The Cash Flow Statement translates earnings in the Income Statement into cash inflows. Explained in detail above as a part of the topic “Financial accounting”, is brought to you by Welingkar’s Distance Learning Division. For more such innovative content on management studies, join WeSchool PGDM-DLP Program: http://bit.ly/SlideshareFaccounting Join us on Facebook: http://www.facebook.com/welearnindia Follow us on Twitter: https://twitter.com/WeLearnIndia Read our latest blog at: http://welearnindia.wordpress.com Subscribe to our Slideshare Channel: http://www.slideshare.net/welingkarDLP

1. Welingkar’s Distance Learning Division
Financial Accounting
CHAPTER-5. The Statement of Cash Flow
We Learn – A Continuous Learning Forum

2. Financial Accounting The Statement of Cash Flows Chapter 05
Importance
Generally Accepted Accounting Principles (GAAP) call for
three principal financial statements from all firms.
These are
$ Balance Sheet
$ Income Statement or P & L Account
$ Statement of Cash Flows

3. Financial Accounting The Statement of Cash Flows Chapter 05
Importance
The Statement of Cash Flows
- translates earnings in the Income Statement
into cash inflows.

4. Financial Accounting The Statement of Cash Flows Chapter 05
Importance
The Statement of Cash Flows
- translates earnings in the Income Statement into cash
inflows.
- shows how good is the firm in realizing adequate cash
from its main operating business.

5. Financial Accounting The Statement of Cash Flows Chapter 05
Importance
The Statement of Cash Flows
- translates earnings in the Income Statement into cash
inflows.
- shows how good is the firm in realizing adequate cash
from its main operating business.
- reveals if firm needs to look outside for other sources
of finance.

6. Financial Accounting The Statement of Cash Flows Chapter 05
Importance
In the Statement of Cash Flows
- definition of cash includes both cash ( currency and
bank account balances).
AND
- cash equivalents.

7. Financial Accounting The Statement of Cash Flows Chapter 05
Importance
In the Statement of Cash Flows
- definition of cash includes both cash AND
- cash equivalents. Which are
$ Short term highly liquid instruments maturing in not
more than 90 days.
$ Treasury Bills ( T-Bills)
$ Short Term Certificates of Deposits (CDs)
$ Commercial Paper (CPs)

8. Financial Accounting The Statement of Cash Flows Chapter 05
Categories
The Statement of Cash Flows reports cash flows, in the
following categories :
- Operating activities: transactions that affect the
net income

9. Financial Accounting The Statement of Cash Flows Chapter 05
Categories
The Statement of Cash Flows reports cash flows, in the
following categories :
$ Operating Activities.
Investing Activities : Transactions which affect
investments in fixed assets like property, plant etc.

10. Financial Accounting The Statement of Cash Flows Chapter 05
Categories
The Statement of Cash Flows reports cash flows, in the
following categories :
$ Operating Activities.
$ Investing Activities.
Financing Activities : Transactions which affect
equity and debt of the business.

11. Financial Accounting The Statement of Cash Flows Chapter 05
Categories
The Statement of Cash Flows reports cash flows, in the
following three categories :
$ Operating Activities.
$ Investing Activities.
$ Financing Activities.

12. Financial Accounting The Statement of Cash Flows Chapter 05
Uses
The Statement of Cash Flows is used by investors and
creditors to :
$ Evaluate management’s abilities to manage
cash now and in the future.

13. Financial Accounting The Statement of Cash Flows
Chapter 05
Uses
The Statement of Cash Flows is used by investors and
creditors to :
$ Evaluate management’s abilities to manage
cash now and in the future.
$ Assess the company’s ability to pay dividends
and to pay creditors.

14. Financial Accounting The Statement of Cash Flows Chapter 05
Uses
The Statement of Cash Flows is used by investors and
creditors to :
$ Evaluate management’s abilities to manage
cash now and in the future.
$ Assess the company’s ability to pay dividends
and to pay creditors.
$ Convert actual net income reported on income
statement to a cash basis figure.

15. Financial Accounting The Statement of Cash Flows Chapter 05
Methods
The Statement of Cash Flows is prepared by using
$ Direct Method.
$ Indirect Method.

