Cash Flow Statement: Notes | Accounting for CA Intermediate (Old Scheme) PDF Download

 Page 1


 
 
4.79 
 
FINANCIAL STATEMENTS OF COMPANIES 
 
? 
LEARNING OUTCOMES 
*  
  
 
UNIT 2: CASH FLOW STATEMENTS 
 
 
 
After studying this unit, you will be able to– 
? Define cash flow statement as per AS 3 “Cash Flow 
Statements”. 
? Differentiate operating, investing and financing activities. 
? Learn the various elements of cash and cash equivalents. 
? Prepare cash flow statement both by direct method and 
indirect method. 
 
 
 
 
 
 
 
 
 
 
 
 
4 
Page 2


 
 
4.79 
 
FINANCIAL STATEMENTS OF COMPANIES 
 
? 
LEARNING OUTCOMES 
*  
  
 
UNIT 2: CASH FLOW STATEMENTS 
 
 
 
After studying this unit, you will be able to– 
? Define cash flow statement as per AS 3 “Cash Flow 
Statements”. 
? Differentiate operating, investing and financing activities. 
? Learn the various elements of cash and cash equivalents. 
? Prepare cash flow statement both by direct method and 
indirect method. 
 
 
 
 
 
 
 
 
 
 
 
 
4 
 
 
4.80 
 
ACCOUNTING 
  
 
 
 2.1 INTRODUCTION 
Information about the cash flows of an enterprise is useful in providing users of 
financial statements with a basis to assess the ability of the enterprise to generate 
cash and cash equivalents and the needs of the enterprise to utilise those cash 
flows. The economic decisions that are taken by users require an evaluation of the 
ability of an enterprise to generate cash and cash equivalents and the timing and 
certainty of their generation. 
The Standard deals with the provision of information about the historical changes 
in cash and cash equivalents of an enterprise by means of a cash flow statement 
which classifies cash flows during the period from operating, investing and 
financing activities. 
This statement provides relevant information in assessing a company’s liquidity, 
quality of earnings and solvency.     
 
 
Definition & 
Significance of  
cash flow 
statement
Meaning of Cash 
& cash 
equivalents and 
Cash flow
Difference 
between 
operating, 
investing and 
financing 
activities.
Preparation of 
Cash Flow 
Statement 
as per AS 3.
cash receipts 
Cash          
payments 
 
Cash Flow 
Statement is 
summary of  
Page 3


 
 
4.79 
 
FINANCIAL STATEMENTS OF COMPANIES 
 
? 
LEARNING OUTCOMES 
*  
  
 
UNIT 2: CASH FLOW STATEMENTS 
 
 
 
After studying this unit, you will be able to– 
? Define cash flow statement as per AS 3 “Cash Flow 
Statements”. 
? Differentiate operating, investing and financing activities. 
? Learn the various elements of cash and cash equivalents. 
? Prepare cash flow statement both by direct method and 
indirect method. 
 
 
 
 
 
 
 
 
 
 
 
 
4 
 
 
4.80 
 
ACCOUNTING 
  
 
 
 2.1 INTRODUCTION 
Information about the cash flows of an enterprise is useful in providing users of 
financial statements with a basis to assess the ability of the enterprise to generate 
cash and cash equivalents and the needs of the enterprise to utilise those cash 
flows. The economic decisions that are taken by users require an evaluation of the 
ability of an enterprise to generate cash and cash equivalents and the timing and 
certainty of their generation. 
The Standard deals with the provision of information about the historical changes 
in cash and cash equivalents of an enterprise by means of a cash flow statement 
which classifies cash flows during the period from operating, investing and 
financing activities. 
This statement provides relevant information in assessing a company’s liquidity, 
quality of earnings and solvency.     
 
 
Definition & 
Significance of  
cash flow 
statement
Meaning of Cash 
& cash 
equivalents and 
Cash flow
Difference 
between 
operating, 
investing and 
financing 
activities.
Preparation of 
Cash Flow 
Statement 
as per AS 3.
cash receipts 
Cash          
payments 
 
Cash Flow 
Statement is 
summary of  
 
 
4.81 
 
FINANCIAL STATEMENTS OF COMPANIES 
 
Benefits:  
(a) Cash flow statement provides information about the changes in cash and cash 
equivalents of an enterprise. 
(b) Identifies cash generated from trading operations. 
(c) The operating cash surplus which can be applied for investment in fixed 
assets. 
(d) Portion of cash from operations is used to pay dividend and tax and the other 
portion is ploughed back. 
(e) Very useful tool of planning. 
Purpose: 
Cash flow statements are prepared to explain the cash movements between two 
points of time. 
Sources of Cash: 
1. Issue of shares and debentures and raising long-term loan. 
2.  Sale of investments and other fixed assets. 
3. Cash from operations (Net Operating Profit). 
Applications of Cash 
1. Redemption of preference shares and debentures and repayment of long-
term loan. 
2. Purchase of investments and other fixed assets. 
3. Payment of tax. 
4. Payment of dividend. 
5. Loss on Operation (Net Operating Loss) 
Note – Cash includes Bank Account also. Increase in cash or decrease in cash is put 
in the applications and the sources respectively just to balance the cash flow 
statement. At this juncture, you may note that changes in all balance sheet items 
are to be taken into consideration separately in cash flow statement for explaining 
movement of cash. 
  
