• Cash Flow statement is a statement prepared as per Accounting Standard 3. It shows the flow of cash and cash equivalents of business during a particular period.
  • Cash comprises of cash in hand and demand deposits with banks whereas cash equivalents are short term highly liquid investments that can be readily converted into cash.
  • Cash flow statement helps in short term financial planning, understanding liquidity and solvency of a business, better cash management, etc.
  • Limitations of cash flow statement are that it cannot work as substitute for income statement and ignores accrual basis of accounting.
  • Three heads of the cash flow statement are cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.
  • Operating activities are principal revenue producing activities. Investing activity include the purchase and sale of long term assets. Financing activities results in the change in size and composition of owner’s capital. Bank overdraft and cash credit are part of financing activities.
  • The two methods of preparing Cash flow Statement are direct and indirect method.
  • Cash comprises cash in hand and demand deposits with bank i.e. deposites which are repayable by banks on demand.
  • Cash Equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and which present insignificant risk of changes in their values. It includes Cash in Hand, Cash at Bank, Short-term Investments or Marketable Securities and Cheques and Drafts on hand.
  • Current liabilities and assets as shown in Balance Sheet form part of operating activities, non-current assets form part of cash flow from investing activities whereas shareholders funds show the cash flow from financing activity.

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