Classification of Activities for the Preparation of Cash Flow Statement

What is a 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.’ As per (Accounting Standard) AS-3, these activities are to be classified into three categories:

  • Operating
  • Investing
  • Financing activities

So as to show distinctly the cash flows produced (or used) by (in) these pursuits. This assists the users of the cash flow statement to evaluate the result of these pursuits on the financial position of a company and also on its cash and cash equivalents.

  • Cash from Operating Activities: Operating activities are the pursuits that form principal activities of a firm. For instance, for a firm producing garments, operating pursuits are the acquisition of raw material, the sale of garments, incurrence of producing expenses, etc., These are the main revenue-producing activities (or the primary activities) of the firm and these pursuits are not financing activities or investing.
  • Cash from Investing Activities: According to AS-3, financing enterprises are the property and sale of long-term assets and other investments which are not covered in cash equivalents. Financing funding associate to the sale and purchase of fixed assets such as furniture, machinery, land and building or long-term assets etc. Activities associated with long-term financing are also funding in activities.
    • Example of Cash outflow from investing activities :
      • Cash payments to procure fixed assets comprising capitalised research and development and intangibles
      • Cash payments to procure shares, securities or debt tools of other firms other than the tools those included for business activities
      • Loans and Cash advances made to the 3rd party ( than loans and advances made by a business enterprise wherein it is administering ventures)
    • Cash inflow from Financing Activities
      • Cash receipt from the disposition of fixed assets involving intangibles
      • Cash receipt from the repayment of loans or advances made to third parties
      • Cash receipt from the disposition of shares, securities or debt tools of other firms except those held for business goals
      • Interest received in cash from loans and advances

The above mentioned is the concept, that is elucidated in detail about the Classification of Activities for the Preparation of Cash Flow Statement for the class 12 Commerce students. To know more, stay tuned to BYJU’S.