Cash Flow Statement — Class 12 Accountancy

A cash flow statement is the third important financial statement, alongside the position statement (balance sheet) and the income statement, and shows the inflows and outflows of cash and cash equivalents over a period. It is prepared in accordance with Accounting Standard 3 (AS-3), which is notified under Section 133 of the Companies Act 2013 and is mandatory for the companies to which it applies. The statement explains the historical changes in cash and cash equivalents by classifying cash flows into three activities: operating, investing and financing. Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing; cash flow from operations may be determined by the direct method or the indirect method, the latter adjusting net profit for non-cash and non-operating items and for changes in working capital. Investing activities relate to the acquisition and disposal of long-term assets and investments, such as the purchase or sale of fixed assets. Financing activities relate to changes in the size and composition of the owners' capital and borrowings, such as the issue of shares or debentures and the repayment of loans. The net effect of all three activities, added to the opening balance, gives the closing balance of cash and cash equivalents, helping users judge the firm's ability to generate cash and to meet its obligations.