Cash Flow Statement Part 1

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In most of the company’s accounting is based on accrual basis. But accounting based on cash flows is also very important. Banks mainly use accounting based on cash flows. Cash is generated from different sources i.e. issue of shares and debentures or loans. Cash is mainly generated for operating activities which is buying assets and discharging liabilities. The cash should not be idle and at the same time shortage of cash should not be there. So, management of cash is very important and accounting based on cash flows can be understood by preparing cash flow statement.

Definition: Cash Flow Statement: “Cash-Flow statement may be defined as a summary of receipts and disbursements of cash for a particular period of time. It also explains reasons for the changes in cash position of the firm.”

Cash flows are cash inflows and outflows. Cash inflow increases the level of cash in the firm which includes cash from operating activities, Sale of current and fixed assets, issue of share capital and debentures etc. and cash outflows decrease the level of cash in the firm which includes loss from operations, purchase of current and fixed assets, redemption of debentures, preference shares and other long-term debt for cash.

Objectives of Cash Flow Statements:

  • It highlights the sources of cash inflows and cash outflows.

  • It helps in planning the repayment of loans and replacement of fixed assets etc.

  • It helps in forecasting future investing and financing plans of the enterprise.

  • It describes the liquidity position in a better manner. That is why cash flow statement is widely used in banks and other financial institutions to know their liquidity position well.

  • It helps in efficient management of cash.

Cash Flow Statement consist of different activities according to AS-3 (revised) standards.

Cash and Relevant Terms as Per as-3 Standards:

  • Cash Fund: It includes Cash in hand, Demand Deposits with banks and 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.

  • Cash inflows and outflows are categorized into three activities.

  • Operating Activities: These are the principal revenue generating activities of the business. Items of operating activities

  • Investing Activities: Which include the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

    1. Cash payments to acquire fixed Assets

    2. Cash receipts from disposal of fixed assets

    3. Cash payments to acquire shares, or debenture investment.

    4. Cash receipts from the repayment of advances and loans made to third parties.

  • Financial Activities: Which include activities that result in change in the size and composition of the owner’s capital and borrowings of the enterprise.

  1. Cash proceeds from issue of shares or other similar instruments.

  2. Cash proceeds from issue of debentures, loans, notes, bonds, and othershort-term borrowings

  3. Cash repayment of amount borrowed

Flowchart:

Cash Flow Statement Flowchart

Cash Flow Statement Flowchart

Cash Flow Statement Flowchart

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