cash flow statement analysis

CASH FLOW STATEMENT ANALYSIS

Chapter 1: INTRODUCTION

Cash is an important component of working capital of business, which

provides speed and power to business. Keeping in view the present wealth dominated

scenario, it can be said that cash is the life blood of business, as it governs and

operates all the activities of business. For all the activities of business, continuous and

healthy flow of cash is the main pillar of business solvency, thus cash is both the

beginning and end of working capital cycle. In all the business organizations

monetary and non-monetary activities takes place and out of which monetary

transactions result in inflow and outflow of cash, so it is very important for business

to know that from what sources and in how much quantity cash has been used. The

cash flow statement is prepared to attain the above-mentioned objective.

WHAT IS A CASH FLOW STATEMENT?

For your business, the cash flow statement may be the most important

financial statement you prepare. It traces the flow of funds (or working capital) into

and out of your business during an accounting period. For a small business, a cash

flow statement should probably be prepared as frequently as possible. This means

either monthly or quarterly. An annual statement is a must for any business.

The cash flow statement’s primary purpose is to provide information regarding

a company’s cash receipts and cash payments. The statement complements the

income statement and balance sheet. It is important to note — cash flow is not the

same as net income. Cash flow is the movement of money into and out of your

company, and it can be affected by several noncash transactions. The cash flow

statement became a requirement for publicly traded companies in 1987. There are

various rules governing how information is reported on cash flow statements, as

determined by generally accepted accounting principles (GAAP). While your business

may not be a public company, a cash flow statement is still important to measure and

track the flow of cash into and out of your business.

Vivek College Of Commerce of 36


Cash flow, simply, is the movement of money in and out of your business, or

the inflows and outflows. A reliable accounting system is in place in your business

and information typically recorded by small businesses is accessible to you.

The cash flow statement reports the cash provided and used by the operating,

investing, and financing activities of a company during an accounting period. In 1987,

the Financial Accounting Standards Board issued Statement No. 95, which requires

that a statement of cash flows accompany the income statement, balance sheet and

statement of retained earnings.

AN OVERVIEW

The cash flow statement explains the change during the period in cash and

cash equivalents. Cash includes currency on hand and demand deposits. Cash

equivalents are short-term, highly liquid investments that are readily convertible to

cash. Cash receipts and payments are required to be classified as operating, investing

and financing activities. The cash flow statement will summarize the cash flows so

that net cash provided or used by each of the three types of activities is reported.

Beginning and ending cash must be reconciled based on the net effect of these

activities.

DEFINITIONS OF CASH FLOW

According to I.C.W.A. (India), “Cash Flow Statement is a statement setting out the

flow of cash under different heads of sources and their utilization to determine the

requirements of cash during the given period and to prepare for its adequate

provisions.”



CLASSIFICATION OF CASH FLOWS ACCORDING TO AS-3

Cash flows or sources and applications of cash: According to accounting

Standard –3 cash flows has been divided into three parts:

CASH FLOWS FROM OPERATING ACTIVITIES

The operating section of the cash flow statement is most important because it

deals with the cash generated or used by the entity’s primary activities. These

activities, and the related cash flows, are recurring. The cash flow statement reports

past cash flows, but the same or similar activities and cash flows can be expected to

occur in the future. If an organization cannot sustain itself over the long run with the

cash generated from operations, it cannot survive.

CASH FLOWS FROM OPERATING ACTIVITIES

OPERATING ACTIVITIES

Cash in Flow Cash out Flow

Most companies present the operating section of the cash flow statement using

an indirect approach under which they start with accrual-basis net income and adjust

that figure to obtain the cash generated or used by operations. Although accrual-basis

income is regarded as the best measure of operating success, it does not tell us the

amount of cash flows from operating and must be adjusted for all items that affect



income and cash differently. Thus, this section of the cash flow statement includes the

following adjustments to net income to determine the cash generated or used by

operations:

Expenses that reduced net income this period but did not use cash must be added

back.

Cash payments made this period for expenses of other periods must be deducted.

Revenues that did not result in cash inflows during the current period must be

deducted.

Cash collections for revenues earned in other periods must be added.

Items reported in the income statement but not directly related to normal

operations must be removed.

Let’s consider a few of the more common adjustments to net income needed to

convert to a cash basis.

Depreciation and Amortization

Under accrual accounting, income is reduced for the cost of an operating

asset’s service potential used up during the period. As we have seen earlier,

depreciation, or the amount of cost recognized during the period under the matching

concept, is an allocation of the original cost of the asset. The depreciation expense

recognized during a period is not a cash expense; it does not result in a decrease in the

cash balance. Cash was reduced initially when the asset was first acquired. The

expense is simply an accountant’s allocation of a cost incurred previously.

Therefore, while income for the period is decreased by the amount of the

depreciation expense, cash is not. The difference in timing between the cash outflow

for the purchase of a fixed asset and the related income effects can be shown as

follows:



If we are interested in the amount of cash generated by a company’s

operations, then we need to add back the amount of depreciation expense to the

company’s net income. In other words, if all other revenues and expenses were cash

items, net income would understate cash generated by the amount of the depreciation

expense.

