Cash Flow Statement Analysis

CASH FLOW STATEMENT ANALYSIS
Chapter 1: INTRODUCTION
Cash is an important component of working capital of business, which provides speed and power to business. Keeping in view the present wealth dominated scenario, it can be said that cash is the life blood of business, as it governs and operates all the activities of business. For all the activities of business, continuous and healthy flow of cash is the main pillar of business solvency, thus cash is both the beginning and end of working capital cycle. In all the business organizations monetary and non-monetary activities takes place and out of which monetary transactions result in inflow and outflow of cash, so it is very important for business to know that from what sources and in how much quantity cash has been used. The cash flow statement is prepared to attain the above-mentioned objective.
WHAT IS A CASH FLOW STATEMENT?

For your business, the cash flow statement may be the most important financial statement you prepare. It traces the flow of funds (or working capital) into and out of your business during an accounting period. For a small business, a cash flow statement should probably be prepared as frequently as possible. This means either monthly or quarterly. An annual statement is a must for any business. The cash flow statements primary purpose is to provide information regarding a companys cash receipts and cash payments. The statement complements the income statement and balance sheet. It is important to note cash flow is not the same as net income. Cash flow is the movement of money into and out of your company, and it can be affected by several noncash transactions. The cash flow statement became a requirement for publicly traded companies in 1987. There are various rules governing how information is reported on cash flow statements, as determined by generally accepted accounting principles (GAAP). While your business may not be a public company, a cash flow statement is still important to measure and track the flow of cash into and out of your business.
Vivek College Of Commerce
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CASH FLOW STATEMENT ANALYSIS Cash flow, simply, is the movement of money in and out of your business, or the inflows and outflows. A reliable accounting system is in place in your business and information typically recorded by small businesses is accessible to you. The cash flow statement reports the cash provided and used by the operating, investing, and financing activities of a company during an accounting period. In 1987, the Financial Accounting Standards Board issued Statement No. 95, which requires that a statement of cash flows accompany the income statement, balance sheet and statement of retained earnings. AN OVERVIEW The cash flow statement explains the change during the period in cash and cash equivalents. Cash includes currency on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to cash. Cash receipts and payments are required to be classified as operating, investing and financing activities. The cash flow statement will summarize the cash flows so that net cash provided or used by each of the three types of activities is reported. Beginning and ending cash must be reconciled based on the net effect of these activities.
DEFINITIONS OF CASH FLOW According to I.C.W.A. (India), Cash Flow Statement is a statement setting out the flow of cash under different heads of sources and their utilization to determine the requirements of cash during the given period and to prepare for its adequate provisions.
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CLASSIFICATION OF CASH FLOWS ACCORDING TO AS-3

