Q.What is a Cash Flow Statement? State its main objectives.

A cash flow statement shows the inflows and outflows of cash and cash equivalents during a period, classified into operating, investing and financing activities, and is prepared as per AS-3.

Meaning. A Cash Flow Statement is a statement that shows the inflows (sources) and outflows (uses) of cash and cash equivalents of an enterprise during an accounting period, classified under three heads — operating, investing and financing activities — and reconciles the opening and closing balances of cash and cash equivalents. In India its preparation is governed by Accounting Standard 3 (AS-3). It answers a question the profit and loss account and balance sheet cannot: where did the cash come from during the year, and where did it go? This matters because a firm can be profitable on paper yet short of cash (its profits locked in stock and debtors), or show a modest profit yet hold plenty of cash.

Objectives:

1. To show the sources and uses of cash during the period, explaining how the closing cash balance arose from the opening balance.
2. To assess liquidity and solvency — the firm's ability to generate cash and to meet its obligations as they fall due.
3. To explain the difference between profit and cash, reconciling why a profitable firm may hold little cash and vice versa.
4. To help in short-term financial planning, by revealing the pattern of cash generation and use so that future cash needs and surpluses can be planned.
5. To evaluate the firm's ability to pay dividends, repay loans and finance growth out of the cash generated from operations. …

Students often confuse the objectives of a cash flow statement with those of a profit and loss account — the cash flow statement is about cash movement, not about measuring profit. Another common gap is naming only 'to show liquidity …