A cash flow statement provides insights into the changes in a business's cash position between two balance sheet dates, detailing cash inflows and outflows from operating, investing, and financing activities. It is crucial for assessing liquidity, aiding management in meeting obligations, and understanding financial dynamics despite limitations in assessing profitability and providing a comprehensive financial picture. The statement differs from a funds flow statement, which focuses on working capital, while the cash flow statement centers on cash and cash equivalents.

1. CASH FLOW STATEMENT

2. Meaning
• A cash flow statement reveals the causes of
changes in cash position of business concern
between two dates of Balance sheets. An
enterprise should prepare a cash flow
statement and present it for each period with
financial statements prepared.
• Cash- includes cash on hand and demand
deposits

3. • Cash equivalents – includes purely short term
and highly liquid investments which are
readily convertible into cash.
• Cash flows – includes inflows and outflows of
cash and cash equivalents. If the effect of
transaction results in increase of cashand its
equivalents then it is called inflow(source). If it
results in decrease of cash and its equivalents
it is called outflow (use).

4. Classification of cash flows
1. Cash flow from operating activities
2. Cash flows from investing activities
3. Cash flow from financing activities

5. Cash flows from operating activities
• Operating activities are the principal revenue
producing activities. Like sale of goods,
receipts from royalties, fees, payments to
suppliers, payments to employees, receipts
and payments of an insurance enterprise,
refunds and payments of taxes, receipts an
payments for derivatives when held for
trading purposes.

6. Cash flow from investing activities
• Acquisition or disposal of long term assets and
other investments not included in cash
equivalents. Include cash payments and
receipts to acquire/ dispose fixed assets
(including intangibles), cash
payments/receipts for acquiring/disposal of
shares or debt instruments and Joint ventures,
advances and loans made/receipts from
repayment of advances and loans .

7. Cash flows from financing activities
• Financing activities result in changes in the
size and composition of owners capital and
borrowing of the enterprise. Include cash
proceeds from issuing of shares, debentures
and other short term or long term borrowings
and repayments /redemption of such
instruments.

8. Treatment of some typical items
1. Interest and dividends – the treatment of
interest and dividends depend on nature of
enterprise. In case of FINANCIAL ENTERPRISE,
cash flows from interests and dividends paid/
received should be classified as cash flows from
operating activities. In case of OTHER
ENTERPRISES, interest and dividend paid is
financing activity but interest and dividend
received is investing activity.

9. 2. Taxes on income – taxes paid are usually
classified as operating activities unless
otherwise identified with investing or financing
activities.
3. Acquisitions and disposals of subsidiaries and
other business units – classified as investig
activities.
4. Non cash transactions – they should be
excluded from cash flow statement. E.g.,
acquisition of enterprise by means of issue of
shares, conversion of debt to equity.

10. Methods of calculating cash flows
1. Direct Method
2. Indirect Method
1. DIRECT METHOD - Cash receipts/payments
from operating revenues /expenses are
calculated to arrive at cash flows from operating
activities. The difference is the net cash flow
from operating activities.

11. 2. INDIRECT METHOD - net cash flow from
operating activities is determined by adjusting
net profit/loss for
• Non cash items (depreciation, provisions,
deferred taxes and unrealised foreign
exchange gains or losses)
• Changes in inventories and receivables and
payables
• All other items for which the cash effects are
investing or financing cash flows

12. NEED FOR CASH FLOW STATEMENT
1. Reveals the causes for changes in cash balances
between two balance sheet dates
2. Helps Management to evaluate its ability to
meet its obligation
3. Throws light on causes of poor liquidity in spite
of good profits and excessive liquidity in spite of
heavy losses.
4. Helpful in short term financial decisions relating
to liquidity.

13. Limitations
1. Not suitable for judging the profitability of a firm as non
cash changes are ignored while calculating cash flow from
operating activities
2. Not a substitute for income statement and funds flow
statement.
3. Based on concept of cash accounting and ignores the
accrual basis of concept.
4. Reveals movement of cash only and ignores most liquid
current assets like Debtors & B/R.
5. Does not give complete picture of financial position of the
concern.

14. Difference between cash flow and fund flow
analysis
1. Funds flow statement reveals change in working capital
between two balance sheet dates . Cash flow statement reveals
change in cash position between two balance shaeet dates.
2. Funds flow statement is useful in planning intermediate and
long term financing. Cash flow statement is useful in short term
analysis and cash planning.
3. Funds flow statement deals with all components of working
capital and cash flow statement deals with only cash and cash
equivalents.
4. Funds flow reveals the sources and application of funds. Cash
flow takes into consideration inflow and outflow in terms of
operating, investing and financing activities.