cash flow - dr. varadraj bapat, iit mumbai1 module 6 cash flow

Cash Flow - Dr. varadraj Bapat, IIT MumbaiCash Flow - Dr. varadraj Bapat, IIT Mumbai 11

Module 6Module 6

Cash FlowCash Flow

Cash Flow - Dr. varadraj Bapat, IIT Cash Flow - Dr. varadraj Bapat, IIT MumbaiMumbai

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ContentsContents

Cash Flow StatementCash Flow Statement Fund Flow StatementFund Flow Statement Cases on preparation and Cases on preparation and

Interpretation of Cash Flow Interpretation of Cash Flow StatementStatement


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IndexIndex

• Introduction Introduction Cash Flow StatementCash Flow Statement• MeaningMeaning• ApplicabilityApplicability• Cash and Cash equivalentsCash and Cash equivalents


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IndexIndex

• Meaning and Types Cash FlowMeaning and Types Cash Flow• Operating ActivitiesOperating Activities• Investing ActivitiesInvesting Activities• Financing ActivitiesFinancing Activities

• InterestInterest• DividendDividend


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IndexIndex

• Foreign Currency transactionsForeign Currency transactions• Extraordinary itemsExtraordinary items• Treatment of TaxTreatment of Tax• Investments in subsidiaries, associates Investments in subsidiaries, associates

and joint venturesand joint ventures


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IndexIndex

• Acquisitions and disposals of Acquisitions and disposals of subsidiaries and other business unitssubsidiaries and other business units

• Non-cash transactionsNon-cash transactions• Disclosures of cash and cash Disclosures of cash and cash

equivalentsequivalents

Cash Flow - Dr. varadraj Bapat, IIT MumbaiCash Flow - Dr. varadraj Bapat, IIT Mumbai 77

IntroductionIntroduction

Traditional financial statement fails to Traditional financial statement fails to inform the way enterprise has inform the way enterprise has generated cash and were utilised in the generated cash and were utilised in the accounting period.accounting period.

The need for inclusion of cash summary The need for inclusion of cash summary was therefore recognisedwas therefore recognised..


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MeaningMeaning

The summary of cash transactions The summary of cash transactions (receipts and payments) during an (receipts and payments) during an accounting period is called Cash accounting period is called Cash Flow Statement. The Flow Statement. The transactions transactions are catagorised as are catagorised as Operating, Operating, Investing and Financing.Investing and Financing.


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Accounting Accounting StandardStandard

The ‘Accounting Standards’ are The ‘Accounting Standards’ are issued to establish principals and issued to establish principals and policies which have to be complied policies which have to be complied by the business entities in by the business entities in preparing the financial statement.preparing the financial statement.


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AS-3AS-3

AS-3/IAS-7/IndAS-7 deals with AS-3/IAS-7/IndAS-7 deals with preparation of Cash flow Statement.preparation of Cash flow Statement.

AS-3 applies to the enterprises:AS-3 applies to the enterprises: Having turnover more than Rs. 50 Having turnover more than Rs. 50

Crores in a financial yearCrores in a financial year Listed companiesListed companies


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Cash and Cash and Cash Cash

EquivalentsEquivalents

Cash:-Cash:- Cash in hand and deposits Cash in hand and deposits

repayable on demand with any repayable on demand with any bank or other financial institutionbank or other financial institution


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Cash and Cash and Cash Cash

EquivalentsEquivalents

Cash Equivalents:-Cash Equivalents:-Short term, highly liquid investments, Short term, highly liquid investments, that are readily convertible into known that are readily convertible into known amounts of cash and are subject to amounts of cash and are subject to insignificant risk/change to valueinsignificant risk/change to value


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Meaning of Meaning of Cash FlowCash Flow

• Cash flows are inflows (i.e. Cash flows are inflows (i.e. receipts) and outflows (i.e. receipts) and outflows (i.e. payments) of cash and cash payments) of cash and cash equivalents.equivalents.

• Movement in cash and cash Movement in cash and cash equivalents are not cash flows.equivalents are not cash flows.


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Types of Cash Types of Cash FlowFlow

The cash flows generated through The cash flows generated through various activities are classified asvarious activities are classified as• Operating cash flowOperating cash flow• Investing cash flowInvesting cash flow• Financing cash flow Financing cash flow


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Cash Flow

Activities

Operating(From Day

to Day Activities)

Investinge.g.

Purchase of Land

Financinge.g. Loan

Taken


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Operating Operating ActivitiesActivities

• These are principal revenue These are principal revenue producing activities of the producing activities of the enterprise.enterprise.

• Examples:Examples:Cash receipts from sale of goods Cash receipts from sale of goods

or rendering servicesor rendering services


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Cash receipts from royalties, fees, Cash receipts from royalties, fees, commissions and other revenuecommissions and other revenue

Cash payments to suppliers of goods Cash payments to suppliers of goods and service;and service;

Cash payments to and on behalf of Cash payments to and on behalf of employees.employees.

