cash flow statement session 1

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Cash flow statement Dr. Reena Kohli IIM Rohtak

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Cash flow statement

Dr. Reena KohliIIM Rohtak

Non-cash items

• Depreciation expense

• Amortization expense

• Credit purchases

• Outstanding expenses

• Credit sales

• Accrued incomes

Illustration –Profit & loss Account for the year ended 31st March, 2010

Particulars Rs.

Sales in cash 1,00,000

Purchases in cash (51,000)

Gross Profits 49,000

Salaries paid in cash (10,000)

Rent paid in cash (10,000)

Depreciation (42,000)

Net loss 13,000

• It does highlight how cash is moving through various operations ofthe business

• Does not account for working capital changes like receipts fromcustomers, payments to suppliers, expenses paid in cash, incomesreceived in cash.

Profit and Loss Account of X Ltd. for the Year Ended 31st

March, 2011

Sales -

Less: Cost of Good Sold (-)

Gross Profits -

Less: Operating Expenses (-)

Operating profits -

Less: Non operating expenses and losses (-)

Add: Non operating incomes (other revenues) and gains -

Profits Before Taxes (PBT) -

Less: Taxes/Provision for taxes (-)

Net profits/ Profits after taxes (PAT) -

• Does not make any demarcation between incomefrom operating, investing and financing activities.Hence may include non-operating expenses andincomes viz.

Non- operating expenses/losses

Non-operating incomes

Loss on sale of non-current assets

Profit on sale of non-current assets

Loss on sale of investment Profit on sale of investment

Interest paid Interest received

Dividend received

Statement of Cash Flows

• The statement that aids management inanalyzing the changes in cash flowposition of the company between twobalance sheet dates is called cash flowstatement.

• It does so by dividing all activities of thecompany into three categories viz. cashfrom operating activities, cash frominvesting activities and cash fromfinancing activities

Meaning of Cash flows

• ‘Cash flows’ means inflow and outflow ofcash and cash equivalents arising out ofoperating, investing and financing activities.

• Cash comprises cash in hand and demanddeposits.

• Cash equivalents are short-term, highlyliquid investments that are readilyconvertible to known amounts of cashwithout risk of decline in its realizable value(as per Ind-AS 7)

Cash flows from Operating Activities

It shows cash flows related to thefundamental operations/lines ofbusinesses that company is in, andalso from the operations incidentalto the main lines of operations.

Cash inflows from Operating activities

Cash sales

Cash received from debtors (ARs)

Cash received as commission, fees, royalty, rent

Cash outflows from Operating activities

Cash purchases

Cash paid to creditors (APs)

Cash operating expenses viz. wages, salaries, commissions, rent, taxes etc

Cash flows from Investing ActivitiesInvesting activities shows cash flows from

sale or purchase of long lived assets andinvestments that are not held for resale.

Include cash inflows arising as incomefrom investing activities such as

Interest received

Dividends received

Investing activities Cash inflows from investing activities

Sale of fixed assets (PPE)/intangible asset

Sale of long term investment (shares of some company )

Cash received on maturity of term deposit

Interest received

Dividends received

Investing activities

Cash outflows from investing activities

Purchase of fixed assets

Purchase of long term investment (shares of some company)

Advancing loan to a subsidiary

Acquisition of a new company

Acquisition of a brand, or any other intangible asset

Investing Activities

• In general, -ve cash flows from investing activities is asign of good health of company as it highlights thatcompany is continually investing more in PPE, landand other fixed assets to replace the assets that havebeen used up or have become technologicallyobsolete.

• Also sign of expansion/growth

• May have +ve cash flows when companies aredivesting whole or part of business.

Financing Activities

Cash flows arising out of the activities that result inchanges in the size and composition of the capitalstructure (equity and borrowings) of the entity.

These highlight the sources from where a company israising funds and how it is redeeming those funds

These also highlight the cost of funds raised that isinterest and dividend paid

Financing activities Cash flows from financing activities

Cash inflows Cash outflows

Issue of equity shares in cash Buy-back of equity shares

Issue of preference shares in cash

Redemption of preference shares

Issue of debentures in cash Re-payment of long term loans

Proceeds of long term borrowings

Re-payment of debentures

Dividends paid

Interests paid

Financing activities

May be positive or negative

If CFO < funds required for investments = positivecash from financing activities (Why?)

