NCERT Class 12 Accountancy Cash Flow Statement

Cash Flow Statement

Tiill now you have learnt about the financial statements being primarily inclusive of Position Statement (showing the financial position of an enterprise as on a particular date) and Income Statement (showing the result of the operational activities of an enterprise over a particular period). There is also a third important financial statement known as Cash flow statement, which shows inflows and outflows of the cash and cash equivalents. This statement is usually prepared by companies which comes as a tool in the hands of users of financial information to know about the sources and uses of cash and cash equivalents of an enterprise over a period of time from various activities of an enterprise. It has gained substantial importance in the last decade because of its practical utility to the users of financial information.

Accounting Standard-3 (AS-3), issued by The Institute of Chartered Accountants of India (ICAI) in june 1981, which dealt with a statement showing ‘Changes in Financial Position’, (Fund Flow Statement), has been revised and now deals with the preparation and presentation of Cash flow statement. The revised AS-3 has made it mandatory for all listed companies to prepare and present a cash flow statement along with other financial statements on annual basis. Hence, it may be noted, that Fund Flow statement is no more considered relevant in accounting and so not discussed here.

A cash flow statement provides information about the historical changes in cash and cash equivalents of an enterprise by classifying cash flows into operating, investing and financing activities. It requires that an enterprise should prepare a cash flow statement and should present it for each accounting period for which financial statements are presented. You will recall that cash flow analysis has also beenmentioned in Chapter 4 as a technique of financial analysis. This chapter discusses this technique and explains the method of preparing a cash from statement for an accounting period.

6.1 Nature of Cash Flow Statement

A Cash flow statement shows inflow and outflow of cash and cash equivalents from various activities of a company during a specific period. The primary objective of cash flow statement is to provide useful information about cash flows (inflows and outflows) of an enterprise during a particular period under various heads, i.e. operating activities, investing activities and financing activities. This information is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation.

6.2 Benefits of Cash Flow Statement

Cash flow statement provides the following benefits :

1 A cash flow statement when used along with other financial statements provides information that enables users to evaluate changes in net assets of an enterprise, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timings of cash flows in order to adapt to changing circumstances and opportunities.

2 Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises.

3 It also enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects o  using different accounting treatments for the same transactions and events.

4 Historical cash flow information is often used as an indicator of the amount, timing and certainty of future cash flows. It is also helpful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and impact of changing prices.

Question for Practice

A. Short Answer Questions

1. What is a Cash flow statement?

2. How the varions activities are classified (as per AS-3 revised) while preparing cash flow statement?

3. State the uses of cash flow statement?

4. What are the objectives of preparing cash flow statement.

5. Explain the terms: Cash Equivalents, Cash flows.

6. Prepare a format of cash flow from operating activities under direct method and indirect method.

7. Now that you know the meaning of operating activities, state clearly what would constitute the operating activities for the following types of enterprises:

(i) Hotel

(ii) Film production house

(iii) Financial enterprise

(iv) Media enterprise

(v) Steel manufacturing unit

(vi) Software business unit.

8. “The nature/type of enterprise can change altogether the category into which a particular activity may be classified.” Do you agree? Illustrate your answer.

Please refer to attached file for NCERT Class 12 Accountancy Cash Flow Statement