Cash Flow Statement
Cash Flow is a part of Financial Statement
In case of a one Person Company (OPC), small company and dormant company, financial statements may not include cash flow statements.
Let us understand what is a “Cash Flow Statement”
- Cash flows are inflows and outflows of cash and cash equivalents, which includes actual cash, cash in Bank and FDs.
Statement – document containing a summary of inflows and outflows of all transactions that took place during the particular period.
- Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
Definition:
- A cash flow statement is a statement of changes in the financial position of a firm on cash basis.
- It reveals the net effects of all business transactions of a firm during a period on cash and explains the reasons of changes in cash position between two balance sheet dates.
- It shows the various sources (i.e., inflows) and applications (i.e., outflows) of cash during a particular period and their net impact on the cash balance.
Objective:
- Information about the cash flows of an enterprise is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilize those cash flows.
- The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation.
- The accounting standard deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period into operating, investing and financing activities.
Please note that cash flow planning and preparing the cash flow statement are two different things.
Cash flow planning can be undertaken by the company in any particular format that suits the business while cash flow statement for reporting purposes has to be prepared as per the prescribed method in the Accounting Standard. There are 2 types of methods – Direct Method and Indirect Method.