Cbse Class 12 Accountancy Part 2 Notes Chapter 6

1. What is a Cash Flow Statement?

Besides the two financial statements that indicate a company's position and operational activities, there's a third statement called the cash flow statement. It reveals how cash and cash equivalents move into and out of the company.

2. Objectives of Cash Flow Statement: The goals of a cash flow statement are:

• To give useful details about the cash movements (money coming in and going out) of a business during a specific time, categorizing them into operating, investing, and financing activities.

• To evaluate how well the business can generate cash and its plans for using that cash flow.

3. Benefits of Cash Flow Statement: 

• It helps users understand how a business's financial health, including its ability to handle cash flow changes and adapt to opportunities.

• It assesses how well a business generates cash, allowing comparisons between different companies' future cash flows.

• It makes it easier to compare how different companies report their performance by using the same rules for accounting.

• It assists in managing cash flow to match changing conditions, verifies past cash flow predictions, and shows how profitability and cash flow relate, especially with changing prices.

4. Cash and Cash Equivalents

Cash, according to AS-3, includes money held and money in demand deposits with banks. Cash equivalents refer to short-term, highly liquid investments easily convertible into known cash amounts with minimal risk of value change. Typically, such investments mature in three months or less from acquisition.

5. Cash Flows

Cash flows refer to the movement of cash into and out of a business because of non-cash items. When cash is received from a non-cash item, it's called cash inflow, and when cash is paid for such items, it's termed as cash outflow.

6. Classification of Activities for the Preparation of Cash Flow Statement

Cash Flow Statement Preparation Activities are typically categorized into three types, outlining how cash moves within a company:

• Cash from Operating Activities- Operating activities are the primary or core activities of a business.

1. Cash inflows from operating activities:

1. Money received from selling goods and providing services.

2. Money received from royalties, fees, commissions, and other sources of income.

2. Cash outflows from operating activities:

1. Money is paid to suppliers for goods and services.

2. Money is paid to employees directly or on their behalf.

3. Money paid to an insurance company for premiums, claims, annuities, and other policy benefits.

4. Money is paid for income taxes unless these expenses can be directly linked to financing and investing activities.

• Cash from Investing Activities involves transactions related to acquiring and selling long-term assets and investments not classified as cash equivalents. This includes purchasing and selling items like machinery, buildings, and land, as well as long-term investments. Here's a breakdown:

1. Cash Outflows from Investing Activities:

1. Payments are made in cash to purchase fixed assets, including intangibles and research and development costs that are capitalized.

2. Cash is used to acquire shares, warrants, or debt instruments of other companies, excluding those bought for trading purposes.

3. Advancing cash or loans to third parties, excluding financial enterprises' transactions considered as operating activities.

2. Cash Inflows from Investing Activities:

1. Cash received from selling fixed assets, including intangibles.

2. Receipts in cash from repayment of loans or advances extended to third parties, except in cases involving financial enterprises.

3. Cash obtained from selling shares, warrants, or debt instruments of other companies, except those held for trading.

4. Interest income is received in cash from loans and advances.

5. Dividends received from investments in other companies.

• Cash from Financing Activities refers to transactions involving long-term capital or funds within a business. This includes activities like receiving cash from issuing equity shares, debentures, or long-term bank loans, as well as repaying loans and paying interest and dividends. Here’s a simplified breakdown:

1. Cash Inflows from financing activities:

1. Cash received from issuing shares (both equity and preference).

2. Cash received from issuing debentures, loans, bonds, and other short or long-term borrowings.

2. Cash Outflows from financing activities:

1. Cash payments are made to repay borrowed amounts.

2. Interest payments on debentures and long-term loans.

3. Dividend payments on equity and preference shares.

7.  Treatment of Items:

• Extraordinary items are rare occurrences, like losses due to theft, earthquakes, or floods, which are not part of regular business activities. Their cash flows should be separately disclosed in financial statements under operating, investing, or financing activities.

• In financial firms focused on lending and borrowing, interest paid, interest received, and dividends received are treated as operating activities. Dividend payments are categorized as financing activities. Non-financial firms typically classify interest and dividend payments as financing activities and receipts as investing activities.

• Income taxes, such as income tax or capital gains tax, are usually included under operating activities unless directly linked to financing or investing activities.

• Non-cash transactions, like acquiring machinery through share issuance or redeeming bonds with shares instead of cash, are excluded from cash flow statements because they involve no cash or equivalents.

8.  Ascertaining cash flow from operating activities:

• Indirect Method: The indirect method for calculating cash flow from operating activities starts with the net profit or loss. This is because the income statement includes all operational activities of a business but is prepared on an accrual basis, not cash. It also accounts for non-operational items like interest paid and non-cash items such as depreciation. Adjustments are necessary to derive the cash flow from operations.

• Direct Method: The direct method reveals primary categories of cash received and paid out.

9.  Ascertaining cash flow from investing and financing activities:

When creating the cash flow statement, it's important to list all significant amounts of money received and paid out separately. These include gross cash receipts and payments, as well as net cash flows related to investing and financing activities. These should be clearly categorized under 'Cash Flow from Investing Activities' and 'Cash Flow from Financing Activities' headings.

10.  Preparation of Cash Flow Statement: Here are the points simplified:

• When preparing a cash flow statement, list all inflows and outflows in detail, including the net cash flow.

• Calculate the total net cash flow (or use) and show it as 'Net Increase/Decrease in cash and Cash Equivalents'. Add this to the 'cash and cash equivalents at the beginning' to find the 'cash and cash equivalents at the end'.

• This final figure matches the total cash in hand, cash at the bank, and cash equivalents shown in the balance sheet.

• If cash flows from operating activities are calculated indirectly and shown that way in the cash flow statement, it's called an 'Indirect method cash flow statement'.

• If cash flows from operating activities are calculated directly for the cash flow statement, it's termed a 'Direct method Cash Flow Statement'.

• Usually, companies use the indirect method unless specified otherwise for preparing the cash flow statement.

5 Important Topics of Cash Flow Statement Class 12 Notes Chapter 6 Accountancy

Importance of Chapter 6 Cash Flow Statement Class 12 Notes

• Cash Flow Statement Notes Chapter 6 is crucial for understanding how well a company manages its cash and liquidity.

• They help investors and creditors make informed decisions about a company's financial stability.

• These notes show how efficiently a company generates and uses cash from its operations, aiding in operational efficiency assessment.

• They assist in predicting future cash flows and planning for financial needs.

• Cash Flow Statement Notes enable comparison with industry standards and competitors' financial performance.

Tips for Learning the Class 12 Accountancy Chapter 6 Cash Flow Statement Notes

• First, understand the basic ideas and parts of cash flow statements well.

• Practice using examples to figure out cash flows from different activities like operations, investments, and financing.

• Know the differences between the direct and indirect ways to make cash flow statements and when to use each.

• Use pictures, graphs, and other visuals to help you see how cash moves in the statement, which makes it easier to understand.

• Relate what you're learning to real-life situations or things happening now to see how cash flow analysis works in the real world.

• Review your notes regularly to ensure you remember everything and are ready for your exams.

Conclusion

CBSE Class 12 Accountancy Revision Notes for Chapter 6 on Cash Flow Statement help students understand how businesses handle their cash. These notes simplify topics such as cash flow from operations, investments, and financing activities, which are crucial for exam preparation. Vedantu provides these notes for FREE, ensuring students can access reliable study materials aligned with the CBSE curriculum. Using Cash Flow Statement Notes PDF; students can enhance understanding and confidence when tackling questions on cash flow analysis in exams.

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