Cash Flow Statement

MEANING AND DEFINITION

Financial statements of an enterprise include income statement, which shows the
operating result and balance sheet, which shows the financial position. For
betterment of decision making additional statement are prepared to analyse the
change in financial position of the enterprise over the accounting period. These
statements of change in financial position includes funds flow statement, cash flow
statement and ratio analysis etc. Cash is the blood of a business. Without sufficient
cash business cannot run properly.
Cash flow is the flow of cash in an accounting year or over two dates of balance
sheet. Cash flow statements shows the inflows and outflows of cash from different
business activities like operating, investing and financing activities. It is the indicator
of the amount of cash receipt and amount of cash payment or disbursement during
an accounting period in different activities of an organization. It shows the causes of
increase or decrease in cash and net change in cash position during a particular
period.
Cash flow is one of the compulsory financial statements that should be prepared with
the other financial statements. As per company act,2063, in case of public limited
company, the cash flow statement must be prepared annually 30 days prior to
annual general meeting but in case of private limited company, it should be prepared
within 60 days from the end of the accounting period.
 
IMORTANCE OF CASH FLOW STATEMENT
The statement of cash flow statement provides information regarding inflows and
outflows of cash of a firm for a period of one year. Therefore, cash flow statement is
important on the following grounds.
 To identify the sources from where cash inflows have risen within in a
particular period.
 To show the various activities where in the cash was utilized.
 To plan cash in systematic method and maintain a proper matching between
cash inflows. and outflows.
 To show the efficiency of the firm in generating cash inflows from its regular
operations.
 To reports the amount of cash used during the period in various long term
investing activities such as purchase of fixed assets.
 To reports the amount of cash received during the period through various
financing activities such as issue of shares, debentures and raising long-term
loan.
 To helps for appraisal of various capital investment programmes to determine
their profitability and viability. 
 DIFFERENCES BETWEEN CASH FLOW STATEMENT AND FUNDS FLOW
STATEMENT
CASH FLOW STATEMENT FUNDS FLOW STATEMENT
It is based on the changes in working capital,
Cash flow statement is based on narrow concept which considers both the changes in cash as
of funds, which considers changes in cash. well as other components of current assets
and current liabilities.
It is prepared on cash basis. It is prepared in accrual basis.
It does not require use of changes in net working
It requires using of a separate statement of
capital because all the changes in assets and
changes in net working capital.
liabilities are summarized in cash flow statement.
The preparation of cash flow statement considers The preparationof funds flow statement
only those transactions that are linked with flow of considers those transactions that are linked
cash. with flow of funds along with actual cash.
This statement is more useful in short-term This is more useful in long-term analysis of
analysis and cash planning. financial planning.
 
PREPARATION OF CASH FLOW STATEMENT
The cash flow statement is prepared by showing inflows and outflows of cash from
major activities of a firm. The activities that result in cash inflows are referred to as
source of cash and the activities that results into cash flow outflow are referred to as
uses of cash. The firm’s activities are classified into 3 categories. They are:
1. Cash flows from operating activities
2. Cash flows from investing activities
3. Cash flow from financing activities
Cash flow from operating activities
Operating activities refer to the day-to-day revenue generating activities of a firm.
These activities are considered to be the major sources of internally generated cash.
Cash inflows form operating activities include the cash from sales and collection from
debtors. Cash outflows for operating activities include cash purchase, payment of
suppliers, payment for other operating expenses, payment for interest and taxes thus
consist of all cash revenue expenses.
Cash flows from operating activities could be determined by using two methods.
Direct and indirect method
1. Cash flow from operating activities under direct method
Under direct method only those items from income statement are selected that result
into actual flow of cash. So, non-cash expenses such as depreciation and amortized
amount appeared in income statement are ignored. The change in some
components of current assets and current liabilities except cash balance are also
incorporated that result into cash inflows and outflows.
A. Cash sales and collection from debtors
It includes cash from sales and cash inflows or outflows resulted from change
in debtors and bills receivable.
B. Cash purchases and payment to suppliers
It includes cash inflow resulted from purchase of raw materials or cost of
goods sold. The changes in creditors and bills payables of two balance sheet
dates are adjusted to the amount of purchase of raw materials or cost of
goods sold.
C. Payment to employees and other operating expenses
It includes cash outflow resulted from payment of wages, salaries,
manufacturing expenses, administrative expenses, selling and distribution
expenses, including insurance and other operating expenses.
D. Payment for interest and taxes
It includes the cash outflow occurring out of payment of interest and taxes.
The change in outstanding interest and taxes are also included.
E. Cash from extra-ordinary activities
It includes all the cash inflows and outflows arising on account of short-term
investment and short-term financing such as short-term bank loan, bank
overdraft, and marketable securities.
2. Cash flows from operating activities under indirect method
Under indirect method first the funds from operation is ascertain by adjusting the net
income by non-cash expenses and non-operating incomes and expenses included in
the income statement. The funds from operation so ascertained are again adjusted
by the changes in current assets and the changes in current liabilities to determine
cash flows from operating activities.
To apply this method all the amount of non-operating and non-cash expenses are
added to the net income and then the amount of non-operating incomes are
deducted. The resulting figure is known as funds from operation. The changes in
current assets, other than cash and the changes in current liabilities are adjusted to
funds from operation so that the resulting figure is known as cash from operating
activities.
Cash flow from investing activities
Investing activities refer to those activities, which are concerned with acquisition or
sales of long-term assets or investment. Cash inflows from investing activities
include the cash received from sales of fixed assets as well as investment and cash
outflows include cash paid for the purchase of fixed assets and investment made.
Cash flow from financing activities
Financing activities are concerned with cash collection by issuing shares and
debentures, raising long-term loan and so on. It also involves cash outflows in terms
of redemption of debentures and preference shares, repurchase of shares,
repayment of long-term loan and payment of cash dividend.