When Does Cash Flow Take Place?

When Does Cash Flow Take Place?

When there is a transaction between one ‘cash’ item and the other ‘non-cash’ item. There is no cash flow when there is a transaction between ‘two cash items’ or ‘two non-cash items.’

For this purpose ‘Cash’ means cash balance, bank balance and marketable securities and non-cash item means any current item (other than cash and cash equivalents) or any non-current item.

Transactions that do not result in Cash inflows/outflows.

(1) When there is movement among the cash and cash equivalents only, like:

1. Cash deposited into bank.

2. Cash withdrawn from bank for business use.

3. Purchase and sale of marketable securities being cash equivalents.

(2)  When there is movement among the non-cash items, like:

1. Purchase of fixed assets, purchase consideration paid by issue of shares/debentures.

2. Conversion of debentures into shares.

Transactions that result in Cash inflows/outflows:

1. Operating activities mean principal revenue producing activities of the business like:

1. Cash sale of goods and services.

2. Cash receipts from royalties, fees, commission etc.

3. Cash payments for purchase of goods and services.

4. Cash payments for salaries, wages etc.

5. Cash payment/refund of Income Tax.

6. Cash receipts/payments relating to future contracts for trading purposes.

2. Investing activities mean the activities relating to acquisition (purchase) and disposal (sale) of long term assets like:

1. Cash paid for purchasing fixed assets.

2. Cash paid for purchasing long term investments.

3. Cash receipts from sale of fixed assets.

4. Cash receipts from sale of long term investments.

5. Cash advances and loans made to outsiders.

6. Cash receipts from repayments of loans and advances to outsiders.

7. Cash receipts/payments relating to future contracts except for trading purposes or when considered as financing activities.

3. Financing activities mean the activities affecting the size and composition of capital structure i.e. the Debt and Equity of the company like:

1. Cash receipts from issue of Shares: Equity shares or/and Preference Shares.

2. Cash receipts from issue of Debentures or any other debt instruments.

3. Cash payments for Buy back of Equity shares.

4. Cash payments for Redemption of preference shares.

5. Cash payments for Redemption of Debentures or any other debt instruments.

6. Payment of Dividend on Equity/Preference shares.

7. Payment of Interest on Debentures and loans.