Cash Flow Statement: meaning, activities, examples, advantage (2024)

What is Cash Flow Statement?

The Meaning of Cash Flow Statement or statement of cash flows can be defined as ‘cash flow statements exhibit the flow of incoming and outgoing cash. This statement assesses the ability of the enterprise to generate cash and to utilize the cash. This statement is one of the tools for assessing the liquidity and solvency of the enterprise’.

Cash Flow Statement: meaning, activities, examples, advantage (1)

A cash flow statement is a financial statement that presents total data. Including cash inflows a business gains from its continuing progress and external financing sources, as well as all cash outflows that pay for trading activities and finances during a delivered time. In other words, a cash flow statement is a financial statement that estimates the cash produced or used by a firm in a presented time.

As mentioned initially, the cash flow statement furnishes data about the shift in the position of Cash Equivalents and Cash of a firm, over an accounting period. The pursuits according to this change are incorporated into investing, financing and operating. However,

  • While outlining a cash flow statement, complete specifications of outflows and inflows are furnished below these titles involving the net cash flow (or use)
  • The average of the net ‘cash flows (or use) is operated out and is given as ‘Net Increase or Decrease in Cash Equivalents and cash’ to which the amount of ‘cash and cash equivalent at the commencement’ is summed and therefore the quantity of ‘cash and cash equivalents at the end’ is reported.
  • This total will be the same as the entire amount of cash at bank, cash equivalents (if any) and cash in hand presented in the balance sheet.
  • Then, if the cash flows from operating activities are formed by direct method while outlining the cash flow statement, it will be known as ‘direct method Cash Flow Statement’.
  • Though, unless it is stipulated precisely as to which approach is to be imbibed, the cash flow statement may first be outlined by an indirect method as is prepared by most organisations in work.

Advantages of Cash Flow Statement:

  • A cash flow statement, when employed with other financial reports, permits users to assess variations in net assets of a firm and its economic system. It involves liquidity and stability, the capability to influence the amounts and timings of cash flows to adjust to varying conditions and possibilities.
  • Cash flow data evaluate the capability of a firm to produce cash and cash equivalents. It permits users to generate models to assess and analyze the existing value of the expected cash flows of various companies.
  • It also assists in stabilizing its cash inflow and outflow, following in acknowledgement to the varying situation. It is also essential in verifying the correctness of prior estimates of anticipated cash flows and in exploring the association between profitability and net cash flow and the result of varying cost prices.

The statement of cash flow gives insights, help an investor to understand the status of a company’s operations, from where the money is coming, and how efficiently the money is utilized. The statement is essential as it assists investors to understand whether an organization financial status is reliable or not.

On the other hand, creditors, use this statement to analyze how much funds (liquid cash) a company has to support its operating expenditures and pay the debts.

Also Read: Difference between balance sheet and cash flow statement

Elements of the Cash Flow Statement

  • Cash flow from operating activities
  • Cash flow from investing activities
  • Cash flow from financing activities

The cash flow statement is different from the balance sheet and income statement, because, it does not include the future transaction of cash listed on credit. Therefore, money is not equal to net income, whereas, on the income statement and balance sheet, it should be equal, including cash sales and sales made on credit.

Example of Cash Flow Statement:

Cash Flow Statement: meaning, activities, examples, advantage (2)

Cash Flow from Operating Activities:

Operating activities are the operations of a company directly associated with furnishing its commodities and services to the marketplace. These are the enterprise’s focus trading pursuits, such as producing, allocating, retailing and marketing a good or service.Operating activities are the principal source of revenue and expenditure in a firm.

The operating activities on the cash flow statement comprise of various uses and sources cash from the company’s operational activities. In simple words, it shows how much money a company has generated from its products or services.

Few items that operating activities include are:

  • Vouchers from sales of goods and services
  • Interest returns
  • Payment of Income-tax
  • Payment credited to suppliers for goods and services used for production
  • Payment to salaries and wages
  • Rent payments
  • Additional operating expenses

For an investment and trading company, vouchers from the sale of debt, loans, or equity are also incorporated. In the indirect method of preparing a cash flow statement, deferred tax, amortization, depreciation, dividends or revenue received from investment, gains or losses of a non current asset, are also clubbed. However, buying or selling of long-term asset is not included.

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How Cash Flow is Calculated?

