Ch14 CASH FLOW STATEMENT

 CHAPTER 14 

CASH FLOW STATEMENT

 

ONE WORD TO ONE SENTENCE QUESTIONS

Q.1. What is cash flow statement?

Ans. A cash flow statement is a financial statement that provides information about the cash inflows and outflows of a company during a specific period. It summarizes the sources and uses of cash, showing how cash has been generated and how it has been utilized. The cash flow statement consists of three main sections: operating activities, investing activities, and financing activities. It helps assess a company's ability to generate cash, its liquidity position, and its cash flow management.

 

Q.2. Give any one advantages of cash flow statement?

Ans. One advantage of the cash flow statement is that it provides a clear and concise view of a company's actual cash inflows and outflows. It helps in assessing the company's liquidity position and cash flow management, providing insights into its ability to meet short-term obligations, invest in growth, and distribute dividends to shareholders.

 

Q.3. Give any one limitation of cash flow statement?

Ans. One limitation of the cash flow statement is that it does not provide information about non-cash items or changes in the value of assets and liabilities. It focuses solely on cash transactions, which means it may not fully reflect the overall financial performance and position of a company. Other financial statements, such as the income statement and balance sheet, are needed to obtain a complete understanding of a company's financial health.

 

Q.4. Give any one objective of cash flow statement?

Ans. One objective of the cash flow statement is to provide information about the cash inflows and outflows of a company, allowing users to assess its ability to generate and manage cash effectively.

 

Q.5. What is non-cash transactions?

Ans. Non-cash transactions refer to financial activities that do not involve the exchange of cash. These transactions are recorded in the financial statements to reflect changes in the company's financial position, even though they do not directly impact the company's cash flow. Examples of non-cash transactions include depreciation, accruals, stock dividends, and non-cash exchanges of assets.

 

Q.6. What are cash equivalent?

Ans. Cash equivalents are highly liquid assets that are easily convertible into cash. They have a short-term maturity of typically three months or less from the date of acquisition. Cash equivalents include short-term investments with a high degree of liquidity, such as Treasury bills, money market funds, and commercial paper. They are considered to be as good as cash because they have minimal risk of value fluctuation and can be readily used to meet short-term cash requirements.

Q.7. Give two examples of non-cash expenses?

Ans. Two examples of non-cash expenses are depreciation and amortization.

 

Q.8. State the different activities of cash flow statements?

Ans. The different activities of a cash flow statement are:

Operating activities: Cash flows from the company's primary business operations, including cash receipts from sales, payments to suppliers, salaries, and operating expenses.

Investing activities: Cash flows from the purchase or sale of long-term assets, such as property, plant, and equipment, as well as investments in securities and loans made to other entities.

Financing activities: Cash flows from activities that involve raising capital or repaying financial obligations, including proceeds from issuing debt or equity, repayment of loans, and payment of dividends to shareholders.

 

Q.9. What is Net cash flow?

Ans. Net cash flow refers to the difference between the total cash inflows and total cash outflows during a specific period. It represents the net increase or decrease in cash and cash equivalents for the period. A positive net cash flow indicates that more cash is coming into the company than going out, while a negative net cash flow indicates that more cash is going out than coming in. Net cash flow is an important measure of a company's liquidity and cash flow management.

 

Q.10. Name any one item taken under the head ‘’cash flow from operating activities?
Ans. One item taken under the head "cash flow from operating activities" is net income or net profit.

 

Q.11. Name any one item taken under the head ‘’cash flow investing activities?
Ans. One item taken under the head "cash flow from investing activities" is the purchase or sale of property, plant, and equipment.

 

Q.12. Give two items of cash outflow from investing activities?
Ans. Two items of cash outflow from investing activities are:

 

1. Purchase of property, plant, and equipment (capital expenditures).

2. Investment in other companies or acquisition of subsidiaries.

 

Q.13. Name any one item taken under the head ‘’cash flow from financing activities?

