What is Cash Flow Statement? - Accounting & Finance

A cash flow statement is a statement which shows changes in cash & cash equivalents of an enterprise over the period by classifying cash flows into operating, investing and financing activities. It is necessary for an enterprise to prepare cash flow statement to know the changes in cash position in each accounting period.

Definition:-

A cash flow statement shows inflow and outflow of cash and cash equivalents from various activities of a company. It deals with 3 main activities that are operating, investing & financing. It is prepared at the end of an accounting period. However, the management can also prepare it quarterly or half-yearly as per the need of the business.

 Benefits of preparing cash flow statement:- 

• A cash flow statement along with another financial statement, helps users to evaluate the change in net assets of an enterprise and its ability to affect other cash equivalents.
• It is helpful in taking decision for the management. And also tells the financial strength of the business by comparing it to the previous year.
• It is also helpful in determining the change in the price of various items and its impact on business profit. It also checks the accuracy of past assessments of future cash flows.

What is cash & cash equivalents?

As stated earlier, cash flow statement only deals with cash and cash equivalent items. As per Accounting standard-3, 'cash' comprises cash in hand and cash at Bank, and 'cash Equivalent' means short-term highly liquid investments that are easily convertible into cash and which are subject to an insignificant risk of changes in value. Thus, cash equivalents refer to such investments that are held for the purpose of meeting short-term cash and are easily convertible to cash in less than a year.

 CASH FLOW STATEMENT CONSIST OF 3 MAIN ACTIVITIES:-

1. Cash flow from operating Activities:-
   Operating Activities are the activities that are main activities of the business. For example, for a company manufacturing garments, procurement of raw materials, incurrence of manufacturing expenses, the sale of garments etc are the main revenue producing activities.
   
   Cash Inflows from Operating Activities:
   • Cash receipt from sale & goods & providing services.
   • Cash receipt from royalties, fees, commission and other revenues.
   Cash  Outflows from Operating Activities:
   
   • Cash payment to suppliers for goods &services.
   • Cash payment on behalf of the employees.
   • Cash payment as insurance premium, claims and policy benefits.
   • Cash payment or refunds of income tax, etc.
     The net position is shown as operating cash flows.  
      
   
   2. Cash from investing Activities.
      
   Investing activities is related to purchase and sale of long-term assets such as machinery, land & Building, furniture etc. Examples of cash flows arising from investing activities are:-
   
   Cash inflows from Investing Activities:
   
   • Cash receipt from the disposal of fixed assets.
   • Cash receipt from the repayment of loans made to third parties.
   • Interest received in cash from Investment.
   • Dividend received from investment.
   
   Cash outflows from Investing activities:
   
   • Cash payment to acquire fixed Assets.
   • Cash advances and loans made to third parties.
      
   3. Cash from Financing Activities:-
   
   Financing activities are related to long-term funds or capital of and enterprise. Examples, equity share, Debentures, Bank loan, etc. As per AS-3, financing activities are activities that result in changes in the size and composition of the owner's capital and borrowing of the enterprise.
   
   Cash Inflow from financing Activities.
   
   • Cash proceeds from issuing shares, Debentures.
   • Cash proceeds from loan, bonds, or other long-term or short-term borrowings.
   
   Cash Outflows from financing activities.
   
   • Interest paid on loans & debentures.
   • Dividend paid on equity & preference capital.
   • Cash payments for the amount borrowed.