Cash Flow Statement

INTRODUCTION

• Traditional financial statement fails to inform the

way enterprise has generated cash and were
utilised in the accounting period.

• The need for inclusion of cash summary was

therefore recognised.

2
 CASH FLOW STATEMENT:
MEANING
• The summary of cash transactions (receipts
and payments) during an accounting period is
called Cash Flow Statement. The transactions
are catagorised as Operating, Investing and
Financing.

3
 ACCOUNTING STANDARDS

The ‘Accounting
Standards’ are issued to
establish principals and
policies which have to
be complied by the
business entities in
preparing the financial
statement.

4
 AS-3

• AS-3/IAS-7/IndAS-7 deals with preparation of

Cash flow Statement.

• AS-3 applies to the enterprises:

– Having turnover more than Rs. 50 Crores in a
financial year
– Listed companies

5
 CASH AND CASH EQUIVALENTS

• Cash: Cash in hand and deposits repayable on

demand with any bank or other financial
institution.

• Cash Equivalents: Short term, highly liquid

investments, that are readily convertible into
known amounts of cash and are subject to
insignificant risk/change to value.

6
 MEANING OF CASH FLOW

• Cash flows are inflows (i.e. receipts) and

outflows (i.e. payments) of cash and cash
equivalents.

• Movement in cash and cash equivalents are not

cash flows.

7
 TYPES OF CASH FLOW

The cash flows generated through Cash Flow

Activities
various activities are classified
as:
Operating
• Operating cash flow (Day to Day (Day to Day
Activities) Activities)

• Investing cash flow (Purchase of Investing

Land) e.g. Purchase
of Land
• Financing cash flow (Loan
Taken) Financing
e.g. Loan
Taken
8
 OPERATING ACTIVITIES

• These are principal revenue producing activities of the

enterprise.

• Examples:
– Cash receipts from sale of goods or rendering services
– Cash receipts from royalties, fees, commissions and
other revenue
– Cash payments to suppliers of goods and service
– Cash payments to and on behalf of employees

9
 REPORTING OF CASH FLOW FROM
OPERATING ACTIVITIES
• It can be derived either from direct method or indirect method
– Direct method: In this method, gross receipts and gross
payments of cash are disclosed

Direct Method
Cash receipts from customers XX
Cash paid to suppliers XX
Cash paid to employees XX
Cash paid for other operating expenses XX
Cash generated from operation XX
Income tax paid XX
Net cash from operating activities XX

10
 REPORTING OF CASH FLOW FROM
OPERATING ACTIVITIES(Contd.)

– Indirect method: In this method, profit and loss

account is adjusted for the effects of transaction of
non-cash and non-operating nature.

▪ Cash flow statement of listed companies shall be

presented only under the indirect method as
prescribed in AS 3

11
Retained Earning XX
Add: Dividend paid XX
Income Tax XX
Net Profit Before Tax XX
Add: Non cash and Non operating expenses XX
Depreciation

Loss on sale of Asset/Investment XX

Interest Paid XX
Provision for Bad debts XX
Less: Non Operating Incomes XX
Interest/ Dividend Received
Profit on sale of Asset/ Investment XX
12
Funds from operations XX
Add: Decrease in Current Asset XX
Add: Increase in Current Liabilities XX
Less: Increase in Current Asset XX
Less: Decrease in Current Liabilities XX
Cash generated from operation XX
Less: Income Tax Paid XX
Net Cash flow from operating activities XX

13
 INVESTING ACTIVITIES
• The activities of acquisition and disposal of long term
assets and other investments not included in cash
equivalent are investing activities.
• It includes acquiring and disposal of debt and equity
instruments, property and fixed assets etc.
• Examples:
– Cash payments for purchase of fixed assets
– Cash receipts from disposal of FAs
– Cash payments to purchase shares, or debt instruments of
other companies
– Cash receipt from disposal of above investments

14
 FINANCING ACTIVITIES
• Those activities that result in changes in size and
composition of owners capital and borrowing of the
organisation.
• It includes receipts from issuing shares, debentures, bonds,
borrowing and payment of borrowed amount, loans etc.
• Examples:
– Issue of equity shares
– Buy back of equity shares
– Issue/redemption of preference shares
– Issue/redemption of debentures
– Long term loan/payment thereof
– Dividend/interest paid
15
 INTEREST

• Interest Received
– Received on investment – it is investment inflow
– Received from short term investment classified, as
cash equivalents should be considered as cash
inflows from operating activities
– Received on trade advances and operating
receivables should be in operating inflows
– For financial enterprises – in operating inflow

16
 INTEREST (Contd.)

• Interest Paid
– On loans/debts is financing activities
– On working capital loan or loan taken to finance
operating activities are included in operating
inflows
– For financial enterprises – in operating outflow

17
 DIVIDEND

• Dividend Received
– For non-financial enterprises- investing inflow
– For financial enterprises – operating inflow

• Dividend Paid
– Always classified as financing inflow

18
 FOREIGN CURRENCY
TRANSACTIONS
• The effect of change in exchange rate in cash and
cash equivalents held in foreign currency should be
reported as separate part of the reconciliation of
cash and cash equivalents.

