fm-cash flow

8/14/2019 FM-cash flow

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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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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.




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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.


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.




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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.



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