Cash Flow Statement

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Purpose of a statement of cash flows:
To provide information about the cash inflows and outflows of an entity
during a period.
To summarize the operating, investing, and financing activities of the
business.

The cash flow statement helps users to assess a company’s
liquidity, financial flexibility, operating capabilities, and risk.
The statement of cash flows is useful because it provides
answers to the following important questions:
Where did cash come from?
What was cash used for?
What was the change in the cash balance?

Specifically, the information in a statement of cash flows, if used
with information in the other financial statements, helps external
users to assess:
1. A company’s ability to generate positive future net
cash flows,
2. A company’s ability to meet its obligations and pay
dividends,
3. A company’s need for external financing,
4. The reasons for differences between a company’s net
income and associated cash receipts and payments,
and
5. Both the cash and noncash aspects of a company’s
financing and investing transactions.

What can we learn from SCF that is not already
available in the other financial statements?
It provides answers to important questions like:
Where did cash come from?
What was cash used for?
What was the change in the cash balance?Couldn’t we just
look the balance sheet?
The change in cash could be determined, but the statement
of cash flows provides detailed information about a
company’s cash receipts and cash payments during the
period.
Many things you want to know about a company is summarized in
this one statement
Operating, financing and investing cash flows
Net income does not always tell the whole story about
operating performance.
A statement of cash flows is an excellent forecasting tool.
Review of terms
Cash and cash equivalents
It is a short-term, highly liquid investment.
It must be readily convertible to cash and it must be so near to
maturity that there is insignificant risks of changes in value due to
changes in interest rate.

Noncash revenues and expenses
Net income includes items that were neither cash inflow nor cash outflows:

Depreciation expense
Accretion expense on asset retirement obligation
Amortization of intangibles
Impairment loss on goodwill and intangibles
Earnings of affiliated companies accounted for using the equity method
Impairment losses on other noncurrent assets
Compensation expense related to stock options

Net income also includes gains and losses from investing and financing activities
Gain ≠ cash received (unless carrying value was zero)
Even when there is a loss, cash might have been received

Net income must be adjusted for these items to get the cash provided by operations – part of the
reconciling schedule or “indirect method”

For other items, there are revenues/expenses as well as cash flows but the amounts are different:

Bond interest expense ≠ bond interest paid (if bonds were sold at premium or discount)
Sales were not all collected in cash (bad debts, other changes in Accounts Receivable)
Purchases were not necessarily paid for during period (change in Accounts Payable)
Income tax expense ≠ income taxes paid due to deferred tax assets/liabilities as well as income
taxes refunds receivable or unpaid taxes owed

Company, Inc.
Statement of Cash Flows
For the year ended December 31, 199X

Cash Flows from Operating Activities
Cash received from customers
Cash received as interest income *
Cash received as dividend income
Cash paid for cost of goods sold *
Cash paid for selling expenses
Cash paid for general & administrative expenses
Cash paid for interest (including interest on capital leases)
Cash paid for income taxes
Cash that would have been paid for taxes except for “excess tax deduction” related to
stock based compensation
Net cash provided by (or used by) operating activities

Cash Flows from Investing Activities
Cash received from sale of property, plant, & equipment
Cash received from sale of investments
Cash received from repayment of note receivables
Cash paid to acquire property, plant, and equipment
Cash paid to acquire investments
Cash paid out as a loan
Net cash provided by (or used by) investing activities

Cash Flows from Financing Activities
Cash received as proceeds from issuance of debt
Cash received as proceeds from issuance of stock
Cash received as proceeds from reissuance of treasury stock
Cash paid to repay debt (principal payment)
Cash paid on principal related to capital leases
Cash paid to reacquire stock (purchase treasury stock)
Cash paid as dividends
Cash retained due to “excess tax deduction” related to stock options
Net cash provided by (or used by) financing activities

Net increase (decrease) in cash
Beginning cash and cash equivalents balance
=Ending cash and cash equivalents balance

Schedule of Noncash Investing and Financing Activities
Assets for Liabilities &/or Equity
Liabilities &/or Equity for Assets
Liabilities for Equity and Equity for Liabilities
Capital lease (acquisition of asset and obligation for lessee)
A reconciliation of net income to cash provided by operations

