Cash Flow Statement Conceptsa

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<ul><li><p>Cash Flow Statement Conceptual FrameworkPaper 3B: Financial Management Chapter 3 Unit II</p><p>CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA), EPBM (IIMC), MCT</p></li><li><p>Learning Objectives</p><p>1. Concept of Cash Flow statement (as per Revised AS 3)1. Concept of Cash Flow statement (as per Revised AS 3)</p><p>2. Format of Cash Flow Statement2. Format of Cash Flow Statement</p><p>3. Preparation and Presentation of Cash Flow Statement3. Preparation and Presentation of Cash Flow Statement</p><p>2</p></li><li><p>Introduction to Cash Flow StatementIntroduction BackgroundImportant terms</p><p>3</p></li><li><p>Cash Flow - Introduction</p><p>1. A statement which discloses the changes in the position of cash and cash equivalents between two periods. </p><p>1. A statement which discloses the changes in the position of cash and cash equivalents between two periods. </p><p>2. According to Revised AS 3 issued by ICAI, an organization should prepare a cash flow statement and present it for each period</p><p>2. According to Revised AS 3 issued by ICAI, an organization should prepare a cash flow statement and present it for each period</p><p>3. Revised AS 3 deals with the provision of information about changes in cash and cash equivalents of an enterprise by means of Cash Flow statement</p><p>3. Revised AS 3 deals with the provision of information about changes in cash and cash equivalents of an enterprise by means of Cash Flow statement</p><p>4</p></li><li><p>Cash Flow - Background</p><p>1. Cash flow statement is an important tool for short term analysis1. Cash flow statement is an important tool for short term analysis</p><p>2. It ascertains the changes in balance of cash in hand and at bank. 2. It ascertains the changes in balance of cash in hand and at bank. </p><p>3. Also analyses the reasons for such changes3. Also analyses the reasons for such changes</p><p>4. Two areas of analysis are Cash generating efficiency and free cash flow4. Two areas of analysis are Cash generating efficiency and free cash flow</p><p>5</p></li><li><p>Cash Flow Important Terms</p><p>1 Cash cash on hand and demand deposits with banks</p><p>2 Cash equivalents short term, highly liquid investments that </p><p>are readily convertible in to known amounts of cash and which are subject to insignificant risk of changes in value (example Government securities)</p><p>3 Cash flow inflows and outflows of cash and cash </p><p>equivalents</p><p>6</p></li><li><p>Classification of Cash Flows</p><p>7</p></li><li><p>Cash Flow - Classification</p><p>1 Cash flow from Operating Activities</p><p> Principal revenue generating activities</p><p>2 Cash flow from Investing Activities</p><p> Acquisition and disposal of long term assets and other investments not included in cash equivalents</p><p>3 Cash flows from Financing activities</p><p> Activities that has an impact of owners capital and borrowings</p><p>8</p></li><li><p>1. Cash Flow from Operating Activities</p><p>Cash receipts from sale of goods or services</p><p>Cash payments to suppliers</p><p>Cash payment to employees</p><p>9</p></li><li><p>2. Cash flow from Investing Activities</p><p>Cash payment to acquire </p><p>fixed assets including </p><p>intangibles</p><p>Cash receipts from disposal of fixed assets</p><p>Cash payment to acquire </p><p>shares, debt instruments of </p><p>other companies, </p><p>etc</p><p>Cash receipts form disposal </p><p>of shares, debentures, </p><p>etc</p><p>10</p></li><li><p>3. Cash