Because depreciation is added back to net income to get the cash generated

from operations, financial analysts sometimes mistakenly refer to depreciation as a

source of cash. But this is silly because firms cannot generate cash just by

depreciating. If depreciation were a source of cash, a change to a more rapid

depreciation method would cause the cash balance to go up. But, that will not happen.

The addition of depreciation in the cash flow statement is simply a way of adding

back an amount that was deducted from income but did not use cash. Depreciation is

neither a source nor a use of cash.

The amortization of intangible assets and the depletion of natural resources

also result in noncash expenses. As with depreciation, these expenses are deducted to

get net income, but do not use cash. Therefore, they are added back to net income to

get the amount of cash generated from operations.

Changes in Deferred Income Taxes

Companies must report income tax expense on an accrual basis by matching

tax expense to reported income. If temporary differences exist between the income

reported in the income statement and that reported on the tax return, a deferred tax

liability or asset is affected. In addition, the tax expense reported in the income



statement is different from cash tax payments. Therefore, the cash flow statement

must report an adjustment to bring net income to the amount of cash generated from

operations.

Amortization of Debt Discount and Premium

Debt discount arises when debt is issued for less than its maturity value.

Because the debt ultimately must be repaid at maturity value, the actual (effective)

interest costs are higher than the current cash interest payments. A portion of the

discount is charged to interest expense each period under accrual accounting.

However, the amount of discount expensed each period represents a noncash charge

against income.

When will cash actually be paid? When the debt matures, its maturity value

will be paid in cash. The difference in timing between the cash flows and expense

recognition can be shown as follows:

Because the company’s interest expense contains a noncash portion, the net

income figure must be adjusted to arrive at the cash generated from operations. Thus,

when interest expense has been increased by the amortization of bond discount, an

amount must be added to net income in the cash flow statement to determine the

amount of cash generated from operations.

If interest expense has been decreased by the amortization of bond premium,

an amount must be deducted from net income in the cash flow statement to arrive at

cash generated from operations.



Gains and Losses

Companies often include in their income statements gains and losses that are

not directly related to their regular operations. For example, companies often report

gains and losses from disposing of investments or fixed assets, and from retiring debt.

Because these gains and losses are not related to regular operations, they must be

eliminated from the operating section of the cash flow statement. Gains must be

deducted from net income in the operating section of the cash flow statement to arrive

at cash generated from operations, and losses must be added back. The cash effects of

the transactions giving rise to the gains and losses are reported in the investing or

financing sections of the cash flow statement.

Changes in Current Assets and Liabilities

Current assets and current liabilities are important in the operations of a

company and facilitate the flow of resources through the operating cycle. We

discussed the operating or cash cycle in Chapter 3 and how changes in receivables,

inventories, payables, and other current accounts can affect the amount of cash

received. Because current assets and liabilities play such an important role in the way

that cash moves through the operating cycle, changes in these items must be

considered in determining the cash generated from operations. For example, sales

increase income, but if the sales are on credit and the receivables are not immediately

collected, no cash is generated. Thus, the cash generated from operations during the

period can be determined only after adjusting net income for the change in receivables

during the period: if receivables increase, less cash is collected than if receivables

decrease.

Similarly, if a company does not pay its bills as quickly as in the past, and

payables increase, less cash is used in operations. Because the expenses reduce

income even though the cash has not been paid, the cash flow statement reports an

adjustment added to net income in the cash flow statement to reflect more cash being

generated from operations. A decrease in trade payables would indicate that more

cash was being used to pay off bills and less was generated by operations. This would

call for a negative adjustment to be reflected in the cash flow statement. Changes in

current liabilities not directly related to sales or normal operating expenses, such as



short-term bank loans or dividends payable, are reported in the financing section of

the cash flow statement. The direction of adjustments for changes in all current assets

is the same, and that for current liabilities is the opposite. Keep in mind that the

purpose of these adjustments in the cash flow statement is to convert accrual-basis net

income to cash generated from operations.

Assessing Cash Flows from Operations

Why do companies report detailed information about operating cash flow?

Why not just report the total? The answer is that, while the total operating cash flow is

important, providing the details allows decision makers to develop a better

understanding of a company’s cash situation and, in turn, make better projections of

future cash flows.

Starting the operating section of the cash flow statement with net income

provides a comparison between accrual-basis income and cash flows and ties the cash

flow statement to the income statement. Reporting individual adjustments allows

decision makers to see precisely how a company’s operations generate cash and why

cash might be more or less than expected based on reported income.

The individual adjustments might show that cash is reduced because

receivables and inventories are building, or perhaps that cash flow is increased

through increases in payables. For example, Kellwood Company’s fiscal 1998 net

income was $42.7 million, but operating activities used $75.2 million of cash. An

examination of individual adjustments in the cash flow statement showed that during

the year receivables had increased by $48.5 million, inventory had increased by $75.5

million, and accounts payable had decreased by $14.4 million, all having a significant

negative effect on the cash flows from operations.

By examining the elements of the operating section of the cash flow statement,

decision makers might be able to identify cash, receivables, and inventory

management problems that could ultimately affect liquidity. Or, they might be able to

spot an impending credit crisis by determining that cash flow is being maintained by

not paying bills. Whatever this section of the statement shows, the key is

understanding the relationships between cash and the elements reported, and using

that information to project future cash flows.



