Transcript
Page 1: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 1/28

 

Cash Flow Statement

Session Four 

Page 2: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 2/28

 

Rationale

Profit alone is not sufficient. ± accrual & matching concept

 ± accounting assumptions

Page 3: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 3/28

 

Cash Flow Statement

A statement that presents the inflows andoutflows of cash to and from an organization dueto various transactions in a given accountingperiod.

Helps assess the ability of an enterprise togenerate cash & cash equivalents and to utilizethe same.

Also helps to assess the liquidity and solvency of the entity.

AS 3 issued by the ICAI guides the preparation of cash flow statement in India.

SEBI ± Clause 32 of the listing agreement of stock exchanges

Page 4: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 4/28

 

Basic Elements

Cash flow from operating activities:

Principal revenue producing activities of theenterprise

Cash flow from investing activities:

 Acquisition and disposal of long term assetsand investments (other than thoseconsidered in cash equivalents)

Cash flow from financing activities:

 Activities that result in change in size andcomposition of owners¶ capital (equity) andborrowings of the enterprise

Page 5: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 5/28

 

Cash Flow Statement Format

Cash Flows from Operating Activities [A] Cash flows from Investing Activities [B]

Cash Flows from Financing Activities [C]

Net increase/(decrease) in cash and cashequivalents [A+B+C] [D]

Opening balance of cash and cashequivalents [E]

Closing balance of cash and cash equivalentsF =[D+E]

Page 6: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 6/28

 

Operating Activities

It is the principle revenue generating activities of an entity

Two ways of calculating it

Direct method

major classes of gross cash receipts andgross cash payments are disclosed -changesthat cash transactions cause in revenue &expense accounts are analyzed.

Indirect method The Profit and Loss Account is adjusted for 

the effects of transactions of non-cash andnon-operating nature

Also known as ³Reconciliation to Net Income´

Page 7: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 7/28

Cash flow from Operating Activities: Indirect

Method

A. Start with Profit before tax from P&L a/c B. Adjust for Non cash items: 

» Add Non cash expenses -Depreciation & other non cashamortizations, provisions for liabilities

C. Adjust for Non operating items

» Add Non operating expenses - Interest costs and other non operating expenses

» Deduct Non operating income

» Deduct Non recurring income

» Deduct Actual cash tax paid

D. Operating Profit before working capital adjustment(Adjusting A B & C)

E. Working capital adjustments Changes in current assets and current liabilities (other than cash

and cash equivalents)

Cash flow from operating activities (D +/- E)

 

Page 8: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 8/28

Illustration ± KK Ent.

Particulars Rs. Particulars Rs.

Purchases for the Year

Direct Expenses

Gross Profit

Total

80,000

20,000

65,000

1,65,000

Sales

Total

1,65,000

1,65,000

Rent

Salary

Provision for taxNet Profit

8,000

20,000

2,00035,000

Gross Profit B/d65,000

Profit & Loss AccountFor the Year ending 31st March 20X9

 

Page 9: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 9/28

Solution ± Direct Method

Cash Flow From Operating Activities:

Cash received on account of sale of goods 1,65,000

Less: Payment made on account of 

Purchases of goods 80,000

Freight and Cartage 20,000

Salary Paid 20,000Rent Paid 8,000

Tax paid during the year 2,000 1,30,000

Cash Inflow 35,000

Kk EnterprisesCash Flow Statement

For the Year ending 31st March 20X9(all figures in Rs)

 

Page 10: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 10/28

Illustration ± KK Ent.

Particulars Rs. Particulars Rs.

