Cbse Class 12 Accountancy Part 2 Notes Chapter 6

Differentiate between operating activities, investing activities, and financing activities.

Differentiate between operating activities, investing activities, and financing activities.

Cash flow statement:

Cash flow statement can be defined as the summary that reflects the cash inflow and outflow occur from the company. Cash flow statement records the cash inflow and outflow from operating, investing and financing activity.

Answer and Explanation: 1

Become a Study.com member to unlock this answer! Create your account View this answer

1. Operating activity: Operating activities can be defined as the basic business activities performed by the entity for the purpose generating revenue.

See full answer below.

Become a member and unlock all Study Answers

Start today. Try it now Create an account

Cbse Class 12 Accountancy Part 2 Notes Chapter 6

An Overview of Cbse Class 12 Accountancy Part 2 Notes Chapter 6

In Cbse Class 12 Accountancy Part 2 Notes Chapter 6, you’ll explore how cash moves in and out of a business with the help of the Cash Flow Statement. This chapter explains the basics of cash flow, different types of cash activities, and why understanding these is important for knowing a company’s real financial health. If you want a clear foundation or feel confused about terms like “operating,” “investing,” or “financing” activities, these notes will make things simple for you. To prepare well, check the Class 12 Accountancy Syllabus for all updated topics.

Table of Content

Many students face doubt about classifying activities correctly or remembering formats, but concise notes help you practise and clear your confusion. Learning this chapter becomes easier with our Class 12 Accountancy Revision Notes prepared by Vedantu experts.

This chapter is important because questions from it often come in CBSE exams and hold a good weightage. Mastering it can boost your confidence and marks during boards.

Access Cash Flow Statement Class 12 Notes for Accountancy 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.

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.

1. 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.

1. 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.

1. 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

Important Topics for Chapter 6 Cash Flow Statement

Structure of Cash Flow Statements

Classification of Cash Flows

https://homework.study.com/explanation/differentiate-between-operating-activities-investing-activities-and-financing-activities.htmlhttps://www.vedantu.com/revision-notes/cbse-class-12-accountancy-part-2-notes-chapter-6