Cash Flow Statement

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Cash plays an important role in the operation of any business concern. In fact cash is both the beginning as well as the end of any business organization . Hence, while analyzing the results of any business concern it becomes useful to know that what were the balances of cash in the beginning and at the end of a particular period? What was the position of cash flow in bringing out the changes in these balances, i.e. What were the sources of cash flow and in which activities such inflow was utilized. All these factors are analyzed through the technique of ‘Cash Flow Statement’.



Cash flow statement is shows inflows and outflows of cash in any business concerns.  “Cash” means cash and cash equivalents, while “flow” means movement of cash.  Treasury Bills  Money Market Funds  Commercial Paper (short-term loans)  Certificates of Deposit  Cash flow statement may be defined as a summary of receipts and payments of cash .

 Cash flow statement explain reasons for the changes in cash position of an enterprise.  Transaction that increase the cash balance of the concern are known as ‘inflow’ of cash and those which decrease the cash balance as ‘outflow’ of cash.  According to the accounting standards-3 (as-3) cash flow is classified into three main activities namely
 operating activities  Investing activities  Financing activities

This shows that the amount of funds flowing into the business is greater than the amount going out - the amount of cash in the tank is referred to as a 'stock'. The stock in this case gets bigger as more money comes in than goes out. Firms in this position are likely to have healthy prospects for the future!

This shows that the funds coming into the business are the same as the amount going out. The stock of cash in this case remains stable. Firms in this position may also have a degree of optimism for the future assuming that the stock of cash in the first place is adequate!

In this scenario, the cash coming into the business is less than that going out. You can see that if this continues the stock of cash gets less and less and over a period of time will lead to serious problems for the business.

• Helps in Efficient Cash Management • Helps in Internal Financial Management
• • • • • Discloses the movement Of Cash Discloses Success or Failure of Cash Planning Helps To Determine The Likely Flow Of Cash Supplemental to Funds Flow Statement Better Tool of Analysis

 Analysis of cash position  Short-term cash planning and management  Evaluation of liquidity  Analysis of cash flow from different activities  Comparison of operating performance  Helpful in estimating future cash flow  Helpful in the formation of policies

 Useful to external analysts

STATEMENT OF CASH FLOWS SECTIONS

14

AS-3 lays down a format for the cash flow statement and according to this format cash flow should be calculated by dividing the activities into following three categories:
 cash flows from operating activities  cash flows from investing activities  cash flows from financing activities

The concept of these three activities and calculation of cash flow from these activities can be understood from the following details

Operating, Investing, and Financing Activities
 Operating activities create revenues,

expenses, gains, and losses.
 Investing activities increase and decrease

long-term assets.
 Financing activities obtain cash from

investors and creditors.

17

CASH INFLOW

ACTIVITIES

CASH OUTFLOW

TO EMPLOYEES FOR WAGES FROM SALES OF GOODS AND SERVICES TO CUSTOMERS

TO SUPPLIERS FOR INVENTORY

FROM RECEIPT OF INTEREST OR DIVIDENDS ON LOANS OR INVESTMENTS

OPERATING ACTIVITIES

TO OTHERS FOR EXPENSES TO CREDITORS FOR INTERSET TO GOVERNMENT FOR TAXES

FROM SALE OF PROPERTY,PLANT AND EQUIPMENT AND OTHER LONG-TERM ASSETS

TO PURCHASE PROPERTY,PLANT AND EQUIPMENT AND OTHER LONG TERM ASSETS

FROM SALE OF LONG OR SHORT TERM MARKETABLE SECSECURITIES

INVESTING ACTIVITIES

TO PURCHASE LONG OR SHORT TERM MARKETABLE SECURITIES
TO MAKE LOANS

FROM COLLECTION OF LOANS

FROM SALE OF PREFERRED OR COMMON STOCK

FINANCING ACTIVITIES

TO REACQUIRE PREFRRED OR COMMON STOCK

TO REPAY DEBT

FROM ISSUANCE OF DEBT
TO PAY DIVIDENDS

PARTICULARS CASH FLOW FROM OPERATING ACTIVITIES: Cash receipts from customer Cash paid to suppliers & employees Tax paid Other receipt Net cash from operating activities CASH FLOW FROM INVESTING ACTIVITIES: Purchase of fixed asset Sale of fixed asset Interest received dividend paid

RS.

