Cash Flow Statement

INTRODUCTION

Traditional financial statement fails to inform the way enterprise has generated cash and were

utilised in the accounting period.

The need for inclusion of cash summary was therefore recognised.

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CASH FLOW STATEMENT: MEANING

The summary of cash transactions (receipts and payments) during an accounting period is

called Cash Flow Statement. The transactions

are catagorised as Operating, Investing and

Financing.

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ACCOUNTING STANDARDS

The Accounting

Standards are issued to

establish principals and

policies which have to

be complied by the

business entities in

preparing the financial

statement.

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AS-3

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

AS-3 applies to the enterprises:

Having turnover more than Rs. 50 Crores in a financial year

Listed companies

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CASH AND CASH EQUIVALENTS

Cash: Cash in hand and deposits repayable on demand with any bank or other financial

institution.

Cash Equivalents: Short term, highly liquid investments, that are readily convertible into

known amounts of cash and are subject to

insignificant risk/change to value.

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MEANING OF CASH FLOW

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

equivalents.

Movement in cash and cash equivalents are not cash flows.

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TYPES OF CASH FLOW

The cash flows generated through

various activities are classified

as:

Operating cash flow (Day to Day Activities)

Investing cash flow (Purchase of Land)

Financing cash flow (Loan Taken)

Cash Flow

Activities

Operating

(Day to Day

Activities)

Investing

e.g. Purchase

of Land

Financing

e.g. Loan

Taken

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These are principal revenue producing activities of the enterprise.

Examples:

Cash receipts from sale of goods or rendering services

Cash receipts from royalties, fees, commissions and other revenue

Cash payments to suppliers of goods and service

Cash payments to and on behalf of employees

OPERATING ACTIVITIES

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REPORTING OF CASH FLOW FROM OPERATING ACTIVITIES

It can be derived either from direct method or indirect method

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

Direct Method

Cash receipts from customers XX

Cash paid to suppliers XX

Cash paid to employees XX

Cash paid for other operating expenses XX

Cash generated from operation XX

Income tax paid XX

Net cash from operating activities XX

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REPORTING OF CASH FLOW FROM OPERATING ACTIVITIES(Contd.)

Indirect method: In this method, profit and loss account is adjusted for the effects of transaction of

non-cash and non-operating nature.

Cash flow statement of listed companies shall be presented only under the indirect method as

prescribed in AS 3

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Retained Earning XX

Add: Dividend paid XX

Income Tax XX

Net Profit Before Tax XX

Add: Non cash and Non operating expenses

Depreciation

XX

Loss on sale of Asset/Investment XX

Interest Paid XX

Provision for Bad debts XX

Less: Non Operating Incomes

Interest/ Dividend Received

XX

Profit on sale of Asset/ Investment XX 12

Funds from operations XX

Add: Decrease in Current Asset XX

Add: Increase in Current Liabilities XX

Less: Increase in Current Asset XX

Less: Decrease in Current Liabilities XX

Cash generated from operation XX

Less: Income Tax Paid XX

Net Cash flow from operating activities XX

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INVESTING ACTIVITIES

The activities of acquisition and disposal of long term assets and other investments not included in cash

equivalent are investing activities.

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

Examples:

Cash payments for purchase of fixed assets

Cash receipts from disposal of FAs

Cash payments to purchase shares, or debt instruments of other companies

Cash receipt from disposal of above investments

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FINANCING ACTIVITIES

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

organisation.

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

Examples:

Issue of equity shares

Buy back of equity shares

Issue/redemption of preference shares

Issue/redemption of debentures

Long term loan/payment thereof

Dividend/interest paid

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Interest Received

Received on investment it is investment inflow

Received from short term investment classified, as cash equivalents should be considered as cash

inflows from operating activities

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

For financial enterprises in operating inflow

INTEREST

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INTEREST (Contd.)

Interest Paid

On loans/debts is financing activities

On working capital loan or loan taken to finance operating activities are included in operating

inflows

For financial enterprises in operating outflow

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DIVIDEND

Dividend Received

For non-financial enterprises- investing inflow

For financial enterprises operating inflow

Dividend Paid

Always classified as financing inflow

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FOREIGN CURRENCY TRANSACTIONS

The effect of change in exchange rate in cash and cash equivalents held in foreign currency should be

reported as separate part of the reconciliation of

cash and cash equivalents.

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

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The cash flows associated with extraordinary items should be classified as arising from Operating,

Investing or Financing activities as appropriate and

separately disclosed.

Examples:

Insurance claim received against loss of stock or profits is extraordinary operating cash inflow

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

EXTRAORDINARY ITEMS

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TREATMENT OF TAX

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

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

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

investing or financing flow respectively

Example: Dividend Tax is recognised as financing flow

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INVESTMENTS IN SUBSIDIARIES/ ASSOCIATES

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

Example: Cash flow relating to dividends and advances

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ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES/OTHER BUSINESSES

Cash flow on acquisition and disposal of subsidiaries and other business units should be :

Presented separately, Classified as investing activities

Total purchase and disposal should be disclosed separately

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

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NON-CASH TRANSACTIONS

These should be excluded from the cash flow statement

These transactions should be disclosed in the financial statements

Examples:

Acquisition of assets by assuming directly related liabilities

Acquisition of an enterprise by means of issue of equity shares

Conversion of debt to equity

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DISCLOSURES OF CASH AND CASH EQUIVALENTS

The components of cash and cash equivalents should be disclosed

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

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

explanation by management)

The amount of undrawn borrowing facilities that may be available for future operating activities (indicating any

restriction on use of these facilities)

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FUND FLOW STATEMENT: MEANING

The fund-flow statement is defined as a statement which summarises, the sources from

which funds were obtained and the specific

uses to which the funds were put.