Flows from Financing activities</p><p>Cash proceeds from issuing shares, debentures, etc</p><p>Cash repayments of amounts borrowed - debentures</p><p>Payment of dividend</p><p>11</p></li><li><p>Cash Flows Special Items</p><p>12</p></li><li><p>Foreign Currency &amp; Extraordinary Items</p><p> To be disclosed separately as arising from operating / investing / financing activities</p><p> Unrealized gains or losses from foreign exchange transactions are not cash flows</p><p>Foreign Currency </p><p>Cash Flows</p><p> To be disclosed separately as arising from operating / investing / financing activities</p><p> Examples Insurance claims, Bad debt recovered, etc</p><p>Extraordinary items</p><p>13</p></li><li><p>Interest and Dividends Financial Enterprises</p><p> Interest Paid Cash flow from </p><p>Operating activities</p><p> Interest Received and Dividend Received Cash flow from </p><p>Operating activities</p><p>Financial enterprises</p><p>14</p></li><li><p>Interest and Dividends Other Enterprises</p><p> Interest Paid on Long Term borrowings Cash flow from Financing </p><p>Activities</p><p> Interest Paid on Working Capital borrowings Cash flow from Operating </p><p>activities</p><p> Interest Received and Dividend Received Cash flow from Investing activities</p><p>Other Enterprises</p><p>15</p></li><li><p>Dividends Paid</p><p> Dividend Paid Cash flow from </p><p>Financing activities</p><p>In all cases</p><p>16</p></li><li><p>Taxes and Acquisition/ Disposition </p><p> Should be separately disclosed under Operating activities unless identified, otherwise</p><p>Taxes on Income</p><p> Should be separately disclosed under Investing activities </p><p>Acquisition and disposition of subsidiaries and other </p><p>business units</p><p>17</p></li><li><p>Non Cash Transactions</p><p> Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from cash flow statement</p><p> Example Purchase of Fixed Assets by Issue of Shares / Debentures</p><p>Non-cash transactions</p><p>18</p></li><li><p>Cash Flow StatementInformation Required for preparation </p><p>19</p></li><li><p>Cash flows Information Required</p><p>1. Comparative Balance Sheets</p><p>2. Profit and Loss Account</p><p>3. Additional information</p><p>Availability of 2 and 3 are optional</p><p>20</p></li><li><p>Cash Flow StatementTwo Methods Direct &amp; Indirect</p><p>21</p></li><li><p>Financial Statements</p><p>22</p><p>Generally prepared on accrual basis of accounting where in </p><p> Net Income does not mean net cash received or </p><p> Net Loss does not mean net cash used in operating activities. </p></li><li><p>Cash Flow from Operating Activities</p><p>Cash from Operating activities can be </p><p>reported in two ways</p><p>Direct Method</p><p>Indirect Method</p><p>23</p></li><li><p>Cash Flow Statement Direct Method</p><p>24</p><p>A: Cash flow from Operating Activities Cash receipts from customers Less: Cash paid to suppliers and employees Cash generated from operations Less: Income tax paid Cash flow before extraordinary item Add: Proceeds from earthquake disaster settlement Net cash from Operating Activities</p><p>B: Cash flow from investing activities</p><p>C: Cash flow from Financing activities</p><p>Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)</p><p>Cash and Cash equivalents at the Beginning of the period</p><p>Cash and Cash equivalents at the End of the period</p></li><li><p>Cash Flow Statement Direct Method Continued</p><p>25</p><p>A: Cash flow from operating activities</p><p>B: Cash flow from investing activities</p><p> Purchase