1. CASH FLOW STATEMENTS
Statement of changes in financial position

2. Cash Flow Statements
Balance sheet and P&L A/c provide a firm’s assets-liabilities and its performance, respectively.
However, both these statements fail to explain the changes (with reasons) in the liquidity position of the firm.
A Cash Flow Statement is a statement which discloses the changes in cash position between two or more periods.
A Cash Flow Statement provides reasons for such changes and also clarifies the modes in which cash is generated as well as utilized by the firm during the period.
Cash includes cash on hand, demand deposits with bank, while cash equivalents as short term liquid investments.

3. Cash Flow Statements – Utility
Indicator of liquidity of a firm
Measures cash profits, i.e. actual performance against dressing
Vital management planning tool
Facilitates effective utilization of cash (balance of sources vs. uses)
Avoids maintaining idle cash as well as cases of cash shortages.
Provides a clear picture to users and management w.r.t. utilization of cash among different purposes
Statutory disclosure requirement as per Accounting Standard – 3

4. Cash Flow Statements – AS 3
Operating activities are ‘the principle revenue producing activities of the enterprise and other activities that are not investing or financing activities.’
Cash flows from operating activities is the key indicator to measure the performance and capability of a company. Examples –
Cash receipts from sale of goods/ rendering services
Cash receipts from royalty, commissions etc
Cash payments to suppliers for goods and services
Cash payments to employees
Any other cash flows relating to business of the enterprise. For e.g. trading, insurance, real-estate, stock-broking, rentals etc.

5. Cash Flow Statements – AS 3
Separate disclosure of investing activities is important because it represents the expenditure incurred for generating future income. It increases the total capacity of the enterprise.
Cash payments to acquire fixed assets (incl. intangibles)
Cash receipts from sale/ disposal of fixed assets (incl. intangibles)
Cash payments for investment in shares, debentures of other Cos.
Cash receipts on sale of investments in other companies
Cash advances and loans made to third parties
Cash receipts from repayment of loans made to third parties
Investing activities - ‘the acquisition and disposal of long term assets and other investments not included in the cash equivalents.’

6. Cash Flow Statements – AS 3
Financing activities are ‘activities that result in changes in the size and composition of the owners’ capital (incl. preference shares) & borrowings of the enterprise.’
Separate disclosure of financing activities is important since it is useful in predicting claims on future cash flows by the providers of the funds (capital + borrowing) to the enterprise.
Cash receipts from issuing shares or similar instruments
Cash receipts by issuing debentures, loans, bonds, notes etc.
Repayment of loans, redemption of debentures, preference shares etc.