
Cash inflow arising from interests
and dividends received should be
shown as cash flow from investing
activities.
Cash outflow arising on account of
interests and dividends paid
should be shown as cash flow from
financing activity.
FINANCIAL ENTERPRISE
Cash inflow arising from interests
and dividends received should be
shown as cash flow from operating
activities.
Cash outflow on account of
interests paid should be shown as
cash flow from operating activities
and cash outflow on account of
dividends paid should be shown as
cash flow from financing activity.

19. Tax paid on income is a part of cash flows
from operating activity. Hence, Taxes paid are shown as
deduction under ‘cash flows from operating activities.
Cash flows relating to extraordinary
items such as bad debts recovered, claims received from
insurance companies, winning of a lottery or a law suit etc.
should be disclosed separately as arising from operating,
investing or financing activities.
There are some investing
and financing activities which do not require the use of cash or
cash equivalents. Such non-cash activities should be excluded
from the cash flow statement. Examples are : the acquisition
of assets by issue of shares or debentures etc.

20. FINANCIAL ENTERPRISE
Financial Enterprise is a company or other
organization engaged in finance that is principally
engaged in financial activities which are closely related
to financial intermediation. Their operating activities
are classifies as :
Cash Inflows
(i) Interest and dividend received
in cash
(ii) Proceeds from sale of securities
(iii) Loans and Advances repaid
by third parties
Cash Outflows
(i) Interest paid in cash
(ii) Payment for Purchase of securities
(iii) Loans and advances to third
parties

21. NON-FINANCIAL ENTERPRISE
Non-financial enterprises are those enterprises which
are mostly engaged in trading or manufacturing of goods
and services(non-financial) and their main operations
are not related to finance management. Their
distribution operations and financial operations are
separated from those of their owners. Almost all the
operating activities of Financial enterprises are
considered as investing activities of the Non-Financial
enterprises. The payment of dividend is considered as
financing activity for both Financial and Non-Financial
Enterprises.

22. NUMERICAL
Following is the balance sheet of Wisben Ltd as on 31st March, 2012

23. Additional Information
During the year, a piece of machinery of the book value of Rs 80,000 was
sold for Rs 65,000. Depreciation provided on tangible assets during the
year amounted to Rs 2,00,000.Prepare a cash flow statement.
Ans.

24. Working Notes :
Calculation of Net Profit Before Tax : ₹
Profit and Loss balance on 31st March, 2012 2,00,000
Less : Profit and loss balance on 31st March, 2011 (1,10,000)
90,000
Net Profit Before Tax
(1)
(2)

25. CONCLUSION
A cash flow statement is a valuable measure of strength,
profitability, and the long-term future outlook for a company. The
CFS can help determine whether a company has enough liquidity or
cash to pay its expenses. A company can use a cash flow statement
to predict future cash flow, which helps with matters
of budgeting.
For investors, the cash flow statement reflects a company's
financial health since typically the more cash that's available for
business operations, the better. However, this is not a hard and
fast rule. Sometimes, a negative cash flow results from a
company's growth strategy in the form of expanding its operations.
By studying the cash flow statement, an investor can get a clear
picture of how much cash a company generates and gain a solid
understanding of the financial well being of a company.

26. Clues:
1. Activity related to
purchase/ sale of long
term assets.
2. Cash flow statement
does not follow this
accounting concept.
3. Proposed dividend of
current year is _____
liability.
4. Redemption of
preference shares is
___ of cash.
5. Dividend received on
shares is _____ of
cash.
6. Activity that result in
change in capital and
borrowings of the firm.
7. Main revenue generating
activity.

27. TRUE / FALSE
1. Income tax paid is an operating activity. True / False
2. Rent paid is an investing activity. True / False
3. Sale of goods on credit does not affect flow of cash. True / False
4. Proceeds from long term loans is inflow of cash. True / False
5. Cash deposited in bank is outflow of cash. True / False
6. Cash flow statement is based upon accrual basis of
accounting. True / False
7. Dividend received is a financing activity. True / False
8. Interest received is a financing activity. True / False
9. Purchase of Goodwill is an investing activity. True / False
10. Buy back of shares is a financing activity. True / False

28. CREATED BY –
Vaneet Kumar
Divanshu Mittal
Sahil Airen
Aayushi Sharma
Ridhima