The Cash Flow Statement is a vital financial tool that shows how cash moves in and out of a business during a specific period. Unlike profit, which can be affected by non-cash items, the cash flow statement focuses purely on liquidity — the actual cash available to meet obligations, invest, and grow. As per Accounting Standard 3 (AS-3), companies are required to prepare a cash flow statement to provide a clear picture of their cash position.
Download UNIT 3 – Cash Flow Statement as per AS-3 Notes
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Importance of Cash Flow Statement
A cash flow statement is important because it:
Helps assess a company’s liquidity and solvency.
Shows whether profits are actually translating into cash inflows.
Assists in planning for future cash needs.
Improves decision-making related to investments, financing, and operations.
Methods of Preparation
AS-3 allows two methods of preparing the cash flow statement:
Direct Method – Lists actual cash receipts and payments.
Indirect Method – Starts with net profit and adjusts for non-cash items and changes in working capital.
In practice, the indirect method is most commonly used.
Classification of Cash Flows
According to AS-3, cash flows are classified into three main activities:
Operating Activities
These are the principal revenue-generating activities of the business.
Examples:Cash received from sales
Cash paid to suppliers and employees
Payment of operating expenses and taxes
Operating cash flows show whether the company’s core activities are generating enough cash.
Investing Activities
These involve the acquisition and disposal of long-term assets and investments.
Examples:Purchase or sale of property, plant, and equipment
Investment in shares, bonds, or other companies
Proceeds from the sale of assets
Investing cash flows reflect the company’s growth and expansion strategies.
Financing Activities
These include cash flows related to raising or repaying capital.
Examples:Issue of shares or debentures
Raising or repayment of loans
Payment of dividends
Financing cash flows show how a business funds its operations and growth.
Cash Flow vs. Fund Flow Statement
It is important to distinguish between these two:
Cash Flow Statement (AS-3): Deals strictly with cash and cash equivalents movement.
Fund Flow Statement: Focuses on changes in working capital (sources and uses of funds).
While fund flow provides a broader picture of financial resources, the cash flow statement is more practical for day-to-day liquidity management.
Conclusion
The cash flow statement as per AS-3 is a crucial tool for financial analysis. By examining operating, investing, and financing activities, stakeholders can understand how well a company manages its cash. While profitability is important, it is cash flow that ensures survival, growth, and long-term stability.