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Cash Flow Statement Conceptual Framework

Paper 3B: Financial Management Chapter 3 Unit II


CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA),
EPBM (IIMC), MCT

Learning Objectives
1. Concept of Cash Flow statement
(as per Revised AS 3)
2. Format of Cash Flow Statement
3. Preparation and Presentation of
Cash Flow Statement

Introduction to Cash Flow Statement


Introduction
Background
Important terms

Cash Flow - Introduction


1. A statement which discloses the changes in the
position of cash and cash equivalents between two
periods.
2. According to Revised AS 3 issued by ICAI, an
organization should prepare a cash flow statement
and present it for each period
3. Revised AS 3 deals with the provision of information
about changes in cash and cash equivalents of an
enterprise by means of Cash Flow statement

Cash Flow - Background


1. Cash flow statement is an important tool for short
term analysis
2. It ascertains the changes in balance of cash in
hand and at bank.
3. Also analyses the reasons for such changes
4. Two areas of analysis are Cash generating
efficiency and free cash flow

Cash Flow Important Terms

1
2
3

Cash cash on hand and demand deposits with banks

Cash equivalents short term, highly liquid investments that


are readily convertible in to known amounts of cash and
which are subject to insignificant risk of changes in value
(example Government securities)

Cash flow inflows and outflows of cash and cash


equivalents

Classification of Cash Flows

Cash Flow - Classification

Cash flow from Operating Activities


Principal revenue generating activities

Cash flow from Investing Activities


Acquisition and disposal of long term assets and
other investments not included in cash equivalents

Cash flows from Financing activities


Activities that has an impact of owners capital and
borrowings

1. Cash Flow from Operating Activities

Cash receipts from sale of goods or services


Cash payments to suppliers
Cash payment to employees

10

2. Cash flow from Investing Activities

Cash payment
to acquire
fixed assets
including
intangibles

Cash receipts
from disposal
of fixed assets

Cash payment
to acquire
shares, debt
instruments of
other
companies,
etc

Cash receipts
form disposal
of shares,
debentures,
etc

11

3. Cash Flows from Financing activities

Cash proceeds from issuing shares, debentures, etc


Cash repayments of amounts borrowed - debentures
Payment of dividend

12

Cash Flows Special Items

13

Foreign Currency & Extraordinary Items

Foreign
Currency
Cash Flows

Extraordinary
items

To be disclosed separately as arising from


operating / investing / financing activities
Unrealized gains or losses from foreign
exchange transactions are not cash flows

To be disclosed separately as arising from


operating / investing / financing activities
Examples Insurance claims, Bad debt
recovered, etc

14

Interest and Dividends Financial Enterprises


Interest Paid
Cash flow from
Operating activities

Financial
enterprises

Interest Received and


Dividend Received
Cash flow from
Operating activities

15

Interest and Dividends Other Enterprises


Interest Paid on Long Term
borrowings
Cash flow from Financing
Activities

Other
Enterprises

Interest Paid on Working Capital


borrowings
Cash flow from Operating
activities
Interest Received and Dividend
Received
Cash flow from Investing activities

16

Dividends Paid

In all
cases

Dividend Paid
Cash flow from
Financing activities

17

Taxes and Acquisition/ Disposition

Taxes on
Income

Should be separately
disclosed under Operating
activities unless identified,
otherwise

Acquisition and
disposition of
subsidiaries
and other
business units

Should be separately
disclosed under Investing
activities

18

Non Cash Transactions

Non-cash
transactions

Investing and financing


transactions that do not require
the use of cash or cash
equivalents should be excluded
from cash flow statement
Example Purchase of Fixed
Assets by Issue of Shares /
Debentures

19

Cash Flow Statement


Information Required for preparation

20

Cash flows Information Required

1. Comparative Balance Sheets


2. Profit and Loss Account
3. Additional information
Availability of 2 and 3 are optional

21

Cash Flow Statement


Two Methods Direct & Indirect

22

Financial Statements

Net Income does not mean net


cash received or
Generally prepared
on accrual basis of
accounting where in

Net Loss does not mean net


cash used in operating activities.

23

Cash Flow from Operating Activities


Cash from Operating
activities can be
reported in two ways

Direct Method

Indirect Method

24

Cash Flow Statement Direct Method


A: Cash flow from Operating Activities

Cash receipts from customers


Less: Cash paid to suppliers and employees
Cash generated from operations
Less: Income tax paid
Cash flow before extraordinary item
Add: Proceeds from earthquake disaster settlement
Net cash from Operating Activities

B: Cash flow from investing activities


C: Cash flow from Financing activities
Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)
Cash and Cash equivalents at the Beginning of the period
Cash and Cash equivalents at the End of the period

25

Cash Flow Statement Direct Method Continued


A: Cash flow from operating activities
B: Cash flow from investing activities

Purchase of fixed assets


Sale of fixed assets
Interest Paid
Net cash from Investing Activities

C: Cash flow from financing activities


Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)
Cash and Cash equivalents at the Beginning of the period
Cash and Cash equivalents at the End of the period