Ans. One item taken under the head "cash flow from financing activities" is the payment of dividends to shareholders.

 

Q.14. State two items of cash outflow from financing activities?

Ans. Two items of cash outflow from financing activities are:

1.Repayment of long-term debt or loans.

2. Repurchase of company shares.

 

Q.15. How bank overdraft will treated in cash flow statements?

Ans. Bank overdraft is treated as a component of cash and cash equivalents in the cash flow statement. It is included in the financing activities section as a change in the cash balance. If there is an increase in the bank overdraft during the period, it is considered as a cash inflow. Conversely, if there is a decrease in the bank overdraft, it is considered as a cash outflow. Bank overdraft is considered a short-term borrowing and is categorized under financing activities as it represents funds obtained from the bank to support the company's operations.

 

VERY SHORT ANSWER TYPE QUESTIONS

Q.1. How cash flow statement is prepared? Discuss.

Ans. The cash flow statement is prepared by following a specific method known as the indirect method. Here's a step-by-step process for preparing a cash flow statement:

Gather the necessary financial information: Collect the relevant financial statements, including the income statement and balance sheet, for the period under consideration.

Determine the cash flow categories: Identify the three main categories of cash flows: operating activities, investing activities, and financing activities.

Prepare the operating activities section: Start with the net income from the income statement and make adjustments to convert the accrual-based net income to cash-based operating activities. Consider items such as depreciation, changes in working capital (such as accounts receivable and accounts payable), and other non-cash expenses or income. Summarize the cash inflows and outflows from operating activities.

Prepare the investing activities section: Analyze changes in non-current assets, such as property, plant, and equipment, and investments. Include cash inflows and outflows from the purchase or sale of these assets. Summarize the cash flows from investing activities.

Prepare the financing activities section: Analyze changes in long-term liabilities, equity, and other financing activities. Include cash inflows and outflows from activities such as issuing or repaying debt, issuing or repurchasing shares, and payment of dividends. Summarize the cash flows from financing activities.

Calculate the net cash flow: Summarize the cash inflows and outflows from the three sections (operating activities, investing activities, and financing activities) to calculate the net cash flow for the period.

Reconcile the net cash flow with the beginning and ending cash balances: Add the net cash flow to the beginning cash balance to obtain the ending cash balance. Ensure that the ending cash balance matches the cash and cash equivalents reported on the balance sheet.

Present the cash flow statement: Format the cash flow statement by listing the three sections (operating activities, investing activities, and financing activities) and their respective cash inflows and outflows. Include a total net cash flow figure at the bottom.

It is important to note that the process may vary slightly depending on the accounting standards and reporting requirements followed by the company.

 

Q.2. What are advantages of cash flow statement?
Ans. The cash flow statement offers several advantages that provide valuable insights into a company's financial health and performance. Some advantages of the cash flow statement include:

Cash Position Assessment: The cash flow statement provides a clear and concise view of a company's actual cash inflows and outflows. It helps assess the company's liquidity position, allowing stakeholders to understand its ability to meet short-term obligations and manage cash effectively.

Cash Flow Management: By analyzing the cash flow statement, companies can identify the sources and uses of cash and make informed decisions about managing cash effectively. It helps in determining the timing and amount of cash needed for various activities, such as investments, operations, and financing.

Investment Analysis: Investors and analysts use the cash flow statement to assess a company's investment potential. It helps evaluate the company's ability to generate cash from its core operations and determine its capacity to fund growth opportunities and capital expenditures.

Financial Performance Evaluation: The cash flow statement complements other financial statements, such as the income statement and balance sheet, in evaluating a company's overall financial performance. It provides insights into the sustainability of cash flows and helps identify any discrepancies between reported profits and actual cash flow.

Comparison and Trend Analysis: The cash flow statement allows for meaningful comparisons and trend analysis over time. By reviewing cash flows from different periods, stakeholders can assess the company's consistency in generating cash and understand the impact of changes in operations, investments, and financing activities.

