CHAPTER - ONE

INTRODUCTION
1.1 Introductory Background
Cash being the most vulnerable item in a business, the reporting should be done in an appropriate
& acceptable format. For any investor, a cash flow statement may sound similar to the profit and
loss account. However while the profit and loss account tells us the revenues and expenses the
company made during the period, the cash flow statement gives an idea of how much cash came
into the company and how much went out of the company. The major difference between the two
is that unlike the profit and loss account which consists of non-cash revenues or expenses, the
statement of cash flows does not include the non-cash revenue/expenses.
Cash Flow Statement is a financial statement that reflects the inflows and outflows of cash &
cash equivalents resulting from operating, investing and financing activities during a specific
time period. Cash flow statements and projections express a business's results or plans in terms
of cash in and out of the business, without adjusting for accrued revenues and expenses. The cash
flow statement doesn't show whether the business will be profitable, but it does show the cash
position of the business at any given point in time by measuring revenue against outlays.
The statement of cash flows is an essential financial statement in the accounting industry. It is
one of four principal financial statements required by GAAP. The primary purpose of the
statement of cash flows is to provide relevant information about the cash receipts and cash
payments of a business during a period. The statement indicates why cash (including short-term
investments that are equivalent to cash) changed during the period by reporting net cash provided
or used by operating activities, investing activities, and financing activities.
This paper will discuss the direct method and indirect method of the statement of cash flows and
will also discuss the different sections for the statement of cash flows and how it assists a variety
of different users. The cash flow statement shows the sources of cash receipts and the purpose of
cash payments during an accounting period. The statement is helpful to explain the changes in
the balances of the cash account.
1

1.2 Origin of the Study

This Internship study has prepared as a requirement for BBA Program is an integrated, practical
and theoretical method of learning, the primary goal of internship is to provide an on-the-job
exposure to the student and an opportunity for translation of their theoretical conceptions in real
life situation. The students of this program are required to have practical exposure in any kind of
business organization as last term of this course.

1.3 Objectives of the Study

The Report accomplish the following specific objective have been covered Cash flow statement.
General Objective
The principle objective of the project is to know Cash Activities. To accomplish this practical
objective following specific objective has been covered:

Specific objective
The objective of this Standard is to require the provision of information about the historical
changes in cash and cash equivalents of an entity by means of a cash flow statement which
classifies cash flows during the period from operating, investing and financing activities.
Cash flow statement makes it possible to predict the amounts, timing, and uncertainty of
future cash flows on the basis of what has happened in the past, in other words it helps in
predicting future cash flows.
By comparing the cash flow statement with that of the budget which was made at the
beginning of the year one can see whether company has spend more or less than original
budget and if there is any big deviation between the two company can take steps to
control such deviation.

To identify the problems of cash activities.

To make suggestions to improve the activities of cash & cash equivalent.
2

 Usually cash and net profit tends to move together. Higher the net profit, higher will be
the cash and vice versa. But sometimes there is shortage of cash even when there are
good profits for the company. With help of cash flow statement its users can now what
was the reason for shortage of cash.
It facilitate management to plan and co-ordinate the financial operations properly,
because with the help of cash flow statement management can know how much fund is
needed, and what time it is needed, also it can decide the source from which fund will be
raised, whether internally or externally.

CHAPTER - TWO
3

CONCEPTUAL ISSUE
2.1 Cash and Cash Equivalents
Cash equivalents are held for the purpose of meeting short-term cash commitments rather than
for investment or other purposes. For an investment to qualify as a cash equivalent, it must be
readily convertible to a known amount of cash and be subject to an insignificant risk of changes
in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a
short maturity of, say, three months or less from the date of acquisition.
Investments in shares are excluded from cash equivalents unless they are, in substance, cash
equivalents; for example, preference shares of a company acquired shortly before their specified
redemption date (provided there is only an insignificant risk of failure of the company to repay
the amount at maturity).
Cash flows exclude movements between items that constitute cash or cash equivalents because
these components are part of the cash management of an enterprise rather than part of its
operating, investing and financing activities. Cash management includes the investment of
excess cash in cash equivalents.

