Undestanding cash flow statement

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Undestanding cash flow statement

  1. 1. Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.com
  2. 2. Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.com
  3. 3. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comIt is a statement which provides informationabout the historical changes in cash andcash equivalent of the entity.It provides the user of financial informationwith a basis on which to assess the ability ofthe entity to generate cash and its needs toutilise that cash.
  4. 4. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comA statement of cash flows classifies cashflows during the period into:•Operating activity•Investing activity and•Financing activity
  5. 5. Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.com
  6. 6. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comCash comprises cash on hand and demand depositsCash equivalents are held for meeting short term cashcommitments rather than for investment or otherpurpose. For an investment to qualify as cash equivalentit must be:•Readily convertible to a known amount of cash i.e. ithas short maturity and•Subject to an insignificant risk of changes in value
  7. 7. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comOperating Activities are the principal revenueproducing activities of the enterprise and otheractivities that are not investing or financingactivities.
  8. 8. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comInvesting Activities are the acquisition anddisposal of long-term asset and other investmentsnot included in cash equivalent.
  9. 9. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comFinancing Activities are the activities that result inchanges in the size and composition of equitycapital and borrowings of the enterprise.
  10. 10. Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.com
  11. 11. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comOperating ActivitiesIt indicates to what extent the operations of entityhave generated cash flows which are availablefor use in other activities.
  12. 12. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comInvesting ActivitiesIt indicates extent of expenditure made inresources intended to generated future incomeand cash flows.
  13. 13. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comFinancing ActivitiesIt is useful in predicting the claims that outsideproviders of capital will have over the future cashflows.
  14. 14. Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.com
  15. 15. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comOperating ActivitiesSince this activity represents internal cashgeneration it is always better to have positive andincreasing cash flows from operating activity.Negative cash flows from this activity indicatesthat the entity is incurring cash losses
  16. 16. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comInvesting ActivitiesSince this activity indicates flow of investment inand out of business for future profit generation, itis better to have negative cash flow here i.e.outflow.Positive cash flow or inflow of cash in this activityindicates that the entity is selling its resources togenerate cash, which is not good.
  17. 17. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comFinancing ActivitiesThis activity indicates change in capital structurei.e. equity or borrowing. While there is a limit toincrease the equity capital (authorised sharecapital) the major volatile component here isborrowing
  18. 18. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comFinancing ActivitiesNegative cash flow i.e. outflow in this activitywould mean that the entity is reducing its debt,there by reducing interest burden which is quitegood.Positive cash flow here indicates increasing debtburden, which should be avoided.
  19. 19. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comComparison of cash flow statement of more thanone year can easily help to assess the solvencyand liquidity position of an entity.

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