Accounting

Objectives Of The Statement of Cash Flows

Objectives Of The Statement of Cash Flows In Brief: The objective of a statement of cash flows is to present financial information about changes in the cash and cash equivalents of an entity during the period. It is classified into three activities. They are – operating activities, investing activities and financing activities. According to International Accounting Standards, cash equivalents are short term and highly liquid investments which are readily convertible into known amounts of cash and that are subject to an insignificant risk of changes in market value.  Cash equivalents are held for the purpose of meeting short term commitments. They are not for investment or other purposes.

 The Statement of Cash flows is classified into:

  1. operating activities
  2. investing activities
  3. financing activities

 Operating activities are the activities which are the primarily revenue producing activities of an entity. These may be any other activities that do not fall under investing and financing activities.  Such cash flows comprise-

  • Receipts from debtors/customer
  • Payments to vendors/suppliers/creditors
  • Payments to employees and income taxes

Operating cash flows may also comprise interest received and dividends received (though these items might be classified as investing activities as well). It may also comprise interest paid (though this item might be classified as financing activities as well).

 Investing activities the activities are the acquisition and disposal of long term assets such as-

  • PPE (property, plant and equipment)
  • subsidiaries
  • businesses and intangibles and
  • other investments those are not included in cash equivalents (such as investment in shares in other entities).

 Financing activities are activities which result in changes in the size and composition of the equity capital and borrowing of an entity, such as-

  • issue of new shares
  • buyback of shares
  • new loans or borrowings
  • repayment of loans or borrowings
  • the payment of dividends (though payment of dividends is sometimes classified as an operating activity)

An entity may report significant accounting losses over a number of successive years and still report positive net cash flows from operating activities over the same period in its Statement of Cash flows.

Significant accounting losses may rise when the entity has large non-cash charges to the statement of comprehensive income.

Likely non-cash charges in Statement of Cash Flows are:

  • depreciation
  • impairment losses
  • increasing provisions
  • provisions for employee benefits

It may also arise when an entity decreases in size through the run-down of the level of inventories and receivables where this is not accompanied by large cash outflows for restructuring or retrenchments.

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