Meaning and objectives of cash flow statement - class-X

The sum of discounted cash flows for a project, minus the initial investment, is the definition of the Net Present Value (NPV).

A Cash Flow Statement provides a detailed breakdown of the sources and uses of cash, explaining why the cash balance increased or decreased over a period.

Cash flow refers to the net amount of cash and cash equivalents being transferred into and out of a business.

Cash and cash equivalents include highly liquid assets such as cash on hand, bank balances, marketable securities, and short-term investments that can be converted to cash quickly.

In financial modeling, cash outflows represent money leaving the project and are denoted by negative numbers to distinguish them from cash inflows.

Purchasing a fixed asset is a cash outflow because it requires spending cash to acquire an asset. The other options involve receiving cash.

Free Cash Flow (FCF) = NOPAT - Net Investment. Given FCF = 17000 and Net Investment = 10000, then 17000 = NOPAT - 10000. Therefore, NOPAT = 17000 + 10000 = 27000.

Accounting Standard 3 (AS-3) is the standard specifically mandated for the preparation and presentation of Cash Flow Statements. AS-6 relates to depreciation, AS-2 to inventory valuation, and AS-13 to accounting for investments.

Free Cash Flow (FCF) is calculated as Net Operating Profit After Taxes (NOPAT) minus Net Investment in Operating Capital. Here, 8000 - 5000 = 3000.

Amount received from debtors $Rs 74,000$ will be received in cash. This is the only transaction that results in flow (inflow) of cash into the business.
Why other options are incorrect? 
1. Deposit of cash into bank and withdrawal of cash from bank are merely the cash management activities of the business. They do not involve any cash flow. 
2. Conversion of debentures into equity shares is a mere change in capital structure of the company. It does not result in cash flow. 
Hence, the correct answer is option (iii). 

Depreciation is a non cash item but to know the profitability of the organization, it is charged to profit & loss account. Due to charge of depreciation, organization gets the tax benefit. 

Deferred tax payments are accounting adjustments that do not involve an immediate cash outflow, thus they are treated as non-cash charges when reconciling net income to cash flow from operations.

The statement of changes in financial position (sometimes called a “cash flow statement”) shows a company's net cash flow in a given period of time. Because it also indicates where the cash flowed from or to, it is often referred to as the “sources and uses of cash statement.”

(a) A cash flow statement is different from a cash budget. A cash flow statement shows the cash inflows and outflows which have already taken place during a past time period.

• The payback reciprocal is a crude estimate of the rate of return for a project or investment. 
• The internal rate of return (IRR) is a discounting cash flow technique which gives a rate of return earned by a project.
• A benefit-cost ratio (BCR) is a ratio used in a cost-benefit analysis to summarize the overall relationship between the relative costs and benefits of a proposed project.
  
• The terminal value method is an improvement over the net present value method of making capital investment decisions. 
  

Cash is a legal tender or coins that can be used to exchange goods,debt or services. 

Operating and non-operating cash flow are inflows and outflows of cash that are related or not related to the day-to-day, ongoing operations of a business. These non operating cash flows are associated with cash flows from investing and cash flows from financing on a company's statement of cash flows.

Statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, financing activities. 

Cash flow is calculated by making certain adjustments to net income by adding or subtracting differences in revenue, expenses and credit transactions resulting from transactions that occur from one period to the next.  These adjustments are made because non-cash items are calculated into net income and total assets and liabilities. 

AS-3, issued by the ICAI in June 1981, which dealt with a statement showing 'changes in financial position' (Fund Flow Statement), has been revised and now deals with the preparations of cash flow statement. The revised AS-3 has made it mandatory for all listed companies to prepare and present a cash flow statement along with other financial statements on annual basis, Hence, it may be noted that fund flow statement is no more considered relevant in accounting and so not discussed.  

Cash flow statement helps users to assess the impact of the activities on the financial position of an enterprise and so on its cash and cash  equivalents.

A cash flow statement shows inflow and outflow of cash and cash equivalents from various activities of a company during a specific period. 

A private limited company with paid up share capital of less than 50 lakh rupees or such higher amount as may be prescribed (not exceeding 5 crore rupees) or with a turnover of less than 2 crore rupees or such higher amount as may be prescribed (not exceeding 20 crore rupees) is not required to prepare cash flow statements while preparing financial statements at the end of the financial year.

Cash and cash equivalent are the amount of currency on hand as well as demand deposits with banks or financial institutions. Includes other kind of accounts that have the general characteristics of demand deposits. Also includes short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they presents insignificant risk of changes in value because of changes in interest rates.  

Cash flow statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities. It shows the details of cash generating and utilization activities of a company during a given period of time. 

Cash flow statements analyzes cash transactions which have already occured whereas cash budget shows the cash movement of the future period.

When a cash payment is received from the debtor, cash is increased and the accounts receivable is decreased. When recording the transaction, cash is debited, and accounts receivable are credited.

To calculate the present value of real cash flows, one must use a real discount rate, which excludes the effects of inflation. Using a money (nominal) discount rate would be appropriate only for nominal cash flows.