The document discusses the concept, objectives, importance and preparation of a cash flow statement. A cash flow statement shows how cash flows in and out of a business over an accounting period. It categorizes cash flows as operating, investing and financing activities. The cash flow statement is important because it provides information about a company's liquidity and cash generating ability to assess its financial health. It is prepared by determining cash inflows and outflows from each category of activities.

1. Cash Flow Statement

2. Meaning and Concept of Cash Flow Statement
The concept of cash flow statement has been developed to
overcome the limitations of other financial statements
such as income statement, balance sheet and funds flow
statement. All other financial statements are prepared on
accrual basis but cash flow statement is under cash basis.
Other financial statement shows the profit ability or
financial position of the organization, balance reports the
cash balance at the end of the period. But cash flow
statements shows, how the cash is generated there in the
organization? By examining two consecutive balance
sheets, we can tell whether cash is increased or decreased
during a particular period. Cash flow statement is
prepared for providing information related with receipt and
payment of cash related to operating, financing and
investing activities. It covers revenue items as well as
capital items of the organization.
“Cash flow statement is a statement prepared to
indicate the increased in the cash resources and the
utilization of such resources of a business during the
accounting period.”

3. Objective of Cash Flow Statement
The purposes of cash flow statement are as below:
 To provide information about the cash inflows
and cash outflows of the organization.
 To show the position of cash flow from operating,
financing and investing activities separately.
 To show the net change in cash position of the
organization.
 To explain the causes of changes in the cash
balance during an accounting period.
 To identify the financial needs and help in
forecasting future need.

4. Importance of Cash Flow Statement
The importance of cash flow statement is presented as below:
 Cash flow statement financial activities on cash basis so cash
flow statement is considered a better indicator of future cash
inflows and outflows of the organization.
 Cash flow statement discloses the cash position of the
organization. Therefore, this statement is useful in short term
financial planning, controlling and decision making.
 Cash flow statement is a critical discloser to company’s
investors and creditors. Company’s investors and creditors
focus on cash flow rather than net income because they care
about the company’s ability to pay bills rather than profit
earned.
 Cash flow statement provides valuable information to various
groups of users for evaluating the company’s financial health.
There groups pay special attention to the cash flow adequacy
ratio and cash flow per share, which are based on net cash
generated by a firm during a particular period of time.
 Cash flow statement is useful in making investing and financing
decision such as project expansion, replacement of projects,
repayment short term and long term debt etc.

5. Preparation of Cash Flow Statement
Cash flow statement includes all the
cash inflow and cash outflow during an
accounting period. Cash flow
statement is prepared combining the
cash flows from operating activities,
investing and financing activities. The
main steps involved in the preparation
of cash flow statement are as follows:

6. Cash flows
(inflows & outflows
Cash flows from
operating activities
Cash flows from
investing activities
Cash flows from
financing activities
Direct method
Indirect method

7. 1. Determination of Cash Flows from Operating Activities
The cash receipt and cash payment foe the normal day to day activities of
organization is called cash flow from operating activities. Cash flow from
operating activities includes payment and receipt and receipt for revenues items
as well as due to change in working capital. Operating activities show the cash
effects of the revenues and expenses that are normally parts of income
statement. Operating activities are related to acquiring and selling the
merchandise goods and services reported, together with an increase or a
decrease in the working capital except and cash equivalent activities.
Particular Amount Amount
A) Cash sales and collection from customers:
sales revenue
decrease in sundry debtors, bills receivable and account receivable……
bad debts recovered.....................................................................
increase in provision for bad/doubtful debts……………………………………….....
increase in provision for discount on
debtors……………………………………………
increase in sundry debtors, bills receivable and account
receivable………..
discount
allowed………………………………………………………………………………………….
bad debts written off during the year………………….
Decrease in provision for bad/doubtful debts………
decrease in provision for discount on debtors…..
xxx
xxx
xxx
Xxx
Xxx
(Xxx)
(Xxx)
(Xxx)
(Xxx)
(xxx)
xxx
B) Cash paid to suppliers for purchase:
Cost of goods sold……………………………………….
Decrease in closing stock/ inventory………………
Increase in sundry creditors/accounts payable and bills
payable………………
Discount received from suppliers………………….
Increase in closing stock/inventory……………...
Decrease in sundry creditors/accounts payable and bills payable…
Alternative
Purchase of raw material……
Increase in sundry creditors/account payable and bills payable…..
Discount received from suppliers……
Decrease in sundry creditors/ accounts payable and bills payable…..
(Xxx)
Xxx
Xxx
Xxx
(Xxx)
(Xxx)
(Xxx)
(Xxx)
(XXX)
Xxx
Xxx
(Xxx)
Cash from operating activities( under direct method