RS.

-------------(------------) (------------) (------------)
_____________________

----------

(--------------) ------------------------___________________

Net cash from investing activities
Continued…

PARTICULARS CASH FLOW FROM FINANCING ACTIVITIES: Issue of share Long term borrowing taken Repayment of loan Dividend paid Net cash flow from financing activities Net increase in cash and cash equivalent Cash and cash equivalent at the beginning Cash and cash equivalent at the end

RS.

RS.

------------------------(------------) (------------) _____________ -------------

From the following summarized cash book of Marine Drive ltd. Prepare a cash flow statement for the year ended at 31st march 2009 in accordance.
PARTICULARS

PARTICULARS
AMOUNT

AMOUNT

To balance c/d To receipts from customer

5000 300000

By payments to supplier By purchase of machine

260000 40000

To sale of machinery
To issue of share

45000
100000

By wages& salaries
By rent , rates &taxes By income tax By dividends By repayment of debenture By balance c/d

20000
10000 5000 10000 15000 90000 450000

450000

PARTICULARS Cash flow from operating activities: Cash receipt from customer Cash payment to supplier Wages and salaries Rent rates &taxes Cash generated from operation Less: income tax Net cash from operating activities Cash flow from investing activities: Cash payment to purchase Of machine Cash receipt from sale of machine Net cash from investing activities

RS.

RS.

800000 (260000) (20000) (10000) ____________ _ 10000 (5000) 5000

(40000) 43000 5000 Continue…

Continue……..

PARTICULARS
CASH FLOW FROM FINANCING ACTIVITIES: Cash proceeds from issue of shares Cash payment of debenture Dividend paid Net cash from financing activities Net increase in cash Cash at the beginning Cash at the end

RS.

RS.

100000 (15000) (10000) 75000 ___________ 85000 5000 ____________ 80000

Operating activities refer to principal revenue producing activities of an enterprise. some examples of cash flow from operating activities are: 1.cash receipts from the sale of goods and/or services rendered. 2.cash receipts from royalties, fee, commission and other revenues. 3.cash payments to suppliers for goods and services. 4.cash payments to and on behalf of employees. 5. cash receipts and cash payer of an insurance company for premiums and claims, annuities and other policy benefits.

6.cash payments or refunds of income taxes unless they can specifically be identified with financing and other activities. 7.cash receipts and payments relating to future contracts, option contracts and swap contracts, when the contracts are held for dealing or trading purposes. For the calculation of cash flows from operating activities, receipts and payments shown in profit and loss A/c are converted into receipts and payments actually in cash and for this purpose non cash revenue and non-cash expenses are eliminated from the revenue earned and expenses incurred. There are two types of methods for such calculations-(a)direct method (b)indirect method (a)Direct method: under this method cash receipts and cash payments related to operating activities are shown and the difference of these two results in cash flows from operating activities. the following format can be used for such calculation:

From the following information calculate net cash flow from operating activities

PARTICULARS

AMOUNT

PARTICULARS
By sales

AMOUNT

To purchases
Cash credit To wages To gross profit c/d 60000 20000 10000 10000

Cash credit

90000 10000 _________ _ 100000 _________ _

___________ By gross profit b/d 100000 By interest received

To depreciation on plant To salaries To loss on sale of plant

___________ By profit on sale of long term investments 1800 5000 700

10000
2500 2500

To net profit

7500

15000

15000

PARTICULARS Cash sales Less:-cash purchases Cash expenses(wages and salaries)

RS.

RS. 90000

60000 15000

75000

Net cash flow from operating activities

__________ _________ 160000

(b)Indirect method: under this method net cash flow from operating activities is calculated on the basis of net profit before tax or by adjusting the amount of net profit or loss.