2.2 Literature Review

The statement of cash flows reports cash flows in the following categories: Operating activities
which are transactions which affect net income, investing activities which are transactions that
affect investments in fixed assets such as property, plant and equipment, and finally financing
activities which affect the equity and debt of the business. The user assisted most by the
operating activities would most likely be accounts payable.
This section of the cash flow statement includes cash payments such as inventory, payroll, taxes,
interest utilities and rent. The net amount of cash provided (or used) by operating activities is the
key figure on a statement of cash flows. The user assisted most by investing activities would be
investors and creditors. This section is used to evaluate managements abilities to manage cash

now and in the future. It also assesses the companys ability to pay dividends and to pay
creditors.
An entity which prepares and presents financial statements under the accrual basis of accounting
should prepare a cash flow statement in accordance with the requirements of this Standard and
should present it as an integral part of its financial statements for each period for which financial
statements are presented.
Information about cash flows may be useful to users of an entitys financial statements in
assessing the entitys cash flows, assessing the entitys compliance with legislation and
regulations (including authorized budgets where appropriate) and for making decisions about
whether to provide resources to, or enter into transactions with an entity. They are generally
interested in how the entity generates and uses cash and cash equivalents.
This Standard applies to all public sector entities other than Government Business Enterprises.
Government Business Enterprises (GBEs) are required to comply with International Accounting
Standards (IASs) issued by the International Accounting Standards Committee. The Public
Sector Committees Guideline No. 1, Financial Reporting by Government Business Enterprises
notes that IASs are relevant to all business enterprises, regardless of whether they are in the
private or public sector. Accordingly, Guideline No. 1 recommends that GBEs should present
financial statements that conform, in all material respects, to IASs.

CHAPTER - THREE
DATABASE
3.1 Scope of the Study
An enterprise should prepare a cash flow statement and should present it for each period for
which financial statements are presented. Users of an enterprises financial statements are
interested in how the enterprise generates and uses cash and cash equivalents. This is the case
regardless of the nature of the enterprises activities and irrespective of whether cash can be
viewed as the product of the enterprise, as may be the case with a financial enterprise.
Enterprises need cash for essentially the same reasons, however different their principal revenueproducing activities might be. They need cash to conduct their operations, to pay their
obligations, and to provide returns to their investors.

3.2 Methodology of the Study

I have mainly prepared my report based on secondary sources. However I have also collected
data from:Primary sources
Like visitors, clients, officials, observation and discussion while I was visiting some private
companies.
Secondary Sources
With regard the secondary information however I have collected information from the various
issues of Annual Report of different companies, Monthly Review of companies, website of
different corporation.

3.3 Limitation of the Study

Some limitations of the reports are

Hesitance to share all types of information on the part of the Bank.

Lack of availability of sufficient data.
Time span was not very sufficient for a report of this magnitude.
Less time to work on.
Capital Market in Retro fee.
Not enough permission to collect more information.

CHAPTER - FOUR
7

FINDINGS OF THE STUDY

4.1 Overview of Cash Flow Statement
Cash flow statement is of vital significance to the management. It helps in short-term financial
decisions relating to liquidity. It shows the causes of changes in cash balance between two
periods and indicates the factors contributing to the reduction of cash balance in spite of increase
in profits and vice versa. The various sources of cash and application of cash are first identified.
The sources of cash are added to the opening cash balance and the various applications of cash
are subtracted to get the actual availability of cash. Cash from operations form an integral part of
the cash flow statement.
Actual cash flow refers to the actual movements of cash into and out of business and notional
cash flows result only in the case of increase or decrease in current assets. The cash flow
statement shows the companies cash inflows and outflows over the financial period. It can be
classified under three broad heads:
1. Operating cash flows: It includes the cash flows related to the normal day to day functioning
of the business. It includes firms primary activities of trade. It also includes payment of income
taxes.
2. Investing cash flows: It includes the cash flows relating to buying, selling of fixed assets like
plant, machinery, buildings, land, etc. It also includes acquisition or sale of securities or segment,
investment in other firm. Broadly it can be stated that it includes transactions that deal with
acquisition or sale of long term assets.
3. Financing cash flows: It includes the cash flows relating to issuance or retirement of firms
debt, debentures, shares and dividend paid to shareholders.
One very important thing to note here is that how a transaction is defined depends on the nature
of the business the firm does. The most suitable example can be of banks. While issuing or

