Cash Flow Statement: Introduction

Cash flow statement indicates a number of cash receipts and the amount of cash payments or disbursements during a specified time. The major business activities that result either net cash inflow or net cash outflow are Operating, Financing and Investing activities. Cash flow statement is prepared to disclose the causes of changes in working capital. All the cash transactions which are related to the firm’s ongoing business are cash flow from operating activities.

Summary

Things to Remember

The cash flow statement shows the net increase or decrease in cash and explains the causes for the changes in the cash balance, during a certain time period.
Cash flow statement is useful in making both internal and external financing and investment decisions such as repayment of short-term debt and long-term debt, project expansion, etc.
Operating activities usually involve the production and delivery of goods and rendering services.
Cash flow statement helps the management in evaluating its ability to meet its obligations such as payment of interest, taxes, dividend, repayment of bank loan, payment to creditors, etc.

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Cash Flow Statement: Introduction

INTRODUCTION

Simply, cash flow statement indicates the amount of cash receipts and the amount of cash payments or disbursements during a specified time. It outlines from where cash was generated and to where it was expensed. In other words, it reports the cash inflows and cash outflows, during a time period.

The cash flow statement shows the net increase or decrease in cash and explains the causes for the changes in the cash balance, during a certain time period. The major business activities that result in either net cash inflow or net cash outflow are Operating, Financing and Investing activities.

According to Anthony, “Cash flow statement is a statement prepared to indicate the increase in the cash resources and the utilization of such resources of a business during the accounting period.”

Statement of Cash Flow

Cash from operations	Cash from operations is the cash generated from everyday business operations.
Cash from investing	Cash from investing is the cash which is used for the investment purpose in assets, as well as the proceeds from the sale of other businesses, equipment or other long-term assets.
Cash from financing	Cash from financing is the cash which is paid or received for issuing or borrowing the funds. This also includes dividends paid (though, sometimes it is listed under cash from operations).
Net increase or decrease in cash	Increases in cash from the previous year are written normally and the decreases in cash are written in () brackets.

Objectives of Cash Flow Statement

To show the impact of operating, financing and investing activities on cash resources.

To explain the causes for cash balance changes.

To report about the cash inflows and cash outflows of the firm’s operating, financing and investing activities.

To determine the financial needs of the firm.

To help in forecasting the future cash flows.

Importance of Cash Flow Statement

Cash flow statement is useful in making both internal and external financing and investment decisions such as repayment of short-term debt and long-term debt, project expansion, etc.

It is useful in making an appraisal of various capital investment projects so that their viability and profitability can be determined.

Cash flow statement helps in explaining the anomaly of poor cash position and substantial profit.

Cash flow statement discloses the movement of the enterprise’s internal funds that are operating activities related, making this statement more appropriate for internal financial planning, controlling and decision-making.

Cash flow statement summarizes the performance of an enterprise on a cash basis, after furnishing the important cash activities.

Cash flow statement helps the management in evaluating its ability to meet its obligations such as payment of interest, taxes, dividend, repayment of bank loan, payment to creditors, etc.

Differences between Cash flow statement and Funds flow statement

Cash flow statement	Funds flow statement
Cash flow statement is prepared to disclose the causes of changes in working capital.	Funds flow statement is prepared to disclose causes of changes in cash and cash equivalents.
It is prepared on accrual accounting basis.	It is prepared on cash system of accounting basis.
It does not have an opening and closing balances.	It consists of opening and closing balances of cash.
It is prepared for long-range financial planning.	It is useful for only short-range financial planning.
It contains all the components of working capital.	It contains only cash, which is one of the components of working capital.
Cash flow statement has become quite obsolete.	Funds flow statement has to be prepared by every listed company, as per given prescription.

Cash Flow from Major Business Activities

When it comes to major cash flow business activities, it divides into 3 parts. They are operating activities, investing activities and financing activities.

Operating activities

Investing activities

Financing activities

Cash receipts:

· Sale of goods or services to customers.

· Collections from customers.

· Insurance claims against loss of inventory.

· Proceeds from settlement of the lawsuit.

· Other operating receipts if any.

Cash receipts:

· Sale of investment.

· Sale of fixed assets.

· Sale of business segments.

· Collection of principal on loans made to others.

Cash receipts:

· Borrowing (Debentures, Notes, Bonds, Mortgages, etc).

· Insurance of shares at premium or discount.

Cash payments:

· Operating expenses like salaries, rent, expenses, telephone, heat light & power etc.

· Inventory purchase, payment of direct wages, carriage inwards, etc.

· Interest expenses on loan.

· Tax expenses, etc.

Cash payments:

· Loans to other entities.

· Purchase of fixed assets.

· Purchase of investment i.e. investment made.

Cash payment:

· Dividend paid to shareholders.

· Re-purchasing business own stock.

· Redemption of preference shares at premium or discount.

· Redemption of borrowings at premium or discount, if any.

Cash Flow from Operating Activities

Operating activities are concerned with day to day business operations. Operating activities usually involve the production and delivery of goods and rendering services. All the cash transactions which are related to the firm’s ongoing business are cash flow from operating activities.

	Cash inflow	Cash outflow
From Trading a/c	Sales revenue Service revenue	Cost of goods sold, wages and manufacturing expenses
From Profit & Loss, a/c	Sundry operating income received such as rent, interest, commission, dividend, etc. receive, bad debt recovered	Operating expenses (cash items only) such as selling expenses, interest, tax, distribution expenses, office expenses, etc.
From Asset side of balance sheet	Decrease in all current assets except cash and cash equivalents.	Increase in all current assets except cash and cash equivalents.
From Liability side of balance sheet	Increase in all current liabilities.	Decrease in all current liabilities.

According to Nepal Accounting Standard clause 03 and section 6 (NAS-03 Sec-6), followings are the examples of cash flows related operating activities:

Cash receipts from the fee, royalties, commission and other revenues.

Cash receipts from the sales of goods and rendering services.

Cash paid to employees.

Cash paid to suppliers for goods and services provided.

Cash payment or refund of income taxes unless they are especially identifiable with financing and investing.

Cash receipts and payments from contracts that are held for dealing or trading purposes.

Cash receipts and payments of an insurance enterprise for premium and claims, annuities and other benefits.

References:

Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu

Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu

Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu

Lesson

Statement of Changes in Financial Position

Subject

Principles of Accounting

Grade

Grade 12

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