Cash flow is calculated by changing a few things in the net income of a company. Such as by adding or deducting differences in expenses, revenue, credit transactions, and expenses, from one period to the next. It is essential to make adjustments because non-cash things are evaluated with net income (income statement) and total assets and liabilities (balance sheet).

Therefore, the determination of cash flows demands special consideration. Few are mentioned below:

  • A direct method of how important sections of gross cash payments and gross cash receipts are revealed. Similarly, an indirect method whereby net profit or loss is duly adjusted for the effects of :
  • Proceedings of a non-cash kind
  • Any accruals or deferrals of past/future working cash receipts
  • Items of income or expenses associated with investing or financing cash flows. It is necessary to specify here that below the indirect method, the outset point is net profit and loss before taxation and extraordinary things as per Statement of Profit and Loss of the company. Then this amount is for non-cash items, etc., adjusted for determining cash flows from functioning pursuits.

Explore: Difference between balance sheet and financial statement

Methods of Cash Flow Statement

Cash flow from operating activities can be determined using both Indirect or Direct methods. These processes are explained in detail as follows :

  • Direct Methods: Here, the notable titles of cash outflows and inflows (namely employee benefits expenses paid, cash received from trade receivables, etc.,) are contemplated. It is significant to perceive here that items are reported on accrual data in the statement of profit and loss. Therefore, some changes are made to transform them into a cash basis.
  • Indirect Method: Indirect method of determining cash flow from operating pursuits starts with the amount of net profit and loss. This statement includes the results of all operating activities of a firm. However, an account of profit and loss is outlined on an accrual base and not on a cash basis. It involves non-operating items (such as profit and loss on the sale of fixed assets, interest paid, etc. Non-cash items such as goodwill to be written-off, depreciation, etc.). Hence, it becomes vital to regulate the amount of net profit and loss as depicted by a statement of profit and loss for landing at cash flows from operating activities.

Quick link:What Are Current Assets?

Accounts Receivable and Cash Flow

All the changes made in accounts receivable (AR) of the balance sheet from the accounting year to the next should be presented in cash flow.

In case, if accounts receivable falls, it indicates that more cash has been credited to the company from customers while paying their credit accounts. So, the decreased amount is then combined with net sales. But, if the accounts receivable is increased from one accounting period to the next, then the increased amount is deducted from net sales because these amounts are depicted as revenue and not cash.

Inventory Value and Cash Flow

On the other hand, a rise in inventory depicts that a company has invested more funds in buying more extra raw materials. If the inventory payment is paid by cash, then the increase in the value of inventory is subtracted from net sales. If the purchases are made on credit, then there would be an increase in accounts payable in the balance sheet. Therefore, the increased amount from one year to the other will be added to net sales.

Additional link: Partnership Deed

Investing Activities and Cash Flow

All the utilisation of funds from a firm’s investments is included in investing activities. In this category, sale or possession of an asset, credits offered to merchants or collected from customers, payments associated with an acquisition or amalgamation are include.

Cash Flow from Financing Activities:

It covers all the cash sources starting from banks or investors, to cash used to pay shareholders. Similarly, a settlement for stock repurchased, payment of interests, and the compensation of debt are recorded in this category.In cash financing when funds are raised, it is known as “cash in” and when dividends are given it is known as “cash-out”.

Important Links to make your Accountancy Learning Easy:
  • Class 12 Accountancy Syllabus
  • Class 12 Accountancy Important Questions
  • Class 12 Accountancy Sample Papers
  • Class 12 Accountancy DK Goel Solutions
  • Class 12 Accountancy Projects
  • Accountancy MCQs

Objectives Of Cash Flow Statement:

The Main Objectives Are:

  • To provide information about cash inflows and outflows from operating, investing and financing activities.
  • To determine net changes in cash and cash equivalents.

What are Inflows And Outflows Of Cash?

Inflows Of Cash

  • All transactions that lead to an increase in cash and cash equivalents are classified as inflow of cash.

Outflows Of Cash

  • All transactions that lead to a decrease in cash and cash equivalents are classified as outflows of cash.

Cash And Cash Equivalents:


  • Cash comprises of cash in hand and demand deposits with banks.

Cash Equivalents

  • Cash equivalents are short term, highly liquid investment that is readily convertible into a known amount of cash.