holding long term securities will be an investing activity for most of the firms, but in the case of
banking institutions it will be classified as an operating activity.
The firms cash flow is quite different from its net income. These differences can arise for at least
two reasons:
1. The income statement does not recognize capital expenditures as expenses in the year that the
capital goods are paid for. Instead, it spreads those expenses over time in the form of an annual
deduction for depreciation.
2. The income statement uses the accrual method of accounting, which means that revenues and
expenses are recognized as they are incurred rather than when the cash is received or paid out.
Further, the income statement takes into account noncash charges like depreciation, amortization
and write off expenditures which do not result in any actual inflow or outflow. But these
transactions are excluded from cash flow statement.

4.2 Structure of the Cash Flow Statement

The most commonly used format for the cash flow statement is broken down into three sections:
cash flows from operating activities, cash flows from investing activities, and cash flows from
financing activities. Cash flows from operating activities are related to your principal line of
business and include the following:

Cash receipts from sales or for the performance of services

Payroll and other payments to employees

Payments to suppliers and contractors

Rent payments

Payments for utilities

Tax payments

Investing activities include capital expenditures disbursements that are not charged to expense
but rather are capitalized as assets on the balance sheet. Investing activities also include

investments (other than cash equivalents as indicated below) that are not part of your normal line
of business. These cash flows could include:

Purchases of property, plant and equipment

Proceeds from the sale of property, plant and equipment

Purchases of stock or other securities (other than cash equivalents)

Proceeds from the sale or redemption of investments

Financing activities include cash flows relating to the businesss debt or equity financing:

Proceeds from loans, notes, and other debt instruments

Installment payments on loans or other repayment of debts

Cash received from the issuance of stock or equity in the business

Dividend payments, purchases of treasury stock, or returns of capital

Cash for purposes of the cash flow statement normally includes cash and cash equivalents. Cash
equivalents are short-term, temporary investments that can be readily converted into cash, such
as marketable securities, short-term certificates of deposit, treasury bills, and commercial paper.
The cash flow statement shows the opening balance in cash and cash equivalents for the
reporting period, the net cash provided by or used in each one of the categories (operating,
investing, and financing activities), the net increase or decrease in cash and cash equivalents for
the period, and the ending balance. There are two methods for preparing the cash flow statement
the direct method and the indirect method. Both methods yield the same result, but different
procedures are used to arrive at the cash flows.

4.3 Methods of Cash Flow Statement

1. Direct Method
Under the direct method, you are basically analyzing your cash and bank accounts to identify
cash flows during the period. You could use a detailed general ledger report showing all the
entries to the cash and bank accounts, or you could use the cash receipts and disbursements
journals. You would then determine the offsetting entry for each cash entry in order to determine
where each cash movement should be reported on the cash flow statement.
10

Another way to determine cash flows under the direct method is to prepare a worksheet for each
major line item, and eliminate the effects of accrual basis accounting in order to arrive at the net
cash effect for that particular line item for the period. Some examples for the operating activities
section include:
Cash receipts from customers:

Net sales per the income statement

Plus beginning balance in accounts receivable

Minus ending balance in accounts receivable

Equals cash receipts from customers

Cash payments for inventory:

Ending inventory

Minus beginning inventory

Plus beginning balance in accounts payable to vendors

Minus ending balance in accounts payable to vendors

Equals cash payments for inventory

Cash paid to employees:

Salaries and wages per the income statement

Plus beginning balance in salaries and wages payable

Minus ending balance in salaries and wages payable

Equals cash paid to employees

Cash paid for operating expenses:

Operating expenses per the income statement

Minus depreciation expenses

Plus increase or minus decrease in prepaid expenses

Plus decrease or minus increase in accrued expenses

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Equals cash paid for operating expenses

Taxes paid:

Tax expense per the income statement

Plus beginning balance in taxes payable

Minus ending balance in taxes payable

Equals taxes paid

Interest paid:

