Preparation of cash flow statement - class-XII

Operating cost is the cost that is associated with the administration and maintenance of the business on day-to-day basis. It includes various costs such as cost of direct materials, direct labour, overhead costs.etc.

Source of funds results in the generation of cash for the company. Sale of investments results in the generation of cash which is regarded as source of funds. 

Owner investment, also called owner's investment or contributed capital, is the amount of assets that the owner puts into the company. 

According to working capital concept, the term 'funds' refers to net working capital (current assets-current liabilities). In the funds statement, inflow and outflow of net working capital is displayed.

Capital expenditure is a money spent by a business or organization on acquiring or maintaining fixed assets, such as land, buildings, and equipment.

Interest received in cash from loans and advances is recorded under investing activities. Interest paid on loans, debentures and advances is recorded under financing activities.

Interest paid and interest and dividends received are usually classified as operating cash flows for a financial enterprises. However, there is no consensus on the classification of these cash flows for other enterprises. It is more appropriate that interest paid and interest and dividends received are classified as financing cash flows and investing cash flows respectively, because they are cost of obtaining financial resources or returns on investments.

The fixed asset is bought as hire purchase is the cost of obtaining financial resources or returns on investments. Hence, interest element is classified under financing activities and loan element is classified under investing activities.

Investing activities related to purchase and sale of long-term and short-term assets or fixed assets such as machinery, furniture, land and building etc.

As per AS-3, financing activities are the activities that result in changes in the size and composition of the owners' capital and borrowings of the enterprises. Separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds to the enterprise.

A business reports net income under operating activities of cash flow statement. The company reports a loss from sale of a long-term business assets as part of its net income because it represents money spent that the business didn't recoup. The difference amount between loss and book value is reported under investing activities.

Companies may increase cash levels through financing and investing activities. 

A cash flow statement only tracks actual cash movements. Conversion of debentures into equity shares and the issuance of bonus shares are non-cash transactions; therefore, they do not appear in the cash flow statement.

As per AS-3, financing activities are activities are activities that result in change in the size and composition of the owners' capital and borrowings of the enterprises.

The owner's capital is the part of the accounting equation that represents the liquid cash that the company has earned, which it has on hand for daily operations as well as capital investments. When a business owner withdraws cash for personal use, these funds come out this capital account. Proprietor withdrawal cash or other asset from business recorded as credit to cash and a debit to the proprietor draws account i.e. cash in hand to decrease.  

The purchase of fixed assets involves the outflow of cash for long-term assets, which is categorized under investing activities in a cash flow statement.

Investing activities in a cash flow statement specifically relate to the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Under AS-3, dividends paid are classified as cash flows from financing activities because they represent the cost of obtaining financial resources (equity).

Redemption of debentures involves the repayment of borrowed capital, which is a cash outflow related to the company's capital structure, thus classified as a financing activity.

Fund flow statement is a statement of cash inflows and cash outflows. There are persons who feel that the funds are cash or working capital which represent the excess of current assets over current liabilities. The term flow means movement and includes both inflows and outflows of resources.And the funds used in the flow statement is a current assets.

Working capital is current assets less current liabilities. A decrease in the net current assets leads to increase in fund flow which needs to be included. Hence, It appear in sources.

A cash flow statement is based on past data (historical), which means it does not necessarily reflect the future cash position or current financial health, making it historical in nature.

According to accounting standards, cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

The cash flow statement provides information about the cash generated and used by an enterprise, which is essential for assessing its liquidity (ability to pay short-term debts) and solvency (ability to meet long-term obligations).

A cash flow statement only reports the movement of cash. It does not provide a comprehensive view of the overall financial position (assets, liabilities, and equity), which is the purpose of the balance sheet.

Investing activities involve the acquisition and disposal of long-term assets. Cash equivalents are specifically excluded from investing activities as they are part of the cash balance itself.

Operating activities are defined as the principal revenue-producing activities of the entity and other activities that are not investing or financing activities.

The main objective of preparing cash flow statement for a particular accounting period is to present information regarding inflow and outflow of cash, cash and cash equivalent generated , used, and net changes in cash flows.

Besides,

It presents the investment and financial activities of a concern for a particular period. It also fulfills the following objectives;

• Ensuring future positive cash flow of particular concern.
• Ensuring capacity of an organization to pay a dividend.
• Identifying non-cash items ensuring cash income and expenses of a concern.
• Comparing various items of the current year with those of last year.

Comparative study is an analytical tool used to interpret financial statements; it is not a limitation of the cash flow statement itself.

Cash flows represent the net movement of cash and cash equivalents, which includes both inflows (receipts) and outflows (payments).