chapter 1tg

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Chapter 1 ; Introduction

-Cash flow analysis introduction- Purpose-Meaning- Definitions ( 3 or 4)

-Advantages-Disadvantages-Profoma - as table-Explanation on each heading under the profoma e.g.: operating expenses; non-operatingexpenses ; cash from investing activities..etc.-Scope of the study-Objective of the study- limitations of the study-Research methodology

- research design (explain)-Primary data(explain)

-secondary data(explain)- Chapter schemeChapter 1 -Introduction

Chapter 2 -Company profileChapter 3Data analysis and interpretationChapter 4Findings , suggestions and conclusion of the studyAnnexure: Bibliography

CHAPTER 2

-Company profileintroduction, founder , all information about the company till date.-Company highlights.-Companys cash flow statement Every item in the cash flow statement should be narrated inwords as individual paragraph. (E.g.; non operating expenses : Generally how many and whatitems are there ? ,whether it was increasing or decreasing ? etc..)

CHAPTER 3

Data analysis and interpretation- how many years data is analyzed , intro, importance of analysisTools used for data analysis:

Cash Flow Statement as at 31st

March, 2012CASH FLOW FROM OPERATING ACTIVITIES 2011-12 2010-11(` 000) (` 000)INFLOW :Premium including Service Tax 52809987 41675147Bank Guarantee/Deposit Premium Receipts 18775882 14413297Sundry Debtors Recovery 593129 149431Misc Receipts (Transfer, Duplicate, Sale of old items, 137996 40619Endorsement fees etc.)


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Cash recovery on loans & advances including interest (excepting HB Loan) 190453 414985Other Cash collection, if any 20079255 57724632Total Inflow 92586702 114418111OUTFLOW:Claims paid 30101854 19311877Commission & Brokerage paid including S.Tax 2755559 3228310

Mgt. Expenses & Advances for expenses 4528388 3226135Refund/ Excess premium payments 6935233 598450Payment of Salary and deductions (Professional Tax, Income Tax etc.) 2238546 2941123Loans and advances paid (except HBL) 369235 701506Payment of Terminal dues 436199 344235Other payments, if any 35789773 79152629Total Outflow 83154787 109504265(A) NET CASH FLOW FROM OPERATING ACTIVITIES 9431915 4913846Registration no. 58 dated 16th March, 2012

EFFP Fa=+ PFEFWoOEF - 2011-12 114115

cash flow statement

Definition

Summary of the actual or anticipated incomings and outgoings ofcash in a firm over anaccounting period (month, quarter, year). It answers the questions Where the money

came (will come) from? and Where it went (will go)? cash flow statements assess the

amount, timing, and predictability ofcash-inflows and cash-outflows, and are used as

the basis for budgeting and business-planning. The accounting data is presented usually

in three main sections: (1) Operating-activities (sales ofgoods or services), (2)

Investing-activities (sale or purchase of an asset, for example), and (3) Financing-

activities (borrowings, or sale ofcommon stock, for example). Together, these sections

show the overall (net) change in the firm's cash-flow for the period the statement isprepared. Lenders and potential investors closely examine the cash flow resulting from

the operating activities. This section represents after-tax net income plus depreciation

and amortization and, therefore, the ability of the firm to service its debt and pay

dividends. With balance sheet and income statement (profit and loss account), cash
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flow statement constitutes the critical set offinancial information required to manage a

business. Also called statement ofcash flows.

Read more:http://www.businessdictionary.com/definition/cash-flow-statement.html#ixzz2F5h5KTRt

Complementing the balance sheet and income statement, the cash flow statement (CFS), amandatory part of a company's financial reports since 1987, records the amounts of cash

and cash equivalents entering and leaving a company. The CFS allows investors to

understand how a company's operations are running, where its money is coming from, andhow it is being spent. Here you will learn how the CFS is structured and how to use it aspart of your analysis of a company.

Read more:http://www.investopedia.com/articles/04/033104.asp#ixzz2F5iBryss

The Structure of the CFSThe cash flow statement is distinct from the income statement and balance sheet because it

does not include the amount of future incoming and outgoing cash that has been recorded

on credit. Therefore, cash is not the same as net income, which, on the income statementand balance sheet, includes cash sales andsales made on credit. (For background reading,

seeAnalyze Cash Flow The Easy Way.)

Read more:http://www.investopedia.com/articles/04/033104.asp#ixzz2F5iPgaac

Operations

Measuring the cash inflows and outflows caused by core business operations, the operationscomponent of cash flow reflects how much cash is generated from a company's products or

services. Generally, changes made in cash, accounts receivable, depreciation, inventory and

accounts payable are reflected in cash from operations.

Cash flow is calculated by making certain adjustments to net income by adding or

subtracting differences in revenue, expenses and credit transactions (appearing on thebalance sheet and income statement) resulting from transactions that occur from one periodto the next. These adjustments are made because non-cash items are calculated into net

income (income statement) and total assets and liabilities (balance sheet). So, because not

all transactions involve actual cash items, many items have to be re-evaluated whencalculating cash flow from operations.

