CASHFLOW STATEMENT

MEANING
CASH

i. Cash in hand ii. Demand Deposits in Banks iii. Cash Equivalents Cash equivalents are short-term, highly liquid investments, readily convertible into cash and which are subject to insignificant risk of changes in values.

 Flow:flow means flow of cash from business to economy and economy to business. Statement:statement is a performa prescribed by Charted Accountant Act,1948.

Thus,
cash flow statement is a statement of inflows(sources) and outflows(uses) ofcash and cash equivalents in an enterprise during a specified period of time.

Categories of Inflows And Outflows

The statement of cash flow shows three main categories of cash inflows and cash outflows, namely : operating, investing and financing activities. Operating activities are the principal revenue generating activitiesof the enterprise. Investing activities include the acquisition and disposal of longtermassets and other investments not included in cash equivalents. Financing activities are activities that result in change in the size and composition of the owners capital (including Preference share capital in the case of a company) and borrowings of the enterprise.

Operating Activities
Cash Outflows:
Cash from sales Cash received from Debtors

Cash Outflows:
Cash purchases Payment to creditors Cash operating expenses Paymant of wages Income tax

Cash received from commision and fees

royalty and other revenues

Investing Activities
Cash inflow:
Sale of fixed assets Sale of investments Interests received Dividend received

Cash outflow:
Purchase of fixed assets Purchase of investments

Financing Activities
Cash inflow: Cash outflow :

Issue of shares Cash repayments of amount borrowed Issue of debuntures in cash Proceeds of long term short term Interest paid on loans/debentures borrowings Dividends paid on equity and preference share capital

Cash flow
Meaning of fund:means only cash component ofcurrent assets. Objective:is to know about the changes occurred in cash position between two balance sheet dates. Basis of preparation:increase in current liability or decrease in current asset results in increase in cash or vice versa. Utility:useful for short term analysis Effect of transaction:effect of a transaction only on cash is considered Cash balances:opening and closing balances are shown in cash flow statement

Fund flow
Fund means net working capital

To know about the changes occurred in net working capital between two balance dates Increase in current liability and decrease in current asset results in a decrease in net working capitaland vice versa Useful for lonterm analysis Effect of a transaction only on net working capital is considered Opening and closing balances are shown in statement of changes in working capital

Limitations of cash flow statement

Though it is true that cash flow statement is very useful now-a-days and serves many purposes. But it is necessary to take certain precautions while making use of this important tool. It is very difficult to precisely define the term cash There are controversies over a number of items like cheques, stamps,postal orders etc. to be included in cash or not.

 As the present business moves from the cash basis to accrual basis, the prepaid and credit transactions might be represented an increase in working capital and it would be misleading to equate net income to cashflow because a number of non cash items would affect the net income.

Balance sheet
liabilities Paid up capital Retained earnings 2005 (Rs. 000) 50 350 2006 (Rs. 000) 50 415 assets Gross fixed assets Accrued depriciation 2005 (Rs.000) 1000 (100) 2006 (Rs.000) 1125 (175)

Long term debts

Notes payable Accounts payable total

500
80 80 1060

550
100 90 1205

inventory
Accounts recevables cash total

100
50 10 1060

110
60 85 1025

Income Statement (Rs.000)

Sales Cost of goods sold Gross profit Selling,general and administartion EBIT Int. exp EBT Taxes Net income 1200 (800) 400 (150) 250 (50) 200 (100) 100

Additional information Dividend paid Additions to be retained Depreciation

(Rs.000) 35 65 75

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