Grade 12 Account Note

Cash Flow Statement


Financial statements of an enterprise include income statement, which shows the operating result and balance sheet, which shows the financial position. For betterment of decision making additional statement are prepared to analyse the change in financial position of the enterprise over the accounting period. These statements of change in financial position includes funds flow statement, cash flow statement and ratio analysis etc. Cash is the blood of a business. Without sufficient cash business cannot run properly.

Cash flow is the flow of cash in an accounting year or over two dates of balance sheet. Cash flow statements shows the inflows and outflows of cash from different business activities like operating, investing and financing activities. It is the indicator of the amount of cash receipt and amount of cash payment or disbursement during an accounting period in different activities of an organization. It shows the causes of increase or decrease in cash and net change in cash position during a particular period.

Cash flow is one of the compulsory financial statements that should be prepared with the other financial statements. As per company act,2063, in case of public limited company, the cash flow statement must be prepared annually 30 days prior to annual general meeting but in case of private limited company, it should be prepared within 60 days from the end of the accounting period.



The statement of cash flow statement provides information regarding inflows and outflows of cash of a firm for a period of one year. Therefore, cash flow statement is important on the following grounds.

To identify the sources from where cash inflows have risen within in a particular period,
To show the various activities where in the cash was utilized.
To plan cash in systematic method and maintain a proper matching between cash inflows and outflows.
To show the efficiency of the firm in generating cash inflows from its regular operations.
To reports the amount of cash used during the period in various long term investing activities such as purchase of fixed assets.
To reports the amount of cash received during the period through various financing activities such as issue of shares, debentures and raising long-term loan.
To helps for appraisal of various capital investment programmes to determine their profitability and viability.





Cash flow statement is based on narrow concept of funds, which considers changes in cash.

It is based on the changes in working capital, which considers both the changes in cash as well as other components of current assets and current liabilities.

It is prepared on cash basis.

It is prepared in accrual basis.

It does not require use of changes in net working capital because all the changes in assets and liabilities are summarized in cash flow statement.

It requires using of a separate statement of changes in net working capital.

The preparation of cash flow statement considers only those transactions that are linked with flow of cash.

The preparationof funds flow statement considers those transactions that are linked with flow of funds along with actual cash.

This statement is more useful in short-term analysis and cash planning.

This is more useful in long-term analysis of financial planning.




The cash flow statement is prepared by showing inflows and outflows of cash from major activities of a firm. The activities that result in cash inflows are referred to as source of cash and the activities that results into cash flow outflow are referred to as uses of cash. The firm’s activities are classified into 3 categories. They are:

1.Cash flows from operating activities

2.Cash flows from investing activities

3.Cash flow from financing activities


Cash flow from operating activities

Operating activities refer to the day-to-day revenue generating activities of a firm. These activities are considered to be the major sources of internally generated cash. Cash inflows form operating activities include the cash from sales and collection from debtors. Cash outflows for operating activities include cash purchase, payment of suppliers, payment for other operating expenses, payment for interest and taxes thus consist of all cash revenue expenses.


Cash flows from operating activities could be determined by using two methods. Direct and indirect method

1.Cash flow from operating activities under direct method

Under direct method only those items from income statement are selected that result into actual flow of cash. So, non-cash expenses such as depreciation and amortized amount appeared in income statement are ignored. The change in some components of current assets and current liabilities except cash balance are also incorporated that result into cash inflows and outflows.

A.Cash sales and collection from debtors

It includes cash from sales and cash inflows or outflows resulted from change in debtors and bills receivable.

B.Cash purchases and payment to suppliers

It includes cash inflow resulted from purchase of raw materials or cost of goods sold. The changes in creditors and bills payables of two balance sheet dates are adjusted to the amount of purchase of raw materials or cost of goods sold.

C.Payment to employees and other operating expenses

It includes cash outflow resulted from payment of wages, salaries, manufacturing expenses, administrative expenses, selling and distribution expenses, including insurance and other operating expenses.

D.Payment for interest and taxes

It includes the cash outflow occurring out of payment of interest and taxes. The change in outstanding interest and taxes are also included.

E.Cash from extra-ordinary activities

It includes all the cash inflows and outflows arising on account of short-term investment and short-term financing such as short-term bank loan, bank overdraft, and marketable securities.


2.Cash flows from operating activities under indirect method

Under indirect method first the funds from operation is ascertain by adjusting the net income by non-cash expenses and non-operating incomes and expenses included in the income statement. The funds from operation so ascertained are again adjusted by the changes in current assets and the changes in current liabilities to determine cash flows from operating activities.

To apply this method all the amount of non-operating and non-cash expenses are added to the net income and then the amount of non-operating incomes are deducted. The resulting figure is known as funds from operation. The changes in current assets, other than cash and the changes in current liabilities are adjusted to funds from operation so that the resulting figure is known as cash from operating activities.


Cash flow from investing activities

Investing activities refer to those activities, which are concerned with acquisition or sales of long-term assets or investment. Cash inflows from investing activities include the cash received from sales of fixed assets as well as investment and cash outflows include cash paid for the purchase of fixed assets and investment made.


Cash flow from financing activities

Financing activities are concerned with cash collection by issuing shares and debentures, raising long-term loan and so on. It also involves cash outflows in terms of redemption of debentures and preference shares, repurchase of shares, repayment of long-term loan and payment of cash dividend.


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