16. Financial Accounting The Statement of Cash Flows Chapter 05
Methods
The Statement of Cash Flows is prepared by using
$ Direct Method.
$ Indirect Method.
The vast majority of publicly traded firms
use indirect method .

17. Financial Accounting The Statement of Cash Flows Chapter 05
Methods
The Statement of Cash Flows is prepared by using
$ Direct Method.
$ Indirect Method.
” The only difference between the two
methods is, how cash flows from
operating activities are calculated.”

18. Financial Accounting The Statement of Cash Flows Chapter 05
Methods
The Statement of Cash Flows is prepared by using
$ Direct Method.
$ Indirect Method.
” The only difference between the two methods is, how cash flows from
operating activities are calculated.”
“Cash flows from investing and
financing activities are
calculated identically in both methods.”

19. Financial Accounting The Statement of Cash Flows Chapter 05
Methods
The Statement of Cash Flows is prepared by using
$ Direct Method.
$ Indirect Method.
” The only difference between the two methods is, how cash flows from
operating activities are calculated.”
“Cash flows from investing and financing activities are calculated identically in
both methods.”
The net cash inflow from operating activities is the same whether
statement prepared by direct or indirect method.

20. Financial Accounting The Statement of Cash Flows Chapter 05
Methods
Direct Method.
Converts each item on the income
statement to a cash flow
i.e. sales are converted to
cash receipts from
sales etc.

21. Financial Accounting The Statement of Cash Flows Chapter 05
Methods
Indirect Method.
Step # 01
Begin with Net Income as reported on the income
statement.

22. Financial Accounting The Statement of Cash Flows Chapter 05
Methods
Indirect Method.
$ Begin with Net Income as reported on the income
statement.
Step # 02
Add back Depreciation, Depletion and Amortization.
( as these are non cash expenses added back to income )

23. Financial Accounting The Statement of Cash Flows Chapter 05
Methods
Indirect Method.
$ Begin with Net Income as reported on the income
statement.
$ Add back Depreciation, Depletion and Amortization.
Step # 03
Subtract gain on disposal of fixed assets.
( These are reported in investing section of the statement)

24. Financial Accounting The Statement of Cash Flows Chapter 05
Methods
Indirect Method.
$ Begin with Net Income as reported on the income statement.
$ Add back Depreciation, Depletion and Amortization.
$ Subtract gain on disposal of fixed assets.
Step # 04
Add back Loss on Disposal of Fixed Assets.
( These are reported in investing section of the statement)

25. Financial Accounting The Statement of Cash Flows Chapter 05
Methods
Indirect Method.
$ Begin with Net Income as reported on the income statement.
$ Add back Depreciation, Depletion and Amortization.
$ Subtract gain on disposal of fixed assets.
$ Add back Loss on disposal of fixed assets.
Step # 05
Adjust for changes in current asset and current liability.

26. Financial Accounting The Statement of Cash Flows Chapter 05
Methods
Indirect Method.
Step # 05
Adjust for changes in current asset and current liability as
under :
1. An increase in current assets is deducted from net income.
2. An increase in current liabilities is added to net income.
3. A decrease in current assets is added to net income.
4. A decrease in current liabilities is deducted from net income.

27. Financial Accounting The Statement of Cash Flows Chapter 05
Methods
Indirect Method.
$ Begin with Net Income as reported on the income statement.
$ Add back Depreciation, Depletion and Amortization.
$ Subtract gain on disposal of fixed assets.
$ Add back Loss on disposal of fixed assets.
$ Adjust for changes in current asset and current liability.
Last Step !
Arrive at Net Cash Inflow ( or Outflow) from Operating Activities.

28. Financial Accounting The Statement of Cash Flows Chapter 05
Methods
It is important to observe that the cash flow compares
Balance Sheets as on two dates and
determines the cash flow.
It is, therefore , more convenient to plot the Balance Sheets
on two dates in a vertical form.

29. Financial Accounting The Statement of Cash Flows Chapter 05
Profit & Loss Account of a firm may show robust
topline and bottomline,
It is the Cash Flow Statement that reveals
liquidity so necessary for survival and
growth of an organization!