Download - FM-cash flow
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Cfs
paramjit sharma
Cash
FlowsStatement
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Are cash flows
sufficient to
support ongoingoperations?
Can we meet
our obligations
to creditors?
Can we paydividends?
Why is there adifference
between net
income and net
cash flow?
Will the companyhave to borrow
money to make
needed
investments?
Purposeof CFS
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The term cash on the statement of cash flows
refers broadly to both currency
and cash equivalents.
Cash
T-bills
Money Market
Funds
Commercial
Paper
Currency andBank Accounts
Cash
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CFS attempts to analyzetransactions
generating cash and using cash
CFS provides summary of
Sources and uses of Cash
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Sources
Cash Profits
Issue of CapitalIssue of securities
Borrowings
Sale of Assets
investments
Uses
Purchase of Assets
Investments
Redemption
Loan repayment
Payment of Tax
Dividend
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FFS & CFS
Ffs based on concept of WC, cfs on Cash
Cfs considers actual movement of cash,
Ffs considers movement of WC
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IMPORTANCE AND RELEVANCE
Sebi requirement- clause 32 of listing agreement
AS-3 -Cash flow Statementwhich summarizes cash receipts, cashpayments and net cash resulting from
operating,
investing and
financing activities
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CFS
Investingactivities
Operatingactivities
Financingactivities
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Operating ActivitiesCash flows
CR from sale of goods and services
CR from fees, royalties, commission and other revenues
CP to suppliers for goods and services
CP to and on behalf of the Employees
CR & CP of an insurance enterprise for
premiums and claims
CP or refund of income tax
CR and CP for future contracts,forward contracts,
Swaps and Options
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Investing ActivitiesCash flows
CP to acuire Fixed Assets, including intangible
CR from disposal of fixed Assets including intangibles
CP to acquire shares,debt instruments of other enterprises
CR on disposal of the above
Cash advances and Loans made to third parties
CR from repayment of Loans and Advances
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Financing ActivitiesCash flows
Cash Proceeds from issue of shares
Cash Proceeds from issuing debentures, bonds..
Cash repayments of amount Borrowed
Payment of dividend
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PREPRATION OF CFS
Direct
Method
Indirect
Method
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Indirect Method Net income is
reconciled to cash flowfrom operating
activities. No supplemental
schedule is required.
Used by 99% ofcompanies.
Direct Method or Indirect Method?
Direct Method Net income is
reconstructed on a cashbasis.
Requires a supplementalreconciliation of netincome to cash flow fromoperating activities.
Used by 1% ofcompanies.
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Preparing a Simplified Statement of
Cash Flows
Cash flows are
divided into
three
categories.
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Preparing a Simplified
Statement of Cash Flows
A reconciliation
of beginning
cash to ending
cash is also
required.
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Operating Activities
Cash flow from operating Activities
N P before Tax & Extraordinary items xxxxx
Adjustment for+depreciation xxxxx
+loss on sale of fixed asset xxxx
+Foreign Exchange loss xxxx
+Interest income xxxx
-Dividend Income xxxx
-Interest received xxxx
Operationg Profit before WC changes xxxxx
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Operating Activities
Increase in Sundry Debtors xxxxx
Decrease in Inventories xxxxx
Decrease in Sundry creditors xxxxx
Cash generated from operations xxxxx
Income Tax Paid (xxxx)
Cash flow before extra ordinary items xxxxx
(+ or )extra ordinery item xxxx
Net Cash from operating Activities xxxxx
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Add: Proceeds from sale of land,buildings, equipment, or other
noncurrent assets XXX
Receipt of interest,dividend
from investments XXX
Less: Payments to acquire land,
buildings, equipment, or other
noncurrent assets (XXX)
Payments to acquire
investments (XXX)Net Cash Flows from Investment Activities XXX
Includes transactions that involve theacquisition or disposal of non current assets.
Investing Activities
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Add: Proceeds from borrowings XXXProceeds from issuing capital
stock XXX
Proceeds from sale of bonds XXX
Less: Principal payments on
borrowed funds (XXX)
Payments related to bond
maturities (XXX)
Dividend payments (XXX)
Net Cash Flows from Investment Activities XXX
Includes transactions involving receipts
from or payments to creditors and owners.
Financing Activities
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Other Cash Flow Issues
For investing
activities and
financing activities,
like-kind inflows
and outflows of
cash must be shown
separately on the
statement of cash
flows.
Example:
qXYZ sells an old
building for
Rs70,00,000 andpurchases a new
building for
Rs100,00,000.
qThe Rs70,00,000
inflow of cash and the
Rs100,00,000 outflow
of cash must be shown
separately.
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Example:
qX company acquires a
building in exchange
for 2,000 shares ofcommon stock.
qThis is reported in a
separate supplementalschedule attached to
the statement of cash
flows.
Direct exchange
transactions occur
when noncurrent
balance sheet itemsare swapped.
Such exchanges
must be disclosed.
Other Cash Flow Issues
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Interpretation of the Statement
of Cash Flows
Examine the operating activities section
carefully.Negative cash flow is usually a sign of
fundamental difficulties.
Ultimately, a positive cash flow is necessary toavoid liquidating assets or borrowing money to
pay for day-to-day activities.
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Net Cash
Flows for a
Period
Net Income
Dividends
Paid toStockholders
Changes in
NoncashAssets
Changes in
Liabilities
Changes in
Capital Stock
Preparing CFS using changes
in Non Cash B Sheet Accounts
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Preparing CFS using changes
in Non Cash B Sheet Accounts
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Example:Inventory is
purchased on credit from
a supplier.
It is implied that cash
was used to acquire the
inventory.
Increases in non cash asset accounts imply
uses of cash.
Preparing CFS using changes
in Non Cash B Sheet Accounts
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Example: Inventory is purchased on
credit from a supplier.
It is implied that an increase in a payable
has the effect of increasing cash available
for other uses.
Increases in liability accounts
imply sources of cash.
Preparing CFS using changes
in Non Cash B SheetAccounts
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Decreases in non cash assets accounts imply
sources of cash.Example: Accounts receivable
decreases when a customer
pays their bill.
When the customer pays his
bill, the companys cash
increases.
Preparing CFS using changes
in Non Cash B Sheet Accounts
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Decreases in liability accounts
imply uses of cash.
When the company makes
the payment, cash decreases.
Example: The company made a
payment on a note payable held
by a creditor.
Preparing CFS using changes
in Non Cash B Sheet Accounts