Contents :
- Meaning & Definitions of Cash Flow Statement.
- Objectives of Cash Flow Statement.
- Advantages and Disadvantages of Cash Flow Statement.
- Differences Between Cash Flow & Fund Flow Statement.
- Cash Flow Statement under Accounting Standard -3 (AS-3).
- Preparation and Format of Cash Flow Statement.
- Adjustments of Cash Flow Statement.
- Example with Solution of Cash Flow Statement.
What is Cash Flow Statement ?
“Cash” is a vital element of any business entity, as it plays a crucial role throughout the entire lifetime of a business enterprise. ‘Cash’ for a ‘Business’ has been aptly compared with the ‘Blood’ for a ‘Human Body’. ‘Cash’ is required to meet day-to-day requirements for running the business and for making payments to ‘Suppliers’, ‘Wages/Salaries to the Employees’, ‘Interest’, ‘Dividends‘, etc. Maintenance of an optimum level of cash is, therefore, of paramount importance for a business entity.
Definition of Cash Flow Statement :
According to Indian Accounting Standard (AS-3) :
Cash flow means inflows and outflows of cash and cash equivalents. Cash comprises of cash in hand and demand deposits with banks. Cash equivalents are short-term, highly liquid investments which are readily convertible into cash.
Cash Flow Statement’ may be defined as a statement, which depicts the changes in financial position of a business organisation due to ‘Inflows’ and ‘Outflows’ of cash. Analysis of such ‘Inflows’ and ‘Outflows’ is necessitated for short-range business activities.
Objectives of Cash Flow Statement :
The fundamental objective behind the preparation of the ‘Cash Flow Statement’ is to underline and emphasis the changes that have taken place in the ‘Cash Position’ during a specific period. The sources from where the cash was procured by an organisation and the uses, to which it (the cash) was put, are elaborated in the cash flow statement.
Other objectives for preparing cash flow statement are discussed in the following points :
1) Showing the Inflows and Outflows (sources and applications) of cash into/out of the business during a specific period.
2) Disclosing the ‘Positive’ and ‘Negative features of ‘Cash Management’ undertaken by the organisation.
3) Facilitating the policy formulation by the management in respect of certain financial matters such as Dividend Policy.
4) Ascertaining the Liquidity Position of the business organisation.
5) Finding out the net changes having taken place in respect of ‘Cash’ and ‘Cash Equivalents’.
6) Studying the trend regarding ‘Cash Receipts’ and ‘Cash Payments’.
7) Finding out the ‘Deviation of Cash’ from ‘Earnings’.
8) Assessing the Financial Position of the business enterprise in a more realistic manner and forecasting the ‘Cash Position’.