Notional outflow of cash takes place whenever a transaction results in decreasing current liabilities or increasing current assets.
Example: Sale of goods on credits.
Entry: Debtors A/c Dr.
To Credit Sales A/c
This transaction results in increasing book-debts / Bills Receivable to the extent of credit sale made. Though there is no actual outflow of cash, goods sold on credit would have been sold for cash and would cost the business in terms of materials, labour and overheads. Hence there is notional outflow of cash i.e. it may be considered as loan advanced to customers. Similarly, when there is decrease in current liabilities, it may be due to part settlement of these dues. Hence, such decrease in current liabilities is treated as notional outflow of cash.
| Cash or Bank Balance at the beginning | Rs | Rs | |
| Add: | Cash Inflows: | ||
| Cash from operations | |||
| Proceeds from sale of fixed assets | |||
| Issue of Shares | |||
| Share Premium | |||
| Issue of Debentures | |||
| Increase in current liabilities | |||
| Raising of loans | |||
| Decrease in current assets | |||
| Non – trading receipts viz: | |||
| Dividend received and | |||
| Refund of Tax | |||
| Less: Cash Outflows: | |||
| Purchase of fixed assets | |||
| Repayment of loans | |||
| Redemption of preference shares | |||
| Redemption of Debentures | |||
| Payment of taxes | |||
| Payment of Dividend | |||
| Cash lost on Operations | |||
| Increase in current assets | |||
| Decrease in current liabilities | |||
| Cash Balance at the end |
Performa of an account form of Cash Flow Statement
| Cash or Bank | Cash Outflows: | ||
| Balance at the beginning Add: Cash Inflow: Cash from operations Proceeds from sale of fixed assets Issue of Shares Share premium Issue of Debentures Raising of loans Decrease in Current assets Increase in current liabilities Non-trading receipts: Dividend received Refund of tax | Purchase of fixed assets Repayment of loans Redemption of Preference Shares. Redemption of Debentures Payment of Dividend Payment of taxes Cash lost in operations Increase in current assets Decrease in current liabilities Cash or Bank balance at the end | ||
Cash flows can be classified into three categories: Cash flows from operating activities, Cash flows from investment activities, Cash from financing activities.
The Accounting Principles Board of The Institute of Chartered Accountants of India recommends a detailed report for cash flow statement, which is insisted in the listing guidelines of Stock exchanges of India. The definitions provided by them are as follows:
- Cash comprises of cash on hand and demand deposits
- Cash Equivalents are 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.
- Cash flows are inflows and outflows of cash and cash equivalents.
- Operating Activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities.
- Investment Activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents
- Financing Activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital) and borrowings of the enterprise.
