The fund flow statement, deals with the movements of funds in terms of working capital i.e. current assets less current liabilities. However, the movement can be analyzed in terms of cash also by preparing Cash Flow Statement.
Cash Flow Statement is a statement which shows inflows (receipt) and outflows (payment) of cash and cash equivalent in an enterprise between two balance sheet dates. The CFS attempts to analyze the cash transactions of the firm in terms of cash i.e. the transactions generating cash and using cash. The focus in CFS is on cash rather than on working capital. The primary objective of cash flow statement is to provide information regarding cash inflows and outflows during a year and the net change in cash position.
1. Clause 32 of Listing Agreement requires that every listed company will provide along with its Profit and Loss Account and Balance Sheet, a cash flow statement in the prescribed format, showing separately cash flows from operating activities, investing activities and financing activities.
2. Accounting Standard 3 (revised) issued by The Institute of Chartered Accountant of India deals with the preparation of Cash Flow Statement. This standard has prescribed two methods for preparing Cash Flow Statement and CFS should strictly be prepared as per either of the prescribed method.
Meaning of certain terms used in the preparation of Cash Flow Statement
2.Cash receipt from royalties, fees commissions and other revenue
3.Cash payments to suppliers for goods and services such as payment of rent, electricity bill, fire insurance premium, printing charges etc.
4.Cash payments of salaries and wages to employees and other expenses etc
The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise to pay dividends, repay loans and make investments without recourse to external sources of financing.
1.Payment to purchase of fixed assets including intangible assets
2.Cash payment relating to capitalized research and development costs
3.Cash receipt from disposal of fixed assets including intangible assets
4.Cash payment to purchase share or debentures of other companies
5.Cash receipt on account of sale of shares or debentures of other companies
6.Any interest received on debentures or other loans given to others (cash inflow)
7.Any dividend received on shares
It is important to make a separate disclosure of cash flows arising from investing activities because the cash flows represent the extent to which expenditures have been incurred for resources intended to generate future income and cash flows.
Any activity which relate to source of finance is known as financing activity. Source of finance means acquisition or repayment of capital (owners or borrowed).
In other words, financing activities are activities that result in changes in the size and composition of the owner’s capital (i.e. equity and preference share) and borrowings of the enterprise. Following are the examples of cash flows arising from financing activities:
Cash proceeds from issuing shares or other similar instruments including premium received on issue of share
It is important to make a separate disclosure of cash flow from financing activity because it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.
Revised accounting Standard has prescribed the following two methods for preparing Cash Flow Statement. Every listed company should follow either of these methods. These are:
Meaning of Cash Flow Statement
Cash Flow Statement is a statement which shows inflows (receipt) and outflows (payment) of cash and cash equivalent in an enterprise between two balance sheet dates. The CFS attempts to analyze the cash transactions of the firm in terms of cash i.e. the transactions generating cash and using cash. The focus in CFS is on cash rather than on working capital. The primary objective of cash flow statement is to provide information regarding cash inflows and outflows during a year and the net change in cash position.
Legal requirement:
1. Clause 32 of Listing Agreement requires that every listed company will provide along with its Profit and Loss Account and Balance Sheet, a cash flow statement in the prescribed format, showing separately cash flows from operating activities, investing activities and financing activities.
2. Accounting Standard 3 (revised) issued by The Institute of Chartered Accountant of India deals with the preparation of Cash Flow Statement. This standard has prescribed two methods for preparing Cash Flow Statement and CFS should strictly be prepared as per either of the prescribed method.
Meaning of certain terms used in the preparation of Cash Flow Statement
Accounting Standard has defined the following terms:
Cash- Cash means cash in hand and demand deposit with banks.
Cash Equivalents- Cash equivalents are short-term, highly liquid investment that is readily convertible into the known amount of cash and which are subject to an insignificant risk of change in value.
