Cash Flow Statement Class 12 Notes

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Cash Flow Statement Class 12

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 of 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 of 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 of 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 interests 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 interests 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 interests 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: 

 Format of Cash Flow Statement
Format of Cash Flow Statement

This brings us to the end of this blog on Cash Flow Statement class 12 study notes. We hope that the blog must prove to be helpful for that quick last minute revision before exams. For more such awesome and amazing reads and for more blogs on study notes, stay tuned with Leverage Edu and we will be back soon with yet another blog on study notes to make you prepare better for your exams. 

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