CBSE Class 12 Accountancy Cash Flow Statement Worksheet Set A

VERY SHORT ANSWER QUESTIONS

1. What do you mean by Cash Flow statement?

2. What are the various activities classified as per AS-3(revised) related to Cash flow statement?

3. State one objective of Cash flow Statement.

4. What do you mean by cash equivalents?

Ans. Short-term highly liquid investments which are readily convertible into known amount of cash and which are subject to an insignificant risk of change in the value.

Important Notes for NCERT Class 12 Accountancy Cash Flow Statement

Meaning:

• A cash-flow statement is a statement showing inflows (receipts) and outflows (payments) of cash during a particular period.

• In other words, it is a summary of sources and applications of cash during a  particular span of time.

• It analyses the reasons for changes in balance of cash between the two  balance sheet dates.

• The term ‘cash’ here stands for cash and cash equivalents.

• A cash-flow statement includes only those items which affect cash.

• A cash-flow statement can be for the past or can be projected for a future period.

• There are two methods for preparing the Cash Flow Statement.

o Direct Method

o Indirect Method

In our syllabus only Indirect Method is there. Even though there is only difference between Direct and Indirect Method is of Operating Activities.

• 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.

Objectives of Cash Flow Statement

• To ascertain the sources (receipts) and the applications (payments) of Cash and Cash Equivalents from/to operating, investing and financing activities of the enterprise.

• To ascertain the net change in Cash and Cash Equivalents i.e. the difference between sources and applications (Change in CCE = Cash Flow from/to Operating Activities + Investing Activities + Financing Activities)

• To highlight the major activities that have provided cash and that have used cash during a particular period and to show their effect on the overall cash balance.

Importance or Uses of Cash Flow Statement

•Useful for Short-Term Financial Planning:

o A cash-flow statement provides information for planning the shortterm financial needs of the firm.

o It becomes easier for the management to assess whether it will have adequate cash to meet day-to-day expenses and pay the trade payables in time.

• Useful in Preparing the Cash Budget

o A cash flow statement prepared for the future period is helpful inpreparing a cash budget.

o It informs the management about the surplus or deficit periods of cash, i.e., in which months the receipts of cash will be in excess of payments and in which months the payments will be in excess of receipts.

o It helps in planning the investment of surplus cash in short-term investments and to plan short-term credit in advance for deficit periods.

• Comparison with the Cash Budget :

o A cash budget is prepared at the commencement of the year, whereas a cash flow statement is prepared at the end of the year.

o A comparison between the two helps in ascertaining the extent to which the financial resources of the firm have been generated and used according to the plan.

o Causes of variances between the figures of two statements can be analysed and proper corrective measures may be taken.

• Study of the Trend of Cash Receipts and Payments :

o A cash-flow statement reveals the speed at which the cash is being generated from trade receivables, inventory and other current assets and the speed at which the current liabilities are being paid.

o It enables the management to assess the true position of the cash in future.

• It Explains the Deviations of Cash from Earnings:

o A firm may earn huge profits yet it may have paucity of cash or when it suffered a loss it may still have plenty of cash. A Cash flow statement explains the reasons for it.

• Helpful in Ascertaining Cash Flow from Various Activities Separately :

o A Cash flow statement aims at highlighting the Cash flow from operating, investing and financing activities separately.

o It indicates how much cash has been generated or used in these activities.

• Helpful in Malting Dividend Decisions :

o The amount of dividend must be deposited in a separate ‘Dividend Bank A/c’ within 5 days of the declaration of such dividend. Hence the management takes the help of cash flow statement to ascertain the position of cash generated from operating activities which can be used for payment of dividend.

• Test for the Managerial Decisions :

o It is a general rule that fixed assets should be purchased from funds raised from long-term sources like issue of shares, debentures, long-term loans etc. and these should be repaid out of cash generated from operating activities. The cash flow statement shows whether this policy has been properly followed by the management or not.

• Useful to Outsiders Cash flow statement helps

o the investors,

o debenture holders,

o bankers,

o lenders,

o supplier’s of credit etc.

To analyse the financial position of the enterprise and they can take proper decisions on the basis of such analysis.

Limitations of Cash-Flow Statement

• Not suitable for judging the Liquidity :—It does not present true picture of the liquidity of a firm because the liquidity does not depend upon cash alone. Liquidity also depends upon those assets which can be converted into cash easily. Exclusion of these assets obstructs the true reporting of the ability of the firm to meet its liabilities when they become due for payment.

• Possibility of Window-dressing :— The possibility of window-dressing is higher in case of cash position in comparison to the working capital position of a firm. The cash balance can be easily manoeuvred (skill fully manipulate) by postponing purchases and other payments and by rapidly collecting cash from trade receivables before the balance sheet date. Hence, a fund-flow statement presents a more realistic picture than a cash-flow statement.

• It ignores non-cash transactions :— Cash-flow statement ignores noncash transactions like purchase of fixed assets by issuing shares or debentures, conversion of debentures into shares, issue of bonus shares etc. Hence, the true position of an enterprise cannot be judged by cash-flow statement.

• It ignores the accrual concept of accounting :—It is prepared on cash basis and hence ignores one of the basic concepts of accounting, namely accrual concept.

• No substitute for an Income Statement:—A Cash Flow Statement is not a substitute of Income Statement which takes into account both cash and non-cash items. Therefore, net cash flow does not mean net income of the business.

• Historical in Nature :—A cash flow statement is prepared on the basis of two comparative Balance Sheets of the past years. Hence, information revealed by it is historical in nature.

What are the differences between Cash-Flow Statement and Cash Budget?

• The only difference is that a cash-flow statement is prepared for a past period whereas a cash budget is prepared for a future period.

• Cash-flow statement usually portrays how cash was received and spent in the past period. A cash budget is therefore prepared showing how much cash is likely to be received and what will be the disbursements during a future period of time?

Procedure of Preparing Cash-Flow Statement

The Institute of Chartered Accountants of India has issued Accounting Standard (AS)-3 Revised, for preparing a cash flow' statement. This Accounting Standard has been made mandatory in respect of accounting periods commencing on or after 1st April 2001, for certain enterprises. These enterprises are :

1) Enterprises whose equity or debt securities are listed on a recognised inventory exchange in India, and enterprises that are in the process of issuing equity or debt securities that will be listed on a recognised inventory exchange in India.

2) All other commercial, industrial and business enterprises, whose turnover for the accounting period exceeds Rs.50 Crores.

The following terms are used for preparing a cash flow statement:

• 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. shortterminvestment. 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,

• 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:

•Cash deposited into bank.

• Cash withdrawn from bank.

• Sale of cash equivalent securities (e.g. Sale of short-term investment, sale of commercial papers)

•Purchases of cash equivalent securities (e.g. Purchase of short-term investment Purchases of Treasury bills).

The above types of transaction are part of cash and equivalents, so these are included in opening and closing cash and cash equivalent only. So these types of transaction not to be included in cash flow from different activities likeoperating investing, financing activities.

Note: Bank Overdraft and Cash Credit will be considered as financing activity as they are short term borrowings. Henceforth, they will not be considered as cash and cash equivalents.

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