Page 4


 
 
4.79 
 
FINANCIAL STATEMENTS OF COMPANIES 
 
? 
LEARNING OUTCOMES 
*  
  
 
UNIT 2: CASH FLOW STATEMENTS 
 
 
 
After studying this unit, you will be able to– 
? Define cash flow statement as per AS 3 “Cash Flow 
Statements”. 
? Differentiate operating, investing and financing activities. 
? Learn the various elements of cash and cash equivalents. 
? Prepare cash flow statement both by direct method and 
indirect method. 
 
 
 
 
 
 
 
 
 
 
 
 
4 
 
 
4.80 
 
ACCOUNTING 
  
 
 
 2.1 INTRODUCTION 
Information about the cash flows of an enterprise is useful in providing users of 
financial statements with a basis to assess the ability of the enterprise to generate 
cash and cash equivalents and the needs of the enterprise to utilise those cash 
flows. The economic decisions that are taken by users require an evaluation of the 
ability of an enterprise to generate cash and cash equivalents and the timing and 
certainty of their generation. 
The Standard deals with the provision of information about the historical changes 
in cash and cash equivalents of an enterprise by means of a cash flow statement 
which classifies cash flows during the period from operating, investing and 
financing activities. 
This statement provides relevant information in assessing a company’s liquidity, 
quality of earnings and solvency.     
 
 
Definition & 
Significance of  
cash flow 
statement
Meaning of Cash 
& cash 
equivalents and 
Cash flow
Difference 
between 
operating, 
investing and 
financing 
activities.
Preparation of 
Cash Flow 
Statement 
as per AS 3.
cash receipts 
Cash          
payments 
 
Cash Flow 
Statement is 
summary of  
 
 
4.81 
 
FINANCIAL STATEMENTS OF COMPANIES 
 
Benefits:  
(a) Cash flow statement provides information about the changes in cash and cash 
equivalents of an enterprise. 
(b) Identifies cash generated from trading operations. 
(c) The operating cash surplus which can be applied for investment in fixed 
assets. 
(d) Portion of cash from operations is used to pay dividend and tax and the other 
portion is ploughed back. 
(e) Very useful tool of planning. 
Purpose: 
Cash flow statements are prepared to explain the cash movements between two 
points of time. 
Sources of Cash: 
1. Issue of shares and debentures and raising long-term loan. 
2.  Sale of investments and other fixed assets. 
3. Cash from operations (Net Operating Profit). 
Applications of Cash 
1. Redemption of preference shares and debentures and repayment of long-
term loan. 
2. Purchase of investments and other fixed assets. 
3. Payment of tax. 
4. Payment of dividend. 
5. Loss on Operation (Net Operating Loss) 
Note – Cash includes Bank Account also. Increase in cash or decrease in cash is put 
in the applications and the sources respectively just to balance the cash flow 
statement. At this juncture, you may note that changes in all balance sheet items 
are to be taken into consideration separately in cash flow statement for explaining 
movement of cash. 
  
 
 
4.82 
 
ACCOUNTING 
 2.2 ELEMENTS OF CASH  
As per AS 3, issued by the Council of the ICAI,  
‘Cash’ include: 
(a) Cash in hand, 
(b) Demand deposits with banks, and 
Cash equivalents include: 
(a) Components 
? 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 
? Securities with short maturity period of, say, three months or less from 
the date of acquisition 
(b) Objective  
? Deploy, for a short period, idle cash required to meet short-term cash-
commitments.   
(c) Examples 
? Acquisition of preference shares, shortly before their specified 
redemption date, bank deposits with short maturity period, etc. 
Conclusion: Thus, cash flow statement deals with flow of cash funds but does not 
consider the movements among cash, bank balance payable on demand and 
investment of excess cash in cash equivalents.  Examples are cash withdrawn from 
current account, cash deposited in bank for 60 days, etc.   
 2.3 CLASSIFICATION OF CASH FLOW ACTIVITIES 
AS 3 provides explanation for changes in cash position of the business entity. As 
per Accounting Standard 3, cash flows during the period are classified as Operating; 
Investing and Financing activities. 
Page 5


 
 
4.79 
 
FINANCIAL STATEMENTS OF COMPANIES 
 
? 
LEARNING OUTCOMES 
*  
  
 
UNIT 2: CASH FLOW STATEMENTS 
 
 
 
After studying this unit, you will be able to– 
? Define cash flow statement as per AS 3 “Cash Flow 
Statements”. 
? Differentiate operating, investing and financing activities. 
? Learn the various elements of cash and cash equivalents. 
? Prepare cash flow statement both by direct method and 
indirect method. 
 
