CASH FLOW
STATEMENTS
Statement of changes in financial position
Cash Flow Statements
Balance sheet and P&L A/c provide a firm’s assets-liabilities
and its performance, respectively.
However, both these statements fail to explain the changes
(with reasons) in the liquidity position of the firm.
A Cash Flow Statement is a statement which discloses the
changes in cash position between two or more periods.
A Cash Flow Statement provides reasons for such changes
and also clarifies the modes in which cash is generated as well
as utilized by the firm during the period.
Cash includes cash on hand, demand deposits with bank,
while cash equivalents as short term liquid investments.
Cash Flow Statements – Utility
Indicator of liquidity of a firm
Measures cash profits, i.e. actual
performance against dressing
Vital management planning tool
Facilitates effective utilization of
cash (balance of sources vs. uses)
Avoids maintaining idle cash as
well as cases of cash shortages.
Provides a clear picture to users
and management w.r.t. utilization
of cash among different purposes
Statutory disclosure requirement
as per Accounting Standard – 3
Cash Flow Statements – AS 3
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Operating activities are ‘the principle
revenue producing activities of the enterprise
and other activities that are not investing or
financing activities.’
Cash flows from operating activities is the
key indicator to measure the performance
and capability of a company. Examples –
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Cash receipts from sale of goods/
rendering services
Cash receipts from royalty, commissions etc
Cash payments to suppliers for goods and
services
Cash payments to employees
Any other cash flows relating to business of
the enterprise. For e.g. trading, insurance,
real-estate, stock-broking, rentals etc.
Cash Flow Statements – AS 3
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Separate disclosure of investing
activities is important because it
represents the expenditure incurred for
generating future income. It increases
the total capacity of the enterprise.
 Cash payments to acquire fixed
assets (incl. intangibles)
 Cash receipts from sale/ disposal of
fixed assets (incl. intangibles)
 Cash payments for investment in
shares, debentures of other Cos.
 Cash receipts on sale of investments
in other companies
 Cash advances and loans made to
third parties
 Cash receipts from repayment of
loans made to third parties
Investing activities - ‘the acquisition
and disposal of long term assets and other
investments not included in the cash
equivalents.’
Cash Flow Statements – AS 3
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Financing activities are ‘activities
that result in changes in the size and
composition of the owners’ capital (incl.
preference shares) & borrowings of the
enterprise.’
Separate disclosure of financing
activities is important since it is useful in
predicting claims on future cash flows
by the providers of the funds (capital +
borrowing) to the enterprise.
 Cash receipts from issuing shares or
similar instruments
 Cash receipts by issuing debentures,
loans, bonds, notes etc.
 Repayment of loans, redemption of
debentures, preference shares etc.