of fixed assets Sale of fixed assets Interest Paid Net cash from Investing Activities</p><p>C: Cash flow from financing activities </p><p>Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)</p><p>Cash and Cash equivalents at the Beginning of the period</p><p>Cash and Cash equivalents at the End of the period</p></li><li><p>Cash Flow Statement Direct Method Continued</p><p>26</p><p>A: Cash flow from operating activities</p><p>B: Cash flow from investing activities</p><p> Proceeds from issue of shares / Long Term borrowings Repayment of Long Term borrowings Dividend Paid Net cash from Financing Activities</p><p>C: Cash flow from financing activities </p><p>Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)</p><p>Cash and Cash equivalents at the Beginning of the period</p><p>Cash and Cash equivalents at the End of the period</p></li><li><p>Cash Flow Statement Indirect Method</p><p>27</p><p>A: Cash flow from operating activities Net Profit before tax and extraordinary items Adjustments for:</p><p> Depreciation Gain or Loss on sale of fixed assets Interest / Dividend</p><p> Operating profit before working capital changes Adjustments for Increase / Decrease in </p><p> Receivables Inventories Payables</p><p> Cash generation from operations Less: Interest paid Less: Direct Taxes paid</p><p> Net cash from Operating Activities</p></li><li><p>Cash Flow Statement Indirect Method Continued</p><p>28</p><p>A: Cash flow from operating activities</p><p>B: Cash flow from investing activities</p><p> Purchase of fixed assets Sale of fixed assets Interest Paid Net cash from Investing Activities</p><p>C: Cash flow from financing activities </p><p>Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)</p><p>Cash and Cash equivalents at the Beginning of the period</p><p>Cash and Cash equivalents at the End of the period</p></li><li><p>29</p><p>A: Cash flow from operating activities</p><p>B: Cash flow from investing activities</p><p> Proceeds from issue of shares / Long Term borrowings Repayment of Long Term borrowings Dividend Paid Net cash from Financing Activities</p><p>C: Cash flow from financing activities </p><p>Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)</p><p>Cash and Cash equivalents at the Beginning of the period</p><p>Cash and Cash equivalents at the End of the period</p><p>Cash Flow Statement Indirect Method Continued</p></li><li><p>Practical IllustrationsExample 1: Direct Method</p><p>30</p></li><li><p>Example 1: Balance Sheet and P&amp;L Account31</p><p>BalanceSheetofMColimitedason31Mar2011</p><p>31.03.2010 31.03.2011 31.03.2010 31.03.2011Liabilities Rsin000 Rsin000 Assets Rsin000 Rsin000ShareCapital 360 444 Land 48 96RetainedEarnings 151.8 163.8 Buildings&amp;Equipments 360 576Accountspayable 240 234 Cash 60 72Outstandingexpenses 24 48 Receivables 168 186Incometaxpayable 12 13.2 Inventories 264 96AccumulatedDepn 120 132 Advances 7.8 9</p><p>907.8 1035 907.8 1035</p><p>ProfitandLossAccountfortheyearended31Mar2011Rsin000</p><p>NetSales 2520Less:COGS 1980Depreciation 60Salariesandwages 240Operatingexpenses 80Provisionfortax 88 2448GrossProfit 72</p><p>Profitonsalesofequipment(Cost:72) 1284</p><p>Dividend 72RetainedEarnings 12</p></li><li><p>Example 1: Identification of Working Notes</p><p>Cash Receipts </p><p>from Customers</p><p>Cash Payments </p><p>to Suppliers </p><p>and Employee</p><p>s</p><p>Income Tax Paid</p><p>Investment in purchase of Building </p><p>and Equipments </p><p>Receipts from Sales of Equipments </p><p>(for this purpose we </p><p>need to know the </p><p>Accumulated