Purchases for the Year

Direct Expenses

Gross Profit

Total

80,000

20,000

65,000

1,65,000

Sales

Total

1,65,000

1,65,000

Rent

Salary

Depreciation

Provision for Bad Debts

Proposed Dividends

Interest on debt

Preliminary Exp. written off

Profit before taxes

Provision for taxes

Profit after taxes

8,000

20,000

15,000

5,000

10,000

2,500

1,500

16,000

2,000

14,000

Gross Profit B/d

Profit on sale of oldmachinery

65,000

13,000

Profit & Loss AccountFor the Year ending 31st March 20X9

 

Page 11: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 11/28

Solution ± Direct Method

Cash Flow From Operating Activities:

Cash received on account of sale of goods 1,65,000

Less: Payment made on account of 

Purchases of goods 80,000

Freight and Cartage 20,000

Salary Paid 20,000

Rent Paid 8,000Tax paid 2,000

Cash Inflow 35,000

Kk EnterprisesCash Flow Statement

For the Year ending 31st March 20X9 (all figures in Rs)

 

Page 12: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 12/28

Solution ± Indirect Method

Cash Flow From Operating Activities:

PBT as per Profit & loss Account 16,000Add: Non-cash transaction

Provision for Bad Debts 5,000Depreciation 15,000Proposed Dividends 10,000Interest on debt 2,500Preliminary Expenses written off 1,500 34,000

Less: Non-operation incomesProfit on sale of machinery 13, 000Tax paid during the year 2,000

Cash Inflow before working capital changes 35,000Working capital changes NILOperating Cash Flow 35,000

Kk Enterprises

Cash Flow Statement

For the Year ending 31st March 20X9 (all figures in Rs)

 

Page 13: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 13/28

Illustration ± KK Ent.

Particulars Rs. Particulars Rs.

Purchases for the Year

(cash ±  60000, credit ±  20000)

Direct Expenses

(Cash 12000, due ±  8000)

Gross Profit

Total

80,000

20,000

65,000

1,65,000

Sales

(Cash ±  100000

Credit ±  65000)

Total

1,65,000

1,65,000

Rent

Salary

(Paid ±  15000,Due - 5000)

DepreciationProvision for Bad Debts

Proposed Dividends

Interest on debt

Preliminary Exp. written off

PBT

Provision for taxesProfit after taxes

8,000

20,000

15,0005,000

10,000

2,500

1,500

16,000

2,00014,000

Gross Profit B/d

Profit on sale of old

machinery

65,000

13,000

Profit & Loss Account

For the Year ending 31st March 20X9

 

Page 14: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 14/28

Solution ± Direct Method

Cash Flow From Operating Activities:

Cash received on account of sale of goods 1,00,000

Less: Payment made on account of 

Purchases of goods 60,000

Freight and Cartage 12,000

Salary Paid 15,000

Rent Paid 8,000

Tax paid 2,000

Cash Inflow 3,000

Kk EnterprisesCash Flow Statement

For the Year ending 31st March 20X9 (all figures in Rs)

 

Page 15: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 15/28

Solution ± Indirect Method

Cash Flow From Operating Activities:

PBT as per Profit & loss Account 16,000Add: Non-cash transaction

Provision for Bad Debts 5,000

Depreciation 15,000

Proposed Dividends 10,000

Interest on debt 2,500

Preliminary Expenses written off 1,500 34,000

Less: Non-operation incomes

Profit on sale of machinery 13,000

Tax paid 2,000

Cash Inflow before working capital changes 35,000

Increase in Debtors (outflow) - 65,000

Increase in Creditors (Inflow) + 20,000

Increase in Accruals (Inflow) + 8,000

Increase in Accs-salary (Inflow) + 5,000 32,000

Operating Cash Flow 3,000

Kk Enterprises

 

Page 16: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 16/28

Investing Activities

Activities related to acquisition and disposalof long-term assets and other investments,which are not taken into considerationunder the cash equivalents head areinvesting activities

Also includes investments made bybusiness entities in other company¶s sharesand debentures

Examples of investment activities include

cash payments or receipts to acquire or dispose fixed assets, shares, debtinstrument, etc.

