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Statement of Changes in

Financial Position : Cash


Flow Statement

Presented by:
Hitesh Baid

The Cash Flow Statement


The cash flow statement provides information
about:
Cash Receipts (cash inflows)
Uses of Cash (cash outflows)
During a Period of Time

Inflows and outflows are reported for:


Operating activities
Investing activities
Financing activities

Cash Inflows and Outflows

Classification of Business
Activities : Inflow and
Outflow of Cash
Operating Activities

Cash Inflow
1)
2)
3)
4)

Cash Sales
Received from Debtor
Commission & Fees
Royalty

Cash Outflow
1)
2)
3)
4)
5)
6)

Cash Purchases
Payment to Creditors
Cash Operating Expenses
Payment of Wages
Income Tax
Manufacturing Expenses

Cash effects the transaction on Net Income

Classification of Business
Activities : Inflow and
Outflow of Cash
Investing Activities

Cash Inflow
1)
2)
3)
4)
5)

Sale of Fixed Assets


Sale of investments
Interest Received
Dividend Received
Working Capital Recovery

Cash Outflow
1) Purchase of Fixed Assets
2) Purchase of Investments
3) Working Capital

Classification of Business
Activities : Inflow and
Outflow of Cash
Financing Activities

Cash Inflow

Cash Outflow

1) Issue of Shares in Cash


2) Issue of Debentures in
Cash
3) Proceeds from long-term
borrowings

1) Payment of Loans
2) Redemption of Preference
Shares
3) Payment of Dividends
4) Interest Paid
5) Repayment of Finance/
Lease Liability

Objectives of Cash Flow


Statement
1. Highlighting cash flow from different
activities
2. Short-term Planning
3. Cash Flow information helps to
understand liquidity
4. Efficient cash management
5. Prediction of sickness
6. Comparison with budget
7. Cash position

Cash Flow Statement :


Limitations

Does not show the liquidity position of the


firm

It is not a substitute of income statement

Does not show the financial position of the


firm in totality

Distinction between Cash flow


Statement and Funds Flow
Statement
Basis Of Difference

Cash Flow

Funds Flow

It recognizes Cash basis


Of accounting

It is based upon accrual


Basis of accounting I.e
Working capital

Significance

It is useful for shortTerm financial planning

It is useful for long-term


Financial planning

Schedule of
Changes in
Working Capital

Such a schedule is not


Prepared for preparing
Cash flow statement

Schedule of changes in
Working capital is
Prepared separately

It studies only the


Causes of cash
variation

It studies causes of Change in working capital

Basis of
Accounting

Causes of
Variation

Preparing a Statement of
Cash Flows
Use net operating income as the starting
point to get net operating cash flow
Add back any non-cash expense
(Example - Depreciation)
Net Cash Flow = Cash Inflow - Cash Outflow
Net Operating Cash Flow = Income after Taxes
+ Depreciation

Preparing a Statement of
Cash Flows
Order of Presentation:
1.

Operating activities.

2.

Investing activities.

3.

Financing activities.

Three Sources of Information:


1. Comparative balance sheets
2. Current income statement
3. Additional information

Direct Method
Indirect Method

Cash Flow from Operating Activities :


Direct Method
Cash Flow from Operating Activities
Cash Receipts from :
Sales
Commission & Fees
Interest Received

Amount
(Rs.)

Amount
(Rs.)

XXX
XXX
XXX

XXX

Cash Payment for :


Purchases
Payments to and for employees
Operating Expenses
Interest Payments
Direct Taxes Paid
Net Cash Flow from Operating Activities

XXX
XXX
XXX
XXX
XXX
XXX

XXX

Cash Flow from Operating Activities :


Indirect Method
Cash Flow from Operating Activities
Net Profit before Tax
Adjustment for :
Depreciation
Loss on Sale of Fixed Assets
Loss on revaluation
Operating Profit before Working Capital Changes
Adjustment* for :
Trade and other Receivables
Inventories or Stocks
Trade Payments or (Creditors and B/P)
Cash Generated from Operations
Interest Paid
Taxes Paid
Net Cash Flow from Operating Activities

Amount
(Rs.)

Amount
(Rs.)

xxx
xxx
xxx
xxx

xxx
xxx

xxx
xxx
xxx
xxx

xxx
xxx
xxx
XXX

Preparing the Statement of


Cash Flows
Indirect and Direct Methods
Companies favor the indirect
method for two reasons:
1. It is easier and less costly
to prepare, and
2. It focuses on the
differences between net
income and net cash flow
from operating activities.

Book Approach
Income Statement
Revenues
Expenses
Cost of Goods Sold
Depreciation*
Operating Expenses
Taxable Income
Income Taxes
Net Income

*Assumes Tax Depreciation = Book Depreciation


Thus, no deferred taxes

Cash Flow Statement


+Net Income
+Depreciation

Operating
+

-Capital Investment
+Salvage Proceeds
-Gain Tax
-Working Inv Cap
+Working Cap Recovery

Investing

+Borrowed Funds
-Repayment of Principal

Financing

Format for Cash Flow


Statement

End of Presentation
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