Cash flows or sources and applications of cash: According to accounting Standard 3 cash flows has been divided into three parts:
CASH FLOWS FROM OPERATING ACTIVITIES The operating section of the cash flow statement is most important because it deals with the cash generated or used by the entitys primary activities. These activities, and the related cash flows, are recurring. The cash flow statement reports past cash flows, but the same or similar activities and cash flows can be expected to occur in the future. If an organization cannot sustain itself over the long run with the cash generated from operations, it cannot survive. CASH FLOWS FROM OPERATING ACTIVITIES
OPERATING ACTIVITIES
Cash in Flow
Cash out Flow
Cash Sales Cash received from Debtors Fees, commission, royalty and other receipts.
Cash Purchase
Operating Activities
Payment to creditors Cash operating expenses Wages, Income tax etc.
Most companies present the operating section of the cash flow statement using an indirect approach under which they start with accrual-basis net income and adjust that figure to obtain the cash generated or used by operations. Although accrual-basis income is regarded as the best measure of operating success, it does not tell us the amount of cash flows from operating and must be adjusted for all items that affect
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CASH FLOW STATEMENT ANALYSIS income and cash differently. Thus, this section of the cash flow statement includes the following adjustments to net income to determine the cash generated or used by operations: Expenses that reduced net income this period but did not use cash must be added back. Cash payments made this period for expenses of other periods must be deducted. Revenues that did not result in cash inflows during the current period must be deducted. Cash collections for revenues earned in other periods must be added. Items reported in the income statement but not directly related to normal operations must be removed. Lets consider a few of the more common adjustments to net income needed to convert to a cash basis.
Depreciation and Amortization Under accrual accounting, income is reduced for the cost of an operating assets service potential used up during the period. As we have seen earlier, depreciation, or the amount of cost recognized during the period under the matching concept, is an allocation of the original cost of the asset. The depreciation expense recognized during a period is not a cash expense; it does not result in a decrease in the cash balance. Cash was reduced initially when the asset was first acquired. The expense is simply an accountants allocation of a cost incurred previously. Therefore, while income for the period is decreased by the amount of the depreciation expense, cash is not. The difference in timing between the cash outflow for the purchase of a fixed asset and the related income effects can be shown as follows:
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If we are interested in the amount of cash generated by a companys operations, then we need to add back the amount of depreciation expense to the companys net income. In other words, if all other revenues and expenses were cash items, net income would understate cash generated by the amount of the depreciation expense. Because depreciation is added back to net income to get the cash generated from operations, financial analysts sometimes mistakenly refer to depreciation as a source of cash. But this is silly because firms cannot generate cash just by depreciating. If depreciation were a source of cash, a change to a more rapid depreciation method would cause the cash balance to go up. But, that will not happen. The addition of depreciation in the cash flow statement is simply a way of adding back an amount that was deducted from income but did not use cash. Depreciation is neither a source nor a use of cash. The amortization of intangible assets and the depletion of natural resources also result in noncash expenses. As with depreciation, these expenses are deducted to get net income, but do not use cash. Therefore, they are added back to net income to get the amount of cash generated from operations.
Changes in Deferred Income Taxes Companies must report income tax expense on an accrual basis by matching tax expense to reported income. If temporary differences exist between the income reported in the income statement and that reported on the tax return, a deferred tax liability or asset is affected. In addition, the tax expense reported in the income
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CASH FLOW STATEMENT ANALYSIS statement is different from cash tax payments. Therefore, the cash flow statement must report an adjustment to bring net income to the amount of cash generated from operations.
Amortization of Debt Discount and Premium Debt discount arises when debt is issued for less than its maturity value. Because the debt ultimately must be repaid at maturity value, the actual (effective) interest costs are higher than the current cash interest payments. A portion of the discount is charged to interest expense each period under accrual accounting. However, the amount of discount expensed each period represents a noncash charge against income. When will cash actually be paid? When the debt matures, its maturity value will be paid in cash. The difference in timing between the cash flows and expense recognition can be shown as follows:
Because the companys interest expense contains a noncash portion, the net income figure must be adjusted to arrive at the cash generated from operations. Thus, when interest expense has been increased by the amortization of bond discount, an amount must be added to net income in the cash flow statement to determine the amount of cash generated from operations. If interest expense has been decreased by the amortization of bond premium, an amount must be deducted from net income in the cash flow statement to arrive at cash generated from operations.
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CASH FLOW STATEMENT ANALYSIS Gains and Losses Companies often include in their income statements gains and losses that are not directly related to their regular operations. For example, companies often report gains and losses from disposing of investments or fixed assets, and from retiring debt. Because these gains and losses are not related to regular operations, they must be eliminated from the operating section of the cash flow statement. Gains must be deducted from net income in the operating section of the cash flow statement to arrive at cash generated from operations, and losses must be added back. The cash effects of the transactions giving rise to the gains and losses are reported in the investing or financing sections of the cash flow statement.
Changes in Current Assets and Liabilities Current assets and current liabilities are important in the operations of a company and facilitate the flow of resources through the operating cycle. We discussed the operating or cash cycle in Chapter 3 and how changes in receivables, inventories, payables, and other current accounts can affect the amount of cash received. Because current assets and liabilities play such an important role in the way that cash moves through the operating cycle, changes in these items must be considered in determining the cash generated from operations. For example, sales increase income, but if the sales are on credit and the receivables are not immediately collected, no cash is generated. Thus, the cash generated from operations during the period can be determined only after adjusting net income for the change in receivables during the period: if receivables increase, less cash is collected than if receivables decrease. Similarly, if a company does not pay its bills as quickly as in the past, and payables increase, less cash is used in operations. Because the expenses reduce income even though the cash has not been paid, the cash flow statement reports an adjustment added to net income in the cash flow statement to reflect more cash being generated from operations. A decrease in trade payables would indicate that more cash was being used to pay off bills and less was generated by operations. This would call for a negative adjustment to be reflected in the cash flow statement. Changes in current liabilities not directly related to sales or normal operating expenses, such as