CASH FLOWS FROM INVESTING ACTIVITIES

Organizations usually must invest cash so they can conduct the operating

activities needed to attain their goals. Thus, an understanding of an organization’s

investing activities is important for anyone analyzing the organization. Cash flows

related to the investing activities of a business typically involve either operating assets

(property, plant, and equipment) or investments in other companies. Cash outflows for

operating assets are usually quite large for companies that are replacing assets or

expanding. Cash inflows can be generated from selling operating assets no longer

needed. Cash outflows for investments in stock often involve the acquisition of a

controlling interest in other companies, referred to as affiliates. Sales of investments

usually result in cash inflows.

CASH FLOWS FROM INVESTING ACTIVITIES

INVESTING ACTIVITIES

Cash in Flow Cash out Flow

Analyzing the investing activities section of the cash flow statement can tell

decision makers whether a company is expanding or contracting its operating

capacity, and how. Is the company expanding by acquiring new plant and equipment,

or by investing in affiliated? Is the company generating a major portion of its cash

inflows by selling off its productive assets, and can such cash inflows be sustained?

Answers to these types of questions are crucial to understanding a company’s future

prospects and projecting future cash flows.


Cash Sales of fixed assets

Sales of investments and collection of loan

Interest and dividend received on loan and

Investing Activities

Purchase of fixed assets

Purchase of Investments

Loan and advances to 3rd parties


Examining the cash expended for plant and equipment in comparison with the

amount of depreciation expense and the amount of plant and equipment reported in

the balance sheet can provide some idea of the rate of growth or contraction. For

example, as can be seen in

CASH FLOWS FROM FINANCING ACTIVITIES

As we have seen, much of an existing company’s financing may come from

operations. However, many companies, especially new ones and those that are

expanding rapidly, need to rely on other sources to provide a stable financing base. As

we discussed in Chapters 11 and 12, this type of financing comes either through

borrowing or by selling ownership interests. The financing section of the cash flow

statement reports on the cash effects of

borrowing (other than trade payables)

repaying debt

issuing stock

repurchasing stock

paying dividends

CASH FLOW FROM FINANCING ACTIVITIES

FINANCING ACTIVITIES

Cash In Flow Cash out Flow


Amount received from issue of share capital

Amount received from long-term loans

Amount received from issue of debentures

Financing Activities

Redemption of shares & Debentures

Payment of loans

Payment of finance and lease liabilities

Payment of interest and dividend


Changes in Debt and Capital Stock

Changes in debt reported in the statement of cash flows are simple and

straightforward: increases in debt generate cash, and decreases use cash for

repayments. Changes in nontrade notes payable, including commercial paper (short-

term negotiable notes), and bonds payable are included in this section of the cash flow

statement. Decision makers are often especially interested in the financing employed

by companies because debt must be repaid and also usually requires periodic interest

payments. The issuance of stock, on the other hand, results in earnings being shared

by more owners and may result in pressure to use cash to pay dividends.

Payment of Cash Dividends

Owners of a corporation expect a return on their investments. One way they

receive a return on their stock investments is through corporate distributions of

income to the owners, or dividends. Cash dividends paid during the period are

reported in the financing section of the cash flow statement because they reflect a

payment to one group of capital suppliers, and, therefore, are related to financing.

Perhaps reflecting an inconsistency, interest expense—the return paid to suppliers of

debt financing—is not reported in the financing section of the cash flow statement; it

is included in the net income amount reported in the operating section of the

statement.

Decision makers are often interested in the portion of the cash generated from

operations that is used to pay dividends. Although the declaration of dividends is not

required, many companies have established dividend policies that place great pressure

on management to continue dividend payment trends. Thus, cash generated from

operations should, at least in the long run, be sufficient to provide for dividends, as

well as the replacement of assets.



OBJECTIVES OF CASH FLOW STATEMENT

PRIMARY OBJECTIVE

A primary purpose of cash flow statement is to provide information about the

cash receipts and cash payments of a business entity for the accounting period

covered by the income statement. It is necessary to maintain a record of cash flows on

a continuing basis in order to keep the business free of troubles is respect of liquidity

problems.

SECONDARY OBJECTIVE

A secondary purpose of cash flow statement is to provide information about a

business entity’s operating, investing and financing activities during the accounting

period.

USEFULNESS OF CASH FLOW STATEMENT

According to Accounting Standard –3 the main objective of preparation of

cash flow statement, is to provide information to users regarding cash flows which

gives description of changes in cash or cash equivalents. Following are the objectives

and uses of cash flow statement:

HELPFUL IN SHORT TERM POLICIES OF FINANCIAL PLANNING

Cash flow statement provides several information to finance managers for

formulating policies for short term financial requirements on the basis of which,

finance manager is able to ascertain the amount of cash which will be required in

future and how much cash will be available from internal sources and how much will

have to be arranged from external sources.

