Class 12 Accountancy Notes
Unit – 10: Cash Flow Statement
Q.1. What is Cash Flow Statement? What are its objectives? Mention its uses and Limitations. 2012, 15, 16, 17, 19
Ans: Cash Flow Statement: Cash flow is made up of two words i.e. Cash
and Flow, whereas Cash means cash balance in hand including cash at bank, and
Flow means changes (which may be increase or decrease) in the cash movements of
the business. So, Cash Flow Statement is a statement which shows the movement of cash
and cash equivalents over a particular period of time and also analyses the
reasons for changes in balance of cash in hand and at bank between two
accounting period. It shows the inflows and outflows of cash and cash
equivalents.
Objectives/Importance/Uses/Significance of
Cash Flow Statement 2013,
2016, 2017, 2020
The Cash Flow Statement is prepared because of
number of merits, which are offered by it. Such merits are also termed as its
objectives. The important objectives are as follows:
a) To Help the Management in Making Future
Financial Policies: Cash Flow statement is very helpful tool to
the management. The management can base its future financial policies and is in
a position to know about surplus or deficit of cash with the help of cash flow
statement.
b) Helpful in determining the ability to pay
dividends: Cash flow statement indicates the various sources and uses of cash
under different heads which helps the shareholders to know whether the business
can make the payment of dividends on their investment or not.
c) Efficient Cash Management: It helps
in efficient management of cash resources. It will help the management to make
the reliable cash flow projections for the immediate future and will tell
surplus or deficit of cash so that management can make plan for the investment
of surplus cash or to arrange the sources to meet the deficiency.
d) To test management efficiency:
Comparison of actual and budgeted cash flow statement will disclose the failure
or success of management in managing cash resources. In case of failure
remedial steps can be taken to improve the position.
e) Helpful in devising the cash requirement: Cash flow statement is helpful in devising
the cash requirement of the business for repayment of liabilities and
replacement of fixed assets.
f) Helpful in predicting sickness of the business: Cash flow is helpful in predicting sickness
of the business. A sound cash position is a true indicator of sound financial
position.
LIMITATIONS OF CASH STATEMENT
Though the Cash Flow Statement is a very
useful tool of financial analysis, it has its limitations which must be kept in
mind at the time of its use. These limitations are:
a) Non-cash Transactions are ignored: Cash flow statement is prepared on cash basis. It shows only inflows and outflows of cash. It does not show non-cash transactions like the purchase of buildings by the issue of shares or debentures to the vendors or issue of bonus shares or depreciation which largely affect the results and position of the business.
b) Historical in Nature: It rearranges the existing information available in the income statement and the balance sheet. It is historical in nature. It will become more useful if it is accompanied by the projected Cash Flow Statement.
c) Ignorance: It is prepared on cash basis of accounting. It ignores basic accounting concept, i.e., accrual concept.
d) What is Cash: It is 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.
e) Does not reveal true liquidity position: A Cash flow statement reveals only the inflow and outflow of cash but the exclusion of near cash items from cash flow statement limits the true reporting of the firm’s liquidity position.
f) Working Capital ignored: Working Capital is wider concept of funds than cash. A funds flow statement presents a more complete picture than cash flow statement. Also chances of window dressing are more in case of cash position in comparison to the working capital position.
Q.2.
How cash flow statement is prepared? Or What are various classification of Cash
flows? Give four examples of each. 2013,
2017
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ALSO READ (AHSEC ASSAM BOARD CLASS 12):
1. AHSEC CLASS 12 ACCOUNTANCY CHAPTERWISE NOTES
2. AHSEC CLASS 12 ACCOUNTANCY IMPORTANT QUESTION (THEORY)
3. AHSEC CLASS 12 ACCOUNTANCY IMPORTANT QUESTION BANK (PRACTICAL)
4. AHSEC CLASS 12 ACCOUNTANCY PAST EXAM PAPERS (FROM 2012 TILL DATE)
5. AHSEC CLASS 12 ACCOUNTANCY SOLVED QUESTION PAPERS (FROM 2012 TILL DATE)
6. AHSEC CLASS 12 ACCOUNTANCY CHAPTERWISE MCQS
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Ans: Cash flow statement is a statement which shows
the movement of cash and cash equivalents over a particular period of time. It
comprised of three sections: Operating activities, investing activities and
financing activities. There are two methods of preparing cash flow statement:
the direct method preferred by FASB and indirect method preferred by most
businesses because of its simplicity. The difference between the two methods
lies in the operating section only. Investing and financing activities
calculation are same under both the methods.
