Undestanding cash flow statement

Roshankumar S Pimpalkar
Email: roshankumar.2007@rediffmail.com


It is a statement which provides information
about the historical changes in cash and
cash equivalent of the entity.

It provides the user of financial information
with a basis on which to assess the ability of
the entity to generate cash and its needs to
utilise that cash.


A statement of cash flows classifies cash
flows during the period into:

•Operating activity

•Investing activity and

•Financing activity


Cash comprises cash on hand and demand deposits

Cash equivalents are held for meeting short term cash
commitments rather than for investment or other
purpose. For an investment to qualify as cash equivalent
it must be:

•Readily convertible to a known amount of cash i.e. it
has short maturity and
•Subject to an insignificant risk of changes in value


Operating Activities are the principal revenue
producing activities of the enterprise and other
activities that are not investing or financing
activities.


Investing Activities are the acquisition and
disposal of long-term asset and other investments
not included in cash equivalent.


Financing Activities are the activities that result in
changes in the size and composition of equity
capital and borrowings of the enterprise.


Operating Activities

It indicates to what extent the operations of entity
have generated cash flows which are available
for use in other activities.


Investing Activities

It indicates extent of expenditure made in
resources intended to generated future income
and cash flows.


Financing Activities

It is useful in predicting the claims that outside
providers of capital will have over the future cash
flows.


Operating Activities

Since this activity represents internal cash
generation it is always better to have positive and
increasing cash flows from operating activity.

Negative cash flows from this activity indicates
that the entity is incurring cash losses


Investing Activities

Since this activity indicates flow of investment in
and out of business for future profit generation, it
is better to have negative cash flow here i.e.
outflow.

Positive cash flow or inflow of cash in this activity
indicates that the entity is selling its resources to
generate cash, which is not good.



This activity indicates change in capital structure
i.e. equity or borrowing. While there is a limit to
increase the equity capital (authorised share
capital) the major volatile component here is
borrowing



Negative cash flow i.e. outflow in this activity
would mean that the entity is reducing its debt,
there by reducing interest burden which is quite
good.

Positive cash flow here indicates increasing debt
burden, which should be avoided.


Comparison of cash flow statement of more than
one year can easily help to assess the solvency
and liquidity position of an entity.

Undestanding cash flow statement

Undestanding cash flow statement

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Undestanding cash flow statement