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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 Statement

2. Format of Cash Flow Statement

3. Preparation and Presentation ofCash Flow Statement

3. Preparation and Presentation ofCash Flow Statement

2



Introduction to Cash Flow Statement

•Introduction•Background

•Important terms

3



Cash Flow Introduction

1. A statement which discloses the changes in theposition of cash and cash equivalents between twoperiods.

1. A statement which discloses the changes in theposition of cash and cash equivalents between twoperiods.

2. According to Revised AS 3 – issued by ICAI, anorganization should prepare a cash flow statementand present it for each period

2. According to Revised AS 3 – issued by ICAI, anorganization should prepare a cash flow statementand present it for each period

3. Revised AS 3 deals with the provision of informationabout changes in cash and cash equivalents of anenterprise by means of Cash Flow statement

3. Revised AS 3 deals with the provision of informationabout changes in cash and cash equivalents of anenterprise by means of Cash Flow statement

4



Cash Flow Background

1. Cash flow statement is an important tool for shortterm analysis1. Cash flow statement is an important tool for shortterm 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 generatingefficiency and free cash flow4. Two areas of analysis are – Cash generatingefficiency 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 andwhich 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 andother investments not included in cash equivalents

3• Cash flows from Financing activities

• Activities that has an impact of owner’s capital andborrowings

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 paymentto acquire

fixed assetsincluding

intangibles

Cash receiptsfrom disposalof fixed assets

Cash paymentto acquire

shares, debtinstruments of

othercompanies,

etc

Cash receiptsform 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 fromoperating / investing / financing activities

• Unrealized gains or losses from foreignexchange transactions are not cash flows

ForeignCurrency

Cash Flows

• To be disclosed separately as arising fromoperating / investing / financing activities

• Examples – Insurance claims, Bad debtrecovered, etc

Extraordinaryitems

13



Interest and Dividends – Financial Enterprises

• Interest Paid• Cash flow from

Operating activities

• Interest Received andDividend Received

• Cash flow fromOperating activities

Financialenterprises

14



Interest and Dividends – Other Enterprises

• Interest Paid on Long Termborrowings

• Cash flow from Financing Activities

• Interest Paid on Working Capitalborrowings

• Cash flow from Operatingactivities

• Interest Received and DividendReceived

• Cash flow from Investing activities

OtherEnterprises

15



Dividends Paid

• Dividend Paid

• Cash flow fromFinancing activitiesIn allcases

16



Taxes and Acquisition/ Disposition

• Should be separatelydisclosed under Operatingactivities unless identified,otherwise

Taxes onIncome

• Should be separatelydisclosed under Investingactivities

Acquisition anddisposition ofsubsidiariesand other

business units

17



Non Cash Transactions

• Investing and financingtransactions that do not requirethe use of cash or cashequivalents should be excluded

from cash flow statement

• Example – Purchase of Fixed Assets by Issue of Shares /

Debentures

Non-cashtransactions

18



Cash Flow Statement Information 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 Statement Two Methods – Direct & Indirect

21



Financial Statements

22

Generally preparedon accrual basis ofaccounting where in

• Net Income does not mean netcash received or

• Net Loss does not mean netcash used in operating activities.



Cash Flow from Operating Activities

Cash from Operating

activities can bereported 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 Activit ies

B: Cash f low from investing activities

C: Cash flow from Financing activit ies

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 f low from investing activit ies

• Purchase of fixed assets

• Sale of fixed assets

• Interest Paid

• Net cash from Investing Activities

C: Cash flow from financing activit ies






Cash Flow Statement – Direct Method Continued

26



• Proceeds from issue of shares / Long Term borrowings

• Repayment of Long Term borrowings• Dividend Paid

• Net cash from Financing Activi ties







Cash Flow Statement – Indirect Method

27


• 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 Activit ies



Cash Flow Statement – Indirect Method Continued

28



• Purchase of fixed assets

• Sale of fixed assets

• Interest Paid

• Net cash from Investing Activities







29



• Proceeds from issue of shares / Long Term borrowings

• Repayment of Long Term borrowings• Dividend Paid

• Net cash from Financing Activit ies





Cash Flow Statement – Indirect Method Continued



Practical IllustrationsExample 1: Direct Method

30



Example 1: Balance Sheet and P&L Account

31

Balance Sheet

of

M

Co

limited

as

on

31

‐Mar

‐2011

31.03.2010 31.03.2011 31.03.2010 31.03.2011

Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000

Share Capital 360 444 Land 48 96

Retained Earnings 151.8 163.8 Buildings & Equipments 360 576

Accounts payable 240 234 Cash 60 72

Outstanding expenses 24 48 Receivables 168 186

Income tax payable 12 13.2 Inventories 264 96

Accumulated Depn 120 132 Advances 7.8 9

907.8 1035 907.8 1035

Profit and Loss Account for the year ended 31‐Mar‐2011

Rs in 000

Net Sales 2520

Less: COGS 1980

Depreciation 60

Salaries and wages 240

Operating expenses 80

Provision for tax 88 2448

Gross Profit 72

Profit on sales of equipment (Cost: 72) 12

84

Dividend 72Retained Earnings 12

32



Example 1: Identification of Working Notes

CashReceiptsfrom

Customers

CashPayments

toSuppliers

andEmployee

s

IncomeTax Paid

Investment

in purchaseof Building

andEquipments

Receiptsfrom Sales ofEquipments

(for thispurpose we

need to knowthe

AccumulatedDepreciationof Equipment

sold)

32

33



Example 1: Direct Method – Working Note 1

33

Working Note:1 (Rs. In 000)

Cash Receipts

from

Customers

Net Sales 2520

Add: Opening Receivables 168

2688

Less: Closing Receivables 186

2502



35




35


Income Taxes

Paid

Provision for Tax during the year 88

Add: Opening

Income

Tax

payable 12

100

Less:

Closing

Income

Tax

payable 13.286.8

36




36


Purchase of Buildings and Equipments

Opening Balance of Building and Equipments 360

Less:

Cost

of

sold

Equipment 72288

Closing Balance of Building and Equipments 576

Purchase of

Building

and

Equipments 288

37




37


Accumulated Depreciation on Equipments sold

Accumulated Depreciation ‐ Opening 120

Add: Depreciation

during

the

year 60

180

Less: Accumulated Depreciation ‐ Closing 132

48

38




Working Note:6 (Rs.

