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Cash Flow Statement is a statement recording systematically all inflows and outflows of cash during an accounting period. Here the term cash includes cash and cash equivalent. It is an important tool for short term planning. Cash Flow statement has to be prepared and presented as per the Performa given under AS-3.
It helps to evaluate the current cash position. A projected cash flow statement can be prepared in order to know the future cash position of a concern to facilitate planning.
As per the format prescribed by AS3 for Cash Flow Statement, all the cash flows has been divided into three main parts:
Operating Activity
Investing Activity
Financial Activity
Cash flow here is derived primarily from the principal revenue producing activities of the enterprise. Therefore they generally result from the transactions that enter into determination of net profit or loss. Increase or decrease in current assets and current liability also reflects operating activity. For examples cash receipts from sale of goods and rendering of services, fees, commission and other revenue.
Under this transactions resulting in long term investments in fixed assets and long term investments are reported. Acquisitions of these assets implies cash flows whereas their disposal means inflow of cash.
Under this Transactions that results from long term sources of finance are included. These mainly includes flow of cash relating to non current liabilities(long term Liabilities).Examples of cash flows arising from financing activities are: 1. Cash proceeds from issue of shares, debentures, bonds etc. 2.Cash repayment of the amounts borrowed. If the net value is positive, it is termed as cash flows generated from financing activities and if it is negative, it is cash used in financing activities.
Direct method
Indirect method
Direct and indirect is with reference to method for calculating cash flow from operating activity. Direct Method : Operating cash receipts and payments reported directly Indirect method : Cash flows from operating activities are reported by way of adjustment in net profit.
Direct Method
Cash receipts: a. Cash sales b. Cash collected from debtors c. Other operating cash receipts Less Cash payments a. Cash purchase b. Cash paid to creditors c. Other cash operating expenditures Cash flow from operating activities before taxes and extra ordinary items Less Taxes
Indirect method
Net profit for the year Add non cash operating and other non operating expenditures less Non cash non operating income Cash flow from operating activities before adjustment for working capital items Adjustment for Working capital items Cash flow from operating activities before taxes and extra ordinary items Less Income tax paid Add Income tax refund Net cash flow from operating activities
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