Communication with Stakeholders: The cash flow statement provides transparent information about a company's cash flows, enabling effective communication with various stakeholders, including investors, lenders, creditors, and regulatory bodies. It enhances transparency and helps stakeholders make well-informed decisions based on reliable cash flow information.

Overall, the cash flow statement is a vital financial statement that helps stakeholders understand a company's cash position, evaluate its cash flow management, and assess its financial performance and investment potential.

 

Q.3. What are the objectives of cash flow statement?

Ans. The cash flow statement serves several important objectives in financial reporting. The main objectives of the cash flow statement are as follows:

Cash Flow Assessment: The primary objective of the cash flow statement is to provide information about the cash inflows and outflows of a company. It helps stakeholders assess the company's ability to generate and manage cash effectively, which is crucial for its liquidity and financial stability.

Operating Performance Evaluation: The cash flow statement helps evaluate a company's operating performance by providing insights into its cash flow from core business operations. It enables stakeholders to assess whether the company's operations are generating sufficient cash to sustain its activities and meet its financial obligations.

Investment Analysis: Another objective of the cash flow statement is to assist investors and analysts in evaluating the investment potential of a company. It helps in assessing the cash flows associated with investing activities, such as capital expenditures and acquisitions, which are important factors in determining the company's growth prospects and ability to generate future cash flows.

Financial Risk Assessment: The cash flow statement allows stakeholders to evaluate the financial risk of a company by analyzing its cash flow from financing activities. It provides insights into the company's reliance on external financing, such as loans or equity issuances, and its ability to repay debt, distribute dividends, or undertake share repurchases.

Cash Flow Management: The cash flow statement helps companies in managing their cash flow effectively. By analyzing the sources and uses of cash, companies can identify areas where cash is being generated or depleted and make informed decisions to optimize cash flow management, such as adjusting operating practices or financing strategies.

Comparison and Trend Analysis: The cash flow statement enables stakeholders to compare and analyze cash flows across different periods. It helps in identifying trends and patterns in cash flow generation and utilization, providing valuable insights into the company's cash flow stability, seasonality, and changes in cash flow drivers over time.

Overall, the objectives of the cash flow statement revolve around providing information about cash flows, evaluating financial performance and risk, supporting investment analysis, facilitating cash flow management, and enabling meaningful comparisons and trend analysis.

 

Q.4. Give four objectives of preparing cash flow statement?

Ans. The four objectives of preparing a cash flow statement are as follows:

Assessing Liquidity: One objective of the cash flow statement is to assess the liquidity position of a company. It provides information about the cash inflows and outflows from operating, investing, and financing activities, helping stakeholders evaluate the company's ability to meet its short-term obligations and manage cash effectively.

Monitoring Cash Flow Management: The cash flow statement helps in monitoring and evaluating the company's cash flow management. It enables stakeholders to understand how cash is generated and utilized, identify areas of improvement, and make informed decisions to optimize cash flow, such as adjusting working capital practices or managing cash flow timing.

Evaluating Operating Performance: Another objective of the cash flow statement is to evaluate the operating performance of a company. It provides insights into the cash flow generated from core business operations, allowing stakeholders to assess whether the company's operations are generating sufficient cash to sustain its activities and indicating the company's ability to generate future cash flows.

Supporting Investment Analysis: The cash flow statement supports investment analysis by providing information about cash flows related to investing activities. It helps stakeholders assess the company's ability to fund capital expenditures, acquisitions, and other investments. By analyzing the cash flow statement, investors can evaluate the company's investment potential and its capacity to generate future cash flows for growth and returns.

Overall, the objectives of preparing a cash flow statement include assessing liquidity, monitoring cash flow management, evaluating operating performance, and supporting investment analysis. The cash flow statement plays a crucial role in providing valuable insights into a company's cash flow dynamics and financial health.

