Accountancy

Cash Flow Statement

1. What is cash flow statement?
Ans: it is a statement of inflows and outflows of cash and cash equivalents between two balance
sheet dates. It is prepared due to clause 32 of listing requirement of SEBI. It is prepared as per
AS-3.

2. What are the purpose / objectives of preparing cash flow statement?

Ans: the purpose /objectives of cash flow statement are as follows:-
(a) Helpful in assessing the solvency and liquidity: Cash flow statement indicates the liquidity and solvency
of an enterprise. It also indicates the ability of an enterprise to generate cash and cash equivalents.
Cash flow statement is helpful in assessing the solvency of an enterprise and ability to utilize those cash
flows for the business operations.
(b) Helpful in short term planning: Information provided by cash flow statement is helpful in short term
planning. On the basis of cash flow statement an enterprise can plan it short term requirements.
(c) Helpful in assessing the ability: cash flow statement indicates the ability of an enterprise to generate
cash and cash equivalents. to know the ability of an enterprise cash flows are classifying into operating
investing and financial activities.
(d) Helpful in assessing the cash flow: Cash flow statement is important because it is helpful in assessing
the cash flow operating activities investing activities and financing activities of an enterprise.
(e) Test for the managerial decision: The golden rule is that too by the fixed assets fund should be raised
through issue of shares issue of the ventures long term loans et cetera end dividend on shares interest
on the ventures and launch should be paid through the cash generated from operating activities. Cash
flow statement indicates that this rule is followed strictly by the enterprise or not.

3. What are the different activities as per AS-3?

Or
Mention the three heads of activities of cash flow as per AS-3 along with one suitable example
under each head.
Ans: The three different activities of cash flow as per AS-3 are:-
1. Operating activities: example; sale of goods for cash, purchase of goods for cash.
2. Investing activities: example; purchase of fixed assets for cash, sale of fixed asset for cash.
3. Financing activities: example; issue of equity shares, payment of dividend.

4. What are the uses/ advantages of cash flow?

Ans: following are the uses/advantages of cash flow statement:-

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(a) Better comparability of financial position between two periods in respect of performance is possible.
(b) Reliability of operation results is ensured.
(c) Verification of cares budget can be done by comparing cash flow with cash budgets.
(d) Basis for preparing future cash budget. Cash flow helps in preparing a cash budget for next period.
(e) Solvency position. Degree of short term solvency can be as curtained.
(f) Relationship between profit and net cash flow can be ascertained.
(g) Information about cash flow from various activities available from cash flow statement.

5. What are the disadvantages of cash flow statement?

Ans: following are the limitation of cash flow statement:-
1. It ignores the basic accounting concept of accrual basis.
2. It is not suitable assessing the profitability of an enterprise.
3. It fails to show long term liquidity position of the business.
4. It ignores the effect of price level changes/inflation.
5. They are quantitative in nature but not qualitative.

6. What are the sources of cash flow?

Ans: the sources of cash flow are as following:-
(a) Effect of window dressing. Sometimes figures presented in accounting form are not true and fair.
Because of window dressing true cash position cannot be ascertained. True window dressing gas
balance can be manipulated easily by the accountant.
(b) Non cash transactions are ignored. Non cash transactions are not recorded in the books of accounts but
they play important role in ascertaining the solvency and liquidity of an enterprise.
(c) Historical in nature. Information provided by the cash flow statement is historical in nature. It ignores
the projected cash flows prepared on the basis of two comparative balance sheets of the previous years.
Information provided by the cash flow statement will be more useful if projected cash flow is also
highlighted in it.
(d) Cash receipt from the sale of goods and rendering of services.
(e) Cash receipt from trade debtors.
(f) Cash receipt from royalties, fees and commission etc.
(g) Cash proceeds from issuing debentures, loans, notes, bonds.
(h) Cash receipt from sale of fixed assets.
(i) Cash receipt against advances and loans made to third parties.

7. Give two example of cash equivalent.

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Ans: 1. Marketable securities. 2. Short term deposits with bank.

8. What is operating activities and gives its two examples.

Ans: operating activities are the principal revenue producing activities of the enterprise and other
that are not investing and financing activities. Example
1. Purchase of goods for cash.
2. Sale of goods for cash.
3. Received of commission, bad debts recover.
4. Payment of wages and salaries.

9. What is investing activities and give its two examples.

Ans: investing activities are the acquisition and disposal of long term assets and other
investments not included in cash and cash equivalents. Examples
1. Purchase of fixed assets for cash
2. Sale of fixed assets for cash.
3. Purchase and sale of long term investments.
4. Receipts of interest and dividend in case of non financial company.

10. What is financing activities and give its two examples.

Ans: financing activities are the activities that results in changes in the size and composition of
the owners’ capital and borrowings of the enterprise. Examples
1. Issue of equity shares.
2. Buy back of equity shares.
3. Issue and redemption of preference shares.
4. Issue and redemption of debentures.
5. Payment of dividend.

11. What is cash and cash equivalent?

Ans: cash means cash in hand and short term demand deposits with bank.
Cash equivalent means short term highly liquid investment which can be readily converted in to
cash without significant decline of its value.

12. What is contingent liability?

Ans: it a liability which may or may not arise depending on the outcome (i.e. happening or non
happening) of an uncertain future event. As per AS-29, a contingent liability is recorded if the
contingency is probable and the amount of the liability can be reasonably estimated. Examples:-
1. Bill discounted but not yet matured.

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2. Claims against the company not acknowledged as debt.

3. Guarantees
4. Product warranties.
5. Outstanding lawsuit.

13. Discuss the procedure of preparing a cash flow statement.

Ans: the procedure for preparing cash flow statement are as follows:-
1. Compute the net increase or decrease in cash and cash equivalents by making a comparison of
these accounts given in the comparative balance sheet.
2. Calculate the net cash flow provided (used in) operating activities by analyzing the profit and loss
account, balance sheet and additional information.
3. Calculate net cash flow from investing activities.
4. Calculate net cash flow from financing activities.
5. Prepare a formal cash flow statement highlighting the net cash flow from operating, investing
and financing activities separately.
6. Make an aggregate of net cash flows from the three activities and ensure that the total net cash
flow is equal to the net cash increase or decrease in cash and cash equivalents as calculated in
step 1.
7. Report significant non cash transactions that did not involve cash or cash equivalents in a
separate schedule to the cash flow statement e.g. purchase of machinery against issue of share
capital or redemption of debentures in exchange for share capital.

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