Cash Flow Statement

Cash: Cash comprises cash in hand and cash at bank.

Cash Equivalents: Cash equivalents are short-term, highly liquid investments that are readily
convertible into known amounts of money and which are subjected to an insignificant risk of
changes in value.
Cash Flows: Cash flows means cash inflow and cash outflow of cash and cash equivalents.
Classification of Cash Flows in Cash Flow Statement
Cash flows is classified in by Operating, Investing and Financing Activities.
Operating Activities: Operating Activities are the principal revenue-producing of an enterprise
and other activities that are not investing or financing activities.
Investing Activities: Investing Activities are concerned with the acquisition and disposal of
long-term assets and other investments not included in cash equivalents.
Financing Activities: Financing activities result in changes in the size and composition of the
equity capital and borrowings of the enterprise.

Separate Disclosure Requirements:

The following items are to be closed separately;

 Extra Ordinary Items
 Interest Paid and Received
 Dividends Paid and Received
 Investments and sale of shares in subsidiaries, associated and joint ventures.
 Components of cash and cash equivalents.

Non-cash transactions should not be reflected in the cash flow statement. However, such
transactions should be disclosed in the form of appropriate narratives.

Examples of non-cash transactions include:

 Acquisition of Assets by means of Finance Lease
 Acquisition of entity through the issuance of shares
 Conversion of loan into capital
 Disposal of assets for consideration other than cash
 Issuance of Bonus shares

Methods of Preparation of Cash Flow Statement.

1. Direct Method
2. Indirect Method
Benefits of Cash Flow Statement
A tool to evaluate liquidity, solvency and financial stability of the entity.
Presentation of a detailed summary of cash inflows and cash outflows.
An indicator of the amount, timing, and extent of future cash flows.
It emphasizes the qualitative aspect of the Profit i.e. what portion of Profit represents cash
inflows.
Measures the ability of an entity to pay cash dividends to owners, salaries to employees,
and settlements to creditors’ invoices.
Evaluates the ability of the entity to generate its cash requirements from normal trading
operations.
Helps in the evaluation of working capital requirement
Cash Inflows
Decrease in assets
Increase in liabilities
Increase in shareholders’ equity
Cash Outflows
Increase in assets
Decrease in liabilities
Decrease in shareholders’ equity

The fundamental qualitative characteristics of useful financial

information are the key qualities that make financial information helpful for
people who use it, like investors, lenders, and other decision-makers. Here’s an
easy explanation of these qualities:
1. Relevance
This means that the information is important and can help people make decisions.
If the information helps predict what will happen in the future or confirms what
was expected, it is relevant. It also means that the information matters enough
that leaving it out could change someone’s decision.
2. Faithful Representation
This means the information is true and accurate. It should reflect what is really
happening with the company or business. To be faithfully represented, the
information should be:
Complete: All the necessary details should be included.
Neutral: It should not be biased or try to influence decisions in one direction.
Free from error: It should not have mistaken or missing important details.

Additional Qualities (Enhancing Characteristics)

These qualities improve the usefulness of the information:

3. Comparability: This means you can compare information easily, either across different
companies or over time. If you can compare one company’s financial information to another, or
to its own past performance, it helps you make better decisions.
4. Verifiability: This means that the information can be checked and proven to be true. If two
different people check the same financial information, they should come to the same
conclusion about what it shows.
5. Timeliness: The information should be available when it’s needed, not too late. If it’s too old,
it may not be helpful in making decisions anymore.
6. Understandability: The information should be easy to understand. Even if the details are
complex, it should be presented in a way that people can follow and use to make decisions.
These characteristics work together to make sure financial information is helpful, reliable, and
easy to use.

The cost constraint on useful financial reporting means that the benefits of providing financial
information should outweigh the costs of gathering and presenting that information.
In simple terms, it means that companies should only provide information that is useful enough
to justify the time, money, and effort it takes to collect and report it. If the cost is too high
compared to the benefit, it may not be worth including.
Accrual accounting shows financial performance by recording revenues and expenses when
they actually happen, not when cash is received or paid.
In simple terms:
Revenue is recorded when you earn it (e.g., when you deliver a product or service), not
when the customer pays.
Expenses are recorded when you incur them (e.g., when you receive goods or services),
not when you actually pay for them.
This gives a more accurate picture of a company’s financial health because it reflects the real
activity, not just cash flow.
When financial performance is reflected by past cash flows, it means looking at the actual cash
that came in and went out of a business during a specific time period. In simple terms:
It shows how much cash the company earned (inflows) and how much it spent (outflows).
It focuses only on the cash transactions, not on what’s owed or what is yet to be paid.
This method gives a clear picture of a company’s ability to generate and manage cash, but it
doesn’t show the full picture of financial health, as it ignores things like sales made on credit or
expenses incurred but not paid yet.

Objective of General-Purpose Financial Reporting:

The main goal of general-purpose financial reporting is to provide useful financial information
to a wide range of people (like investors, lenders, and others) to help them make better
decisions about a company. This includes showing how well the company is performing and its
financial position.

Usefulness of General-Purpose Financial Reporting:

Helps Decision-Making: It helps people understand the company’s financial health and
make informed decisions (like whether to invest or lend money).
Provides Transparency: It gives a clear view of the company’s activities, so users can see
if the company is doing well or struggling.
Assists Planning and Evaluation: It helps in forecasting future performance and
comparing it to other companies or past performance.

Limitations of General-Purpose Financial Reporting:

Doesn’t Show Everything: It might not include all the details a user needs, like future
plans or hidden risks.
Can Be Complicated: Sometimes the information can be hard to understand, especially
for non-experts.
Might Not Be Up-to-Date: Financial reports are usually done at certain times (like once
a year), so they might not show the most current financial situation.
May Have Bias: The information can sometimes be influenced by management's
choices, which might not fully reflect the company's true performance.
In short, general-purpose financial reports are helpful for decision-making but have some
limitations in terms of completeness and clarity.