USEFUL IN PREPARING CASH BUDGET

Cash flow statement helps managers in preparing cash budget, it gives

information about preparing cash budget, it gives information about surplus or

deficiency of cash to managers and on the basis of this managers can plan to invest



surplus of cash in short term investments or to cover the deficit from the search of

other sources of short term goodwill.

KNOWLEDGE OF SOLVENCY

Knowledge of solvency can be obtained with the help of cash flow statement,

as it provides the real information about the available cash in the organization.

HELPFUL IN CONTROL

Cash flow statement acts as a control device for finance managers. With

comparison of cash flows statement with cash budget management can come to know

about the extent, to which financial sources have uses, in accordance with plan.

HELPFUL IN INTERNAL FINANCIAL MANAGEMENT

On the basis of information available from cash flows statement payment of

long-term liabilities, formulation of dividend policy is facilitated.

USEFUL TO EXTERNAL INVESTORS

External investors are able to obtain information about liquidity of

organization with the help of cash flows statement on the basis of which they can take

their decision regarding lending loan to organization or not.

STUDY OF THE TRENDS OF CASH RECEIPTS AND PAYMENTS FROM

VARIOUS ACTIVITIES

With the help of this statement managers are able to obtain information about

the frequency of cash receipts from current assets and what is frequency of payments

of current liabilities so that future cash requirements can be ascertained.



LIMITATIONS OF CASH FLOW STATEMENT

Following are the main limitations of cash flow statement:

Incomplete Substitute: Cash flow statement is not a substitute of income statement

as net cash flow depicted by cash flows statement is not equal to net profit shown

by income statement.

It does not show the Liquidity Position of the Firm: This statement depicts the

inflow and outflow of cash, liquidity position of the firm cannot be ascertained

from this.

Accrual Basis: Cash flow statement does not pay attention to accrual basis concept

of accounting.

Misleading Comparison: Cash flows statement has proved to be misleading in

comparison of industry and firm.

DIFFERENCE BETWEEN FUND FLOW STATEMENT & CASH

FLOW STATEMENT

Basis of

Difference

Fund Flow Statement Cash Flow Statement

Meaning Fund Flow refers to the changes

in the Fund by business

transactions.

Cash Flow Statement is a

statement of cash flow and cash

flow signifies the movement of

cash in and out of a business

concern.

Uses It helps the reader to understand

not only the financial stability of

the business concern but also the

successful implementation of

financial policies of

management.

A cash flow statement is of

primary importance to the

financial management. It is an

essential tool of short-term

financial analysis.

Basis of

accounting

Fund Flow Statement is based

on accrual basis of accounting.

Cash Flow Statement is based

on cash basis of accounting.

Limitation Fund Flow Statement does not Working Capital being a wider



provide information about

changes in Cash; which are

more important and relevant

than Working Capital.

concept of funds, a funds flow

statement presents a more

complete picture than Cash

Flow Statement.

FORMATS OF CASH FLOW STATEMENT

Accounting Standard-3 (Amended) has not prescribed any format for cash

flows statement. Following is the pro forma of cash flows statement, prepared by

direct and indirect method and which has been prescribed by SEBI and is used by

maximum number of organizations.

Cash Flow Statement (Direct Method)

For the year ended 31st March,….

Particulars Rs. Rs.

A. Cash Flows From Operating Activities:

Cash receipts from customers

Cash paid to suppliers and employees

Cash generated from operating activities

Income Tax Paid

Cash flow before extraordinary items

(+) or (-) Extraordinary items

Net Cash from operating activities

B. Cash Flows From Investing Activities

Purchase of Fixed Assets

Sales of Fixed Assets

Purchase of Investment (Long-term)

Sales of Investment (Long-term)

Interest received

……

(……)

……

……

(……)

……

……

……

(……)

……

(……)

……

……

……



Dividend received

Net Cash from investing activities

C. Cash Flows From Financing Activities

Proceeds from issue of share capital

Proceeds from long-term borrowings

Repayments of long-term borrowings

Interest Paid

Dividend Paid

Net cash from financing activities

Net Increase (or decrease) in cash(A+B+C)

Cash and Cash equivalents at the beginning of the period

Cash and Cash equivalents at the end of the period

……

……

……

……

……

(……)

(……)

(……)

……

……

……

Cash Flow Statement (Indirect Method)

For the year ended 31st March,….

Particulars Rs. Rs.

A. Cash Flows From Operating Activities:

Net profit before tax and extraordinary items

Adjustment For:

Depreciation

Loss on sale of fixed assets

Gain on sale of fixed assets

……

……

……

(……)



Interest paid

Interest received

Dividend received

Goodwill written off

Preliminary Exp. written off

Provision for taxation

Proposed Dividend (Current Year)

Operating profit before working capital Changes

Add: Decrease in Current Assets

Increase in Current Liabilities

Less: Increase in Current Assets ……

Decrease in Current Liabilities ……

Cash generated from operating activities

Income Tax Paid

Cash flow before extraordinary items

(+) or (-) extraordinary items

Net Cash from operating activities

B. Cash Flows From Investing Activities

Purchase of Fixed Assets (See Note-5)

Sales of Fixed Assets

Purchase of Investment (Long-term)

Sales of Investment (Long-term)

Interest received

Dividend received

Net Cash from investing activities

C. Cash Flows From Financing Activities

Proceeds from issue of share capital

……

(……)

