This lesson video series is on the topic of Cash Flow Statements covering broadly the different cash flows and how are they incorporated in the Cash Flow Statements
Introduction to CBSE Class 12 Accountancy Chapter: Cash-Flow Statement
A Cash-Flow Statement provides a summary of cash inflows and outflows from operating, investing, and financing activities during a specific period. It helps in evaluating a company’s liquidity, solvency, and financial flexibility. According to the Accounting Standard (AS) 3, activities are categorized into:
- Operating Activities: These include the primary revenue-generating activities of the business, such as cash receipts from sales of goods and services and cash payments to suppliers and employees.
- Investing Activities: These involve the acquisition and disposal of long-term assets and investments, such as cash payments to acquire machinery and cash receipts from the sale of a building.
- Financing Activities: These involve changes in the size and composition of the equity capital and borrowings, such as issuing shares, repaying loans, and paying dividends.
The indirect method starts with the net profit and adjusts for non-cash transactions, changes in working capital, and other items to derive the net cash flow from operating activities. The direct method, however, lists all major operating cash receipts and payments.
Assignments
- Assignment 1: Prepare a Cash-Flow Statement
- Using the indirect method, prepare a Cash-Flow Statement for a hypothetical company, starting with a net profit of ₹500,000. Include adjustments for depreciation, changes in working capital, and gains/losses on asset sales.
- Assignment 2: Classify Cash Flows
- Identify and classify cash flows into operating, investing, or financing activities from the following transactions: purchase of equipment, issue of shares, and receipt of interest income.
- Assignment 3: Analyze a Real-World Cash-Flow Statement
- Obtain the Cash-Flow Statement of a publicly traded company and analyze its cash flows. Discuss how effectively the company manages its cash flows and any significant trends you observe.
Conclusion
Understanding Cash-Flow Statements is essential for evaluating a company’s financial health. By analyzing cash inflows and outflows, stakeholders can make informed decisions about the company’s performance and strategic direction.
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Questions and Answers for CBSE Class 12 Accountancy Chapter: Cash-Flow Statement
Q1. What is a Cash-Flow Statement? ANS: A financial statement that shows the inflow and outflow of cash and cash equivalents within a company during a specific period.
Q2. What are the three main categories of activities in a Cash-Flow Statement? ANS: Operating activities, investing activities, and financing activities.
Q3. How is the indirect method used in preparing a Cash-Flow Statement? ANS: It starts with net income and adjusts for changes in non-cash items, working capital, and other adjustments to calculate net cash from operating activities.
Q4. What is the purpose of a Cash-Flow Statement? ANS: To provide information about the cash inflows and outflows of a business, which helps assess its liquidity, solvency, and financial flexibility.
Q5. Give an example of a cash inflow from investing activities. ANS: Cash received from the sale of a long-term asset, such as a building.
Q6. Why is depreciation added back in the indirect method of preparing a Cash-Flow Statement? ANS: Because depreciation is a non-cash expense that reduces net income but does not affect actual cash flow.
Q7. What constitutes cash flows from financing activities? ANS: Activities that result in changes in the size and composition of the equity capital and borrowings, such as issuing shares and repaying loans.
Q8. Explain the term ‘cash equivalents.’ ANS: Short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.
Q9. How does an increase in accounts receivable affect the Cash-Flow Statement? ANS: It decreases the cash flow from operating activities as it represents sales made on credit, which has not yet been collected in cash.
Q10. What is the significance of analyzing a company’s Cash-Flow Statement? ANS: It helps stakeholders understand the company’s cash position, evaluate its ability to generate cash, and make informed decisions about its financial health.
