cash flow analysis.ppt
TRANSCRIPT
CASH FLOW ANALYSIS
Meaning of cash Flow Statement
A statement of sources and application of cash in a period is called Cash Flow Statement. Sources are otherwise called as inflow and application or otherwise called as outflow of cash.
•Sources of Cash:
1.Cash from Operation
2.Issue of Share Capital
3.Issue of Debenture
4.Raising of long-term Loan
5.Sale of Fixed Assets and Investments
•Application of Cash:
1.Cash lost in operation
2.Redemption of Preference Share Capital
3.Redemption of Debenture
4.Purchase of Fixed Assets
5.Payment of Tax
6.Payment of Dividend
• Objectives of Cash Flow Statement
The Objectives of Cash Flow Statement are as follows:
1. To Measure the movement of cash over a period of time.
2. To find out whether the cash is utilised properly.
3. To take corrective action if there is any default in the utilisation of cash.
4. To assess the requirement of cash for the smoothful functioning of a concern.
5. To take various managerial decisions of a company.
• Advantages of Cash Flow Statement
The following are the advantages of Cash Flow Statement
i. It helps to find out the movement of cash over a period of time.
ii. It is possible to assess the requirement of cash for a period.
iii. The cash performance of a company at present when compared to the previous periods can be ascertained.
iv. It helps for allocating cash for various requirements in a company.
v. It is an important tool for the management for managerial decision making.
• Limitations of Cash Flow Statement
The limitations of Cash Flow Statement are stated as follows:
1. Cash flow statement analyses only the historical facts. There is no projection of cash in future in this method.
2. The manipulation done in Balance Sheets will affect the accuracy of the movement of cash for a period.
3. It analyses the movement of cash only for two periods.
4. It won’t be a substitute for the Income Statement.
• Procedures in the preparation of Cash Flow Statement
1. Calculation of Cash from Operating activities
2. Preparation of Cash Flow Statement.
Net profit is ;the basis for calculating Cash from Operation in this method. The following is the procedure for calculating Cash from Operation.
Statement of Cash from Operation
Particulars
Rs.
Rs.
Net Profit before tax
Add: Non –cash and non-trading items
(Debited in Profit & Loss Account)
i.Depreciation on Fixed Assets
ii.Goodwill, Patent or Trade mark written of (Intangible assets)
iii.Preliminary expenses, Underwriting commission, Discount on issue of Shares or
Debentures written off (Fictitious assets)
iv.Provision for Bad and Doubtful Debts
v.Loss on sale of Fixed Assets and Investment
vi.Provision for Taxation
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Vii Provision for General Reserve
Viii Proposed Dividend
Less: Non-cash and non-trading items
(Credited in Profit & Loss Account)
i.Profit on sale of Fixed Assets
ii.Interest, Commission, Dividend received
iii.Income Tax refund
Net Cash flow before adjusting
Working Capital items
Add: Increase in Current Liabilities
Decrease in Current Assets
Less: Increase in Current Assets
Decrease in Current Liabilities
Net cash flow from Operating Activities
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A. Statement Form of preparing Cash Flow Statement
A Model of the Cash Flow Statement form is stated as follows: Statement of Cash Flow
Rs. Rs.
Cash balance in the beginningAdd: Sources Cash from Operation Issue of Share Capital Issue of Debentures Raising of Loan Sale of Investments Sales of Fixed Assets Less: Applications Purchase of Fixed Assets Purchase of Investment Redemption of Share Capital Redemption of Debenture Repayment of Loan Payment of Tax Payment of Dividend Payment of Tax Cash balance at the end
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• Illustration: 1
Calculate Cash from Operation from the following.
Trading and Profit & Loss Account
Additional Information:
i. Net Profit Rs. 90,000
Dividend Rs. 35,000
Rs. 55,000
Particulars Rs. Particulars Rs.
To Opening StockTo PurchaseTo Manufacturing expensesTo Gross Profit
To DepreciationTo Administrative ExpensesTo Provision for TaxationTo Net Profit
74,0009,14,000
82,0002,50,000
13,20,00040,00070,00050,00090,000
2,50,000
By SalesBy Closing stock
By Gross Profit
12,33,00087,000
13,20,0002,50,000
2,50,000
ii. Opening and Closing balances of Debtors are Rs. 54,000 and Rs. 74,000 respectively.
iii. Opening and Closing balances of Sundry Creditors are Rs. 32,000 and Rs. 17,000 respectively.
iv. Opening and closing balances of Provision for Tax are Rs. 47,000 and Rs. 52,000 Respectively.
Solution:
Calculation of Cash from Operating Activities
Workings i. Cash receipts from customers Rs.
Sales 12,33,000
Add: Closing Debtors 74,000
13,07,000
Less: Opening Debtors 54,000
12,53,000
Particulars Rs.
Cash receipts from customersCash paid to suppliers and employeesCash generated from operationIncome tax paidCash from Operating Activities
12,53,00010,81,000
1,72,00045,000
1,27,000
ii. Cash paid to suppliers and employees
Purchase 9,14,000
Add : Opening Sundry Creditors 32,000
9,46,000
Less : Closing Sundry Creditors 17,000
9,29,000
Add : Manufacturing expenses 82,000
Administration expenses 70,000
10,81,000
iii. Tax Paid
Opening balance of Provision for Tax 47,000
Add : Provision of the year 50,000
97,000
Less : Closing Balance of provision for Tax 52,000
45,000
Note : Payment of Dividend should be treated as the cash flow from Financing Activities.
