Classification of Activities for the Preparation of Cash Flow Statement

In every business venture, there are three major statements of finance—the positional statement, the income statement, and the cash flow statement. The cash flow statement signifies the inflow and outflow of cash and the equivalents of cash-like assets, liabilities, shares, and investments. Every company has to keep these records as a prescriptive measure elaborated in the Companies Act of 2013, the standards of which are highlighted under section 133 of the Companies Act.

A choice statement of finance is based on the practicality, reliability, and validity of the statement. The most practical of the three statements mentioned above is the cash flow statement. The classification of activities that comes in the cash flow statement is on the basis of the changes in cash flow over a period of time. 

The Classification of Activities for the Preparation of Cash Flow Activities

The cash flow activities can be classified on the basis of the major changes that occur through the history of the income and expenditure of the company. The classifications are as follows according to the AS-3 of the Companies Act of 2013:

1. Operating Activities

Any activity that comprises the basic activity of a company in terms of income and expenditure is called an operating activity. These activities ascertain the major capitalistic activities. For example, if a company has a business of transporting milk, the activities of collecting milk from a dairy, the expenditure incurred by the filtration and pasteurization of milk or any other such activity, and also the profit earned by the door to door selling of milk, is labelled as the operating activities. As the name suggests, the activities that operate the whole business are known as the operating activities in the classification of activities in a cash flow statement.

• The inflow of Cash Activities

Cash receipt:

• selling of goods and services, royalties, commissions etc.

• The outflow of Cash Activities

Cash payments:

• On behalf of the employees, insurance services, income tax of investing and financing activities, supply payments etc.

1. Investing Activities

In order to acquire and dispose of assets that are in the company for a very long time, also known as long term assets, companies have to make a record. These activities which pertain to the selling or purchasing of assets that affect the company in the long term are known as investing activities. The buying and selling of fixed assets such as property, machinery, land, etc., are all included in investing activities.

• The inflow of Cash Activities

Cash Receipt:

• Disposed land, property, furniture, machinery etc. (all fixed assets), shares
• Interest on loans advances received in cash
• Repaid advances or loans received from a third party
• Investment dividends

• The outflow of Cash Activities

Cash Payments:

• Payments are made for the sale of the aforementioned commodities.

1. Financing Activities

The activities which indicate the difference in the size and the consistency of the entrepreneurial capital and the loans undertaken by the company are known as financing activities. These activities are recorded as important as they yield prescriptive claims for the future flow of cash. 

•  The inflow of Cash Activities

Cash proceeds from: 

• Issuance of shares and equity
• Issuance of long-term loans and advances
• Issuance of Debentures and loans

  The outflow of Cash Activities

Payments of:

• Repaid loans
• Equity on dividends of equity and preference capitals
• Payment of interest on debenture

 Objectives of the Cash Flow Activities

1. Show the inflow and outflow of cash in the company.
2. Classification of activities pertaining to the flow of cash in the company.
3. Record of the income and expenditure of the company.
4. Have Information about the liabilities and assets.
5. Correct evaluation of the net worth of assets and liabilities.
6. Provide useful information regarding the relative financial position of the company.

 Conclusion

Analysts determine the state of liquidity of a company with the help of cash flow statements. The Companies Act of 2013 makes provisions for the preparation and reporting of the cash flow statement which has to be made according to AS-3. The classification of activities for the preparation of cash flow statements is divided into flows from financing, investing, and operating activities. This helps a business and its shareholders and investors determine how much cash will be generated and with what certainty the company can count on the inflow of cash.