Operating Operating ActivitiesActivities


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Reporting of Reporting of Cashflow from Cashflow from operating activitiesoperating activities

• It can be derived either from direct It can be derived either from direct method or indirect methodmethod or indirect method

• Direct method: Direct method: In this method, gross receipts In this method, gross receipts and gross payments of cash and gross payments of cash are disclosedare disclosed


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Direct MethodDirect Method

Cash receipts from customersCash receipts from customers XXXX

Cash paid to suppliersCash paid to suppliers XXXX

Cash paid to employeesCash paid to employees XXXX

Cash paid for other operating expensesCash paid for other operating expenses XXXX

Cash generated from operationCash generated from operation XXXX

Income tax paidIncome tax paid XXXX

Net cash from operating activitiesNet cash from operating activities XXXX


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• Indirect method: Indirect method: In this method, profit and loss account In this method, profit and loss account

is adjusted for the effects of transaction is adjusted for the effects of transaction of non-cash and non-operating nature. of non-cash and non-operating nature.

Cash flow statement of listed Cash flow statement of listed companies shall be presented only companies shall be presented only under the under the indirect methodindirect method as prescribed as prescribed in AS 3in AS 3


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Retained EarningRetained Earning XXXX

Add: Dividend paid Add: Dividend paid XXXX

Income TaxIncome Tax XXXX

Net Profit Before TaxNet Profit Before Tax XXXX

Add: DepreciationAdd: Depreciation XXXX

Loss on sale of Asset/InvestmentLoss on sale of Asset/Investment XXXX

Interest PaidInterest Paid XXXX

Provision for Bad debtsProvision for Bad debts XXXX

Less: Interest/ Dividend ReceivedLess: Interest/ Dividend Received XXXX

Profit on sale of Asset/ InvestmentProfit on sale of Asset/ Investment XXXX


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Funds from operationsFunds from operations XXXX

Add: Decrease in Current AssetAdd: Decrease in Current Asset XXXX

Add: Increase in Current LiabilitiesAdd: Increase in Current Liabilities XXXX

Less: Increase in Current AssetLess: Increase in Current Asset XXXX

Less: Decrease in Current LiabilitiesLess: Decrease in Current Liabilities XXXX

Cash generated from operationCash generated from operation XXXX

Income Tax PaidIncome Tax Paid XXXX

Net Cash flow from operating Net Cash flow from operating activitiesactivities

XXXX


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Investing Investing ActivitiesActivities

• The activities of acquisition and The activities of acquisition and disposal of long term assets and other disposal of long term assets and other investments not included in cash investments not included in cash equivalent are investing activities.equivalent are investing activities.

• It includes acquiring and disposal of It includes acquiring and disposal of debt and equity instruments, property debt and equity instruments, property and fixed assets etc.and fixed assets etc.


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• Examples:Examples: Cash payments for purchase of Cash payments for purchase of

fixed assetsfixed assets Cash receipts from disposal of FAsCash receipts from disposal of FAs Cash payments to purchase shares, Cash payments to purchase shares,

or debt instruments of other or debt instruments of other companiescompanies

Cash receipt from disposal of Cash receipt from disposal of above investmentsabove investments


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Financing Financing ActivitiesActivities

• Those activities that result in changes Those activities that result in changes in size and composition of owners in size and composition of owners capital and borrowing of the capital and borrowing of the organization.organization.

• It includes receipts from issuing shares, It includes receipts from issuing shares, debentures, bonds, borrowing and debentures, bonds, borrowing and payment of borrowed amount, loan etc.payment of borrowed amount, loan etc.


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• Financing ActivitiesFinancing Activities• Example:Example: Issue of equity sharesIssue of equity shares Buy back of equity sharesBuy back of equity shares Issue/ Redemption of preference sharesIssue/ Redemption of preference shares Issue / redemption of debenturesIssue / redemption of debentures Long term loan / payment thereofLong term loan / payment thereof Dividend / interest paidDividend / interest paid


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InterestInterest

Interest ReceivedInterest Received Received on investment – it is Received on investment – it is

investment inflowinvestment inflow Received from short term investment Received from short term investment

classified, as cash equivalents should classified, as cash equivalents should be considered as cash inflows from be considered as cash inflows from operating activitiesoperating activities


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Received on trade advances and operating Received on trade advances and operating receivables should be in operating inflowsreceivables should be in operating inflows

For financial enterprises – in operating For financial enterprises – in operating inflowinflow


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Interest PaidInterest Paid On loans/debts is financing activitiesOn loans/debts is financing activities On working capital loan or loan taken to On working capital loan or loan taken to

finance operating activities are included finance operating activities are included in operating inflowsin operating inflows

