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CASH FLOW ANALYSISPRESENTATION

BY

S.CLEMENT

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Sales is vanity

Profit is sanity

Cash is reality

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What is cash ? Currency/coins or

Balances held at bank or

Short term investments or

What constitutes cash for a layman maybe different for a finance guy

In terms of AS3, any thing convertiblein to cash is deemed as cash.

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Cash Flow statement Cash flow statement- it is a summary of

cash inflows and outflows during a

particular period for a business unit

Captures the impact of varioustransactions on the cash position of the

firm the net change in cash position

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Cash Flow Analysis - why Cash is life line of business

Cash position is not equal to that ofprofit which denotes fund position

Profit with out cash generation ?

Financial needs assessed on cash flows-lenders look at the cash position of thebusiness unit

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PROFIT VS CASH

PROFIT CASH

Accounting principles No such principles

Affected by Intangibleitems

Not affected

Accrual basis Actual basis

Revenue nature Capital+revenue

Affected by inventory

valuation

No such treatment

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Cash flow vs balance sheet Cash flow

Cash position

Actual position Changes in cash

position

Shorter or longer

period Summary of inflow

and outflow

Balance sheet

Funds position

Accrual position

Changes in A/L

Normally for a year

Position on aparticular day

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Cash flow Vs Fund flow Cash flow

No such restrictions

Actual basis

For shorter period Indicates cash position

Not affected by intangible items

Fund flow

Refers to changes in WCchanges

Accrual basis Normally useful for longer

period

Indicates fund position

E.g. debentures converted in

to equity will not figure incash flow.

Includes intangible items

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Non cash transactions Depreciation

Amortization of intangible expenses

Profit or loss on sale of fixed assets

Profit or loss on revaluation of FA

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Cash flows Inflow

Cash sales

Cash from debtors

Sale of fixed assets

Interest/dividendreceived

Loans

Shares/Debentures

Out flow

Cash purchases

Operating expenses

Taxes & duties

Purchase of FA

Loans given & repaid

Int.& Dividend paid

Redemption ofPref.shares anddebentures

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What decides flow of cash ? Credit worthiness of the firm

Management policy liquidity

preference,level of inventory etc Terms of purchase and sale credit given

and taken

Nature of product- consumer goods/capital

goods etc Market conditions inflation/deflation

Relation with the banks

Efficient management of cash flow

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AS

3 Cash flow statement AS 3 defines cash flow statement cash flow

statement is a statement setting out cash

under different heads of sources andutilization to determine the requirements ofcash during the given period and to preparefor its adequate provisions

Listed companies /company with a turn overof RS 50 cr and above CF mandatory

Cash or its equivalent

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Accounting standards - 3 Cash flow

Three parts operating, investing & financing

Operating

cash flow from Principalrevenue activities

Investing Purchase & sale of assets and

raising of funds and redemption of liabilities. Financing Equity & borrowings

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OPERARTING CASH FLOW Operating flows from principal revenue

producing activities

It includes

cash sales & receipts from debtors,

Payment to suppliers of goods & employees,

Receipts from royalties fees etc,insurancepremium,payment and refund of IT .

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CF statement as per AS 3 CF from Operating activity

PBT

add

depreciation +int.paid+ forex lossless Int. received+dividend received+Forexprofit

add - decrease in CA(other than cash) &

increase in CL less incre.in CA & decre. In CLless - tax paid

add extraordinary items

Net cash from OPR. activity

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Investing cash flow Purchase and sale of fixed assets

Purchase and slae of investments

Changes in loan position

Interest income

Dividend income Net cash flow

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Financing cash flow Issue of share capital

Buy back of shares

Proceeds from long term borrowings Repayment of long term borrowings

Short term loans

Dividends paid Interest paid

Net cash flow

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Net cash flow a) Operating +

B) Investing +

C) Financing +

net increase or decrease in cash

balance cash &equivalents (opening) balance cash &equivalents ( closing)

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Cash flow

(Re in crore)

2004 2005 2006

Operating 11778 17289 10302

Investing (10563) (8162) (12131)

Financing (1137) (5742) 367

Opening

balance

147 224 3609

Net change 77 3385 (1463)

Closing balance 224 3609 2146

RELIANCE INDUSTRIES LTD

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Preparation of c/f

Direct method

accounting actual cashinflow and out flow and arriving at cashbalance.

Indirect method (AS 3)

also called netprofit method. under this method ,calculation starts from net profit aftereffecting changes in non cash transactionssuch as depreciation.

For preparing CF, Two balance sheets and aP & L a/c is required.

