Meaning of Cash Flow Statement
A Cash Flow Statement describes the inflow (sources) and outflow (applications) of cash and cash equivalents in an enterprise over a specified period of time. It includes receipts and disbursements of cash, as well as the net effect of the various business transactions. It summarizes the reasons for changes in a business enterprise’s cash position between balance sheet dates. In accordance with AS-3 (revised), an enterprise should prepare a cash flow statement and present it for each period for which financial statements are prepared. Cash, cash equivalents, and cash flow are used in the statement with the following definitions:
Cash consists of cash on hand and demand deposits with the bank.
Cash Equivalents are highly liquid, short term investments that can readily be converted into known amounts of cash and which have a low risk of value changes. Rather than to invest in the stock market or for other purposes, cash equivalents are held for the purpose of meeting short-term cash obligations. An investment normally qualifies as a cash equivalent only when it has a short-maturity, of say, three months or less from the date of acquisitions.
Cash flow refers to the movement of funds toward the outside, called cash outflow, or towards the inside, called cash inflow. In other words, the flow of cash occurs when any transaction changes the amount of cash and cash equivalents before the transaction takes place.An enterprise’s cash flows do not include movements between items that constitute cash and cash equivalents, since these items are part of its cash management rather than its operating, investing, and financing activities. The investment of excess cash in cash equivalents is part of cash management.
Essentially, a cash flow statement is a chart that shows the change in cash position over time. As an example, a business’s balance sheet shows its cash balance on 31st Dec. 2003 as Rs. 20,000, while the cash balance on 31st Dec. 2004 shows Rs.30,000.In 2004, the amount of cash inflow was Rs.10,000 more compared to 2003.
An explanation of these inflows or outflows of cash is given in the cash flow statement. Such information is also helpful for future planning. The company is projected to have enough cash flow to pay its trade creditors, to make bank payments, and to pay dividends to shareholders.
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I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,
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