ACCOUNTANCY
B
UNIT -6
CASH FLOW STATEMENT
1. What is Cash Flow Statement?
Ans: Cash flow statement is a statement which
describes the inflows and outflows of cash and cash equivalents in an
enterprise during a specified period of time. A cash flow statement summarises
the causes of changes in cash position of a business enterprise between dates
of two balance sheets.
2. What are the objectives of
cash flow statement?
Ans: Following are the objectives of cash flow
statement:
a. To recognise the sources from operation,
investing and financing activities from where cash and cash equivalent are
generated.
b. To recognises the uses by operating, investing
and financing activities for which cash and cash equivalents were used by the
enterprise.
c. To compute the net changes in cash and cash
equivalents indicating the difference between sources and uses from operating,
investing and financing activities between the dates of two balance sheets.
3. What are the uses and
significance or advantages of cash flow statement?
Ans: Following are the uses and significance or
advantages of cash flow statement:
a. Cash flow statement is based on the cash basis of accounting; it is
very useful in the evaluation of cash position of a firm.
b. Cash flow statement is prepared in order to know the future cash
position of a concern so as to enable a firm to plan and coordinate its
financial operations properly.
c. Cash flow statement helps in planning the repayment of loans,
replacement of fixed assets and other similar long term planning of cash.
d. Cash flow statement provides information of all activities classified
under operating, investing and financing activities.
e. Cash flow statement is prepared according to AS-3 (Revised) is more
suitable for making comparisons than the funds flow statement as there is no
standard format used for the same.
4. What are the limitations of Cash
flow statement?
Ans: Following are the limitations of Cash flow statement:
a. Cash flow statement is based on cash basis of
accounting; it ignores the basic accounting concept of accrual basis.
b. Cash flow statement is not suitable for
judging the profitability of a firm as non-cash charges are ignored while
calculating cash flows from operating activities.
c. Cash flow statement is not a substitute of an
income statement; it is complementary to an income statement. Net cash flow
does not mean the net income of a firm.
d. Cash flow statement is also not a substitute
of funds flow statement which provides information relating to the causes that
lead to increase or decrease in working capital.
e. A comparative study of cash flow statements
may give misleading results.
5. Mention three sources of cash
flow as per AS-3(Revised).
Ans: Following are the sources of cash flow as per
AS-3(Revised):
a. Cash flows from operating activities.
b. Cash flows from investing activities.
c. Cash flows from financing activities.
6. Short notes:
A. Cash Equivalents: Cash equivalents are short term, highly liquid
investments that are readily convertible into cash and which are subject to an
insignificant risk of changes in value. Cash equivalents are held for the
purpose of meeting short-term cash commitments rather than for investment or
other purposes.
B.
Cash Flows: cash flows are
inflows and outflows of cash and cash equivalents. Flow f cash is said to have
taken place when any transaction makes changes in the amount of cash and cash
equivalents available before happening of the transaction. If the effect of
transaction results in the increase of cash and its equivalents, it is called
inflow (source) and if the effect of transaction results in the decrease of
total cash, it is known as outflow (use) of cash.
C. Cash Flow from Operating
Activities: Operating
activities are the principal revenue producing activities of the enterprise.
The amount of cash flows arising from 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.
D. Cash Flow from Investing
Activities: Investing activities
are the acquisition and disposal of long-term assets and other investments not
included in cash equivalents. The separate disclosure of cash flows arising
from investing activities is important because the cash flows represent the
extent to which expenditures have been made for resources intended to generate
future income and cash flows.
E. Cash Flows from Financing
Activities: Financing
activities are activities that result in changes in the size and composition of
the owner’s capital and borrowings of the enterprise. Cash flows arising from
financing activities is important because it is useful in predicting claims on
future cash flows by providers of funds to the enterprise.
****
