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Cash Flow Statements - Pdfshiv4

A cash flow statement discloses changes in a company's cash position between two periods and explains the reasons for these changes. It shows how cash is generated and used through operating, investing, and financing activities. The statement is required by Accounting Standard 3 and helps management and users assess a company's liquidity and cash utilization.

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Neha Sinha
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73 views

Cash Flow Statements - Pdfshiv4

A cash flow statement discloses changes in a company's cash position between two periods and explains the reasons for these changes. It shows how cash is generated and used through operating, investing, and financing activities. The statement is required by Accounting Standard 3 and helps management and users assess a company's liquidity and cash utilization.

Uploaded by

Neha Sinha
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CASH FLOW

STATEMENTS
Statement of changes in financial position
Cash Flow Statements
Balance sheet and P&L A/c provide a firm’s assets-
liabilities and its performance, respectively.
However, both these statements fail to explain the
changes (with reasons) in liquidity position of firm
A Cash Flow Statement is a statement which discloses
changes in cash position between two periods.
A Cash Flow Statement provides the reasons for such
changes and also the ways in which cash is generated and
utilized by the firm during the period.
Cash includes cash on hand, demand deposits with bank,
while cash equivalents are short term liquid investments.
Cash Flow Statements – Utility
Indicator of liquidity of a firm
Measures cash profits, i.e. actual performance against
dressing
Vital management planning tool
Facilitates effective utilization of cash (generation – use
balance)
Avoids keeping idle cash as well as cash shortages.
Provides a clear picture to users and management w.r.t.
utilization of cash among different purposes
Statutory disclosure requirement as per Accounting
Standard – 3
Presentation of Cash Flow Statements
Ω As per Accounting Standard 3 (AS 3), cash flow
statement should report cash flows during the period
classified into the following activities –
≈ Operating,

≈ Investing, and

≈ Financing

Ω Such classification provides information that allows its


users to assess the impact of those activities on the
financial position of the company.
Ω This facilitates better utilization of financial statements
by its users, viz. shareholders, creditors, financial
institutions
Cash Flow Statements – AS 3
 Operating activities are ‘the principle revenue producing
activities of the enterprise and other activities that are not investing
or financing activities.’
 Cash flows from operating activities is the key indicator to
measure the performance and capability of the company –
 Cash receipts from sale of goods/ rendering services

 Cash receipts from royalty, commissions etc

 Cash payments to suppliers for goods and services

 Cash payments to employees

 Any other cash flows relating to the business of the

enterprise. For e.g. trading, insurance, real-estate etc.


Cash Flow Statements – AS 3
 Investing activities are ‘the acquisition and disposal of long
term assets and other investments not included in cash equivalents.’
 Separate disclosure of investing activities is important
because it represents the expenditure incurred for generating
future income. It increases the total capacity of the
enterprise.
 Cash payments to acquire fixed assets (incl. intangibles)
 Cash receipts from sale/ disposal of fixed assets (incl. intangibles)
 Cash payments to acquire shares, debentures of other enterprises
 Cash receipts from sale of shares, debentures of other enterprises
 Cash advances and loans made to third parties
 Cash receipts from repayment of loans made to third parties
Cash Flow Statements – AS 3
 Financing activities are ‘activities that result in changes
in the size and composition of the owners’ capital (incl.
preference shares) & borrowings of the enterprise.’
 Separate disclosure of financing activities is important since it
is useful in predicting claims on future cash flows by the
providers of the funds (capital + borrowing) to the enterprise.
 Cash proceeds from issuing shares or similar
instruments
 Cash proceeds from issuing debentures, loans, bonds,
notes
 Cash repayment of amounts borrowed
Cash Flow (AS 3) – other items
 Cash flows from interest and dividend should be disclosed
separately. For a financing company interest paid and dividend
received are under operating activities.
 In case of other enterprises –
o Interest/ dividend paid – Financing

o Interest/ dividend recd – Investing

 Taxes on income should be separately disclosed under operating


activities.
 Cash flows arising from transactions in foreign currency should be
recorded in the company’s reporting currency.
 Exchange rate at the date of cash flow statement should be
considered.
Cash Flow Statement Preparation
 Balance Sheet and Profit & Loss Account are prepared on an
accrual basis of accounting.
 Hence, income and expenses will differ from actual receipts
and payments of cash. So, to calculate net cash flows, profit
from operating activities is converted into cash flows from
operating activities.
 Non-cash items are eliminated from the P&L statement.
There are 2 methods for the same, viz. Direct and Indirect.
 Under Direct method, accrual basis financial statements are
converted in cash statements and compared.
 Under Indirect method, adjustment to net profit/ loss to
obtain cash profits. Changes in w. capital also considered.
Funds Flow vs. Cash Flow
 Funds flow statement is based on accrual accounting system,
while Cash flow is based on cash based accounting.
 Funds flow statement is used for working capital management
while Cash flow statement is used for measuring liquidity.
 Funds flow analysis is more useful for long range planning,
while Cash flow analysis is used for short term measurement.
 Funds flow analysis does not differentiates between functions
of funds utilization, whereas Cash flow analysis classifies in 3
functions – operating, investing and financing.
 Funds flow statement are not governed by any standard, but
Cash flow statement is guided by AS 3.
 FF analysis is not mandatory while CF is mandatory for AS 3.

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