CASH FLOW STATEMENT

CASH FLOW
A cash flow statement, when used in conjunction with the
other financial statements, provides information that
enables users to evaluate the changes in net assets of an
enterprise, its financial structure (including its liquidity and
solvency) and its ability to affect the amounts and timing
of cash flows in order to adapt to changing circumstances
and opportunities.

 Cash flow information is useful in assessing the ability of

the enterprise to generate cash and cash equivalents and
enables users to develop models to assess and compare
the present value of the future cash flows of different
enterprises.
It also enhances the comparability of the reporting of
operating performance by different enterprises because it
eliminates the effects of using different accounting
treatments for the same transactions and events.
Historical cash flow information is often used as an
indicator of the amount, timing and certainty of future
cash flows.

DEFINITIONS
Cash comprises cash on hand and demand
deposits with banks.
Cash equivalents are short term, highly liquid
investments that are readily
convertible into known amounts of cash and
which are subject to an insignificant risk of
changes in value.
Cash flows are inflows and outflows of cash and
cash equivalents.

DEFINITIONS
Operating activities are the principal revenueproducing activities of the enterprise and other
activities that are not investing or financing
activities.
Investing activities are the acquisition and
disposal of long-term assets and other
investments not included in cash equivalents.
Financing activities are activities that result in
changes in the size and composition of the
owners capital (including preference share
capital in the case of a company) and
borrowings of the enterprise.
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PREPARING A CASH FLOW

STATEMENT

All the cash flow activities are required to be

segregated under three activities viz., operating,
investing and financing
The sum of these activities reflects the net increase or
decrease in the cash and cash equivalents
Here, by cash we mean both cash in hand and bank
demand deposits, similarly cash equivalents means all
the short-term investments which can be readily
converted into cash without decline in its value

OPERATING ACTIVITIES

It is the principle revenue generating activities of an entity

Two ways of calculating it
Direct method

We independently analyze the changes that cash

transactions cause in each balance sheet non-cash
account

Indirect method

The Profit and Loss Account is adjusted for the effects of

transactions of non-cash and non-operating nature
Also known as Reconciliation to Net Income

The indirect method uses net-income as a starting

point, makes adjustments for all transactions for
non-cash items, then adjusts for all cash-based
transactions. An increase in an asset account is
subtracted from net income, and an increase in a
liability account is added back to net income. This
method converts accrual-basis net income (loss) into
cash flow by using a series of additions and
deductions

The following rules are used to make adjustments for

changes in current assets and liabilities, operating items
not providing or using cash and non-operating items.
Decrease in noncash current assets are added to net income
Increase in noncash current asset are subtracted from net
income
Increase in current liabilities are added to net income
Decrease in current liabilities are subtracted from net income
Expenses with no cash outflows are added back to net
income
Revenues with no cash inflows are subtracted from net
income (depreciation expense is the only operating item that
has no effect on cash flows in the period)
Non-operating losses are added back to net income
Non-operating gains are subtracted from net income
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Non-Cash Items

Non-operating
Items

WC Items

+ Depreciation /
Depletion /
Amortisation, Bad
Debt expense,
Provisions.

+ interest
expense/ Loss on
sale of fixed
assets or
investments

+ Decrease in CAs
and increase in
CLs

- Excess provision
written back

- Interest income /
gain on sale of
above

- Increase in CAs
and decrease in
CLs

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EXAMPLES

FUND FLOW ANALYSIS

WHAT IS FUND?
Fund is capital freely available for being used in any which
way the organisation intends i.e. for long term or short term
needs. To enable such usage, funds (capital that we call
funds) should be supported not just by assets which are
convertible but by assets that are easily convertible.
All the capital that is supported by current assets cannot be
said to be freely available for use without any hindrance. We
do not consider Current liabilities to be representing capital
that is freely available for use, since they are to be repaid
within a short time span
Therefore, capital supported by current assets excluding
current liabilities would only be considered as fund.
Funds = Current Assets - Current Liabilities = Working Capital

FUND FLOW
Fund being working capital, Funds flow indicates the flow of
working capital between two points of time. It involves
information relating to the various transformations undergone
by working capital (i.e. the changes that have taken place in
working capital) during the period involved between the two
points of time.
Every change in working capital is associated with (or is on
account of) a flow either an inflow or an outflow. Thus, funds
flow involves information relating to the inflows and outflows
that resulted in a change in working capital between the two
points of time.