(……)

……

……

……

……

……

……

……

……

……

……

……

……

……

……

(……)

……

(……)

……

……

……

……

……

……

……

……



Proceeds from long-term borrowings

Repayments of long-term borrowings

Interest Paid

Proposed Dividend Paid (Previous Year)

Net cash from financing activities

Net Increase (or decrease) in cash (A + B + C)

Cash and Cash equivalents at the beginning of the period

Cash and Cash equivalents at the end of the period

(……)

(……)

(……)

…… ……

……

……

……

Chapter 2: WAYS AND METHODS TO ANALYSE CASH

FLOW STATEMENT

HOW TO ANALYZE A CASH FLOW STATEMENT

While a balance sheet and income statement are tools for management,

without a cash flow statement they are limited barometers and may even be

misleading.



OPERATING ACTIVITIES

The cash flow statement will tell you where money came from and how it was

used. When analyzing cash flow, the first place to look is the cash flow from

operating activities. It tells you whether the firm generated cash or whether it needs a

cash infusion. A few periods of negative cash from operating activities is not by itself

a reason for alarm if it is based on plans for company growth or due to a planned

increase in receivables or inventories. However, if a negative cash flow from

operating activities is a surprise to managers and owners, it may be undesirable.

Over time, if uncorrected, it can foretell business failure. Managers and

owners should pay particular attention to increases in accounts receivable. The cash

flow statement gives the true picture of the account. A large increase in accounts

receivables may warrant new billing or collection procedures.

INVESTING ACTIVITIES

The cash flow statement puts investing activities into perspective. At one

glance, you can see whether or not a surplus in operations is being used to grow the

company. A lack of investing activities, which is few purchases of new equipment or

other assets, may indicate stagnant growth or a diversion of funds away from the

company.

FINANCING ACTIVITIES

The financing activities section of the cash flow statement will show

repayments of debt, borrowing of funds, as well as injections of capital and the

payment of dividends. As a company expands, this area of the cash flow statement

will become increasingly important. It will tell outsiders how the company has grown

and the financial strategies of management.

Together, the three sections of the cash flow statement show the net change in

cash during the period being examined. A comparison between past periods will give



owners and managers a good idea of the trend of their business. Positive trends in

cash flow may encourage owners to consider long-term financing as an aid to growth

and increase their comfort level concerning the company’s ability to generate cash for

repayment. Strong cash flow will also make it easier to acquire financing and to

negotiate with lenders from a position of strength. Preparation of a cash flow

statement is the first step toward financial management for long-term success.

METHOD USED TO ANALYZE THE CASH FLOW

STEP 1: SCANNING THE BIG PICTURE

First, place your company in context in terms of its age, industry, and size.

(Mature companies have different cash flows from start-up companies. And

service industries look different from heavy manufacturing industries.)

Flip through the annual report and other accounting records to determine how

management believes the year progressed. Was it a good year? Perhaps a record-

breaking year in terms of revenue or net income? Or is management explaining

how the company has had some rough times?

Look at net income. Does it show income or losses over the past few years? Is

income (or loss) shrinking or growing?

STEP 2: CHECKING THE POWER OF THE CASH FLOW ENGINE

The cash flow from operating activities section is the cash flow engine of the

company. When this engine is working effectively, it provides the cash flows to

cover the cash needs of operations.

To check the cash flow check if the cash flow from operating activities is greater

than zero. Also check whether it is growing or shrinking. Assuming it is positive,

the next question is can it cover important, routine expenditures?



An exception is start-up companies often have negative cash flow from operating

activities because they had to spend a lot to get the company started and their cash

flow engines are not yet up to speed.

Examine the operating working capital accounts. Inventories, receivables, and

accounts payable usually grow in expanding companies.

STEP 3: PINPOINTING THE GOOD NEWS AND THE BAD NEWS

Begin with cash flow from investing activities. One systematic observation is to

check whether the company is generating or using cash in its investing activities.

A healthy company invests continually in more plant, equipment, land, and other

fixed assets to replace the assets that have been used up or have become

technologically obsolete.

You must look at the entire package to evaluate whether your cash flows from

financing are in the “good news” or “bad news” categories. One systematic way to

begin is to compare borrowing and payments on debt with each other across the

years and note the trends. Another way in uncovering the news in this section is to

check the activities in the stock accounts.

STEP 4: PUTTING THE PUZZLE TOGETHER

It would be rare to find a company in which all of the evidence is positive, or in

which all of the evidence is negative.

To make a balanced evaluation, you must use both the good news and the bad

news identified in each section of the statement.

Sometimes there are unusual or unknown items that may need further looked into

(possibly by a professional).



Chapter 3: CASH FLOW STATEMENT ANALYSIS



Net Pro

fit Befo

re Ta

x

Cash Fr

om Opera

ting

Cash fr

om Inve

sting

Cash fr

om Finan

cing

Net incre

ase In

Cash

Op Cash &

Cash Eq

ui

Cl Cash

& Cash

Equi

-30000

-20000

-10000

0

10000

20000

30000

40000

CASH FLOW STATEMENT ANALYSIS OF RELIANCE INDUSTRIES LTD

Mar '12Mar '11Mar '10Mar '09Mar '08

Amt i

n Cr

ores

The above diagram shows the Cash Flow of Reliance Industries ltd from 2007-

08 to 2011-12 comparing its yearly profits with Cash and Cash equivalent held at the

year end and the Net Cash from/ used in different activities with each other.

