1. CASH FLOW ANALYSIS
By
Mr. K. Ganesha Moorthy
Assistant Professor
Department of Commerce (Corporate Secretaryship)
ANJA College, Sivakasi.
2. Meaning
Cash flow statement reports the inflows and outflows of
cash and its equalents of an organization during a particular
period. It reports the cash receipts and payments classified
according to the firm’s major activities - Operating, Investing
and financing.
It shows the net cash inflow or net cash outflow for each
activity and for the overall business of the firm. It reports from
where cash has come and how it has been utilized.
3. Objectives of Cash flow analysis
• To provide information about the cash flows of an enterprise
• To enable the users of financial statements to evaluate the
‘Timings and certainty’ of the generation of cash flows
• To classify the cash flows on the basis of Operating, Investing and
Financing activities
• There is a possibility of using cash very properly through
preparing cash flow statement
• To take management decisions regard to short term finance
4. Advantages of Cash Flow Analysis
• Assessment of firms ability to generate cash flows:
Cash flow statement helpful in assessing the ability of the firm to generate cash and cash equalents
and also timing and certainty of such cash flows
• Classification of cash flows:
Cash flows are classified on the basis of major activities i.e., Operating, Investing and Financing. It
helps to assess the effectiveness of the management policies relating to each of these major activities.
• Historical analysis as guide to forecasting:
It presents in detail the movement of cash in the recent past. This can provide clear indication for
the cash flows in the future period, thus helping in forecasting the future commitments and needs.
5. Advantages of Cash Flow Analysis
• Effective cash Management
Cash flow statement can act as a guide for coordinating the inflows and out flows of
cash. The matching of the future cash receipts and payments results in effective
cash management.
• Liquidity position
It reveal the liquidity position of the firm by highlighting the various sources of cash
and its uses.
• Short term financial decision
Short range financial decisions like repayment of overdraft or loans, payment of
bonus, advertising campaign etc., may be taken on the basis of the analysis
provided by the cash flow statement.
6. Limitations of Cash Flow Analysis
• Cash flow statement discloses inflows and out flows of cash alone
• The scope is very limited compared to fund flow statement which
reveals the changes in working capital or the income statement
which displays the overall financial position.
• Cash flow statement reveals the cash balance only.
• Non cash items of expenses and incomes are excluded, it cannot
provide a comprehensive picture of a firm’s financial position.
7. Format of Cash Flow Statement
Particulars Rs. Rs.
Opening Cash Balance XXXX
Add: Sources of Cash (Cash Receipts) XXXX XXXX
Total Cash Available XXXX
Less: Applications Cash (Cash Payments) XXXX XXXX
Total Applications of cash XXXX
Closing Cash Balance XXXX
8. Before going to problem you may
know some important points
• Operating Activities
• Investing Activities
• Financing Activities
• How to find Operating activities?
In simple, here you may consider Current assets and Current
liabilities only.
In this statement we take base as Fund from Operations.
Fund from operations is not given directly we find that with the help of
preparing Adjusted profit and loss a/c.
9. Format for Cash From Operation
Particulars Rs. Rs.
Fund from operations XXXX
Add: Increase in Current liability /
Decrease in Current Assets
XXXX XXXX
XXXX
Less: Increase in Current Assets /
Decrease in Liabilities
XXXX XXXX
Cash from Operations XXXX
Add:
Current Assets
Current Liabilities
Less:
Current Assets
Current Liabilities
• If Cash from operations in Positive
value (+) taken as Sources of Cash
(Receipts)
• If Cash from operations in Negative
value (-) taken as Applications of
Cash (Payments)
10.
11. Calculation of Cash from operation
(Workings)
Particulars Rs. Rs.
Fund from operation (P&L a/c) (46,000 – 20,000) 26,000
Add: Increase in Current liability / Decrease in Current Assets
Debtors (2,40,000 – 2,30,000) 10, 000 10,000
36,000
Less: Increase in Current Assets / Decrease in Liabilities:
Stock (1,60,000 – 1,80,000)
Creditors (1,40,000 – 90,000)
20,000
50,000 70,000
Cash from operation (Outflow) (-34,000
12. Cash Flow Statement
Particulars Rs. Rs.
Opening Cash Balance 60,000
Add: Sources of Cash (Cash Receipts)
Issue of Shares (5,00,000 – 4,00,000) 1,00,000 1,00,000
Total Cash Available 1,60,000
Less: Applications Cash (Cash Payments)
Cash outflow (Cash from operations)
Purcahase of Land (1,32,000 – 1,00,000)
34,000
32,000
Total Applications of cash 66,000
Closing Cash Balance 94,000