In

000)

Cash Receipts from Sale of Equipments

Cost of sold Equipment 72

Accumulated Depreciation

on

Equipments

sold 48

Written Down Value of Equipment sold 24

Add: Profit on sales 12

36

39



Example 1: Direct Method - Solution

CASH FLOW STATEMENT

(Rs. In 000)

Cash flows from Operating activities:

Cash Receipts from Customers 2502

Cash Paid to Suppliers and Employees 2115.2

Cash Generated from Operations 386.8

Less: Income

Tax

Paid 86.8

Net Cash from Operating activities 300

40



Example 1: Direct Method – Solution - Continued

(Rs. In 000)

Cash flows

from

Investing

activities:

Purchase of Land 48

Purchase

of

Building

and

Equipment 288

336

Cash received on sale of Equipment 36

Net Cash from Investing activities (300)

41



Example 1: Direct Method – Solution - Continued

(Rs. In 000)

Cash flows

from

Financing

activities:

Issue of Shares 84

Dividend Paid 72

Net Cash from Financing activities 12

Net increase in Cash and Cash equivalents 12

Cash and

Cash

equivalents

at

the

beginning

60

Cash and Cash equivalents at the end 72

42



Practical IllustrationsExample 2: Indirect Method

43



Example 2: Balance Sheet and P&L Account

Balance Sheet

of

M

Co

limited

as

on

31

‐Mar

‐2011

31.03.2010 31.03.2011 31.03.2010 31.03.2011

Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000

Share Capital 360 444 Land 48 96

Retained Earnings 151.8 163.8 Buildings & Equipments 360 576

Accounts payable 240 234 Cash 60 72

Outstanding expenses 24 48 Receivables 168 186

Income tax payable 12 13.2 Inventories 264 96

Accumulated Depn 120 132 Advances 7.8 9

907.8 1035 907.8 1035

Profit and

Loss

Account

for

the

year

ended

31

‐Mar

‐2011

Rs in 000

Net Sales 2520

Less: COGS 1980

Depreciation 60

Salaries and wages 240

Operating expenses 80

Provision for tax 88 2448

Gross Profit 72

Profit on sales of equipment (Cost: 72) 12

84

Dividend 72

Retained Earnings 12

44



Example 2: Identification of Working Notes

Income Tax PaidInvestment in purchase

of Building andEquipments

Receipts fromSales of

Equipments (forthis purpose weneed to know

the AccumulatedDepreciation of

Equipment sold)

45



Example 1: Indirect Method – Working Note 1


Income Taxes

Paid

Provision for Tax during the year 88

Add: Opening

Income

Tax

payable 12

100

Less: Closing Income Tax payable 13.2

86.8

46





Purchase of

Buildings

and

Equipments

Opening Balance of Building and Equipments 360

Less: Cost of sold Equipment 72

288

Closing Balance of Building and Equipments 576

Purchase of

Building

and

Equipments 288

47





Accumulated Depreciation on Equipments sold

Accumulated Depreciation ‐ Opening 120

Add: Depreciation

during

the

year 60

180

Less: Accumulated Depreciation ‐ Closing 132

48

48




Working Note:4 (Rs.

In

000)

Cash Receipts from Sale of Equipments

Cost of sold Equipment 72

Accumulated Depreciation

on

Equipments

sold 48

Written Down Value of Equipment sold 24

Add: Profit on sales 12

36

49



Example 2: Indirect Method - SolutionCASH

FLOW

STATEMENT

(Rs. In 000)

Cash flows from Operating activities:

Net Profit Before tax and extradinary items:

Gross Profit 72

Provision for Tax 88

160

Adjustments for:

Depreciation 60

Operating profit before working capital changes 220

Adjustments for Working Capital Changes:

Add: Decrease in Inventories 168

Less: Increase in Receivables ‐(18)

Less: Increase in Advances ‐(1.2)

Less:

Decrease

in

Accounts

Payable ‐

(6)Add: Increase in Outstanding expenses 24

166.8

Cash Generation from Operations 386.8

Less: Income Tax Paid 86.8

Net Cash

from

Operating

activities 300



51



Example 2: Indirect Method - Solution- Continued

(Rs. In 000)

Cash flows

from

Financing

activities:

Issue of Shares 84

Dividend Paid 72

Net Cash from Financing activities 12

Net increase in Cash and Cash equivalents 12

Cash and

Cash

equivalents

at

the

beginning

60

Cash and Cash equivalents at the end 72

52



Lesson SummaryWe 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

Cash Flow Classification - Cash Flow from Operating, Investingand Financing ActivitiesCash Flow Classification - Cash Flow from Operating, Investingand Financing Activities

Treatment of certain special items in Cash Flow StatementTreatment of certain special items in Cash Flow Statement

Format of Cash Flow Statement - Direct Method and IndirectMethodFormat of Cash Flow Statement - Direct Method and IndirectMethod

Preparation and Presentation of Cash Flow StatementPreparation and Presentation of Cash Flow Statement

53



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