Arrange the following activities in correct sequence while preparing the Cash Flow Statement.

A. Cash flow from Investing Activities

B. Cash flow from Operating Activities

C. Profit before tax and Extraordinary items

D. Cash flow from Financing Activities

E. Cash and Cash Equivalents

Choose the correct answer from the options given below :

C, B, A, D, E

The correct answer is option (2) : C, B, A, D, E.

C. Profit before tax and Extraordinary items- If there is any tax and extraordinary items included in the net profit then they are adjusted to calculate the net profit before tax and extraordinary items. Then this is the starting point for the cash flow statement as it represents the net income generated by the company before considering non-cash items and taxes.

B. Cash flow from Operating Activities- Operating activities are the activities that constitute the primary or main activities of an enterprise. For example, for a company manufacturing garments, operating activities are procurement of raw material, incurrence of manufacturing expenses, sale of garments, etc. These are the principal revenue-generating activities (or the main activities) of the enterprise and these activities are not investing or financing activities.

A. Cash flow from Investing Activities- As per AS-3, investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Investing activities relate to purchase and sale of long-term assets or fixed assets such as machinery, furniture, land and building, etc. Transactions related to long term investment are also investing activities. Separate disclosure of cash flows from investing activities is important because they represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.

D. Cash flow from Financing Activities- Financing activities relate to long-term funds or capital of an enterprise, e.g., cash proceeds from issue of equity shares, debentures, raising long-term bank loans, repayment of bank loan, etc. As per AS-3, financing activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in case of a company) and borrowings of the enterprise. Separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.

E. Cash and Cash Equivalents- According to Accounting Standard 3 (AS-3), 'Cash' encompasses physical cash on hand and demand deposits held in banks. 'Cash equivalents' refer to short-term, highly liquid investments that can be quickly converted into known amounts of cash with minimal risk of value fluctuations. Typically, an investment qualifies as a cash equivalent when it has a short maturity period, often three months or less from the acquisition date. Investments in stocks are not considered cash equivalents, unless they meet specific criteria. For instance, preference shares that are acquired shortly before their scheduled redemption date, provided there's minimal risk of the company failing to repay the amount upon maturity, can be treated as cash equivalents. Similarly, short-term marketable securities that can be readily converted into cash without significant changes in their value are also considered cash equivalents. These investments must be highly liquid and easily convertible into cash.

This is the correct sequence of preparing cash flow statement-
(1) Cash flows from operating activities
(2) Cash flows from investing activities
(3) Cash flows from financing activities
Net increase (decrease) in cash and cash equivalents (1 + 2 + 3)
+ Cash and cash equivalents at the beginning
= Cash and cash equivalents at the end.

* To calculate the cash flow from operating activity net profit before tax and extraordinary items is the first step.