CASH FLOW STATEMENT

1. Dr.E.RAMAPRABA,
ASSISTANT PROFESSOR OF COMMERCE
BON SECOURS COLLEGE FOR WOMEN,
THANJAVUR.
CASH FLOW STATEMENT
(CASH FLOW ANALYSIS)
INTRODUCTION
The limitations of funds flow statement gave birth to cash flow statement. Cash flow
statement is basically a statement of changes in financial position prepared on cash basis. It is
very much useful for short-term analysis and cash planning of the business. The procedure for
preparing cash flow statement is quite different from the procedure followed in the preparation of
fund flow statement.
MEANING OF CASH FLOW STATEMENT
A cash flow statement is a statement of changes in financial position depicting changes in
cash position from one accounting period to another. The cash flow statement shows the reasons
for changes in cash inflows and/or outflows between two dates of balance sheets.
The term ‘cash’ signifies both cash in hand and cash at bank. Cash flow statement
describes both sources (inflows) and uses (outflows) of cash and cash equivalents in an
enterprise during a specified period of time.
According to AS-3 (Revised), an enterprise should prepare a cash flow statement and should
present it for each period for which financial statements are prepared.
Cash, cash equivalents and cash flows
 Cash comprises cash in hand and demand deposits with banks.
 Cash equivalents are short term, highly liquid investments that are readily and
quickly convertible into known amount of cash and which are subject to an
insignificant risk of changes in value. Cash equivalents are held for the purpose of
meeting short-term cash requirements rather than for investments or other purposes.

2.  Cash flows are inflows or outflows of cash. Flow of cash is said to have taken place
when any transaction makes changes in the amount of cash available before the
happening of such transaction. If the effect of such transaction results in the increase
of cash, it is called a ‘cash inflow’ and if it results in the decrease of cash, it is known
as ‘cash outflow’.
CLASSIFICATION OF CASH FLOWS
According to AS-3 (Revised), the cash flow statement should report cash flows during
the period resulting from operating, investing and financing activities. Accordingly, cash flows
are classified into three categories:
1. Cash flows from operating activities.
2. Cash flows from investing activities.
3. Cash flows from financing activities.
1. Cash flows from operating activities.
Every business concern aims at generating income by carrying out operations. Cash
outflows incurred in carrying out business operations and cash inflows generated because of the
execution of business operations are called cash flows from operating activities. Operating
activities are the activities other than investing and financing activities.
Examples of cash flows from operating activities.
The most common such examples are:
 Cash payments to suppliers of goods and services.
 Cash receipts from the sale of goods and from the providing of services.
 Cash inflows due to royalties, fees and commission.
 Cash outflows due to payment of wages and salaries.
2. Cash flows from investing activities:
No business operations and day-to-day activities could be carried without sufficient
investment in fixed assets. Fixed assets are the essentials to proceed with routine business
operations. Thus, commitment of cash in investment activities and availing of cash from such
investment activities have become an integral part of every business enterprise. Investment in
cash equivalents does not come under this category of cash flows from investment activities.
Examples of cash flows arising out of investment activities.
The most common such examples are:
 Cash payments to acquire fixed assets
 Cash commitments in constructing building
 Cash payment towards research and development activity.
 Cash receipts by selling of fixed assets.
 Cash payments to buy shares and debt instruments of other enterprises
 Cash receipts through selling of shares and debt instruments of other enterprises

3.  Cash outflows due to granting of loans and advances to third parties.
 Cash inflows caused by repayments of loans and advances by third parties.
 Cash payments towards future/forward contracts & option contracts.
3. Cash flows from financing activities.
Money is the life-blood of any business. Necessary cash is brought in by owners and at
the same time required amount is borrowed from outsiders too. Thus, financing activities cause
changes in owners’ capital and borrowed capital.
Examples of cash flows resulting from financing activities.
The most common such examples are:
 Cash inflows from issue of shares, debentures and bonds.
 Cash inflows due to borrowing from banks and financial institutions.
 Cash payments due to redemption of preference shares/debentures.
 Cash outflows because of repayment of loans obtained from banks and financial
institutions.
USES AND IMPORTANCE OF CASH FLOW STATEMENT
Cash flow statement is very much useful for arriving at managerial decisions. It is also
useful for proper financial management. The major advantages of cash flow statement are as
follows:
1. Helps in evaluation of cash position and liquidity position of a firm.
2. Helps in efficient cash management.From cash flow statement, the management can
know how much cash is required, from which source(s) the required cash will be
obtained.
3. Helps in internal financial management.Cash flow analysis provides information
about funds, which will be available from business operations. Thus, it will help the
management in formulating policies like dividend policy.
4. A series of intra-firm and inter-firm cash flow statement reveal whether the firm’s
short-term solvency is improving or deteriorating over a period of time.
5. It helps in availing loan from banks and other financial institutions.
6. It also helps in planning the repayment schedule of firm’s obligations.
7. Cash flow analysis is more useful and appropriate than funds flow analysis for short-
term financial planning and analysis.
8. Cash flow statement describes the complete movement of cash. It provides
information as to movement of cash due to the operating, investing and financing
activities during the particular period.
9. The extent of success or failure of cash planning can be known by comparing the
actual cash flow statements with the projected cash flow and necessary remedial
measures can be taken on time.