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Liab. 2008 2009 Asset 2008 2009

Equity cap 80,000 80,000 FA 82.000 80,000

Pref.cap - 20,000 -depre. 22,000 30,000

Reserves 4,000 4,000 60,000 50,000

P & L 2,000 2,800 Debtors 40,000 48,000

Debentures 12,000 14000 Stock 60,000 70,000

Creditors 24,000 22,000 Pre.pd.exp.

600 1000

Prov.Tax 6,000 8,000 Cash 2,400 7,000

Dividend 10,000 11,600

Bank loan 25,000 13,600

Total 1,63,000 1,76,000 163000 176000

W ki

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Working notes

Cash from operations

Profit made during the year (2800-2000) 800

Add appropriations and non cash items

Provision for taxation 8000

Proposed dividend 11600

Depreciation 8000 27600

Profit from operations 28400

Less increase in CA except cash

Debtors 48000 - 40000 8000

Stock 70000 60,0000 10000

Prepaid expenses 1000

600 400

Less decrease in CL (Bank loan)

Creditors 24000 22000 2000 20400

8000

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Cash balance as on 2008 2400

Add sources/ inflow

Cash from operation 8000

Issue of preference shares 20000

Issue ofdebentures 2000

Sale of FA 82000 80000 2000 32000

34400

Less sources/outflow

Payment of dividend 10000

Payment of tax 6000

Payment of bank loan 11400 27400

Cash balance as on 2009 7000

Cash Flow Statement

Assumption provision for tax and dividend has been paid.

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Liability 2008 2009 Asset 2008 2009

Capital 70000 70000 Fixedassets

50000 91000

Loans - 40,000 Inventory 15000 40000

Creditors 14,000 39000 Debtors 5000 20000

Tax payable 1000 3000 Cash 20000 7000

Profit 7000 10000 Prepaidexpenses

2000 4000

Total 92000 162000 92000 162000

Prepare cash flow statement

P & L / 2009

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Op.stock 15000 cl.Stock 40,000

Purchases 98000 Sales 1,00,000

GP 27000

1,40,000 1,40,000

Gen.Exp. 11,000 GP /D 27000

Depre. 8000Tax. Prov. 4000

Net profit 4000

27000 27000

Dividend 1000 Bal.b/f 7000

Profit c/o 10000 Net profit 4000

11000 11000

P & L a/c 2009

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Cash sales 85000

Sales 100000 - 15000

(debtors 20000 5000)

Less cash purchase 73000

Purchases 98000 - 25000(creators 39000 -14000)

General expenses 13000 -86000

(11000+ prepaid 4000

prepaid 2000(2008)Cash flow from operation -1000

Direct method

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Taxes a/c

Cash a/c(balancing)

2000 Balanceb/d

1000

Balancec/d

3000 Taxprovision

4000

5000 5000

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Fixed Asset a/c

Balance b/d 50000 Depreciation 8000

Cash a/c -purchase

(balancing)

49000 Balnce c/d 91000

99000 99000

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Inflow Re Outflow ReOpening balance 20,000 Loss from

operations1000

Inflow Taxes paid 2000

Loans 40,000 Dividend paid 1000

Purchase of FA 49000

53,000

Closing balance 7,000

Total 60,000 Total 60,000

Cash flow statement (Direct)

I di t th d

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A cash flow from operating

Net profit 4000

Add non cash items

Depreciation 8000

Provision for taxes 4000 12000

Funds from operations 16000

Add increase in CL 39

14 2500041000

Less increase in CA

Debtors (20000 -5000) 15000

Inventory ( 40000-15000) 25000Prepaid Exp.(4000 2000) 2000 42000

Cash flow from operations (1000)

Net tax paid

Net cash from operating(outflow)

(2000)

(3000)

Indirect method

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Cash flow investing

Purchase of FA 49000

Calse of FA -

Interest/Dividend -

Net cash flow(outflow)

(49000)

CF - - Financing

Capital -

Loans 40000

Dividends (outflow) (1000)

Net cash flow 39000Net decrease incash

(13000)

Opening cash 20000

Closing cash 7000

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Operating cash flow (3000)

Investing cash flow (49000)

Investing 39000

Opening balance 20000

Net outflow 39000 -(49000+3000) -13000

Closing balance 7000

Summary indirect method

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CF what it reveals Segment wise cash flows surplus or deficit

management Receivables and paymentperiod

Ability to fund expansion plan/acquisition ofassets

Ability to meet debt/interest/dividendobligations

Reason for differences between cash andincome generation

Need for external financing

Useful for credit analysis,bankruptcyprediction,dividend policy etc

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Thank You

For your patient hearing