For financial enterprises – in operating For financial enterprises – in operating outflowoutflow


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DividendDividend

• Dividend ReceivedDividend Received For non-financial enterprises- investing For non-financial enterprises- investing

inflowinflow For financial enterprises – operating For financial enterprises – operating

inflowinflow• Dividend PaidDividend Paid

Always classified as financing inflowAlways classified as financing inflow


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Foreign Foreign currency currency transactionstransactions

• The effect of change in exchange rate in The effect of change in exchange rate in cash and cash equivalents held in foreign cash and cash equivalents held in foreign currency should be reported as separate currency should be reported as separate part of the reconciliation of cash and cash part of the reconciliation of cash and cash equivalents.equivalents.

• Unrealized gain and losses arising from Unrealized gain and losses arising from changes in foreign exchanges rates are changes in foreign exchanges rates are not cash flows.not cash flows.


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Extraordinary Extraordinary itemsitems

Ex. loss by FireEx. loss by FireThe cash flows associated with The cash flows associated with extraordinary items should be extraordinary items should be classified as arising from classified as arising from Operating, Investing or Financing Operating, Investing or Financing activities as appropriate and activities as appropriate and separately disclosed.separately disclosed.


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ExampleExample:: Insurance claim received against loss Insurance claim received against loss

of stock or profits is extraordinary of stock or profits is extraordinary operating cash inflowoperating cash inflow

Insurance claim received against loss Insurance claim received against loss of fixed assets is extraordinary of fixed assets is extraordinary investing cash inflowinvesting cash inflow


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Treatment of taxTreatment of tax

Cash flow for tax payments / Cash flow for tax payments / refund should be classified as cash refund should be classified as cash flow from operating activities.flow from operating activities.

Tax deducted at source against Tax deducted at source against income are operating cash income are operating cash outflows if concerned income are outflows if concerned income are operating.operating.


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Treatment of taxTreatment of tax

Cash flow for tax payments Cash flow for tax payments identified with a specific investing identified with a specific investing or financing flow should be or financing flow should be classified as investing or financing classified as investing or financing flow respectivelyflow respectively

E.g. Dividend Tax is recognised as E.g. Dividend Tax is recognised as financing flow. financing flow.


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Investments in Investments in subsidiaries/ subsidiaries/ associatesassociates

• Only the cash flow between Only the cash flow between enterprise itself and the investee is enterprise itself and the investee is required to be reportedrequired to be reported

• Example: Cash flow relating to Example: Cash flow relating to dividends and advancesdividends and advances


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Acquisitions and Acquisitions and disposals of disposals of subsidiaries/other subsidiaries/other businessesbusinesses

Cash flow on acquisition and Cash flow on acquisition and disposal of subsidiaries and other disposal of subsidiaries and other business units should be :business units should be :• Presented separately, Classified Presented separately, Classified

as investing activitiesas investing activities


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• Total purchase and disposal should Total purchase and disposal should be disclosed separatelybe disclosed separately

• The position of the purchase / The position of the purchase / disposal consideration discharged disposal consideration discharged by means of cash and cash by means of cash and cash equivalents should be disclosed equivalents should be disclosed separatelyseparately


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Non-cash Non-cash transactionstransactions

• These should be excluded from the These should be excluded from the cash flow statement.cash flow statement.

• These transactions should be These transactions should be disclosed in the financial disclosed in the financial statements.statements.


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• ExamplesExamples• Acquisition of assets by assuming Acquisition of assets by assuming

directly related liabilitiesdirectly related liabilities• Acquisition of an enterprise by Acquisition of an enterprise by

means of issue of equity sharesmeans of issue of equity shares• Conversion of debt to equityConversion of debt to equity


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Disclosures of cash and Disclosures of cash and cash equivalentscash equivalents

• The components of cash and cash The components of cash and cash equivalents should be disclosedequivalents should be disclosed

• Reconciliation of the amount in the Reconciliation of the amount in the cash flow statement with the cash flow statement with the equivalent items reported in the equivalent items reported in the balance sheetbalance sheet


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• The amount of cash and cash The amount of cash and cash equivalent balance held by the equivalent balance held by the enterprises that are not available for enterprises that are not available for use (with explanation by management)use (with explanation by management)

• The amount of undrawn borrowing The amount of undrawn borrowing facilities that may be available for facilities that may be available for future operating activities (indicating future operating activities (indicating any restriction on use of these facilities)any restriction on use of these facilities)

Disclosures of Disclosures of cash and cash cash and cash equivalentsequivalents

cash flow - dr. varadraj bapat, iit mumbai1 module 6 cash flow

Documents

varadraj bapat

iit mumbaicash flow

cash equivalentscash

preparation of cash

cash flowcash flow

payments of cash

valuecash flow

cash flowcash flows