Statement of Changes in Financial Position : Cash Flow Statement

Presented by: Hitesh Baid

The Cash Flow Statement

The cash flow statement provides information about:
Cash Receipts (cash inflows) Uses of Cash (cash outflows) During a Period of Time

Inflows and outflows are reported for:

Operating activities Investing activities Financing activities

Cash Inflows and Outflows

Classification of Business Activities : Inflow and Outflow of Cash

Operating Activities

Cash Inflow
1) 2) 3) 4) Cash Sales Received from Debtor Commission & Fees Royalty 1) 2) 3) 4) 5) 6)

Cash Outflow
Cash Purchases Payment to Creditors Cash Operating Expenses Payment of Wages Income Tax Manufacturing Expenses

Cash effects the transaction on Net Income

Classification of Business Activities : Inflow and Outflow of Cash

Investing Activities

Cash Inflow
1) 2) 3) 4) 5) Sale of Fixed Assets Sale of investments Interest Received Dividend Received Working Capital Recovery

Cash Outflow
1) Purchase of Fixed Assets 2) Purchase of Investments 3) Working Capital

Classification of Business Activities : Inflow and Outflow of Cash

Financing Activities

Cash Inflow
1) Issue of Shares in Cash 2) Issue of Debentures in Cash 3) Proceeds from long-term borrowings

Cash Outflow
1) Payment of Loans 2) Redemption of Preference Shares 3) Payment of Dividends 4) Interest Paid 5) Repayment of Finance/ Lease Liability

Objectives of Cash Flow Statement

1. Highlighting cash flow from different activities 2. Short-term Planning 3. Cash Flow information helps to understand liquidity 4. Efficient cash management 5. Prediction of sickness 6. Comparison with budget 7. Cash position

Cash Flow Statement : Limitations

Does not show the liquidity position of the firm It is not a substitute of income statement Does not show the financial position of the firm in totality

Distinction between Cash flow Statement and Funds Flow Statement

Basis Of Difference Basis of Accounting Cash Flow
It recognizes Cash basis Of accounting It is useful for shortTerm financial planning Such a schedule is not Prepared for preparing Cash flow statement It studies only the Causes of cash variation

Funds Flow
It is based upon accrual Basis of accounting I.e Working capital It is useful for long-term Financial planning Schedule of changes in Working capital is Prepared separately It studies causes of Change in working capital

Significance
Schedule of Changes in Working Capital Causes of Variation

Preparing a Statement of Cash Flows

Use net operating income as the starting point to get net operating cash flow Add back any non-cash expense (Example - Depreciation)
Net Cash Flow = Cash Inflow - Cash Outflow
Net Operating Cash Flow = Income after Taxes + Depreciation

Preparing a Statement of Cash Flows

Order of Presentation:
1. 2. 3.

Operating activities. Investing activities. Financing activities.

Direct Method Indirect Method

Three Sources of Information:

1. Comparative balance sheets 2. Current income statement 3. Additional information

Cash Flow from Operating Activities : Direct Method

Cash Flow from Operating Activities Cash Receipts from : Sales Commission & Fees Interest Received Cash Payment for : Purchases Payments to and for employees Operating Expenses Interest Payments Direct Taxes Paid Net Cash Flow from Operating Activities
Amount (Rs.) Amount (Rs.)

XXX XXX XXX

XXX
XXX XXX XXX XXX XXX XXX

XXX

Cash Flow from Operating Activities : Indirect Method

Cash Flow from Operating Activities
Net Profit before Tax Adjustment for : Depreciation Loss on Sale of Fixed Assets Loss on revaluation Operating Profit before Working Capital Changes Adjustment* for : Trade and other Receivables Inventories or Stocks Trade Payments or (Creditors and B/P) Cash Generated from Operations Interest Paid Taxes Paid Net Cash Flow from Operating Activities
Amount (Rs.) Amount (Rs.)

xxx xxx xxx xxx

xxx xxx

xxx xxx xxx xxx

xxx xxx xxx XXX

Preparing the Statement of Cash Flows

Indirect and Direct Methods
Companies favor the indirect method for two reasons: 1. It is easier and less costly to prepare, and 2. It focuses on the differences between net income and net cash flow from operating activities.

Book Approach
Income Statement
Revenues Expenses Cost of Goods Sold Depreciation* Operating Expenses Taxable Income Income Taxes Net Income

Cash Flow Statement

+Net Income +Depreciation -Capital Investment +Salvage Proceeds -Gain Tax -Working Inv Cap +Working Cap Recovery +Borrowed Funds -Repayment of Principal

Operating + Investing

+
Financing

*Assumes Tax Depreciation = Book Depreciation Thus, no deferred taxes

Format for Cash Flow Statement

End of Presentation ********************** Thank You