CASH FLOW

APPLICARTON OF AS-3 FOR COMPANIES

1 Mandatory for All Companies Except Small and Medium Enterprises (SMEs):
Under AS-3, it is mandatory for all listed companies and certain large unlisted companies to prepare a cash flow statement as part of their financial
reporting. This excludes smaller companies that qualify as Small and Medium Enterprises (SMEs) based on turnover and borrowing thresholds.
2. Reporting of Cash Flow in Annual Reports:
The cash flow statement must be presented in a company's annual report, giving investors and stakeholders clear visibility into how the company
generates and uses its cash over a financial period
.3. Standardized Presentation
AS-3 provides a standardized structure for the cash flow statement, dividing it into three main activities—operating, investing, and financing—
ensuring consistency and comparability across companies
.4. Operating Activities:
For companies, this section reports the cash generated from core business activities such as sales, purchases, and operational expenses. It can be
presented using either the direct method (reporting gross cash receipts and payments) or the indirect method (adjusting net income for non-cash
items and changes in working capital)
.5. Investing Activities:
Companies report cash spent or earned from the purchase or sale of long-term assets (e.g., machinery, property, or investments in other
companies). This section helps stakeholders assess the company's long-term investment strategy.
6. Financing Activities
Companies disclose cash flows related to raising or repaying debt, issuing or buying back equity, and paying dividends. This section provides insights
into how the company finances its operations and returns value to shareholders
.8. Useful for Decision-Making:
For companies, the cash flow statement is crucial for internal management, investors, and creditors to understand liquidity, cash management, and
 IMPORTANCE OF CASH FLOW STATEMENT
• 1. Understanding Cash Position: Cash flow statements provide a clear picture of a company's cash position, showing how much cash
is available at any given time. This is crucial for businesses to ensure they can meet their short-term obligations and operational
needs.

• 2. Operational Insights: By detailing cash flows from operating activities, the statement helps assess the efficiency of a company’s
core operations. It reveals whether the business generates enough cash from its day-to-day activities to sustain itself.

• 3. Investment Decisions: Investors rely on cash flow statements to evaluate the financial health of a company. A strong cash flow
can indicate a stable and potentially profitable investment, while weak cash flows may raise red flags.

• 4. Liquidity and Solvency: The statement helps in assessing liquidity, which is the ability to meet short-term liabilities. It also
provides insights into solvency, indicating whether the company can continue to operate in the long term without facing financial
distress.

• 5. Cash Flow Management: Businesses use cash flow statements to manage their cash flows effectively. By analyzing cash inflows
and outflows, companies can make informed decisions about spending, investing, and financing.

• 6. Forecasting Future Cash Flows: Historical cash flow data helps companies project future cash flows, which is essential for
budgeting and strategic planning. This forecasting enables better financial planning and resource allocation.

• 7. Comparison with Other Financial Statemen ts: The cash flow statement complements the income statement and balance sheet.
While the income statement shows profitability, the cash flow statement reveals the actual cash generated or used, providing a more
 0BJECTIVE OF CASH FLOW STATEMENT
1. Cash Flow Analysis:
The cash flow statement provides a comprehensive overview of cash inflows and outflows over a specific period. This analysis helps stakeholders
understand how effectively a company generates cash from its operations, investments, and financing activities. By examining these cash flows, one
can determine the company's ability to maintain and grow its operations.
2. Liquidity Assessment:
Liquidity refers to a company's ability to meet its short-term obligations. The cash flow statement is essential for assessing liquidity because it shows
the actual cash available at a given time. This information is critical for creditors and investors, as it indicates whether the company can pay its bills and
other liabilities as they come due.

3. Operational Performance Evaluation:

The cash flow from operating activities section of the statement highlights the cash generated by the company’s core business operations. This
evaluation is vital for investors and analysts as it provides insight into how well the company is performing in its primary business activities, separate
from cash flows generated from investing or financing activities.
4. Investment and Financing Activities:
The cash flow statement categorizes cash flows into operating, investing, and financing activities. This categorization helps stakeholders understand
how the company is investing in growth (through capital expenditures) and how it is financing its operations (through loans or equity). This
information is crucial for assessing the company's growth strategies and financial health.
5. Future Cash Flow Projections
: By analyzing historical cash flows, companies can make more accurate projections about future cash flows. This forecasting is essential for budgeting,
planning for capital expenditures, and ensuring that the company can maintain sufficient liquidity to support its operations and growth.

