Statement of Changes in Statement of Changes in Financial Position : Cash Financial Position : Cash

Flow StatementFlow Statement

Presented by:

Hitesh Baid

The cash flow statement provides information about:

• Cash Receipts (cash inflows)• Uses of Cash (cash outflows) • During a Period of Time

Inflows and outflows are reported for:• Operating activities• Investing activities• Financing activities

The Cash Flow StatementThe Cash Flow Statement

Cash Inflows and OutflowsCash Inflows and Outflows

Classification of Business Classification of Business Activities : Inflow and Activities : Inflow and

Outflow of CashOutflow of CashOperating Activities

Cash Inflow

1) Cash Sales2) Received from Debtor3) Commission & Fees 4) Royalty

Cash Outflow

1) Cash Purchases2) Payment to Creditors3) Cash Operating Expenses4) Payment of Wages5) Income Tax6) Manufacturing Expenses

Cash effects the transaction on Net Income

Investing Activities

Cash Inflow

1) Sale of Fixed Assets2) Sale of investments3) Interest Received4) Dividend Received5) Working Capital Recovery

Cash Outflow

1) Purchase of Fixed Assets2) Purchase of Investments3) Working Capital

Classification of Business Classification of Business Activities : Inflow and Activities : Inflow and

Outflow of CashOutflow of Cash

Classification of Business Classification of Business Activities : Inflow and Activities : Inflow and

Outflow of CashOutflow of CashFinancing Activities

Cash Inflow

1) Issue of Shares in Cash2) Issue of Debentures in Cash3) Proceeds from long-term borrowings

Cash Outflow

1) Payment of Loans2) Redemption of Preference Shares3) Payment of Dividends4) Interest Paid5) Repayment of Finance/ Lease Liability

Objectives of Cash Flow Objectives of Cash Flow StatementStatement

1. Highlighting cash flow from different activities

2. Short-term Planning3. Cash Flow information helps to

understand liquidity4. Efficient cash management5. Prediction of sickness6. Comparison with budget7. Cash position

• Does not show the liquidity position of the firm

• It is not a substitute of income statement

• Does not show the financial position of the firm in totality

Cash Flow Statement : Cash Flow Statement : LimitationsLimitations

Causes of Variation

It studies only theCauses of cash variation

It studies causes of Ch-ange in working capital

Basis Of Difference Cash Flow Funds Flow

Basis ofAccounting

It recognizes Cash basisOf accounting

It is based upon accrualBasis of accounting I.eWorking capital

Schedule ofChanges in

Working Capital

Such a schedule is notPrepared for preparingCash flow statement

Schedule of changes inWorking capital is Prepared separately

Significance It is useful for short-Term financial planning

It is useful for long-termFinancial planning

Distinction between Cash flow Distinction between Cash flow Statement and Funds Flow Statement and Funds Flow

StatementStatement

Preparing a Statement of Preparing a Statement of Cash FlowsCash Flows

• Use net operating income as the starting point to get net operating cash flow

• Add back any non-cash expense

(Example - Depreciation)

Net Cash Flow = Cash Inflow - Cash Outflow

Net Operating Cash Flow = Income after Taxes+ Depreciation

Preparing a Statement of Preparing a Statement of Cash FlowsCash Flows

Order of Presentation:

1. Operating activities.

2. Investing activities.

3. Financing activities.

Direct Method

Indirect Method

Three Sources of Information:

1. Comparative balance sheets

2. Current income statement

3. Additional information

Cash Flow from Operating Activities : Cash Flow from Operating Activities : Direct MethodDirect Method

Cash Flow from Operating Activities Amount

(Rs.)

Cash Receipts from :

Sales

Commission & Fees

Interest Received

Cash Payment for :

Purchases

Payments to and for employees

Operating Expenses

Interest Payments

Direct Taxes Paid

Net Cash Flow from Operating Activities

XXX

XXX

XXX

Amount

(Rs.)

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

Cash Flow from Operating Activities : Cash Flow from Operating Activities : Indirect MethodIndirect Method

Cash Flow from Operating Activities Amount

(Rs.)

Amount

(Rs.)

Net Profit before Tax

Adjustment for :

Depreciation

Loss on Sale of Fixed Assets

Loss on revaluation

Operating Profit before Working Capital Changes

Adjustment* for :

Trade and other Receivables

Inventories or Stocks

Trade Payments or (Creditors and B/P)

Cash Generated from Operations

Interest Paid

Taxes Paid

Net Cash Flow from Operating Activities

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

XXX

Preparing the Statement of Preparing the Statement of Cash FlowsCash Flows

Indirect and Direct Methods

Companies favor the indirect method for two reasons:

1. It is easier and less costly to prepare, and

2. It focuses on the differences between net income and net cash flow from operating activities.

+Net Income+Depreciation

-Capital Investment+Salvage Proceeds-Gain Tax-Working Inv Cap+Working Cap Recovery

+Borrowed Funds-Repayment of Principal

RevenuesExpenses

Cost of Goods SoldDepreciation*Operating Expenses

Taxable IncomeIncome Taxes

Net Income

Income Statement Cash Flow Statement

Operating

Investing

Financing

+

+

Book Approach

*Assumes Tax Depreciation = Book Depreciation Thus, no deferred taxes

Format for Cash Flow Format for Cash Flow StatementStatement

End of PresentationEnd of Presentation********************************************

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