Cash Flow Statement

It is made in addition to P&L A/c and Balance sheet. Reasons Profits reinvested in inventory and actual cash not available Sales made & revenue or turnover shown in P&L a/c but that is accrued & not paid Cash may have been invested in fixed assets & only a proportion of cost is charged to the P&L a/c so the profits may be very high and cash balances are very low. Cash inflows are sources of cash Cash outflows are uses of cash

 For making the cash flow statement : Determine the cash from business operations (from P&L a/c) by adjusting the items on the accrual basis Exclude the non-cash items like depreciation & amortisation Notice the changes in the long term assets like machinery cash has either been obtained from the sales or used in acquisition Notice the changes in long term liabilities means issue of shares or redemption All the increases in current asset excluding cash & decreases in current liabilities will decrease the cash and increase WC. Current assets Debtors, inventories, prepaid expenses Current liabilities creditors, O/D, Bills Payable

Examples : Sundry debtors Net sales (+) debtors at the beginning of the year (- )debtors at the end of the year = cash receipts from debtors during the year Sundry creditors Credit purchases (+ )Creditors at the beginning = Total amount payable to creditors (- )Creditors at the year end = cash payment to the creditors during the year

Components of Cash flow Statements

Operating activities- they produce either revenue or are the direct cost of producing a product or service. Cash inflows- customer collection from sales of product, interest or dividends received. Cash outflows- suppliers payments, employees payments, interest & income tax payments. Investing Activities- it is buying & selling non-current assets which generates revenues over a long period of time. Cash inflows are sales of non-current assets, lending money & receiving loan payments. Financing activities- is borrowing & repaying money, issuing stock & paying dividends

How to Prepare a Cash flow Statement

Take information from the P&L A/c for the current year & Balance sheet for the past two years. Net income is adjusted for the deferrals & accruals. The purpose of adjustments is to convert the accrual basis P&L A/c to a Cash flow statement. There are 2 methods of calculating the net cash flow. The result is same in both the cases: 1) The Direct method- where gross cash inflows & gross outflows are taken. 2) The indirect method- reconciles net income with net cash flow from operating activities by adjusting net income from deferrals, accruals & items affecting investing & financing cash flows.

Cash flows by Activities

Inflows of CashOperating Activities: Collections from customers Interest income Dividend receipts Other Operating Cash receipts Investing Activities: Collection on loans Sales of Debt or Equity instruments Sale of Productive Assets Financing Activities Issuance of Long-term debt Issuance of Equity

Cash flows by Activities

Outflows of Cash: Operating Activities: Payments to suppliers, employers Interest payments Income Tax payments Investing Activities: Purchase of Assets, Debt & Equity instruments Making Loans Financing Activities: Payment of Dividends Acquisition of own Equity securities Repayment of Amount borrowed

Cash flows from Operating Activities using the indirect method Adjustments to net income are made with the following : (+) Depreciation (-) Amortization of bond premium (+) Amortization of bond discount (-) Gain on sale of equipment (+) Loss on sale of equipment (+ )Decrease in Accounts Receivable (-) Increase in Accounts Receivable

(+) Decrease in inventory (-) Increase in inventory (-) Decrease in Accounts Payable (+) Increase in Accounts Payable (-) Decrease in Accrued expenses (+) Increase in Accrued expenses (+) Decrease in Prepaid expenses (- )Increase in prepaid expenses (-) Decrease in taxes payable (+) Increase in taxes payable

Example Question
Net Income is (Rs.) 300, Depreciation 110, Increase in A/P 20, Increase in Accrued Income tax 40, Increase in A/R 130, Increase in inventory 25, Purchase of Plant & Equipment 300 and additional shares issued is 40. Find out cash flows from operating, investing & financing activities and the overall cash flow statement.

 1. The following is the summary of cash transactions of Anju Ltd. for the year ended March 31, 2005. Prepare a Cash flow statement.
Receipts Balance as on 1.4.2004 Issue of equity shares Receipts from customers Sale of fixed assets Rs. 150 900 8,400 300 Payments Payment to creditors Purchase of fixed assets Expenses Wages and salaries Tax Dividends Repayment of bank loan Balance as on 31.3.2005 Rs. 6,000 600 600 300 750 150 900 450

Total

9750

Total

9750