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CASH FLOW STATEMENT ANALYSIS short-term bank loans or dividends payable, are reported in the financing section of the cash flow statement. The direction of adjustments for changes in all current assets is the same, and that for current liabilities is the opposite. Keep in mind that the purpose of these adjustments in the cash flow statement is to convert accrual-basis net income to cash generated from operations. Assessing Cash Flows from Operations Why do companies report detailed information about operating cash flow? Why not just report the total? The answer is that, while the total operating cash flow is important, providing the details allows decision makers to develop a better understanding of a companys cash situation and, in turn, make better projections of future cash flows. Starting the operating section of the cash flow statement with net income provides a comparison between accrual-basis income and cash flows and ties the cash flow statement to the income statement. Reporting individual adjustments allows decision makers to see precisely how a companys operations generate cash and why cash might be more or less than expected based on reported income. The individual adjustments might show that cash is reduced because receivables and inventories are building, or perhaps that cash flow is increased through increases in payables. For example, Kellwood Companys fiscal 1998 net income was $42.7 million, but operating activities used $75.2 million of cash. An examination of individual adjustments in the cash flow statement showed that during the year receivables had increased by $48.5 million, inventory had increased by $75.5 million, and accounts payable had decreased by $14.4 million, all having a significant negative effect on the cash flows from operations. By examining the elements of the operating section of the cash flow statement, decision makers might be able to identify cash, receivables, and inventory management problems that could ultimately affect liquidity. Or, they might be able to spot an impending credit crisis by determining that cash flow is being maintained by not paying bills. Whatever this section of the statement shows, the key is understanding the relationships between cash and the elements reported, and using that information to project future cash flows.
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CASH FLOW STATEMENT ANALYSIS CASH FLOWS FROM INVESTING ACTIVITIES Organizations usually must invest cash so they can conduct the operating activities needed to attain their goals. Thus, an understanding of an organizations investing activities is important for anyone analyzing the organization. Cash flows related to the investing activities of a business typically involve either operating assets (property, plant, and equipment) or investments in other companies. Cash outflows for operating assets are usually quite large for companies that are replacing assets or expanding. Cash inflows can be generated from selling operating assets no longer needed. Cash outflows for investments in stock often involve the acquisition of a controlling interest in other companies, referred to as affiliates. Sales of investments usually result in cash inflows.
CASH FLOWS FROM INVESTING ACTIVITIES
INVESTING ACTIVITIES
Cash in Flow Cash Sales of fixed assets Sales of investments and collection of loan Interest and dividend received on loan and
investments
Cash out Flow Purchase of fixed assets Investing Activities Purchase of Investments Loan and advances to 3rd parties
Analyzing the investing activities section of the cash flow statement can tell decision makers whether a company is expanding or contracting its operating capacity, and how. Is the company expanding by acquiring new plant and equipment, or by investing in affiliated? Is the company generating a major portion of its cash inflows by selling off its productive assets, and can such cash inflows be sustained? Answers to these types of questions are crucial to understanding a companys future prospects and projecting future cash flows.
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CASH FLOW STATEMENT ANALYSIS Examining the cash expended for plant and equipment in comparison with the amount of depreciation expense and the amount of plant and equipment reported in the balance sheet can provide some idea of the rate of growth or contraction. For example, as can be seen in
CASH FLOWS FROM FINANCING ACTIVITIES As we have seen, much of an existing companys financing may come from operations. However, many companies, especially new ones and those that are expanding rapidly, need to rely on other sources to provide a stable financing base. As we discussed in Chapters 11 and 12, this type of financing comes either through borrowing or by selling ownership interests. The financing section of the cash flow statement reports on the cash effects of borrowing (other than trade payables) repaying debt issuing stock repurchasing stock paying dividends
CASH FLOW FROM FINANCING ACTIVITIES FINANCING ACTIVITIES
Cash In Flow
Cash out Flow
Amount received from issue of share capital Amount received from issue of debentures Amount received from long-term loans Financing Activities
Redemption of shares & Debentures Payment of loans
Payment of interest and dividend Payment of finance and lease liabilities
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CASH FLOW STATEMENT ANALYSIS Changes in Debt and Capital Stock Changes in debt reported in the statement of cash flows are simple and straightforward: increases in debt generate cash, and decreases use cash for repayments. Changes in nontrade notes payable, including commercial paper (shortterm negotiable notes), and bonds payable are included in this section of the cash flow statement. Decision makers are often especially interested in the financing employed by companies because debt must be repaid and also usually requires periodic interest payments. The issuance of stock, on the other hand, results in earnings being shared by more owners and may result in pressure to use cash to pay dividends.
Payment of Cash Dividends Owners of a corporation expect a return on their investments. One way they receive a return on their stock investments is through corporate distributions of income to the owners, or dividends. Cash dividends paid during the period are reported in the financing section of the cash flow statement because they reflect a payment to one group of capital suppliers, and, therefore, are related to financing. Perhaps reflecting an inconsistency, interest expensethe return paid to suppliers of debt financingis not reported in the financing section of the cash flow statement; it is included in the net income amount reported in the operating section of the statement. Decision makers are often interested in the portion of the cash generated from operations that is used to pay dividends. Although the declaration of dividends is not required, many companies have established dividend policies that place great pressure on management to continue dividend payment trends. Thus, cash generated from operations should, at least in the long run, be sufficient to provide for dividends, as well as the replacement of assets.
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OBJECTIVES OF CASH FLOW STATEMENT

