6

Cash-Flow Statement
A cash-flow statement is a statement showing inflows (receipts) and outtiOwS
(payments) ol cash during a particular period. In other words, it is a summary of
sOurces and applications of cash during a particular span of time. It analyses the
reasons for changes in balance of cash between the two balance sheet dates. The term
cash' here stands for cash and cash equivalents. A cash-flow statement includes only
those items which affect cash.
A cash-flow statement can be for the past or can be projected for a future period.
e

Objectives of Cash Flow Statement

(i) To ascertain the sources (receipts) of Cash and Cash Equivalents from
operating, investing and financing activities of the enterprise.
(i) To ascertain the applications (payments) of Cash and Cash Equivalents under
operating, investing and financing activities of the enterprise.

(ii) To ascertain the net change in Cash and Cash Equivalents i.e. the difference
between sources and applications under the three activities between the dates
of two consecutive Balance Sheets.
have used
(iv) To highlight the major activities that have provided cash and that
effect on the overall cash
cash during a particular period and to show their
balance.

Statement
Importance or Uses of Cash Flow
a cash-flow statement can be laid down as
The main objectives behind preparing
under
Financial Planning A cash-flow
statement
() Useful for Short-Term financial needs of the firm. Since it
provides information for planning the short-term
and utiisation of cash during a period, it
rovides information regarding the sourcesassess whether it will have adequate cash to
Ecomes easier forthe management to
expenses and pay the trade payables in time, whether it will have
day-to-day thereon and whether it has
CIent cash to pay the long-term l0ans and nterest
of fixed assets or not.
g h cash to pay for the purchase
2)Useful in Preparing the Cash Budget:A cash flow statement prepared for
a cash budget. It informs the management
Tuture period is helpful in preparing in which months the receipts of cash
ut the surplus or deficit periods of cash, i.e., in excess of
and in which months the payments will be
T n of payments
excess
short-term investments
pts.It helps in planning the investment of surplus cash in
T o plan short-term credit in advance for deficit periods.
6.2
CASH-FILOW STATEMENT

with the Cash Budget. A cash budget is prepared at the

(3) Comparison
flow statement is prepared at the end of the
commencement of the year, whereas a cash
year. A comparison between the two helps in ascertaining the extent to which the
finaneial resources of the firm have been generated and used according to the plan
Causes of variances between the figures of two statements can be analysed and proper
corective measures may be taken.
(4) Study of the Trend of Cash Receipts and Payments A cash-flow
statementreveals the speed at which the cash is being generated from trade
receivables, inventory and other current assets and the speed at which the current
liabilities are being paid. It enables the management to assess the true position of the
cash in future.
5 ) It Explains the Deviations of Cash from Earnings:-A firm may earn huge
profits yet it may have paucity ofcash or when it suffered a loss it may still have plenty
Lofcash. A Cash flow statement explains the reasons for it.
(6) Helpful in Ascertaining Cash Flow from Various Activities Separately:
A Cash flow statement aims at highlighting the Cash flow from operating, investing
and financing activities separately. It indicates how much cash has been generated or
used in these activities.

(7) Helpful in Making Dividend Decisions The amount of dividend must be

deposited in separate 'Dividend Bank A/c' within 5 days of the declaration of such
a
dividend. Hence the management takes the
position of cash generated from operating activitiescash
help of flow statement to ascertain the
which can be used for of
dividend. payment
(8)Test for the
Managerial Decisions : - It is a
purchased from funds raised from long-term general
should be rule that fixed assets
sources like issue of shares.
debentures, long-term loans etc. and these
should be repaid out of cash
operating activities. The cash flow statement shows generated from
properly followed by the management or not. whether this policy has been
(9) Useful to Outsiders Cash flow statement
debentureholders, bankers. lenders,
supplier's of credit
helps the investors.
position of the enterprise and they can take etc. to analyse the financial
analysis proper decisions on the basis of such
Limitations of Cash-Flow Statement
fTTNot suilable for Judging the
the Yqutdity of afirm because the Liquidity - It does not present true pieture ot
lhquidity does not depend
also depends upon those asscts which can
be converted upon cash alone. Liquidity
into cash
these assets obstructs the true
reporting of the ability of the easily. Eclusion of
hen they become due for pay ment. tirm to meet its
liabilities
(2) Possibility of W
hioker indow-dressing:
incase of cash position The possibility of
working capitalwindow-dressing
in is
comparison to the
The cash balance can be casily position ot a tirm
manoeuvred by postponing
payments and by rapidly collecting cash Irom rade receivablespurchases and other
heet date. Hence, a fund-1low statement presents a mmore
before the balane
cash-flow statement. realistie picture than a