 

Q.5. Write any two limitations of cash flow statement?

Ans. Two limitations of the cash flow statement are as follows:

Non-Cash Transactions: The cash flow statement only considers cash transactions and does not include information about non-cash transactions. Non-cash transactions, such as depreciation, changes in accounts payable or receivable, or stock-based compensation, are important elements of a company's financial position and performance. Excluding these non-cash transactions from the cash flow statement may limit the understanding of the complete financial picture and the company's ability to generate future cash flows.

Timing and Relevance: The cash flow statement provides information about cash inflows and outflows during a specific period, but it does not capture the timing or the reason behind those cash flows. The statement may not reflect the actual timing of cash receipts or payments, as transactions may be recorded based on accounting principles or the timing of when cash is received or paid. Additionally, the cash flow statement may not provide information about the future cash flows or the impact of significant events that occur after the reporting period, limiting its relevance for decision-making.

It is important to consider these limitations when interpreting the cash flow statement. Supplementing the cash flow statement with other financial statements and analysis methods can provide a more comprehensive understanding of a company's financial position and performance.

 

Q.6. What do you mean by ‘cash flow from operating activities?

Ans. 'Cash flow from operating activities' is a section of the cash flow statement that reports the cash inflows and outflows resulting from a company's core business operations. It shows the cash generated or used by the day-to-day operations of the company, excluding cash flows from investing and financing activities.

The 'cash flow from operating activities' section includes cash receipts from customers for sales of goods or services, interest and dividends received, and other cash inflows directly related to the company's core operations. It also includes cash payments for operating expenses, such as salaries, rent, utilities, taxes, and payments to suppliers or vendors.

The purpose of reporting the cash flow from operating activities is to assess the cash-generating ability of a company's primary business operations. A positive cash flow from operating activities indicates that the company is generating cash from its core operations, which is generally a positive sign. On the other hand, a negative cash flow from operating activities suggests that the company is using cash to sustain its operations.

Analyzing the cash flow from operating activities helps stakeholders evaluate the company's ability to generate sufficient cash to fund its operations, repay debts, invest in growth, and distribute dividends. It provides insights into the company's cash flow management, efficiency of operations, and sustainability of cash flows in the long run.

 

Q.7. What do you mean by ‘’ cash flow from investing activities?

Ans. 'Cash flow from investing activities' is a section of the cash flow statement that reports the cash inflows and outflows related to a company's investing activities. It reflects the cash flows resulting from the acquisition or disposal of long-term assets, such as property, plant, and equipment (PP&E), investments, or other capital assets.

The 'cash flow from investing activities' section includes cash inflows from the sale or disposal of long-term assets, such as proceeds from the sale of equipment or investments. It also includes cash inflows from the collection of loans made to other entities or the receipt of dividends or interest from investments.

On the other hand, the section also includes cash outflows related to investing activities. These can include cash payments for the purchase or acquisition of long-term assets, such as the purchase of equipment, buildings, or investments in other companies. It may also include cash payments for loans made to other entities or investments in financial instruments.

The purpose of reporting the cash flow from investing activities is to assess the cash flows associated with a company's investments in long-term assets. Positive cash flows from investing activities indicate that the company is receiving more cash from the sale of assets or investments than it is spending on acquiring them. Negative cash flows from investing activities suggest that the company is investing more cash in long-term assets than it is receiving from their disposal.

Analyzing the cash flow from investing activities helps stakeholders evaluate the company's investment strategies, capital expenditure decisions, and overall use of cash for long-term assets. It provides insights into the company's ability to fund its growth, the efficiency of its investment decisions, and the impact of these activities on its cash position.

 

Q.8. What do you mean by’’ cash flow from financing activities?

Ans. 'Cash flow from financing activities' is a section of the cash flow statement that reports the cash inflows and outflows resulting from a company's financing activities. It reflects the cash flows related to raising capital and repaying debts, as well as activities that affect the company's capital structure.

