Accountancy · Chapter 9
Study notes aligned to the official NEB syllabus.
Profit is not the same as cash. A company can report a healthy profit and still run out of money to pay its bills, because profit is measured on an accrual basis while survival depends on cash. The cash flow statement explains where cash came from and where it went during the year, and it is a required part of company reporting under the accounting standards. This chapter studies how cash flows are classified, how the direct and indirect methods work, and how the statement is prepared.
A cash flow statement is a statement that shows the inflows and outflows of cash and cash equivalents during an accounting period, classified by the activity that caused them. Its objective is to explain the change in the cash balance from the beginning to the end of the year, so that users can judge how the company generates and uses cash, and whether it can meet its obligations. Cash equivalents are short term, highly liquid investments that can be turned into a known amount of cash quickly.
Every cash flow is placed under one of three activities.
Operating activities are the main revenue producing activities of the business, such as cash received from customers and cash paid to suppliers and employees. This section shows whether the core business is generating cash.
Investing activities are the acquisition and disposal of long term assets, such as the purchase and sale of machinery, land and investments. Buying a fixed asset is a cash outflow and selling one is a cash inflow.
Financing activities are the transactions that change the size and composition of the company's capital and borrowings, such as issuing shares or debentures, and repaying loans and paying dividends.