(3 t inores non-cash transacti0ns ästh-tlow Stalenment ignores non-cash

CASH-FLOW STATEMENT 6.3
transactions like purchase of fixed assets by issuing shares or debentures, conversion
of debentures into shares, issue of bonus shares etc. Hence, the true position ol an
enterprise cannot be judged by cash-flow statement.
(4) It
ignores the accrual concept of accounting:-It is prepared on cash basis
and hence 1gnores one of the basic concepts of accounting, namely accrual
concept
(5) No substitute for an Income Statement:-A Cash Flow Statement is not a
substitute of Income Statement which takes into account both cash and non-cash items.
Therefore, net cash flow does not mean net income of the business.
(6) Historiecal in Nature:-A cash flow statement is prepared on the basis oftwo
comparative Balance Sheets of the past years. Hence, information revealed by it is
historical in nature. Information revealed by it will be more useful if it is accompanied
by the projected cash flow statement.
Difference between Cash-Flow Statement and Cash Budget
There is not much difference between a cash-flow statement and a cash budget.
The only difference is that a cash-flow statement is prepared for a past period whereas
a cash budget is prepared for a future period. Cash-flow statement usually portray how
cash was received and spent in the past period. Hence, it is of limited use as far as the
future periods are concened. A cash budget is theresfore prepared showing how much
cash is likely to be received and what will be the disbursements during a future period
of time? Thus, a cash budget indicates in which months there will be surplus cash and
in which months there will be deficiency of cash resources. The management can then
take suitable decision to invest the surplus cash or make arrangement for the deficiency
of cash at the required time.

Procedure of Preparing Cash-Flow Statement

India has issued Accounting Standard
The Institute of Chartered Acountants of
flow statement. This Accounting Standard has
(AS)-3 Revised, for preparing a cash or after 1st
been made mandatory in respect of accounting periods commencing on
These enterprises are:
April 2001, for certain enterprises.
or debt securities are listed on a recognised inventory
(i) Enterprises whose equity
that are in the process of issuing equity or debt
exchange in India, and enterprises exchange in India.
securitiesthat will be listed on a recognised inventory
industrial and business enterprises, whose turnover for
(ii) All other commercial,
exceeds 750 Crores.
the accounting period
statement has been prepared according to AS-3 Revised in
As such, the Cash flow
this Chapter.
the cash floW statement summarizes the cash inflows
According to AS-3 Revised,
the net changes (increase or decrease) in cash and cash
and cash outflows and
and financing activities ofa firm during
resulting from operating, investing
equivalents
a period.
used for preparing a cash flow statement
The following terms are
CashIt comprises cash in hand and demand deposits with banks ie., deposits
which are by banks on demand.
repayable
Cash Equivalents -These are short-term, highly liquid investments that are
 CASH-FLOW STATEMENT

including redemption
short term or long term borrowings
(d) Cash repayments of shares, loans (Short-term
or long-term);
of debentures, bonds, preference
year's proposed dividends
interim dividend and previous
(e) Cash payments of
Shares;
both on Preference and Equity
such as Debentures and
Cash payments for interest on long-term borrovWings
() such as Bank Overdraft and
Cash Credit,
interest on short term borrowings
and Cash Credit.
(g) Change in Bank Overdraft
of Preliminary Expenses (including share issue expenses).
(h) Payment
SomeSpecial Items:
items as below:
AS-3 (Revised) has provided for the treatment of some special
inflow from interest and dividend and cash
() Interest and Dividends-Cash
should be disclosed separately. Cash
of interest and dividend
account
outflow on
shown as cash flow from
from interest and dividends received should be
inflow arising interest and dividend paid
on account of
activities whereas cash outflow
investing
should be shown as cash flow from financing activity.
income is a part of cash flows from
(ii) Taxes on Income- Tax paid on
flows from
deduction under 'cash
operating activity. Hence,
Taxes paid are shown as a
operating activities."

(iii) Extraordinary
Items-Cash flows relating to extraordinary items such as
received from insurance companies, winning of a lottery
bad debts recovered, claims
arising from operating, investing
or
or a law suit etc. should
be disclosed separately as
on
from insurance company
tinancing example, the amount received
activities. For cash
fire, earthquake, floods etc. should be reported as
account of loss of inventory by
flows from operating activities.
Transactions- There are some investing and
(iv) Significant Non-Cash cash equivalents. Such
activities which do not require the use of cash or
financing from the cash flow statement. Examples are:
excluded
non-cash activities should be
issue of debentures or shares, conversion of debentures into
he acquisition of assets by cash
non-cash transactions should be disclosed outside the
shares etc. Such significant
flow statement
Classification of Business Activities as per AS-3 showing
Cash Inflows' and Cash Outflows'.

Operating Activities

Cash Inflows Cash Outflows

) Cash Sales () Cash Purchases

(i) Cash received from Royalty, (i) Cash paid to Creditors/Trade
Fees and Commission Payables
(ini) Cash received from Debtors/ (ii) Payment of Operating ExpensC
and
Trade Receivables like Wages, Salary, Office
Selling Expenses etc.