The above comparison shows that there has been stagnant increase in the

profits & cash balance expect for 2008-09 there has been decline in the profits from

23,010.14 crores to 18,433.23 crores where as the cash balance has increased from

4,280.05 crores to 22,176.53 crores and next year it declined to 13,462.65 crores even

after making a profit of 20,547.44 crores.

Observing the diagram we can say that there has been considerable increase in

the Net Cash from Operating activities expect for 2011-12 which has declined from

33,280.52 crores to 26,974 crores. There has been an equal amount of investments

during 2007-08 & 2008-09 which declined in 2009-10 from 24,084.20 crores to



18,204.5 crores and again raised to 20,332.88 crore which intensely declined during

2011-12 to 3,046 crores.

RIL has raised funds during 2007-08 & 2008-09 continuously which was

8,973.04 crores & 23,732.58 crores respectively and which is being paid off

subsequently year by year.

ACCOUNTS RECEIVABLE INVENTORY

ACCOUNTS PAYABLE

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2009-10

2010-11

2011-12

RELIANCE INDUSTRIES LTD

2009-102010-112011-12

Amt i

n Cr

ores

The above diagram shows Reliance Group of Industries’ Accounts Receivable,

Inventory, and Accounts Payable position of last three years in the cash flow

statement.

The above diagram shows that RIL has a good credit policy as its accounts

receivable has been declined from 5,790.65 crores to 1,068 crores. It has maintained a

very lower level of stock i.e. the level of stock has declined from 14,396.67 crores to

7,724 crores. It has even a good level of credit payment policy as it has declined from

14,249.20 crores to 2,044 crores. This shows that RIL maintains good relationships

with its suppliers and customers.



Net Pro

fit Befo

re Ta

x

Cash Fr

om Opera

ting

Cash fr

om Inve

sting

Cash fr

om Finan

cing

Net incre

ase In

Cash

Op Cash &

Cash Eq

ui

Cl Cash

& Cash

Equi

-30000

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

CASH FLOW STATEMENT ANALYSIS OF TATA STEEL LTD


Amt i

n Cr

ores

The above diagram shows the Cash Flow of Tata Steel Industries ltd from

2007-08 to 2011-12 comparing its yearly profits with Cash and cash equivalent held

at the year end and the Net cash from/used in different activities with each others.

The above diagram shows that the Profits and Cash balance of Tata Steel has

been increasing stagnantly expect for 2011-12’s cash balance which declined from

4,141.54 crores to 3900.53 crores where as profits increased from 9776.85 crores to

9,857.35 crores. The Net cash from operating activities has also been stagnantly

increasing from 6,254.2 crores to 10,256.47 crores.

Tata has invested about 29,318.58 crores during 2007-08 which declined

vigorously to 5,254.84 crores in 2009-10 which again raised the next year to

13,288.13 crores and again declined to 2,859.11 crores in 2011-12. Tata steel raised



funds during 2007-08 for 15,848.07 crores thereafter it reduced raising funds to

7,599.35 crores in 2011-12.

A/C RE-CEIVABLE INVENTORY

A/C PAYABLE

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

2009-10

2010-11

2011-12

TATA STEEL INDUSTRIES LTD

2009-102010-112011-12

Amt i

n Cr

ores

The above diagram shows Tata steel Industries’ Accounts receivables,

Inventory, and Accounts Payable position of last three years in the cash flow

statement.

The above diagram says that there has been decrease in Accounts receivables

by 2,118.96 crores which means customers have paid the debts and next year there is

increase in Accounts receivable by 4,718.97 crores which means company has made

aggressive credit sale and next year again there is a decrease of Accounts receivables

by 889 crores which says that receivables are not managed properly. Inventory also

has a similar position i.e. decrease of stock by 1,884.24 crores in 2009-10 and

increase in stock during 2010-11 by 4,888.51 crores and again a decline by 407.72

crores in 2011-12. Accounts payable of Tata steel shows that it makes late payments

to its creditors or is provided with longer credit period as it has an increase of 898.51

crores and 2,432.58 crores in two subsequent years and made payment during 2011-

12 which is shown with a decline of 137.42 crores during 2011-12.



Net Pro

fit Befo

re Ta

x

Cash Fr

om Opera

ting

Cash fr

om Inve

sting

Cash fr

om Finan

cing

increase

In Cash

Op Cash &

Cash Eq

ui

Cl Cash

& Cash

Equi

-5000

0

5000

10000

15000

20000

CASH FLOW STATEMENT ANALYSIS OF INFOSYS LTD


Amt i

n Cr

ores

The above diagram shows the Cash Flow of Infosys Ltd from 2007-08 to

2011-12 comparing its yearly profits with Cash and Cash equivalent held at the year

end and the Net Cash from/ used in different activities with each other.