Sources of Funds

Uses of Funds

Issue of Shares and Debenture for

cash

Purchase of Investments or OFA

Long Term Loans

Redemption of loans/equity

Sale of investments or OFA

Payment of dividend / tax

Funds from Operations

Increase in WC

Decrease in WC

CROSS AND NON CROSS

TRANSACTIONS
Cross transactions are accounting transactions involving one
account which falls in the current area and another account
which falls in the non-current area of the balance sheet and
which change in the same direction when one of them is an asset
and the other is a liability or in opposing directions when both are
either assets or liabilities. Cross transactions is an idea used in
the topic funds flow analysis. Such transactions influence i.e.
bring about a change in fund or working capital. (Cross
NCA & CA, NCA & CL, NCL & CL, NCL & CA)
Where both the ledger accounts affected by an accounting
transaction belong to the same area of the balance sheet i.e.
either current or non-current, then the transaction would be a
non cross transaction. Non Cross transaction is an identification
relevant to the topic funds flow analysis. Such transactions
would not result in a change in fund or working capital.
Non-cross NCA & NCL, CA & CL, NCL & NCL, NCA & NCA, CA &
CA, CL & CL

CHANGE IN WC
Working Capital = Current Assets - Current Liabilities; (Or) =
Non-Current Liabilities - Non-Current Assets

NO CHANGE

We see
in working capital, where,
on account of a transaction, there is a change by the same
amount in the same direction in a current asset and a
current liability (Or) a non current asset and a non current
liability
change by the same amount in opposite directions in
two current assets (Or) two current liabilities (Or) two noncurrent assets (Or) two non-current liabilities

CHANGE IN WC
We see A CHANGE in working capital, where, on account of a
transaction, there is a
change by the same amount in the same direction in a
current asset and a non-current liability (Or) a current liability
and a non current asset
change by the same amount in opposite directions in a
current asset and a non-current asset (Or) a current liability
and a non-current liability

FUND FLOW STATEMENT

A funds flow statement is a consolidated statement of all the
cross transactions over the period for which the flow is being
analysed. Cross Transactions i.e. transactions involving a current
account and a non-current account bring about a change in the
fund or working capital. Some bring about an increase in fund
and others bring about a decrease in the available fund (working
capital).
The cross transactions presented in the funds flow statement are
classified/grouped into two as,
Sources/Inflows of funds
Transactions which bring about an increase in the available fund
(working capital)
Applications/Outflows of funds
Transactions which bring about a decrease in the available fund
(working capital)

FUND FLOW STATEMENT

There will be an inflow, when, on account of the transaction,
there is
A decrease in the value of a non-current asset
(Or) an increase in the value of a non-current liability

There will be an outflow, when, on account of the transaction,

there is
A decrease in the value of a non-current liability
(Or) an increase in the value of a non-current asset

FUND FLOW EXAMPLE-1

Liability

2013

2014

Asset

2013

2014

Share
Capital

10000

15000

cash

5000

8000

From P&L

5000

8000

Debtors

12000

13000

Term Loan

6000

4000

Stock

10000

12000

Sry.Creditor 8000

12000

Machinery 3000

5000

Bills
Payable

5000

3000

Land

4000

4000

Total

34000

42000

34000

42000

FUND FLOW EXAMPLE -2

Liability

2013

2014

Asset

2013

2014

Capital

185000
0

2100000

Goodwill

600000

600000

From P&L

147800
0

1764000

L&B

1850000

2200000

Bank Loan

120000
0

900000

Plant &
M/c

474000

524000

Bills Payable 400000

680000

Furniture

194000

194000

Sry.
Creditors

140000
0

1220000

Stock

826000

724000

Reserve for
Tax

200000

180000

Sry.
Debtors

1200000

1280000

Bill Rec

800000

721000

Bank

500000

483000

Cash

84000

118000