6.Decision-Making Aid:
The cash flow statement provides valuable information that aids in decision-making for various stakeholders. Investors use it to assess the viability of
investing in the company, creditors evaluate the risk of lending, and management relies on it for strategic planning. The insights gained from the cash
flow statement can influence decisions about expansion, cost management , and operational adjustment
 LIMITATIONS OF CASH FLOW
STATEMENT
1. Historical Data: Cash flow statements reflect past cash transactions and do not provide insights into future cash flows. They
can be misleading if used alone for predicting future performance.

2. Non-Cash Activities: The statement does not account for non-cash transactions, such as depreciation and amortization, which
can significantly impact a company's financial health. This can lead to an incomplete understanding of overall performance.

3. Timing Issues: Cash flow statements may not accurately represent the timing of cash flows. For example, cash received might
not reflect the actual sale period, leading to discrepancies in understanding operational efficiency.

4. Ignores Profitability: A company can have strong cash flows while being unprofitable. Therefore, relying solely on cash flow
statements can give a false impression of a company's financial health.

5. Lack of Standardization: Different companies may use various methods to prepare cash flow statements, leading to
inconsistencies and making comparisons difficult across different firms or industries.
6. Limited Scope: The cash flow statement focuses only on cash inflows and outflows, ignoring other important financial metrics
like profitability, return on investment, and overall financial position.

7. Short-Term Focus: Cash flow statements tend to emphasize short-term liquidity rather than long-term financial stability. This
can lead to decisions that favor immediate cash generation over sustainable growth.
 CLASSIFICATION OF CASH FLOW ACTIVITIES
I- OPERATING ACTIVITES
• Operating activities in cash flow refer to the cash that a business generates or spends through its
regular day-to-day operations.
• This includes all the cash transactions related to selling goods or services.
• For example, when a company sells products, the money received from customers is
considered cash inflow from operating activities
• . On the other hand, cash payments made to suppliers for purchasing materials, paying employees'
salaries, and covering other operating expenses like rent and utilities are cash outflows .
• The cash flow from operating activities is important because it shows how well a company can
generate cash from its core business functions.
• If a company has more cash coming in than going out from these activities, it indicates that the
business is healthy and can support its operations, pay debts, and invest in growth
• . There are two main ways to calculate this cash flow: the direct method, which lists all cash
inflows and outflows directly, and the indirect method, which starts with net income and adjusts
for non-cash expenses and changes in working capital.
• Some example of inflows and outflows take from book pg- 5.7
II. INVESTING ACTIVITIES

*Investing activities in cash flow refer to the cash transactions related to the purchase and sale
of long-term assets and investments
* This includes things like buying or selling property, equipment, or investments in other
companies.
*For example, if a business buys a new machine to help produce its products, the cash spent
on that machine is considered an outflow from investing activities.
* if the company sells an old piece of equipment or its investment in another company, the
cash received from that sale is an inflow.
*Investing activities are important because they show how much a company is investing in its
future growth and expansion.
* A company that is actively investing in new assets may be looking to improve its operations
or increase its revenue potential.
* However, if a company is selling off assets, it might indicate that it is trying to raise cash for
other purposes.
*Overall, cash flow from investing activities helps stakeholders understand how a company is
FINANCING ACTIVITIES
• Financing activities in cash flow refer to the cash transactions that involve raising funds for
the business or paying back money that the business owes.
• This includes activities like borrowing money from banks or other lenders, issuing stocks
to investors, or paying dividends to shareholders.
• For example, if a company takes out a loan, the cash it receives is considered an inflow
from financing activities.
• On the other hand, if the company pays back part of that loan or pays dividends to its
shareholders, those cash payments are outflows.
• Financing activities are important because they show how a company is managing its
capital and funding its operations.
• If a company is raising a lot of money through loans or issuing stocks, it might be looking
to expand or invest in new projects.
• if it's paying off debts or reducing dividends, it may be focusing on strengthening its
financial position.
• Overall, cash flow from financing activities gives insight into how a company finances its