The Beginners Guide To CASH FLOW STATEMENT

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A cash flow statement is one of the essential financial statements prepared and presented by the management to depict the changes in cash and cash equivalents at the end of the year. This statement shows the cash inflows and cash outflows from all the operating activities, investing activities, financing activities at the year-end. This statement also helps in cash flow analysis along with the management of cash and cash equivalents effectively

Meaning of Cash and Cash Equivalents:

Cash and cash equivalents include cash on hand, short-term highly liquid investments that are easily convertible into the known amounts of cash which are subject to insignificant risk or change in value.

Cash and cash equivalents are short-term investments or short-term assets that are easily convertible into cash. This statement will include only cash and cash equivalents as mentioned above. Thus, the statement will not consider the non-cash items and non-cash transactions.

Cash flow means inflows and outflows of cash and cash equivalents. Any transaction which does not involve cash flow is not shown in the cash flow statement. Only transactions involving cash flow are recorded and shown in the cash flow statement.

The three types of Cash flows are shown below

Net cash flow from operating activities:

The cash flow generated from the Operating Activities of the business entity is called the Cash flow from operating activities.

For example, payments to suppliers for goods purchased on a credit basis and cash received on sale of goods, salary payments to employees.

Net cash flow from investing activities:

This includes the cash generated from investing activities such as the sale of fixed assets, purchase of fixed assets, sale and purchase of long term investments.

Thus cash flow from investing activities include the activities arising from the sale and purchase of long-term assets and investments

Net cash flow from Financing activities:

This includes the activities resulting from the change in the size and composition of the share capital. These activities include the issue of equity share capital, preference capital, debentures, the redemption of debentures, the payment of interest on debentures, payment of dividends on shares to shareholders.

The cash flow statement needs to be prepared as per the relevant accounting standards or accounting principles. The Financial statements are the reports or statements prepared as per the Generally Acceptable Accounting Principles or International Financial Reporting Standards which show the financial performance and position of the business entity. General Purpose Financial Statements include the income statement, balance sheet, cash flow statement, Notes to Accounts. The Cash flow statement tends to be one of the General Purpose Financial statements that include the income statement, position statement, cash flow statement, notes to financial statements.

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Originally published at https://charteredfinanceaccounts.blogspot.com on December 19, 2020.