The document provides information about cash flow statements, including: 1) It defines key terms like cash flows, operating activities, investing activities, and financing activities. Cash flows represent inflows and outflows from these three categories of activities. 2) Operating activities involve core business operations and include cash from sales, collections, and payments for expenses. Investing activities relate to purchase/sale of long-term assets and investments. Financing activities cover equity/debt raising and repayments. 3) Non-cash items like depreciation are excluded from cash flow statements, which focus only on actual inflows/outflows of cash. Direct and indirect methods are outlined to calculate cash flows from operations.

1. Cash flow statement
Dr. Reena Kohli
IIM Rohtak

2. Non-cash items
• Depreciation expense
• Amortization expense
• Credit purchases
• Outstanding expenses
• Credit sales
• Accrued incomes

3. Illustration –Profit & loss Account for the year
ended 31st March, 2010
Particulars Rs.
Sales in cash 1,00,000
Purchases in cash (51,000)
Gross Profits 49,000
Salaries paid in cash (10,000)
Rent paid in cash (10,000)
Depreciation (42,000)
Net loss 13,000

4. • It does highlight how cash is moving through various operations of
the business
• Does not account for working capital changes like receipts from
customers, payments to suppliers, expenses paid in cash, incomes
received in cash.

5. Profit and Loss Account of X Ltd. for the Year Ended 31st
March, 2011
Sales -
Less: Cost of Good Sold (-)
Gross Profits -
Less: Operating Expenses (-)
Operating profits -
Less: Non operating expenses and losses (-)
Add: Non operating incomes (other revenues) and gains -
Profits Before Taxes (PBT) -
Less: Taxes/Provision for taxes (-)
Net profits/ Profits after taxes (PAT) -

6. • Does not make any demarcation between income
from operating, investing and financing activities.
Hence may include non-operating expenses and
incomes viz.
Non- operating
expenses/losses
Non-operating incomes
Loss on sale of non-
current assets
Profit on sale of non-current
assets
Loss on sale of investment Profit on sale of investment
Interest paid Interest received
Dividend received

7. Statement of Cash Flows
•The statement that aids management in
analyzing the changes in cash flow
position of the company between two
balance sheet dates is called cash flow
statement.
•It does so by dividing all activities of the
company into three categories viz. cash
from operating activities, cash from
investing activities and cash from
financing activities

8. Meaning of Cash flows
• ‘Cash flows’ means inflow and outflow of
cash and cash equivalents arising out of
operating, investing and financing activities.
• Cash comprises cash in hand and demand
deposits.
• Cash equivalents are short-term, highly
liquid investments that are readily
convertible to known amounts of cash
without risk of decline in its realizable value
(as per Ind-AS 7)

9. Cash flows from Operating Activities
It shows cash flows related to the
fundamental operations/lines of
businesses that company is in, and
also from the operations incidental
to the main lines of operations.

10. Cash inflows from Operating activities
Cash sales
Cash received from debtors (ARs)
Cash received as commission, fees, royalty, rent

11. Cash outflows from Operating activities
Cash purchases
Cash paid to creditors (APs)
Cash operating expenses viz. wages, salaries,
commissions, rent, taxes etc

12. Cash flows from Investing Activities
Investing activities shows cash flows from
sale or purchase of long lived assets and
investments that are not held for resale.
Include cash inflows arising as income
from investing activities such as
Interest received
Dividends received

13. Investing activities
Cash inflows from investing activities
Sale of fixed assets (PPE)/intangible asset
Sale of long term investment (shares of some
company )
Cash received on maturity of term deposit
Interest received
Dividends received

14. Investing activities
Cash outflows from investing activities
Purchase of fixed assets
Purchase of long term investment (shares of some
company)
Advancing loan to a subsidiary
Acquisition of a new company
Acquisition of a brand, or any other intangible
asset

15. Investing Activities
• In general, -ve cash flows from investing activities is a
sign of good health of company as it highlights that
company is continually investing more in PPE, land
and other fixed assets to replace the assets that have
been used up or have become technologically
obsolete.
• Also sign of expansion/growth
• May have +ve cash flows when companies are
divesting whole or part of business.

