3. CHAPTER 5 : CASH FLOW STATEMENT: CASH FLOW FROM OPERATING ACTIVITIES

LEARNING OUTCOMES:

* COMPUTATION OF CASH FLOW FROM OPERATING ACTIVITIES

LEARNING OUTCOMES:

After going through this, you shall be able to understand the following concepts.

 Some Important Terms Used in Cash Flow Statement

Cash Flow Statement records the inflows and outflows of cash and cash equivalents during a particular period.
This statement is prepared to know how the cash and cash equivalents are used in the business.
All the Listed Companies are compulsorily required to prepare the Cash Flow Statement as per the Revised Accounting Standard- 3 (AS-3) along with their Financial Statements.
According to the AS-3, Cash Flow Statement is bifurcated into three main heads.

 Cash Flow from Operating Activities




Cash Flow from Investing Activities

Cash Flow from Financing Activities


Some Important Terms Used in Cash Flow Statement

 Cash- It consists of cash in hand and demand deposits with banks.

 Cash Equivalents- These are short-term highly liquid investments that are easily convertible into cash and which are subject to an insignificant risk of change in value. In other words, cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or any other purpose. An investment held for short-term maturity say three months, can be regarded as cash equivalent. Some example of cash equivalents are treasury bills, commercial papers, etc.
Cash Flows- Cash flows refer to the movement of cash in and out of the business. Cash flows can be either inflows or outflows of cash and cash equivalents. A cash inflow implies receipt of cash by the business and cash outflow implies the payment of cash by the business. Cash inflows result in increase in the total cash balance and cash outflows result in decrease in the total cash balance.

 Operating Activities- These activities are the main or principal revenue generating activities (such as sale and purchase of goods and services) of an organisation.

 Investing Activities- These activities basically involve sale and purchase of long-term investments and fixed assets. Long-term assets are the assets which are not meant for resale and are used for comparatively long period of time.

 Financing Activities- These are the activities which result due to changes in the composition and size of the capital structure and borrowings of an organisation.
EXAMPLE:

 Read each of the following transaction carefully and sate with reason whether the transaction would (a) Increase, (b) Decrease or (c) No change in Cash and Cash Equivalents.

 1. Cash Rs 20,000 deposited into bank :
No change

 Cash and Bank balance together are termed as cash equivalents. This transaction will not result in any change in the total balance of cash and cash equivalents

 2. Depreciation on Machinery Rs 5,000 :
No change
Because depreciation is a non-cash transaction

 3. Treasury bill Rs 3,000 matured :
No change

 Treasury bills (T-bills) are considered as short-term investments with maturity of less than 3 months. Such investments are classified under cash and cash equivalents. At the time of maturity of T-bills, the balance of cash and cash equivalents increases (due to inflow of cash) and decrease (due to the maturity of T-bills) by the same amount, so the net effect is zero. Therefore, there is no change on the balance of cash and cash equivalents on the maturity of T-bills.

 4.Payment of Rs 15,000 made to supplies of goods:
Decrease

 Payment to the suppliers of goods will reduced the cash balance as supplier is paid in cash/cheque.

 5. Interest Rs 200 received on Investment :
Increase
Because interest is received in cash.

 6. Dividend Rs 3,000 declared and paid:
Decrease
Payment of dividend will result decrease in cash balance

 7. Profit of Rs 3,000 on sale of investment:
No change

 Profit on sale of investment is nominal account transaction while Cash and cash equivalents are treated as real account.

 8. Loss on sale of Machinery Rs 1,600
No change
Loss on sale affect the Profit and loss, does not affect the cash and cash equivalents.
9.Bill Receivable Rs 1,200 honored at maturity:
Increase
This transaction will result in inflow of cash balance.

 10.Debtors Rs 600 proved bad:
No change
Bad debt is considered as non-cash transaction, so there would not be any change


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