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    Cash Flow Theory

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    xavierjoseph
    The document defines a cash flow statement as showing the inflows and outflows of cash and cash equivalents over a period of time. It is divided into three sections - operating, investing, and financing activities. Cash comprises cash on hand and bank deposits, while cash equivalents are highly liquid short-term investments convertible to cash within 3 months like deposits and commercial paper. The cash flow statement excludes movements between cash and equivalents. Its objectives are to determine cash generation/use by activity and assess differences between earnings and cash flow.

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    Cash Flow Theory

    Uploaded by

    xavierjoseph
    45 views2 pages
    The document defines a cash flow statement as showing the inflows and outflows of cash and cash equivalents over a period of time. It is divided into three sections - operating, investing, and financing activities. Cash comprises cash on hand and bank deposits, while cash equivalents are highly liquid short-term investments convertible to cash within 3 months like deposits and commercial paper. The cash flow statement excludes movements between cash and equivalents. Its objectives are to determine cash generation/use by activity and assess differences between earnings and cash flow.

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    Cash flow Theory

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    The document defines a cash flow statement as showing the inflows and outflows of cash and cash equivalents over a period of time. It is divided into three sections - operating, investing, and financing activities. Cash comprises cash on hand and bank deposits, while cash equivalents are highly liquid short-term investments convertible to cash within 3 months like deposits and commercial paper. The cash flow statement excludes movements between cash and equivalents. Its objectives are to determine cash generation/use by activity and assess differences between earnings and cash flow.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    45 views2 pages

    Cash Flow Theory

    Uploaded by

    xavierjoseph
    The document defines a cash flow statement as showing the inflows and outflows of cash and cash equivalents over a period of time. It is divided into three sections - operating, investing, and financing activities. Cash comprises cash on hand and bank deposits, while cash equivalents are highly liquid short-term investments convertible to cash within 3 months like deposits and commercial paper. The cash flow statement excludes movements between cash and equivalents. Its objectives are to determine cash generation/use by activity and assess differences between earnings and cash flow.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Cash flow statement

    It is a statement that shows flow (Inflow or outflow) of cash and cash equivalents during a given period of
    time. As per Accounting Standard-3 (Revised) the changes resulting in the flow of cash & cash equivalent
    arises on account of three types of activities i.e.
    (1) Cash flow from Operating Activities.
    (2) Cash flow from Investing Activities.
    (3) Cash flow from Financing Activities

    Cash: Cash comprises cash in hand and demand deposits with bank.

    Cash equivalents: Cash equivalents are short-term, highly liquid investment that are readily convertible into
    known amount of cash and which are subject to an insignificant risk of change in the value e.g. short-term
    investment. Generally these investments have a maturity
    Period of less than three months.

    Some examples of cash equivalent: Short-term deposits, marketable securities. Treasury bills, commercial
    papers, money market funds, money market funds, investment in preference shares if redeemable within
    three months provided that there is no risk of the failure of the company.

    Cash flow exclude movements between items that constitute cash or cash equivalents because these
    components are part of the cash management of an enterprise rather than part of its operating, investing and
    financing activities. Some types of transaction which are considered movement between cash and cash
    equivalents are given below:
    1. Cash deposited into bank.
    2. Cash withdrawn from bank.
    3. Sale of cash equivalent securities (e.g. Sale of short-term investment, sale of commercial papers)
    4. Purchases of cash equivalent securities (e.g. Purchase of short-term investment Purchases Of Treasury
    bills).

    PREPARATION OF CASH FLOW STATEMENT (SIMPLE FORMAT)

    Computation of Cash flows from different activities


    (1) Cash flow from operating activities:
    Operating activities are the main revenue generating activities of the enterprises. It also includes all those
    transactions which are not included in investing and financing activities
    2. Cash Flow from Investing Activities
    Investing activities are those activities which related to the acquisition (busying) and disposal (selling) of
    fixed assets and investment (other than cash equivalents). It also includes income from fixed assets and
    investment like rent received, interest received on investment, dividend received on investment in shares and
    mutual funds

    3. Cash Flow from financing Activities


    Financing activities are those activities that result in the changes in size and composition of the share capital
    (equality and preference) and borrowed fund of the business enterprises. Generally cost related to these
    funds also included in financing activities like interest paid on loans and debentures and dividend paid on
    equity and preference capital

    Objectives of Cash Flow Statement


    1. To ascertain how much cash or cash equivalents have been generated or used in different activities i.e.,
    operating/investing/financing activity.
    2. To ascertain the net changes in cash and cash equivalents.
    3. To assess the causes of difference between actual cash & cash equivalent and related net earnings/income.
    4. To help in formulation of financial policies such as dividend policy, fixed assets policy, capital structure
    related policy.
    5. To help in short-term financial planning.
    6. To ascertain the liquidity of enterprises.

    Limitations of Cash Flow Statement


    1. Non cash transaction are not taken into consideration like shares or debentures issued to vendors,
    depreciating charged during the year.
    2. It is a statement related with past data.
    3. It is not used for judging the profitability of enterprise.
    4. Accrual accounting concept is ignored in this statement e.g. credit sales, credit purchases, outstanding
    expenses, accrued income are not included

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