Terminology used in Cash Flow Statement
At present times, a cash flow statement is prepared as per the requirements of the Accounting Standard (AS-3) issued by the Institute of Chartered Accountants of India (ICAI). According to the As-3 (Revised), a cash flow statement summarizes the cash inflows and outflows of an organisation resulting from Operating Activities, Investing Activities, and Financing Activities during a specified time period.
Some basic terms used while preparing a cash flow statement are as follows:
1. Cash:
Cash under a cash flow statement consists of cash in hand and demand deposits with banks.
2. Cash Equivalents:
Cash Equivalents are short-term highly liquid investments that can be easily converted into a known amount of cash with insignificant risk. Cash and Cash Equivalents also consist of investments that have a maturity period of three months or less from the date of acquisition. For Example, Treasury Bills, Commercial Papers, etc. Besides these, a company’s preference shares purchased shortly before their date of redemption are also treated as Cash and Cash Equivalents, only if there is no risk in the failure of their payment by the company. In simple terms, Cash and Cash Equivalents consist of Short-term Deposits/Short-term Investments, Marketable Securities/Treasury Bills, and Current Investments.
Note: The Current Investments of a company are considered Marketable Securities, until and unless specified otherwise.
3. Cash Flow:
Cash Flow refers to the inflow and outflow of cash and cash equivalents. According to As-3 (Revised), an organisation should prepare its cash flow statement in a manner that reveals the inflows and outflows of cash and cash equivalents classified into three parts; viz., Cash Flow from Operating Activities, Cash Flow from Investing Activities, and Cash Flow from Financing Activities. One should also keep in mind that any movement in the components of cash and cash equivalents is the part of cash management of an organisation instead of its operating, investing, and financing activities.
Some examples of Movement of Cash and Cash Equivalents are as follows:
- Cash Deposited into Bank
- Cash Withdrawn from the bank for business purposes
- Purchase and sale of marketable securities
The users of a cash flow statement of a company can evaluate the impact of the activities mentioned above on its cash and cash equivalents.