Depreciation of Equipment </p><p>sold)</p><p>32</p></li><li><p>Example 1: Direct Method Working Note 1</p><p>33</p><p>WorkingNote:1 (Rs.In000)CashReceiptsfromCustomersNetSales 2520Add:OpeningReceivables 168</p><p>2688Less:ClosingReceivables 186</p><p>2502</p></li><li><p>Example 1: Direct Method Working Note 2</p><p>34</p><p>WorkingNote:2 (Rs.In000)CashPaidtoSuppliersandEmployeesCOGS 1980SalariesandWages 240OperatingExpenses 80</p><p>2300Add:OpeningAccountsPayable 240OpeningOutstandingExpenses 24ClosingInventories 96ClosingAdvances 9 369</p><p>2669Less:ClosingAccountsPayable 234</p><p>ClosingOutstandingExpenses 48OpeningInventories 264OpeningAdvances 7.8 553.8</p><p>2115.2</p></li><li><p>Example 1: Direct Method Working Note 3</p><p>35</p><p>WorkingNote:3 (Rs.In000)</p><p>IncomeTaxesPaid</p><p>ProvisionforTaxduringtheyear 88</p><p>Add:OpeningIncomeTaxpayable 12</p><p>100</p><p>Less:ClosingIncomeTaxpayable 13.2</p><p>86.8</p></li><li><p>Example 1: Direct Method Working Note 4</p><p>36</p><p>WorkingNote:4 (Rs.In000)</p><p>PurchaseofBuildingsandEquipments</p><p>OpeningBalanceofBuildingandEquipments 360</p><p>Less:CostofsoldEquipment 72</p><p>288</p><p>ClosingBalanceofBuildingandEquipments 576</p><p>PurchaseofBuildingandEquipments 288</p></li><li><p>Example 1: Direct Method Working Note 5</p><p>37</p><p>WorkingNote:5 (Rs.In000)</p><p>AccumulatedDepreciationonEquipmentssold</p><p>AccumulatedDepreciation Opening 120</p><p>Add:Depreciationduringtheyear 60</p><p>180</p><p>Less:AccumulatedDepreciation Closing 132</p><p>48</p></li><li><p>Example 1: Direct Method Working Note 6</p><p>38</p><p>WorkingNote:6 (Rs.In000)</p><p>CashReceiptsfromSaleofEquipments</p><p>CostofsoldEquipment 72</p><p>AccumulatedDepreciationonEquipmentssold 48</p><p>WrittenDownValueofEquipmentsold 24</p><p>Add:Profitonsales 12</p><p>36</p></li><li><p>Example 1: Direct Method - Solution39</p><p>CASHFLOWSTATEMENT</p><p>(Rs.In000)</p><p>CashflowsfromOperatingactivities:</p><p>CashReceiptsfromCustomers 2502</p><p>CashPaidtoSuppliersandEmployees 2115.2</p><p>CashGeneratedfromOperations 386.8</p><p>Less:IncomeTaxPaid 86.8</p><p>NetCashfromOperatingactivities 300</p></li><li><p>Example 1: Direct Method Solution - Continued</p><p>40</p><p>(Rs.In000)</p><p>CashflowsfromInvestingactivities:</p><p>PurchaseofLand 48</p><p>PurchaseofBuildingandEquipment 288</p><p>336</p><p>CashreceivedonsaleofEquipment 36</p><p>NetCashfromInvestingactivities (300)</p></li><li><p>Example 1: Direct Method Solution - Continued</p><p>41</p><p>(Rs.In000)</p><p>CashflowsfromFinancingactivities:</p><p>IssueofShares 84</p><p>DividendPaid 72</p><p>NetCashfromFinancingactivities 12</p><p>NetincreaseinCashandCashequivalents 12</p><p>CashandCashequivalentsatthebeginning 60</p><p>CashandCashequivalentsattheend 72</p></li><li><p>Practical IllustrationsExample 2: Indirect Method</p><p>42</p></li><li><p>Example 2: Balance Sheet and P&amp;L Account43</p><p>BalanceSheetofMColimitedason31Mar2011</p><p>31.03.2010 31.03.2011 31.03.2010 31.03.2011Liabilities Rsin000 Rsin000 Assets Rsin000 Rsin000ShareCapital 360 444 Land 48 96RetainedEarnings 151.8 163.8 Buildings&amp;Equipments 360 576Accountspayable 240 234 Cash 60 72Outstandingexpenses 24 48 Receivables 168 186Incometaxpayable 12 13.2 Inventories 264 96AccumulatedDepn 120 132 Advances 7.8 9</p><p>907.8 1035 907.8 1035</p><p>ProfitandLossAccountfortheyearended31Mar2011Rsin000</p><p>NetSales 2520Less:COGS 1980Depreciation 60Salariesandwages 240Operatingexpenses 80Provisionfortax 88 2448GrossProfit 72</p><p>Profitonsalesofequipment(Cost:72) 