Cash Flow Statement Class 12 Notes

The chapter of Accountancy on Cash Flow Statement class 12, is a pretty long and complicated chapter that comes in not only the main CBSE board exams of Accountancy class 12 but also comes in the Practical Exams. Hence, it becomes one of the very important chapters in Accountancy that covers good weightage as well. In this Leverage Edu blog, we will get to know everything related to the Cash Flow Statement so that you can solve your practical or numerical questions without any hassle in the exams. 

What is a Cash Flow Statement? 

As per the chapter of Accountancy on Cash Flow Statement class 12, a cash flow statement refers to a statement showing the cash inflows and outflows or the financial position of a business during different intervals of time in terms of cash and cash equivalents.

All publicly listed entities have to prepare and report a cash flow statement along with other financial statements on an annual basis under the New Accounting Standard-3.

Cash vs Cash Equivalent

According to the chapter on Cash Flow Statement class 12, Cash is divided into two categories which are cash in hand and demand deposits with the bank. On the other hand, cash equivalents are described as short-term highly liquid assets that are readily convertible into known amounts of cash and have a low risk of value change.

What are Cash Flows? 

As per the chapter on Cash Flow Statement class 12, cash flows are referred to as the inflows and the outflows of cash and cash equivalent in a business. In other words, it can be explained as the movement in and movement out of cash and cash equivalents. Think of it this way, the receipt of cash from a non-cash item would be termed as cash inflow and the cash payment in respect of such items would be termed as cash outflow. 

The Objectives of Cash Flow Statement

Based on the chapter on Cash Flow Statement class 12, the following are the objectives of a cash flow statement: 

1. When it comes to short-term financial planning, this method comes in handy.
2. When it comes to successful cash management, this is a must-have.
3. It is useful in the implementation of business policies.
4. Assists in the creation and formulation of a cash budget.
5. Used to measure cash flow from different activities such as running, saving, and funding.

Limitations of the Cash Flow Statement

Based on the chapter on Cash Flow Statement class 12, the following are various limitations of a cash flow statement: 

1. It is based on the historical cost principle
2. Additionally, it is based on secondary data
3. No adherence to basic accounting principles 
4. A cash flow statement is not a substitute for the income statement
5. It ignores all the non-cash transactions

Classification of Business Activities

As per the chapter of Cash Flow Statement class 12 and the Accounting Standard-3 (revised), the changes that are resulting in the inflows and outflows of cash and cash equivalents are classified into 3 business activities namely: 

Cash Flow from Operating Activities

The cash flow from operating activities covers the enterprise’s key revenue-generating activities as well as other non-investment and non-financing activities.

Operating Activities

Cash inflow	Cash outflow
Cash sales  Cash received from debtors  Cash received from commission and fees  Royalty	Cash purchases  Payment made to the creditors  Cash operating expenses  Payment of wages  Income tax

For a Finance Company 

Cash inflow	Cash outflow
Cash received for interest and dividends  Sale of securities  Cash sales  Cash received from debtors  Cash received from commission and fees  Royalty	Cash paid for interests  Purchase of securities  Cash purchases Payment made to the creditors  Cash operating expenses  Payment of wages  Income tax

For an Insurance Company 

Cash inflow	Cash outflow
Premiums and claims received  Cash received for interest and dividends  Sale of securities  Cash sales  Cash received from debtors  Cash received from commission and fees  Royalty	Premium and claims paid Cash paid for interests  Purchase of securities  Cash purchases  Payment made to the creditors  Cash operating expenses  Payment of wages Income tax

For a Real Estate or Infrastructure Company 

Cash inflow	Cash outflow
Rent Received  Premiums and claims received  Cash received for interest and dividends  Sale of securities  Cash sales  Cash received from debtors  Cash received from commission and fees  Royalty	Rent paid  Premium and claims paid Cash paid for interests  Purchase of securities  Cash purchases  Payment made to the creditors  Cash operating expenses  Payment of wages  Income tax

Cash Flow from Investing Activities

Investing activities (as specified by AS-3 or the Accounting Standards-3) are the purchase and disposition of long-term assets and other investments that are not included in cash equivalents. The following is a map of cash flow from investment activities:

Investing Activities

Cash inflow	Cash outflow
Sale of fixed assets  Sale of investments  Interest received  Dividends received  Rent received	Purchase of fixed assets  Purchase of investments

Cash Flow from Financing Activities

Financing operations, according to AS-3, are those that result in a change in the size and composition of the owner’s capital (including preference share capital) and borrowings (including debentures) from other sources. The following is a chart or table of cash flow generated by financing activities:

Financing Activities 

Cash inflow	Cash outflow
Issue of shares in cash  Issue of debentures in cash  Proceeds from long-term borrowings  Securities premium received  Increase in the balance of bank overdraft or cash credit account	Payment of loans  Redemption of preference shares and debentures  Buy-back of equity shares  Payment of dividends  Payment of interest  Premium paid on redemption of preference shares and debentures  The decrease in the balance of bank overdraft or cash credit account.

The  Format of Cash Flow Statement

The format of the Indirect Method of the Cash Flow Statement as per the chapter on Cash Flow Statement class 12 and the Accounting Standard-3 (Revised) is as follows: 

Numerous vivid examples are included in the NCERT Solutions for Class 12 Accountancy Chapter 6, which helps the students understand the concepts and pick up new information rapidly. These are the answers in accordance with the Class 12 CBSE syllabus. Visit BYJU’S or download BYJU’S – The Learning App for more information on NCERT solutions for Class 12 Accountancy, as well as additional solutions and study tools.

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