The 'cash flow from financing activities' section includes cash inflows from activities such as issuing equity shares, issuing bonds or other debt instruments, or obtaining loans from financial institutions. It also includes cash inflows from the receipt of additional investments from shareholders or owners.

On the other hand, the section also includes cash outflows related to financing activities. These can include cash payments for dividends or interest on debt, repayment of loans or bonds, or the repurchase of the company's own shares.

The purpose of reporting the cash flow from financing activities is to provide information about the cash flows associated with a company's capital structure and financing decisions. Positive cash flows from financing activities indicate that the company is raising more cash from financing sources than it is paying back, which can be a sign of external funding or increased shareholder investment. Negative cash flows from financing activities suggest that the company is paying back more cash to financing sources than it is receiving.

Analyzing the cash flow from financing activities helps stakeholders assess the company's ability to raise capital, manage its debt obligations, and distribute returns to shareholders. It provides insights into the company's financing strategies, capital structure decisions, and overall impact on its cash position.

 

Q.9. What is included in operating activities? Explain.

Ans. Operating activities refer to the day-to-day activities of a company that are directly related to its core operations and generate revenue. The 'cash flow from operating activities' section of the cash flow statement provides information about the cash inflows and outflows resulting from these operating activities.

In the 'cash flow from operating activities' section, the following items are typically included:

Cash receipts from customers: This includes cash received from customers for the sale of goods or services. It represents the primary source of cash inflow for a company and reflects the revenue generated from its core operations.

Cash payments to suppliers and vendors: This includes cash payments made to suppliers or vendors for the purchase of goods and services necessary for the company's operations. It represents the cash outflow associated with acquiring inventory or raw materials.

Cash payments to employees: This includes cash payments made to employees as wages, salaries, bonuses, or other compensation. It reflects the cash outflow related to the labor costs incurred in running the business.

Cash payments for operating expenses: This includes cash payments for various operating expenses, such as rent, utilities, insurance, advertising, and administrative expenses. It represents the cash outflow associated with running and maintaining the day-to-day operations of the company.

Cash receipts and payments related to interest and dividends: This includes cash receipts of interest income from loans or investments and cash payments for interest expenses on loans or debt. It also includes cash receipts of dividends from investments and cash payments for dividends to shareholders.

The 'cash flow from operating activities' section aims to provide insights into a company's ability to generate cash from its core business operations. A positive cash flow from operating activities indicates that the company is generating more cash from its operations than it is using, which is generally seen as favorable. On the other hand, a negative cash flow from operating activities suggests that the company is using cash to sustain its operations and may need to improve its profitability or cash flow management.

 

Q.10. What is included in investing activities? Explain?

Ans. Investing activities refer to a category of cash flows in a company's financial statements that involve the purchase, sale, or acquisition of long-term assets and investments. These activities are essential for a company's growth and expansion as they involve deploying capital to generate future returns. The following items are typically included in investing activities:

Purchase and Sale of Property, Plant, and Equipment (PP&E): This includes the acquisition or disposal of tangible assets such as land, buildings, machinery, and vehicles used in the company's operations.

Investments in Marketable Securities: Companies may invest their excess cash in stocks, bonds, or other marketable securities issued by other companies. Investing in these securities can generate interest, dividends, or capital gains.

Purchase and Sale of Long-term Investments: Companies may acquire or sell long-term investments, such as stocks or bonds of other companies, that are not intended for short-term trading purposes.

Acquisition and Disposal of Subsidiaries or Business Units: If a company acquires or sells a subsidiary or business unit, the cash flows associated with these transactions are considered investing activities.

Loans Made to Others: Cash flows related to loans made to other entities, such as providing financing to customers or other businesses, are classified as investing activities.

Collections of Loans Made to Others: When a company receives principal repayments or interest payments on loans it has made to others, those cash flows are also categorized as investing activities.