 
 
 
 
 
 
 
 
 
 
 
4 
 
 
4.80 
 
ACCOUNTING 
  
 
 
 2.1 INTRODUCTION 
Information about the cash flows of an enterprise is useful in providing users of 
financial statements with a basis to assess the ability of the enterprise to generate 
cash and cash equivalents and the needs of the enterprise to utilise those cash 
flows. The economic decisions that are taken by users require an evaluation of the 
ability of an enterprise to generate cash and cash equivalents and the timing and 
certainty of their generation. 
The Standard deals with the provision of information about the historical changes 
in cash and cash equivalents of an enterprise by means of a cash flow statement 
which classifies cash flows during the period from operating, investing and 
financing activities. 
This statement provides relevant information in assessing a company’s liquidity, 
quality of earnings and solvency.     
 
 
Definition & 
Significance of  
cash flow 
statement
Meaning of Cash 
& cash 
equivalents and 
Cash flow
Difference 
between 
operating, 
investing and 
financing 
activities.
Preparation of 
Cash Flow 
Statement 
as per AS 3.
cash receipts 
Cash          
payments 
 
Cash Flow 
Statement is 
summary of  
 
 
4.81 
 
FINANCIAL STATEMENTS OF COMPANIES 
 
Benefits:  
(a) Cash flow statement provides information about the changes in cash and cash 
equivalents of an enterprise. 
(b) Identifies cash generated from trading operations. 
(c) The operating cash surplus which can be applied for investment in fixed 
assets. 
(d) Portion of cash from operations is used to pay dividend and tax and the other 
portion is ploughed back. 
(e) Very useful tool of planning. 
Purpose: 
Cash flow statements are prepared to explain the cash movements between two 
points of time. 
Sources of Cash: 
1. Issue of shares and debentures and raising long-term loan. 
2.  Sale of investments and other fixed assets. 
3. Cash from operations (Net Operating Profit). 
Applications of Cash 
1. Redemption of preference shares and debentures and repayment of long-
term loan. 
2. Purchase of investments and other fixed assets. 
3. Payment of tax. 
4. Payment of dividend. 
5. Loss on Operation (Net Operating Loss) 
Note – Cash includes Bank Account also. Increase in cash or decrease in cash is put 
in the applications and the sources respectively just to balance the cash flow 
statement. At this juncture, you may note that changes in all balance sheet items 
are to be taken into consideration separately in cash flow statement for explaining 
movement of cash. 
  
 
 
4.82 
 
ACCOUNTING 
 2.2 ELEMENTS OF CASH  
As per AS 3, issued by the Council of the ICAI,  
‘Cash’ include: 
(a) Cash in hand, 
(b) Demand deposits with banks, and 
Cash equivalents include: 
(a) Components 
? 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 
? Securities with short maturity period of, say, three months or less from 
the date of acquisition 
(b) Objective  
? Deploy, for a short period, idle cash required to meet short-term cash-
commitments.   
(c) Examples 
? Acquisition of preference shares, shortly before their specified 
redemption date, bank deposits with short maturity period, etc. 
Conclusion: Thus, cash flow statement deals with flow of cash funds but does not 
consider the movements among cash, bank balance payable on demand and 
investment of excess cash in cash equivalents.  Examples are cash withdrawn from 
current account, cash deposited in bank for 60 days, etc.   
 2.3 CLASSIFICATION OF CASH FLOW ACTIVITIES 
AS 3 provides explanation for changes in cash position of the business entity. As 
per Accounting Standard 3, cash flows during the period are classified as Operating; 
Investing and Financing activities. 
 
 
4.83 
 
FINANCIAL STATEMENTS OF COMPANIES 
 
 
 
2.3.1 Operating Activities 
1. Definition: These are the principal revenue generating activities of the 
enterprise.   
2. Net Impact: Net impact of operating activities on flow of cash is reported as 
‘Cash flows from operating activities’ or ‘cash from operations’. 
3. Key Indicator: The amount of cash flows from operating activities is a key 
indicator of the extent to which the operations of the enterprises have 
generated sufficient cash flows to: 
(a)  Maintain the operating capability of the enterprise; 
(b)  Pay dividends, repay loans; and  
(c) Make new investments without recourse to external sources of 
financing.  
4.   Information Provided: It provides useful information about financing through 
working capital.  
5.  Benefits: Information about the specific components of historical operating 
cash flows is useful, in conjunction with other information, in forecasting 
future operating cash flows.  
Cash Flow Activities
Inflow of Activities
Cash increase
Outflow of Activities
Cash decrease 
Classification of Cash Flow Activities
Operating activities
(principle revenue 
generating)     
Investing activities
(acquisition and 
disposal of long-
term assets and 
other investments) 
Financing activities 
(changes in the size 
and composition of 
the owner’s capital 
and borrowings)