By CA CS Harish A Mathariya

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CASH FLOW STATEMENT For Video Lectures call

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CASH FLOW STATEMENT (AS - 3)

• Is Statement of Changes in Cash and Cash equivalents during

a particular accounting period.
• It shows Net Cash flows from Operating, Investing &
Financing Activities
• Not a substitute for Income Statement (P&L A/c) & Position
Statement (Balance Sheet)
• Historical in nature
APPLICABILITY OF AS-3 CASH FLOW
STATEMENTS
As per Companies Act 2013; to be prepared by all
companies
BUT, the act also specifies a certain category of
companies which are exempted:-
One Person Company (OPC),
Small Company and
Dormant Company
ADVANTAGES OF CASH FLOW STATEMENT
Advantages Helps in ascertaining Net Cash flows
to evaluate Cash Financial Performance
Facilitates to evaluate Cash Financial Position
Facilitates Efficient Cash Management
Facilitates Comparison
Facilitates Capital Budgeting Decisions
Facilitates Capital Structure Decisions
Facilitates Planning
Answers important financial questions
LIMITATIONS
Ignores Non-cash transactions

Secondary Data Based Statement

Historical Statement

Ignores Accrual Concept

CASH AND CASH EQUIVALENTS
• Cash comprises Cash on hand
CASH and Demand Deposits with
banks
• Eg. Cash in hand, Cash at Bank

• are short term, highly liquid investments

that are readily convertible (Short term
CASH maturity 3 M or less) into known
amounts of cash & very low risk of
EQUIVALENTS changes in value
• Eg. Treasury Bills, Commercial Papers,
Commercial Bills, Call Money,
Certificate of Deposit
TRANSACTIONS NOT NON-CASH TRANSACTIONS :
CONSIDERED AS CASH FLOWS Ignore in CFS
1. Issue of Equity Shares or Debentures against
the purchase of an Asset
2. Issue of Equity Shares on conversion of
Convertible Debentures
3. Charging of Depreciation
Movements 4. Amortization of a Fixed Intangible Asset
between Logic: 5. Written off of an old Fixed Tangible Asset
items of Since 6. Declaration of Final Dividend on Shares
Cash or Cash these are,
part of
Equivalents the cash
are not managem
considered as ent
Cash Flows
SOURCES OF CASH
Sources of Cash

Internal sources External Sources

Purchase of
Sale of
Loss on Raising Plant and
Amortization Creation of Issue of Fixed
Depreciation sale of Long-term Machinery
of intangible reserves New Shares Assets,
fixed assets Loans on deferred
Investments
payments
ACTIVITIES
OPERATING ACTIVITIES

