Page 1 - Lesson Note

Class-XII

Accountancy

Topic – CASH FLOW STATEMENTS

Meaning of Cash Flow Statements
It is a statement that shows flow (Inflow or outflow) of cash and cash equivalents
during a given period of time.
As per Accounting Standard-3 (Revised) the changes resulting in the flow of cash &
cash equivalent arises on account of three types of activities i.e.,

 Cash flow from Operating Activities
 Cash flow from Investing Activities.
 Cash flow from Financing Activities

Objectives of Cash Flow Statement

 To ascertain how much cash or cash equivalents have been generated
or used in different activities i.e., operating/investing/financing
activity.
 To ascertain the net changes in cash and cash equivalents.

 To assess the causes of difference between actual cash & cash
equivalent and related net earnings/income.
 To help in formulation of financial policies such as dividend policy,
fixed assets policy, capital structure related policy.
 To help in short-term financial planning.
 To ascertain the liquidity of enterprises.

Limitations of Cash Flow Statement

 1. Non cash transaction are not taken into consideration like shares or
debentures issued to vendors, depreciating charged during the year.
 2. It is a statement related with past data.
 3. It is not used for judging the profitability of enterprise.
 4. Accrual accounting concept is ignored in this statement e.g. credit

sales, credit purchases, outstanding expenses, accrued income are not
included.