PRIMARY OBJECTIVE A primary purpose of cash flow statement is to provide information about the cash receipts and cash payments of a business entity for the accounting period covered by the income statement. It is necessary to maintain a record of cash flows on a continuing basis in order to keep the business free of troubles is respect of liquidity problems.
SECONDARY OBJECTIVE A secondary purpose of cash flow statement is to provide information about a business entitys operating, investing and financing activities during the accounting period.
USEFULNESS OF CASH FLOW STATEMENT

According to Accounting Standard 3 the main objective of preparation of cash flow statement, is to provide information to users regarding cash flows which gives description of changes in cash or cash equivalents. Following are the objectives and uses of cash flow statement:
HELPFUL IN SHORT TERM POLICIES OF FINANCIAL PLANNING Cash flow statement provides several information to finance managers for formulating policies for short term financial requirements on the basis of which, finance manager is able to ascertain the amount of cash which will be required in future and how much cash will be available from internal sources and how much will have to be arranged from external sources.
USEFUL IN PREPARING CASH BUDGET Cash flow statement helps managers in preparing cash budget, it gives information about preparing cash budget, it gives information about surplus or deficiency of cash to managers and on the basis of this managers can plan to invest
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CASH FLOW STATEMENT ANALYSIS surplus of cash in short term investments or to cover the deficit from the search of other sources of short term goodwill.
KNOWLEDGE OF SOLVENCY Knowledge of solvency can be obtained with the help of cash flow statement, as it provides the real information about the available cash in the organization.
HELPFUL IN CONTROL Cash flow statement acts as a control device for finance managers. With comparison of cash flows statement with cash budget management can come to know about the extent, to which financial sources have uses, in accordance with plan.
HELPFUL IN INTERNAL FINANCIAL MANAGEMENT On the basis of information available from cash flows statement payment of long-term liabilities, formulation of dividend policy is facilitated.
USEFUL TO EXTERNAL INVESTORS External investors are able to obtain information about liquidity of organization with the help of cash flows statement on the basis of which they can take their decision regarding lending loan to organization or not.
STUDY OF THE TRENDS OF CASH RECEIPTS AND PAYMENTS FROM VARIOUS ACTIVITIES With the help of this statement managers are able to obtain information about the frequency of cash receipts from current assets and what is frequency of payments of current liabilities so that future cash requirements can be ascertained.
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LIMITATIONS OF CASH FLOW STATEMENT

Following are the main limitations of cash flow statement: Incomplete Substitute: Cash flow statement is not a substitute of income statement as net cash flow depicted by cash flows statement is not equal to net profit shown by income statement. It does not show the Liquidity Position of the Firm: This statement depicts the inflow and outflow of cash, liquidity position of the firm cannot be ascertained from this. Accrual Basis: Cash flow statement does not pay attention to accrual basis concept of accounting. Misleading Comparison: Cash flows statement has proved to be misleading in comparison of industry and firm.
DIFFERENCE BETWEEN FUND FLOW STATEMENT & CASH FLOW STATEMENT

Basis of Fund Flow Statement Cash Flow Statement
Difference Meaning Fund Flow refers to the changes Cash in the Fund by Flow Statement is a
business statement of cash flow and cash flow signifies the movement of cash in and out of a business concern.
transactions.
Uses
It helps the reader to understand A cash flow statement is of not only the financial stability of primary importance to the
the business concern but also the financial management. It is an successful implementation of essential financial management. Basis of Fund Flow Statement is based Cash Flow Statement is based on accrual basis of accounting. on cash basis of accounting. policies tool of short-term
of financial analysis.
accounting
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CASH FLOW STATEMENT ANALYSIS Limitation Fund Flow Statement does not Working Capital being a wider provide information about concept of funds, a funds flow presents a more Cash
changes in Cash; which are statement
more important and relevant complete picture than than Working Capital. Flow Statement.
FORMATS OF CASH FLOW STATEMENT