A)
Section one: Cash flow from operating activities: Operating
activities are the principal revenue generating activities of the business. These
are cash flows from regular course of operations such as manufacturing, trading
etc. All activities that are not investing or financing activities are included
under operating activities.
Examples of Operating Activities: 2013
(Sources and applications of cash flow)
Ø
Cash receipts from the sale of goods and
rendering of services. (Source)
Ø
Cash payments to suppliers of goods and
services. (application)
Ø
Cash receipts from royalties, fees, commission
and other revenue. (Source)
Ø
Cash payments to and on behalf of employees
for wages, etc. (application)
Ø
Cash payments and refunds of income taxes.
(application)
Under indirect method cash flow from
operating activities is calculated with the help of net profit before tax and
extraordinary items. Non-cash and non-operating expenses and losses are added
and non-cash and non-operating incomes are deducted from net profit before tax
and extraordinary items to find net cash flow from operating activities before
working capital change. After this changes in working capital is adjusted and
payment of taxes during the year is deducted to find cash flow from operating
activities.
B) Section two: Cash
from investing activities: The investing activities of a business include all cash flow
arises due to acquisition and disposal of long term assets (whether tangible
and intangible) and investments. Acquisition or disposal of companies also
comes under investing activities. These are separately discloses in cash flow
statement.
Examples of Investing Activities: 2013, 2019
(Sources and applications of cash flow)
Ø
Cash payments to acquire long term fixed
assets (tangible and intangible) and investments. (application)
Ø
Cash receipts from the disposal of long term fixed
assets (including intangibles) and investments. (Source)
Ø
Cash payments for purchase or of shares,
warrants, or debt instruments of other enterprises and interest in joint
ventures. (application)
Ø
Cash receipts from sale of shares, warrants,
debt instruments of other enterprises and interest in joint ventures. (source)
Ø
Cash receipts from repayments of advances and
loans made to third parties. (source)
All the sources of cash from investing
activities are added and all the applications of cash in investing activities
are deducted to find net cash flow from investing activities.
C) Section three:
Cash flows from financing activities: Financing activities are the activities which
results in changes in the size and composition of the owner’s capital and
borrowings of the enterprises from other sources. The financing activities of a
firm include issuing or redemption of share capital, issue and redemption of
debentures, raising and repayment of long term loans etc. Dividends and
Interest paid are also come under financing activities. 2018
Examples of Financing Activities: (Sources and
applications of cash flow)
Ø
Cash proceeds from the issue of shares or
other similar instruments. (source)
Ø
Cash proceeds from the issue of debentures,
loans, bonds and other short term borrowings. (source)
Ø
Buy-back of equity shares. (application)
Ø
Cash repayments of the amounts borrowed
including redemption of debentures. (application)
Ø
Payments of dividends and interest on
borrowings. (application)
All the sources of cash from financing
activities are added and all the applications of cash in financing activities
are deducted to find net cash flow from financing activities.
Last
section – Bottom line: All the cash flows from three sections are
added to find net cash flow during the year. Thereafter opening balance of cash
and cash equivalent s are added with this amount and the resulting amount will
be the closing balance of cash and cash equivalents. Here cash and cash
equivalents means:
Cash: Cash
comprises cash on hand and demand deposits with banks.
Cash
Equivalents: Cash Equivalents are short-term, highly liquid investments that
are readily convertible cash. Examples of cash equivalents are: (a) treasury
bills, (b) commercial paper, (c) money market funds and (d) Investments in
preference shares and redeemable within three months. (2018)
Format of Cash Flow Statement under Indirect
Method
|
Particulars |
Amount |
|
A.
Cash
Flow from operating activities: Net Surplus before tax and
extraordinary items Add: Non operating/non-cash expenses Less: Non operating/non-cash
income |
++++++++ ++++++++ ------------ |
|
Net cash flow from operating activities before change in W.C Effect of change in working
capital: Increase in current assets Decrease in current assets Increase in Current
Liabilities Decrease in current liabilities |
++++++++
----------- +++++++ +++++++ ---------- |
|
Less:
Payment of taxes net of tax refund |
+++++++ ----------- |
|
1. Cash Flow from operating activities B. Cash Flow from Investing
activities: Sources of cash Applications of cash |
+++/---
++++++ --------- |
|
2. Cash flow from investing activities C.
Cash
Flow from Financing activities: Sources of cash Applications of cash |
+++/----
++++++ --------- |
|
3.
Cash flow from Financing activities |
+++/--- |
|
D.
Cash
Flow during the year (1 + 2 + 3) Add: Opening balance of cash
& cash equivalent |
++++/---- +++++++ |
|
Closing balance of cash & cash equivalent |
+++++++ |