4. LIMITATIONS OF CASH FLOW STATEMENT
Cash flow statement is a device to analyse financial position of a concern. However, it
has its own limitations. The main limitations of cash flow are as under:
1. Cash flow statement ignores one of the basic accounting concepts called ‘accrual
concept’.
2. As it ignores accrual concept, the net cash flow does not necessarily mean net income
of the business.
3. Cash flow statement is prepared on a narrow sense called ‘cash’ and as such if does
not present a complete picture as funds, flow statement presents.
4. There is no scope for analyzing the profitability of a concern as non-cash items are
ignored while calculating cash from operations.
5. Cash flow statement cannot replace either the income statement or the funds flow
statement.
6. FUNDS FLOW STATEMENT VS CASH FLOW STATEMENT
7. A cash flow statement is much similar to a funds flow statement as both are prepared to
summarise the changes in the financial position and are called statement of changes in
financial position (SCFP). Nevertheless, there are differences between these two
statements.
8. The following are the main differences between a funds flow statement and a cash flow
statement:
9. Differences between funds flow and cash flow statement
Points of Difference Funds flow statement Cash flow statement
Basis of concept It is based on the popular
concept of funds. i.e., Working
capital
It is based on the narrow
concept of funds called cash.
Basis of Accounting It is based on accrual basis of
accounting.
It is based on cash basis of
accounting.
Purpose It is prepared for long-term
financial planning and analysis.
It is prepared for short-term
financial analysis and cash
planning of the business.
Method of preparation It is prepared by considering the
sources and uses of funds. The
net difference between these
two represents either net
increase or net decrease in
working capital.
It is prepared by classifying
all cash inflows and outflows
in terms of operating,
investing and financing
activities. The net difference
represents the net increase or
decrease in cash .
Schedule of changes in
working capital
Schedule of changes in working
capital is prepared in order to
No such schedule of changes
in working capital is prepared.

5. ascertain net changes in
working capital by considering
changes in current assets and
current liabilities.
Starting point In preparing funds flow
statement, the opening net
working capital is not taken as
the starting point.
The preparation of cash flow
statement starts with opening
balance of cash and ends with
closing/opening balance of
cash.
WIDELY USED FORMAT OF CASH FLOW STATEMENT
AS-3 (Revised) has not provided any specific format for preparing a Cash Flows
Statement. The Cash Flow Statement should report cash flows during the period classified by
operating, investing and financing activities .A widely used format of Cash Flow Statement is
given below:
Cash Flow Statement (As per accounting standard - 3)
Particulars Rs. Rs.
A. Cash Flows from Operating activities
Net profit before tax xxx
Add: Non-Cash and Non-Operating Expenses:
Preliminary expenses/miscellaneous exp/ xxx
Goodwill/ pattern rights /bad debts written off xxx
Transfer to general reserve/ sinking fund xxx
Loss on sale of fixed assets/long term investment xxx
Depreciation written off xxx
Discount – (issue of debenture / share) written off xxx
Provision for taxation paid xxx
Proposed dividend / interim dividend paid xxx xxx
Less: Non – Cash and Non-operating income:
Rent, dividend received xxx
Interest on investment xxx
Profit on sale of fixed assets / investments xxx
Non-trading investments xxx
Value appreciation of fixed assets xxx
Income tax refund xxx xxx

6. xxx
Operating profit before working capital changes / cash trading
profit
Add:
Increase in current liabilities xxx
Decrease in current Assets xxx
Less:
Increase in current assets xxx
Decrease in current liabilities xxx
xxx
Net cash from operating activities (or) Cash from operation - A xxx
B. Cash flow from investing activities:
Add:
Sales of fixed asset xxx
Sale of investment xxx
Interest received xxx
Dividend received xxx
Less:
Purchased of fixed asset xxx
Purchase of investment xxx
Net cash from investing activities – B xxx
C. Cash flow from financing activities:
Add:
Issue of share capital xxx
Long term borrowings xxx
Less: xxx
Payment of long term borrowings xxx
Dividend paid xxx
Drawings xxx
Net cash from financing activities – C xxx
A+B+C = Net increase or decrease in cash xxx
Add: Cash at the beginning of the period (Opening balance) xxx
Cash at the end of the period (Closing balance B/F) xxx