1284</p><p>Dividend 72RetainedEarnings 12</p></li><li><p>Example 2: Identification of Working Notes</p><p>Income Tax PaidInvestment in purchase </p><p>of Building and Equipments </p><p>Receipts from Sales of </p><p>Equipments (for this purpose we need to know </p><p>the Accumulated Depreciation of Equipment sold)</p><p>44</p></li><li><p>Example 1: Indirect Method Working Note 1</p><p>45</p><p>WorkingNote:1 (Rs.In000)</p><p>IncomeTaxesPaid</p><p>ProvisionforTaxduringtheyear 88</p><p>Add:OpeningIncomeTaxpayable 12</p><p>100</p><p>Less:ClosingIncomeTaxpayable 13.2</p><p>86.8</p></li><li><p>Example 1: Indirect Method Working Note 2</p><p>46</p><p>WorkingNote:2 (Rs.In000)</p><p>PurchaseofBuildingsandEquipments</p><p>OpeningBalanceofBuildingandEquipments 360</p><p>Less:CostofsoldEquipment 72</p><p>288</p><p>ClosingBalanceofBuildingandEquipments 576</p><p>PurchaseofBuildingandEquipments 288</p></li><li><p>Example 1: Indirect Method Working Note 3</p><p>47</p><p>WorkingNote:3 (Rs.In000)</p><p>AccumulatedDepreciationonEquipmentssold</p><p>AccumulatedDepreciation Opening 120</p><p>Add:Depreciationduringtheyear 60</p><p>180</p><p>Less:AccumulatedDepreciation Closing 132</p><p>48</p></li><li><p>Example 1: Indirect Method Working Note 4</p><p>48</p><p>WorkingNote:4 (Rs.In000)</p><p>CashReceiptsfromSaleofEquipments</p><p>CostofsoldEquipment 72</p><p>AccumulatedDepreciationonEquipmentssold 48</p><p>WrittenDownValueofEquipmentsold 24</p><p>Add:Profitonsales 12</p><p>36</p></li><li><p>Example 2: Indirect Method - Solution49</p><p>CASHFLOWSTATEMENT</p><p>(Rs.In000)CashflowsfromOperatingactivities:NetProfitBeforetaxandextradinaryitems:GrossProfit 72ProvisionforTax 88</p><p>160Adjustmentsfor:Depreciation 60Operatingprofitbeforeworkingcapitalchanges 220</p><p>AdjustmentsforWorkingCapitalChanges:Add:DecreaseinInventories 168Less:IncreaseinReceivables (18)Less:IncreaseinAdvances (1.2)Less:DecreaseinAccountsPayable (6)Add:IncreaseinOutstandingexpenses 24</p><p>166.8CashGenerationfromOperations 386.8</p><p>Less:IncomeTaxPaid 86.8NetCashfromOperatingactivities 300</p></li><li><p>Example 2: Indirect Method - Solution- Continued</p><p>50</p><p>(Rs.In000)</p><p>CashflowsfromInvestingactivities:</p><p>PurchaseofLand 48</p><p>PurchaseofBuildingandEquipment 288</p><p>336</p><p>CashreceivedonsaleofEquipment 36</p><p>NetCashfromInvestingactivities (300)</p></li><li><p>Example 2: Indirect Method - Solution- Continued</p><p>51</p><p>(Rs.In000)</p><p>CashflowsfromFinancingactivities:</p><p>IssueofShares 84</p><p>DividendPaid 72</p><p>NetCashfromFinancingactivities 12</p><p>NetincreaseinCashandCashequivalents 12</p><p>CashandCashequivalentsatthebeginning 60</p><p>CashandCashequivalentsattheend 72</p></li><li><p>Lesson Summary</p><p>52</p><p>We have learnt important terms used in Cash Flow Statement -Cash, Cash Equivalents and Cash Flow StatementWe have learnt important terms used in Cash Flow Statement -Cash, Cash Equivalents and Cash Flow Statement</p><p>Cash Flow Classification - Cash Flow from Operating, Investing and Financing ActivitiesCash Flow Classification - Cash Flow from Operating, Investing and Financing Activities</p><p>Treatment of certain special items in Cash Flow StatementTreatment of certain special items in Cash Flow Statement</p><p>Format of Cash Flow Statement - Direct Method and Indirect MethodFormat of Cash Flow Statement - Direct Method and Indirect Method</p><p>Preparation and Presentation of Cash Flow StatementPreparation and Presentation of Cash Flow Statement</p></li><li><p>Thank You</p><p>53</p></li></ul>