CASH FLOW STATEMENT
Meaning: Meaning: IT IS a
IT IS a summary of firm’s cash receipts and cash payments duringsummary of firm’s cash receipts and cash payments during period of time
period of time..
The purpose of cash f
The purpose of cash flow statement is to report a flow statement is to report a firm’s cashirm’s cash inflow and outflows, during a period of time,
inflow and outflows, during a period of time, segregated in to threesegregated in to three categories:
categories: operating, investing andoperating, investing and financing activities.financing activities. The statement of cash f
The statement of cash flow explains changes in cash and cashlow explains changes in cash and cash equivalent such as treasure bill and the activities that increase
equivalent such as treasure bill and the activities that increase andand decrease cash. The cash flow statement may
decrease cash. The cash flow statement may be presented using either abe presented using either a “direct method” (Which is
“direct method” (Which is encouraged by financial accounting standardsencouraged by financial accounting standards board) or an “Indirect Method” (which is
board) or an “Indirect Method” (which is likely to be the methodlikely to be the method followed by good majority of firms). The
followed by good majority of firms). The only difference between theonly difference between the direct and indirect method of presentation concern the reporting of direct and indirect method of presentation concern the reporting of operating activities; the investing and financing activities
be identical under either method. Under the direct method, operating cash be identical under either method. Under the direct method, operating cash
flow reported directly by major classes of operating cash receipts (from flow reported directly by major classes of operating cash receipts (from customers) and payment
customers) and payment (to suppliers and e(to suppliers and employees). A mployees). A separate indirectseparate indirect reconciliation of Net income to net cash flow
reconciliation of Net income to net cash flow from operating activitiesfrom operating activities must be provided. The reconciliation starts with reported net income and must be provided. The reconciliation starts with reported net income and adjusts this figure for non-cash income
adjusts this figure for non-cash income statement items and relatedstatement items and related changes in balance sheet items to determine cash
changes in balance sheet items to determine cash provides by operatingprovides by operating activities.
activities.
Cash flow statement has three activities like as
Cash flow statement has three activities like as follow:follow:
Operating Activities
Operating Activities:- Shows impact of transactions not defined :- Shows impact of transactions not defined asas investigation or financing activities. These cash flows are generally the investigation or financing activities. These cash flows are generally the cash effects or transaction that enter into the
cash effects or transaction that enter into the determination of net income.determination of net income. Thus, we see items that not all statement users might think of as
Thus, we see items that not all statement users might think of as ‘operating’
‘operating’ flows-items such as flows-items such as dividends and interest received, as dividends and interest received, as well aswell as interest paid.
interest paid.
Investing Activities
Investing Activities:- :- Shows impact Shows impact of buying of buying and selling and selling fixed assetsfixed assets or equity securities of other entities.
or equity securities of other entities.
Financing Activities
Financing Activities:- Shows impact of :- Shows impact of all cash transactions withall cash transactions with
shareholders and the borrowing and repaying transactions with lenders. shareholders and the borrowing and repaying transactions with lenders.
IMPORTANCE
IMPORTANCE
The effects of cash and The effects of cash and non-cash investing and financingnon-cash investing and financing transaction.
transaction.
A manager can assess the reason for differences between netA manager can assess the reason for differences between net income and net cash flow fr
income and net cash flow from operating activities.om operating activities.
It is also helpful for a company to generate future net cash inflowsIt is also helpful for a company to generate future net cash inflows from operations to pay debts, interest
from operations to pay debts, interest and dividends.and dividends.
It gives indication to a It gives indication to a company’company’s need for s need for external financing.external financing.
A cash flow statement is straightforward and easy toA cash flow statement is straightforward and easy to Understand.
Understand.
It gives a strong indication of how viable the company will be over It gives a strong indication of how viable the company will be over time.
The extent of success or The extent of success or failure of cash planning can be failure of cash planning can be known byknown by comparing the actual cash statement with the budgeted cash flow comparing the actual cash statement with the budgeted cash flow statement and remedial measures can be
statement and remedial measures can be taken.taken.
It discloses the volume and the It discloses the volume and the speed at which cash flows inspeed at which cash flows in different segments of the business
different segments of the business