The above diagram shows that the profits & cash balance of Infosys Ltd has

been increasing stagnantly from 5,100 crores in 2007-08 to 11,096 crores in 2011-12

and 7,689 crores in 2007-08 to 19,557 crores in 2011-12 which is a good sign of

growth. Cash from operating activities has also been stagnantly increasing expect for

2010-11 when operating activities declined from 5,876 crores to 4,270 crores. Infosys

had made Investments of 978 crores which declined to 195 crores during 2008-09

which then had a boost of 3,314 crores during 2009-10. Thereafter, Infosys raised

funds through investing activities i.e. during 2010-11 to 3,235 crores and 565 crores

during 2011-12.



Infosys has been paying off its debts subsequently year after year i.e. 777

crores during 2007-08, 2,430 crores during 2008-09, 1,486 crores during 2009-10,

3,642 crores during 2010-11, 2,298 crores during 2011-12.

ACCOUNTS RE-CEIVABLE

ACCOUNTS PAYABLE-200

0

200

400

600

800

1000

1200

2009-10

2010-11

2011-12

INFOSYS LTD

2009-102010-112011-12

Amt i

n Cr

ores

The above diagram shows Infosys Ltd’ Accounts receivables, Inventory, and

Accounts Payable position of last three years in the cash flow statement.

The above diagram shows that there has been a tremendous rise in Accounts

receivable during 2010-11 compared to the previous year 2009-10 i.e. from a decline

of 194 crore in 2009-10 to an increase of 1159 crore in 2010-11 which was continued

during 2011-12 by a growth of 1189 crore which means that there has been aggressive

credit sale to promote the product.

Accounts payable have also been subsequently increasing which means there

has been increase in the level of credit purchase from 204 crores in 2009-10 to 620

crores in 2011-12.



Net Pro

fit Befo

re Ta

x

Cash Fr

om Opera

ting

Cash fr

om Inve

sting

Cash fr

om Finan

cing

Increase

In Cash

Op Cash &

Cash Eq

ui

Cl Cash

& Cash

Equi

-4000

-2000

0

2000

4000

6000

8000

CASH FLOW STATEMENT ANALYSIS OF WIPRO LTD


Amt i

n Cr

ores

The above diagram shows the Cash Flow of Wipro Ltd from 2007-08 to 2011-

12 comparing its yearly profits with Cash and Cash equivalent held at the year end

and the Net Cash from/ used in different activities with each other.

The above comparison shows that the profits & cash balance of Wipro Ltd has

been increasing stagnantly expect for the cash balance of 2010-11 which declined

from 5664.3 crores to 5203.3 crores in spite of the increase of profits from 5688.8

crores to 5705.5 crores. Comparison of Net cash from/used in different activities gives

us the conclusion that there has been less operating activities of 715.9 crores during

2007-08 and a very sharp increase in operating activities by 4,344.5 crores in the next

year which was then followed by a considerable growth of 1329 crores and then there

was a stagnant decline in Operating activities from 4477.4 crores to 2997.9 crores in

two years.



There has been very less investments during 2007-08 i.e. 1,127.5 crores which

increased thereby to 3662.7 crores the next year but again declined to 339.8 crores in

three years. There has been lot of financing activity or in other words there has been

an increase of debt to the company during 2007-08 of 2,290 crores which has been

paid off during the subsequent years regularly each year.

A/C RE-CEIVABLE

INVENTORY A/C PAYABLE0

5,000

10,000

15,000

20,000

25,000

2009-10

2011-12

WIPRO LTD

2009-102010-112011-12

Amt i

n M

illio

ns

The above diagram shows Wipro Ltd’ Accounts receivables, Inventory, and

Accounts Payable position of last three years in the cash flow statement.

The above diagram says that there has been increase in the credit giving

percentage of Wipro where as it has maintained a good level of accounts payable

which has increased considerably from 650 million to 7,150 millions in two years.

As Wipro’s level of operation has increased this considerable increase can be

justified but accordingly Wipro has maintained very poor level of inventory i.e. 862

millions in 2011-12 & 1,781 millions in 2010 -11 which is not justified.



Net Pro

fit Befo

re Ta

x

Cash Fr

om Opera

ting

Cash fr

om Inve

sting

Cash fr

om Finan

cing

Increase

In Cash

Op Cash &

Cash Eq

ui

Cl Cash

& Cash

Equi

-30000

-20000

-10000

0

10000

20000

30000

CASH FLOW STATEMENT OF 2007-08 ANALYSIS OF RELIANCE AND TATA STEEL

RILTS

AMT

IN C

ROES

The above diagram compares the Cash flow statements of Reliance Group of

Industries ltd and Tata steel industries ltd during 2007-08. Comparing their profit,

Cash and cash equivalent held at the year end and the Net cash from/used in different

activities.

The above diagram shows that Reliance Industries has earned higher level of

profits then Tata Steel Industries. Cash from Operating activities of Reliance

Industries is also more compared to Tata Steel Industries. But Tata Steel has

maintained a higher level of Investments than Reliance Industries during the year.

Reliance has even raised lesser rate of funds than Tata Steel. Reliance has maintained

a very higher level of cash balance than Tata Steel.



