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3.2 Management Accounting (Section B)—ISC XII

SUMMARY OF THE CHAPTER

• Cash Flows are the inflows and outflows of Cash and Cash Equivalents.

• Cash Flow Statement is a statement that shows the flow of Cash and Cash Equivalents during a period.
This statement shows the net increase or net decrease of Cash and Cash Equivalents under each activity
(operating/investing/financing) and collectively.

• When does the Flow of Cash Arise?
Cash Flow arises when the net effect of transactions is either to increase or to decrease the amount of
Cash or Cash Equivalents.
• Cash means Cash in Hand and Demand Deposits with Bank.

• Cash Equivalents: Cash Equivalents are short-term, highly liquid investments that are readily convertible
into known amount of cash and which are subject to an insignificant risk of change in value. An investment
normally qualifies as cash equivalent only when it has a short maturity of, say, three months or less from
the date of acquisition.
Examples of Cash Equivalents are: (a) Treasury bills, (b) Commercial papers, (c) money market funds and
(d) Investment in Preference Shares redeemable within three months can also be taken as cash equivalents
if there is insignificant risk of change in its value.
Cash Equivalents also include Bank, Short-term Investments and Marketable Securities.

• Operating Activities: Operating Activities are the principal revenue producing activities of the enterprise
and other activities that are not investing or financing activities.
• Investing Activities: Investing Activities are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.

• Financing Activities: Financing Activities are the activities that result in change in the size and composition
of the owners’ capital (including Preference Share Capital in the case of a company) and borrowings of
the enterprise.

Notes: • Bank Overdraft and Cash Credit are Short-term Borrowings. They are shown under Financing
Activities in Cash Flow Statement.
• Current Investment is a part of Working Capital.

• Short-term Investments and Marketable Securities are part of Cash Equivalents.

• Proposed Dividend (also called final dividend) is the dividend proposed by the Board of Directors
of the company but it is paid only after it is approved, i.e., declared by the shareholders. Shareholders
have the power to approve it, not approve it or approve it at a lower rate. In effect, declaration of final
dividend is contingent on approval by the shareholders. Proposed Dividend is not accounted and shown
as short-term provision in the Balance Sheet because it is prescribed by revised Accounting Standard–4,
Contingencies and Events Occurring After the Balance Sheet Date that Proposed Dividend should
not be provided in the books of account but should be shown in the Notes to Accounts.