Cash flow statement is a statement of inflow or outflow of cash or cash equivalent of the company in the specified period. In other words, cash flow statement present the reason of changes in cash passion in two Balance Sheet date.
Cash flow includes inflow or outflow of cash or cash equivalent. ‘Cash Flows’ implies movement of cash in and out due to some non-cash items. Receipt of cash from a non-cash item is termed as cash inflow while cash payment in respect of such items as cash outflow. For example, purchase of machinery by paying cash is cash outflow while sale proceeds received from sale of machinery is cash inflow. Other examples of cash flows include collection of cash from trade receivables, payment to trade payables, payment to employees, receipt of dividend, interest payments, etc.
As per AS-3, these activities are to be classified into three categories:(1) operating, (2) investing, and (3) financing activities so as to show separately the cash flows generated (or used) by (in) these activities. This helps the users of cash flow statement to assess the impact of these activities on the financial position of an enterprise and also on its cash and cash equivalents.
SIGNIFICANCE OF CASH FLOW STATEMENT
The cash flow statement provides information regarding inflows and outflows of cash of an organization for a particular period. Therefore, we say that the following are the importance of cash flow statement:
1. Cash flow statement helps to identify the sources from where cash inflows have arisen and where in the cash was utilized within a particular period.
2. Cash flow statement is significant to management for proper cash planning and maintaining a proper matching between cash inflows and outflows
3. Cash flow statement shows efficiency of a firm in generating cash inflows from its regular operations
4. Cash flow statement reports the amount of cash used during the period in various long-term investing activities, such as purchase of fixed assets
5. Cash flow statement reports the amount of cash received during the period through various financing activities, such as issue of shares, debentures and raising long-term loan
6. Cash flow statement helps for appraisal of various capital investment programmes to determine their profitability and viability
7. Cash flow statement helps the investors to judge whether the company is financially sound or not.
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