Cash Flow Statement

A Cash Flow Statement is a statement which shows the changes in financial position of a firm on cash basis. All the cash inflows during a particular period are shown in the statement from which the cash outflows are deducted for the same period. The net cash flow after taking into account the initial balance at the beginning of the period is indicated in the cash flow statement.

Reasons for Cash Flow Statements

Amount of net profit in the profit and loss account cannot be taken as the amount of cash earned during the accounting period because

Profit and Loss account takes into account items involving cash flow and not involving cash flow. For e.g. sales income includes both cash sales as well as credit sales. b. The Profit and Loss account shows only the revenue expenses and not the capital items. c. Certain items are mere book entries and are treated as charge against profits in the profit and loss account. Depreciation is one such item which does not result in the actual cash flow.

The cash flows are categorized into three main heads as those related to the following: Operating activities Investing activities Financing activities

Statement of Retained Earnings Statement of Cash Flows

Statement of Retained Earnings

Retained Earnings/ Capital in the beginning Add:Net Income Less:Dividends /Drawings Retained Earnings /Capital at the end of the year ***** **** **** *****

Statement of Cash Flows

Net Profit Add/Less: Income /Expenses from Operating Activities Add/Less: Income /Expenses from Long term investing Activities Add/Less: Income /Expenses from Financing Activities ****** *****

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Net Decrease/Increase in Cash Add:Cash at the beginning of the year Cash at the end of the year

******* ***** *******

Operating activities
Operating activities include all the activities related to the actual business operations. The actual manufacture, sales and delivery of the product in which the organization deals are operating activities. The cash flows from operating activities could include the inflows and outflows related to the above activities

Cash flows from operating activities could include

i) Revenue from sale of goods ii) Purchase cost of raw materials iii) Payments to suppliers for goods and services iv) Tax payments v) Payments towards operating expenses vi) Inventory costs vii) Transportation costs viii) Advertising expenses

Investing activities:
Investing activities include actual investments made in projects, asset acquisition etc.. Cash flow from investing activities includes money spent on acquisition of assets and the money received from the sale of assets. Investments and their redemption such as money spent on purchasing shares of other companies, loans given to others etc are also included here.

Cash flows from investing activities

i) Purchase of other companies shares and debentures ii) Returns from the above such as dividend or interest iii) Issue of loans to other parties iv) Interest received on the above loans v) Collection of loan issued to others vi) Purchase of assets vii) Sale value of assets viii)Sale value of debentures or shares of other companies.

Financing activities
Financing activities include activities related to obtaining finance for the business in terms of shares, debentures or loans.. Dividend paid to shareholders as well as interests paid on loans become the cash outflows from financing activities.

Cash flows from financing activities

i) Proceeds from issue of shares ii) Money raised through short term or long term loans iii) Payment of dividend iv) Payment of interest v) Repayment of debt vi) Payment towards buyback of shares by the company

Operating Activities
ADD: Depreciation/Amortization Losses from sale Increase in CL/Decrease in CA LESS: Increase in CA/Decrease in CL

Long Term Investing Activities

Add/Less: Increase/Decrease in Fixed Assets / Investments

Financing Activities
Add/Less: Increase/Decrease in loans, debentures, share capital etc.