• Unrealized gain and losses arising from changes in

foreign exchanges rates are not cash flows.

19
 EXTRAORDINARY ITEMS

• The cash flows associated with extraordinary items

should be classified as arising from Operating,
Investing or Financing activities as appropriate and
separately disclosed.
• Examples:
– Insurance claim received against loss of stock or
profits is extraordinary operating cash inflow
– Insurance claim received against loss of fixed assets is
extraordinary investing cash inflow

20
 TREATMENT OF TAX

• Cash flow for tax payments / refund should be

classified as cash flow from operating activities
• Tax deducted at source against income are operating
cash outflows if concerned income are operating
• Cash flow for tax payments identified with a specific
investing or financing flow should be classified as
investing or financing flow respectively
• Example: Dividend Tax is recognised as financing
flow

21
 INVESTMENTS IN
SUBSIDIARIES/ ASSOCIATES

• Only the cash flow between enterprise itself and the

investee is required to be reported

• Example: Cash flow relating to dividends and

advances

22
ACQUISITIONS AND DISPOSALS OF
SUBSIDIARIES/OTHER BUSINESSES

• Cash flow on acquisition and disposal of

subsidiaries and other business units should be :
– Presented separately, Classified as investing
activities
– Total purchase and disposal should be disclosed
separately
– The position of the purchase / disposal consideration
discharged by means of cash and cash equivalents
should be disclosed separately

23
 NON-CASH TRANSACTIONS

• These should be excluded from the cash flow

statement
• These transactions should be disclosed in the
financial statements
• Examples:
– Acquisition of assets by assuming directly related
liabilities
– Acquisition of an enterprise by means of issue of
equity shares
– Conversion of debt to equity

24
 DISCLOSURES OF CASH AND CASH
EQUIVALENTS
• The components of cash and cash equivalents should be
disclosed
• Reconciliation of the amount in the cash flow statement
with the equivalent items reported in the balance sheet
• The amount of cash and cash equivalent balance held by
the enterprises that are not available for use (with
explanation by management)
• The amount of undrawn borrowing facilities that may be
available for future operating activities (indicating any
restriction on use of these facilities)

25
 Free Cash Flow
• Free cash flow is the cash that a company is left with
after it pays out interest and dividends to its
investors and pays for the capital expenditures it
needs to maintain its productive capacity.
• This cash can be used for expansion, reducing debt,
or other purposes.
• Free cash flow depends primarily on the company’s
capacity to generate cash from operations, which in
turn is heavily influenced by the company's net
income.

26
• Free Cash Flow = Cash Flow From Operating
Activities- Capital Expenses to keep current
level of operation – Interest - Dividends

27
• The presence of free cash flow indicates that a
company has cash to expand, develop new products,
buy back stock or reduce its debt.
• High or rising free cash flow is often a sign of a
healthy company that is thriving in its current
environment.
• Furthermore, since FCF has a direct impact on the
worth of a company, investors often hunt for
companies that have high or improving free cash
flow but undervalued share prices - the disparity
often indicates that share price will soon increase.

28
 Alternate methods

• Free Cash Flows to the Firm (FCFF) = Cash

Flow from Operating Activities- Capital
Expenses to keep current level of operation
• Free Cash Flows to the equity (FCFE) = Cash
Flow from Operating Activities - Capital
Expenses to keep current level of operation +
Net borrowing - Net debt repayment

29
 Analysis of Cash Flow Statement

• In addition to the classification of cash flow in

three different activities i.e. operating,
investing and financing, cash flow statement
can also be analyzed through following Ratios.

