Accountancy Class 12

Financial Statements
Chapter - 4
Cash – Flow
Statement
 Cash –Flow Statement
A Cash-flow Statement is a statement showing
inflows (receipts) and outflows (payments) of
cash during a particular period.

Objectives of Cash Flow Statement

To ascertain the To ascertain the To ascertain the net To highlight the
applications change in Cash and major activities that
sources (receipts) Cash Equivalents i.e.
of cash and cash (payments) of Cash have provided cash
and Cash the difference
and that have used
equivalents from between sources and
Equivalents under cash during a
operating, applications under the
particular period
operating, investing three activities
investing and and to show their
and financing between the dates of
financing activities activities of the effect on the overall
two consecutive
of the enterprise. enterprise. Balance Sheets. cash balance.
 Importance or Uses or Cash Flow Statement
Useful for short-term financial planning :
A cash-flow statement provides information for planning the short-term financial needs of the firm.

Useful in Preparing the Cash Budget :

A cash flow statement prepared for the future period is helpful in preparing a cash budget.

Comparison with the Cash Budget :

A cash budget is prepared at the commencement of the year, whereas a cash flow statement is prepared at the end of the
year.

Study of the Trend of Cash Receipts and Payments :

A cash-flow statement reveals 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 Explains the Deviations of cash from Earnings :

A firm may earn huge profits yet it may have paucity of cash or when it suffered a loss it may still have plenty of cash. A
Cash flow statement explains the reasons for it.

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.
 Limitations of Cash - Flow Statement
 Not Suitable for Judging the Liquidity - It does not present true picture of the
liquidity of a firm because the liquidity does not depend upon cash alone.
 Possibility of Window-Dressing - The possibility of window-dressing is higher
in case of cash position in comparison to the working capital position of a firm.
 It Ignores Non-cash Transactions - Cash-flow statement ignores non-cash
transactions like purchase of fixed assets by issuing shares or debentures,
conversion of debentures into shares, issue of bonus shares etc.
 It Ignores the Accrual Concept of Accounting - It is prepared on cash
basis and hence ignores one of the basic concepts of accounting, namely accrual concept.
 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.
 Historical in Nature - A cash flow statement is prepared on the basis
of two comparative Balance Sheets of the past years.
Difference between Cash-Flow Statement and 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. A cash budget
is therefore prepared showing how much cash is likely to be received.

Cash - Flows
It implies movement of cash in and out of non-cash items. Receipt of cash from a non-cash item is
termed as cash inflow while cash payment in respect of such items is termed as cash outflow.

Cash and Cash Equivalents

• As per AS-3, 'cash' comprises cash in hand and demand deposits with banks, and
'cash equivalents' means short-term highly liquid investments that are readily
convertible into known amounts of cash and which are subject to an insignificant
risk of changes in value.
• For example, Short-term marketable securities, which can be readily converted into
cash, are treated as cash equivalents.
 Classification of business activities as per AS-3 showing
'Cash Inflows' and 'Cash Outflows'

1) Operating Activities
Cash Inflows Cash Outflows

i. Cash Sales i. Cash Purchases

ii. Cash received from Royalty, Fees and ii. Cash paid to Creditors / Trade Payables
Commission iii. Payment of Operating Expenses like Wages,
iii. Cash received from Debtors/ Trade Salary, Office and Selling Expenses etc.
Receivables iv. Payment of Income Tax
Cash Inflows Cash Outflows
In Case of Financial Companies In Case of Financial Companies
iv. Interest and Dividend received in Cash v. Interest paid in Cash
v. Proceeds from Sale of Securities vi. Payment for Purchase of Securities
vi. Loans and Advances repaid by third parties vii. Loans and Advances to third parties
 Investing Activities
Cash Inflows Cash Outflows

 Proceeds from Sale of Fixed

Assets  Purchase of
 Proceeds from Sale of Non- Fixed Assets
Current Investments
 Interest received on  Purchase of Non
Debentures – Current
 Dividend received on
Shares Investments
 Financing Activities
Cash Inflows Cash Outflows

 Proceeds from Issue of  Payment for Buy-Back of Equity Shares

 Payment for Redemption of Preference Shares
Shares in Cash
 Payment for Redemption of Debentures
 Proceeds from Issue of  Repayment of loans (Long term or Short term)
Debentures in Cash  Payment of Interim Dividend and Previous Year's
Proposed Dividend.
 Loans raised (Long-term  Payment of Interest on Long-term and Short-term
or Short-term) Loans.
 Payment of Interest on Bank Overdraft/ Cash Credit
 Increase in Balance of  Payment of Preliminary Expenses (including share
Bank Overdraft or Cash issue expenses)
Credit  Decrease in Balance of Bank Overdraft or Cash
Credit
 XYZ Ltd.
CASH FLOW STATEMENT for the year ended ……… Format of Cash –
(Indirect Method)
(as per Accounting Standard – 3 Revised)
Flow Statement
₹ ₹
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 written off ………………
Goodwill, Patents and Trademarks Amortized ………………
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 goodwill ………………
Proceeds from Sale of Non – Current Investments ………………
Interest and Dividend Received ………………
Rent Received ………………
Purchase of Tangible Fixed Assets (………………)
Purchase of Intangible Fixed Assets like goodwill (………………)
Purchase of Non – Current Investments (………………)
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 :
i. Increase in the Balance of Bank Overdraft and Cash Credit ………………
ii. 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 (Wether 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 …………..