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A cash flow statement is a statement that reflects inflows and outflows of cash during a particular period. In other words, it is the crux of sources and applications of cash during a particular period. It analyses the reason for the change in cash between two balance sheet dates. The term ‘Cash’ here refers to the Cash and cash equivalents. A cash flow includes only those items that affect Cash, All non-cash items are excluded from the Cash Flow Statement.

Objectives of Cash Flow Statement:

• To ascertain the sources of cash and cash equivalents from operating, investing and Financing activities of the enterprises.
• To ascertain the applications of cash and cash equivalents under operating, investing and Financing activities of the enterprises.
• To ascertain the net changes in Cash and Cash equivalents i.e. the difference between sources and applications under the main activities.
• To know the major activities that have provided cash during the year.

Importance of Cash Flow Statement

By preparing a Cash Flow Statement, the trend of cash is known and on the basis of trend important decisions are taken.

A Cash Flow statement provides information for planning the short-term financial needs of the firm. Since it provides information regarding the sources and applications of cash during the year.

A Cash Flow Statement prepared for the future period helps in preparing a Cash Budget. It helps in planning the investment of surplus cash in short-term investments and to plan short-term credit in advance for deficit periods.

Classification of Cash Flows

Operating Activities– Operating Activities are those activities whose main aim is to generate profit for the enterprises by purchases and sale of goods and services.

 Examples of Cash Inflow from Operating Activities:

-Cash Sale of goods, Cash received from Trade Debtors, Cash Received from Trading, Commission, and Royalty.

Examples of Cash Outflow in Operating Activities:

 -Cash Purchases of gods, Cash paid to creditors, Operating expenses like salaries, wages, etc. paid.

Calculation of Cash Flow from Operating Activities:

Cash Flow from Operating Activities
	Net Profit before Tax from Continuing Operations
		(+) Depreciation and Amortization Expenses
		(+)Deferred tax
		(+) Provisions
		(+) Interest on Long Term Borrowings
		(+)/(-) Other Non cash items
	Changes in Working Capital

After all calculations, we get Cash Flow from operating activities. As a final step subtract Income tax paid from it to get the Net cash flow from operating activities.

• Investing Activities –Investing activities include the purchase and sale of long-term assets such as Machinery, Land & building, Furniture, etc. not held for resale. These activities also include those investments which are not included in Cash equivalents. Cash flow from investing activities discloses the expenditure incurred for resources intended to generate future income and cash flows. Examples of Cash Flow arising from Investing activities are:
• Cash receipt from the sale of any Noncurrent assets
• Cash payment to acquire fixed assets
• Cash receipt from the sale of shares, warrants, or debt instruments of other enterprises
• Cash receipt of insurance claim for property involved in an accident
• Cash advances and loans made to third-party
• Cash receipt from repayment of loans & advances made to third party.
• Financing Activities- Financing activities are those activities that arise as a result of changes in shareholder funds and borrowings of the organization. In other words, it includes those activities that result in changes in the size and composition of the Owner’s equity (Equity share capital and Preference share capital) and Borrowings (both Short-term and Long-term). Examples of cash flow arising from Financing activities are:
• Cash receipt from issue of equity or preference shares
• Cash receipt form Long term and short term borrowings such as issue of Bonds, Debentures, Bank Loan, Bank Overdraft, CC limit etc.
• Cash payment for Buy back of equity shares
• Cash payment of Short term and long term borrowings including redemption of debentures, bonds, preferences share, loans etc.
• Cash payment of Interim Dividend and Previous year Proposed Dividend
• Cash payment of interest on long term and short term borrowings.
• Cash and Cash Equivalent- It includes Cash and Cash Equivalents and the list is-
  • Cash in hand
  • Cash at Bank
  • Current Investments
  • Short term Investments or Marketable securities
  • Cheques and Drafts in hand

Some Special Items of Cash Flow Statement

1. Repurchase of Capital Stock– also known as buyback. If a company buys back its shares from the market and cancel it out we call it a repurchase of Capital Stock. It happens usually in the case of overcapitalization. As per Cash Flow, it indulges the outflow of cash.
2. Capital Expenditure– Any expenditure which is incurred in acquiring or increasing the value of fixed assets is termed as Capital Expenditure. For instance, Building purchases, and machinery purchased are examples of Capital Expenditure.
3.  Issuance or repayment of Debt- It is the same as the Issue of Debentures and redemption of debentures which is long-term borrowing.    

Importance of Cash Flow for Investors:

Cash Flow Statement tells Investors about the company’s operations. It allows investors to understand where the Company’s cash is used and from which sources Cash is being generated. It is important for investors as they come to know the Company’s footing. Usually company expects Investors not to demand dividend because of Liquidity crunch in the company. So a company can justify itself by presenting Cash Flow statement. Though Cash flow statement has its own limitations as well:

• It is based on Historical data and history is past and not very useful for the future as the future is uncertain
• It ignores the accrual concept and is based on the cash concept.
• It is a secondary data based statement. It merely rearranges the primary data already appearing in other statements like Income statement and Balance sheet.