Cash Flow Statement
Definition
A cash flow statement is a statement that records the cash flows of a business. It shows:
- How much money came in (inflow)
- How much money went out (outflow)
Utility
The cash flow statement serves as an important tool for the analysis of financial statements. It tracks cash flows and their sources. It is prepared according to AS3 Revised.
Preparation Method
There are two methods to create a cash flow statement:
- Direct method
- Indirect method (in syllabus)
Activities
There are three types of activities in a cash flow statement:
1. Operating Activity
Cash flows from operating the business:
- Cash collection from debtors
- Payment to creditors
- Operating income and expenses
2. Investing Activity
Cash flows related to fixed assets and investments:
- Purchase and sale of fixed assets and investments
- Rent, interest, and dividend income
- Purchase of goodwill
3. Financing Activity
Cash flows related to share capital and long-term liabilities:
- Issue and redemption of shares and debentures
- Loans taken and repayment
- Interest and dividend payment
- Bank overdraft
Specific Points
Share Issue and Debenture
- Issue: Money will come (plus)
- Redemption: Money will go (minus)
Bank Overdraft
- Increase: Plus
- Decrease: Minus
Provision for Tax
- Only provision for tax in the balance sheet
- Current year plus
- Previous year minus
- Provision for tax in additional points
- Make account (made and paid)
- Only tax paid in additional points
- Plus and minus in operating
Goodwill
- Write off: Plus in operating
- Purchase: Minus in investing
Provisional Dividend
- Always minus in financing and plus in operating
Interest
- Calculation: On opening balance (if not mentioned)
- On interest payment: Plus in operating, minus in financing
Cash and Cash Equivalent
- Balance in opening cash, bank, and marketable securities
- A + B + C plus opening = closing
Short/Common Questions
- Which activity? (Operating/Investing/Financing)
- Direction of flow (Inflow/Outflow)