Cash Flows-Cash flow means inflow and outflows of cash and cash equivalents. The cash flow during a period are classified into three main categories, namely
• Cash flow from operating activities• Cash flow from investing activities• Cash flow from financing activities
Cash Flow From operating Activities:
As per revised accounting standard-3, “operating Activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. In other words cash flow from operating activities means that cash which has come from the core activity (including those activity which are supporting to the core activity) of the business. Core activity means that activity for which business has been started.Examples of cash flow from operating activities are:
1.Cash receipt from the sale of goods and the rendering of services2.Cash receipt from royalties, fees commissions and other revenue
3.Cash payments to suppliers for goods and services such as payment of rent, electricity bill, fire insurance premium, printing charges etc.
4.Cash payments of salaries and wages to employees and other expenses etc
The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise to pay dividends, repay loans and make investments without recourse to external sources of financing.
Cash Flow from Investing Activities
Investment activities are the acquisition and disposal of long term assets and other investments not included in cash equivalent. In other words, investing activities include transactions and events that involve the purchase and sale of long-term assets (e.g. land, building, plant and machinery, furniture, goodwill, patent, and trademark etc.) not held for resale. Examples of cash flow from investing activities are:1.Payment to purchase of fixed assets including intangible assets
2.Cash payment relating to capitalized research and development costs
3.Cash receipt from disposal of fixed assets including intangible assets
4.Cash payment to purchase share or debentures of other companies
5.Cash receipt on account of sale of shares or debentures of other companies
6.Any interest received on debentures or other loans given to others (cash inflow)
7.Any dividend received on shares
It is important to make a separate disclosure of cash flows arising from investing activities because the cash flows represent the extent to which expenditures have been incurred for resources intended to generate future income and cash flows.
Cash Flow From financing Activities
Any activity which relate to source of finance is known as financing activity. Source of finance means acquisition or repayment of capital (owners or borrowed).In other words, financing activities are activities that result in changes in the size and composition of the owner’s capital (i.e. equity and preference share) and borrowings of the enterprise. Following are the examples of cash flows arising from financing activities:
Cash proceeds from issuing shares or other similar instruments including premium received on issue of share
- Repayment of preference or equity share including premium paid on their repayment
- Cash proceeds from issuing debentures, bonds loan
- Repayment of debentures or loan
- Interest paid on loan or debentures
- Dividend paid on equity or preference shares
It is important to make a separate disclosure of cash flow from financing activity because it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.
Methods of preparing Cash Flow Statement
Revised accounting Standard has prescribed the following two methods for preparing Cash Flow Statement. Every listed company should follow either of these methods. These are:
1. Direct Method
2. Indirect Method
Basis of difference
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Fund flow statement
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Cash Flow Statement
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1
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Basis of preparation
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FFS is based on the concept of Working capital and it provides the details of fund movement.
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CFS is based on ‘cash’ and it provides the details of cash movement.
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2
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Schedule of changes in working capital
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Schedule of changes in working capital is usually prepared along with Fund Flow Statement. Though it is not compulsory.
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No such schedule is prepared.
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3
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Relevancy
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FFS is more relevant in estimating the firm’s ability to meet its long term liabilities.
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CFS is more relevant in estimating the firm’s capacity to meet its short term liabilities.
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4
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Legal requirement
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Preparation of FFS is not legally required
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As per listing agreement for every listed company its compulsory to prepare cash Flow Statement.
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5
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Opening and closing balance of cash and cash equivalent
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Fund flow statement does not contain opening and closing balance of cash and cash equivalent.
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In CFS both opening and closing Balance of cash and cash equivalent are given
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6
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Contents
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FFS records sources and uses of fund and difference between source and use of fund indicate increase or decrease in working capital
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CFS records inflow or outflow of cash and the difference between inflow and outflow of cash indicate increase or decrease in cash or cash equivalent.
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7
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Dependence on each other
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FFS can be prepared if CFS prepared by indirect method is made available.
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CFS cannot be prepared if only FFS is available.
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