• Every company needs to have an overall understanding of its cash
position mainly comprising of information related to where the cash
is being generated in the company and where it is being spent.
• Both of this information allows the company to ascertain not only
their liquidity position but also their long-term solvency standing.
• These statements assess the cash flow from activities which are
mainly categorized as
- operating and
- financing activities.
What is Cash flow statement?
• A cash flow statement is a statement depicting change in cash and cash
equivalents position from one period to another.
• For example, if the cash balance of a business is shown by its balance sheet
on 31 December 2017 at `20,000 while the cash balance as per its balance
sheet on 31 December 2017 is 30,000,
- there has been an inflow of cash of `10,000 in the year 2017 as
compared to the year 2016.
• The cash flow statement explains the reasons for such inflows or outflows
of cash, as the cash might be.
• It also helps management in making plans for the immediate future such as
- ascertaining how much cash will be available to meet obligations to
trade creditors, to pay bank loans and to pay dividend to the
• The term ‘cash’ here stands for cash and demand deposits with banks
• . Cash equivalents are short-term, highly liquid investments that are
readily convertible into known amount of cash and which are subject
to an insignificant risk of changes in value.
• They have a short maturity, say three months or less from the date of
Preparation of Cashflow statement
• The change in the cash position from one period to another is
computed by taking in account ‘sources’ and ‘applications’ of cash
• Sources of Cash Sources of cash can be internal as well as external.
• Internal Sources
Examples of cash flows arising from investing
(a) cash payments to acquire fixed assets (including intangibles)
(b) cash receipts from disposal of fixed assets(including intangibles);
(c) cash payments to acquire shares, warrants or debt instruments of other enterprises and interests in joint
(d) cash receipts from disposal of shares, warrants or debt instruments of other enterprises and interests in
(e) cash advances and loans made to third parties (other than advances and loans made by a financial
(f) cash receipts from the repayment of advances and loans made to third parties (other than advances and
loans of a financial enterprise);
(g) cash payments for futures 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;
(h) cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when
the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities
Examples of cash flows arising from Financing
• (a) cash proceeds from issuing shares or other similar instruments;
• (b) cash proceeds from issuing debentures, loans, notes, bonds, and
other short or long-term borrowings; and
• (c) cash repayments of amounts borrowed