What is Cash Flow Statement

It is a statement of changes in cash position between the beginning and end of the period. It is a statement which summarizes the sources from which cash payments are made during a particular period of time, say a months or a year. In other words, it shows the various sources of cash inflow and uses of cash outflow during a period thus explaining the changes in cash position of the business. A cash circulation statement is not so much various from a funds flow statement.

What is Cash Flow Statement

Actually, the main variation between cash flow statement and funds flow statement relates to concept and meaning of the phrase fund. The phrase fund as utilized in funds flow statement signifies net working capital i.e. the distinction between current liabilities and current assets. However in a cash flow statement the word fund signifies cash fund as based on AS-3.


Cash Flow Statement and Funds Flow Statement

1. Cash position and working capital position. A cash flow statement is mainly concerned with changes in cash position white a funds flow statement is concerned with changes in working capital. It should be understood that working capital is a wide term and includes cash besides other current assets like debtors, bills receivable, stock in trade etc. Thus, cash is only one of the constituents of the working capital.

2. Usefulness in short-term financial analysis. For short term financial analysis, it is considered to be more useful to management as compared to funds flow statement. For example, if it is to be found whether a company will be able to meet its obligations maturing within one month, cash flow analysis will prove more realistic than funds flow analysis.

3. Method of preparation. Techniques of preparing cash flow statement and funds flow statement are different. In funds flow statement, an increase in a current liability or decease in a current asset result in decrease in net working capital and vice versa. But in a cash flow statement, an increase in a current liability or decrease in a current asset (other than cash) might result in increase in cash and vice-versa.

4. Schedule of changes in working capital. A funds flow statement is generally followed by a schedule of changes in working capital. But a cash flow statement is not followed by any other such statement.

5. Opening and closing balances. In cash flow statement opening and closing balances of cash and cash equivalents are given. But a funds flow statement does not contain any opening and closing balances.

6. Legal requirement. There is no legal requirement to prepare funds flow statement. But cash flow statement is to be prepared by every listed company as per AS-3 as required by SEBI.

Standard Cash Flow Statement

The Institute of Chartered Accountants of India (ICAI) issued AS-3 (Revised): Cash Flow Statement in March 1997. This standard supersedes AS-3: Changes in Financial Position which was issued in June 1981. It is in tune with international trends because Standard Cash Flow Statements have replaced Statement of Changes in Financial Position in almost every country.

This AS-3 has become mandatory w.e.f. 1-4-2001 for the following enterprises:
(î) Enterprises whose equity or debt securities are listed or going to be listed on a recognized stock exchange in India.

The companies in respect of which AS-3 is mandatory are required to comply with AS-3 under Sec. 211 of the Companies Act, 1956. This means that statutory auditors of such companies are required to give an assertion in respect of companies with AS-3. Securities and Exchange Board of India (SEBI) requires that all listed companies should submit a Cash Flow Statement along with other financial results of the company, prepared as per accounting standard AS-3 issued by ICAI.