26

Cash Flow Statement Direct Method Continued


A: Cash flow from operating activities
B: Cash flow from investing activities
C: Cash flow from financing activities

Proceeds from issue of shares / Long Term borrowings


Repayment of Long Term borrowings
Dividend Paid
Net cash from Financing Activities

Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)


Cash and Cash equivalents at the Beginning of the period
Cash and Cash equivalents at the End of the period

27

Cash Flow Statement Indirect Method


A: Cash flow from operating activities
Net Profit before tax and extraordinary items
Adjustments for:
Depreciation
Gain or Loss on sale of fixed assets
Interest / Dividend
Operating profit before working capital changes
Adjustments for Increase / Decrease in
Receivables
Inventories
Payables
Cash generation from operations
Less: Interest paid
Less: Direct Taxes paid
Net cash from Operating Activities

28

Cash Flow Statement Indirect Method Continued


A: Cash flow from operating activities
B: Cash flow from investing activities

Purchase of fixed assets


Sale of fixed assets
Interest Paid
Net cash from Investing Activities

C: Cash flow from financing activities


Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)
Cash and Cash equivalents at the Beginning of the period
Cash and Cash equivalents at the End of the period

29

Cash Flow Statement Indirect Method Continued


A: Cash flow from operating activities
B: Cash flow from investing activities
C: Cash flow from financing activities

Proceeds from issue of shares / Long Term borrowings


Repayment of Long Term borrowings
Dividend Paid
Net cash from Financing Activities

Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)


Cash and Cash equivalents at the Beginning of the period
Cash and Cash equivalents at the End of the period

30

Practical Illustrations
Example 1: Direct Method

31

Example 1: Balance Sheet and P&L Account


BalanceSheetofMColimitedason31Mar2011
Liabilities
ShareCapital
RetainedEarnings
Accountspayable
Outstandingexpenses
Incometaxpayable
AccumulatedDepn

31.03.2010 31.03.2011
Rsin000
Rsin000
360
444
151.8
163.8
240
234
24
48
12
13.2
120
132
907.8

Assets
Land
Buildings&Equipments
Cash
Receivables
Inventories
Advances

1035

907.8

ProfitandLossAccountfortheyearended31Mar2011
Rsin000
NetSales
2520
Less:COGS
1980
Depreciation
60
Salariesandwages
240
Operatingexpenses
80
Provisionfortax
88
2448
GrossProfit
72
Profitonsalesofequipment(Cost:72)
Dividend
RetainedEarnings

31.03.2010 31.03.2011
Rsin000
Rsin000
48
96
360
576
60
72
168
186
264
96
7.8
9

12
84
72
12

1035

32

Example 1: Identification of Working Notes

Cash
Receipts
from
Customers

Cash
Payments
to
Suppliers
and
Employee
s

Income
Tax Paid

Investment
in purchase
of Building
and
Equipments

Receipts
from Sales of
Equipments
(for this
purpose we
need to know
the
Accumulated
Depreciation
of Equipment
sold)

33

Example 1: Direct Method Working Note 1


WorkingNote:1
CashReceiptsfromCustomers
NetSales
Add:OpeningReceivables
Less:ClosingReceivables

(Rs.In000)
2520
168
2688
186
2502

34

Example 1: Direct Method Working Note 2


WorkingNote:2
CashPaidtoSuppliersandEmployees
COGS
SalariesandWages
OperatingExpenses
Add:
OpeningAccountsPayable
OpeningOutstandingExpenses
ClosingInventories
ClosingAdvances

(Rs.In000)
1980
240
80
2300
240
24
96
9

Less:
ClosingAccountsPayable

234

ClosingOutstandingExpenses
OpeningInventories
OpeningAdvances

48
264
7.8

369
2669

553.8
2115.2

35

Example 1: Direct Method Working Note 3


WorkingNote:3

(Rs.In000)

IncomeTaxesPaid
ProvisionforTaxduringtheyear

88

Add:OpeningIncomeTaxpayable

12
100

Less:ClosingIncomeTaxpayable

13.2
86.8

36

Example 1: Direct Method Working Note 4


WorkingNote:4

(Rs.In000)

PurchaseofBuildingsandEquipments
OpeningBalanceofBuildingandEquipments
Less:CostofsoldEquipment

360
72
288

ClosingBalanceofBuildingandEquipments

576

PurchaseofBuildingandEquipments

288

37

Example 1: Direct Method Working Note 5

WorkingNote:5

(Rs.In000)

AccumulatedDepreciationonEquipmentssold
AccumulatedDepreciation Opening
Add:Depreciationduringtheyear

120
60
180

Less:AccumulatedDepreciation Closing

132
48

38

Example 1: Direct Method Working Note 6

WorkingNote:6

(Rs.In000)

CashReceiptsfromSaleofEquipments
CostofsoldEquipment

72

AccumulatedDepreciationonEquipmentssold

48

WrittenDownValueofEquipmentsold

24

Add:Profitonsales

12
36

39

Example 1: Direct Method - Solution


CASHFLOWSTATEMENT
(Rs.In000)
CashflowsfromOperatingactivities:
CashReceiptsfromCustomers
CashPaidtoSuppliersandEmployees
CashGeneratedfromOperations
Less:IncomeTaxPaid
NetCashfromOperatingactivities

