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  • Cash Flow Statement Conceptual FrameworkPaper 3B: Financial Management Chapter 3 Unit II

    CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA), EPBM (IIMC), MCT

  • Learning Objectives

    1. Concept of Cash Flow statement (as per Revised AS 3)1. Concept of Cash Flow statement (as per Revised AS 3)

    2. Format of Cash Flow Statement2. Format of Cash Flow Statement

    3. Preparation and Presentation of Cash Flow Statement3. Preparation and Presentation of Cash Flow Statement

    2

  • Introduction to Cash Flow StatementIntroduction BackgroundImportant terms

    3

  • Cash Flow - Introduction

    1. A statement which discloses the changes in the position of cash and cash equivalents between two periods.

    1. A statement which discloses the changes in the position of cash and cash equivalents between two periods.

    2. According to Revised AS 3 issued by ICAI, an organization should prepare a cash flow statement and present it for each period

    2. According to Revised AS 3 issued by ICAI, an organization should prepare a cash flow statement and present it for each period

    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

    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

    4

  • Cash Flow - Background

    1. Cash flow statement is an important tool for short term analysis1. Cash flow statement is an important tool for short term analysis

    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.

    3. Also analyses the reasons for such changes3. Also analyses the reasons for such changes

    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

    5

  • Cash Flow Important Terms

    1 Cash cash on hand and demand deposits with banks

    2 Cash equivalents short term, highly liquid investments that

    are readily convertible in to known amounts of cash and which are subject to insignificant risk of changes in value (example Government securities)

    3 Cash flow inflows and outflows of cash and cash

    equivalents

    6

  • Classification of Cash Flows

    7

  • Cash Flow - Classification

    1 Cash flow from Operating Activities

    Principal revenue generating activities

    2 Cash flow from Investing Activities

    Acquisition and disposal of long term assets and other investments not included in cash equivalents

    3 Cash flows from Financing activities

    Activities that has an impact of owners capital and borrowings

    8

  • 1. Cash Flow from Operating Activities

    Cash receipts from sale of goods or services

    Cash payments to suppliers

    Cash payment to employees

    9

  • 2. Cash flow from Investing Activities

    Cash payment to acquire

    fixed assets including

    intangibles

    Cash receipts from disposal of fixed assets

    Cash payment to acquire

    shares, debt instruments of

    other companies,

    etc

    Cash receipts form disposal

    of shares, debentures,

    etc

    10

  • 3. Cash Flows from Financing activities

    Cash proceeds from issuing shares, debentures, etc

    Cash repayments of amounts borrowed - debentures

    Payment of dividend

    11

  • Cash Flows Special Items

    12

  • Foreign Currency & Extraordinary Items

    To be disclosed separately as arising from operating / investing / financing activities

    Unrealized gains or losses from foreign exchange transactions are not cash flows

    Foreign Currency

    Cash Flows

    To be disclosed separately as arising from operating / investing / financing activities

    Examples Insurance claims, Bad debt recovered, etc

    Extraordinary items

    13

  • Interest and Dividends Financial Enterprises

    Interest Paid Cash flow from

    Operating activities

    Interest Received and Dividend Received Cash flow from

    Operating activities

    Financial enterprises

    14

  • Interest and Dividends Other Enterprises

    Interest Paid on Long Term borrowings Cash flow from Financing

    Activities

    Interest Paid on Working Capital borrowings Cash flow from Operating

    activities

    Interest Received and Dividend Received Cash flow from Investing activities

    Other Enterprises

    15

  • Dividends Paid

    Dividend Paid Cash flow from

    Financing activities

    In all cases

    16

  • Taxes and Acquisition/ Disposition

    Should be separately disclosed under Operating activities unless identified, otherwise

    Taxes on Income

    Should be separately disclosed under Investing activities

    Acquisition and disposition of subsidiaries and other

    business units

    17

  • Non Cash Transactions

    Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from cash flow statement

    Example Purchase of Fixed Assets by Issue of Shares / Debentures

    Non-cash transactions

    18

  • Cash Flow StatementInformation Required for preparation

    19

  • Cash flows Information Required

    1. Comparative Balance Sheets

    2. Profit and Loss Account

    3. Additional information

    Availability of 2 and 3 are optional

    20

  • Cash Flow StatementTwo Methods Direct & Indirect

    21

  • Financial Statements

    22

    Generally prepared on accrual basis of accounting where in

    Net Income does not mean net cash received or

    Net Loss does not mean net cash used in operating activities.

  • Cash Flow from Operating Activities

    Cash from Operating activities can be

    reported in two ways

    Direct Method

    Indirect Method

    23

  • Cash Flow Statement Direct Method

    24

    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

    B: Cash flow from investing activities

    C: Cash flow from Financing activities

    Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)

    Cash and Cash equivalents at the Beginning of the period

    Cash and Cash equivalents at the End of the period

  • Cash Flow Statement Direct Method Continued

    25

    A: Cash flow from operating activities

    B: Cash flow from investing activities

    Purchase of fixed assets Sale of fixed assets Interest Paid Net cash from Investing Activities

    C: Cash flow from financing activities

    Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)

    Cash and Cash equivalents at the Beginning of the period

    Cash and Cash equivalents at the End of the period

  • Cash Flow Statement Direct Method Continued

    26

    A: Cash flow from operating activities

    B: Cash flow from investing activities

    Proceeds from issue of shares / Long Term borrowings Repayment of Long Term borrowings Dividend Paid Net cash from Financing Activities

    C: Cash flow from financing activities

    Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)

    Cash and Cash equivalents at the Beginning of the period

    Cash and Cash equivalents at the End of the period

  • Cash Flow Statement Indirect Method

    27

    A: Cash flow from operating activities Net Profit before tax and extraordinary items Adjustments for:

    Depreciation Gain or Loss on sale of fixed assets Interest / Dividend

    Operating profit before working capital changes Adjustments for Increase / Decrease in

    Receivables Inventories Payables

    Cash generation from operations Less: Interest paid Less: Direct Taxes paid

    Net cash from Operating Activities

  • Cash Flow Statement Indirect Method Continued

    28

    A: Cash flow from operating activities

    B: Cash flow from investing activities

    Purchase of fixed assets Sale of fixed assets Interest Paid Net cash from Investing Activities

    C: Cash flow from financing activities

    Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)

    Cash and Cash equivalents at the Beginning of the period

    Cash and Cash equivalents at the End of the period

  • 29

    A: Cash flow from operating activities

    B: Cash flow from investing activities

    Proceeds from issue of shares / Long Term borrowings Repayment of Long Term borrowings Dividend Paid Net cash from Financing Activities

    C: Cash flow from financing activities

    Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)

    Cash and Cash equivalents at the Beginning of the period

    Cash and Cash equivalents at the End of the period

    Cash Flow Statement Indirect Method Continued

  • Practical IllustrationsExample 1: Direct Method

    30

  • Example 1: Balance Sheet and P&L Account31

    BalanceSheetofMColimitedason31Mar2011

    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&Equipments 360 576Accountspayable 240 234 Cash 60 72Outstandingexpenses 24 48 Receivable