Cash Advances and Collections on Notes Receivable: Cash flows related to the issuance and repayment of short-term notes or advances made to suppliers, customers, or employees fall under investing activities.

It is important to note that investing activities generally involve cash flows and exclude non-cash transactions, such as the exchange of assets or issuance of stock in a non-cash transaction. Additionally, investing activities are reported in the statement of cash flows, which provides insights into how a company has deployed its resources to grow its business over a given period of time.

 

Q.11. What is included in financing activities? Explain.

Ans. Financing activities are a category of cash flows in a company's financial statements that involve raising or repaying capital from various sources to fund the company's operations and growth. These activities primarily focus on changes in the company's capital structure and include the following:

 

Issuance of Equity: Cash flows related to the issuance of company shares, such as common stock or preferred stock, either through an initial public offering (IPO) or subsequent equity offerings.

Repurchase of Equity: Cash outflows resulting from the repurchase of the company's own shares from the open market or shareholders. This is often referred to as share buybacks.

Issuance of Debt: Cash inflows from borrowing money through issuing bonds, debentures, or other forms of long-term debt securities.

Repayment of Debt: Cash outflows related to the repayment of principal amounts borrowed, including payments of interest and other related costs.

Payment of Dividends: Cash outflows resulting from the distribution of profits to shareholders in the form of dividends. Dividends are typically paid out of retained earnings or accumulated profits.

Proceeds from Loans: Cash inflows resulting from short-term or long-term borrowing from financial institutions or other lenders.

Repayment of Loans: Cash outflows related to the repayment of borrowed funds, including principal and interest payments.

Capital Lease Obligations: Cash flows associated with the acquisition or repayment of assets under capital lease agreements.

Financing Lease Obligations: Cash flows related to the acquisition or settlement of obligations under financing lease arrangements.

Financing activities provide insights into how a company raises funds and manages its capital structure. These activities are crucial for maintaining liquidity, managing debt levels, and determining the return of capital to shareholders. The statement of cash flows reports these financing activities to help investors and analysts assess a company's financial health and its ability to meet its financial obligations.

 

SHORT ANSWER TYPE QUESTIONS

Q.1. What is cash flow statement? Give its three objectives?

Ans. A cash flow statement is a financial statement that provides information about the cash inflows and outflows of a company over a specific period of time. It summarizes the sources and uses of cash, allowing stakeholders to evaluate the company's ability to generate and manage cash. The cash flow statement is divided into three sections: operating activities, investing activities, and financing activities.

The three main objectives of a cash flow statement are as follows:

Provide Information on Cash Sources and Uses: The primary objective of a cash flow statement is to provide a clear picture of where the company's cash is coming from and how it is being utilized. It presents the net cash provided or used by operating activities, investing activities, and financing activities separately, allowing stakeholders to understand the key drivers of cash flow.

Assess Cash Flow Adequacy: The cash flow statement helps assess the company's ability to generate sufficient cash flow to meet its operational needs, repay debts, pay dividends, and invest in future growth. By examining the net increase or decrease in cash and cash equivalents during the reporting period, stakeholders can evaluate whether the company has a healthy cash position.

Enhance Transparency and Decision-Making: The cash flow statement enhances the transparency of a company's financial statements by providing additional information beyond the income statement and balance sheet. It allows stakeholders to evaluate the quality of earnings by comparing net income with operating cash flow. It also assists in making informed investment and lending decisions, as it provides insights into the company's cash-generating capabilities and its ability to fund its activities.

By fulfilling these objectives, the cash flow statement provides a comprehensive view of a company's cash flow dynamics, enabling stakeholders to assess its financial performance, liquidity, and cash management effectiveness.

 

Q.2. Define cash flow statement. Give its three limitations?