Interest expense per the income statement

Plus beginning balance in interest payable

Minus ending balance in interest payable

Equals interest paid

Under the direct method, for this example, you would then report the following in the cash flows
from operating activities section of the cash flow statement:

Cash receipts from customers

Cash payments for inventory

Cash paid to employees

Cash paid for operating expenses

Taxes paid

Interest paid

Equals net cash provided by (used in) operating activities

Similar types of calculations can be made of the balance sheet accounts to eliminate the effects
of accrual accounting and determine the cash flows to be reported in the investing activities and
financing activities sections of the cash flow statement.
2. Indirect Method
12

In preparing the cash flows from operating activities section under the indirect method, you start
with net income per the income statement, reverse out entries to income and expense accounts
that do not involve a cash movement, and show the change in net working capital. Entries that
affect net income but do not represent cash flows could include income you have earned but not
yet received amortization of prepaid expenses, accrued expenses, and depreciation or
amortization.
Under this method you are basically analyzing your income and expense accounts, and working
capital. The following is an example of how the indirect method would be presented on the cash
flow statement:

Net income per the income statement

Minus entries to income accounts that do not represent cash flows

Plus entries to expense accounts that do not represent cash flows

Equals cash flows before movements in working capital

Plus or minus the change in working capital, as follows:

An increase in current assets (excluding cash and cash equivalents) would be shown
as a negative figure because cash was spent or converted into other current assets,
thereby reducing the cash balance.
A decrease in current assets would be shown as a positive figure, because other
current assets were converted into cash.
An increase in current liabilities (excluding short-term debt which would be reported
in the financing activities section) would be shown as a positive figure since more
liabilities mean that less cash was spent.
A decrease in current liabilities would be shown as a negative figure, because cash
was spent in order to reduce liabilities.

The net effect of the above would then be reported as cash provided by (used in) operating
activities. The cash flows from investing activities and financing activities would be presented
the same way as under the direct method.

4.4 Advantages of Cash flow statement

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(a) Measurement of Cash

Inflows of cash and outflows of cash can be measured annually which arise from operating
activities, investing activities and financial activities.
(b) Generating Inflow of Cash
Timing and certainty of generating the inflow of cash can be known which directly helps the
management to take financing decisions in future.
(c) Classification of Activities
All the activities are classified into: operating activities, investing activities and financial
activities which help a firm to analyze and interpret its various inflows and outflows of cash.
(d) Prediction of Future
A Cash Flow Statement, no doubt, forecasts the future cash flows which helps the management
to take various financing decisions since synchronization of cash is possible.
(e) Assessing Liquidity and Solvency Position
Both the inflows and outflows of cash and cash equivalent can be known, and, as such, liquidity
and solvency position of a firm can also be maintained as timing and certainty of cash generation
is known, i.e. it helps to assess the ability of a firm to generate cash.
(f) Evaluation of Future Cash Flows
Whether the cash flow from operating activities are quite sufficient in future to meet the various
payments; e.g. payment of expenses/debts/dividends/taxes.
(g) Supply Necessary Information to the Users
A Cash Flow Statement supplies various information relating to cash inflows and outflows; to the
users of accounting information in the following ways:
i.
ii.
iii.
iv.

To assess the ability of a firm to pay its obligations as soon as it becomes due;
To analyze and interpret the various transactions for future courses of action;
To see the cash generation ability of a firm;
To ascertain the cash and cash equivalent at the end of the period.
14

(h) Helps the Management to Ascertain Cash Planning:

No doubt a cash flow statement helps the management to prepare its cash planning for the future
and thereby avoid any unnecessary trouble.

4.5 Merits and demerits of Cash Flow Statement

A cash flow statement is useful in short-term planning. A business firm requires sufficient cash to
meet its various obligations in the near future. An analysis of different sources and applications
of cash will enable the management to make reliable estimates about inflows and outflows of
cash. On the basis of such estimates, management can plan out for investment of surplus cash or
for meeting any cash deficit.
The main advantages of a cash flow statement are as follows.
i.

Cash flow statement helps in efficient cash management. It is useful in evaluating

financial policies and cash position of the business. Cash is the basis of all financial
operations. Therefore, a projected cash flow statement will enable the management to
plan and control the financial operations properly. The management can know how much
cash is needed from which source it will be derived, and how much cash can be generated
internally and 1 much could be obtained from outside.

ii.