Illustration : 2
Calculate Cash from Operating Activities from the following
Particulars Rs. Particulars Rs.
To Operating StockTo PurchaseTo WagesTo Gross Profit
To SalaryTo Telephone To ElectricityTo RentTo DepreciationTo Loss on sale of FurnitureTo Goodwill written offTo Provision for TaxationTo Net profit
53,0001,80,000
20,0003,67,0006,20,000
59,00014,00019,00024,00030,000
7,00014,00090,000
1,38,0003,95,000
By SalesBy Closing Stock
By Gross ProfitBy Profit on sale of plantBy Refund of Income Tax
5,50,00070,000
6,20,0003,67,000
13,00015,000
3,95,000
Solution:
Calculation of Cash From Operating Activities
Particulars Rs. Rs.
Net profit after taxAdd : Appropriation and non cash expenses Provision for Taxation Goodwill written off Depreciation Loss on sale of furniture
Less : Non cash income & adjustments Profit on sale of Plant Refund of Income Tax Increase in StockCash from Operating Activities
90,00014,00030,000
7,000
13,00015,00017,000
1,38,000
1,41,0002,79,000
45,0002,34,000
Illustration : 3
Calculate Cash from Operating Activities from the following
The details of current items are as follows.
Rs.
Net profit transferred to Balance sheetDepreciation for Fixed AssetsProvision for TaxationGoodwill written offPreliminary expenses written offProfit on sale of Fixed Assets Refund of Income taxProvision for General ReserveProposed Dividend
3,50,00055,00079,00020,00015,00019,00010,00030,00040,000
Opening BalanceRs.
Closing BalanceRs.
Stock DebtorsSundry creditors
35,00020,00010,000
50,00015,00017,000
Solution :
Calculation of Cash from Operating Activities
Particulars Rs. Rs.
Net ProfitAdd : Depreciation Provision for Taxation Goodwill written off Preliminary expenses written off Provision for General Reserve Proposed Dividend
Less : Profit on sale of Fixed Assets Refund of Income tax
Add : Increase in Current Liabilities Sundry creditors Decrease in Current Assets : Debtors
Less : Increase in current Assets : Stock Cash from Operating Activities
55,00079,00020,00015,00030,00040,000
19,00010,000
7,0005,000
3,50,000
2,39,0005,89,000
29,0005,60,000
12,0005,72,000
15,0005,57,000
Illustration: 4
The Balance Sheets of WD Ltd., as on 31st March 2006 and 2007 are stated as follows.
Balance Sheets
Prepare a Statement of Cash Flow.
Liabilities 2006Rs.
2007Rs.
Assets 2006Rs.
2007Rs.
Share CapitalProfit & Loss a/cMortgage LoanSundry CreditorsBank Overdraft
7,00,00087,000
2,00,00034,00029,000
10,50,000
9,00,00075,000
1,20,00053,00012,000
11,60,000
LandPremisesPlant StockDebtorsCash
3,00,0002,50,0003,60,000
38,00027,00075,000
10,50,000
4,00,0003,70,0002,70,000
24,00041,00055,000
11,60,000
Solution:
Statement of Cash Flow
Calculation of Cash from Operation
Inflow Rs. Outflow Rs.
Cash Balance in the beginningIssue of Share CapitalSale of Plant
75,0002,00,00090,000
3,65,000
Cash Lost in OperationPurchase of LandPurchase of PremisesRepayment of LoanCash Balance at the end
10,0001,00,0001,20,00080,00055,000
3,65,000
Particulars Rs. Rs.
Closing Balance of Profit & Loss AccountAdd : Increase in Sundry Creditors Decrease in Stock
Less : Increase in Debtors Decrease in bank overdraft Opening Balance of Profit & Loss AccountCash Lost in Operation
14,00017,00087,000
75,00019,00014,000
1,08,000
1,18,00010,000
Illustration : 5
Calculate a Statement of Cash flow from the following Balance Sheets.
Balance Sheets.
Adjustments :
i. Depreciation for Fixed Assets Rs.75,000
ii. Provision for General reserve during the year Rs.12,000.
Liabilities 2006Rs.
2007Rs.
Assets 2006Rs.
2007Rs.
Share CapitalProfit & Loss a/cGeneral ReserveDebentureLoanAccount Payable
9,00,00077,00042,000
2,50,0001,75,00020,000
14,64,000
10,00,0001,12,00054,000
2,00,0002,40,00042,000
16,48,000
Fixed AssetsStock DebtorsCash
13,50,00033,00037,00044,000
14,64,000
15,10,00049,00030,00059,000
16,48,000
Solution:
Statement of Cash flow
Calculation of Cash from Operation
Inflow Rs. Outflow Rs.
Opening Balance of CashCash from OperationIssue of Share CapitalRaising of Loan
44,0001,35,0001,00,00065,000
3,44,000
Purchase of Fixed AssetsRedemption of DebenturesClosing Balance of cash
2,35,00050,00059,000
3,44,000
Particulars Rs. Rs.
Closing Balance of profit & Loss AccountAdd : Provision for General Reserve Depreciation for Fixed Assets Increase in Account Payable Decrease in Debtors
Less : Increase in Stock Opening Balance of Profit & Loss AccountCash from Operation
16,00077,000
1,12,00012,00075,00022,0007,000
2,28,000
93,0001,35,000
Fixed Assets Account
Particulars Rs. Particulars Rs.
To Balance b/dTo Cash (Purchase)
13,50,0002,35,000
15,85,000
By Profit & Loss Account (Depreciation)By Balance c/d
75,00015,10,00015,85,000