Ans. A cash flow statement is a financial statement that provides information about the cash inflows and outflows of a company over a specific period of time. It is designed to present the sources and uses of cash, highlighting the operating, investing, and financing activities that impact the company's cash position. The cash flow statement helps stakeholders understand how cash is generated, managed, and allocated within the organization.

Limitations of the cash flow statement include the following:

Non-Cash Transactions: The cash flow statement focuses on cash inflows and outflows, which means it does not capture non-cash transactions. Certain significant transactions, such as the issuance of stock in exchange for assets, conversion of debt into equity, or the acquisition of assets through a capital lease, do not impact the cash flow statement directly. Therefore, relying solely on the cash flow statement may provide an incomplete view of the company's overall financial performance.

Timing of Cash Flows: The cash flow statement provides information on cash flows during a specific reporting period. It may not reflect the timing differences between when cash is received or paid and when the related transactions actually occur. For example, cash receipts or payments related to sales or purchases may not align perfectly with the recognition of revenues or expenses in the income statement. As a result, the cash flow statement may not provide an accurate depiction of the company's ongoing operating activities.

Lack of Future-oriented Information: While the cash flow statement provides historical information on cash flows, it does not provide insights into future cash flows or cash flow projections. It focuses on past events and does not consider potential changes in the company's operating, investing, or financing activities. Therefore, it is limited in its ability to assist stakeholders in making forward-looking decisions or forecasting the company's future cash position.

It is important to consider these limitations and supplement the analysis of the cash flow statement with other financial statements, such as the income statement and balance sheet, to gain a comprehensive understanding of a company's financial performance, liquidity, and cash management.

 

Q.3. Briefly explain the objectives of preparing a cash flow statement?

Ans. The objectives of preparing a cash flow statement are as follows:

Provide Information on Cash Flows: The primary objective of a cash flow statement is to provide relevant and reliable information about the cash inflows and outflows of a company during a specific period. It presents the sources and uses of cash, categorizing them into operating activities, investing activities, and financing activities. This information helps stakeholders understand the company's cash flow dynamics and how it generates, manages, and allocates cash.

Assess Liquidity and Cash Management: The cash flow statement helps assess the liquidity of a company by providing insights into its ability to generate cash to meet its short-term obligations. It allows stakeholders to evaluate the company's cash flow adequacy, including its ability to fund operations, repay debts, pay dividends, and invest in future growth. By analyzing the net increase or decrease in cash and cash equivalents, stakeholders can assess the company's cash position and its ability to manage cash effectively.

Facilitate Decision-Making: Another objective of the cash flow statement is to enhance the decision-making process for various stakeholders. It provides valuable information that helps investors, creditors, and other interested parties evaluate the company's financial health and its ability to generate future cash flows. The cash flow statement complements the income statement and balance sheet by providing insights into the quality of earnings, the sustainability of cash flows, and the company's cash-generating capabilities. This information assists stakeholders in making informed investment, lending, and managerial decisions.

By fulfilling these objectives, the cash flow statement contributes to the transparency and reliability of financial reporting, providing stakeholders with a comprehensive view of a company's cash flow activities and its overall financial performance.

 

Q.4. what do you mean by cash flow from the operating activities?

Ans. Cash flow from operating activities refers to the section of the cash flow statement that reports the cash inflows and outflows resulting from a company's core operational activities. It represents the cash generated or utilized by the day-to-day operations of the business, excluding investing and financing activities.

 

Cash flow from operating activities typically includes the following:

Cash receipts from the sale of goods or services: This includes cash collected from customers for the sale of products or services provided by the company.

Cash payments to suppliers and employees: This includes cash paid to suppliers for the purchase of goods or services, as well as cash paid to employees as salaries, wages, and benefits.

Cash payments for operating expenses: This includes cash outflows related to various operating expenses, such as rent, utilities, insurance, marketing, and administrative costs.

Cash interest and income tax payments: This includes cash payments for interest on loans and income taxes owed by the company.

Dividends received: Cash inflows from dividends received from investments in other companies.

