Meaning of Certain Terms:Cash comprises cash on hand and demand deposit with bankCash equivalents are short term, highly liquid investment e.g. treasury bills.Cash flows are inflows and out flows of cash & cash equivalent
Classification of Cash Flows: Cash Flow from Cash Flow from Operating Activity Investing Activity Cash Flow from Financing Activity
CF from Operating Activities:Operating cash flow is the cash that a company generates through running its business.
CF from Operating Activities:Examples of cash flows from operating activities:• Cash receipt from the sale of goods and rendering of services• Cash receipts from royalties, fees, commissions and other revenue• Cash payments to suppliers for goods and services• Cash payments to and on behalf of employees
CF from Investing Activities:An item on the cash flow statement that reports theaggregate change in a companys cash position resultingfrom any gains (or losses) from investments in thefinancial markets and changes resulting from amountsspent on investments in capital assets such as plant andequipment.
CF from Investing Activities:Examples of cash flows from investing activities:• Cash payments to acquire fixed assets (including intangibles)• Cash receipts from disposal of fixed assets• Cash payments to acquire shares or debt instruments of other enterprises• Cash advances and loans made to third parties (other than advances and loans made by a financial enterprise)
CF from Financing Activities:Financing activities are activities that result in changes in the size and composition of the owner’s capital (including preference share capital in the case of a company) and borrowings of the enterprise.
CF from Financing ActivitiesExamples of cash flows from Financing activities• Cash proceeds from issuing shares or other similar instruments• Cash proceeds from issuing debentures, bonds and other short-term borrowing• Cash repayments of amounts borrowed• Payments of dividend and interest
Information required for CashFlow Statement:1.Comparative Balance Sheets: BS at the beginning and atthe end of the accounting period indicate the amount ofchanges that have taken place in assets, liabilities and capital2. Profit and Loss Account: The P & L A/c. of the currentperiod enables to determine the amounts of cash providedby or used in operations during the accounting period aftermaking adjustments for non-cash, current assets and currentliabilities
Information required for CashFlow Statement3.Additional Data: In addition to the above statements,additional data are collected to determine how cash hasbeen provided or used e.g. sale or purchase of assets forcash.
Cash from operations may be ascertained by either1. Direct Method known as ‘Cash Sales Method’ or2. Indirect Method known as ‘ Net Profit Method’
Direct Method:Cash from operations = cash sales – (cash purchase +cashoperating exp.)*All non cash transactions such as depreciation, written off offictitious assets and profit or loss on sale of assets andinvestments are not considered.
Indirect MethodNormally it is used when amount of sales is not available
Uses of Cash Flow Statement Helpful in Planning and Co-ordination Helpful in control Useful in Internal Financial Management Knowledge of Changes in Cash Position Helpful in Short-term Financial Decisions
Limitations of Cash Flow Statement:Conflicting areasIncomplete SubstituteDefective Presentation of Liquidity
Format of Cash Flow Statement Amt. Rs. Amt. Rs. Particulars ***A. Cash flow from operating activities:Net profit before taxAdjustment for: ***Depreciation ***Loss on sale of assets ***Loss on revaluation ***Operating Pt. Before working capital changesAdjustment for: ***Trade and other receivables ***Inventories ***Trade payables ***Cash generated from operationsInterest paid ***Taxes paid *** ***Net cash flow from operating activities
Format of Cash Flow Statement Amt. Rs. Amt. Rs. ParticularsB. Cash flows from investing activities ***Purchase of fixed assetsPurchase of investmentsSale of fixed assets ***Sale of investments ***Interest received ***Dividend received ***Net cash used in investing activitiesC. Cash flows from financing activities : ***Proceeds from issue of shares ***Proceeds from long term borrowings ***Repayment of finance/lease liability ***Dividend paidNet cash used in financing activities ***Net increase (Decrease) in cash and cash equivalents *** ***Cash and cash equivalents at (opening)Cash and cash equivalents at (closing)