Cash flow refers to the movement of cash and cash equivalents into and out of a business. Transactions that increase cash and cash equivalents are known as cash inflows, while those that decrease them are called cash outflows. A statement that records these inflows and outflows over a specific accounting period is known as a Cash Flow Statement. It can be prepared using the comparative balance sheets of a company and classifies cash transactions into three categories: operating activities, investing activities, and financing activities. In India, the preparation of a Cash Flow Statement is governed by Accounting Standard (AS) 3 (Revised), issued by the Institute of Chartered Accountants of India (ICAI). Furthermore, under the Companies Act, 2013, the preparation of a Cash Flow Statement is mandatory for all companies except One Person Companies (OPCs) as specified under Section 2(40)
Classification of Business Activities in Cash Flow (AS - 3)
1. Operating Activities: The principal revenue-generating activities of a business and include transactions that help determine the net profit or net loss of an enterprise. In simple terms, these activities relate to the day-to-day operations of the business. The information required to calculate cash flow from operating activities is primarily obtained from the comparative balance sheets and the Profit and Loss Account of the current accounting period. Since the Profit and Loss Account may contain certain non-cash items, such as depreciation or amortisation, which do not involve any actual inflow or outflow of cash, these items are adjusted while calculating cash flow from operating activities. According to Accounting Standard (AS) 3, cash flow from operating activities can be determined using either the Direct Method or the Indirect Method.
The cash inflows and outflows under operating activities are as follows:
Cash Inflows: Cash Sales, Cash received from Trade Receivables (Debtors and B/R), Sale of Securities, Loans and Advances repaid by third parties, Cash received from Royalty, Insurance Claim received for loss of Stock, Fees and Commission, and Interest and Dividend received.
Cash Outflows: Cash Purchases, Cash paid to Trade Payables (Creditors and B/P), Purchases of Securities, Loans and Advances to third parties, Payment of Operating Expenses like salary, rent, wages, etc., Interest paid in cash and Tax Paid (unless the amount paid is identified as investing or financing activity).
2. Investing Activities: It include transactions related to the acquisition and disposal of long-term assets and investments that are not held for resale in the ordinary course of business. These activities involve the purchase and sale of fixed assets, such as land, buildings, machinery, and equipment, as well as investments in securities or other businesses. Cash flows arising from investing activities indicate the extent to which a company has invested in assets that are expected to generate future income and growth. Therefore, the sale and purchase of investments and fixed assets not intended for resale are classified under investing activities The cash inflows and outflows under investing activities are as follows:
Cash Inflows: Sale of Fixed Assets, Interest, Dividend and Rent received, Sale of Investments (Current and Non-current other than marketable securities), Insurance Claim received for the destruction of fixed assets, and Repayments of Loans and Advances received.
Cash Outflows: Purchase of Investments (Non-current and Current other than marketable securities), Purchase of Fixed Assets (Tangible or Intangible), Payment of capital gain tax, and Loans and Advances to third parties.
3. Financing Activities: Financing Activities refer to those activities that result in changes in the size and composition of a company's capital and borrowings. These activities include transactions related to raising funds from shareholders and lenders, as well as the repayment of such funds. Examples include the issue of shares, debentures, and long-term loans, repayment of borrowings, redemption of shares or debentures, and payment of dividends. Cash flows from financing activities help users of financial statements understand how a company finances its operations and growth through equity and debt sources. The cash inflows and outflows under financing activities are as follows:
Cash Inflows: Issue of Shares (Cash), Issue of Debentures (Cash), Issue of Bonds (Cash), Proceeds from Long-term or Short-term Borrowings, Increase in the balance of Bank Overdraft or Cash Credit A/c.
Cash Outflows: Repayment of Loans, Redemption of Preference Shares, Buy-back of Equity Shares, Redemption of Debentures for Cash, Decrease in the balance of Bank Overdraft or Cash Credit A/c, Payment of Interest and Dividend, and Payment of Dividend Tax.
Balance Sheet as per Schedule III of Companies Act, 2013