30
 Cash Flow Statement

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

 M/s ABC and Co. provides you with this Profit and loss account and balance
sheet for the two years. The directors are interested in tracking down the
activities that generate cash inflows during the year ending March 31, 2012.
prepare a cash flow statement based upon the following details:

Balance Sheet
Assets 2011 2012 Liabilities 2011 2012
Fixed assets 4,00,000 5,00,000 Equity 2,50,000 5,00,000
Investments 2,00,000 Nil Preference 50,000 20,000
shares

Machinery 1,50,000 3,00,000 Debentures 1,00,000 40,000

Cash in hand 41,000 2,00,000 Long termIncrease of Nil 30,000
borrowings 159000

Debtors 30,000 42,000 Net profit 1,20,000 1,39,000

Inventory 22,000 18,000 Reserves and 2,91,000 2,91,000
surplus

Creditors 32,000 40,000

Total 8,43,000 10,60,000 Total 8,43,000 10,60,000
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 Profit and loss Account

Particulars Amount Particulars Amount

To purchases 15,000 By sales 85,000
To salary and wages 5,000 By interest received 15,000

To income tax 1,000 By dividend income 10,000

To debentures interest 6,000

To dividend (preference) 3,000

To dividend (equity) 6,000

To depreciation 55,000
Net profit 19,000
Total 1,10,000 Total 1,10,000

Depreciation is provided @ 10%. New assets, if added, are assumed to be

purchased on the last date of financial year.

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

 Profit and loss Account

Particulars Amount Particulars Amount

To purchases 15,000 By sales 85,000

To salary and wages 5,000 By interest received 15,000

To income tax 1,000 By dividend income 10,000

To debentures interest 6,000

To dividend (preference) 3,000

To dividend (equity) 6,000

To depreciation 55,000

Net profit 64000 19,000

Total
Total 1,10,000 1,10,000

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

 Amount Amount
A. Cash flow from operating activities
Net profit before indirect expenses and incomes 19,000
Add: Non cash and Non operating Expenses
Debentures interest 6,000
Dividend (Preference shares) 3,000
Dividend (Equity shares) 6,000
Depreciation 55,000 70,000
Less: Non operating Incomes
Interest received (15,000)
Dividend received (10,000) (25,000)
Net Profit before working capital change 64,000

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

 Balance Sheet and Changes

Change
Assets 2011 2012 Change Liabilities 2011 2012

Fixed assets 4,00,000 5,00,000 1,00,000Equity 2,50,000 5,00,000 2,50,000

Preference
Investments 2,00,000 0 -2,00,000 50,000 20,000 -30,000
shares

Machinery 1,50,000 3,00,000 1,50,000Debentures 1,00,000 40,000 -60,000

Long term
Cash in hand 41,000 2,00,000 1,59,000 0 30,000 30,000
borrowings

Debtors 30,000 42,000 12,000Net profit 1,20,000 1,39,000 19,000

Reserves and
Inventory 22,000 18,000 -4,000 2,91,000 2,91,000 0
surplus

Creditors 32,000 40,000 8000

Total 8,43,000 10,60,000 2,17,000Total 8,43,000 10,60,000 2,17,000

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

 Amount Amount
A. Cash flow from operating activities
Net profit before indirect expenses and incomes 19,000
Add: Non cash and Non operating Expenses
Debentures interest 6,000
Dividend (Preference shares) 3,000
Dividend (Equity shares) 6,000
Depreciation 55,000 70,000
Less: Non operating Incomes
Interest received (15,000)
Dividend received (10,000) (25,000)
Net Profit before working capital change 64,000

Add: Decrease in current assets and Increase in current liabilities

Inventory 4,000

Creditors 8,000 12,000

Less: Increase in current assets and Decrease in current liabilities

Debtors (12,000) (12,000)

Net cash flow from Operating activities 64,000

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 Balance Sheet and Changes Investing Activities

Change
Assets 2011 2012 Change Liabilities 2011 2012

Fixed assets 4,00,000 5,00,000 1,00,000Equity 2,50,000 5,00,000 2,50,000

Preference
Investments 2,00,000 0 -2,00,000 50,000 20,000 -30,000
shares

Machinery 1,50,000 3,00,000 1,50,000Debentures 1,00,000 40,000 -60,000

Long term
Cash in hand 41,000 2,00,000 1,59,000 0 30,000 30,000
borrowings

Debtors 30,000 42,000 12,000Net profit 1,20,000 1,39,000 19,000

Reserves and
Inventory 22,000 18,000 -4,000 2,91,000 2,91,000 0
surplus

Creditors 32,000 40,000 8000

Total 8,43,000 10,60,000 2,17,000Total 8,43,000 10,60,000 2,17,000

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

 Working note 1 (Fixed assets)
Particulars Amount Particulars Amount
To Opening balance 4,00,000 By Depreciation @ 10% 40,000
To Purchases (Outflow – 1,40,000 By Closing balance 5,00,000
Assumed)
Total 5,40,000 Total 5,40,000

