In this article we will discuss about:- 1. Introduction to Cash Flow Statement 2. Meaning of Cash Flow Statement 3. Definition 4. Objectives 5. Scope 6. Benefits.
Introduction to Cash Flow Statement:
In June 1981, the Institute of Chartered Accountants of India issued Accounting Standard 3: Changes in Financial position. This accounting standard dealt with the financial statement that summarised, for the period covered by it, the changes in financial position showing the sources from which funds were obtained by the enterprise and the specific uses to which funds were applied.
Funds were defined as cash or cash equivalents or working capital, that is, current assets minus current liabilities. But the flow statements suffered from certain limitations. A Funds Flow Statement showed flows of working capital which included items, like stock of goods and prepaid expenses which did not contribute to the short term ability of the enterprise to pay its debts. Flows were not classified under the heads of operating, financial and investing activities.
There was no standard format of the statement. There was the need of a Cash Flow Statement in a standard format classifying flows from different activities. In June 1995 the Securities and Exchange Board of India (SEBI) amended clause 32 of the Listing Agreement requiring every listed company to give prescribed format, showing separately cash flows from operating activities, investing activities and financing activities.
In March 1997 the Institute of Chartered Accountants of India issued AS-3 (Revised); Cash Flow Statement. The revised accounting standard supersedes AS-3: Changes in Financial Position, issued in June 1981. Cash Flow Statement has replaced Statement of Changes in Financial Position.
Meaning of Cash Flow Statement:
Cash Flow Statement reports the inflows and outflows of cash and its equivalents of an organisation during a particular period. It reports the cash receipts and payments classified according to the firm’s major activities – Operating, Investing and Financing.
It shows the net cash inflow or net cash outflow for each activity and for the overall business of the firm. It reports from where cash has come and how it has been utilised. It explains the causes for the change in the cash balance by reconciling the opening balance of the period with the closing balance.
Definition of Cash Flow Statement:
Cash Flow Statement is a statement which shows inflows and outflows of cash and its equivalent in an enterprise during a specified period of time. An enterprise prepares Cash Flow Statement, according to the Revised Accounting Standard – 3, and present it for each period for which financial statements are presented.
The following terms are used in this Statement with the meanings specified:
(a) CASH comprises on hand and demand deposits with banks.
(b) CASH EQUIVALENTS are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
(c) CASH FLOWS are inflows and outflows of cash and cash equivalents.
Objectives of Cash Flow Statement:
Information about the cash flows of an enterprise 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 utilize these 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.
The statement deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financial activities.
Scope of Cash Flow Statement:
An enterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented. Users of an enterprise’s financial statements are interested in how the enterprise generates and uses and cash and cash equivalents. This is the case regardless of the nature of the enterprise’s activities and irrespective of whether cash can be viewed as the product of the enterprise, as may be the case with a financial enterprise.
Enterprises need cash for essentially the same reasons, however, different from their principal revenue – producing activities might be. They need cash to conduct their operations, to pay their obligations, and to provide returns to their investors.
Benefits of Cash Flow Statement:
Cash Flow Statement has the following benefits, in brief:
1. It is an indicator for the cash flows in the future period. It helps the management in forecasting the future needs and plans.
2. It is an important tool as it helps in efficient management of cash.
3. The cash flow analysis on the basis of major activities i.e. Operating, Investing and Financial, facilitate the management to assess the effectives of management’s financial policies.
4. It reveals the liquidity position of the firm.
5. It provides a better measure for inter period and inter firm comparison.
6. It is very useful in evaluating financial policies and cash position.
7. It highlights the trend of the movement of cash.
8. It enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events.
9. Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enable the users to develop models to assess and compare the present value of the future cash flows of different enterprises.