What is Cash Flow Statement

Meaning of Cash Flow Statement:

According to Accounting Standard 3, Cash flow statement is defined as, ‘Cash flow statements exhibit the flow of incoming and outgoing cash. This statement assesses the ability of the enterprise to generate cash and to utilize the cash. This statement is one of the tools for assessing the liquidity and solvency of the enterprise.’

CASH FLOW STATEMENT

A cash flow statement is a statement that shows the flow of cash and cash equivalents during a period.

OBJECTIVES OF CASH FLOW STATEMENT

THE MAIN OBJECTIVES ARE

  • To provide information about cash inflows and outflows from operating, investing and financing activities.
  • To determine net changes in cash and cash equivalents.

CASH EQUIVALENTS

Cash Equivalents are short term, highly liquid investments that are readily convertible into known

amount of cash and which are subject to an insignificant risk of changes in value.

Three Examples of Cash Equivalents are:

(i) Treasury bills; (ii) Marketable Securities; (iii) Commercial Papers.

CASH FLOWS

Cash flow is inflow and outflow of cash and cash equivalents.

Cash flow statement renders the following advantages:

  • A cash flow statement when employed along with other financial reports gives the date that permits users to assess variations in net assets of a firm and its economic system (involving its liquidity and stability) and its capability to influence the amounts and timings of cash flows in order to adjust to varying conditions and possibilities.
  • Cash flow data helps to evaluate the capability of the firm to produce cash and cash equivalents and permits users to generate models to evaluate and analyse the existing value of the expected cash flows of various companies.
  • It also assists in stabilising its cash inflow and outflow, following in acknowledgement to the varying situation. It is also essential in verifying the correctness of prior estimates of anticipated cash flows and in exploring the association between profitability and net cash flow and the result of varying cost prices.

The above mentioned is the concept, that is elucidated in detail about the Cash Flow Statement – Meaning, Objectives and Benefits for the class 12 Commerce students. To know more, stay tuned to BYJU’S.

MULTIPLE CHOICE QUESTIONS

Q.1- Which of the following is the type of cash flow:

a. The inflow of cash

b. The outflow of cash

c. Either (a) & (b)

d. Both (a) & (b)

Q.2- Proceeds from issue of shares or debentures also affects:

a. Cash flow statement

b. Ratios

c. Operating activities

d. Investing activities

ANSWER KEY

1-d, 2-a

MULTIPLE CHOICE QUESTIONS

Q.1- Cash & cash equivalents for the purpose of cash flow statement generally includes:

a. Cash on hand

b. Current investment

c. Cheques

d. Any of the above

ANSWER KEY

1-d