For example, depreciation is not really a cash expense; it is an amount that is deductedfrom the total value of an asset that has previously been accounted for. That is why it isadded back into net sales for calculating cash flow. The only time income from an asset is

accounted for in CFS calculations is when the asset is sold.

Changes in accounts receivable on the balance sheet from one accounting period to the next

must also be reflected in cash flow. If accounts receivable decreases, this implies that morecash has entered the company from customers paying off their credit accounts - the amount

by which AR has decreased is then added to net sales. If accounts receivable increase fromone accounting period to the next, the amount of the increase must be deducted from net

sales because, although the amounts represented in AR are revenue, they are not cash.
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An increase in inventory, on the other hand, signals that a company has spent more money

to purchase more raw materials. If the inventory was paid with cash, the increase in the

value of inventory is deducted from net sales. A decrease in inventory would be added tonet sales. If inventory was purchased on credit, an increase in accounts payable would

occur on the balance sheet, and the amount of the increase from one year to the otherwould be added to net sales.

The same logic holds true for taxes payable, salaries payable and prepaid insurance. If

something has been paid off, then the difference in the value owed from one year to thenext has to be subtracted from net income. If there is an amount that is still owed, then any

differences will have to be added to net earnings. (For mroe insight, seeOperating Cash

Flow: Better Than Net Income?)

Investing

Changes in equipment, assets or investments relate to cash from investing. Usually cashchanges from investing are a "cash out" item, because cash is used to buy new equipment,buildings or short-term assets such as marketable securities. However, when a company

divests of an asset, the transaction is considered "cash in" for calculating cash from

investing.

Financing

Changes in debt, loans or dividends are accounted for in cash from financing. Changes incash from financing are "cash in" when capital is raised, and they're "cash out" whendividends are paid. Thus, if a company issues a bond to the public, the company receives

cash financing; however, when interest is paid to bondholders, the company is reducing its

cash.

Read more:http://www.investopedia.com/articles/04/033104.asp#ixzz2F5isQa4nConclusion

A company can use a cash flow statement to predict future cash flow, which helps withmatters in budgeting. For investors, the cash flow reflects a company's financial health:basically, the more cash available for business operations, the better. However, this is not ahard and fast rule. Sometimes a negative cash flow results from a company's growth

strategy in the form of expanding its operations.

By adjusting earnings, revenues, assets and liabilities, the investor can get a very clear

picture of what some people consider the most important aspect of a company: how much

cash it generates and, particularly, how much of that cash stems from core operations.

Read more:http://www.investopedia.com/articles/04/033104.asp#ixzz2F5j3OWk9Cash flow statements and projections express a business's results or plans in terms of cash in and

out of the business, without adjusting for accrued revenues and expenses. The cash flow statement

doesn't show whether the business will be profitable, but it does show the cash position of the

business at any given point in time by measuring revenue against outlays.

The cash flow statement should be prepared on a monthly basis during the first year, on a quarterly

basis for the second year, and annually for the third year. The following 17 items are listed in the

order they need to appear on your cash flow statement:
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Cash refers to cash on hand in the business.

Cash sales are income from sales paid for by cash.

Receivables is income from the collection of money owed to the business resulting from

sales.

Other income is income from investments, interest on loans that have been extended, and

the liquidation of any assets.

Total income is the sum of total cash, cash sales, receivables and other income.

Material/merchandise is the raw material used in the manufacture of a product (for

manufacturing operations only), the cash outlay for merchandise inventory (for

merchandisers such as wholesalers and retailers), or the supplies used in the performance

of a service.

Direct labor is the labor required to manufacture a product (for manufacturing operations

only) or to perform a service.

Overhead is all fixed and variable expenses required for the operations of the business.

Marketing/sales is all salaries, commissions and other direct costs associated with the

marketing and sales departments.

R&D is labor expenses required to support the research and development operations of the

business.

G&A is labor expenses required to support the general and administrative functions of the

business.

Taxes are all taxes, except payroll, paid to the appropriate government institutions.

Capital represents the capital requirements to obtain any equipment needed to generate

income.

Loan payments are the total of all payments made to reduce any long-term debts.

Total expenses are the sum of material, direct labor, overhead expenses, marketing, sales,

R&D, G&A, taxes, capital and loan payments.

Cash flow is the difference between total income and total expenses. This amount is carried

over to the next period as beginning cash.

Cumulative cash flow is the difference between current cash flow and cash flow from the

previous period.


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A cash flow statement is the financial statement that measures thecashgenerated or used by a

company in a given period.

How It Works/Example:

A cash flow statementtypically breaks out a company'scashsources and uses for the period intothree categories: cash flow from operating activities, cash flow from investing activities, and cash

flow from financing activities. It is important tonotethatcash flowis not the same asnet income,

which includes transactions that did not involve actual transfers ofmoney(depreciationis common

example of a noncash expense that is included in net income calculations but not in cash flow

calculations).

Cash flow from operating activitiesare generally calculated according to the following formula:

Cash Flows from Operations = Net income + Noncash Expenses + Changes inWorking

Capital

Because working capital is a component of cash flow from operations, investors should be awarethat companies can influence cash flow by lengthening the time they take to pay the bills (thus

preserving their cash), shortening the time it takes to collect whats owed to them (thus accelerating

the receipt of cash), and putting off buyinginventory(again thus preserving cash).

Cash flow from investing activitiesprimarily reflect the company's purchases or sales of capital

assets (that is, assets with a useful life of more than one year that appear on the balance sheet). It is

important to note that companies have some leeway about what items are or are not considered

capital expenditures, and the investor should be aware of this when comparing the cash flow of

different companies.

Cash flow from financing activitiestypically reflect the company's purchase or sale of stock and any

proceeds from or payments on debt financing. The measure varies with the differentcapitalstructures,dividendpolicies, or debt terms companies may have.

What Is the Meaning and Objectives of Cash Flow

Statements?

Jump to:navigation , search

Original post by Erika Johansen of Demand Media

Cash flow refers to the amount of cash moving in or out of a business. A cash flow statement, also known as

the statement of cash flows, describes the cash flow during a given period covered by the statement. The

cash flow statement is one of several core financial documents in any business enterprise.
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Contents

1Purpose of Statement

2Definition of Cash

3Statement Contents

4Statement Uses

4.1Resources

4.2References

4.3About the Author

Purpose of Statement

A cash flow statement is designed to give a more complete financial picture of a company. Rather than

analyzing long-term financial prospects, as some other financial documents do, a cash flow statement focuses

on a company's access to liquid assets in the short term. Essentially, a cash flow statement shows how much

real money a company has.

Definition of Cash

A statement of cash flow doesn't necessarily only include cash. Certain business assets that operate in much

the same manner as cash may be included as well. For instance, a cash flow statement may include bank

deposits that the business has the right to demand immediately. It may also include any assets that are

sufficiently liquid and anticipate minimal changes in value, such that a cash value can be placed on those

instruments. The statement can also include expected or realized returns on investments.

Statement Contents

The typical cash flow statement includes three basic areas: operating activities, investing activities and

financing activities. The operating activities section describes the amount of incoming and outgoing cash

from everyday business operations. The investing activities section includes the incoming cash from the sale
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of assets, as well as the outgoing cash used to invest in the same types of assets. The financing activities

section describes cash received or distributed from lending and borrowing activities. Depending on the cash

flow statement, the company may include dividends paid in either the operating or financing activities

section. The names of these sections may vary, but the division into three parts is fairly standard for every

cash flow statement. A fourth section may also describe miscellaneous pertinent information, such as

exchange of other non-cash assets or payment of income taxes.

Statement Uses

The financial health of a company may appear to be optimistic in the long term, but this doesn't necessarily

guarantee that the company has sufficient assets to remain solvent in the short term. A cash flow statement

can show whether a company has sufficient immediate assets to pay its bills, or pay dividends to

shareholders. The statement may be used not only to assess a company's current cash held, but that

company's prospects of cash holdings in the future.

Definition of

cash flow statementAccounting

account of cash transactionsa record of a company's cash inflows and cash outflows over a specific period of time, typically

a year.

It reports funds on hand at the beginning of the period, funds received, funds spent, and funds remaining at the end of the

period. Cash flows are divided into three categories: cash from operations; cash investment activities; and cash-financing

activities. Companies with holdings in foreign currencies use a fourth classification: effects of changes in currency rates on

cash

cash flow statementForm 10-K

cash flows from investing activities

DefinitionA summary of a company's cash flow over a given period of time.
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cash flows from investing activitiescash flows from operating activities

cash flows from financing activities

DefinitionAn accounting offunds related to the company's investments, reported on the cash flow statement of a

company's annual report. This number shows how much money the company has received (or lost) from its

investing activities. It includes money that the company has made (or lost) by investing its excess cash in

different investments (stocks, bonds, etc), money the company has made (or lost) from buying or selling

subsidiaries, and all the money the company has spent on its physical property, such as plants and

equipment.

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8zm

cash flows from financing activitiescash flows from operating activities

cash flows from investing activities

DefinitionAn accounting offunds related to the financing of the company which is reported on the cash flow statement

of a company's annual report. This is where the company reports the money that it took in and paid out in

order to finance its activities. In other words, it calculates how much money the company spent or received

from its stocks and bonds. This includes any dividend payments that the company made to its shareholders,

any money that it made by selling new shares of stock to the public, any money it spent buying back shares of

its stock from the public, any money it borrowed, and any money it used to repay money it had previously

borrowed.

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GP
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Definition of 'Cash Flow Statement'One of the quarterly financial reports any publicly traded company is required to disclose to

the SEC and the public. The document provides aggregate data regarding all cash inflows acompany receives from both its ongoing operations and external investment sources, aswell as all cash outflows that pay for business activities and investments during a given

quarter.

Read more:http://www.investopedia.com/terms/c/cashflowstatement.asp#ixzz2F5t8SJIPThe Statement of Cash Flows

Cash flow statements have three distinct sections, each of which relates to a particularcomponent - operations, investing and financing - of a company's business activities. For

the less-experienced investor, making sense of a statement of cash flows is made easier bythe use of literally-descriptive account captions and the standardization of the terminologyand presentation formats used by all companies:

Read more:http://www.investopedia.com/articles/stocks/07/easycashflow.asp#ixzz2F5thBHEv

Cash Flow from OperationsThis is the key source of a company's cash generation. It is the cash that the companyproduces internally as opposed to funds coming from outside investing and financing

activities. In this section of the cash flow statement, net income (income statement) is

adjusted for non-cash charges and the increases and decreases to working capital items -operating assets and liabilities in the balance sheet's current position.

Cash Flow from InvestingFor the most part, investing transactions generate cash outflows, such as capital

expenditures for plant, property and equipment, business acquisitions and the purchase ofinvestment securities. Inflows come from the sale of assets, businesses and investment

securities. For investors, the most important item in this category is capital expenditures(more on this later). It's generally assumed that this use of cash is a prime necessity forensuring the proper maintenance of, and additions to, a company's physical assets to

support its efficient operation and competitiveness.

Cash Flow from Financing

Debt and equity transactions dominate this category. Companies continuously borrow and

repay debt. The issuance of stock is much less frequent. Here again, for investors,particularly income investors, the most important item is cash dividends paid. It's cash, not

profits, that is used to pay dividends to shareholders.

A Simplified Approach to Cash Flow AnalysisA company's cash flow can be defined as the number that appears in the cash flow

statement as net cash provided by operating activities, or "net operating cash flow," or

some version of this caption. However, there is no universally accepted definition. Forinstance, many financial professionals consider a company's cash flow to be the sum of its

net income and depreciation (a non-cash charge in the income statement). While oftencoming close to net operating cash flow, this professional's shortcut can be way off the mark

and investors should stick with the net operating cash flow number.
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While cash flow analysis can include several ratios, the following indicators provide a

starting point for an investor to measure the investment quality of a company's cash flow:

Operating Cash Flow/Net Sales

This ratio, which is expressed as a percentage of a company's net operating cash flow to itsnet sales, or revenue (from the income statement), tells us how many dollars of cash we

get for every dollar of sales.

There is no exact percentage to look for but obviously, the higher the percentage the better.It should also be noted that industry and company ratios will vary widely. Investors should

track this indicator's performance historically to detect significant variances from the

company's average cash flow/sales relationship along with how the company's ratiocompares to its peers. Also, keep an eye on how cash flow increases as sales increase; it is

important that they move at a similar rate over time.

History of Free Cash FlowFree cash flow is often defined as net operating cash flow minus capital expenditures, which,

as mentioned previously, are considered obligatory. A steady, consistent generation of free

cash flow is a highly favorable investment quality - so make sure to look for a company that

shows steady and growing free cash flow numbers.

For the sake of conservatism, you can go one step further by expanding what is included inthe free cash flow number. For example, in addition to capital expenditures, you could alsoinclude dividends for the amount to be subtracted from net operating cash flow to get to get

a more comprehensive sense of free cash flow. This could then be compared to sales as was

shown above.

As a practical matter, if a company has a history of dividend payments, it cannot easily

suspend or eliminate them without causing shareholders some real pain. Even dividendpayout reductions, while less injurious, are problematic for many shareholders. In general,the market considers dividend payments to be in the same category as capital expenditures

- as necessary cash outlays.

But the important thing here is looking for stable levels. This shows not only the company's

ability to generate cash flow but it also signals that the company should be able to continuefunding its operations.

Read more:

http://www.investopedia.com/articles/stocks/07/easycashflow.asp#ixzz2F5u9OW9b

In financial accounting, a cash flow statement, also known asstatement of cash flows,[1]

is afinancial statement that shows how changes in balance sheet accounts and income affect cashand cash equivalents, and breaks the analysis down to operating, investing, and financingactivities. Essentially, the cash flow statement is concerned with the flow of cash in and out ofthe business. The statement captures both the current operating results and the accompanyingchanges in the balance sheet.

[1]As an analytical tool, the statement of cash flows is useful in

determining the short-term viability of a company, particularly its ability to pay bills.International Accounting Standard 7 (IAS 7), is the International Accounting Standard that dealswith cash flow statements.
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People and groups interested in cash flow statements include:

Accounting personnel, who need to know whether the organization will be able to cover

payroll and other immediate expenses

Potential lenders or creditors, who want a clear picture of a company's ability to repay

Potential investors, who need to judge whether the company is financially sound

Potential employees or contractors, who need to know whether the company will be

able to afford compensation

Shareholders of the business.

Purpose

Statement of Cash Flow - Simple Example

for the period 01/01/2006 to 12/31/2006

Cash flow from operations $4,000

Cash flow from investing ($1,000)

Cash flow from financing ($2,000)

Net cash flow $1,000

Parentheses indicate negative values

The cash flow statement was previously known as the flow of Cash statement.[2]

The cash flow

statement reflects a firm's liquidity.

The balance sheet is a snapshot of a firm's financial resources and obligations at a single point intime, and the income statement summarizes a firm's financial transactions over an interval oftime. These two financial statements reflect the accrual basis accounting used by firms to matchrevenues with the expenses associated with generating those revenues. The cash flow statementincludes only inflows and outflows of cash and cash equivalents; it excludes transactions that donot directly affect cash receipts and payments. These non-cash transactions include depreciationor write-offs on bad debts or credit losses to name a few.[3]The cash flow statement is a cashbasis report on three types of financial activities: operating activities, investing activities, andfinancing activities. Non-cash activities are usually reported in footnotes.

The cash flow statement is intended to[4]

provide information on a firm's liquidity and solvency and its ability to change cash flows

in future circumstances

provide additional information for evaluating changes in assets, liabilities and equity
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improve the comparability of different firms' operating performance by eliminating the

effects of different accounting methods

indicate the amount, timing and probability of future cash flows

The cash flow statement has been adopted as a standard financial statement because it eliminates

allocations, which might be derived from different accounting methods, such as varioustimeframes for depreciating fixed assets.[5]

[edit] History and variationsCash basis financial statements were very common before accrual basis financial statements. The"flow of funds" statements of the past were cash flow statements.

In 1863, the Dowlais Iron Company had recovered from a business slump, but had no cash toinvest for a new blast furnace, despite having made a profit. To explain why there were no fundsto invest, the manager made a new financial statement that was called a comparison balance

sheet, which showed that the company was holding too much inventory. This new financialstatement was the genesis of Cash Flow Statement that is used today.[6]

In the United States in 1971, the Financial Accounting Standards Board (FASB) defined rulesthat made it mandatory under Generally Accepted Accounting Principles (US GAAP) to reportsources and uses of funds, but the definition of "funds" was not clear."Net working capital"might be cash or might be the difference between current assets and current liabilities. From thelate 1970 to the mid-1980s, the FASB discussed the usefulness of predicting future cash flows.

[7]

In 1987, FASB Statement No. 95 (FAS 95) mandated that firms provide cash flow statements.[8]In 1992, the International Accounting Standards Board issued International Accounting Standard7 (IAS 7), Cash Flow Statement, which became effective in 1994, mandating that firms provide

cash flow statements.[9]

US GAAP and IAS 7 rules for cash flow statements are similar, but some of the differences are:

IAS 7 requires that the cash flow statement include changes in both cash and cash

equivalents. US GAAP permits using cash alone or cash and cash equivalents.[5]

IAS 7 permits bank borrowings (overdraft) in certain countries to be included in cash

equivalents rather than being considered a part of financing activities.[10]

IAS 7 allows interest paid to be included in operating activities or financing activities. US

GAAP requires that interest paid be included in operating activities.[11]

US GAAP (FAS 95) requires that when the direct method is used to present the operating

activities of the cash flow statement, a supplemental schedule must also present a cash

flow statement using the indirect method. The IASC strongly recommends the direct

method but allows either method. The IASC considers the indirect method less clear to

users of financial statements. Cash flow statements are most commonly prepared using

the indirect method, which is not especially useful in projecting future cash flows.
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[edit] Cash flow activitiesThe cash flow statement is partitioned into three segments, namely: 1) cash flow resulting fromoperating activities; 2) cash flow resulting from investing activities;and 3) cash flow resultingfrom financing activities.

The money coming into the business is called cash inflow, and money going out from thebusiness is called cash outflow.

[edit] Operating activitiesOperating activities include the production, sales and delivery of the company's product as wellas collecting payment from its customers. This could include purchasing raw materials, buildinginventory, advertising, and shipping the product.

Under IAS 7, operating cash flows include:[11]

Receipts from the sale of goods or services

Receipts for the sale of loans, debt or equity instruments in a trading portfolio

Interest received on loans

Payments to suppliers for goods and services.

Payments to employees or on behalf of employees

Interest payments (alternatively, this can be reported under financing activities in IAS 7,

and US GAAP)

buying Merchandise

Items which are added back to [or subtracted from, as appropriate] the net income figure (whichis found on the Income Statement) to arrive at cash flows from operations generally include:

Depreciation (loss of tangible asset value over time)

Deferred tax

Amortization (loss of intangible asset value over time)

Any gains or losses associated with the sale of a non-current asset, because associated

cash flows do not belong in the operating section.(unrealized gains/losses are also

added back from the income statement)

[edit] Investing activitiesExamples of Investing activities are

Purchase or Sale of an asset (assets can be land, building, equipment, marketable

securities, etc.)

Loans made to suppliers or received from customers
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Payments related to mergers and acquisitions.

Dividends Received.

[edit] Financing activitiesFinancing activities include the inflow of cash from investors such as banks and shareholders, as

well as the outflow of cash to shareholders as dividends as the company generates income. Otheractivities which impact the long-term liabilities and equity of the company are also listed in thefinancing activities section of the cash flow statement.

Under IAS 7,

Proceeds from issuing short-term or long-term debt

Payments of dividends

Payments for repurchase of company shares

Repayment of debt principal, including capital leases For non-profit organizations, receipts of donor-restricted cash that is limited to long-

term purposes

Items under the financing activities section include:

Dividends paid

Sale or repurchase of the company's stock

Net borrowings

Payment of dividend tax

[edit] Disclosure of non-cash activitiesUnder IAS 7, non-cash investing and financing activities are disclosed in footnotes to thefinancial statements. Under US General Accepted Accounting Principles (GAAP), non-cashactivities may be disclosed in a footnote or within the cash flow statement itself. Non-cashfinancing activities may include[11]

Leasing to purchase an asset

Converting debt to equity

Exchanging non-cash assets or liabilities for other non-cash assets or liabilities

Issuing shares in exchange for assets

[edit] Preparation methodsThe direct method of preparing a cash flow statement results in a more easily understoodreport.[12]The indirect method is almost universally used, because FAS 95 requires asupplementary report similar to the indirect method if a company chooses to use the directmethod.
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[edit] Direct methodThe direct method for creating a cash flow statement reports major classes of gross cash receiptsand payments. Under IAS 7, dividends received may be reported under operating activities orunder investing activities. If taxes paid are directly linked to operating activities, they arereported under operating activities; if the taxes are directly linked to investing activities or

financing activities, they are reported under investing or financing activities. Generally AcceptedAccounting Principles (GAAP) vary from International Financial Reporting Standards in thatunder GAAP rules, dividends received from a company's investing activities is reported as an"operating activity," not an "investing activity."

[13]

Indirect methodThe indirect method uses net-income as a starting point, makes adjustments for all transactionsfor non-cash items, then adjusts from all cash-based transactions. An increase in an asset accountis subtracted from net income, and an increase in a liability account is added back to net income.This method converts accrual-basis net income (or loss) into cash flow by using a series ofadditions and deductions.

[15]

[edit]Rules (operating activities)

To Find Cash Flows

from Operating Activities

using the Balance Sheet and Net Income

For Increases in Net Inc Adj

Current Assets (Non-Cash) Decrease

Current Liabilities Increase

For All Non-Cash...

*Expenses (Decreases in Fixed Assets) Increase

*Non-cash expenses must be added back to NI. Such expenses may be represented onthe balance sheet as decreases in long term asset accounts. Thus decreases in fixed

assets increase NI.

The following rules can be followed to calculate Cash Flows from Operating Activities whengiven only a two year comparative balance sheet and the Net Income figure. Cash Flows fromOperating Activities can be found by adjusting Net Income relative to the change in beginningand ending balances of Current Assets, Current Liabilities, and sometimes Long Term Assets.When comparing the change in long term assets over a year, the accountant must be certain thatthese changes were caused entirely by their devaluation rather than purchases or sales (i.e. theymust be operating items not providing or using cash) or if they are nonoperating items.[16]

Decrease in non-cash current assets are added to net income

Increase in non-cash current asset are subtracted from net income

Increase in current liabilities are added to net income

Decrease in current liabilities are subtracted from net income
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Expenses with no cash outflows are added back to net income (depreciation and/or

amortization expense are the only operating items that have no effect on cash flows in

the period)

Revenues with no cash inflows are subtracted from net income

Non operating losses are added back to net income Non operating gains are subtracted from net income

The intricacies of this procedure might be seen as,

For example, consider a company that has a net income of $100 this year, and its A/R increasedby $25 since the beginning of the year. If the balances of all other current assets, long term assetsand current liabilities did not change over the year, the cash flows could be determined by the

rules above as $100$25 = Cash Flows from Operating Activities = $75. The logic is that, if thecompany made $100 that year (net income), and they are using the accrual accounting system(not cash based) then any income they generated that year which has not yet been paid for incash should be subtracted from the net income figure in order to find cash flows from operatingactivities. And the increase in A/R meant that $25 of sales occurred on credit and have not yetbeen paid for in cash.

In the case of finding Cash Flows when there is a change in a fixed asset account, say theBuildings and Equipment account decreases, the change is added back to Net Income. Thereasoning behind this is that because Net Income is calculated by, Net Income = Rev - Cogs -Depreciation Exp - Other Exp then the Net Income figure will be decreased by the building's

depreciation that year. This depreciation is not associated with an exchange of cash, therefore thedepreciation is added back into net income to remove the non-cash activity.