Cash flow statement helps in internal financial management. It is useful in formulation of

financial plans, e.g., possibility of repayment of long-term loans dividend policy
replacement of plant and machinery, etc.

iii.

Cash flow statement discloses the movements of cash and reasons thereof. It tells the
reasons for less cash balance in spite of heavy operating profits or for heavy cash balance
in spite of low profits.

15

iv.

Cash flow statement discloses success or failure of cash planning. Actual cash flow
statement and projected cash flow statement can be compared to detect deficiency, if any,
in cash management. Remedial measures can then be taken to remove the deficiency.

Cash flow statement suffers from the following boundaries:

i.

Cash flow statement does not disclose net income from operations. Therefore, it cannot
be a substitute for income statement,

ii.

The cash balance as shown by the cash flow statement may not represent the real
liquidity position of the business because it can be easily influenced by postponing the
purchases and other payments,

iii.

Cash flow statement cannot replace the funds flow statement. Each of the two has a
separate function to perform.

In spite of these limitations, cash flow statement is a useful supplementary tool for management.
It discloses the volume as well as the speed at which the cash flows in the different segments of
the business. This is helpful to management in knowing the amount of capital tied up in a
particular segment of the business. The cash flow analysis together with the ratio analysis serves
as a barometer in measuring the profitability and financial position of business.

4.6 Statement of Cash Flows

Discussing the steps of the statement of cash flows- Direct Method
Step- 1: Operating activities
Determine net cash provided/ used by operating activities by converting net income from an
accrual basis to a cash basis. To simplify and condense the operating activities section,
16

companies report only major payments. For these major classes, the difference between cash
receipts and cash payments is the net cash provided by operating activities. These relationship
are given belowCash receipts

From sale of goods and services to customers

From receipts of interest and dividend on loans and investment

Cash payments

To suppliers
To employee
For operating expenses
For interest
For tax

Steps-2: Investing and Financing ActivitiesAnalyze changes is non-current assets and liabilities accounts and record an investing and
financing activities or as significant non-cash transaction.

Increase in land
Increase in equipment
Increase in bonds payable
Increase in common stock
Increase in retained earnings

Step-3: Net change in cashCompare the net change in cash flows with the change in the cash accounts reported on
the balance sheet to make sure the amounts agree.

17

Format on Direct Method:

Cash flow statement
For the ended

18

Particulars
Cash flows from operating activities

Tk.

Tk.

Cash received from customer

Cash received from interest
Cash dividend received
Commission received
cash payments:
To suppliers
For operating expense
For interest expense
For income taxes
A. net cash provided or used by operating activities

Cash flows from investing activities

(+) Sale of any assets
(-) purchase of any assets
B. Net cash provided or used by investing activities

Cash flows from financing activities

(+) Issue of share
(-) Redeem of share
(-) Cash dividend paid
C. Net cash provided or used by financing activities
Over all net cash provided or used by (A+B+C)
(+) Beginning of cash and cash equivalents
Cash and cash equivalents at the end of the year
Calculation payment process of the Direct Method items:
1. Cash received from customerSales revenue

xxx

(+)

Decrease in A/R

xxx

(-)

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Increase in A/R

(xxx)
xxx

2. Cash received from interestInterest received

xxx

(+)

Decease received in accrued revenue

xxx

(-)

Increase in accrued revenue

(xxx)
xxx

3. Cash payment to suppliersCost of goods sold

xxx

Increase in merchandise inventory

xxx

Decrease in merchandise inventory

(xxx)

(-) Increase in A/P

(+)
(-)

(xxx)

4. Cash payment for operating expenseOpening expenses

xxx

(+)

Increase in prepaid expenses

xxx

(-)

Decrease in prepaid expenses

(xxx)

(-) Increase in accrued expenses

(xxx)

(+) Decrease in accrued expenses

xxx

depreciation expenses

(xxx)

