CASH FLOW STATEMENT

Vishesh Singh
[email protected]
What Is a Cash Flow Statement?

• A cash flow statement provides data regarding all cash inflows that a company receives
from its ongoing operations and external investment sources.
• The cash flow statement includes cash made by the business through operations,
investment, and financing—the sum of which is called net cash flow.
• The first section of the cash flow statement is cash flow from operations, which includes
transactions from all operational business activities. 
• Cash flow from investment is the second section of the cash flow statement, and is the
result of investment gains and losses. 
• Cash flow from financing is the final section, which provides an overview of cash used from
debt and equity.
Objective of Cash Flow Statement:

 The primary objective of cash flow statement is to supply the necessary information
relating to generation of cash to the users of financial statement. It also highlights the
future or prospective cash positions i.e. cash or cash equivalent. The inflows and
outflows of cash can be represented with the help of this statement.

• Measurement of cash
• Generating inflow of cash
• Classification of activities
• Prediction of future
• Assessing liquidity and solvency position
• Evaluation of future cash flow
• Supply necessary information to uses
• Helps the management to a certain cash planning
Limitations of Cash Flow Statement:

1. Cash flow statement shows only cash inflow and cash outflow. But, the cash balance disclosed by the
statement cannot reveals the true liquid position of the business.
2. Net Cash Flow disclosed by Cash Flow Statement does not necessarily mean net income of the business
because net income is determined by taking into account both cash and non-cash items.
3. It does not give complete picture of the financial position of the business concern.
4. The preparation of cash flow statement is only postmortem analysis. There is no projection of cash in
future in this method.
5. It is not a substitute of Income Statement.
6. The accuracy of cash flow statement is based on the balance sheet. If balance sheet is wrong, the cash flow
statement is also wrong.
7. It is not prepared on the basic accounting concept of accrual basis. Hence, the accuracy of cash flow
statement is questionable.
8. It is not suitable for judging the profitability of a firm as non-cash items are not included in the
calculation of cash flow from operating activities.
STRUCTURE OF THE CASH FLOW
STATEMENT:
Operating Activities:

 The operating activities on the CFS include any sources and uses of cash from business activities. In other
words, it reflects how much cash is generated from a company’s products or services.
 These operating activities might include:
• Receipts from sales of goods and services
• Interest payments
• Income tax payments
• Payments made to suppliers of goods and services used in production
• Salary and wage payments to employees
• Rent payments
• Any other type of operating expenses
 In the case of a trading portfolio or an investment company, receipts from the sale of loans, debt, or equity
 instruments are also included because it is a business activity.
Classification of Business Activities: Inflow and Outflow of
Cash-

Operating Activities

Cash Inflow Cash Outflow

Cash
Received from Commission Cash Payment to Payment of Manufacturing
Cash Sale Royalty Operating Income Tax
Debtors and Fees Purchased Creditors Wages Expenses
Expenses
Investing Activities:

 Investing activities include any sources and uses of cash from a company’s investments.
Purchases or sales of assets, loans made to vendors or received from customers, or any
payments related to mergers and acquisitions (M&A) are included in this category. In short,
changes in equipment, assets, or investments relate to cash from investing.
 Changes in cash from investing are usually considered cash-out items because cash is used
to buy new equipment, buildings, or short-term assets such as marketable securities. But
when a company divests an asset, the transaction is considered cash-in for calculating cash
from investing.
Classification of Business Activities: Inflow and Outflow of
Cash-

Investing Activities
Cash
Cash Inflow
Outflow
Sale of Working Purchased Purchased
Sale of Interest Dividend Working
Fixed Capital of Fixed of
Investment Received Received Capital
Assets Recovery Assets Investment
Financing Activities

 Cash from financing activities includes the sources of cash from investors and banks, as well
as the way cash is paid to shareholders. This includes any dividends, payments for 
stock repurchases, and repayment of debt principal (loans) that are made by the company.
 Changes in cash from financing are cash-in when capital is raised and cash-out when
dividends are paid. Thus, if a company issues a bond to the public, the company receives
cash financing. However, when interest is paid to bondholders, the company is reducing its
cash. And remember, although interest is a cash-out expense, it is reported as an operating
activity—not a financing activity.
Classification of Business Activities: Inflow and Outflow of
Cash-

Financing Activities
Cash
Cash Outflow
Inflow
Proceeds Repayment
Issues of Issues of Redemptions
from Long Payment of Payment of of Finance/
Shares in Debentures of Preference Interest Paid
Term Loans Dividends Lease
cash in cash Shares
Borrowings Liability
How Cash Flow Is Calculated ?

1. Direct Cash Flow Method

 The direct method adds up all of the cash payments and receipts, including cash paid to suppliers, cash
receipts from customers, and cash paid out in salaries. This method of CFS is easier for very small
businesses that use the cash basis accounting method.
 These figures can also be calculated by using the beginning and ending balances of a variety of asset and 
liability accounts and examining the net decrease or increase in the accounts. It is presented in a
straightforward manner.
2. Indirect Cash Flow Method
 With the indirect method, cash flow is calculated by adjusting net income by adding or subtracting
differences resulting from non-cash transactions. Non-cash items show up in the changes to a company’s
assets and liabilities on the balance sheet from one period to the next. Therefore, the accountant will
identify any increases and decreases to asset and liability accounts that need to be added back to or
removed from the net income figure, in order to identify an accurate cash inflow or outflow.
Cash Flow Statement- DIRECT vs INDIRECT:
 PARTICULARS Rs.

A. Cash Flows from operating activities

(List of individual items) xxx
Net Cash provided/used by operating activities xxx

B. Cash flows from investing activities

(List of individual inflows and outflows) xxx
Net Cash provided/used by investing activities xxx

C. Cash Flows from financing activities

(List of individual inflows and outflows) xxx
Net Cash provided/used by financing activities xxx

D. Net increase/decrease in cash and cash

equivalents (A+B+C) xxx
(ADD)
E. Cash at beginning of period xxx

F. Cash at end of period

SPECIMEN OF CASH FLOW STATEMENT:
Basic Questions:

 Which Kinds of Cash Flows Show Up in Operations? Cash inflows and outflows from business
activities such as buying and selling inventory and supplies, paying salaries, accounts payable,
depreciation, amortization, and prepaid items booked as revenues and expenses.
 When Capital Expenditures Increase, What Happens to Cash Flow? Generally, cash flow is reduced,
as the cash has been used to invest in future operations, thus promoting future growth of the company.
 What Does a Negative Cash Flow From Financing Mean? A negative number can show that a
company is paying off debt, making dividend payments or buying back its stock.
The Bottom Line
 The cash flow statement has three key sections: cash flow from operations, cash flow from investments
and cash flow from financing. Even if the business uses accrual accounting as its main reporting system,
the cash flow statement is focused on cash accounting. The cash flow statement enables managers,
analysts, and investors to assess how well a company is doing. Overall investors prefer that companies
generate the bulk of their cash flow from operations, rather than from investments and financing.
Bibliography:

 https://www.investopedia.com/terms/c/cashflowstatement.asp

 https://image.slidesharecdn.com/cash-flow-statement-1220159910575245-9/95/cas
h-flow-statement-3-728.jpg?cb=1220137726

 https://www.yourarticlelibrary.com/accounting/cash-flow-statement/cash-flow-statem
ent-meaning-objectives-and-importance/65785#:~:text=The%20primary%20objective
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 Book~ ts grewal
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