Financial Reporting and Analysis

Lecture 4 - Preparation of Cash Flow Statement

Start-up on a Growth Track !

Profit & Loss A/c for the month ended on 28.2.2009

Dr.

Particulars
To Vehicle Running ex a/c To Office Rent a/c To Salary a/c To Travelling Exp. To Depreciation a/c To Ins. Premium a/c To Phone charges To Interest a/c To Profit taken to B/S

Amount In Rs.
1,800 2,000 5,500 7,700 5,000 56 2,100 2,000 14,844

Particulars
By Commission a/c

Cr. Amount in Rs.

41,000

41,000

41,000

Balance Sheet as on 28.02.2009

Liabilities Equity Balance on 1.2.09 Additional Capital Withdrawl of Capial Profit for the month Bank Loan I nt accrued but not due Salary outstanding Outstanding Bills Telephone Travel Assets Vehicle 250,000 99,344 Less Depn (4,167) 50,000 245,833 (3,500) Furniture 20,000 145,844 Less Depn (J an+ (833) Feb) 19,167 14,844 Rent Deposit 10,000 200,000 Phone Deposit 3,000 Commission Receivable 27,000 2,000 Addl Comm. Receivable 5,500 - Current month 2,000 - Last month 2,000 2,100 Prepaid I nsurance 618 3,700 Bank 61,770 Cash 2,600 373,988 373,988
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Balance Sheet as on 31.01.2009

Liabilities
Capital Profit/Loss for January Salary Outstanding Dues for Jan phone bill

Amoun t in Rs.

Assets

Amoun t in Rs.
20,000 10,000 3,000 674 59,270 11,000

100,000 Furniture -656 Rent Deposit 99,344 Phone Deposit Prepaid Insurance 2,000 Bank 2,600 Cash

103,944

5 103,944

What is a CFS?
Provides information on the changes in cash position of a company over a period of time Companies are required to summarize transactions affecting the cash position into operating, investing and financing activities Direct and Indirect Methods are available Cash from operating activities provide valuable information as to earning quality when compared with Net Income
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 Traces flow of Cash during a period 3 kinds of activities trigger transactions:

Operating Activities (mainly affects Income Statement and working capital components rarely impact on other assets and liabilities) Investing Activities (mainly affects items appearing under Fixed assets and Investments and working capital components small effect on Income Statement) Financing Activities (mainly affects items appearing under Share Capital, Reserves and Loan and working capital components small effect on Income 7 Statement)

Cash Flow Statement

Operating Profit and Working Capital

Income gives rise to (exactly opposite for expenses)
Increase in Equity and Increase in Assets or Decrease in Liabilities

Operating Income results in (exactly opposite for expenses) increase in equity and
Increase in Current Assets or Decrease in Current Liabilities
(very rarely otherwise)
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Operating Profit gets directly reflected in working capital changes

at Cash Flow Statement

Arising out of Accounting Equation
Change during a period in non-current assets and liabilities must reflect the change in Fund Change during a period in non-current assets and liabilities and in current assets other than cash and current liabilities must reflect the change in Cash Change in non-current assets arise mainly due to investing decisions of the period Change in non-current liabilities arise mainly due to financing decisions of the period Change in Equity (other than due to issue or buyback) and current assets & liabilities arise mainly due to operating decisions of the period

Cash Flow Statement for Direct the month ended on 28.02.2009

Particulars
Cash From Operating Activities: Commission Income Payment for Outstanding Expenses Rent Payment Travel cost Vehicle running expense

Amount Amount in Rs. in Rs.

10,000 (4,600) (2,000) (4,000) (1,800)

10

10 (2,400)

Cash Flow Statement for Direct the month ended on 28.02.2009

Particulars
Cash From Investing Activities: Purchase of Vehicle Cash From Financing Activities: Bank Loan Equity contribution Withdrawal by owner

Amount Amount in Rs. in Rs.

(250,000 ) 200,000 50,000 (3,500) 246,500

Net change in Cash during the period Balance at the beginning of the 11

(5,900) 11 70,270

Cash from Operating Activities

Start with PBT and Extraordinary items Scrutinize each item of income and expense

Non-cash

Cash or Non-cash

Cash

Neutralize its effect

Operating

Operating or Non-operating

Leave it alone

Non-operating
Neutralize its effect and show under Investing / Financing 12

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Steps to CFS preparation

CF from Operating activities
Start with PBT and Extraordinary items Follow the flowchart to arrive at Operating profit before w/capital changes Tick off items in B/S whose changes have been accounted for Give effect to w/capital changes Show tax payment (not the provision) Consider extraordinary items Obtain cash flow from operation Again tick off changes that have been captured
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 CF from Investing Activities

Steps to CFS preparation cont.

Pick up from flowchart items knocked out due to their being arising out of investing activities (include cash flow and NOT the profit/loss) Look for changes in items of Fixed Assets and Investments Again tick off changes that have been captured Pick up from flowchart items knocked out due to their being arising out of financing activities Look for changes in items of Equity and Reserve arising NOT out of current years Profit Again tick off changes that have been captured
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CF from Financing Activities

Scrutinize for any untapped item in Op./Cl. B/S

Cash Flow Statement for month ended on 28.02.2009

Particulars
Cash From Operating Activities: Net Profit Add: Depreciation Unpaid Expenses
(salary+phone+travel)

Indirect the

Amount Amount in Rs. in Rs.

5,000 11,300 56 2,000 (31,000) 14,844

Prepaid Insurance Interest Less: Comm. Receivable Operating profit before W/C Changes
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(12,644) 2,200 (4,600) 15 (2,400)

Cash Flow Statement for month ended on 28.02.2009

Particulars
Cash From Investing Activities: Purchase of Vehicle Cash From Financing Activities: Bank Loan Equity contribution Withdrawal by owner Net change in Cash during the period Balance at the beginning of the 16

Indirect the

Amount Amount in Rs. in Rs.

(250,000 ) 200,000 50,000 (3,500) 246,500 (5,900)
16 70,270

A Step Back!
Before we close the chapter on CFS, here is a look back In our attempt to capture the changes in B/S on two different dates that have moved through cash, how does the Feb B/S looks like AFTER we have neutralized all non-cash items and non-cash components of items in the P/L A/C ? The answer is on the next page Compare this B/S with the Jan B/S note the differences only with respect to Decrease in C/Liabilities and non-operating cash flows!
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Summary
Cash Flow Statement captures the impact on cash of the changes between two B/Sheets. An alternative exercise called Fund Flow Statement captures the impact on Working Capital This impact is split up into three components operation, investment and financing Cash includes cash, bank balance and investment into short-term instruments which are easily converted into cash without much loss of principal
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