Working note 2 (Machinery)

Particulars Amount Particulars Amount

To Opening balance 1,50,000 By Depreciation @ 10% 15,000
To Purchases (Outflow – 1,65,000 By Closing balance 3,00,000
Assumed)
Total 3,15,000 Total 3,15,000

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

 Profit and loss Account

Particulars Amount Particulars Amount

To purchases 15,000 By sales 85,000

To salary and wages 5,000 By interest received 15,000

To income tax 1,000 By dividend income 10,000

To debentures interest 6,000

To dividend (preference) 3,000

To dividend (equity) 6,000

To depreciation 55,000

Net profit 19,000

64000
Total
Total 1,10,000 1,10,000

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

 Amount Amount
B. Cash flow from investing activities
Inflow:
Dividend received 10,000
Interest received 15,000
Sale of investments 2,00,000 2,25,000
Outflow:
Purchase of Fixed assets (Working note 1) (1,40,000)
Purchase of Machinery (Working note 2) (1,65,000) (3,05,000)

Net cash flow from Investing activities (80,000)

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

 Balance Sheet and Changes – Financing

Change
Assets 2011 2012 Change Liabilities 2011 2012

Fixed assets 4,00,000 5,00,000 1,00,000Equity 2,50,000 5,00,000 2,50,000

Preference
Investments 2,00,000 0 -2,00,000 50,000 20,000 -30,000
shares

Machinery 1,50,000 3,00,000 1,50,000Debentures 1,00,000 40,000 -60,000

Long term
Cash in hand 41,000 2,00,000 1,59,000 0 30,000 30,000
borrowings

Debtors 30,000 42,000 12,000Net profit 1,20,000 1,39,000 19,000

Reserves and
Inventory 22,000 18,000 -4,000 2,91,000 2,91,000 0
surplus

Creditors 32,000 40,000 8000

Total 8,43,000 10,60,000 2,17,000Total 8,43,000 10,60,000 2,17,000

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

 Profit and loss Account

Particulars Amount Particulars Amount

To purchases 15,000 By sales 85,000

To salary and wages 5,000 By interest received 15,000

To income tax 1,000 By dividend income 10,000

To debentures interest 6,000

To dividend (preference) 3,000

To dividend (equity) 6,000

To depreciation 55,000

Net profit 19,000

64000
Total
Total 1,10,000 1,10,000

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

 Amount Amount
C. Cash flow from financing activities
Inflow:
Issue of equity shares 2,50,000
Long term borrowing 30,000 2,80,000
Outflow:
Debentures redeemed (60,000)
Preference shares redeemed (30,000)
Debentures Interest (6,000)
Dividend paid (Preference shares) (3,000)
Dividend paid (Equity shares) (6,000) (1,05,000)

Net cash flow from Financing activities 1,75,000

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

 Amount Amount
A. Cash flow from operating activities
Net profit before indirect expenses and incomes 19,000
Add: Non cash and Non operating Expenses
Debentures interest 6,000
Dividend (Preference shares) 3,000
Dividend (Equity shares) 6,000
Depreciation 55,000 70,000
Less: Non operating Incomes
Interest received (15,000)
Dividend received (10,000) (25,000)
Net Profit before working capital change 64,000

Add: Decrease in current assets and Increase in current liabilities

Inventory 4,000

Creditors 8,000 12,000

Less: Increase in current assets and Decrease in current liabilities

Debtors (12,000) (12,000)

Net cash flow from Operating activities (A) 64,000

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 Amount Amount
B. Cash flow from investing activities
Inflow:
Dividend received 10,000
Interest received 15,000
Sale of investments 2,00,000 2,25,000
Outflow:
Purchase of Fixed assets (Working note 1) (1,40,000)
Purchase of Machinery (Working note 2) (1,65,000) (3,05,000)

Net cash flow from Investing activities (B) (80,000)

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

 Amount Amount
C. Cash flow from financing activities
Inflow:
Issue of equity shares 2,50,000
Long term borrowing 30,000 2,80,000
Outflow:
Debentures redeemed (60,000)
Preference shares redeemed (30,000)
Debentures Interest (6,000)
Dividend paid (Preference shares) (3,000)
Dividend paid (Equity shares) (6,000) (1,05,000)

Net cash flow from Financing activities (C) 1,75,000

Change in Cash (A +B+ C) 159000

Add: Opening Cash Balance 41000
Closing Cash Balance 200000

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.