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Cash Flow Statement

Why?

How much cash has been generated from normal business operating
activities/operations of a company?

What have been the other premier financing activities of the firm through
which cash has been raised? What has happened to cash so obtained?

How much cash has been spent on investment activities, say, on


purchase of new plant and equipments?

How

was the
accomplished?

Have

redemption

of

preference

shares

and

debentures

long-term sources of cash (internally generated plus raised


externally) adequate to finance purchase of new long-term/fixed assets?

Why?

What has been the proportion of debt and equity for cash
raised from outside?

Why are dividends not larger?


Is the company borrowing to pay cash dividends?
Has the liquidity position of the company improved?

CASH INFLOW & OUTFLOW

NON-CASH EXPENDITURE & NONOPERATING EXPENSES


Mr. X is doing business of buying and selling of toys. On 03-08-2011
morning he borrowed Rs 7000 from his friend to start his business. He
made the following transactions for the day.
1.
2.
3.
4.

Total toys purchased Rs 7000


Total toys sold Rs 10,000
He uses an assistant in his business and paid salary of Rs 1000
He uses a motor cycle for his business and he charged Depreciation
Rs 400
5. Spent Rs 100 for fuel
6. Repaid money to his friend Rs 7300 with interest

5-5

HOW MUCH IS HIS PROFIT?


Sales Revenue
Less: Purchases
Gross profit

Rs 10,000
Rs 7,000
Rs 3,000

Less: Other expenses


Salary
Rs 1000
Depreciation Rs 400
Fuel
Rs 100
Interest
Rs 300
Net Profit

Rs 1,800
Rs 1,200

5-6

HOW MUCH HE HAS IN HIS POCKET?


Rs 1200?

Net Profit
expenditure depreciation

Rs 1,200 Add: Non-cash


Rs 400
Rs 1,600

5-7

HO MUCH CASH HE GENERATED


FROM BUSINESS OPERATION?
Rs 1600?
Net Profit
expenditure depreciation

Rs 1,200 Add: Non-cash


Rs 400
Rs 1,600
Add: Non-operating expenditure
Rs 300
Cash from operations
Rs 1,900

5-8

CASH FROM OPERATIONS

Year 1

Total

Year 2

Cash

Credit

Total

Cash

Credit

Sales

100,000.00 80,000.00 20,000.00 150,000.00 120,000.00 30,000.00

Less:Purchase

80,000.00

Net profit

50,000.00 30,000.00 110,000.00 70,000.00

20,000

40,000

40,000.00

How much the business generated cash in Year 1 & 2?


5-9

HOW DO YOU CALCULATE CFO FROM STATEMENT OF


PROFIT AS IT DOES NOT HAVE CREDIT TRANSACTION
DETAILS?

Year 1

Year 2

Total

Total

Sales

Less:Purchase

Net profit

100,000.00

150,000.00

80,000.00

110,000.00

20,000

40,000

5 - 10

RULES FOR RELATING THE CHANGES IN CURRENT


ASSETS AND CURRENT LIABILITIES TO THE PROFIT AND
LOSS ACCOUNT IN THE COMPUTATION OF CASH FROM
OPERATIONS
1) All the increases in current assets (excluding cash) and decreases in
current liabilities which increase working capital decrease cash.
The decrease in current liabilities takes place when they are paid in cash.
For instance, decrease in creditors, bank overdrafts, bills payable and
dividends payable will occur due to their payment
Negative impact of increase in current assets on cash. For instance, an
increase in sundry debtors takes place when credit sales are greater than
cash collections from them.
2) From the first follows the second ruleall decreases in current assets
other than cash and increases in current liabilities which cause a
decrease in working capital increase cash.
Debtors would decrease when cash collections are more than current
credit sales. Inventories would decrease because cost of goods sold is
more than cost of goods purchased; Decrease in prepaid expenses
reflects that the firm has paid less for services than are currently used.
5 - 11

SUMMARY OF
Operating Activities:
Operating cashflows are directly related to production and sales of
the firms products/services.
Investment Activities:
Investment flows are cashflows associated with purchase/sale of
both fixed assets and business interests.
Financial Activities:
Financing flows are cashflows that result from debt/equity
financing transactions and include incurrence and repayment of
debt cashflows from the sale of shares and cash outflows to
purchase shares or pay dividend.
5 - 12

OPERATING ACTIVITIES
Cash flow From Operating Activities
o
o
o
o
o
o

Cash receipts from customers


xxxxx
Cash paid to suppliers and employees
xxxxx
Cash generated from operations
xxxxx
Income tax
xxxxx
Cash flow before extraordinary items
xxxxx
Proceeds from earthquake disaster settlementxxxxx

Net cash from operating activities

xxxxx

5 - 13

INVESTING ACTIVITIES
Cash flow From Investing Activities
Purchase of fixed assets
Proceeds from sale of equipments
Interest received
Dividends received
Net cash from investing activities

xxxxx
xxxxx
xxxxx
xxxxx
xxxxx

5 - 14

FINANCING ACTIVITIES
Cashf low From Financing Activities

Proceeds from issuance of share capital xxxx


Proceeds from long-term borrowings xxxx
Repayments of long-term borrowings xxxx
Interest paid
xxxx
Dividends paid
xxxx
______
Net cash used in financing activities
xxxx

5 - 15

METHODS OF PREPARATION OF
CASH FLOW STATEMENT
Direct Method Cash Flow Statement
Indirect Method Cash Flow Statement AS3

5 - 16

AS-3: CASH FLOW STATEMENT


The Institute of Chartered Accountants of India (ICAI) issued the
Accounting Standard (AS-3) relating to the preparation of cash
flow statement (CFS) for accounting periods commencing on or
after April 1, 2001 for enterprises.
1) Which have either turnover of more than Rs 50 crore in a
financial year or
2) The shares of which are listed in stock exchange (i.e. the listed
companies) in India or outside India or
3) Enterprises which are in the process of listing their equity or
debt securities as evidenced by the Board of Directors
resolution in this regard.

