cash flow_fund flow_cash forecasts
TRANSCRIPT
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Fund flow and Cash flow Analysis
Cash flow forecasts/budgets
By Sudha Agarwal
Chartered Accountant
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Contents
Definition of Fund Flow Statement
Advantages and Limitations of Fund Flow statement
Construction of Fund flow statement
Treatment of Special items
Definition of Cash Flow Statement Need for Cash Flow statement
Direct Method of cash flow
Indirect Method of Cash flow
Preparation of Cash Flow
Format of Cash Flow Difference between Fund flow and Cash flow
Cash flow forecasts/budgets
Methods of computing cash flow forecasts/budgets
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Fund Flow statement
a statement measures the inflows and outflows ofnet working capital that result from any type of
business activity
A statement summarising the significant financial
changes which have occurred between the
beginning and end of the companys accounting
period
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Advantages and Limitations
Advantages determines financial consequences of business
to obtain finance from Banks and FI
to plan financial resources, internal and external to compare plan v/s actual use of funds
guide for future requirements of funds
Disadvantages
Only rearranges facts appearing in financialstatements
Does not consider non fund transactions
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Construction of Fund Flow statement
1. Basic principles :increase in assets involves outflow of funds
decrease in assets involves inflow of funds
increase in liabilities involves inflow of funds
decrease in liabilities involves outflow of funds
2. Process of construction :
- Sources of funds
Issue of shares/debentures, Receipt of term loans/Fixed deposit, Saleof Fixed assets/Investments, Non operating income, Operating profit,Decrease in working capital
- Application of fundsRedemption of shares/debentures, Term loan repayments, Purchaseof fixed assets/Investments, Repayment of deposits/loans, Nonoperating expenses, Operating loss, dividends, Increase in workingcapital
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Construction of Fund Flow statement
Treatment of special items
(a) Operating Profit/Loss
Net profit as per P&L
Add : Depreciation on FA, Preliminary expenses w/o,
Goodwill w/o, Loss on sale of FA/Invts, Non cash exps,
Non recurring or abnormal exps, Non operating exps
Less : Profit on sale of FA/Invts, Non recurring or
abnormal income, Non operating income
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Construction of Fund Flow statement
(b) Statement showing changes in working capital
Particulars
Balance at
beginning
Balance at
end Increase Decrease
A Current Assets
Stock
Debtors
Bills receivable
Cash balance
Bank balance
Prepaid expenses
Advances
Marketable securities
B Current liabilities
Creditors
Bills payable
Outstanding expenses
Provisions
C Net working capital
(A - B)
D
Net Increase/Decrease during the
ear
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Construction of Fund Flow statement
(b) Statement show ing changes in work ing capita l
Principles to be remembered Increase in CA increases WC
Increase in CL decreases WC
Decrease in CA decreases WC
Decrease in CL increases WC
( c) Provis ion fo r Tax or A dvance tax
Two ways to treat the same
Treated as CL or CA and will be routed thru the statement showingchanges in WC
Tax provn will be added back to profit as per P&L to arrive atoperating profit. Actual tax exps will be shown as Application offunds. Both will not appear in statement showing changes in WC
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Construction of Fund Flow statement
(d) Dividend
Inter im and Final
Two ways to treat the same
Provn for proposed dividend treated as CL and
considered in changes in WC statement. The operating
profit will be shown as source of funds net of proposeddividend
Provn for proposed dividend and interim dividend is added
back to P&L to arrive at operating profit. Actual dividend
paid will be shown as Application of funds
(e)Non recurring/Abnormal income/expense
Income is deducted from profit
Expense is added back to profit
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Cash Flow statement
a statement depicting change in cash position offirm from one period to another.
It explains the total sources of cash and uses orapplication of cash to arrive at the net cash flow
Eg : - Cash balance at beginning is 20,000 and
cash balance at end of year is 30,000, then net
cash inflow during the year is 10,000
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Need for cash flow statement
- determines the liquidity position of the company
- availability of cash to pay dividends and taxes
- helps in efficient cash management
- helps in internal financial management- discloses movement of cash
- discloses success or failure of cash planning
eg co. has made huge profits but there is no cash to
pay dividends, coz debtors have not paid.
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Direct Method for cash flow statement
1. Cash from Operating activities
- Cash receipts from customers
- Cash paid to suppliers and employees
- Cash generated from operations
- Income tax
- Cash flow before extraordinary item- Proceeds from earthquake disaster settlement
Net Cash from operat ing activ i t ies
2. Cash from Investing activities
- Purchase of fixed assets- Proceeds from sale of equipment
- Interest received
- Dividend received
Net Cash from invest ing activ i t ies
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Direct Method for cash flow statement
3.
