The Financial Statements of an Organisation provides the operational results and financial position of an Organisation.  The operational results shows the surplus or deficit/ profit or loss on accrual basis of accounting (Incomes and Expenses are recorded in the books of business on due basis rather than when they are actually received or paid). In such case, it is difficult to make out how much of the profits have resulted in actual cash flows and how much of them are still due as receivables. Similarly, there are many expenses which are recorded on due basis but their actual payment is still due till the reporting date.

Moreover, there are various other cash inflows and outflows which do not find place in the Income Statement i.e; Capital Receipts such as proceeds from the issue of Capital, Borrowings or in the form of Loans and outflows in the form of repayment of Loans and Borrowings or on account of acquisition of Fixed Assets. That is why, it is also important, apart from the knowledge of profits or losses of the business, to know the position of cash flows in the organisation in the form of their source of occurrence and areas of disposal as well as the timings where these cash flows usually takes place. That is why a separate statement apart from financial statements, called as Cash Flow statement is prepared which shows the inflow and outflow of Cash from different sources or activities.

In the statement of cash flows, all the activities of the enterprise are divided into three categories namely, Operating activities, Investing activities and Financing activities. The net cash flow of the enterprise from these activities is added to the opening balance of cash & cash equivalents at the beginning of the year and the figure derived is the closing balance of cash & cash equivalent at the end of the reporting period. This closing balance is identical with the figure of cash & cash equivalents in the Statement of Financial Position or Balance Sheet of the enterprise.

Now we will discuss the salient features and objectives of Cash Flow Statement:-

 

Objectives of Cash Flow Statement:-

1. to ascertain the sources from which the inflow of cash takes place through operating, investing & financing activities.
2. to ascertain the areas from where the outflow of cash takes place on account of operating, investing & financing activities.
3. to check the position of cash & cash equivalents in the enterprise at different points of time.

 

Now we will see how cash flows are divided into different activities:

 

1. Cash Flow from Operating activities:

Operating activities are the principle revenue producing activities of an enterprise. These activities or operations are those for which the enterprise is being established. Revenue earned from these activities are their principle source of revenue. The Operating activities of the enterprise are:

 

1. I) in case of Non-financial companies:
2. Revenue from sale of Goods or services.
3. Expenses for purchases of goods for resale or directly connected with rendering of services.
4. Other revenues directly affiliated to the principle revenue producing activities of the business.
5. Expenses on Employees benefit, Administration of the business, maintenance and running of assets used in the business.

 

1. II) In case of Financial companies:
2. Revenue in the form of interest on loans given.
3. Interest received on investments made by the company.
4. Interest paid on loans borrowed for financing money lending operations.
5. Interest paid on deposits of public made in the company.

 

So, it is quite clear, that what is an operating activity for one business may not be the one for another business.

We may categorize Operating, Investing and Financing activities for Financial & Non-financial Companies:

	Cash Inflows	Cash Outflows
1.	Receipts from sale of goods or rendering of services	Money paid on purchases of goods for resale
2.	Money received from Trade Receivables	Money paid to Trade payables
3.	Money received as Royalties, Fees	Money paid as Royalties, Fees, Salaries or Commission
4.	Income Tax Refunds	Payment of Income Tax

1. I) Non – Financial Companies:

 

 

 

 

 

 

 

 

1. II) Financial Companies:

 

	Cash Inflows	Cash Outflows
1.	Money received from interest and dividends	Amount paid as interest and dividends
2.	Money received from sale of Securities	Amount paid on purchase of Securities

 

 

 

 

 

 

2. Cash flow from Investing activities

	Cash Inflows	Cash Outflows
1.	Sale of assets used in the business	Non-Financial Companies
2.	Sale of Securities held as investments	Purchase of assets to be used in the business
3.	Interest & Dividends on investments	Purchase of Securities as investments

Financial and Non-Financial Companies

 

 

 

 

3. Cash flow from Financing activities

Financial and Non-Financial Companies

	Cash Inflows	Cash Outflows
1.	Proceeds from issue of Shares and Debentures	Money paid on redemption of Shares and Debentures
2.	Money received in the form of Loans and Borrowings	Money paid as repayment of Loans and Borrowings