16. Financing Activities
Cash flows arising out of the activities that result in
changes in the size and composition of the capital
structure (equity and borrowings) of the entity.
These highlight the sources from where a company is
raising funds and how it is redeeming those funds
These also highlight the cost of funds raised that is
interest and dividend paid

17. Financing activities
Cash flows from financing activities
Cash inflows Cash outflows
Issue of equity shares in cash Buy-back of equity shares
Issue of preference shares in
cash
Redemption of preference
shares
Issue of debentures in cash Re-payment of long term
loans
Proceeds of long term
borrowings
Re-payment of debentures
Dividends paid
Interests paid

18. Financing activities
May be positive or negative
If CFO < funds required for investments = positive
cash from financing activities (Why?)
If CFO > funds required for investments = negative
cash from financing activities (Why?)

19. Areas of Confusion
• Interest received (MFs)
• Dividend received
• Interest paid (MFIs)
• Dividend paid

20. Cash flows from extraordinary transactions
•To be disclosed separately in cash flow
statement to enable the users to
understand their nature and effect on
present and future cash flows of the
enterprise
•For instance, insurance proceeds from
earthquake disaster settlement from GIC.
•Cash outflow on account of guarantee
given on behalf of subsidiary company

21. Non-cash transactions
Not reported in cash flows statement
but may be given in notes to
accounts.
•Example:
• Repaying existing bonds by converting
them into common stock
• Acquiring fixed assets by issuing notes
payable/debentures.

22. Preparation of cash flow statement

23. Preparing a Cash Flow Statement
CASH FLOW STATEMENT
Cash flows from operating activities 1
Add: cash flows from investing activities 2
Add: cash flows from financing activities 3
Cash generated/used during the year 1+2+3
Add: Cash at the beginning of the year 4 (From
Balance
Sheet )
Cash at the end of the year 1+2+3+4

24. Cash Flows from Operating Activities
•Approaches to presentation
•Direct method.
•Indirect method.
•An entity can report cash flows from
operating activities using either of
the above stated method

25. Direct method of presenting cash
flows from operating activities
In direct method, Cash from operating
activities is computed as:
Gross cash receipts – Gross cash
payments
Where, Gross cash receipts include
cash sales, cash collected from debtors,
other operating revenues like
commissions received , rent received

26. Direct method of presenting cash
flows from operating activities
While, Gross cash payments include cash
paid for purchasing inventory, cash paid
to accounts payable for credit purchases
of inventory, operating expenses paid in
cash like salaries, wages, commissions,
taxes etc.
Here emphasis is on cash receipts and
cash payments
Just looks like cash account

27. Illustration – Profit & loss Account
For the period ending 31-03-2009
Particulars Amount Rs.
Sales:
Cash: 40,000
Credit: 80,000
Cost of goods sold
Gross Profits
Depreciation
Other expenses paid in cash
Net Profit
1,20,000
(70,000)
50,000
(30,000)
(9500)
10,500
Additional information 31.03.08 31.03.09
Accounts receivable 20,000 24,000
Accounts payable 7,000 5,000
Inventory 22,000 27,000
Cash Purchases during the year = 70000

28. COGS
• COGS= Op inventory+ purchases – closing inventory
• COGS= Op inventory+ (cash purchases + credit purchases)– closing
inventory
• 70000= 22000+(70000+ credit purchases)- 27000
• 70000= 65000 + credit purchases
• Credit purchases= 5000

29. Solution – Direct Method
Cash Flow From Operating Activities:
Cash sales 40,000
Cash received on account of sale of goods 76,000
Less:
Purchases of goods in cash 70,000
Cash expenses 9,500
Payment made on account of credit purchases 7,000
(86,500)
Cash Inflow  29,500

30. Cash from investing activities

31. Cash from investing activities
Inflows: Sale of non-current assets -
Sale of long term investment -
Dividend received -
Interest received on long term investment -
Outflows: Purchase of non-current assets -
Purchase of long term investment -
Cash from investing activities -

32. Illustration - Kanishk
• The following transactions occur at Kanishk
Enterprises:
Particulars Amount (Rs.)
Purchased a machinery for 1,50,000
Sold shares of X limited worth 2,00,000
Received interest on debentures 10,000
Received dividend on shares held 20,000
Sold old machinery 50,000

33. Solution
Cash Flow from Investing Activities:
Sale of Shares 2,00,000
Interest received 10,000
Sale proceeds of old machinery 50,000
Dividend received 20,000
2,80,000
Less: Outflow on account of machine purchase 1,50,000
Cash flow from Investing Activities 1,30,000
Kanishk Enterprises
Cash Flow Statement

34. Cash from financing activities

35. Cash from financing activities
Inflows: Issue of share capital -
Issue of debentures -
Raising long term loans -
Outflows: Redemption of debentures -
Repayment of long term loans -
Dividends paid -
Interest paid -
Cash from financing activities -