Accounting Standard-3 (Amended) has not prescribed any format for cash flows statement. Following is the pro forma of cash flows statement, prepared by direct and indirect method and which has been prescribed by SEBI and is used by maximum number of organizations.
Cash Flow Statement (Direct Method) For the year ended 31st March,. Particulars A. Cash Flows From Operating Activities: Cash receipts from customers Cash paid to suppliers and employees () Cash generated from operating activities Income Tax Paid () Cash flow before extraordinary items (+) or (-) Extraordinary items Rs. Rs.
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Net Cash from operating activities () B. Cash Flows From Investing Activities Purchase of Fixed Assets Sales of Fixed Assets Purchase of Investment (Long-term) Sales of Investment (Long-term) Interest received Dividend received ()
Net Cash from investing activities C. Cash Flows From Financing Activities Proceeds from issue of share capital Proceeds from long-term borrowings Repayments of long-term borrowings Interest Paid Dividend Paid () () ()
Net cash from financing activities
Net Increase (or decrease) in cash(A+B+C) Cash and Cash equivalents at the beginning of the period
Cash and Cash equivalents at the end of the period
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CASH FLOW STATEMENT ANALYSIS Cash Flow Statement (Indirect Method) For the year ended 31st March,. Particulars A. Cash Flows From Operating Activities: Net profit before tax and extraordinary items Adjustment For: Depreciation Loss on sale of fixed assets Gain on sale of fixed assets Interest paid Interest received Dividend received Goodwill written off Preliminary Exp. written off Provision for taxation Proposed Dividend (Current Year) () () () Less: Increase in Current Assets Decrease in Current Liabilities Cash generated from operating activities Income Tax Paid Rs. Rs.
Operating profit before working capital Changes Add: Decrease in Current Assets Increase in Current Liabilities
Cash flow before extraordinary items (+) or (-) extraordinary items Net Cash from operating activities
B. Cash Flows From Investing Activities Purchase of Fixed Assets (See Note-5) Sales of Fixed Assets ()
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CASH FLOW STATEMENT ANALYSIS Purchase of Investment (Long-term) Sales of Investment (Long-term) Interest received Dividend received ()
Net Cash from investing activities
C. Cash Flows From Financing Activities Proceeds from issue of share capital Proceeds from long-term borrowings Repayments of long-term borrowings Interest Paid Proposed Dividend Paid (Previous Year) () () ()
Net cash from financing activities
Net Increase (or decrease) in cash (A + B + C) Cash and Cash equivalents at the beginning of the period Cash and Cash equivalents at the end of the period
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Chapter 2: WAYS AND METHODS TO ANALYSE CASH FLOW STATEMENT

HOW TO ANALYZE A CASH FLOW STATEMENT
While a balance sheet and income statement are tools for management, without a cash flow statement they are limited barometers and may even be misleading.
OPERATING ACTIVITIES The cash flow statement will tell you where money came from and how it was used. When analyzing cash flow, the first place to look is the cash flow from operating activities. It tells you whether the firm generated cash or whether it needs a cash infusion. A few periods of negative cash from operating activities is not by itself a reason for alarm if it is based on plans for company growth or due to a planned increase in receivables or inventories. However, if a negative cash flow from operating activities is a surprise to managers and owners, it may be undesirable. Over time, if uncorrected, it can foretell business failure. Managers and owners should pay particular attention to increases in accounts receivable. The cash flow statement gives the true picture of the account. A large increase in accounts receivables may warrant new billing or collection procedures.
INVESTING ACTIVITIES The cash flow statement puts investing activities into perspective. At one glance, you can see whether or not a surplus in operations is being used to grow the company. A lack of investing activities, which is few purchases of new equipment or other assets, may indicate stagnant growth or a diversion of funds away from the company.
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CASH FLOW STATEMENT ANALYSIS FINANCING ACTIVITIES The financing activities section of the cash flow statement will show repayments of debt, borrowing of funds, as well as injections of capital and the payment of dividends. As a company expands, this area of the cash flow statement will become increasingly important. It will tell outsiders how the company has grown and the financial strategies of management.
Together, the three sections of the cash flow statement show the net change in cash during the period being examined. A comparison between past periods will give owners and managers a good idea of the trend of their business. Positive trends in cash flow may encourage owners to consider long-term financing as an aid to growth and increase their comfort level concerning the companys ability to generate cash for repayment. Strong cash flow will also make it easier to acquire financing and to negotiate with lenders from a position of strength. Preparation of a cash flow statement is the first step toward financial management for long-term success.
METHOD USED TO ANALYZE THE CASH FLOW

STEP 1: SCANNING THE BIG PICTURE First, place your company in context in terms of its age, industry, and size. (Mature companies have different cash flows from start-up companies. And service industries look different from heavy manufacturing industries.)
Flip through the annual report and other accounting records to determine how management believes the year progressed. Was it a good year? Perhaps a recordbreaking year in terms of revenue or net income? Or is management explaining how the company has had some rough times?
Look at net income. Does it show income or losses over the past few years? Is income (or loss) shrinking or growing?
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CASH FLOW STATEMENT ANALYSIS STEP 2: CHECKING THE POWER OF THE CASH FLOW ENGINE The cash flow from operating activities section is the cash flow engine of the company. When this engine is working effectively, it provides the cash flows to cover the cash needs of operations.
To check the cash flow check if the cash flow from operating activities is greater than zero. Also check whether it is growing or shrinking. Assuming it is positive, the next question is can it cover important, routine expenditures?
An exception is start-up companies often have negative cash flow from operating activities because they had to spend a lot to get the company started and their cash flow engines are not yet up to speed.
Examine the operating working capital accounts. Inventories, receivables, and accounts payable usually grow in expanding companies.
STEP 3: PINPOINTING THE GOOD NEWS AND THE BAD NEWS Begin with cash flow from investing activities. One systematic observation is to check whether the company is generating or using cash in its investing activities. A healthy company invests continually in more plant, equipment, land, and other fixed assets to replace the assets that have been used up or have become technologically obsolete.
You must look at the entire package to evaluate whether your cash flows from financing are in the good news or bad news categories. One systematic way to begin is to compare borrowing and payments on debt with each other across the years and note the trends. Another way in uncovering the news in this section is to check the activities in the stock accounts.
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CASH FLOW STATEMENT ANALYSIS STEP 4: PUTTING THE PUZZLE TOGETHER It would be rare to find a company in which all of the evidence is positive, or in which all of the evidence is negative.
To make a balanced evaluation, you must use both the good news and the bad news identified in each section of the statement.
Sometimes there are unusual or unknown items that may need further looked into (possibly by a professional).
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Chapter 3: CASH FLOW STATEMENT ANALYSIS
CASH FLOW STATEMENT ANALYSIS OF RELIANCE INDUSTRIES LTD

