Accountancy · Ch 10 — Cash Flow Statement
Summary
Summary
- Purpose and classification: A cash flow statement shows inflows and outflows of cash and cash equivalents over a period. It is classified into three activities: Operating, Investing, and Financing.
- Operating activities: Principal revenue-producing activities. Cash flows include receipts from customers, payments to suppliers and employees, and cash from interest/dividends (for financial enterprises). Indirect method starts with Net Profit before Tax and Extraordinary Items, then adjusts for non-cash items (depreciation, goodwill amortisation), changes in working capital (increase in current assets decreases cash; increase in current liabilities increases cash), and non-operating items (profit on sale of asset deducted, loss added).
- Investing activities: Purchase and sale of long-term assets (PPE, intangible assets) and non-current investments. Includes cash paid to acquire fixed assets, cash received from sale of fixed assets, and interest/dividend received (for non-financial enterprises).
- Financing activities: Changes in equity and borrowings. Includes proceeds from issue of shares/debentures, repayment of long-term borrowings, buyback of shares, and dividend paid.
- Cash and cash equivalents: Cash in hand, demand deposits, and short-term, highly liquid investments (original maturity ≤ 3 months). Bank overdraft is treated as a financing activity (not a cash equivalent).
- Format: Prepared using the Indirect Method (recommended by NCERT). The proforma:
- A. Cash Flow from Operating Activities: Net Profit before Tax + Non-cash items + Changes in Working Capital – Tax Paid = Net Cash from Operations.
- B. Cash Flow from Investing Activities: Net cash used in/from purchase/sale of fixed assets and investments.
- C. Cash Flow from Financing Activities: Net cash from issue/redemption of shares/debentures, borrowings, and dividend paid.
- Net Increase/Decrease in Cash and Cash Equivalents = A + B + C.
- Add opening cash balance to get closing cash balance.
- Key adjustments: The previous year's proposed dividend, once declared (approved) in the current year, is added back to profit while computing Net Profit before Tax and its payment is shown as a financing outflow; the current year's proposed dividend is not recorded as a liability (as per AS-4 it is disclosed only in the Notes to Accounts until declared). Interim dividend paid is also a financing outflow. Tax paid is shown under operating activities (unless specifically related to investing/financing). …