What is the cash flow statement? why do we need to prepare?

The financial statement of the business included the three statements theses are Trading and Profit/loss account, Balance sheet and Cash flow statement. It is also a very important statement which shows the actual flow of cash i.e. inflow and outflow of the cash and cash equivalents.

What is the Cash flow Statement?

The cash flow statement is that statement which shows the inflow and outflow of cash and cash equivalents for the particular financial year.  The inflow of cash & cash equivalents means those transactions which increase in the balance of cash & cash equivalents and the outflow of cash & cash equivalents means those transactions which decrease in the balance of the cash & cash equivalents. Now you have the following questions in your mind:

What is cash & cash Equivalents?

The cash & cash equivalents include cash in hand, cash at bank, Marketable security, etc. The current investment also considered as marketable security if not specified it. 

What is included in the inflow of the Cash & Cash equivalents?

When the business enterprises received payments in cash or cash equivalents then this situation is known as the inflow of cash. The inflow of the Cash & Cash Equivalents includes the transactions related to the following terms: 

1. Cash Sales
2. Cash received from the Sundry Receivables
3. Cash Received from the incomes other than sales i.e. commission and royalty
4. Cash received from the sale of the following Assets
   1. Fixed Assets 
   2. Investment(other than Marketable Security)
   3. Security
5. Cash received From the Loans and Advances
6. Cash received from the proceeds of the following
   1. Equity Shares
   2. Preference Shares 
   3. Debentures

What is included in the outflow of the Cash & Cash equivalents?

when the business enterprises make payments by cash or cash equivalents, then this situation is known as the outflow of cash. The outflow of the Cash & Cash Equivalents includes the transactions related to the following terms: 

1. Cash Purchases
2. Cash paid to the Sundry Payables
3. Cash paid for all types of expenses: 
   1. Factory and Production Expenses 
   2. Office and Administrations Expenses 
   3. Selling and Distribution Expenses
4. Cash paid for the purchase of the following Assets
   1. Fixed Assets 
   2. Investment(other than Marketable Security)
   3. Security
5. Cash paid for Loans and Advances
6. Cash paid for the following
   1. Buyback of Equity Shares
   2. Redemption of Preference Shares 
   3. Redemption of Debentures

Why do we need to Prepare a Cash Flow Statement?

The Income statement/Trading & Profit/Loss account/ Profit/loss statement are prepared to know the actual profit and loss of the business. It means it includes the non-cash items also. So with the help of Profit/loss statement, we can’t find out the actual cash inflow and outflow in/from the business in the particular financial year. 

The Balance Sheet shows all assets, liabilities and balance of capital. The balance of all above includes the carry forward balance from the previous year so it also can’t show the actual inflow or outflow of the business. 

That’s why to know the actual inflow and outflow of the business in the particular financial year we need to prepare cash flow statement. This is now the part of the financial statement of the company as per the company law. 

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References: –

1. Class +2 Accountancy by Sultan Chand & Sons (P) Ltd.