40000
30000
20000 Mar '12 Amt in Crores 10000 Mar '11 Mar '10 0 Mar '09 Mar '08 -10000
-20000
-30000
The above diagram shows the Cash Flow of Reliance Industries ltd from 200708 to 2011-12 comparing its yearly profits with Cash and Cash equivalent held at the year end and the Net Cash from/ used in different activities with each other. The above comparison shows that there has been stagnant increase in the profits & cash balance expect for 2008-09 there has been decline in the profits from 23,010.14 crores to 18,433.23 crores where as the cash balance has increased from 4,280.05 crores to 22,176.53 crores and next year it declined to 13,462.65 crores even after making a profit of 20,547.44 crores. Observing the diagram we can say that there has been considerable increase in the Net Cash from Operating activities expect for 2011-12 which has declined from 33,280.52 crores to 26,974 crores. There has been an equal amount of investments Vivek College Of Commerce Page 23 of 36
CASH FLOW STATEMENT ANALYSIS during 2007-08 & 2008-09 which declined in 2009-10 from 24,084.20 crores to 18,204.5 crores and again raised to 20,332.88 crore which intensely declined during 2011-12 to 3,046 crores. RIL has raised funds during 2007-08 & 2008-09 continuously which was 8,973.04 crores & 23,732.58 crores respectively and which is being paid off subsequently year by year.
RELIANCE INDUSTRIES LTD

16,000 14,000 12,000 Amt in Crores 10,000 8,000 6,000 4,000 2,000 0 ACCOUNTS RECEIVABLE INVENTORY 2011-12 2010-11 2009-10 ACCOUNTS PAYABLE 2009-10 2010-11 2011-12
The above diagram shows Reliance Group of Industries Accounts Receivable, Inventory, and Accounts Payable position of last three years in the cash flow statement. The above diagram shows that RIL has a good credit policy as its accounts receivable has been declined from 5,790.65 crores to 1,068 crores. It has maintained a very lower level of stock i.e. the level of stock has declined from 14,396.67 crores to 7,724 crores. It has even a good level of credit payment policy as it has declined from 14,249.20 crores to 2,044 crores. This shows that RIL maintains good relationships with its suppliers and customers.
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CASH FLOW STATEMENT ANALYSIS OF TATA STEEL LTD

20000 15000 10000 5000 0 -5000 -10000 -15000 -20000 -25000 -30000 Mar '12 Mar '11 Mar '10 Mar '09 Mar '08
Amt in Crores
The above diagram shows the Cash Flow of Tata Steel Industries ltd from 2007-08 to 2011-12 comparing its yearly profits with Cash and cash equivalent held at the year end and the Net cash from/used in different activities with each others. The above diagram shows that the Profits and Cash balance of Tata Steel has been increasing stagnantly expect for 2011-12s cash balance which declined from 4,141.54 crores to 3900.53 crores where as profits increased from 9776.85 crores to 9,857.35 crores. The Net cash from operating activities has also been stagnantly increasing from 6,254.2 crores to 10,256.47 crores. Tata has invested about 29,318.58 crores during 2007-08 which declined vigorously to 5,254.84 crores in 2009-10 which again raised the next year to 13,288.13 crores and again declined to 2,859.11 crores in 2011-12. Tata steel raised
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CASH FLOW STATEMENT ANALYSIS funds during 2007-08 for 15,848.07 crores thereafter it reduced raising funds to 7,599.35 crores in 2011-12.
TATA STEEL INDUSTRIES LTD