Investing activities refer to acquisition and disposal long term assets and other investments not included in cash equivalents. The separate disclosure of such flow is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. Examples of cash flows arising from investing activities are: •Cash payments for purchasing/acquiring fixed assets including intangibles. •Cash receipts from disposal of fixed assets including intangibles. •Cash payments for acquiring shares, debt- instruments, warrants of other enterprises and interest in joint ventures including the receipts •Cash receipts from the sale of shares, debt instruments warrants of other enterprises and interest in joint ventures excluding the receipt •Cash advances and loans made to third parties. • Repayment of loans and advances •Cash payments for future contracts, forward contracts

FORMAT
PARTICULARS Proceeds from disposal of non current asset: Sale of machinery Sale of land and building Sale of furniture and fixture Proceeds from investment Sale of goodwill/patent/trademark RS. RS.

--------------------------------------------------__________

Add: Non operating income from investment Dividend received on shares Interest received on debenture Rent received from property

------------------------------__________ Continue….

Continue….

PARTICULARS

RS.

RS.

Less: purchase of non current asset Purchase of machinery Purchase of land and building Purchase of furniture Purchase of investment Purchase of goodwill/patent/trademark

(-----------) (-----------) (-----------) (-----------) (-----------) ____________ ___________ ------------

Net cash flow from investing activities

 Cash proceeds from the issue of equity or preference    



shares. Cash proceeds from the issue of debentures, bonds or other short-term or long-term borrowings, Cash repayments of amount borrowed, Cash payments to redeem Preference Shares or Debentures, Payment of Dividend on Shares, Payment of interest on Debentures/ Loans.

 Cash  Cash equivalent  Cash flows  Interest and Dividend
 In a case of financial enterprises  In a case of other enterprises

 Tax and income  Extraordinary items

Non cash transaction:The acquisition of assets or purchase of business by issue of shares or debentures. Conversion of debentures into equity. Issue of bonus shares.

 Cash flow from foreign currency
 Purchases of fixed assets on hirepurchase

Sources of cash can be internal as well as external-

Internal sources

Depreciation Amortization of intangible assets Loss on sale of fixed assets Gain in from sale of fixed assets Creation of reserves

Issue of new shares Raising long term loans Purchase of plant and machinery on deferred payments Short-term borrowings- cash credit from banks Sale of fixed assets, investments etc.

CASH INFLOW

ACTIVITIES

CASH OUTFLOW

TO EMPLOYEES FOR WAGES FROM SALES OF GOODS AND SERVICES TO CUSTOMERS

TO SUPPLIERS FOR INVENTORY

FROM RECEIPT OF INTEREST OR DIVIDENDS ON LOANS OR INVESTMENTS

OPERATING ACTIVITIES

TO OTHERS FOR EXPENSES TO CREDITORS FOR INTERSET TO GOVERNMENT FOR TAXES

FROM SALE OF PROPERTY,PLANT AND EQUIPMENT AND OTHER LONG-TERM ASSETS

TO PURCHASE PROPERTY,PLANT AND EQUIPMENT AND OTHER LONG TERM ASSETS

FROM SALE OF LONG OR SHORT TERM MARKETABLE SECSECURITIES

INVESTING ACTIVITIES

TO PURCHASE LONG OR SHORT TERM MARKETABLE SECURITIES
TO MAKE LOANS

FROM COLLECTION OF LOANS

FROM SALE OF PREFERRED OR COMMON STOCK

FINANCING ACTIVITIES

TO REACQUIRE PREFRRED OR COMMON STOCK

TO REPAY DEBT

FROM ISSUANCE OF DEBT
TO PAY DIVIDENDS

 PURCHASE OF FIXED ASSETS: Cash may be utilized for

additional fixed assets or renewals or replacements of existing fixed assets. loans such as loans from financial institutions or debentures results in decrease in cash. It is, therefore, an application of cash. plant and machinery purchased on deferred payment basis has to be made as per the agreement. it is, therefore, an application of cash. of business operations will result in out flow of cash.

