Unit:4

Chapter:11

What are Cash Flow Statement ?

Cash Flow Statement

Cash Flow Statement is a statement that shows the changes in financial position of a business concern for a financial year or specific intervals of time in terms of cash and cash equivalents.

Inflows Of Cash

All transactions that lead to an increase in cash and cash equivalents are classified as inflow of cash.

Outflows Of Cash

All transactions that lead to a decrease in cash and cash equivalents are classified as outflows of cash.

Benefits of Cash Flow Statements

  • ➥ Ascertaining liquidity and profitability Positions
  • ➥ Ascertaining optimum Cash Balance
  • ➥ Cash Management
  • ➥ Capital Budgeting Decisions
  • ➥ Superiority over accural basis of accounting
  • ➥ Planning and Co-ordination
  • ➥ Movement of Cash
  • ➥ Performance appraisal

Cash & Cash Equivalents

  • Cash comprises of cash in hand, cash at bank and demand deposits with the bank.
  • Cash Equivalents comprise of โ€˜Short-term highly liquid investments/Short term marketable securities/Treasury Bills that can be readily convertible into known amount of cash and which are subjected to an insignificant/low risk of change in valueโ€™.

Objectives Of Cash Flow Statement

  • To determine the source (receipts) of cash and cash Equivalents under operating, investing and financing activities of the enterprise.
  • To determine applications (payments) of cash and cash equivalents under operating, investing and financing activities of the enterprise.
  • To determine net change in cash and cash Equivalents.

Limitations Of Cash Flow Statement

  • It is based on the historical cost principle.
  • It is based on secondary data provided.
  • There is no adherence to basic accounting principles.ย 
  • A cash flow statement is not a substitute for the Income Statement or Position Statement.
  • It ignores all the non-cash transactions.

Classification Of Business Activities: The Revised Accounting Standard-3

This states that the changes in inflows and outflows of cash and cash equivalents will be classified into following three activities: (i) Cash flow from Operating Activities. (ii) Cash flow from Investing Activities. (iii) Cash flow from Financing Activities.

Format of Cash Flow Statement (Indirect Method) for the year ended...

[As per Accounting Standard-3 (Revised)]