5,000 4,000 3,000
Amt in Crores
2,000 1,000 0 -1,000 -2,000 -3,000 A/C RECEIVABLE INVENTORY A/C PAYABLE 2011-12 2010-11 2009-10
2009-10 2010-11 2011-12
The above diagram shows Tata steel Industries Accounts receivables, Inventory, and Accounts Payable position of last three years in the cash flow statement. The above diagram says that there has been decrease in Accounts receivables by 2,118.96 crores which means customers have paid the debts and next year there is increase in Accounts receivable by 4,718.97 crores which means company has made aggressive credit sale and next year again there is a decrease of Accounts receivables by 889 crores which says that receivables are not managed properly. Inventory also has a similar position i.e. decrease of stock by 1,884.24 crores in 2009-10 and increase in stock during 2010-11 by 4,888.51 crores and again a decline by 407.72 crores in 2011-12. Accounts payable of Tata steel shows that it makes late payments to its creditors or is provided with longer credit period as it has an increase of 898.51 crores and 2,432.58 crores in two subsequent years and made payment during 201112 which is shown with a decline of 137.42 crores during 2011-12.
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CASH FLOW STATEMENT ANALYSIS OF INFOSYS LTD

20000
15000
Amt in Crores
10000
Mar '12 Mar '11 Mar '10
5000
Mar '09 Mar '08
-5000
The above diagram shows the Cash Flow of Infosys Ltd from 2007-08 to 2011-12 comparing its yearly profits with Cash and Cash equivalent held at the year end and the Net Cash from/ used in different activities with each other. The above diagram shows that the profits & cash balance of Infosys Ltd has been increasing stagnantly from 5,100 crores in 2007-08 to 11,096 crores in 2011-12 and 7,689 crores in 2007-08 to 19,557 crores in 2011-12 which is a good sign of growth. Cash from operating activities has also been stagnantly increasing expect for 2010-11 when operating activities declined from 5,876 crores to 4,270 crores. Infosys had made Investments of 978 crores which declined to 195 crores during 2008-09 which then had a boost of 3,314 crores during 2009-10. Thereafter, Infosys raised funds through investing activities i.e. during 2010-11 to 3,235 crores and 565 crores during 2011-12.
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CASH FLOW STATEMENT ANALYSIS Infosys has been paying off its debts subsequently year after year i.e. 777 crores during 2007-08, 2,430 crores during 2008-09, 1,486 crores during 2009-10, 3,642 crores during 2010-11, 2,298 crores during 2011-12.
INFOSYS LTD
1200 1000 2009-10 2010-11 2011-12 2010-11 2009-10 ACCOUNTS RECEIVABLE ACCOUNTS PAYABLE 2011-12
Amt in Crores
800 600 400 200 0 -200
The above diagram shows Infosys Ltd Accounts receivables, Inventory, and Accounts Payable position of last three years in the cash flow statement. The above diagram shows that there has been a tremendous rise in Accounts receivable during 2010-11 compared to the previous year 2009-10 i.e. from a decline of 194 crore in 2009-10 to an increase of 1159 crore in 2010-11 which was continued during 2011-12 by a growth of 1189 crore which means that there has been aggressive credit sale to promote the product. Accounts payable have also been subsequently increasing which means there has been increase in the level of credit purchase from 204 crores in 2009-10 to 620 crores in 2011-12.
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CASH FLOW STATEMENT ANALYSIS OF WIPRO LTD

7000 6000 5000 4000 3000 Amt in Crores 2000 1000 0 -1000 -2000 -3000 -4000 Mar '12 Mar '11 Mar '10 Mar '09 Mar '08
The above diagram shows the Cash Flow of Wipro Ltd from 2007-08 to 201112 comparing its yearly profits with Cash and Cash equivalent held at the year end and the Net Cash from/ used in different activities with each other. The above comparison shows that the profits & cash balance of Wipro Ltd has been increasing stagnantly expect for the cash balance of 2010-11 which declined from 5664.3 crores to 5203.3 crores in spite of the increase of profits from 5688.8 crores to 5705.5 crores. Comparison of Net cash from/used in different activities gives us the conclusion that there has been less operating activities of 715.9 crores during 2007-08 and a very sharp increase in operating activities by 4,344.5 crores in the next year which was then followed by a considerable growth of 1329 crores and then there was a stagnant decline in Operating activities from 4477.4 crores to 2997.9 crores in two years.
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CASH FLOW STATEMENT ANALYSIS There has been very less investments during 2007-08 i.e. 1,127.5 crores which increased thereby to 3662.7 crores the next year but again declined to 339.8 crores in three years. There has been lot of financing activity or in other words there has been an increase of debt to the company during 2007-08 of 2,290 crores which has been paid off during the subsequent years regularly each year.
WIPRO LTD
25,000 20,000 Amt in Millions 2009-10 15,000 10,000 5,000 0 A/C RECEIVABLE INVENTORY A/C PAYABLE 2011-12 2010-11 2009-10 2010-11 2011-12
The above diagram shows Wipro Ltd Accounts receivables, Inventory, and Accounts Payable position of last three years in the cash flow statement. The above diagram says that there has been increase in the credit giving percentage of Wipro where as it has maintained a good level of accounts payable which has increased considerably from 650 million to 7,150 millions in two years. As Wipros level of operation has increased this considerable increase can be justified but accordingly Wipro has maintained very poor level of inventory i.e. 862 millions in 2011-12 & 1,781 millions in 2010 -11 which is not justified.
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CASH FLOW STATEMENT OF 2007-08 ANALYSIS OF RELIANCE AND TATA STEEL

