Statement of Cash Flows

Statement of Cash Flows Explained

An entity shall prepare a statement of cash flows in accordance with the requirements of Indian Accounting Standard (Ind AS) 7 and shall present it as an integral part of its financial statements for each period for which financial statements are presented.

Users of an entity’s financial statements are interested in knowing how the entity generates and uses cash and cash equivalents. This is the case regardless of the nature of the entity’s activities and irrespective of whether cash can be viewed as the product of the entity, as may be the case with a financial institution.

Before moving to the Statement of Cash Flow, it’s important to know that what is Cash Flow. Simply saying, Cash flows are inflows and outflows of cash and cash equivalents. Cash comprises cash on hand, bank balance, and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

What is a Statement of Cash Flows?

A Statement of Cash Flow shows the movement in the cash and cash equivalents for a specified period in a format prescribed as per Ind AS 7. The statement of cash flows shall report cash flows during the period classified by operating, investing, and financing activities. It is a periodical statement as it covers a particular period of time, like a month or a year. The Cash Flow Statement is an indicator of the cash earning capacity of the firm. The Cash Flow Statement reflects clearly how the financial position of a firm changes over a period of time due to its operating activities, investing activities, and financing activities.

The objective of preparation of a Statement of Cash Flows:

  • Is to provide information about historical changes in cash and cash equivalents: The cash flow statement aims at providing information about how the cash has been generated during the year and for what purposes it has been utilized.
  • To assess the ability to generate cash and cash equivalents: Cash flow statement is intended to provide the stakeholders with the efficiency of the company in generating cash and cash equivalents.
  • To understand the timing and certainty of their generation: The historical analysis of the statement of cash flow can set a trend regarding the years in which the company could generate a fair amount of cash flows and the probability of generating it.

Presentation of a Statement of Cash Flows:

The statement of cash flows shall report cash flows during the period classified by operating, investing, and financing activities.

An entity presents its cash flows from operating, investing, and financing activities in a manner that is most appropriate to its business. Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the entity and the amount of its cash and cash equivalents.

Cash Flow from Financing Activities

Activities that result in a change in the size and composition of the owner’s capital (including preference share capital in case of a company) and borrowings of the enterprise.

The separate disclosures of cash flows arising from the financing activities are important because it is useful in predicting claims on future cash flows by the provider of the funds (both capital and borrowings) to the enterprise.

Cash Flow from Investing Activities

Investing activities include the acquisition and disposal of long term assets and other investments not included in cash equivalents.

The separate disclosures of cash flows arising from the investing activities is important because the cash flows represent the extent to which expenditure have been made for resources intended to generate future income and cash flows.

Cash Flow from Operating Activities

Operating activities are the principal revenue generating activities of the enterprise.

The amount of cash flows arising from the operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, pay dividends, repay loans and make new investments without recourse to external sources of financing.

There are two methods for reporting cash flows from operating activities. One is Direct method and another one is Indirect method.

Note: Under both methods, the amount of cash flow from Operating activities needs to be necessarily the same. It’s only the approach for presentation which differs.

Format of a Statement of Cash Flows (Indirect Method):

Other important points:

  • Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities. Always operating unless otherwise specified.
  • Cash flow reporting should not be made on a net basis. All cash flows should be reported on a gross basis.
  • Cash & Cash Equivalents are the opening & closing balances in the Cash Flow Statement. These balances may be in the form of cash balance, bank balance, & investments which are expected to be realized within 90 days.
  • If any bank overdraft is repayable on demand then it will also be considered as a part of cash & cash equivalents. All other overdrafts shall be disclosed under financing activities.
  • If any cash equivalent is held in foreign currency then consider it at the actual rate instead of the closing rate. If any exchange fluctuation was booked at the balance sheet date due to a change in exchange rate then such difference should also be eliminated from Net Profit.

Other disclosures:

  • The amount of undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments, indicating any restrictions on the use of these facilities.
  • The aggregate amount of cash flows that represent increases in operating capacity separately from those cash flows that are required to maintain operating capacity, it will help the stakeholders to know whether an entity is paying proper attention for maintenance also.
  • The amount of the cash flows arising from the operating, investing, and financing activities of each reportable segment (IND AS 108, Operating Segments).  This will provide an idea about the company as a whole as well as the various parts of the company and their efficiencies.

FAQs:

What is the meaning of Operating activities in the statement of Cash Flows?

Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities.

What is the meaning of Investing activities in the statement of Cash Flows?

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

What is the meaning of Financing activities in the statement of Cash Flows?

Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.

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