Cash Flow Statement

  • Cash Flow Statement is an important Financial Statement that shows inflows and outflows of cash and cash equivalents from its various activities.
  • Cash Flow Statement indicates the source of cash in a company and the use of cash by the company.

Cash/Cash Equivalent and Cash Flow

  • Cash comprises the cash in hand of a company and demand deposits with banks.
  • Cash Equivalent refers to instruments that are highly liquid and can be converted to cash instantly on-demand like Treasury Bills and Government Bonds. The value of these instruments has no considerable change in values.
  • Cash Flow involves the movement of cash inside and outside a company due to various activities of the company. When cash is received in exchange for an item, it is inflow and when a payment is done for an item, it is an outflow.
  • Whenever there is a cash outflow, assets increase and in case of cash inflow, assets decrease. The following illustrations will clarify the statement.

Illustration 1:

ABC Ltd. buys a conveyor belt for its factory for Rs. 100000. Here, Rs. 100000 is cash outflow as cash is going outside the company. However, an asset i.e. conveyor belt is created in the company.


Illustration 2:

XYZ Ltd. sells a unit of its factory for Rs. 1000000. Here, Rs. 100000 is cash inflow as cash is coming in the company. However, an asset i.e. unit of the factory is now reduced from the company.

Types of Cash Flow

The Accounting Standards divide the cash flow of a company into three categories as following:


1. Cash Flow from Operating Activities: Operating Activities are the principal revenue-generating activities of a company. For example, for a shoe manufacturing company selling shoes is an operating activity, and selling furniture is not an operating activity.
  • Cash Flow from operating activities includes payment for raw materials, a receipt for finished goods, etc.

2. Cash Flow from Investing Activities: Investing Activities are related to the purchase or sale of long-term assets for a company. Example, for a shoe manufacturing company purchase of a leather processor machine, is an Investing Activity.
  • Cash Flow from investing activities includes the payment to acquire a land/asset/machinery, a receipt for sale of an old asset, etc.


3. Cash Flow from Financing Activities: Financing Activities are related to debt, equity, and dividends of a company, these activities decide the change in the owner’s capital of a company. For example, An IPO is a Financing Activity for any company.
  • Cash Flow from financing activities includes cash received from the share issue, the dividend paid on equity, etc.
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