If CFO > funds required for investments = negativecash from financing activities (Why?)

Areas of Confusion

• Interest received (MFs)

• Dividend received

• Interest paid (MFIs)

• Dividend paid

Cash flows from extraordinary transactions

• To be disclosed separately in cash flowstatement to enable the users tounderstand their nature and effect onpresent and future cash flows of theenterprise

• For instance, insurance proceeds fromearthquake disaster settlement from GIC.

•Cash outflow on account of guaranteegiven on behalf of subsidiary company

Non-cash transactions

Not reported in cash flows statement but may be given in notes to accounts.• Example:

• Repaying existing bonds by converting them into common stock

• Acquiring fixed assets by issuing notes payable/debentures.

Preparation of cash flow statement

Preparing a Cash Flow StatementCASH FLOW STATEMENT

Cash flows from operating activities 1

Add: cash flows from investing activities 2

Add: cash flows from financing activities 3

Cash generated/used during the year 1+2+3

Add: Cash at the beginning of the year 4 (FromBalance Sheet )

Cash at the end of the year 1+2+3+4

Cash Flows from Operating Activities

•Approaches to presentation•Direct method.• Indirect method.

•An entity can report cash flows fromoperating activities using either ofthe above stated method

Direct method of presenting cash flows from operating activities

In direct method, Cash from operatingactivities is computed as:

Gross cash receipts – Gross cash payments

Where, Gross cash receipts include

cash sales, cash collected from debtors,other operating revenues likecommissions received , rent received

Direct method of presenting cash flows from operating activities

While, Gross cash payments include cashpaid for purchasing inventory, cash paidto accounts payable for credit purchasesof inventory, operating expenses paid incash like salaries, wages, commissions,taxes etc.

Here emphasis is on cash receipts andcash payments

Just looks like cash account

Illustration – Profit & loss AccountFor the period ending 31-03-2009

Particulars Amount Rs.

Sales:

Cash: 40,000

Credit: 80,000

Cost of goods sold

Gross Profits

Depreciation

Other expenses paid in cash

Net Profit

1,20,000

(70,000)

50,000

(30,000)

(9500)

10,500

Additional information 31.03.08 31.03.09

Accounts receivable 20,000 24,000

Accounts payable 7,000 5,000

Inventory 22,000 27,000

Cash Purchases during the year = 70000

COGS

• COGS= Op inventory+ purchases – closing inventory

• COGS= Op inventory+ (cash purchases + credit purchases)– closing inventory

• 70000= 22000+(70000+ credit purchases)- 27000

• 70000= 65000 + credit purchases

• Credit purchases= 5000

Solution – Direct Method

Cash Flow From Operating Activities:

Cash sales 40,000

Cash received on account of sale of goods 76,000

Less:

Purchases of goods in cash 70,000

Cash expenses 9,500

Payment made on account of credit purchases 7,000

(86,500)

Cash Inflow 29,500

Cash from investing activities

Cash from investing activities

Inflows: Sale of non-current assets -

Sale of long term investment -

Dividend received -

Interest received on long term investment -

Outflows: Purchase of non-current assets -

Purchase of long term investment -

Cash from investing activities -

Illustration - Kanishk• The following transactions occur at Kanishk

Enterprises:

Particulars Amount (Rs.)

Purchased a machinery for 1,50,000

Sold shares of X limited worth 2,00,000

Received interest on debentures 10,000

Received dividend on shares held 20,000

Sold old machinery 50,000

Solution

Cash Flow from Investing Activities:

Sale of Shares 2,00,000

Interest received 10,000

Sale proceeds of old machinery 50,000

Dividend received 20,000

2,80,000

Less: Outflow on account of machine purchase 1,50,000

Cash flow from Investing Activities 1,30,000

Kanishk EnterprisesCash Flow Statement

Cash from financing activities

Cash from financing activitiesInflows: Issue of share capital -

Issue of debentures -

Raising long term loans -

Outflows: Redemption of debentures -

Repayment of long term loans -

Dividends paid -

Interest paid -

Cash from financing activities -