 

Page 17: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 17/28

Illustration - Kanishk

The following transactions occur at Kk Enterprises:

Particulars Amount

(Rs.)Purchased a machinery for 1,50,000

Sold shares worth 2,00,000

Received interest on debentures

purchased earlier  10,000

Received dividend on shares held 20,000

Sold old machinery (including profit on

sale 13,000)

50,000

 

Page 18: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 18/28

Solution

Cash Flow from Investing Activities:

Sale of Shares 2,00,000

Interest received 10,000

Sale proceeds of old machinery 50,000

Dividend received 20,000

2,80,000

Less: Outflow on a/c of machine purchase 1,50,000

Cash flow from Investing Activities 1,30,000

Kk EnterprisesCash Flow Statement

 

Page 19: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 19/28

Financing Activities

The activities that result in the change in size andcomposition of the long-term capital employed in thefirm are known as financing activities

Includes both owner(s) capital and long-term borrowingof the entity

Example: cash received from issue of share capital,issue of loans and cash payment on dividend,redemption, etc.

Supposing during the year Kk Enterprises has taken aloan of Rs 1,50,000 and paid an interest of Rs 2,500

thereon, the cash flow from financing activities for theyear comes to Rs 1,47,500 (i.e., 1,50,000 - 2,500)

Thus Net Cash Flow for Kk Ent. = CFO (3,000) + CFI(1,30,000) + CFF (1,47,500) = 2,80,500

Adjusting for Opening cash balance say Rs 5,000

would give closing cash balance of Rs 2,85,500

Page 20: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 20/28

Page 21: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 21/28 

Page 22: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 22/28

Recap

Proceeds from the sale of equipment used in thebusiness ± A/B/C or supplemental info

The loss on sale of equipment as above

Declaration and payment of dividends on

company's stock

An increase in the balance in retailer'smerchandise

Retirement of long term bonds payable

The amortization of the cost of an intangibleasset

The exchange/conversion of long-term bonds

into common stock

 

Page 23: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 23/28

Recap

A corporation reported the following information for the past year:

Net Income $200,000

Depreciation Expense 30,000

Gain on Sale of Truck 5,000Proceeds from Sale of Truck 8,000

Decrease in Accounts Receivable 10,000 

Assuming these are the only facts, what amount will thecorporation report as the CFO on the cash flowstatement?

 

Page 24: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 24/28

Items that do not figure in cash flow

statement

The following transactions have noimpact on cash flow:

 ± Issue of bonus shares

 ± Conversion of loan to equity ± Acquisition of business with shares

 ± Purchase of Fixed assets on credit

 All the above items have no immediatecash impact 

 

Page 25: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 25/28

Issues

Interest received on long-term investments vis-à-

vis interest received on short-term investments

(including interest on trade advances and

operating receivables)

Interest paid on loans and debts vis-à-vis interest

paid on working capital loan

Dividend received in case of financial enterprises

vis-à-vis dividends received by any other type of 

enterprise

Dividend paid is always classified as financing

activity

 

Page 26: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 26/28

Cash Flow statement: A simple

illustrationBalance Sheet as on 31/03/07 31/03/06

SOURCES OF FUNDS:

Paid up share capital 300 250

Share premium 50 0

General reserve 200 150

Profit & Loss Account 75 50

Loans 275 200

TOTAL S OUR CES 900 650  

 APPLICATION OF FUNDS:

Gross block 900 700

Less: Accumulated Depn. -425 -350

Net Block 475 350

Investments 100 150

Net current assets 250 100

(excl. cash and bank balances)

Cash and bank balances 75 50

TOTAL  APPLI C  ATION  900 650  

Investments are sold at a profit of Rs. 25

Interim dividend paid Rs.20

 

Page 27: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 27/28

Pattern of cash flows

Most of the financially strong companieswill have positive CFO

 

Page 28: Cash Flow Statement.ppt

5/12/2018 Cash Flow Statement.ppt - slidepdf.com

http://slidepdf.com/reader/full/cash-flow-statementppt 28/28

Cash flow statement: How to inter pret?

Identify the major sources of cashinflows and cash outflows.

Compare capital expenditure with

depreciation number. See how operating cash flows are being

utilized.

Find out whether the enterprise isgrowing. If yes, whether organically or inorganically.


Top Related