Cash flow statement

Cash flow statement

What Is A Cash Flow Statement?

Cash flow statement, also called as statement of cash flows, is part of the financial statements of a company and shows the inflows i.e receipts and outflows i.e payments of cash and cash equivalents of the company during a particular period. It shows the movement of cash into the company and movement of cash out of the company. It reports from where cash has come i.e sources of cash and how it is spent i.e uses of cash during a particular period.
Cash flow statement reports the cash inflows and cash outflows of a company by classifying them according to the company’s three major activities- operating, investing and financing.

(1) Cash flows from operating activities:-

Inflows and outflows of cash arising from the operating activities are called as cash flows from operating activities.Operating activities are the main business activities of the company and are the principal revenue- producing activities for the company. Operating activities result in cash inflows and cash outflows. Cash inflows result from selling goods and providing services while cash outflows result from the cost of goods sold and other operating expenses. Following are some of the examples of cash flows from operating activities:-
– Cash receipts from sale of goods and rendering of services (cash inflow)
– Cash receipts from commission, royalties, fees and other revenues (cash inflow)
– Cash refunds of income taxes if they cannot be specifically identified with financing or investing activities (cash inflow)
– Cash payments to suppliers for goods and services (cash outflow)
– Cash payments to and on behalf of employees (cash outflow)
– Cash payments of income taxes if they cannot be specifically identified with financing or investing activities (cash outflow)

 (2) Cash flows from investing activities:-

Inflows and outflows of cash arising from the investing activities are called as cash flows from investing activities. Investing activities of the company involve acquisition and disposal of tangible and intangible fixed assets and also other long-term investments. Following are some of the examples of cash flows from investing activities:-
– Cash receipts from disposal of fixed assets (cash inflow)
– Cash receipts from the sale of shares and debt instruments of other companies (cash inflow)
– cash receipts of dividend and interest (cash inflow)
– Cash receipts from the repayment of loans and advances made to other parties (cash inflow)
– Cash payments to acquire or construct fixed assets (cash outflow)
– Cash payments to purchase shares and debt instruments of other companies (cash outflow)
– Cash payments in the form of loans and advances made to other parties (cash outflow)

 (3) Cash flows from financing activities:-

Inflows and outflows of cash arising from the financing activities are called as cash flows from financing activities. Financing activities of the company involve raising capital through the issue of shares, debt instruments, borrowings and redemption of debt instruments, repayment of borrowings and payment of dividend and interest. Following are some of the examples of cash flows from financing activities:-
– Cash proceeds from issuing shares and other equity instruments (cash inflow)
– Cash proceeds from issuing debt instruments such as debentures and bonds
(cash inflow)
– Cash proceeds from issuing preference shares (cash inflow)
– Cash receipts from borrowings (cash inflow)
– Cash payments to redeem debt instruments such as debentures and bonds (cash outflow)
– Cash payments to redeem preference shares (cash outflow)
– Cash payments to repay borrowings (cash outflow)
– Cash payments of dividend and interest (cash outflow)

 To prepare the cash flow statement profit and loss account of the current accounting period and balance sheets of current accounting period and previous accounting period are used. Additional information is also taken into consideration to prepare the cash flow statement.

Format Of Cash Flow Statement:-

Cash flow statement is divided into three sections:-
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
There are two methods by which cash flow statement can be prepared.
(1) Direct method
(2) Indirect method
The main difference between the two methods is the way in which the cash flows from operating activities are shown in the cash flow statement.

 (1) Direct Method Of Cash Flow Statement:

Direct method of cash flow statement

(2) Indirect Method Of Cash Flow Statement:-

ndirect method of cash flow statement

 

 

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