Cash Flow Statements – Basic Terms
Cash Flow Statement means the statement of change in cash and cash equivalents.
|Operating Activities||Operating activities are the revenue producing activities of an enterprise.|
|Examples||Cash sales, Cash received from Debtors, the Trading commission received, Income tax paid.|
|Investing Activities||Investing activities represents changes in fixed assets and long-term investment, in the beginning and at the end of the year.|
|Examples||Purchase of machinery, sale of machinery, sale of investments, brokerage paid on purchase of investments.|
|Financing Activities||Financing activities represents change in size and composition of owners capital of an enterprise.|
|Examples||Issue of share capital, Long term borrowings, rent received from property held as investment.|
|Cash and Cash Equivalents||Cash equivalents are short term investments that are readily converted in to cash.|
|Examples||Bank overdraft, cash credit, short term deposits, marketable securities.|
Objectives of Cash Flow Statement
- Ascertain the change in cash and cash equivalents.
- Ascertain the specific sources from which cash and cash equivalent were generated.
- Ascertain the various uses for which cash and cash equivalent were used.
Uses of Cash Flow Statements.
- Enables management to identify the direction of change in cash.
- Enables user to check the financial structure.
- Enables user to check the needs of enterprise to utilise cash flows.
- Helps ion ascertaining liquidity position of an enterprise.
- Helps in planning future investments.
Limitations of Cash Flow Statements.
- Ignore non cash transactions.
- Historical statement
- Secondary data based statement.
Steps in preparation of Cash Flow Statements.
- Analyse the changes in non current assets.
- Analyse the changes in non current liabilities.
- Compute cash flow after extraordinary items.
- Prepare Cash Flow Statement.
Points to Remember
- Cash flow is not the same as profit or net income.
- Cash Flows are cash inflow and outflow of Cash and cash equivalents.
The ending cash flow for a particular period should equal the cash shown on the balance sheet for that period.