Benefits of Cash Flow Information :-

1. Information about the cash flows of an entity is useful in assisting users to predict the future cash requirements of the entity, its ability to generate cash flows in the future and to fund changes in the scope and nature of its activities. A cash flow statement also provides a means by which an entity
can discharge its accountability for cash inflows and cash outflows during the reporting period.

2. A cash flow statement, when used in conjunction with other financial statements, provides information that enables users to evaluate the changes in net assets/equity of an entity, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. It also
enhances the comparability of the reporting of operating performance by different entities because it eliminates the effects of using different accounting treatments for the same transactions and other events.

3. Historical cash flow information is often used as an indicator of the amount, timing and certainty of future cash flows. It is also useful in checking the accuracy of past assessments of future cash flows.

Scope Of Cash Flow Statements :-

1. An entity which prepares and presents financial statements under the accrual basis of accounting should prepare a cash flow statement in accordance with the requirements of this Standard and should present it as an integral part of its financial statements for each period for which financial statements are presented.
2. Information about cash flows may be useful to users of an entity’s financial statements in assessing the entity’s cash flows, assessing the entity’s compliance with legislation and regulations (including authorized budgets where appropriate) and for making decisions about whether to provide resources to, or enter into transactions with an entity. They are generally interested in how the entity generates and uses cash and cash equivalents. This is the case regardless of the nature of the entity’s activities and irrespective of whether cash can be viewed as the product of the entity, as may be the case with a public financial institution. Entities need cash for essentially the same reasons, however different their principal revenue producing activities might be. They need cash to pay for the goods and services they consume, to meet ongoing debt servicing costs, and, in some cases, to reduce levels of debt. Accordingly, this Standard requires all entities to present a cash flow statement.
3. This Standard applies to all public sector entities other than Government Business Enterprises.
4. Government Business Enterprises (GBEs) are required to comply with International Accounting Standards (IASs) issued by the International Accounting Standards Committee. The Public Sector Committee’s Guideline No. 1, “Financial Reporting by Government Business Enterprises” notes that IASs are relevant to all business enterprises, regardless of whether they are in the private or public sector. Accordingly, Guideline No. 1 recommends that GBEs should present financial statements that conform, in all material respects, to IASs.

Objective The cash flow statement :-

The cash flow statement identifies the sources of cash inflows, the items on which cash was expended during the reporting period, and the cash balance as at the reporting date. Information about the cash flows of an entity is useful in providing users of financial statements with information for both accountability and decision making purposes. Cash flow information allows users to ascertain how a public sector entity raised the cash it required to fund its activities and the manner in which that cash was used. In making and evaluating decisions about the allocation of resources, such as the sustainability of the entity’s activities, users require an understanding of the timing and certainty of cash flows. The objective of this Standard is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities.

The cash flow from Operating Activities :-

o The cash flow from operating activities section of a cash flow statement can be presented using the direct format or the indirect format. The bottom line is the same, but the two begin at different points. Companies are free to use either format. Below is an example of both formats.
o Direct method: shows how much cash came in for sales and how much cash went out for inventory and other operating expenditures.
o Indirect method: starts with net income as a figure that summarizes most of the cash transactions for operating activities in a firm. However, net income also includes transactions that ere not cash, so we must eliminate the non-cash transactions from the net income figure to arrive at an accurate presentation of cash flow from operating activities.

Specimen Of Cash Flow Statement :-

Format of the Cash Flow Statement :-

• The cash flow statement is divided into three sections:
o Cash flow from operating activities: shows the results of cash inflows and outflows related to the fundamental operations of the basic line or lines of business in which the company engages. (Example: cash receipts from the sale of goods or services and cash outflows for purchasing inventory and paying rent and taxes.)
o Cash flow from investing activities: associated with purchases and sales of non-current assets (Example: building and equipment purchases or sales of investments or subsidiaries.)
o Cash flow from financing activities: associated with financing the firm (Example: selling and paying off bonds and issuing stock and paying dividends)

• Exceptions
o Short-term marketable securities are treated as long-term investments and appear in cash flow from investing activities
o Short-term debt is treated as long-term debt and appears in cash flow from financing activities
o Although dividends are handled as a cash outflow in the cash flow from financing activities section, interest payments are considered an operating outflow, despite the fact that both are payments to outsiders for using their money.

CASH FLOW STATEMENTS :-

Cash flow statement may provide considerable information about what is really happening in a business beyond that contained in either the income statement or the balance sheet. Analyzing this statement should not present an intimidating task, instead it will quickly become obvious that the benefits of understanding the sources and uses of a company’s cash far outweigh the costs of undertaking some very straightforward analyses.