CASHFLOW STATEMENT

MEANING

• CASHi. Cash in handii. Demand Deposits in Banksiii. Cash Equivalents

• Cash equivalents are short-term, highly liquid investments, readily convertible into cash and which are subject to insignificant risk of changes in values.

• Flow:flow means flow of cash from business to economy and economy to business.

• Statement:statement is a performa prescribed by Charted Accountant Act,1948.

Thus, cash flow statement is a statement of

inflows(sources) and outflows(uses) ofcash and cash

equivalents in an enterprise during a specified period of time.

Categories of Inflows And Outflows

• The statement of cash flow shows three main categories of cash inflows and cash outflows, namely : operating, investing and financing activities.

• Operating activities are the principal revenue generating activitiesof the enterprise.

• Investing activities include the acquisition and disposal of longtermassets and other investments not included in cash equivalents.

• Financing activities are activities that result in change in the size and composition of the owner’s capital (including Preference share capital in the case of a company) and borrowings of the enterprise.

Operating Activities

• Cash Outflows:• Cash from sales• Cash received fromDebtors

• Cash received from commision and fees

• royalty and other revenues

• Cash Outflows:• Cash purchases• Payment to creditors• Cash operating expenses• Paymant of wages• Income tax

Investing Activities

• Cash inflow:• Sale of fixed assets • Sale of investments• Interests received • Dividend received

• Cash outflow:• Purchase of fixed assets• Purchase of investments

Financing Activities

• Cash inflow:• Issue of shares• Issue of debuntures in cash• Proceeds of long term short term

borrowings

• Cash outflow :• Cash repayments of amount

borrowed• Interest paid on loans/debentures• Dividends paid on equity and

preference share capital

Cash flow Fund flow• Meaning of fund:means only cashcomponent ofcurrent assets.• Objective:is to know about the changes

occurred in cash position between two balance sheet dates.

• Basis of preparation:increase in current liability or decrease in current asset results in increase in cash or vice versa.

• Utility:useful for short term analysis• Effect of transaction:effect of a transaction

only on cash is considered• Cash balances:opening and closing balances

are shown in cash flow statement

• Fund means net working capital

• To know about the changes occurred in net working capital between two balance dates

• Increase in current liability and decrease in current asset results in a decrease in net working capitaland vice versa

• Useful for lonterm analysis• Effect of a transaction only on net working

capital is considered• Opening and closing balances are shown in

statement of changes in working capital

Limitations of cash flow statement

Though it is true that cash flow statement is very useful now-a-days and serves many purposes. But it is necessary to take certain precautions while making use of this important tool.

• It is very difficult to precisely define the term ‘cash’• There are controversies over a number of items like

cheques, stamps,postal orders etc. to be included in cash or not.

• As the present business moves from the cash basis to accrual basis, the prepaid and credit transactions might be represented an increase in working capital and it would be misleading to equate net income to cashflow because a number of non cash items would affect the net income.

Balance sheetliabilities 2005

(Rs. ‘000)2006(Rs. ‘000)

assets 2005(Rs.’000)

2006(Rs.’000)

Paid up capital

50 50 Gross fixed assets

1000 1125

Retained earnings

350 415 Accrued depriciation

(100) (175)

Long term debts

500 550 inventory 100 110

Notes payable

80 100 Accounts recevables

50 60

Accounts payable

80 90 cash 10 85

total 1060 1205 total 1060 1025

Income Statement (Rs.’000)

• Sales 1200• Cost of goods sold (800)• Gross profit 400• Selling,general and administartion (150)• EBIT 250• Int. exp (50)• EBT 200• Taxes (100)• Net income 100

• Additional information (Rs.’000)• Dividend paid 35• Additions to be retained 65• Depreciation 75

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