Net Pro

fit Befo

re Ta

x

Cash Fr

om Opera

ting

Cash fr

om Inve

sting

Cash fr

om Finan

cing

Increase

In Cash

Op Cash &

Cash Eq

ui

Cl Cash

& Cash

Equi

-20000

-10000

0

10000

20000

30000

40000

CASH FLOW STATEMENT OF 2011-12 ANALYSIS OF RELIANCE AND TATA STEEL

RILTS

AMT

IN C

RORE

S

The above diagram compares the Cash flow statements of Reliance Group of

Industries ltd and Tata steel industries ltd during 2011-12. Comparing their profit,

Cash and cash equivalent held at the year end and the Net cash from/used in different

activities.

The above diagram shows that Reliance Industries has earned higher level of

profits then Tata Steel Industries. Cash from Operating activities of Reliance

Industries is also more compared to Tata Steel Industries. But Reliance Industries and

Tata Steel has maintained a same level of Investments during the year. Reliance has

even paid off a higher rate of debts than Tata Steel. Reliance has maintained a very

higher level of cash balance than Tata Steel.



Net Pro

fit Befo

re Ta

x

Cash Fr

om Opera

ting

Cash fr

om Inve

sting

Cash fr

om Finan

cing

Increase

In Cash

Op Cash &

Cash Eq

ui

Cl Cash

& Cash

Equi

-2000

-1000

0

1000

2000

3000

4000

5000

6000

7000

8000

CASH FLOW STATEMENT OF 2007-08 ANALYSIS OF INFOSYS AND WIPRO

INFOSYSWIPRO

AMT

IN C

RORE

S

The above diagram compares the Cash flow statements of Infosys ltd and

Wipro ltd during 2007-08. Comparing their profit, Cash and cash equivalent held at

the year end and the Net cash from/used in different activities.

The above diagram shows that Infosys ltd has earned higher level of profits

then Wipro ltd. Cash from Operating activities of Infosys ltd is also more compared to

Wipro ltd. Infosys ltd had less investments compared to Wipro during the year.

Infosys ltd has even paid off some of its debts where as Wipro ltd has raised a higher

rate of funds. Infosys ltd has maintained a very higher level of cash balance than

Wipro ltd.



Net Pro

fit Befo

re Ta

x

Cash Fr

om Opera

ting

Cash fr

om Inve

sting

Cash fr

om Finan

cing

Increase

In Cash

Op Cash &

Cash Eq

ui

Cl Cash

& Cash

Equi

-5000

0

5000

10000

15000

20000

CASH FLOW STATEMENT OF 2011-12 ANALYSIS OF INFOSYS AND WIPRO

INFOSYSWIPRO

AMT

IN C

RORE

S

The above diagram compares the Cash flow statements of Infosys ltd and

Wipro ltd during 2011-12. Comparing their profit, Cash and cash equivalent held at

the year end and the Net cash from/used in different activities.

The above diagram shows that Infosys ltd has earned higher level of profits

then Wipro ltd. Cash from Operating activities of Infosys ltd is also more compared to

Wipro ltd. Infosys ltd had earned higher profits compared to Wipro ltd through

investments. Infosys ltd has even paid off a higher rate of debts than Wipro ltd.

Infosys ltd has maintained a very higher level of cash balance than Wipro ltd.



CONCLUSION

A cash flow statement is one of the most important financial statements for a

project or business. The statement can be as simple as a one page analysis or may

involve several schedules that feed information into a central statement.

A cash flow statement is a listing of the flows of cash into and out of the

business or project. Think of it as your checking account at the bank. Deposits are the

cash inflow and withdrawals (checks) are the cash outflows. The balance in your

checking account is your net cash flow at a specific point in time.

The above analysis shows that there has been equal level of increase of profit

earning for Reliance and Tata Steel even after four years. Reliance has very much

improved its cash holdings after four years compared to which Tata Steel has

increased to a little percentage.

Comparing Infosys and Wipro’s four years growth both the companies have

maintained equal level of growth and cash flow.

This shows that cash flow statement is one of the important statement for

analyzing a company’s cash flow.



BIBLOGRAPHY

BOOKS

MANAGEMENT ACCOUNTING

By Bhattacharyya Debarshi

FUNDAMENTAL ACCOUNTING

By D. K. Flynn, Carolina Koornhof, David Flynn

WEBSITES

http://www.investopedia.com/

https://www.zionsbank.com/

http://shodhganga.inflibnet.ac.in/

http://www.accountingcoach.com/

http://www.cashflowspy.com/

http://bizfinance.about.com/


http://bizfinance.about.com/od/cashflowanalysis/tp/cash-flow-ratios.htm

http://www.cashflowspy.com/how-to-analyze-cash-flow-statement.html

http://www.accountingcoach.com/online-accounting-course/06Xpg01.html

http://shodhganga.inflibnet.ac.in/bitstream/10603/723/14/14_chapter%209.pdf

https://www.zionsbank.com/pdfs/biz_resources_book-4.pdf

http://www.investopedia.com/articles/04/033104.asp

cash flow statement analysis

Documents

share capital

cash equivalent

preparing

increasing

cash flow

cash flow

tata steel

term borrowings