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Cash Flow Statement

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Cash Flow Statement

  1. 1. Statement of Changes in Financial Position : Cash Flow Statement Presented by: Hitesh Baid
  2. 2. <ul><li>The cash flow statement provides information about: </li></ul><ul><li>Cash Receipts (cash inflows) </li></ul><ul><li>Uses of Cash (cash outflows) </li></ul><ul><li>During a Period of Time </li></ul><ul><li>Inflows and outflows are reported for: </li></ul><ul><li>Operating activities </li></ul><ul><li>Investing activities </li></ul><ul><li>Financing activities </li></ul>The Cash Flow Statement
  3. 3. Cash Inflows and Outflows
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. Objectives of Cash Flow Statement <ul><li>Highlighting cash flow from different activities </li></ul><ul><li>Short-term Planning </li></ul><ul><li>Cash Flow information helps to understand liquidity </li></ul><ul><li>Efficient cash management </li></ul><ul><li>Prediction of sickness </li></ul><ul><li>Comparison with budget </li></ul><ul><li>Cash position </li></ul>
  8. 8. <ul><li>Does not show the liquidity position of the firm </li></ul><ul><li>It is not a substitute of income statement </li></ul><ul><li>Does not show the financial position of the firm in totality </li></ul>Cash Flow Statement : Limitations
  9. 9. 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
  10. 10. <ul><li>Use net operating income as the starting point to get net operating cash flow </li></ul><ul><li>Add back any non-cash expense </li></ul><ul><li>(Example - Depreciation) </li></ul>Preparing a Statement of Cash Flows Net Cash Flow = Cash Inflow - Cash Outflow Net Operating Cash Flow = Income after Taxes + Depreciation
  11. 11. Preparing a Statement of Cash Flows <ul><li>Order of Presentation: </li></ul><ul><ul><li>Operating activities. </li></ul></ul><ul><ul><li>Investing activities. </li></ul></ul><ul><ul><li>Financing activities. </li></ul></ul>Direct Method Indirect Method <ul><li>Three Sources of Information: </li></ul><ul><ul><li>Comparative balance sheets </li></ul></ul><ul><ul><li>Current income statement </li></ul></ul><ul><ul><li>Additional information </li></ul></ul>
  12. 12. 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
  13. 13. 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
  14. 14. Preparing the Statement of Cash Flows Indirect and Direct Methods <ul><li>Companies favor the indirect method for two reasons: </li></ul><ul><ul><li>It is easier and less costly to prepare, and </li></ul></ul><ul><ul><li>It focuses on the differences between net income and net cash flow from operating activities. </li></ul></ul>
  15. 15. +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
  16. 16. Format for Cash Flow Statement
  17. 17. End of Presentation ********************** Thank You

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