Cash Flow Statement Class 12 Notes: Revision Notes are essential study materials required for appropriate and effective learning and gaining of knowledge. Every student, throughout their educational lives, is asked to make notes and then study using the ones that they have created. It has been scientifically proven that visual images and constant repetition of information make it easier for our brains to remember the information. Hence, making revision notes is a good and well-acclaimed habit. For students, who still don’t like to make notes or might not get sufficient time to create notes for every chapter from each subject, we have brought you help.
In this article, students can find Revision Notes for Class 12 Accountancy Chapter 6 Cash Flow Statement. A thorough reading, understanding, and analysis of the chapter has been done before making these Cash Flow Statement class 12 revision notes. We have also kept an eye on the updated and revised CBSE Syllabus and Board guidelines, while making these revision notes on Cash Flow Statement, for you. Check the CBSE Cash Flow Statement class 12 short notes, here.
Related:
CBSE Class 12 Accountancy Syllabus 2023-2024
CBSE Class 12 Accountancy MCQs
NCERT Solutions for Class 12 Accountancy
CBSE Class 12 Accountancy Chapter 2 Mind Maps
CBSE Class 12 Accountancy Chapter 1 Revision Notes
CBSE Class 12 Accountancy Chapter 2 Revision Notes
Revision Notes for CBSE Class 12 Accountancy Chapter 6 Cash Flow Statement
What is Cash Flow Statement?
Apart from the two mentioned financial statements of a company that focuses on finding the position of the company and showing the operational activities of the enterprise, there is a third statement known as the cash flow statement which shows the inflows and outflows of cash and cash equivalents.
Objectives of Cash Flow Statement
The objectives of cash flow statement are:
- 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
- To assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows
Benefits of Cash Flow Statement
The advantages of cash flow statement are:
- 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
- Assess the ability of the enterprise to generate cash and cash equivalents and enable 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.
Cash and Cash Equivalents
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.
Cash Flows
Cash Flows imply 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.
Classification of Activities for the Preparation of Cash Flow Statement
There are generally three activities that allow cash flows to take place, which form a cash flow statement.
- Cash from Operating Activities- Operating activities are the activities that constitute the primary or main activities of an enterprise.
1. Cash inflows from operating activities
a. cash receipts from the sale of goods and the rendering of services.
b. cash receipts from royalties, fees, commissions, and other revenues
2. Cash outflows from operating activities
a. Cash payments to suppliers for goods and services.
b. Cash payments to and on behalf of the employees.
c. Cash payments to an insurance enterprise for premiums and claims, annuities, and other policy benefits.
d. Cash payments of income taxes unless they can be specifically identified with financing and investing activities.
- Cash from Investing Activities- Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Investing activities relate to the purchase and sale of long-term assets or fixed assets such as machinery, furniture, land, buildings, etc. Transactions related to long-term investment are also investing activities.
1. Cash Outflows from investing activities
a. Cash payments to acquire fixed assets including intangibles and capitalized research and development.
b. Cash payments to acquire shares, warrants, or debt instruments of other enterprises other than the instruments held for trading purposes.
c. Cash advances and loans made to a third party (other than advances and loans made by a financial enterprise wherein it is operating activities).
2. Cash Inflows from investing activities
a. Cash receipt from disposal of fixed assets including intangibles.
b. Cash receipt from the repayment of advances or loans made to third parties (except in the case of financial enterprise).
c. Cash receipt from disposal of shares, warrants, or debt instruments of other enterprises except those held for trading purposes.
d. Interest received in cash from loans and advances.
e. Dividend received from investments in other enterprises
- Cash from Financing Activities- Financing activities relate to long-term funds or capital of an enterprise, e.g., cash proceeds from the issue of equity shares, debentures, raising long-term bank loans, repayment of bank loans, etc.
1. Cash Inflows from financing activities
a. Cash proceeds from issuing shares (equity or/and preference).
b. Cash proceeds from issuing debentures, loans, bonds, and other short/ long-term borrowings.
2. Cash Outflows from financing activities
a. Cash repayments of amounts borrowed.
b. Interest paid on debentures and long-term loans and advances.
c. Dividends paid on equity and preference capital.
Treatment of Items
- Extraordinary Items- Extraordinary items are not a regular phenomenon, e.g., loss due to theft earthquake, or flood. They are non-recurring in nature and hence cash flows associated with extraordinary items should be classified and disclosed separately as arising from operating, investing, or financing activities.
- Interest and Dividend- In the case of a financial enterprise (whose main business is lending and borrowing), interest paid, interest received and dividend received are classified as operating activities while dividend paid is a financing activity. In the case of a non-financial enterprise, it is considered more appropriate that payment of interest and dividends are classified as financing activities whereas receipt of interest and dividends are classified as investing activities.
- Taxes on Income and Gains- Taxes may be income tax, capital gains tax, or dividend tax. The cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.
- Non-cash transactions- Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a cash flow statement. Examples of such transactions are – the acquisition of machinery by the issue of equity shares or the redemption of debentures by the issue of equity shares.
Ascertaining cash flow from operating activities
- Indirect Method- The indirect method of ascertaining cash flow from operating activities begins with the amount of net profit/loss. This is so because the statement of profit and loss incorporates the effects of all operating activities of an enterprise. However, the Statement of Profit and Loss is prepared on an accrual basis (and not on a cash basis). Moreover, it also includes certain non-operating items such as interest paid, profit/loss on sale of fixed assets, etc.) and non-cash items (such as depreciation, goodwill written-off, dividends declared, etc. Therefore, it becomes necessary to adjust the amount of net profit/loss as shown by the Statement of Profit and Loss for arriving at cash flows from operating activities.
- Direct Method- Major classes of gross cash receipts and gross cash payments are disclosed.
Ascertaining cash flow from investing and financing activities
While preparing the cash flow statement, all major items of gross cash receipts, gross cash payments, and net cash flows from investing and financing activities must be shown separately under the headings ‘Cash Flow from Investing Activities’ and ‘Cash Flow from Financing Activities’ respectively.’
Preparation of Cash Flow Statement
Some points to keep in mind while preparing a cash flow statement have been jotted down below:
- While preparing a cash flow statement, full details of inflows and outflows are given under these heads including the net cash flow
- The aggregate of the net ‘cash flows (or use) is worked out and is shown as ‘Net Increase/Decrease in cash and Cash Equivalents’ to which the amount of ‘cash and cash equivalent at the beginning’ is added and thus the amount of ‘cash and cash equivalents at the end is arrived at
- This figure will be the same as the total amount of cash in hand, cash at the bank, and cash equivalents (if any) given in the balance sheet
- When cash flows from operating activities are worked out by an indirect method and shown as such in the cash flow statement, the statement itself is termed as an ‘Indirect method cash flow statement
- Similarly, if the cash flows from operating activities are worked by direct method while preparing the cash flow statement, it will be termed as ‘direct method Cash Flow Statement’.
- However, unless it is specified clearly as to which method is to be used, the cash flow statement may preferably be prepared by an indirect method as is done by most companies in practice.
To download the complete Revision Notes for CBSE Class 12 Cash Flow Statement, click on the link below
Also Check:
CBSE Class 12 Commerce Study Materials
NCERT Solutions for Class 12 Commerce
CBSE Class 12 Business Studies MCQs