• principal revenue-producing activities of the enterprise &

• other activities that are not investing or financing activities

INVESTING ACTIVITIES

• are the acquisition and disposal of Long-term Assets and other

Investments not included in Cash Equivalents

FINANCING ACTIVITIES
• changes in owners’ capital and Borrowings (whether ST or LT)
DISTINCTION BETWEEN FUNDS FLOW STATEMENT AND CASH FLOW STATEMENT
1. A cash flow analysis is concerned only with the change in the cash position. Fund flow analysis concerned with
change in working capital position, between two balance sheet dates. Cash is only one of the constituents
2. A cash flow statement is merely a record of cash receipts and disbursements. While studying the short-term
solvency of a business one is interested not only in cash balance but also in the assets which can be easily
converted into cash like in FFS.
3. Cash flow analysis is more useful to the management as a tool of financial analysis in short-periods
4. Funds flow analysis, helps to find out firm’s capacity to meet its long-term obligations, if changes in working
capital position on account of operations are observed.
5. Cash is part of working capital and therefore, an improvement in cash position results in an improvement in the
funds position, but the reverse is not true. In other words ‘inflow of cash’ results in ‘inflow of funds’ but inflow of
funds may not necessarily results in ‘inflow of cash.’
6. Method of preparation. Techniques of preparing the cash flow statement and funds flow statement are
different. In funds flow statement, an increase in a current liability brings a decrease in the current asset
resulting in decrease in net working capital and vice-verse. In a cash flow statement an increase in a current
liability or decrease in a asset (other than cash) might result in an increase in cash and vice versa.
CLASSIFY THE FOLLOWING ACTIVITIES AS (I) OPERATING ACTIVITIES;
(II) INVESTING ACTIVITIES; (III) FINANCING ACTIVITIES
(i) Purchase of Machinery (Vi) Receipt of Dividend
(ii) Sale of Land (vii) Payment of Interest on Debenture
(iii) Payment of Income Tax (viii) Receipt of Interest on Debenture
(iv) Refund of Income Tax (ix) Issue of Debentures
(v) Payment of Dividend (x) Buy-back of Equity Shares
SOLUTION
(i) Investing Activity, (ii) Investing Activity
(iii) Operating Activity, (iv) Operating Activity
(v) Financing Activity, (Vi) Investing Activity
(vii) Financing Activity, (viii) Investing Activity
(ix) Financial Activity, (x) Financing Activity
 CLASSIFY THE FOLLOWING ACTIVITIES
1. Bank Overdraft 15. Wages & Salaries paid
2. Issue of Equity Share Capital 16. Sale of Patents
3. Cash Sales 17. Interest received on Debentures
4. Interest on Short-term Borrowings 18. Interest paid on borrowings
5. Sale of Machinery 19. Office & Adm. Expenses paid
6. Cash receipts from Debtors 20. Manufacturing Overheads paid
7. Commission and Royalty received 21. Dividend received on Shares
8. Purchase of Current Investments 22. Rent received on property
9. Redemption of Preference shares 23. Cash Credit
10. Cash Purchases of Goods 24. Income Tax paid
11. Brokerage - purchase of Investments 25. Dividend paid on Pref. Shares
12. Purchase of Goodwill 26. Underwriting Commission paid
13. Cash paid to suppliers of Goods. 27. Rent paid
14. Interim Dividend paid on Equity Shares 28. Brokerage paid on issue of shares
 Classify the following activities as (i) operating activities; (ii)
investing activities; (iii) Financing activities in case of a
(a) Manufacturing enterprise; (b) Financial enterprise

1. Purchase of Investments.
2. Proceeds from Sale of Investments.
3. Brokerage paid on purchase & sale of Investments.
4. Interest received on Debentures held as Investments.
5. Dividend received on shares held as Investments.
6. Loans & Advances made to third parties.
7. Receipts from the repayments of loans & advances made to third parties.
8. Receipt of Interest on loans & advances made to third parties.
 Indirect Method: Operating activities is determined by
METHODS – CASH FLOW STATEMENT making necessary adjustments in the net profit (or loss)
as disclosed by profit and loss account

Direct Method: Cash receipts from operating revenues CASH FLOW STATEMENT (INDIRECT METHOD)
and cash payments for operating expenses are Particulars
calculated and shown in the cash flow statement. (A) Cash flows from operating activities
Net profit before working capital changes
CASH FLOW STATEMENT (DIRECT METHOD) (+) Decrease in CA
Particulars -
(A) Cash flows from operating activities (-) Increase in CA
Cash receipt from customers -
(+) Increase in CL
Cash paid to suppliers & employees
-
Cash generated from operation (-) Decrease in CL
Other/misc. income / Exp Cash generated from operation
Other/misc. expenses Other/misc. income
Income tax/ advance tax paid Other/misc. expenses
Cash before extraordinary item Income tax/ advance tax paid
Extraordinary item Cash before extraordinary item
Extraordinary item
CASH FLOW FROM OPERATING ACTIVITIES
CASH FLOW FROM OPERATING ACTIVITIES
(B) Cash flow from investing activities:
Sale of Fixed Assets
Purchase of Fixed Assets
Investment in subsidiary
Interest received on investment
Dividend received on investment
(C) Cash flows from financing activities :
Issue of share capital / Debentures
Redemption of preference shares / Debentures
Securities premium
Long-term borrowing
Long term borrowing paid
Dividend paid
Interest paid on debenture/long term loans
Tax on dividends/corporate dividend tax
Interim dividend paid
Total (a) + (b) + (c)
Cash and cash equivalent at the beginning
Cash and cash equivalent at the end