9. cash flow statement

8/19/2019 9. Cash Flow Statement

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Cash Flow Statement


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Purposes of Cash Flow Statement

1.

Predict future cash flows

Evaluate management decisions

Determine the ability to pay dividends to stockholders’and payments to creditors

Show the relationship of net income to the business’scash flows


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Cash Flow Statement

A Cash-Flow statement defined as a summary of receipts and

disbursements of cash for a particular period of time. It also explainsreasons for the changes in cash position of the firm between two dates ofBalance Sheets.

The term cash as used in the statement of cash flows refers to both cashand cash equivalents.

Cash means, cash in hand and demand deposits with the bank.

Cash equivalent are short-term, highly liquid investments, readilyconvertible into cash and which are subject to insignificant risk ofchanges in values, consists of bank overdraft, cash credit, short term

deposits and marketable securities.

Cash flow statement provides relevant information in assessing acompany's liquidity, quality of earnings and solvency.

It is very useful in the evaluation of cash position of a firm.


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Cash Flow Statement

Cash flows are both cash inflows and outflows of Cash and

Cash equivalents

Transactions which increase the cash position of the entity arecalled as inflows of cash and those which decrease the cash

position as outflows of cash.

The statement of cash flow shows three main categories ofcash inflows and cash outflows, namely:

Operating Activities

Investing Activities

Financing Activities


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Classification of Cash Flows

OperatingActivities

InvestingActivities Financing

Activities

Cash Flow

Statement


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Operating Activities are the principal revenue generating

activities of the enterprise - create revenues, expenses,gains, and losses.

Includes:

– Current assets – Current Liabilities

– Revenue and Expenses (includes interest expense andrevenue, and dividends received)


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Cash inflows Cash outflows

• Cash sale Cash purchases

• Cash received from Debtors Cash payment to creditors & B/ P

• Cash received from Commission Cash payment for goods & services& fees Payment of wages & others

• Interest & Dividend recd on loans Income Tax paidand investments Interest payments

• Other revenues Other operating expenses (cash

• Other Operating cash receipts payments)

Net cash flows from operating activities


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Investing activities

Investing Activities include the acquisition and

disposal of long term assets and other investments -increase and decrease long-term assets

Includes:

Short-term and long-term investments

Long term assets - Property, Plant and Equipment

Intangible Assets


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Investing activities

Cash inflows Cash outflows

• Cash Sale of fixed assets Purchase of fixed assets

• Cash Sale of investments - Shares, Purchase of investments

Debentures & other securities

• Interest received

• Dividend received

Net cash flows from investing activities


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Financing Activities are activities that result in change in

the size and composition of the owner’s capital and borrowings of the enterprise - obtain cash from investorsand creditors

Includes:

– Share Capital

– Short-term and long-term loans

– Interest Paid

– Dividends Paid


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Cash inflow Cash outflow

• Cash received from Issue of Cash repayments of loans

shares & debentures Redemption of debentures

• Receipts of long term & Dividends paid on equity and preference

short term borrowings share capital

Interest paid on loans/debentures

Net cash flows from financing activities


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Limitations of Cash Flow Statement

Cash Flow Statement has limited scope as it compares with Fund flow

statement. Because it discloses inflows and outflows of cash alone. Itdoes not reveal the overall financial position of the concern.

Cash Flow Statement cannot provide a comprehensive picture of afinancial position because non-cash items of expenses and incomes are

excluded. The balances as disclosed by the cash flow statement may not be

treated as actual liquid position of a concern since it cannot be easilyinfluenced by postponing purchases and other payments.

Not suitable for Judging Profitability

Statement does not reflect real liquid position

Can not be equated with Income Statement

METHOD OF PREPARING CASH FLOW


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METHOD OF PREPARING CASH FLOWSTATEMENT

Indirect Method:

Under this method, the Net Profit for the year is taken as

base & adjust the items which appear in P&L A/C but do notcause any cash inflow or outflow.

Non - cash items such as Depreciation, Provisions for Tax,Proposed Dividend, Transfer to Reserves (Adjustment of

non-cash items)

Changes during the period in Inventories and Receivables

and payables (Adjustment of Working Capital items) All other items for which the cash effects are Investing or

Financing cash flows


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Rules of calculating Operating Cash Flow

Change Adjustment to Net Income

Decrease in Current Asset Add

Increase in Current Liability Add

Decrease in Current Liability Subtract

Increase in Current Asset Subtract

Format of Cash Flow from Operating Activities


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Format of Cash Flow from Operating Activities – Indirect method

(A) Cash flows from Operating Activities

Closing balance of P&L A/c xxxx

Add - Non- Cash items debited to P&L A/C xxxx

Less - Non- Cash items credited to P&L A/C xxxx

Add – Interest Payment xxxx

Less – Interest/Dividend Income xxxx

Profit before Tax

Operating profit before adjusting Working Capital items xxxx

Add - Decrease in Current Assets & Increase in Current Liability xxxx

Less - Increase in Current Assets & Decrease in Current Liability xxxx

Less Tax paid xxxx

Net Cash flow from Operating Activities xxxx



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(A) Cash flows from Operating Activities

Closing balance of P&L A/c

Add - Non- Cash items debited to P&L A/C - Depreciation, Losses from

sale of assets

Less - Non- Cash items credited to P&L A/C - Gains from sale of assets

Add – Interest Payment

Less – Interest/Dividend Income

Profit before Tax

Operating profit before adjusting Working Capital items



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Add or Less

• Add - increases in current liabilities & decreases incurrent assets

• Less - decreases in current liabilities & increases in

current assets

• Less Tax paid

Net Cash flow from Operating Activities

Format of Cash Flow from Investing & Financing


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Format of Cash Flow from Investing & FinancingActivities – Indirect method

(B) Cash flows from Investing Activities

Add - Sales of fixed assetsAdd - Sales of Investments

Less - Purchase of fixed assets

Less - Purchase of Investments

Net Cash flow from Investing Activities

(C) Cash flows from Financing Activities

Less - Repayment of Bonds & Debentures

Less - Dividends paid

Add - Issue of Shares

Net Cash flow from Financing Activities

Net Increase (Decrease) in Cash

9. cash flow statement

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