Cash Flow Statement (CFS)

By Abdulla Israr & Simran Rani

CASH FLOW STATEMENT

Introduction

  • A Cash Flow Statement (CFS) is a financial statement that shows how cash is generated and used by an organization during a specific period.
  • Unlike the Profit & Loss Account (which shows income and expenses on accrual basis), the cash flow statement records only actual cash inflows and outflows.
  • It provides valuable insights into the liquidity, solvency, and financial flexibility of an organization.
  • It is mandatory for companies as per Accounting Standard-3 (AS-3) in India and also under IAS 7 (International Accounting Standards).

Basic Concepts of Cash Flow Statement

  1. Cash and Cash Equivalents
    • Cash: Includes cash in hand and demand deposits with banks.
    • Cash Equivalents: Short-term, highly liquid investments that can be easily converted into cash (e.g., treasury bills, commercial papers, marketable securities).
  2. Cash Flow
    • Refers to movement of cash—both inflows (receipts) and outflows (payments).
    • Helps to assess operating performance, financial policies, and future prospects.
  3. Classification of Cash Flows (as per AS-3/IAS 7)
    • Operating Activities
      • Cash flows from the main revenue-generating activities of the business.
      • Examples: cash received from patients in hospitals, payment to staff, suppliers, utilities.
    • Investing Activities
      • Cash flows related to acquisition and disposal of long-term assets and investments.
      • Examples: purchase/sale of equipment, investments in buildings, interest/dividend received.
    • Financing Activities
      • Cash flows that change the capital and borrowing structure of the company.
      • Examples: issue of shares, raising loans, repayment of borrowings, dividend payments.
  4. Methods of Preparing Cash Flow Statement
    • Direct Method:
      • Shows actual cash receipts and cash payments during the period (like a cash book summary).
    • Indirect Method:
      • Starts with net profit and adjusts for non-cash items (depreciation, goodwill written off) and changes in working capital.

Basic Format of Cash Flow Statement

(As per AS-3 / IAS 7)

A. Cash Flow from Operating Activities

  • Cash receipts from customers/patients
  • Cash paid to suppliers, employees, expenses
  • Cash generated from operations
  • Income tax paid
    = Net Cash Flow from Operating Activities

B. Cash Flow from Investing Activities

  • Purchase of fixed assets (outflow)
  • Sale of fixed assets (inflow)
  • Purchase of investments (outflow)
  • Sale of investments (inflow)
    = Net Cash Flow from Investing Activities

C. Cash Flow from Financing Activities

  • Issue of shares or debentures (inflow)
  • Raising/repayment of long-term loans
  • Dividend paid (outflow)
    = Net Cash Flow from Financing Activities

D. Net Increase/Decrease in Cash & Cash Equivalents

= (A + B + C)

E. Opening Balance of Cash & Cash Equivalents

F. Closing Balance of Cash & Cash Equivalents

= (D + E)

Example 1 (Simplified)

XYZ Hospital presents the following data:

  • Cash received from patients: ₹5,00,000
  • Payment to staff and suppliers: ₹3,00,000
  • Purchase of equipment: ₹1,00,000
  • Sale of old ambulance: ₹50,000
  • Loan taken from bank: ₹2,00,000
  • Dividend paid: ₹30,000
  • Opening cash balance: ₹70,000

Cash Flow Statement of XYZ Hospital
(For the year ending 31st March)

A. Cash Flow from Operating Activities
Cash received from patients = ₹5,00,000
Less: Payment to staff & suppliers = (₹3,00,000)
= ₹2,00,000

B. Cash Flow from Investing Activities
Purchase of equipment = (₹1,00,000)
Sale of ambulance = +₹50,000
= (₹50,000)

C. Cash Flow from Financing Activities
Loan taken from bank = +₹2,00,000
Dividend paid = (₹30,000)
= ₹1,70,000

D. Net Increase in Cash & Cash Equivalents
= (₹2,00,000 + ₹(50,000) + ₹1,70,000)
= ₹3,20,000

E. Opening Cash Balance = ₹70,000

F. Closing Cash Balance = ₹70,000 + ₹3,20,000
= ₹3,90,000

Importance of Cash Flow Statement

  • Assesses liquidity position (ability to meet obligations).
  • Helps in financial planning and short-term investment decisions.
  • Provides insights into operating efficiency.
  • Useful for creditors and investors to evaluate financial health.
  • Complements Profit & Loss A/c and Balance Sheet (gives cash-based view).

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