Cash from Financing activities- Proceeds from issuance of share capital
- Proceeds from long term borrowings
- Repayments of long term borrowings
- Interest paid
- Dividend paid
Net Cash used in f inancing act iv i t ies
Net increase in cash and cash equivalentsCash equivalents consists of cash on hand andbank balance, investment in money market(short term) and effect of exchange rate changes
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Indirect Method for cash flow statement
1. Cash from Operating activities
- Net Profit before tax and extraordinary itemAdjustment for :-
- Depreciation
- Foreign exchange loss
- Interest income
- Dividend Income- Interest expense
- Operating Profit before WC changes
- Increase in Sundry Debtors
- Decrease in inventories
- Decrease in Sundry Creditors- Cash generated form Operations
- Income tax paid
- Cash flow before extraordinary item
- Proceeds from earthquake disaster settlement
Net Cash from operat ing act ivi t ies
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Indirect Method for cash flow statement
2. Cash from Investing activities
- Purchase of Fixed assets- Proceeds from sale of equipment
- Interest received
- Dividend received
Net Cash from invest ing act ivi t ies
3. Cash from Financing activities- Proceeds from issuance of share capital
- Proceeds from long term borrowings
- Repayments of long term borrowings
- Interest paid
- Dividend paidNet Cash used in f inancin g act ivi t ies
Net increase in cash and cash equivalents
Cash equivalents consists of cash on hand and bank balance,investment in money market (short term) and effect of exchange ratechanges
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Preparation of Cash flow statement
Sources of Cash1. Internal Sources Cash from Operations
Adjustment for non cash items
Depreciation
Amortisation of intangible assets Loss/Gain on sale of Fixed Assets
Creation of reserves
Adjustment for changes in Current assets and current
liabilities Add Decrease in current asset other than cash, Increase in
Current liabilities (item wise)
Less Increase in current asset other than cash, Decrease in
Current liabilities (item wise
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Preparation of Cash flow statement
2. External Sources Issue of new shares
Raising long term loans
Purchase of P&M on deferred payments
Short term borrowings cash credit from banks
Sale of Fixed Assets
Applications of Cash1. Purchase of fixed assets
2. Payment of long term loans
3. Decrease in deferred payment liabilities
4. Loss on account of operations5. Payment of tax
6. Payment of dividend
7. Decrease in unsecured loans, deposits, etc
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Format of Cash flow statement
Cash flow statement for the year ending ..
Opening balance : Cash and BankAdd : Sources of cash
Issue of shares
Raising of long term loans
Sale of fixed assets
Short term borrowings
Cash from Operations :
Profit as per P&L a/c
Add/Less : Adjustment for non cash itemsAdd : Increase in Current Liabilities
Decrease in Current Assets
Less :Increase in Current Assets
Decrease in Current Liabilities
TOTAL CASH AVAILABLE
Less : Application of Cash :
Redemption of Preference shares
Redemption of Long term loans
Purchase of fixed assets
Decrease in Deferred payment liabilities
Cash outflow on account of operations
Tax paid
Dividend paid
Decrease in Unsecured loans, Deposits
TOTAL APPLICATIONClosing balance : Cash and Bank
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Difference between Fund flow and Cash flow
1. FF is broader concept, CF is narrower concept
2. FF based on accrual concept, in CF, cashreceipts and payments are recorded
3. FF used of planning immediate and lon termfinancing, CF used for short term analysis and
cash planning4. In FF statement of changes in WC is prepared,
in CF the same is not prepared
5. In FF, balance sheet items are classified into
current and non current, in CF this is notnecessary
6. In FF sources and application are matched, inCF it begins with opening balance of cash and
ends with closing balance of cash
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Cash flow forecasts/budgets
Forecasts both inflow and outflow
Prepared based on estimates of cash receipts
and cash disbursements
Three methods available for preparing cash
budget
Receipt and Payment method
Adjusted Profit and Loss account method
Balance sheet method
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Methods of computing cash flow forecasts/budgets
Receipt and Payment method Prepared on basis of all expected cash receipts and all cash payments
Anticipated cash receipts and payments are only considered, accruals and adjustmentsare not considered
Special care to be given to time lag in credit transaction
Adjusted Profit and Loss account method
Similar to preparation of cash flow statement To the Opening cash balance, cash profit is added.
To the profit as per P&L add depreciation, outstanding expenses, provision for tax,dividend etc
Add capital receipts, decrease in CA and increase in CL
Subtract capital expenditure, capital redemption, repayment of long term loans,increase in CA and decrease in CL
Balance represents closing balance
Balance sheet method
Budgeted balance sheet is prepared for all items of liabilities, capital and assets exceptcash.
The balancing figure denotes cash and bank balance or bank overdraft
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Thank You