February 26, 2019

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Preparation of Cash flow statements

Cash Flow Statements – Basic Terms



Cash Flow Statement means the statement of change in cash and cash equivalents.

Operating Activities Operating activities are the revenue producing activities of an enterprise.
Examples Cash sales, Cash received from Debtors, the Trading commission received, Income tax paid.
Investing Activities Investing activities represents changes in fixed assets and long-term investment, in the beginning and at the end of the year.
Examples Purchase of machinery, sale of machinery, sale of investments, brokerage paid on purchase of investments.
Financing Activities Financing activities represents change in size and composition of owners capital of an enterprise.
Examples Issue of share capital, Long term borrowings, rent received from property held as investment.
Cash and Cash Equivalents Cash equivalents are short term investments that are readily converted in to cash.
Examples Bank overdraft, cash credit, short term deposits, marketable securities.

Objectives of Cash Flow Statement

  1. Ascertain the change in cash and cash equivalents.
  2. Ascertain the specific sources from which cash and cash equivalent were generated.
  3. Ascertain the various uses for which cash and cash equivalent were used.

Uses of Cash Flow Statements.

  1. Enables management to identify the direction of change in cash.
  2. Enables user to check the financial structure.
  3. Enables user to check the needs of enterprise to utilise cash flows.
  4. Helps ion ascertaining liquidity position of an enterprise.
  5. Helps in planning future investments.

 Limitations of Cash Flow Statements.

  1. Ignore non cash transactions.
  2. Historical statement
  3. Secondary data based statement.

Steps in preparation of Cash Flow Statements.

  1. Analyse the changes in non current assets.
  2. Analyse the changes in non current liabilities.
  3. Compute cash flow after extraordinary items.
  4. Prepare Cash Flow Statement.

Points to Remember

  • Cash flow is not the same as profit or net income.
  • Cash Flows are cash inflow and outflow of Cash and cash equivalents.

The ending cash flow for a particular period should equal the cash shown on the balance sheet for that period.

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