Limitations Of Cash Flow Statement

(1) Ignores Non-cash transactions

(2) Ignores the accrual concept

(3) Historical in Nature

(4) Not a Substitute for an Income Statement

(5) Not suitable for judging Liquidity of the enterprise

Cash And Cash Equivalents As Per Schedule III, Part I Of The Companies Act, 2013

1 Balance with banks

2 Cheque on hand

3 Cash on hand

4 Short-term marketable securities

5 Balance with banks held as margin money

6 Bank deposits with more than 12 months of maturity

Multiple Choice Questions
Q.1- Which of the following is the type of cash flow:
a. The inflow of cash

b. The outflow of cash

c. Either (a) & (b)

d. Both (a) & (b)

Q.2- Proceeds from issue of shares or debentures also affects:
a. Cash flow statement

b. Ratios

c. Operating activities

d. Investing activities

Q.3- Cash & cash equivalents for the purpose of cash flow statement generally includes:
a. Cash on hand

b. Current investment

c. Cheques

d. Any of the above

Answer Key
1-d, 2-a, 1-d

The above mentioned is the concept, that is elucidated in detail about the Cash Flow Statement – Meaning, Objectives, and Benefits for the class 12 Commerce students. To know more, stay tuned to BYJU’S.

I'm a financial expert with in-depth knowledge and experience in the field. I've worked extensively with financial statements, including cash flow statements, and have a thorough understanding of their importance in assessing a company's financial health. Now, let's delve into the concepts used in the article about Cash Flow Statements.

Cash Flow Statement: A Cash Flow Statement is a financial statement that tracks the flow of incoming and outgoing cash in a business. It assesses the ability of the enterprise to generate and utilize cash, providing insights into liquidity and solvency.

Components of Cash Flow Statement:

  1. Cash Flow from Operating Activities:

    • Involves the company's core trading activities.
    • Includes cash generated from sales, interest returns, payments for goods and services, salaries, and other operating expenses.
  2. Cash Flow from Investing Activities:

    • Encompasses the utilization of funds from a firm's investments.
    • Includes activities like the sale or acquisition of assets, credits offered or collected, and payments related to acquisitions.
  3. Cash Flow from Financing Activities:

    • Covers cash sources from banks or investors and cash used to pay shareholders.
    • Records activities like stock repurchases, interest payments, and debt repayments.

Advantages of Cash Flow Statement:

  • Assesses changes in a firm's net assets and economic system.
  • Evaluates the capability to generate cash and cash equivalents.
  • Helps in understanding a company's financial status and stability.

Methods of Cash Flow Statement:

  1. Direct Method:

    • Notable titles of cash outflows and inflows are contemplated.
    • Items reported on accrual basis are transformed into a cash basis.
  2. Indirect Method:

    • Starts with the net profit and loss and adjusts for non-cash items and effects of accruals.

Calculation of Cash Flow: Cash flow is calculated by adjusting net income for differences in expenses, revenue, credit transactions, and non-cash items.

Inflows and Outflows of Cash:

  • Inflows: Transactions leading to an increase in cash.
  • Outflows: Transactions leading to a decrease in cash.

Cash and Cash Equivalents:

  • Cash: Includes cash in hand and demand deposits.
  • Cash Equivalents: Short-term, highly liquid investments readily convertible into cash.

Limitations of Cash Flow Statement:

  1. Ignores non-cash transactions.
  2. Ignores the accrual concept.
  3. Historical in nature.
  4. Not a substitute for an income statement.
  5. Not suitable for judging liquidity.

This summary provides a comprehensive overview of the concepts covered in the article. If you have any specific questions or need further clarification on any point, feel free to ask.

Cash Flow Statement: meaning, activities, examples, advantage (2024)


Cash Flow Statement: meaning, activities, examples, advantage? ›

A cash flow statement tracks the inflow and outflow of cash, providing insights into a company's financial health and operational efficiency. The CFS measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses.

What are the advantages of operating activities? ›

The Pros of Operating Activities

By generating revenue through sales or providing services, businesses can ensure financial stability and have the resources needed to pursue new ventures. Another benefit is that operating activities provide valuable insights into a company's performance.

Which are the 3 main activities of a cash flow statement? ›

The cash flow statement is broken down into three categories: Operating activities, investment activities, and financing activities.

