Cash Flow Statement Chapter 6 Class 12 NCERT Textbook PDF

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Cash Flow Statement

Chapter 4: Cash Flow Statement

A Cash flow statement shows the inflow and outflow of cash and cash equivalents from various activities of a company during a specific period.

The primary objective of the cash flow statement is to provide useful information about cash flows (inflows and outflows) of an enterprise during a particular period under various heads, i.e., operating activities, investing activities, and financing activities.

This information is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilize those cash flows.

The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation.

6.2 Benefits of Cash Flow Statement

A cash flow statement provides the following benefits: A cash flow statement when used along with other financial statements provides information that enables users to evaluate changes in the net assets of an enterprise, its financial structure (including its liquidity and solvency), and its ability to affect the amounts and timings of cash flows in order to adapt to changing circumstances and opportunities.

Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises.

It also enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events.

It also helps in balancing its cash inflow and cash outflow, keeping in response to changing conditions.

It is also helpful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and the impact of changing prices.

6.3 Cash and Cash Equivalents

As stated earlier, a cash flow statement shows inflows and outflows of cash and cash equivalents from various activities of an enterprise during a particular period.

As per AS-3, ‘Cash’ comprises cash in hand and demand deposits with banks, and ‘Cash equivalents’ means short-term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

An investment normally qualifies as cash equivalents only when it has a short maturity, of say, three months or less from the date of acquisition.

Investments in shares are excluded from cash equivalents unless they are in substantial cash equivalents.

For example, preference shares of a company acquired shortly before their specific redemption
date, provided there is only an insignificant risk of failure of the company to repay the amount at maturity.

Similarly, short-term marketable securities which can be readily converted into cash are treated as cash equivalents and is liquid able immediately without considerable change in value.

6.4 Cash Flows

‘Cash Flows’ implies the movement of cash in and out due to some non-cash items. Receipt of cash from a non-cash item is termed as cash inflow while cash payment in respect of such items as cash outflow.

For example, the purchase of machinery by paying cash is a cash outflow while sale proceeds received from the sale of machinery are a cash inflow.

Other examples of cash flows include a collection of cash from trade receivables, payment to trade payables, payment to employees, receipt of dividends, interest payments, etc.

Cash management includes the investment of excess cash in cash equivalents. Hence, the purchase of marketable securities or short-term investment which constitutes cash equivalents is not considered while preparing a cash flow statement.

Language English
No. of Pages46
PDF Size3 MB

NCERT Solutions Class 12 Accountancy Chapter 6 Cash Flow Statement

1. What is a Cash Flow Statement?

A financial statement that represents the inflow and outflow of cash and cash equivalents of a company is called a cash flow statement.

It shows how well a company can manage its cash position and generates enough cash to pay the obligations in the form of debt and also run the operational expenses.

2. How are the various activities classified (as per AS-3 revised) while preparing a cash flow statement?

Three types of activities are defined:

1. Operating Activities

2. Financing Activities

3. Investing Activities

3. State the uses of the cash flow statement?

Following are the uses of the cash flow statement:

1. Useful for evaluating the cash position of a firm

2. Helpful in finding deficiencies and variations in firms performance which helps in effective decision making

3. It helps in the assessment of the liquidity of a company

4. It analyses cash receipts and payments from the various activities of a company and helps in short-term planning

5. It helps in segregating cash flows obtained from the various activities of the business

6. It helps in providing decisions about the distribution of profit.

7. It is useful for short-term financial analysis

4. What are the objectives of preparing a cash flow statement?

Following are the objectives:

1. To determine the inflow and outflow of cash and the cash equivalents obtained from the different kinds of activities.

2. To seek out various reasons responsible for the change in cash balances during the accounting period

3. It helps in depicting the position of the company in terms of liquidity and solvency

4. It also helps in determining the requirement and the corresponding availability of cash for business in the future.

5. State the meaning of the terms: Cash Equivalents, Cash flows.

Cash equivalents are investments that are highly liquid in nature and do not change value easily. Cash equivalents are essential for managing short-term cash requirements or any such investments. For example treasury bills.

Cash Flows: It is the inflow and outflow of cash and cash equivalents. Cash inflows boost cash balance and cash outflow has a negative impact on cash balance

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