Cash flow statement is statement of cash inflows and outflows of operating, investing and financing activities of business. It helps the management to prepare budget for business. Cash inflow is defined as a receipt of non-cash item and cash payment of such item is called as cash outflow. Both are essential for any business. Cash flow statement involves three activities i.e.,
- Cash flow from operating activities
- Cash flow from investing activities
- Cash flow from financing activities
Cash can be categorised in to two types
- Cash in hand
- Deposits with bank
Deposits are again divided into short term deposits and long term deposits. Short term deposits are readily convertible in to cash and which are insignificant risk of change in the value.
Some examples of short term deposits:-
Bank overdraft, cash credit, short term deposits, marketable securities, bills, commercial papers, money market funds, investment in preference shares ( redeemable within three months).
Objectives of Cash flow statement:
- It is used for Short term financial planning
- It is used for Formulation of business policies
- It is used for Preparation of cash budget
- It is used for Assessment of cash flow from various activities of operating, investing and financial.
- It is used for Inefficient cash management
Limitations of cash flow statement:
- It is based on historical cost principle
- It is based on secondary data
- It is based on non-cash transactions
- No adherence of basic accounting principles
- It’s not substitute for income statement
Cash flow statement Format: