9. cash flow statement
TRANSCRIPT
-
8/19/2019 9. Cash Flow Statement
1/18
Cash Flow Statement
-
8/19/2019 9. Cash Flow Statement
2/18
Purposes of Cash Flow Statement
1.
Predict future cash flows
Evaluate management decisions
Determine the ability to pay dividends to stockholders’and payments to creditors
Show the relationship of net income to the business’scash flows
-
8/19/2019 9. Cash Flow Statement
3/18
Cash Flow Statement
A Cash-Flow statement defined as a summary of receipts and
disbursements of cash for a particular period of time. It also explainsreasons for the changes in cash position of the firm between two dates ofBalance Sheets.
The term cash as used in the statement of cash flows refers to both cashand cash equivalents.
Cash means, cash in hand and demand deposits with the bank.
Cash equivalent are short-term, highly liquid investments, readilyconvertible into cash and which are subject to insignificant risk ofchanges in values, consists of bank overdraft, cash credit, short term
deposits and marketable securities.
Cash flow statement provides relevant information in assessing acompany's liquidity, quality of earnings and solvency.
It is very useful in the evaluation of cash position of a firm.
-
8/19/2019 9. Cash Flow Statement
4/18
Cash Flow Statement
Cash flows are both cash inflows and outflows of Cash and
Cash equivalents
Transactions which increase the cash position of the entity arecalled as inflows of cash and those which decrease the cash
position as outflows of cash.
The statement of cash flow shows three main categories ofcash inflows and cash outflows, namely:
Operating Activities
Investing Activities
Financing Activities
-
8/19/2019 9. Cash Flow Statement
5/18
Classification of Cash Flows
OperatingActivities
InvestingActivities Financing
Activities
Cash Flow
Statement
-
8/19/2019 9. Cash Flow Statement
6/18
Operating Activities
Operating Activities are the principal revenue generating
activities of the enterprise - create revenues, expenses,gains, and losses.
Includes:
– Current assets – Current Liabilities
– Revenue and Expenses (includes interest expense andrevenue, and dividends received)
-
8/19/2019 9. Cash Flow Statement
7/18
Operating Activities
Cash inflows Cash outflows
• Cash sale Cash purchases
• Cash received from Debtors Cash payment to creditors & B/ P
• Cash received from Commission Cash payment for goods & services& fees Payment of wages & others
• Interest & Dividend recd on loans Income Tax paidand investments Interest payments
• Other revenues Other operating expenses (cash
• Other Operating cash receipts payments)
Net cash flows from operating activities
-
8/19/2019 9. Cash Flow Statement
8/18
Investing activities
Investing Activities include the acquisition and
disposal of long term assets and other investments -increase and decrease long-term assets
Includes:
Short-term and long-term investments
Long term assets - Property, Plant and Equipment
Intangible Assets
-
8/19/2019 9. Cash Flow Statement
9/18
Investing activities
Cash inflows Cash outflows
• Cash Sale of fixed assets Purchase of fixed assets
• Cash Sale of investments - Shares, Purchase of investments
Debentures & other securities
• Interest received
• Dividend received
Net cash flows from investing activities
-
8/19/2019 9. Cash Flow Statement
10/18
Financing Activities
Financing Activities are activities that result in change in
the size and composition of the owner’s capital and borrowings of the enterprise - obtain cash from investorsand creditors
Includes:
– Share Capital
– Short-term and long-term loans
– Interest Paid
– Dividends Paid
-
8/19/2019 9. Cash Flow Statement
11/18
Financing Activities
Cash inflow Cash outflow
• Cash received from Issue of Cash repayments of loans
shares & debentures Redemption of debentures
• Receipts of long term & Dividends paid on equity and preference
short term borrowings share capital
Interest paid on loans/debentures
Net cash flows from financing activities
-
8/19/2019 9. Cash Flow Statement
12/18
Limitations of Cash Flow Statement
Cash Flow Statement has limited scope as it compares with Fund flow
statement. Because it discloses inflows and outflows of cash alone. Itdoes not reveal the overall financial position of the concern.
Cash Flow Statement cannot provide a comprehensive picture of afinancial position because non-cash items of expenses and incomes are
excluded. The balances as disclosed by the cash flow statement may not be
treated as actual liquid position of a concern since it cannot be easilyinfluenced by postponing purchases and other payments.
Not suitable for Judging Profitability
Statement does not reflect real liquid position
Can not be equated with Income Statement
METHOD OF PREPARING CASH FLOW
-
8/19/2019 9. Cash Flow Statement
13/18
METHOD OF PREPARING CASH FLOWSTATEMENT
Indirect Method:
Under this method, the Net Profit for the year is taken as
base & adjust the items which appear in P&L A/C but do notcause any cash inflow or outflow.
Non - cash items such as Depreciation, Provisions for Tax,Proposed Dividend, Transfer to Reserves (Adjustment of
non-cash items)
Changes during the period in Inventories and Receivables
and payables (Adjustment of Working Capital items) All other items for which the cash effects are Investing or
Financing cash flows
-
8/19/2019 9. Cash Flow Statement
14/18
Rules of calculating Operating Cash Flow
Change Adjustment to Net Income
Decrease in Current Asset Add
Increase in Current Liability Add
Decrease in Current Liability Subtract
Increase in Current Asset Subtract
Format of Cash Flow from Operating Activities
-
8/19/2019 9. Cash Flow Statement
15/18
Format of Cash Flow from Operating Activities – Indirect method
(A) Cash flows from Operating Activities
Closing balance of P&L A/c xxxx
Add - Non- Cash items debited to P&L A/C xxxx
Less - Non- Cash items credited to P&L A/C xxxx
Add – Interest Payment xxxx
Less – Interest/Dividend Income xxxx
Profit before Tax
Operating profit before adjusting Working Capital items xxxx
Add - Decrease in Current Assets & Increase in Current Liability xxxx
Less - Increase in Current Assets & Decrease in Current Liability xxxx
Less Tax paid xxxx
Net Cash flow from Operating Activities xxxx
Format of Cash Flow from Operating Activities
-
8/19/2019 9. Cash Flow Statement
16/18
Format of Cash Flow from Operating Activities – Indirect method
(A) Cash flows from Operating Activities
Closing balance of P&L A/c
Add - Non- Cash items debited to P&L A/C - Depreciation, Losses from
sale of assets
Less - Non- Cash items credited to P&L A/C - Gains from sale of assets
Add – Interest Payment
Less – Interest/Dividend Income
Profit before Tax
Operating profit before adjusting Working Capital items
Format of Cash Flow from Operating Activities
-
8/19/2019 9. Cash Flow Statement
17/18
Format of Cash Flow from Operating Activities – Indirect method
Add or Less
• Add - increases in current liabilities & decreases incurrent assets
• Less - decreases in current liabilities & increases in
current assets
• Less Tax paid
Net Cash flow from Operating Activities
Format of Cash Flow from Investing & Financing
-
8/19/2019 9. Cash Flow Statement
18/18
Format of Cash Flow from Investing & FinancingActivities – Indirect method
(B) Cash flows from Investing Activities
Add - Sales of fixed assetsAdd - Sales of Investments
Less - Purchase of fixed assets
Less - Purchase of Investments
Net Cash flow from Investing Activities
(C) Cash flows from Financing Activities
Less - Repayment of Bonds & Debentures
Less - Dividends paid
Add - Issue of Shares
Net Cash flow from Financing Activities
Net Increase (Decrease) in Cash