Cash flow statement

What is the cash flow statement? – Definition

A cash-based statement of financial position that defines financial resources like cash, and explain what caused the changes in the cash balance during the year is called cash flow statement.

Cash flow statement shows the movement in cash items that takes place over a given financial period. The object of its preparation is to reconcile the opening cash position with the closing cash position by providing a fairly detailed, and itemized, list of sources from which additional cash was generated during the period and the use to which such cash was put to. Thus there would be two basic parts of this statement.

Explanation

The cash flow statement shows the movement of cash between two periods. This statement shows various causes of variances in cash balance. Like the fund flow statement, this statement also shows inflow and outflow of cash between two time periods generally from January to 31 December.

Cash flow statement is like fund flow statement, cash flow highlights only total cash inflow and closing cash in the end. It speaks about the short term financial positions of a corporate. It speaks about the speed of cash being collected from debtors, stock and other current assets, on the other hand, the use of cash in paying current liabilities.

A brief statement that shows:

  • The total amount of cash held at the beginning of the year (in the form of cash in hand, cash at bank, short-term investments, etc.)
  • The total amount of cash held at the end of the year (in the form of cash in hand, cash at bank, short-term investments, etc.)
  • Net increase, or decrease, recorded in the cash balances over the year. This is the difference between the above two figures.

A detailed statement that shows:

  • All sources from which cash was generated during the year.
  • All uses made of cash during the year.
  • Net cash flow generated during the year (i.e. the difference between the above two lists)
  • The net increase (or decrease) shown by the first statement should be equal to the net cash flow disclosed by the second statement. In the following paragraphs, we will discuss the sources from which cash is generated and the uses that are made of cash resources in a given financial period.

Steps to prepare the cash flow statement

Its procedure is the same as of fund flow statement, its left-hand side records various sources of cash inflows and right-hand side records the use or outflow of cash.

(a). The sources are: Opening cash, cash from operations, issue of share capital: Issue of debentures, issue of long term loans, sales of fixed assets and capital profits (Profit on sale of fixed assets).

(b). Application of cash or cash outflows. Cash lost in operation or cash from operation (shows no loss). Redemption of preference share, the redemption of debentures, repayment of long term loans, purchase of fixed assets for cash, payment of liabilities: Tax or Dividend.

Format/Specimen of Cash Flow Statement

Cash inflowAmountCash outflowAmount
1. Opening CashxxxxPayment of:
2. Cash from operationsxxxx1. Dividendsxxxx
3. Long term loansxxxx2. Taxxxxx
4. Increase in Share Capitalxxxx3. Payment of long term loansxxxx
5. Sale of fixed assetsxxxx4. Decrease in preference share capitalxxxx
6. Issue of debenturesxxxx5. Purchase of fixed assetsxxxx
6. Redemptions of debenturesxxxx
7. Cash closing balancexxxx

Objectives

The chief objectives of the cash flow statement are as under:

1. Knowledge of cash inflow and outflow: Cash flow statement shows what are various sources of cash inflow and where the same has been used.

2. Knowledge of Trading Profits: This statement can tell how cash is generated and where it is being used and what is the balance if it is in excess it speaks about profit.

3. Knowledge of increase or decrease in share capital: Cash flow statement highlights the change in share capital whether it is increased or decreased.

4. Knowledge of purchase or sale of fixed assets: This statement provides useful information regarding the purchase or sale of fixed assets.

5. Knowledge of increase or decrease in long term loans: This statement shows for what purpose the long term loan is raised or if a loan is paid, what is the source of payment of the loan.

6. Knowledge of increase or decrease in cash balance: This statement highlights the exact position of whether the cash increased or decreased in a specific period.

7. Knowledge of tax and dividend paid: This statement is very useful in knowing the amount which is actually paid for the purpose of tax or dividend.

Example

From the following balance sheet of Star Mills Ltd. Prepare a statement of cash flow.

Cash flow statement example

(i). Dividends paid during the year $46,000.
(ii). Depreciation on Machinery written off $28,000.
(iii). The provision for taxation was made $66,000.

Solution

Cash from operations

Cash flow statement Solution

Cash Flow Statement

Cash flow statement

Working Notes:

(1). Tax Paid

Provision for tax account - Cash Flow Statement

(2). Machinery Purchased

Machinery AC - Cash Flow Statement

(3). Business Premises A/c

Business Premises Ac - Cash Flow Statement

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