[edit]Rules (financing activities)Finding the Cash Flows from Financing Activities is much more intuitive and needs littleexplanation. Generally, the things to account for are financing activities:

Include as outflows, reductions of long term notes payable (as would represent the cash

repayment of debt on the balance sheet)

Or as inflows, the issuance of new notes payable

Include as outflows, all dividends paid by the entity to outside parties

Or as inflows, dividend payments received from outside parties

Include as outflows, the purchase of notes stocks or bonds

Or as inflows, the receipt of payments on such financing vehicles.[citation needed]

Cash Flow Statement
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What Does Cash Flow StatementMean?

One of the quarterly financial reports a publicly traded company is required to disclose to theSEC and the public. It provides aggregate data regarding all cash inflows a company receivesfrom both its ongoing operations and its external investment sources as well as all cash outflowsthat pay for business activities and investments during a specified quarter.

Investopedia explains Cash Flow Statement

Because public companies tend to use accrual accounting, the income statements they releaseeach quarter may not necessarily reflect changes in their cash positions. For example, if acompany lands a major contract, that contract will be recognized as revenue (and thereforeincome), but the company may not yet receive the cash from the contract until a later date.Although the company may be earning a profit in the eyes of accountants (and paying incometaxes on it), the company may, during the quarter, end up with less cash than it had when itstarted. Even profitable companies can manage their cash flow inadequately. That is why thecash flow statement is important: It helps investors see if a company is having cash troubles.

Read more:What is CASH FLOW STATEMENT? definition of CASH FLOW STATEMENT (Black's

Law Dictionary)

Many business owners disregard the importance of cash flow statements because they unwittingly

believe that their current financial standing can be construed from other financial reports and

projections. Unfortunately, however, a cash flow statement is necessary to adequately assess the

incoming and outgoing flow of cash and other resources in a business.

Not only will a business owner with a cash flow system be more aware of his or her financial

standing, but it will also help investors to make educated decisions on future investments. A business

with regular and reliable cash flow statements shows more economic solvency, and is more attractive

to investors.

A cash flow statement documents the incoming and outgoing cash in plain terms. Future sales and

sales made for credit (unless they have been paid off) are not included in the cash flow statement,

and most of the data will come from core operations. Payables and receivables should be expressly

defined, as should depreciation of product value and inventory that has not yet been moved.

This will allow a business owner to compare past periods with the current financial standing and

determine whether your receivables have increased or decreased.
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This can also help to track your investments next to your receivables and payables. Are your

investments increasing or decreasing in value? And has your inventory moved at a steady pace? New

or expanding businesses can expect to see a decrease in cash flow, but this doesn't mean that the

business is going under. More stables businesses should see a steadily increase in cash flow over a

period of several months or years.

There are typically five different sections in a cash flow statement, though large businesses might

have more complex cash flow systems as required.

1. Beginning Cash Balance - This is the amount of cash that the business has in its possession

prior to the start of a cash flow statement period. Owed balances should not be considered here.

2. Projected Cash Sources - This includes any sources of income that will play a part in your cash

flow, such as investments and royalties.

3. Projected Cash Uses - This is the amount of cash that the business expects to pay out over the

cash flow period, including all costs of operation.

4. Projected Net Change - This is the Projected Cash Uses subtracted from the Beginning Cash

Balance, which will give you the net change. (This number may be negative, in which case it should

be indicated as a deficit).

5. Ending Cash Balance - This is the Projected Net Change added to the Beginning Cash Balance.

You can create a cash flow system for your statements using a normal spreadsheet software such as

Microsoft Excel. However, larger businesses may require a sophisticated cash flow statement

software that can adequately manage the amount of data inputted every month. Microsoft Dynamics

has several financial software options, as does Centage.

The cash flow statement provides information regarding inflows and outflows of

cash of a firm for a period of one year. Therefore cash flow statement is

important on the following grounds.

1.Cash flow statement helps to identify the sources from where cash inflows

have arisen within a particular period and also shows the various activities where
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in the cash was utilized.

2. Cash flow statement is significant to management for proper cash planning

and maintaining a proper matching between cash inflows and outflows.

3. Cash flow statement shows efficiency of a firm in generating cash inflows from

its regular operations.

4.Cash flow statement reports the amount of cash used during the period in

various long-term investing activities, such as purchase of fixed assets.

5. Cash flow statement reports the amount of cash received during the period

through various financing activities, such as issue of shares, debentures and

raising long-term loan.

6. Cash flow statement helps for appraisal of various capital investment

programmes to determine their profitability and viability.

V

Importance

Paradoxically a situation arises when profits are reported but negative cash flows areexperienced by the business entities. Therefore, it is of the essence that the changes incash position be depicted; to know the cash concepts that the statement of cash flows isbased upon; to get the information about the cash receipts and the cash payments during aperiod. Also, it is necessary to assess the ability of a business entity to generate cash sothat it can be used as and when it is needed. Moreover, it is required to assess the liquidityand solvency position of a business. Thus, the preparation of cash flow statement is verymuch useful to management. It is one of the three main financial statements (BalanceSheet, Income Statement and the cash flow statement).