*Brackets indicate items that are normally combined

Operating Activities
(Usually associated with working capital accounts like Accounts
receivable, inventory, salaries payable, etc.)
Inflows:
From sale of goods and services
From receiving dividends investments
From receiving interest from investments or loans
From sale of trading securities
From reduced income taxes due to “excess tax deduction”
related to stock options
Outflows:
To suppliers for inventory and other materials
To employees for services
To other entities for services (insurance, etc.)
To government for taxes
To lenders for interest
To purchase trading securities

Interest expense is an operating item! Investment earnings (dividends & interest) is an operating item!
Buying and selling trading securities are operating activities! These things may not make sense to you –
so “memorize.”
Investing Activities
(Usually associated with long-term assets)
Inflows:
From sale of property, plant and equipment
From sale of debt or equity investments of other
entities*
From collections of principal on loans to other entities
Outflows:
To purchase property, plant and equipment
To purchase debt or equity securities of other entities
To make loans to other entities



*except investments classified as trading securities which are included in operating activities













Financing Activities
(Usually associated with long-term liability and equity items)
Inflows:
From issuance of debt (bonds and notes)
From issuance of equity securities
Common stock
Preferred stock
Re-issuance of treasury stock
Outflows:
To stockholders as dividends
To repay or retire long-term debt, including capital
leases for lessee (interest on leases is classified as
operating)
To reacquire capital stock (treasury stock)


An “anomaly” on SCF
Dividends are paid to stockholders and interest is paid to
bondholders.
Dividends paid are shown as outflows under financing activities
However, FASB defined interest expense to be an operating
activity
Interest & dividend revenue are defined to be operating
activities, too.












Question: From the summarised cash account of ABC Limited (Ltd.) prepare cash
flow statement for the year ended 31st December 2006 in accordance with
AS-3 (Revised) using the direct method and indirect method. The company
does not have any cash equivalents :


Question: Calculate cash flow from operating activities from the following information :
Rs.
Sales 1,20,000
Purchases 70,000
Wages 25,000
Assume that all the transactions were in cash. Ans (Rs 25,000)


Question: From the following particulars , prepare the Cash Flow Statement for the year ended
31
st
March, 2007 by the Direct Method :

(i) Cash sales Rs. 65,86,000.
(ii) Cash collected from debtors during the year amounted to Rs. 33,23,400.
(iii) Cash paid to suppliers was Rs. 79,36,810.
(iv) Rs.9, 87, 500 was paid to and for employees.
(v) Furniture of the book value of Rs. 18,500 was sold for Rs. 11,000 and a new furniture costing
Rs. 83,160 was purchased.
(vi) Debentures of the face value of Rs. 3,00,000 were redeemed at a premium of 2 per cent
interest on debentures. Interest on debentures, Rs. 84,000 was also paid.
(i) Dividend, Rs. 4,50,000 for the year ended 31
st
March, 2007 was distributed in May, 2007.
(ii) Cash in hand and at bank as on March 31, 2006 and March 31,2007 was Rs. 51,070 and
Rs. 5,74,000 respectively.

Question: From the summary cash account of X Ltd. prepare the Cash Flow Statement for the
year ended 31
st
March, 2007 by Direct Method.
CASH BOOK
Dr. for the year ended March 31,2007 Cr.

Particulars Rs. Particular Rs.

To Balance on April 1,2006 50,000 By Payment to Suppliers 20,00,000
To Issue of Equity Shares 3,00,000 By Purchased of Fixed Assets 2,00,000
To Receipts from Customers 28,00,000 By Overhead Expenses 2,00,000
To Sale of Fixed Assets 1,00,000 By Wages and Salaries 1,00,000
By Income Tax Paid 2,50,000
By ‘Dividend Paid 3,00,000
By Re payment of Bank Loan 3,00,000
By Balance on March 31, 2007 1,50,000

32,50,000 32,50,000

Question: The financial position of ABC Ltd. as on 31
st
March was as follows :

Dr. Cr.

Liabilities 2006 2007 Assets 2006 2007
Rs. Rs. Rs. Rs.

Current Liabilities 72,000 82,000 Cash 8,000 7,2000
Loan from Z Ltd. …. 40,000 Debtors 70,000 76,800
Loan from Bank 60,000 50,000 Stock 50,000 44,000
Share Capital 2,00,000 2,00,000 Land 40,000 60,000
Profit and Loss A/c 96,000 98,000 Buildings 1,00,000 1,10,000
Machinery 2,14,000 2,44,000
Provision for Dep. (54,000) (72,000)
4,28,000 4,70,000 4,28,000 4,70,000

During the year. Rs. 52,000 were paid as dividend. Prepare Cash Flow Statement.

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