8. C) Cash paid to employ and operating:
wages….
salary……
manufacturing expenses…..
office and administrative expenses……………………………………….
selling and distribution expenses…………..
insurance premium……..
other operating expenses…
decrease in outstanding expenses…
increase in prepaid…….
increase outstanding expenses…
(Xxx)
(Xxx)
(Xxx)
(Xxx)
(Xxx)
(Xxx)
(Xxx)
(Xxx)
Xxx
xxx (xxx)
D) Cash paid for interest and tax:
interest expenses…
tax expenses….
decrease in interest and tax payable..
increase in prepaid interest and tax….
(Xxx)
(Xxx)
(Xxx)
(Xxx) (Xxx)
E) Cash flow from extra ordinary items:
decrease in short term loan and bank o/d…
increase in short term investment and marketable security..
decrease in short term investment and marketable security..
interest on investment ….
increase in short term loan ….
dividend received ……………………….
rent receipt…………
compensation received…………..
increase in rent receivable………………………………
decrease in rent receivable ……………………..
(Xxx)
(Xxx)
Xxx
(Xxx)
Xxx
Xxx
Xxx
Xxx
(Xxx)
Xxx Xxx
Cash flow from operating activities (A+B+C+D+E) XXX

9. 2. Cash Flow from investing activities
Investing activities are the purchase and sales of noncurrent
assets (i.e. long term assets and other investments) which are
not included in cash equivalent. It is the second step of cash
flow statement. It is calculated from comparative Balance
sheet. It is related to sale and purchase of fixed assets and
investment. Increase in fixed assets will be considered as
purchase (acquisition) where-as decrease in fixed assets will
be considered as sale (disposal) of fixed assets as well as long
term investment.
Purchase of fixed assets as well as long term
investment indicates cash outflow whereas sale of fixed assets
as well as long term investment indicates cash inflow.
Intangible fixed assets like goodwill, trade mark, patent and
franchise, if increase in intangible fixed assets, and then it is
treated as purchase of intangible fixed assets. But decrease in
intangible fixed assets is treated as non operating
expenditure.
According to International
Accounting Standards (IAS), “Investing activities are the
acquisition and disposal of long term assets and investment
not included in cash equivalent.”

10. Particular Amount
Increase or purchase of plant and machinery …….
Increase or purchase of furniture and fixture…….
Increase or purchase of land and building……
Increase or purchase of other fixed assets ….
Increase or purchase of long term investment…
Decrease or sale of furniture and fixture……..
Decrease or sale of plant and m/c….
Decrease or sale of land and building …..
Decrease or sale of other fixed assets…….
Decrease or sale of long term investment………………
(Xxx)
(Xxx)
(Xxx)
(Xxx)
(Xxx)
Xxx
Xxx
Xxx
Xxx
Xxx
Cash flow from investing activities…………………………………. ±xxx
Format of cash flow from investing activities

11. 3. Cash flow from financing activities
Cash flow from financing activities includes following
items:
- Increase or issue of equity share capital (indicates cash
inflow)
- Increase or issue of preference share capital (indicates
cash inflow)
- Increase in share premium (indicates cash inflow)
- Increase or issue of debenture and bonds (indicates cash
inflow)
- Increase in borrowed long term loan (indicates cash
inflow)
- Decrease or redemption of preference share capital
(indicates cash inflow)
- Decrease or redemption of bond and debenture (indicates
cash inflow)
- Decrease or repayment of long term loan (indicates cash
inflow)
- Dividend paid (indicates cash inflow)

12. Cash flow from financing activities can be
calculated in the following form:
Particulars Amount
Issue of equity share capital…………….
Issue of preference share capital……………
Issue of debentures and bonds…………
Long term loan borrowed…….
Increase in share premium…………….
Repayment of long term of loan……..
Redemption of debentures and bonds……..
Redemption of preference share capital…….
Dividend paid…………………..
Xxx
Xxx
Xxx
Xxx
Xxx
(xxx)
(xxx)
(xxx)
(xxx)
Cash flow from financing activities………………………. ±xxx

13. Cash and Cash Equivalent
Cash and cash equivalents includes cash in and, cash
at bank and any cash invested in short-term and highly
liquid financial instruments. Generally, marketable
securities such as treasury bills, commercial paper,
and money market funds are these examples of cash
equivalents. Cash and cash equivalents are not
included in the cash flows from operating activities. In
other words, cash and cash equivalents are adjusted at
the end of cash flow statements i.e. their opening
balances are added with the net changes in cash
balance to determine the ending cash balance.