Cash Flow Statement

Statement of Changes in Financial Position : Cash Flow Statement Presented by: Hitesh Baid

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
The Cash Flow Statement

Cash Inflows and Outflows

Classification of Business Activities : Inflow and Outflow of Cash Operating Activities Cash Inflow 1) Cash Sales 2) Received from Debtor 3) Commission & Fees 4) Royalty Cash Outflow 1) Cash Purchases 2) Payment to Creditors 3) Cash Operating Expenses 4) Payment of Wages 5) Income Tax 6) Manufacturing Expenses Cash effects the transaction on Net Income

Investing Activities Cash Inflow 1) Sale of Fixed Assets 2) Sale of investments 3) Interest Received 4) Dividend Received 5) 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

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
Highlighting cash flow from different activities
Short-term Planning
Cash Flow information helps to understand liquidity
Efficient cash management
Prediction of sickness
Comparison with budget
Cash position

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
Cash Flow Statement : Limitations

Basis Of Difference Cash Flow Funds Flow Distinction between Cash flow Statement and Funds Flow Statement Causes of Variation It studies only the Causes of cash variation It studies causes of Ch- ange in working capital Basis of Accounting It recognizes Cash basis Of accounting It is based upon accrual Basis of accounting I.e Working capital Schedule of Changes in Working Capital Such a schedule is not Prepared for preparing Cash flow statement Schedule of changes in Working capital is Prepared separately Significance It is useful for short- Term financial planning It is useful for long-term Financial planning

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

Preparing a Statement of Cash Flows
Order of Presentation:
Operating activities.
Investing activities.
Financing activities.
Direct Method Indirect Method
Three Sources of Information:
Comparative balance sheets
Current income statement
Additional information

Cash Flow from Operating Activities : Direct Method Cash Flow from Operating Activities Amount (Rs.) 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 XXX XXX XXX Amount (Rs.) XXX XXX XXX XXX XXX XXX XXX XXX

Cash Flow from Operating Activities : Indirect Method Cash Flow from Operating Activities Amount (Rs.) Amount (Rs.) 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 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:
It is easier and less costly to prepare, and
It focuses on the differences between net income and net cash flow from operating activities.

+Net Income +Depreciation -Capital Investment +Salvage Proceeds -Gain Tax -Working Inv Cap +Working Cap Recovery +Borrowed Funds -Repayment of Principal Revenues Expenses Cost of Goods Sold Depreciation* Operating Expenses Taxable Income Income Taxes Net Income Income Statement Cash Flow Statement Operating Investing Financing + + Book Approach *Assumes Tax Depreciation = Book Depreciation Thus, no deferred taxes

Format for Cash Flow Statement

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Cash Flow Statement

by Hitesh Baid

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