Cash Flow Statement Meaning, Objectives, Limitations and Format

In this article we will study about cash flow statement. We will discuss the meaning of cash flow statement with objectives. Also we will discuss the Limitations and Format of Cash Flow Statement.

Meaning of Cash Flow Statement :

Cash Flow Statement refers to that statements which shows inflow (receipts) and outflow (payments) of cash in an organisation during a particular period.It is a source of cash during a particular span of time.It analysis the change between two balance sheet date. The term cash  here stands for cash and cash equivalents. Cash Flow Statements includes those items which effect cash.

Objectives or Use of Cash Flow Statements :

  1. Cash Flow Statement is used for short-Term financial planning.
  2. Cash Flow Statement prepared for the future period is helpful in preparing a cash budget.
  3. A cash flow statement prepared for the comparison of cash budget.
  4. Prepared to study of trend of cash receipts and payments.
  5. Cash flow statements helps organisation in making dividend decision.

Limitations of Cash-Flow Statements :

  1. It doesn′t help organisation to judging liquidity.
  2. Cash flow statements ignores non-cash transactions.
  3. It ignores accrual concept of accounting.
  4. Historical in nature….

Format of CASH FLOW STATEMENTS :

XYZ Ltd.

Cash Flow Statement for the year ended …………

( Indirect Method )

 A. Cash Flow from Operating Activities 

Net Profit Before Tax ( See note no.1 )

Adjustments for non cash and non operating items :

Add: Deprecation

Preliminary expenses/ Discount on issue of shares and                                             Debentures written off, Goodwill, Patents and Trademarks Amortised   ,                   Interest on long-term borrowings, loss on sale of Fixed assets.

Less :  Interest Income , Dividend Income,   Rental Income, Profit on sale of                        Fixed Assets.

Operating profit before Working Capital Changes

   Add : Decrease in  Current Assets                                                                                           Increase in current Liabilities.

Loss : Increase in Current Assets                                                                                             Decrease in Current Liabilities.

Cash generated from operations

  Less : Income Tax paid ( Net of Tax Refund received )

Net cash from Operating Activities.

  B. Cash Flow from Investing Activities :  

Proceeds from sale of tangible Fixed Assets                                                                         Proceeds from sale of Intangible Fixed Assets like Goodwill                                              Proceeds from sales of Non-Current Investments                                                            Interest and Dividend received                                                                                                   Rent received

Purchase of Tangible fixed assets                                                                                                     purchase of intangible  Fixed Assets like Goodwill                                                                       Purchase of Non-Current Investments

Net cash from investing activities .    

C. Cash Flow from Financing Activities :

Proceeds from issue of Shares and Debentures, Other long-term borrowings.                 Final dividend paid, Interim dividend paid                                                                         Interest on long-term borrowings paid                                                                                Repayment of loans                                                                                                                  Redemption of debentures.

Net cash from Financing Activities.

Net Increases or decreases in cash and cash equivalent

Add : Cash and cash equivalent in the beginning  of the year

Cash and cash equivalent at the end of the year.

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