 PAYMENT OF LONG TERM LOANS: The payment of long-term

 DECREASE IN DEFERRED PAYMENT LIABILITIES: Payments for

 LOSS ON ACCOUNT OF OPERATION: Loss suffered on account

PAYMENT OF TAX: Payment of tax will result in decrease of cash and hence it is an application of cash.
PAYMENT OF DIVIDEND: This decreases the cash available for business and hence it is an application of cash. DECREASE IN UN SECURED LOANS, DEPOSITS, etc: The decrease in this liabilities denotes they have been paid off to that extent. It results, therefore, in outflow of cash.

Cash flow
 cash flow statement is

Fund flow
 Cash flow statement is a

based on narrow concept i.e. cash ,which is only one of the elements of working capital.  Cash flow starts with the opening balance of cash and reaches to the closing balance of cash by preceding through sources And uses

broader concept i.e. . Working capital  Fund flow statement tells about various sources from where the funds generated with various uses to which they are put.

CONTINUE….

Cash flow
 Cash flow statement is

Fund flow
 Fund flow statement is

useful in understanding the short-term phenomenon affecting the liquidity of the business..  In cash flow statement changes in current assets and current liabilities are shown in the cash flow statement itself.

more useful in assessing the long range financial strategy.  In fund flow statement changes in current assets and current liabilities are shown through the schedule of changes in working capital
CONTINUE……

Cash flow
 Cash flow statement shows

Fund flow
 Fund flow statement

the cause the changes in cash  In cash flow statement the data obtained on accrual basis are converted into cash basis.

shows the causes of changes in the net working capital  Fund flow statement is consonant with the accrual basis of accounting.

Cash flow
 Institute of Chartered

Fund flow
 Less useful
 No such Performa is

Accountants of India; FASB, America and SEBI all have accepted cash flow more useful than funds flow particularly from the view of analysis of liquidity of a business firm.  Cash Flow Statement is compulsorily to be prepared in prescribed Performa as given in AS-3,

prescribed for the preparation of Funds Flow Statement.

CASH FLOW
 cash flow statement is useful

CASH BUDGET
 Cash budget is useful only

for internal management as well as to external analyst, such as shareholders, debenture holders, financial institutions and creditors also.  Cash flow statement is prepared on the basis of balance sheets and profit & loss A/c related to a particular accounting period

for internal purposes.  cash budget is constructed on the basis of past records, future possibilities and various seasonal factors.

CASH FLOW
 Cash flow statement

CASH BUDGET
 cash budget provides an

explains that from which sources cash was received during a particular period and it was utilized

estimate of requirement of cash for operating activities and the sources to be taped for this purpose

Misleading inter-industry comparison : Cash flow statement does not measure the economic efficiency of one company in relation to another. Usually a company with heavy capital investment will have more cash inflow. Therefore, inter-industry comparison of cash flow statement may be misleading.  Misleading comparison over a period of time : Just because the company's cash flow has increased in the current year, a company may not be better off than the previous year. Thus, the comparison over a period of time can be misleading.


 Misleading inter-firm comparison : The terms of purchases

and sales will differ from firm to firm. Moreover, cash inflow does not always mean profit. Therefore, inter-firm comparison of cash
 Influenced by changes in management policies : The cash

balance as disclosed by the cash flow statement may not represent the real liquid position of the business. The cash can be easily influenced by purchases and sales policies, by making certain advance payments or by postponing certain payments.

 Cannot be equated with income statement

: Cash flow statement cannot be equated with the income statement. An income statement takes into account both cash as well as non-cash items. Hence net cash flow does not necessarily mean net income of the business.  Not a replacement of other statement  +: Cash flow statement is only a supplement of

funds flow statement and cannot replace the income statement or the funds flow statement as each one has its own function or purpose of preparation.

CASH FLOW
Increase in Cash
Cash

Decrease in Cash

Leakage
Accounts Receivable Accounts Payable

Cash Sales

Production/Cash Purchases

Inventory

Leakage

 Despite the above limitations, cash flow

statement is a very useful tool of financial analysis. It discloses the volume and speed at which cash flows in various segments of the business and the amount of capital tied-up in a particular segment.

THANKS

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