The CFS of listed companies should be presented as per the


indirect method prescribed in AS-3.
5 - 17

DIRECT METHOD CASH FLOW STATEMENT

Cash flow From Operating Activities


Cash receipts from customers
Cash paid to suppliers and employees
Cash generated from operations
Income tax
Cash flow before extraordinary items
Proceeds from earthquake disaster settlement
Net cash from operating activities
Cash flow From Investing Activities
Purchase of fixed assets
Proceeds from sale of equipments
Interest received
Dividends received
Net cash from investing activities
Cash flow From Financing Activities
Proceeds from issuance of share capital
Proceeds from long-term borrowings
Repayments of long-term borrowings
Interest paid
Dividends paid
Net cash used in financing activities
Net Increase in Cash and Cash-equivalents
Cash and cash-equivalents at the beginning of a period
Cash and cash-equivalents at the end of a period

CASH FROM BUSINESS


OPERATION (INDIRECT METHOD)
Net income (or loss) as shown by profit and loss account
Add: Depreciation expenses;
Amortisation of goodwill, patents and other intangible assets;
Amortisation of discount on debentures or share issue expenses;
Amortisation of extraordinary losses occurred in previous years;
Loss on sale of non-current assets;
Less: Amortisation of premium received on debentures;
Profit on sale of equipment (already included under sources)
Profit on revaluation of non-current assets (does not contribute
working capital)
Dividends and interest received on investments (reported separately).
(A + B C) = Working capital from business operations.
Adjustment to convert to cash basis:

Add: Decrease in WC (CA or +CL)


Decrease in current assets other than cash (item wise)
Increase in current liabilities (item-wise)
Less:
Increase in WC (+CA or CL)
Increase in current assets other than cash (item-wise)
Decrease in current liabilities (item-wise)
Cash flow from business operations

to

DIRECT METHOD - EXAMPLE


Cash from Operating Activities
Cash from Debtors

1984

Cash paid to creditors

-1429

Operating Ex -455
Income Tax paid

-72 28

Cash from Investing Activities


Machinery Sold

Purchase of Machinery
Purchase of Patent

-75

-16

-85

Cash from Financing Activities


Repayment of Debentures -160
Interest paid to Debenture holders
Dividend Paid -16
Issue of Equity share capital
Net Decrease in cash Balance

-14

210

20
-37

Cash and Cash equivalents at the beginning


Cash and Cash equivalents at the end
37

74

INDIRECT METHOD - EXAMPLE


Cash from Operating Activities
Net Loss from operation

-3

Add: Depreciation on P & L

23

Patent written off

Interest on debenture

14
40

CA/CL Adjustments
Decrease in Sundry Debtors
Decrease in Inventories

7
35

Decrease in Prepaid expenses

Increase in Sundry Creditors


Tax paid

16
-72

28

CONTINUED
Cash from Investing Activities
Machinery Sold

Purchase of Machinery
Purchase of Patent

-75

-16 -85

Cash from Financing Activities


Repayment of Debentures -160
Interest paid to Debenture holders

-14

Dividend Paid -16


Issue of Equity share capital
Net Decrease in Cash Balance

210 20
-37

Cash and Cash equivalents at the beginning 74


Cash and Cash equivalents at the end 37

EXERCISE 5.15 INDIRECT


METHOD
Cash from Operating activities
Net profit ( 360,000 2,88,00)72,000
Less: Under-Valuation of Op.Stock
Add: Transferred to GR

-28,800

1,44,000

Proposed dividend

1,74,000

Provision for Taxes (Current year)


Net profit before taxation and Extra ordinary items

Depreciation

4,08,000
7,69,200

4,20,000

Loss on Sale of FA

36,000

Fixed assets written off


Preliminary ex written off

12,000
48,000

Premium on redemption 14,400


Operating profit before working capital changes

12,99,600

CONTINUED
Increase in current assets (12,72,000-11,62,800)
Increase in current liabilities
Tax Paid

48,000

-4,32,000

Net Cash from Operation

8,06,400

Cash from Investing activities


Purchase of FA

-10,20,000

Sale of FA

1,20,000

Sale of Investment

1,44,000

Net cash from Investing

-7,56,000

Cash from Financing activities


Proceeds from Issue of share capital
Redemption of Debentures
Dividend paid

4,80,000

-3,02,400

-1,26,000

Net cash from Financing activities

51,600

-1,09,200

CONTINUED
Net cash inflow

1,02,000

Cash at the beginning


Cash at the end

2,10,000
3,12,000

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