Accountancy for Class 12, Part 1, Chapter 6 Cash Flow Statement

Learn CBSE Accountancy Index Terms for Class 12, Part I, Chapter 6 Cash Flow Statement

1. Cash Flow Statement – The meaning of cash flow statement or statement of cash flows can be defined as cash flow statements exhibiting the flow of incoming and outgoing cash. This statement assesses the ability of the enterprise to generate cash and utilise the cash. This statement is one of the tools for assessing the liquidity and solvency of the organisation.

A cash flow statement is a financial statement that presents total data. Including cash inflows a business gains from its continuing progress and external financing sources, as well as all cash outflows that pay for trading activities and finances during a delivered time. In other words, a cash flow statement is a financial statement that estimates the cash earned or used by a firm in the present time.

2. Cash Inflow – Cash inflows refer to all such activities that result in the business acquiring cash inflow into business. The cash flow statement’s main objective is to determine the impact of cash on various types of cash outflows and inflows.

3. Cash Equivalents – The cash equivalents consist of bank accounts, short-term government bonds, commercial paper, marketable securities, and treasury bills with a maturity date of 3 months or less.

4. Cash Outflows – Cash outflow is considered as the process of movement of cash outside the business, which is due to the various liabilities that a business has during its course of operations.

The various ways in which cash would leave the business can be in the form of office rents, electricity bills, or towards dividend payments to the shareholders, and staff salaries. In principle, it functions in the exact opposite way of cash inflows, which is the movement of cash into the business.

The balance of cash outflow and inflow determines the stability of a business. It is a general rule of thumb that any business which has a higher cash outflow as compared to its cash inflow is considered to be unhealthy or has a higher chance of getting bankrupt.

5. Non-cash Items – Non-cash items are referred to as those entries on an income statement or cash flow statement that do not involve actual cash transactions. In other words, these are expenses that are listed in an income statement that does not involve cash payment.

Non-cash items are useful for tracking or recording the wear and tear of assets or the changes taking place in the value of the investments that haven’t been sold.

6. Operating Activities – Operating activities are the operations of a company directly associated with furnishing its services and commodities to the marketplace. These are the enterprise’s focus trading pursuits, such as producing, allocating, retailing, and marketing a good or service. Operating activities are the principal source of revenue and expenditure in a firm.

The operating activities on the cash flow statement comprise various uses and sources of cash from the company’s operational activities. In simple words, it shows how much money a company has generated from its products or services.

7. Investing Activities – Investing activities comprise the second section of the cash flow statement where it is representing the cash outflow and inflow of the business.

This outflow and inflow of cash can be obtained by investing in non-current assets such as PPE (Plant, Property, and Equipment), investment in securities and from the sale of assets and securities, and acquisition of other businesses.

Cash flow from investing activities deals with the cash outflow and inflow related to the sale and purchase of assets, loan amount received from customers or the one taken from the suppliers, and any other payments that are related to any kind of merger and acquisitions.

8. Financing Activities – These are the activities that result in changes in the size and composition of the owner’s capital and borrowings of the enterprise. Cash flows from financing activities are those that take place between a firm and its investors.

These include both the equity investments of stockholders (owners) and the loans from bondholders and other creditors. When the company issues new shares, it records a cash inflow from financing, and when it repurchases shares, pays dividends or pays off debt, it records a cash outflow.

9. Extraordinary Items – Extraordinary items in accounting are referred to as any kind of abnormal loss or gain that is not generated from regular business operations. Such types of events are infrequent in nature and are non-recurring.

The accounting for extraordinary items is done separately in the financial statements of the business entity. These items are excluded by the financial analysts while determining the profit-to-earnings ratio for obtaining the real profitability of the business.

We hope that the offered Accountancy Index Terms for Class 11 with respect to Part 2, Chapter 6: Accounting Ratios will help you.

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