Cash Flow Statement

1. Introduction to Cash Flow

Cash flow refers to the movement of money in and out of a business over a specific period. It
includes cash received from sales, investment income, and cash spent on operations, investments, or
financing activities.

Key Definitions:

 Cash Inflows: Money that comes into the business (e.g., revenue from sales, interest income,
and loans).

 Cash Outflows: Money spent by the business (e.g., expenses, salaries, and loan repayments).

 Net Cash Flow: The difference between cash inflows and outflows during a particular period.

Categories of Cash Flow:

1. Operating Activities: Cash generated or used in the core business operations, including sales,
services, wages, and inventory costs.

2. Investing Activities: Cash related to the acquisition or disposal of assets like property,
equipment, or investments.

3. Financing Activities: Cash from or used for financing, including issuing shares, borrowing, or
repaying loans.

Purpose of a Cash Flow Statement:

A Cash Flow Statement is a financial report that summarizes cash inflows and outflows over a
reporting period. It helps stakeholders understand the liquidity, financial health, and ability of the
business to generate cash.

2. Introduction to Ind AS (Indian Accounting Standards)

Ind AS stands for Indian Accounting Standards, which are set by the Institute of Chartered
Accountants of India (ICAI) and adopted by the Ministry of Corporate Affairs (MCA) to converge with
the International Financial Reporting Standards (IFRS).

Key Points:

 Ind AS aims to bring transparency, reliability, and comparability to financial reporting in India.

 Ind AS 7 specifically deals with Cash Flow Statements, prescribing the presentation of cash
flows from operating, investing, and financing activities.

Significant Aspects of Ind AS:

 Accrual vs. Cash Basis: Ind AS emphasizes the accrual method for accurate financial
reporting, but Cash Flow Statements require cash-based accounting.

 Fair Presentation: Financial statements under Ind AS should present a true and fair view of a
company’s financial performance and position.
  International Comparability: Ind AS aligns with IFRS to ensure global comparability of
financial data.

3. Importance of Cash Flow Analysis

Understanding and managing cash flow is crucial for business survival and growth. Here are the key
reasons why cash flow analysis is important:

a. Liquidity and Solvency

 Liquidity: Cash Flow Statements help assess a company’s ability to meet short-term
obligations and operational needs.

 Solvency: Long-term viability of a business is evaluated through cash generated from

b. Decision-Making

 Internal Management: Helps management decide on investing in new projects, expansion,

 External Stakeholders: Investors, creditors, and analysts use cash flow data to gauge
financial health, risk, and returns.

c. Planning and Forecasting

 Cash flow data is essential for budgeting and forecasting future cash needs, anticipating
shortages, and planning for funding requirements.

d. Financial Stability and Risk Management

 Healthy cash flow indicates financial stability. Monitoring cash flow helps identify and
mitigate financial risks before they escalate.

4. When is a Cash Flow Statement Mandatory?

Cash Flow Statements are legally and regulatory mandatory for certain entities in India, especially
under Ind AS guidelines:

a. For Listed Companies

 All companies listed on stock exchanges are required to prepare and disclose Cash Flow
Statements as part of their annual financial reporting.

b. For Specific Types of Companies

 Public Limited Companies

 Holding and Subsidiary Companies

 Companies with Net Worth of ₹250 Crore or More (Under Ind AS guidelines)

c. Under the Companies Act, 2013

 Section 129 of the Companies Act requires all companies, except small companies and one-
person companies, to include a Cash Flow Statement in their financial statements.

d. For Entities Adopting Ind AS

5. Structure of the Cash Flow Statement (As per Ind AS 7)

A detailed breakdown of how a cash flow statement is structured:

a. Cash Flow from Operating Activities

 Direct Method: Lists specific cash receipts and payments (e.g., cash from customers, cash
paid to suppliers).

 Indirect Method: Adjusts net profit by adding back non-cash items (e.g., depreciation) and
changes in working capital.

b. Cash Flow from Investing Activities

 Purchases and sales of assets (e.g., property, equipment, investments).

 Cash flows from acquisitions and disposals of subsidiaries.

c. Cash Flow from Financing Activities

 Cash from issuing shares, raising debt, or repaying loans.

 Dividend payments to shareholders.

6. Practical Applications of Cash Flow Analysis

a. Assessing Company Performance

 Use cash flow statements to compare periods, identify trends, and evaluate efficiency.

 Determine if a company generates sufficient cash from operations to fund its growth.

b. Valuation

 Free Cash Flow (FCF) analysis is critical for valuing companies.

 Understanding Discounted Cash Flow (DCF) analysis, a common valuation technique.

c. Risk Assessment

 Identifying cash flow problems can indicate deeper financial distress.

 Cash flow volatility analysis helps assess risk.

d. Strategic Planning

 Cash flow analysis helps businesses make informed strategic decisions, such as investing in
new projects, mergers, or acquisitions.
Classification the list o activities

1. Purchase of machinery for ₹5,00,000

2. Cash received from the sale of old equipment

3. Cash paid to suppliers for raw materials

4. Dividends paid to shareholders

5. Cash received from issuing equity shares

6. Interest paid on a long-term loan

7. Cash received from customers for goods sold

8. Repayment of a bank loan

9. Rent paid for office premises

10. Proceeds from the sale of investments

11. Purchase of land for setting up a new office

12. Cash received as royalty income from patents

13. Cash paid to employees for salaries

14. Payment of income tax for the current year

15. Proceeds from a government grant related to business operations

16. Repayment of bonds issued earlier

17. Dividend income received on investments

18. Proceeds from issuing debentures

19. Cash advances given to a supplier for a future purchase

20. Repayment received for a loan previously advanced to a third party