(iv) Payment of Income 1ax

CASL FLOW STATEMENT 6
Cash Inflows
Cash Outflows
in Case of Financial Companies in Case of Financial Companies
(iv) Interest and Dividend received
(v) Interest paid in Cash
in Cash
() Proceeds from Sale of Securities
(vi) Payment for Purchase of Securities
(vi) Loans and Advances
repaid (vii) Loans and Advances to third parties
by third parties

Investing Activities

Cash Inflows
Cash Outflows
(i) Proceeds from Sale of Fixed Assets
(i) Purchase of Fixed Assets
(ii) Proceeds from Sale of Non-
(i) Purchase of Non-Current
Current Investments
Investments
(iir) Interest received on Debentures
(iv) Dividend received on Shares
11.
Financing Activities

Cash Inflows
Cash Outflows
(i) Proceeds from Issue of Shares
() Payment for Buy-back of Equity
in Cash
Shares
(ii) Proceeds from Issue of (i) Payment for Redemption of
Debentures in Cash Preferénce Shares
(ii) Loans raised (Long-ternm (ii) Payment for Redemption of
or Short-term)
Debentures
(v) Increase in Balance of Bank (iv) Repayment of Loans (long-term or
Overdraft or Cash Credit Short-term)
() Payment of Interim Dividend and
Previous Year's Proposed Dividend
(vi) Payment of Interest on Long-term
and short-term Loans
(vii) Payment of Interest on Bank
Overdraft/Cash Credit
(vii) Payment of Preliminary Exp.
(including share issue exp.)
(ix) Decrease in Balance of Bank
Overdraft or Cash Credit

FORMAT OF CASH FLOW STATEMENT

(as per CBSE Circular No. Acad-43/2013 dated 2nd July, 2013
issued by the CBSE New Delhi)
N
A cash flow statement may be prepared either by dire. or indirect method. Cash
low statement under direct method is not under the
purview of existing syIlabus
Format under the indirect method is given below
6.8
CASH-FLOW STATEME-
XYZ Ltd.

CASH FLOW STATEMENT or the year ended..

(Indirect Method)
(as per Accounting
Standard 3Revised)

A. Cash Flows from Operating Activities

Net Profit before Tax (See Note No. 1)
Adjustments for non cash and non operating items
Add: Depreciation
Preliminary Expenses/Discount on issue of
Debentures writen off
Goodwill, Patents and Trademarks Amortised
Interest paid on short term and
long-term Borrowings
Interest paid on Bank Overdraft/Cash Credit * ****

Loss on Sale of Fixed Assets '**"

Increase in Provision for Doubtful Debts * ***

Less : Interest Income (..

Dividend Income
Rental Income
Gain (Profit) on Sale of Fixed Assets
Decrease in Provision for Doubtful Debts
Operating Profit before Working Capital Changes ******"***

Add: Decrease in Current Assets **

Increase in Current Liabilities

Less: Increase in Current Assets ..)|
Decrease in Current Liabilities .) ..**
Cash generated from operations
Less: Income Tax paid (Net of Tax Refund received)
Net cash from (or used in) operating activities * * * * *

B. Cash flows from Investing Activities:

Proceeds from Sale of Tangible Fixed Assets *****

Proceeds from Sale of Intangible Fixed Assets like

Proceeds from Sale of Non-Current Investments
goodwill ***"a***

Interest and Dividend Received

Rent Received
***
Purchase of Tangible Fixed Assets
Purchase of Intangibie Fixed Assets like
Purchase of Non-Current Investments
goodwill )

Net cash from (or used in) Investing Activities

c. Cash flows from Financing Activities:
Proceeds from issue of Shares and Debentures
Proceeds from Other Long-term Borrowings
Proceeds from Short-term Borrowings
(0 Inerease in the Balance of Bank Overdraft and Cash Credit
CASH-FLOW STATEMENT

6.9

(i)Decrease in the Balance of Bank Overdraft and Cash Credit

Payment of Interim Dividend
Payment of Proposed Dividend of Previous Year
Interest paid on Short-term and Long-term Borrowings (....
Interest paid on Bank Overdraft/Cash Credit
)
Repayment of Loans (Whether short-term or long-term) (. .
Redemption of Debentures/Preference Shares
Net cash from (or used in) financing activities
Net Increase (or Decrease) in Cash & Cash Equivalents (A+B+C)
Add: Cash and Cash Equivalents in the beginning of the year
Cash and Cash Equivalents at the end of the year

Note No. 1:Calculation of Net Profit before Tax

Particulars
Net Profit of the current year (after appropriations)
Add: Transfer to Reserves (all transfers to Reserves from balances of the
Statement of Profit & Loss)
Proposed Dividend of Previous Year
Interim Dividend paid during the year
Provision for Tax made during the current year
Less: Refund of Tax
Net Profit before Tax

i.e. amounts that are to be deducted.

ote: Amounts in brackets denote negative items,

ILLUSTRATION 1. END
Activities,
the following into (i) Operating Activities, (ii) Investing
Classify while preparing a Cash Flow
nancing Activities and (iv) Cash Equivalents
Statement
1. Cash Sales
Cash received from Trade Receivables
3.
Purchase of Building
4 Sale of Building
SSue of Share Capital or Debentures
Buy-back of Equity Shares
7. Dividend paid
8 Loans by (a) Finance Company
on Debentures
or Long-term
rest paid
6) Non-finance company
9. Cash Purchases
10. Cash
paid to trade payables
Preference Shares
Debentures and
12. Kedemption of
epayment fLong-term Loan
13
Office
14. Selling
Expenses
and Distribution
15. Manufacturing xpensesExpenses