Particulars โ‚น
I. Cash Flow from Operating activities
(A) Net profit before tax and Extraordinary items (as per working note
Adjustment for Non-cash and Non-operating items)
(B) Add : Items to be Added
  • Depreciation
  • ...
  • Goodwill, Patents and Trademarks Amortised
  • ...
  • Interest on Bank Overdraft/Cash Credit
  • ...
  • Interest on Borrowings (Short-term and Long-term) and Debentures
  • ...
  • Writing off Underwriting Commission/Share Issue Expenses
  • ...
  • Loss on Sale of Fixed Assets
  • ...
  • Increase in Provision for Doubtful Debts*
  • ... ...
    ...
    (C) Less : Items to be Deducted
  • Interest Income
  • ...
  • Dividend Income
  • ...
  • Rental Income
  • ...
  • Gain (Profit) on Sale of Fixed Assets
  • ...
  • Decrease in Provision for Doubtful Debts*
  • ... ...
    (D) Operating Profit before Working Capital Changes (A + B โ€“ C) ...
    (E) Add : Decrease in Current Assets and
    Increase in Current Liabilities
  • Decrease in Inventories (Stock)
  • ...
  • Decrease in Trade Receivables (Debtors/Bills Receivable)
  • ...
  • Decrease in Accrued Incomes
  • ...
  • Decrease in Prepaid Expenses
  • ...
  • Increase in Trade Payables (Creditors/ Bills Payable)
  • ...
  • Increasse in Outstanding Expenses
  • ...
  • Increase in Advance Incomes
  • ... ...
    (F) Less : Increase in Current Assets and
    Decrease in Current Liabilities
  • Increase in Inventories (Stock)
  • ...
  • Increase in Trade Receivables (Debtors/Bills Receivable)
  • ...
  • Increase in Accrued Incomes
  • ...
  • Increase in Prepaid Expenses
  • ...
  • Decrease in Trade Payables (Creditors/Bills Payable)
  • ...
  • Decrease in Outstanding Expenses
  • ...
  • Decrease in Advance Incomes
  • ... ...
    (G) Cash Generated from Operations (D + E โ€“ F) ...
    (H) Less : Income tax paid (Net of Tax Refund) ...
    (I) Cash Flow before Extraordinary Items ...
  • Extraordinary Items (+/โ€“)
  • ...
    (J) Cash Flow from (or Used in) Operating Activities ...
    II. Cash Flow from Investing Activities
  • Proceeds from Sale of Fixed Assets
  • ...
  • Proceeds from Sale of Investments Other than Current Investments
    (to be included in Cash and Cash Equivalents) and Marketable Securities
  • ...
  • Proceeds from sale of Intangible Assets
  • ...
  • Interest and Dividend received (For Non-financial Companies only)
  • ...
  • Rent Received
  • ...
  • Payment for Purchase of Fixed Assets
  • (...)
  • Payment for Purchase of Investments (Other than Marketable Securities)
  • (...)
  • Payment for Purchase of Intangible Assets like Goodwill
  • (...)
  • Extraordinary Items (e.g., Insurance Claim on Machinery against Fire) (+/โ€“)
    Cash Flow from (or Used in) Investing Activities
  • ...
    III. Cash Flow from Financing Activities
  • Proceeds from Issue of Shares and Debentures
  • ...
  • Proceeds from Other Long-term Borrowings
  • ...
  • Increase/Decrease in Bank Overdraft and Cash Credit
  • ...
  • Payment of Final Dividend (on both Equity and Preference Share Capital)
  • (...)
  • Payment of Interim Dividend
  • (...)
  • Payment of Interest on Debentures and Loans (Short-term and Long-term)
  • (...)
  • Repayment of Loans
  • (...)
  • Redemption of Debentures/Preference Shares
  • (...)
  • Payment of Share Issue Expenses or Underwriting Commission
  • (...)
  • Payment for Buy-back of Shares as Extraordinary Activity
  • (...)
    Cash Flow from (or Used in) Financing Activities ...
    IV. Net Increase/Decrease in Cash and Cash Equivalents (I + II + III)
    V. Add : Cash and Cash Equivalents in the beginning of the year
  • Cash on Hand
  • ...
  • Cash at Bank
  • ...
  • Short-term Deposits
  • ...
  • Current Investments
  • ...
  • Marketable Securities
  • ... ...
    ...
    VI. Cash and Cash Equivalents at the end of the year
  • Cash on Hand
  • ...
  • Cash at Bank
  • ...
  • Short-term Deposits
  • ...
  • Current Investments
  • ...
  • Marketable Securities
  • ... ...

    *Alternatively, increase/decrease in Provision for Doubtful Debts may be treated under increase/decrease in Current Liabilities. In this situation, increase/decrease in Provision for Doubtful Debts is adjusted after Operating Profit before Working Capital Changes

    Working Note: Net Profit before tax and Extraordinary Items: โ‚น
    Net Profit as per Statement of Profit and Loss or Difference between Closing Balance
    and Opening Balance of Surplus. i.e., Balance in Statement of Profit and Loss
    Add : Transfer to Reserves ...
    Dividend Payable (Proposed Dividend of previous year) paid during the year ...
    Interim Dividend paid during the year ...
    Provision for Tax for the current year ...
    Extraordinary Items, if any, debited to the Statement of Profit and Loss ...
    Less : Extraordinary Items, if any, credited to the Statement of Profit and Loss
    Refund of Tax credited to the Statement of Profit and Loss
    ...
    Net Profit before Tax and Extraordinary Items ... ...

    Alternatively, Net Profit before Tax and Extraordinary Items may be shown in the Cash flow Statement itself.

    Notes :
    1. Amounts in brackets means amounts that are to be deducted.
    2. Increase/Decrease in unpaid Interest on Debentures/Loans affect Cash Flow from Financing Activities.
    3. Increase/Decrease in Unclaimed Dividend affects Cash Flow from Financing Activities.
    4. Increase/Decrease in Accrued Interest on Investments affects Cash Flow from Investing Activities.