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The cash flow statement is an important tool as it explains the changes in cash and givesthe information related to the business operating, investing and financing activities in a wayto bring advantage to short term analysis and cash planning of the business.

The basic objective of cash flow statement is to provide the information to the managementabout the cash receipts and the cash payments of an organization and it is used in efficient

cash management as well. Since one of the important functions of a financial manager iscash management and to ensure if adequate cash is available to meet the liabilities, it isowing to the cash flow statement that the related information is derived. Cash flowstatement is useful to plan financial operations in an efficient manner.

Cash flows are inflows and outflows of cash and cash equivalents. The cash activities areclassified into three main categories of cash inflows and cash outflows. The tree categoriesare:-

1- Operating activities2- Investing Activities3- Financing Activities

Operating Activities:- They are revenue generating activities of the business entity. Theyinclude cash effects of transactions by which Net profit or loss is determined.

For example; a few of the operating activities are mentioned below:Cash receipts from the sale of goods and providing services.Cash receipts from commissions, fees or other revenuesCash payment to suppliers for goods and servicesCash payments to employeesDividends received

Investing Activities:- Investing activities are those that involve the acquisition and sellingfixed assets.(Land, building and equipments) not held for resale. Below mentioned are fewof investing activities:-

Cash payments to acquire fixed assets.Cash receipts from the disposal of fixed assetsAcquiring and disposal of stock from third parties.Making and collecting loans to third parties

Financing Activities:- These activities are the activities by which the size and thecomposition of owners capital is changed. They are as follows:-Cash proceeds from issuing sharesCash proceeds from the issuance of debt, loans and short term borrowing.Treasury stock transactionsPayments of dividends.

Brief overview on the preparation of Statement of Cash flows:

Cash flow statement can be prepared by two methods, direct and indirect method. Bothmethods are acceptable under US GAAP. Both methods provide the same results inasmuchas the direct method differs from the other in the presentation of operating activities. Inorder to prepare the statement of cash flows, balance sheet at the beginning and at the endof the period are needed as the changes related to assets, liabilities and capital can bedetermined. The income statement of the current year is used to provide the informationabout the operations by making the adjustments to the non-cash items. Besides, additionaldata is collected to know how cash has been used. The statement of cash flow is a better


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tool of analysis as cash is more important than working capital and the cash flow statementprovides the information about generating cash. It is through the statement of cash flowsthat the health and efficiency of a business entity is determined while it enables to assessthe liquidity and solvency position of a business.

For those of you who either dont know what a cash flow statement is or dont think its very

important here are some reasons you might want to reconsider your position on this topic:

A cash flow statement can tell you if youre running out of money while youre profitable.

Yes, profits are incredibly important if youre a small business, but cash is even moreimportant. Its possible that fast growing businesses can be profitable, and at the same time runout of cash. A cash flow statement can tell you if this is happening.

A cash flow statement can tell you if the owner is taking too much money out of the

business.

Many small businesses are pass through organizations and are taxed as Subchapter SCorporations. Owners of these companies will often take money out in the form ofdistributions. Distributions dont show up on a profit and loss statement but do show up on acash flow statement.

You will see the results of building inventory, letting receivables grow or paying suppliers

more quickly.

Changes in any of the three areas above wont show up in your profit and loss statement. Theywill appear in your balance sheet, but you have to understand how to interpret the changes. In acash flow statement they are easy to spot and that helps you understand whats happening to your

cash.

Capital purchases show up as an expense.

Your profit and loss statement wont show you if youre buying too much equipment. Your cashflow statement will. If you need equipment, you can see how that equipment should be financed.

Youll see what your bank loan payments are doing to your cash.

As with equipment purchases, payments to your bank for principal dont show up on your profitand loss statement.

These changes in your cash position often mean your business will run out of money if notmanaged properly. They have nothing to do with your profit and loss statement but they have ahuge effect on the cash in your business. And, there is a major rule of business; if you run out ofmoney you dont get to play the game anymore.

CASH - FLOW STATEMENT

Limitations of Cash Flow Statement


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Despite a number of uses, Cash Flow Statement suffers from the following limitations:

(1) Ignore Accounting Concept of Accrual Basis: As CFS is based on cash basis of accounting, it ignores

the basic accounting concept of accrual basis.

(2) Ignores Non-cash Transactions: CFS ignores the non-cash transactions. In other words, it does not

consider those transactions which do not affect the cash e.g., issue of shares against the purchase of

fixed assets, conversion of debentures into equity shares, etc.

(3) Not Suitable for Judging the profitability: CFS is not suitable for judging the profitability of a firm as

non-cash charges are ignored while calculating cash flows from operating activities.

(4) Based on Secondary Data: CFS is based on secondary data. It merely rearranges the primary data

already appearing in other statements i.e., Balance Sheet and Income Statement.

(5) Short-term analysis: CFS is a technique of short-term financial analysis. It do

chapter 1tg

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