cash flow statement ppt

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Welingkar’s Distance Learning Division Financial Accounting CHAPTER-5. The Statement of Cash Flow We Learn – A Continuous Learning Fo

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The Cash Flow Statement translates earnings in the Income Statement into cash inflows. Explained in detail above as a part of the topic “Financial accounting”, is brought to you by Welingkar’s Distance Learning Division. For more such innovative content on management studies, join WeSchool PGDM-DLP Program: http://bit.ly/SlideshareFaccounting Join us on Facebook: http://www.facebook.com/welearnindia Follow us on Twitter: https://twitter.com/WeLearnIndia Read our latest blog at: http://welearnindia.wordpress.com Subscribe to our Slideshare Channel: http://www.slideshare.net/welingkarDLP

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Page 1: Cash Flow Statement PPT

Welingkar’s Distance Learning Division

Financial Accounting

CHAPTER-5. The Statement of Cash Flow

We Learn – A Continuous Learning Forum

Page 2: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

ImportanceImportance

Generally Accepted Accounting Principles (GAAP) call for three principal financial statements from all firms.

These are $ Balance Sheet $ Income Statement or P & L Account $ Statement of Cash Flows

Page 3: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

ImportanceImportance

The Statement of Cash Flows

- translates earnings in the Income Statement into cash inflows.

Page 4: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

ImportanceImportance

The Statement of Cash Flows

- translates earnings in the Income Statement into cash inflows.

- shows how good is the firm in realizing adequate cash from its main operating business.

Page 5: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

ImportanceImportance The Statement of Cash Flows

- translates earnings in the Income Statement into cash inflows.- shows how good is the firm in realizing adequate cash from its main operating business.- reveals if firm needs to look outside for other sources of finance.

Page 6: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

ImportanceImportance In the Statement of Cash Flows

- definition of cash includes both cash ( currency and bank account balances).

AND- cash equivalents.

Page 7: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

ImportanceImportance In the Statement of Cash Flows

- definition of cash includes both cash AND- cash equivalents. Which are

$ Short term highly liquid instruments maturing in not more than 90 days.

$ Treasury Bills ( T-Bills)

$ Short Term Certificates of Deposits (CDs)

$ Commercial Paper (CPs)

Page 8: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

CategoriesCategories The Statement of Cash Flows reports cash flows, in the

following categories :

- Operating activities: transactions that affect the net income

Page 9: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

CategoriesCategories The Statement of Cash Flows reports cash flows, in the

following categories : $ Operating Activities.

Investing Activities : Transactions which affect investments in fixed assets like property, plant etc.

Page 10: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

CategoriesCategories The Statement of Cash Flows reports cash flows, in the

following categories : $ Operating Activities. $ Investing Activities.

Financing Activities : Transactions which affect equity and debt of the business.

Page 11: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

CategoriesCategories The Statement of Cash Flows reports cash flows, in the

following three categories :

$ Operating Activities. $ Investing Activities.

$ Financing Activities.

Page 12: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

UsesUses The Statement of Cash Flows is used by investors and

creditors to :

$ Evaluate management’s abilities to manage cash now and in the future.

Page 13: Cash Flow Statement PPT

Financial Accounting The Statement of Cash FlowsChapter 05

UsesUses The Statement of Cash Flows is used by investors and

creditors to :

$ Evaluate management’s abilities to manage cash now and in the future. $ Assess the company’s ability to pay dividends and to pay creditors.

Page 14: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

UsesUses The Statement of Cash Flows is used by investors and

creditors to :

$ Evaluate management’s abilities to manage cash now and in the future. $ Assess the company’s ability to pay dividends and to pay creditors. $ Convert actual net income reported on income statement to a cash basis figure.

Page 15: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

MethodsMethods The Statement of Cash Flows is prepared by using

$ Direct Method.

$ Indirect Method.

Page 16: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

MethodsMethods The Statement of Cash Flows is prepared by using

$ Direct Method.

$ Indirect Method.The vast majority of publicly traded firms use indirect method .

Page 17: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

MethodsMethods The Statement of Cash Flows is prepared by using

$ Direct Method.$ Indirect Method.

” The only difference between the two methods is, how cash flows from

operating activities are calculated.”

Page 18: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

MethodsMethods The Statement of Cash Flows is prepared by using

$ Direct Method.$ Indirect Method.

” The only difference between the two methods is, how cash flows from operating activities are calculated.”

“Cash flows from investing and financing activities are calculated identically in both methods.”

Page 19: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

MethodsMethods The Statement of Cash Flows is prepared by using

$ Direct Method.$ Indirect Method.

” The only difference between the two methods is, how cash flows from operating activities are calculated.”

“Cash flows from investing and financing activities are calculated identically in both methods.”

The net cash inflow from operating activities is the same whether statement prepared by direct or indirect method.

Page 20: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

MethodsMethods Direct Method.

Converts each item on the income statement to a cash flow

i.e. sales are converted tocash receipts from

sales etc.

Page 21: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

MethodsMethods Indirect Method. Step # 01

Begin with Net Income as reported on the income statement.

Page 22: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

MethodsMethods Indirect Method. $ Begin with Net Income as reported on the income

statement. Step # 02

Add back Depreciation, Depletion and Amortization.( as these are non cash expenses added back to income )

Page 23: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

MethodsMethods Indirect Method. $ Begin with Net Income as reported on the income

statement. $ Add back Depreciation, Depletion and Amortization.

Step # 03Subtract gain on disposal of fixed assets.( These are reported in investing section of the statement)

Page 24: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

MethodsMethods Indirect Method.

$ Begin with Net Income as reported on the income statement. $ Add back Depreciation, Depletion and Amortization. $ Subtract gain on disposal of fixed assets.

Step # 04

Add back Loss on Disposal of Fixed Assets.( These are reported in investing section of the statement)

Page 25: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

MethodsMethods Indirect Method.

$ Begin with Net Income as reported on the income statement. $ Add back Depreciation, Depletion and Amortization. $ Subtract gain on disposal of fixed assets. $ Add back Loss on disposal of fixed assets.

Step # 05Adjust for changes in current asset and current liability.

Page 26: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

MethodsMethods Indirect Method. Step # 05

Adjust for changes in current asset and current liability as under :

1. An increase in current assets is deducted from net income.2. An increase in current liabilities is added to net income.3. A decrease in current assets is added to net income.4. A decrease in current liabilities is deducted from net income.

Page 27: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

MethodsMethods Indirect Method. $ Begin with Net Income as reported on the income statement. $ Add back Depreciation, Depletion and Amortization. $ Subtract gain on disposal of fixed assets. $ Add back Loss on disposal of fixed assets.

$ Adjust for changes in current asset and current liability.

Last Step ! Arrive at Net Cash Inflow ( or Outflow) from Operating Activities.

Page 28: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

MethodsMethods It is important to observe that the cash flow compares

Balance Sheets as on two dates and determines the cash flow.

It is, therefore , more convenient to plot the Balance Sheets on two dates in a vertical form.

Page 29: Cash Flow Statement PPT

Financial Accounting The Statement of Cash Flows Chapter 05

Profit & Loss Account of a firm may show robust topline and bottomline,

It is the Cash Flow Statement that reveals liquidity so necessary for survival and

growth of an organization!