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C H A P T E R

Cash Flow Statement

MEANING OF KEY TERMS USED IN THE CHAPTER

1. Cash Flow Statement It is the statement that shows flow of Cash and Cash Equivalents
during the period under report.
2. Cash Flows These are the inflows (receipts) and outflows (payments) of Cash and
Cash Equivalents.

3. Cash It comprises of Cash on Hand and demand deposits with banks.
4. Cash Equivalents These 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 short maturity period
of, say, three months or less from the date of acquisition,
i.e., purchase.
5. Operating Activities These are the principal revenue producing activities of the enterprise
and other activities that are not Investing and Financing Activities.
6. Investing Activities These are activities of acquisition and disposal of long-term assets
and other investments not included in cash equivalents.
7. Financing Activities These are the activities that result in change in the size and
composition of the owner’s capital (including Preference Share Capital
in the case of a company) and borrowings of the enterprise.
8. Extraordinary Activities These are incomes or expenses that arise from events or
transactions that are clearly distinct from the ordinary activities of the
enterprise and, therefore, are not expected to recur frequently
or regularly.

CHAPTER SUMMARY

• Cash Flow Statement is a statement that shows flow of Cash and Cash Equivalents during the period
under report. The statement shows net increase or decrease of Cash and Cash Equivalents under each
activity separately (operating/investing/financing) and collectively.
• Preparation of Cash Flow Statement: Cash Flow Statement is prepared following the steps as follows:
Step 1: Compute Cash Flow from Operating Activities.
Step 2: Compute Cash Flow from Investing Activities.
Step 3: Compute Cash Flow from Financing Activities.
Step 4: Cash flows under each activity, i.e., Operating Activity, Investing Activity and Financing Activity as
computed under Steps 1, 2 and 3 are added in Cash Flow Statement and the resultant amount
is Net Increase or Decrease in Cash and Cash Equivalents.