Presentation on Statement of Cash Flows

What is Cash flow statement?Statement showing inflow/outflow of Cash during

the accounting period from different activities.

Meaning of Cash Cash means Cash and cash equivalents, which

includes cash in highly liquid assets which can be readily sold at current market prices and short term investments (e.g., money market funds and treasury bills)

How is it different from cash/Checkbook register?In cash register, Cash transactions are

recorded when the amount is paid or received. And it doesn’t differentiate the cash transactions into different activities.

Cash flow statement is normally prepared at the end of the year and it divides the sources and uses of cash into major three categories i.e., operating activities, investing activities, and financing activities.

Purpose & use of Cash flow statementProvide information about the cash flows

associated with the period’s operations.To know entity’s investing and financing activities

during the period.To know entity’s ability to generate future cash

flows.To know entity’s ability to pay dividend and

obligations.To know the reasons for difference between Net

Profit and operating cash profit.

Major sources and uses of cashSources

OperationsNew borrowings New stock issuesSale of property,

plant, and equipment

Sale of other non-current assets

UsesCash dividendsRepayment of

borrowingsRepurchase of stockPurchase of

property, plant and equipment

Purchase of other non-current assets

How is it different from cash/Checkbook register?In cash register, Cash transactions are

recorded when the amount is paid or received. And it doesn’t differentiate the cash transactions into different activities.

Cash flow statement is normally prepared at the end of the year and it divides the sources and uses of cash into major three categories i.e., operating activities, investing activities, and financing activities.

Operating activitiesAll transactions that are not investing and

financing activities.Transactions associated with ordinary

/principal /core / main activity of a business.E.g., 1. Manufacturing business – manufacturing and selling of goods2. Retail business – Buying and re-selling of goods3. Service sector – selling and providing services

Investing activitiesCash Inflows associated with -

disposing of long-lived assets, and collecting loans.

Interest/dividend received on Investments.

Cash Outflows associated with acquiring long-lived assets such as property, plant, equipment, and investment in securities that are not cash equivalents; and lending money (i.e., loans receivable).

Financing activitiesInclude the cash In/outflows associated with-Borrowing of cash (Debentures, Bank loans

etc.)Repayments of borrowingsIssuance of equity shares and preference

shares, redemption of preference shares and Buy-back of equity shares.

Payment of dividend to equity and preference share holders.

Direct method and Indirect method for operating cash flows

Direct methodOperating Cash Inflows

and outflows are recorded to arrive at Net cash flow from operations.

It doesn’t explain the difference between - year’s net profit and operating cash flow.

Not allowed as per Accounting Standard - 3.

Indirect methodStart with the net income

amount and adjust for differences between Revenues (or gain) and operating cash inflows

Accordingly the adjustment is given for difference between operating cash outflows and expenses (or losses).

Interest incomes, profit /loss on sale of Investment are also adjusted (as it doesn’t belong to op. activity)

Direct method of operating cash flows

Under this method, following cash inflows and outflows are compared to get operating cash profit. Cash inflows associated with -

- sales revenues and other servicesCash outflows associated with -

- operating expenses - payment to suppliers of goods and services

- payment to workers, employees, and tax authority

- payment to suppliers for other operating expenses.

Indirect Method for operating cash flowsNet profit and cash from operations can never be similar -Because we follow following concepts to prepare Income statement.1) Realisation concept:

Revenues recognised when the amount for sale of goods and services (cash or credit)is “reasonably certain”. [nothing to do with cash receipts]

2) Matching concept:a) Direct matching (for exps. which can be directly associated with

the revenue): Expenses incurred are recognised when matches with the revenue of a period. E.g., cost of goods manufactured with sales.

b) Period costs (for exps. which can be associated to a period but can not be matched/traced to any revenue): Expenses charged if it belongs to a accounting period. E.g., salary of salesperson. [nothing do with cash payments]

contd…

Contd…

Under indirect method -Starting point would be Net Profit of a period and the

adjustments for non-cash expenses and non- operating transactions is given to get the cash from operations.

In the same manner, Working capital adjustments (by comparing the closing balance with opening balance of W.C.) would also be given to eliminate the effect of receivables, payables and other transactions from net profit.

E.g., to convert the credit sales amount into cash collected from customers, receivables account closing and opening balance would be compared.

Cash flow statement format as per AS-3 ( Indirect method) Cash flow from operations

Net Profit xxxAdd: Non-cash Expenses xxx (e.g., depreciation)Add: Non-operating expenses xxx (e.g., loss on sale of invt.)Less: Non-operating incomes xxx (e.g., profit on sale of invt.)Cash profit before W.C. adjustment XXXXAdd: Increase in current liabilities xxAdd: Decrease in current assets xxLess: Increase in current assets xxLess: Decrease in current liabilities xx

XXXLess: Income tax paid xNet Cash In/out Flow from operations (A) XXXX

contd…

Contd…

Cash flow from Investing activitiesProceeds from disposal of fixed assets xxx

Add: Proceeds from sale of Investments xxxAdd: Interest/dividend income on Investments xxxLess: Purchase of Investments xxxLess: Acquisition of fixed assets xxxNet cash in/out flow from Investing activities (B) xxxx

Cash flow from financing activitiesProceeds from borrowings (short-term and long-term) xxx

Add: Proceeds from Issue of shares (Eq. and Pref.) xxxLess: Repayment of borrowings (short-term and long-term) xxxLess: Dividend paid xxxNet cash in/out flow from financing activities (C) xxxxNet change in cash and equivalent (A+B+C) XXXXAdd: Opening balance of cash and cash equivalent xx

Closing balance of cash and cash equivalent XXX

Thank You