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Fund from Operations Sale of Fixed Asset Issue of Shares

Purchase of Fixed Asset

Purchase of Investments

Increase in Working Capital

F

U

N

D

S

Application Sources

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NEED FOR THE FUND FLOW STATEMENT

Profit and Loss A/c shows book profits for specific period of time and Balance sheet shows

the financial position of the concern at particular

point of time. It does not show the flow of funds

(increase/decrease in funds) of concern during

year. Hence separate fund flow statement need to

be prepared.

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PREPARATION OF FUND FLOW STATEMENT

Analysis of balance sheet enables to ascertain the changes in working capital and other major

sources of finance and where these funds are

employed. Profit and loss A/c is analysed to

ascertain the funds from operating activities.

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FUNDS FROM OPERATIONS

Net Profit (After Tax) XX

Adjust: Non-Cash Expenses

Depreciation/Amortisation XX

Adjust: Non-operating Items

Interest or Dividend

Loss/Profit on sale of fixed asset XX

Funds from Operation XX

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STATEMENT OF CHANGES IN WORKING CAPITAL

Particulars Current

Year

Previous

Year

Increase/Dec in

W.C.

A. Current

Assets

Stock

Debtors

Bank

Total CAs

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STATEMENT OF CHANGES IN WORKING CAPITAL

Inflows ` `

Funds from Operation XX

Decrease in Working Capital XX

Sale of Fixed Assets XX

Sale of Investment XX

Issue of Shares/ Debentures XX

Non-Operating income XX

Loan Taken XX

Total Inflows XX

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CASH FLOW STATEMENT

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CASH GENERATED FROM OPERATIONS

Retained Earning XX

Dividend XX

Net Profit After Tax XX

Add: Provision for Tax XX

Net Profit Before Tax XX

Add: Non-cash Expenses

Depreciation XX

Amortisation (Goodwill w/o) XX

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CASH GENERATED FROM OPERATIONS (Contd.)

Adjust: Non-operating items XX

Loss on sale of Asset/Investment XX

Interest expenses XX

Interest/ Dividend Income (XX)

Profit on sale of Asset/ Investment (XX)

Funds from Operations XX

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CASH GENERATED FROM OPERATIONS (Contd.)

Adjust: Working Capital Items XX

Decrease in Current Asset XX

Increase in Current Liabilities XX

Increase in Current Asset (XX)

Decrease in Current Liabilities (XX)

Cash generated from operation XX

Income Tax Paid (XX)

Cash flow from operating activities XX

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Cash Flow from Investing Activities

Purchase of Assets / Investment (XX)

Sale of Assets / Investment XX

Interest / Dividend received XX

Investment in joint venture (XX)

Cash flows from investing activities XX

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Cash Flow from Financing Activities

Issue of shares/ debentures for cash XX

Redemption of Preference shares/ debentures (XX)

Interest / Dividend paid (XX)

Proceeds from borrowings XX

Repayment of loan (XX)

Cash flows from financing activities XX

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CASH FLOW STATEMENT

1. Cash Flow from Operating Activities XX

2. Cash Flow from Investing Activities XX

3. Cash Flow from Financing Activities XX

Net Increase / decrease in cash (1+2+3) XX

Cash & Cash Equivalents at the beginning XX

Cash & Cash Equivalents at the end XX

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CASH FLOW STATEMENT (Contd.)

Cash & Cash Equivalents at

Beginning

at

End

Cash XX XX

Bank XX XX

Short Term Investment XX XX

Total XX XX

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Free Cash Flow

Free cash flow is the cash that a company is left with after it pays out interest and dividends to its investors and pays for the capital expenditures it needs to maintain its productive capacity.

This cash can be used for expansion, reducing debt, or other purposes.

Free cash flow depends primarily on the companys capacity to generate cash from operations, which in turn is heavily influenced by the company's net income.

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Free Cash Flow = Cash Flow From Operating Activities- Capital Expenses to keep current level of operation Interest - Dividends

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The presence of free cash flow indicates that a company has cash to expand, develop new products, buy back stock or reduce its debt.

High or rising free cash flow is often a sign of a healthy company that is thriving in its current environment.

Furthermore, since FCF has a direct impact on the worth of a company, investors often hunt for companies that have high or improving free cash flow but undervalued share prices - the disparity often indicates that share price will soon increase.

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Alternate methods

Free Cash Flows to the Firm (FCFF) = Cash Flow from Operating Activities- Capital Expenses to keep current level of operation

Free Cash Flows to the equity (FCFE) = Cash Flow from Operating Activities - Capital Expenses to keep current level of operation + Net borrowing - Net debt repayment

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Analysis of Cash Flow Statement

In addition to the classification of cash flow in three different activities i.e. operating, investing and financing, cash flow statement can also be analyzed through following Ratios.

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Cash Realization Ratio

Cash realization ratio is calculated by taking cash generated from operations as a proportion of net income. The ratio shows the relationship between cash generation and earnings.

Cash Realization Ratio = Cash generated by operation /Profit After Tax

The ratio is considered to signal quality of earnings and is sometimes called the quality of the earnings ratio.

It should be used with caution since cash management tactics, such as a slowdown in paying account payables, can increase the numerator and the ratio.

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Coverage Ratio Coverage Ratios are those ratios which are used to test the

adequacy of cash flows generated through earnings for purposes of meeting debt and lease obligations.

Cash interest cover uses operating cash flow and net interest paid (interest paid minus interest received) as shown by the cash flow statement instead of interest payable. It is:

Cash interest cover = Operating cash flow Interest paid

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