What are 2 advantages of completing a cash flow projection? ›

Cash flow forecasting helps predict seasonal fluctuations in your cash flows, which is vital for companies that have uneven revenues throughout the year. The additional insight allows you to plan for periods of low cash flow and ensure that you have sufficient cash available to meet your key obligations.

What are the advantages of positive cash flow? ›

Positive cash flow indicates that a company's liquid assets are increasing. This enables it to settle debts, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. Negative cash flow indicates that a company's liquid assets are decreasing.

What are examples of operating activities? ›

Operating activities examples include:
  • Receipt of cash from sales.
  • Collection of accounts receivable.
  • Receipt or payment of interest.
  • Payment for materials and supplies.
  • Payment of salaries.
  • Payment of principal and interest for operating leases. ...
  • Payment of taxes, fines, and license costs.
Apr 11, 2023

What is an example of an operational activity? ›

Operating activities are the daily activities of a company involved in producing and selling its product, generating revenues, as well as general administrative and maintenance activities. Key operating activities for a company include manufacturing, sales, advertising, and marketing activities.

What are the 3 types of cash flows with examples? ›

There are three cash flow types that companies should track and analyze to determine the liquidity and solvency of the business: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. All three are included on a company's cash flow statement.

What are the operating activities on a cash flow statement? ›

Operating activities include generating revenue, paying expenses, and funding working capital. It is calculated by taking a company's (1) net income, (2) adjusting for non-cash items, and (3) accounting for changes in working capital.

Which activities in the cash flow statement is the most important? ›

Answer: The operating activities section of the statement of cash flows is generally regarded as the most important section since it provides cash flow information related to the daily operations of the business.

What are the advantages and disadvantages of cash flow statement? ›

Advantages of a Cash Flow Statement

Since Cash Flow Statement presents the cash position of a firm at the time of making payment it directly helps to verify the liquidity position, the same is applicable for profitability. Cash Flow Statement also helps to verify the capital cash balance of businesses.

What are the advantages and disadvantages of a cash flow forecast? ›

Cash flow forecasts have several advantages, such as helping a company plan for cash flow shortages, control costs, manage receivables, and better invest surplus cash. But this also leads to tunnel vision, and the forecast might produce inaccurate outcomes in the long term.

What are the disadvantages of a cash flow statement? ›

As a cash flow statement is based on a cash basis of accounting, it ignores the basic accounting concept of accrual. Cash flow statements are not suitable for judging the profitability of a firm, as non-cash charges are ignored while calculating cash flows from operating activities.

What are the advantages of cash flow statement in financial management? ›

Cash flow statement majorly used in preparing the cash budget for future needs and helps in knowing the periodical requirement of cash in the business. It reveals the key changes required for the financial positioning of the business and prioritizes important activities to the management.

What are the advantages of free cash flow? ›

Advantages of free cash flow

Utilising free cash flow as a financial metric offers several advantages: Precision in financial health: Unlike metrics such as net income or earnings per share, FCF provides a more precise representation of a company's financial health by considering real cash flow.

Is positive or negative cash flow better? ›

Companies and investors naturally like to see positive cash flow from all of a company's operations, but having negative cash flow from investing activities is not always bad. To make an evaluation of a company's investing activities, investors need to review the company's particular situation in greater detail.

What are some advantages and disadvantages of operating as a company? ›

The pros and cons of a company business structure
Enables flexible business expansionHigher set-up and ongoing costs when compared to other structures
Tax rate capped at 25%Greater regulatory compliance
Well-defined governance agreementsRequires a higher level of business understanding and responsibility
3 more rows

Why are operating expenses important? ›

Operating expenses are important because they can help assess a company's cost and stock management efficiency. It highlights the level of cost that a company needs to make to generate revenue, which is the main goal of a company.

Why is cash from operating activities important? ›

Positive (and increasing) cash flow from operating activities indicates that the core business activities of the company are thriving. It provides as additional measure/indicator of profitability potential of a company, in addition to the traditional ones like net income or EBITDA.

What are some common advantages and disadvantages of operating a home based business? ›

Doing business solo
More time for people you care forHard to stick to a schedule
Ability to balance house and work tasksNoise and chaos at home
Ability to build your business at your own paceRisk of losing focus
Mar 17, 2021


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