30000
20000
10000 AMT IN CROES
RIL 0 TS
-10000
-20000
-30000
The above diagram compares the Cash flow statements of Reliance Group of Industries ltd and Tata steel industries ltd during 2007-08. Comparing their profit, Cash and cash equivalent held at the year end and the Net cash from/used in different activities. The above diagram shows that Reliance Industries has earned higher level of profits then Tata Steel Industries. Cash from Operating activities of Reliance Industries is also more compared to Tata Steel Industries. But Tata Steel has maintained a higher level of Investments than Reliance Industries during the year. Reliance has even raised lesser rate of funds than Tata Steel. Reliance has maintained a very higher level of cash balance than Tata Steel.
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CASH FLOW STATEMENT OF 2011-12 ANALYSIS OF RELIANCE AND TATA STEEL

40000
30000
20000 AMT IN CRORES RIL 10000 TS
-10000
-20000
The above diagram compares the Cash flow statements of Reliance Group of Industries ltd and Tata steel industries ltd during 2011-12. Comparing their profit, Cash and cash equivalent held at the year end and the Net cash from/used in different activities. The above diagram shows that Reliance Industries has earned higher level of profits then Tata Steel Industries. Cash from Operating activities of Reliance Industries is also more compared to Tata Steel Industries. But Reliance Industries and Tata Steel has maintained a same level of Investments during the year. Reliance has even paid off a higher rate of debts than Tata Steel. Reliance has maintained a very higher level of cash balance than Tata Steel.
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CASH FLOW STATEMENT OF 2007-08 ANALYSIS OF INFOSYS AND WIPRO

8000 7000 6000 5000 AMT IN CRORES 4000 3000 2000 1000 0 -1000 -2000 INFOSYS WIPRO
The above diagram compares the Cash flow statements of Infosys ltd and Wipro ltd during 2007-08. Comparing their profit, Cash and cash equivalent held at the year end and the Net cash from/used in different activities. The above diagram shows that Infosys ltd has earned higher level of profits then Wipro ltd. Cash from Operating activities of Infosys ltd is also more compared to Wipro ltd. Infosys ltd had less investments compared to Wipro during the year. Infosys ltd has even paid off some of its debts where as Wipro ltd has raised a higher rate of funds. Infosys ltd has maintained a very higher level of cash balance than Wipro ltd.
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CASH FLOW STATEMENT OF 2011-12 ANALYSIS OF INFOSYS AND WIPRO

20000
15000
AMT IN CRORES
10000 INFOSYS WIPRO 5000
-5000
The above diagram compares the Cash flow statements of Infosys ltd and Wipro ltd during 2011-12. Comparing their profit, Cash and cash equivalent held at the year end and the Net cash from/used in different activities. The above diagram shows that Infosys ltd has earned higher level of profits then Wipro ltd. Cash from Operating activities of Infosys ltd is also more compared to Wipro ltd. Infosys ltd had earned higher profits compared to Wipro ltd through investments. Infosys ltd has even paid off a higher rate of debts than Wipro ltd. Infosys ltd has maintained a very higher level of cash balance than Wipro ltd.
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CONCLUSION
A cash flow statement is one of the most important financial statements for a project or business. The statement can be as simple as a one page analysis or may involve several schedules that feed information into a central statement. A cash flow statement is a listing of the flows of cash into and out of the business or project. Think of it as your checking account at the bank. Deposits are the cash inflow and withdrawals (checks) are the cash outflows. The balance in your checking account is your net cash flow at a specific point in time. The above analysis shows that there has been equal level of increase of profit earning for Reliance and Tata Steel even after four years. Reliance has very much improved its cash holdings after four years compared to which Tata Steel has increased to a little percentage. Comparing Infosys and Wipros four years growth both the companies have maintained equal level of growth and cash flow. This shows that cash flow statement is one of the important statement for analyzing a companys cash flow.
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BIBLOGRAPHY
BOOKS
MANAGEMENT ACCOUNTING By Bhattacharyya Debarshi FUNDAMENTAL ACCOUNTING By D. K. Flynn, Carolina Koornhof, David Flynn
WEBSITES
http://www.investopedia.com/ https://www.zionsbank.com/ http://shodhganga.inflibnet.ac.in/ http://www.accountingcoach.com/ http://www.cashflowspy.com/ http://bizfinance.about.com/
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