The net result of these cash inflows and outflows from operating activities indicates the operating cash flow generated by the company during the reporting period. A positive operating cash flow indicates that the company generated more cash from its core operations than it used, while a negative operating cash flow suggests that the company's operations consumed more cash than it generated.

Analyzing cash flow from operating activities helps stakeholders assess the company's ability to generate consistent and sustainable cash flow from its primary business operations. It provides insights into the company's profitability, efficiency in managing working capital, and its ability to generate cash to fund future investments and obligations.

 

Q.5. What do you mean by cash flow from investing activities?

Ans. Cash flow from investing activities refers to the section of the cash flow statement that reports the cash inflows and outflows resulting from a company's investment activities. It focuses on the acquisition and disposal of long-term assets and investments, as well as other activities related to the company's investment portfolio.

Cash flow from investing activities typically includes the following:

Cash inflows from the sale of long-term assets: This includes cash received from the sale of property, plant, and equipment (PP&E), such as land, buildings, machinery, or vehicles.

Cash inflows from the sale of investments: This includes cash received from the sale of investments in stocks, bonds, or other marketable securities held by the company.

Cash outflows for the purchase of long-term assets: This includes cash payments for the acquisition of property, plant, and equipment (PP&E) necessary for the company's operations.

Cash outflows for the purchase of investments: This includes cash payments for the acquisition of investments in stocks, bonds, or other marketable securities.

Cash outflows for loans made to others: This includes cash payments for loans made by the company to other entities, such as customers, suppliers, or other businesses.

Cash inflows from the repayment of loans made to others: This includes cash receipts from the repayment of principal amounts and interest on loans made by the company to others.

Cash outflows for business acquisitions or mergers: This includes cash payments made for acquiring subsidiaries or other business units.

The net result of these cash inflows and outflows from investing activities indicates the net cash generated or utilized by the company's investing activities during the reporting period. A positive cash flow from investing activities suggests that the company has generated more cash from its investments than it has invested, while a negative cash flow indicates that the company has made more investments than it has received cash from.

Analyzing cash flow from investing activities helps stakeholders evaluate the company's investment decisions, capital expenditure, and the effectiveness of its asset management. It provides insights into the company's growth strategies, capital allocation, and the extent to which it is deploying capital to generate future returns.

 

Q.6. Explain any four limitations of cash flow statement?
Ans. Certainly! Here are four limitations of the cash flow statement:

Non-Cash Transactions: The cash flow statement only focuses on cash inflows and outflows, excluding non-cash transactions. Significant non-cash transactions, such as the issuance of stock in exchange for assets, conversion of debt into equity, or the acquisition of assets through a capital lease, are not reflected in the cash flow statement. Relying solely on the cash flow statement may provide an incomplete view of the company's overall financial performance.

Timing Differences: The cash flow statement provides information on cash flows during a specific reporting period. However, the timing of cash receipts and payments may not perfectly align with the recognition of revenues or expenses in the income statement. This mismatch can occur due to credit terms, accrual accounting principles, or other factors. As a result, the cash flow statement may not accurately represent the company's ongoing operating activities.

Lack of Future Orientation: The cash flow statement focuses on historical information and does not provide insights into future cash flows or cash flow projections. It primarily looks at past events and does not consider potential changes in the company's operating, investing, or financing activities. Therefore, it may not be sufficient for making forward-looking decisions or forecasting the company's future cash position.

Manipulation and Interpretation: Like other financial statements, the cash flow statement can be subject to manipulation or misinterpretation. Companies may employ various accounting techniques or discretionary choices that can affect the presentation of cash flows. Additionally, different interpretation methods and classification choices can impact the analysis and comparability of cash flow statements across companies or industries.

Considering these limitations, it is important to supplement the analysis of the cash flow statement with other financial statements and information sources to gain a comprehensive understanding of a company's financial performance, liquidity, and cash management.