Cash flow Statement (CFS) is an additional information provided to the users of accounts in the form of an statement, which reflects the various sources from where cash was generated (inflow of cash) by an enterprise during the relevant accounting year and how these inflows were utilised (outflow of cash) by the enterprise. This helps the users of accounts to:

  • identify the historical changes in the flow of cash & cash equivalents.
  • determine the future requirement of cash & cash equivalents.
  • assess the ability to generate cash & cash equivalents.
  • estimate the further requirement of generating cash & cash equivalents.
  • compare the operational efficiency of different enterprises.
  • study the insolvency and liquidity position of an enterprise.

Cash comprises cash on hand and demand deposits with banks.

Cash equivalents are:

  • short term (maximum three months of maturity from the date of acquisition),
  • highly liquid investments,
  • readily convertible,
  • convertible amounts of cash is known,
  • subject to an unimportant risk of changes in value.

For example, Share Capital is not considered as cash equivalent even though they are readily convertible into cash because the amount that will be realized on sale of investment is not determinable unless investment is actually sold. Likewise, fixed deposit for one year is also not considered as cash equivalent because they are not readily convertible into cash, even though the amount can be determined.

This is different than the concept of three months or less. As this standard states that three months or less from the date of acquisition, any investment which is not classified as cash equivalent cannot be reclassified as cash equivalent, even when the maturity period is less than three months. One should look at the status only on the date of acquisition and not later.

Cash flows are inflows and outflows of cash and cash equivalents.

Inventories as Assets
Presentation of a Cash Flow Statement

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