2502
2115.2
386.8
86.8
300

40

Example 1: Direct Method Solution - Continued

(Rs.In000)
CashflowsfromInvestingactivities:
PurchaseofLand
PurchaseofBuildingandEquipment

48
288
336

CashreceivedonsaleofEquipment
NetCashfromInvestingactivities

36
(300)

41

Example 1: Direct Method Solution - Continued

(Rs.In000)
CashflowsfromFinancingactivities:
IssueofShares

84

DividendPaid

72

NetCashfromFinancingactivities

12

NetincreaseinCashandCashequivalents

12

CashandCashequivalentsatthebeginning

60

CashandCashequivalentsattheend

72

42

Practical Illustrations
Example 2: Indirect Method

43

Example 2: Balance Sheet and P&L Account


BalanceSheetofMColimitedason31Mar2011
Liabilities
ShareCapital
RetainedEarnings
Accountspayable
Outstandingexpenses
Incometaxpayable
AccumulatedDepn

31.03.2010 31.03.2011
Rsin000
Rsin000
360
444
151.8
163.8
240
234
24
48
12
13.2
120
132
907.8

Assets
Land
Buildings&Equipments
Cash
Receivables
Inventories
Advances

1035

907.8

ProfitandLossAccountfortheyearended31Mar2011
Rsin000
NetSales
2520
Less:COGS
1980
Depreciation
60
Salariesandwages
240
Operatingexpenses
80
Provisionfortax
88
2448
GrossProfit
72
Profitonsalesofequipment(Cost:72)
Dividend
RetainedEarnings

31.03.2010 31.03.2011
Rsin000
Rsin000
48
96
360
576
60
72
168
186
264
96
7.8
9

12
84
72
12

1035

44

Example 2: Identification of Working Notes

Income Tax Paid

Investment in purchase
of Building and
Equipments

Receipts from
Sales of
Equipments (for
this purpose we
need to know
the Accumulated
Depreciation of
Equipment sold)

45

Example 1: Indirect Method Working Note 1


WorkingNote:1

(Rs.In000)

IncomeTaxesPaid
ProvisionforTaxduringtheyear

88

Add:OpeningIncomeTaxpayable

12
100

Less:ClosingIncomeTaxpayable

13.2
86.8

46

Example 1: Indirect Method Working Note 2


WorkingNote:2

(Rs.In000)

PurchaseofBuildingsandEquipments
OpeningBalanceofBuildingandEquipments
Less:CostofsoldEquipment

360
72
288

ClosingBalanceofBuildingandEquipments

576

PurchaseofBuildingandEquipments

288

47

Example 1: Indirect Method Working Note 3

WorkingNote:3

(Rs.In000)

AccumulatedDepreciationonEquipmentssold
AccumulatedDepreciation Opening
Add:Depreciationduringtheyear

120
60
180

Less:AccumulatedDepreciation Closing

132
48

48

Example 1: Indirect Method Working Note 4

WorkingNote:4

(Rs.In000)

CashReceiptsfromSaleofEquipments
CostofsoldEquipment

72

AccumulatedDepreciationonEquipmentssold

48

WrittenDownValueofEquipmentsold

24

Add:Profitonsales

12
36

49

Example 2: Indirect Method - Solution


CASHFLOWSTATEMENT
(Rs.In000)
CashflowsfromOperatingactivities:
NetProfitBeforetaxandextradinaryitems:
GrossProfit
ProvisionforTax

72
88
160

Adjustmentsfor:
Depreciation
Operatingprofitbeforeworkingcapitalchanges
AdjustmentsforWorkingCapitalChanges:
Add:DecreaseinInventories
Less:IncreaseinReceivables
Less:IncreaseinAdvances
Less:DecreaseinAccountsPayable
Add:IncreaseinOutstandingexpenses

60
220

168
(18)
(1.2)
(6)
24

CashGenerationfromOperations

166.8
386.8

Less:IncomeTaxPaid
NetCashfromOperatingactivities

86.8
300

50

Example 2: Indirect Method - Solution- Continued

(Rs.In000)
CashflowsfromInvestingactivities:
PurchaseofLand
PurchaseofBuildingandEquipment

48
288
336

CashreceivedonsaleofEquipment
NetCashfromInvestingactivities

36
(300)

51

Example 2: Indirect Method - Solution- Continued

(Rs.In000)
CashflowsfromFinancingactivities:
IssueofShares

84

DividendPaid

72

NetCashfromFinancingactivities

12

NetincreaseinCashandCashequivalents

12

CashandCashequivalentsatthebeginning

60

CashandCashequivalentsattheend

72

52

Lesson Summary
We have learnt important terms used in Cash Flow Statement Cash, Cash Equivalents and Cash Flow Statement
Cash Flow Classification - Cash Flow from Operating, Investing
and Financing Activities

Treatment of certain special items in Cash Flow Statement

Format of Cash Flow Statement - Direct Method and Indirect


Method

Preparation and Presentation of Cash Flow Statement

53

Thank You

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