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Definitions
Chandigar h
Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
Cash flows are inflows and outflows of cash and cash equivalents.
Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities.
Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Financing activities are activities that result in changes in the size and composition of the owners capital (including preference share capital in the case of a company) and borrowings of the enterprise.
The Statement of Cash Flow (formerly Statement of Changes in Financial Position) shows the changes in Cash and Cash Equivalents arising from the operating, financing and investing activities of the enterprise. This information is useful for: 1. understanding effects of operating, financing and investing activities on cash; 2. assessing liquidity and solvency; and 3. assessing the firms ability to generate
Cash and cash equivalents include cash, plus temporary investments that are highly liquid (e. g., maturities of three months or less, like treasury bills). Investments in equities are excluded (no maturity date). Bank overdraft can be considered negative cash equivalent if bank balance fluctuates regularly between positive and negative.
Chandigar Statement h
1. Highlighting cash flow from different activities 2. Short-term Planning 3. Cash Flow information helps to understand liquidity 4. Efficient cash management 5. Prediction of sickness 6. Comparison with budget 7. Cash position
Operating Activities
Chandigar h
The activities of acquisition and disposal of long term assets and other investments not included in cash equivalent are investing activities. It includes making and collecting loans, acquiring and disposal of debt and equity instruments, property and fixed assets etc. Examples of cash flows arising from investing activities are as follows:
Cash payments to acquire fixed assets
Cash receipts from disposal of fixed assets Cash payments to acquire shares, warrants or debt instruments of other enterprises and interest in joint ventures Cash receipt from disposal of above investments
Financing Activities
Chandigar h
Those activities that result in changes in size and composition of owners capital and borrowing of the organization. It includes receipts from issuing shares, debentures, bonds, borrowing and payment of borrowed amount, loan etc.
Sale of share Buy back of shares Redemption of preference shares Issue / redemption of debentures Long term loan / payment thereof Dividend / interest paid
Cash Inflow
1) 2) 3) 4) Cash Sales Received from Debtor Commission & Fees Royalty 1) 2) 3) 4) 5) 6)
Cash Outflow
Cash Purchases Payment to Creditors Cash Operating Expenses Payment of Wages Income Tax Manufacturing Expenses
Cash Inflow
1) 2) 3) 4) 5) Sale of Fixed Assets Sale of investments Interest Received Dividend Received Working Capital Recovery
Cash Outflow
1) Purchase of Fixed Assets 2) Purchase of Investments 3) Working Capital
Cash Inflow
1) Issue of Shares in Cash 2) Issue of Debentures in Cash 3) Proceeds from long-term borrowings
Cash Outflow
1) Payment of Loans 2) Redemption of Preference Shares 3) Payment of Dividends 4) Interest Paid 5) Repayment of Finance/ Lease Liability
Funds Flow
It is based upon accrual Basis of accounting I.e Working capital It is useful for long-term Financial planning Schedule of changes in Working capital is Prepared separately It studies causes of Change in working capital
Significance
Schedule of Changes in Working Capital Causes of Variation
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Chandigar Limitations h
Does not show the liquidity position of the firm It is not a substitute of income statement Does not show the financial position of the firm in totality
Indirect Method Chandigar Format of Cash Flow Statement for the year h ended ................
PARTICULARS Rs (i) Cash flows from operating Activities Net Profit as per Profit and Loss A/c or difference between closing balance and opening balance of Profit and Loss A/c A: Add : Transfer to reserve xxx Proposed dividend for current year xxx Interim dividend paid during the year xxx Provision for tax made during the current year B: Add: Depreciation xxx Preliminary expenses xxx Discount on issue of shares and debentures written off xxx Interest on borrowings and debentures xxx Loss on sale of fixed assets
Chandigar h
C. Less : Interest income/received xxx Dividend income received xxx Rental income received xxx Profit on sale of fixed asset xxx D. Operating profits before working capital changes (A + B C) E. Decrease in current assets and increase in current liabilities F. Less : Increase in current assets and decrease in current liabilities G. Cash generated from operations (D + E F) H. Less : Income tax paid (Net tax refund received) J. Net cash from operating activities
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Chandigar h