(-)
xxx

5. Cash payment for interest expensesInterest expenses

xxx

(+) Decrease in interest payable

xxx

(-) Increase in interest payable

(xxx)
xxx
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6. Cash payment for income tax expensesIncome expenses

xxx

Decrease in accrued income tax expenses

(+)

xxx

(-) Increase in accrued income tax expenses

(xxx)
xxx

Using a worksheet to prepare the statement of cash flowsIndirect MethodWhen preparing a statement of cash flows companies may need to make numerous adjustments
of net income. In such cases they often use a worksheet to assemble and classify the data that
will appear on the statement. The worksheet is merely an aid in preparing the statement. Its use is
optional.
Preparing the worksheetPreparing worksheet involves a series of prescribed steps. The steps in this case are1. Enter in the balance sheet accounts and their beginning and ending balance.
2. Enter in the reconciling columns of the worksheet the balance sheet accounts other than cash
and their effects on the statement of cash flows.
3. Enter on the cash line and at the bottom of the worksheet the increase or decrease

Format on worksheetCompany Name

Worksheet
Statement of cash flows for the year ended

21

Balance sheet accounts

Debit balance accounts

Credit

balance

End of last

Recording items

End of current

year balance

Debit

year balance

Total xxx

xxx

xxx

xxx

Credit
xxx

xxx

accounts xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

Total
Statement of cash flows effects
Operating activities
Net income

xxx

Adjustments to net income

xxx

Investing activities

xxx
xxx

Receipts and payments

xxx

financing activities

xxx

Receipts and payments

xxx

Total
Increase(decrease) in cash
Total

xxx

xxx

(xxx)

xxx

xxx

(xxx)
xxx

CHAPTER - FIVE
CONCLUSION
5.1 Summary Observation
22

In this chapter we have discussed the important of the statement of cash flows in terms of
providing information for investors and creditors. We have seen that how we convert accrual
accounting information to cash based information and arrange that information. So, that investors
and creditors can better understand the cash effects of a companys operating, investing and
financing activities.
The cash flow statement provides information about the performance of a business. Income
statement can provide revenue, expense and income information but can exclude important
items. For example, a capital intensives business like a utility company on a real estate
investment trust will have significant depreciations expenses. A company could have minimum
income but strong cash flow.
A cash flow statement can also provide key information about accounts received which can
indicate the ability of business to collect from the customers.

5.2 Recommendations
1. Describe the purpose of statement of cash flows. The primary purpose of the statement of
cash flows is to provide information about cash receipts and cash payments of an entity
during a period. A secondary objective is to report the entity operating, investing and
financing activities during the period.
2. Identity the major classifications of cash flows. The cash flows are classified as- (a)
Operating activities, (b) Investing activities, (c) Financing activities.
3. Differentiate between net income and net cash flows operating activities. Net income on
an accrual basis must be adjusted to determine net cash flow from operating activities
because some expenses and losses do not provide cash flows.
4. Contrast the direct and indirect methods of calculating net cash flow from operating
activities under the direct approach major classes of operating cash receipts and cash
disbursements or calculated. The indirect method adds back to net income the non cash
expenses and losses and subtracts the non cash revenues and gains.
23

5. Determine net cash flows from investing and financing activities. Once the net cash flow
from operating is compute, the next steps is to determine whether any other changes in
balance sheet accounts caused an increase or decrease in cash.
6. Prepare a statement of cash flows preparing the statement involves three major steps- (a)
Determine the net change in cash, (b) Determine the net cash flow from operating
activities, (c) Determine cash flows from investing and financing activities.
7. Identity sources of information for a statement of cash flows. The information to prepare
the statement usually comes from three sources- (1) Comparative balance sheet (2)
Current income statement (3) selected transaction data.
8. Explain the use of a worksheet in preparing a statement of cash flows. When numerous
adjustments are necessary or other complicating factors are present, a worksheet is often
used to assemble, and classify the data that will appear on the statement of cash flows.

Bibliography
For making the term paper information has collected from these following sources1. Intermediate Accounting Donald E, kieso, Jerroi, J Weygandt Terry D, Warfield.
2. Principle of Accounting Donald E, Kimmel, kieso, Jerroi J Weygandt Terry D , Warfield.
3. Principle of Accounting :Hafiz uddin
4. Intermediate Accounting M. A. Kalam
5. At last following my honorable teachers guidelines.

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