Guide to Cash Flow Statement with FAQs

A Cash Flow Statement is a financial document that provides a summary of the cash inflows and outflows for a business over a specific period of time, typically a month, quarter, or year. This statement is one of the three main financial statements used to assess a company's performance and financial health, alongside the balance sheet and the income statement. The Cash Flow Statement is essential for understanding how well a company generates cash to fund its operating expenses, pay its debts, and fund its investments without requiring external financing. This statement also provides critical insight into the liquidity and financial flexibility of a business.

Table of Contents

1. Introduction
2. Cash and Cash Equivalents
3. Types of Cashflows
4. Frequently Asked Questions

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1. Introduction

The statement of cash flows shall report cash flows during the period classified under the following three categories —

• Cash flow from operating activities;
• Cash flow from investing activities; and
• Cash flow from financing activities.

Note – Sum of these three types of cash flows reflects the net change in cash and cash equivalent of the entity.

2. Cash and Cash Equivalents

• Cash shall consist of cash in hand and demand deposits; and
• Cash equivalent consist of short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

3. Types of Cashflows

3.1 Cash Flow from Operating Activities

Cash flows from operating activities are primarily derived from the principal revenue producing activities of the entity. Therefore, they generally result from the transactions and other events that enter into the determination of profit or loss.

Examples of cash flows from operating activities are –

1. cash receipts from the sale of goods and the rendering of services;
2. cash receipts from royalties, fees, commissions and other revenue;
3. cash payments to suppliers for goods and services;
4. cash payments to and on behalf of employees;
5. cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy benefits;
6. cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and
7. cash receipts and payments from contracts held for dealing or trading purposes.

Note – Cash received on account of sale of an item of plant is a cash flow from investing activities.

Again, cash flows arising from the purchase and sale of dealing or trading securities are classified as operating activities. Similarly, cash advances and loans made by financial institutions are usually classified as operating activities since they relate to the main revenue-producing activity of that entity.

3.2 Cash Flow from Investing Activities

The activities of acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents are investing activities. However, only expenditures that result in a recognized asset in the balance sheet are eligible for classification as investing activities.

Examples of cash flows arising from investing activities are –

1. cash payments to acquire property, plant and equipment, intangibles and other long-term assets. These payments include those relating to capitalised development costs and self-constructed property, plant and equipment;
2. cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;
3. cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other than payments for those instruments considered to be cash equivalents or those held for dealing or trading purposes);
4. cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than receipts for those instruments considered to be cash equivalents and those held for dealing or trading purposes);
5. cash advances and loans made to other parties (other than advances and loans made by a financial enterprise);
6. cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a financial enterprise);
7. cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities; and
8. cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities.

3.3 Cash from Financing Activities

These are activities that result into change in size and composition of owner’s capital and borrowing of the organisation. Accordingly, it includes receipts from issue of shares, bonds and other instruments, borrowing and repayment of loans.

Examples of cash flows arising from financing activities are –

1. cash proceeds from issuing shares or other similar instruments;
2. cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or long-term borrowings;
3. cash repayments of amounts borrowed.

4. Frequently Asked Questions