Undestanding cash flow statement

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<p>Slide 1</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comHow to Read Cash Flow Statement</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comWhat is Cash Flow Statement?</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comIt is a statement which provides information about the historical changes in cash and cash equivalent of the entity.</p> <p>It provides the user of financial information with a basis on which to assess the ability of the entity to generate cash and its needs to utilise that cash.</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comA statement of cash flows classifies cash flows during the period into:</p> <p>Operating activity</p> <p>Investing activity and</p> <p>Financing activity</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comDefinitions</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comCash comprises cash on hand and demand deposits</p> <p>Cash equivalents are held for meeting short term cash commitments rather than for investment or other purpose. For an investment to qualify as cash equivalent it must be:</p> <p>Readily convertible to a known amount of cash i.e. it has short maturity andSubject to an insignificant risk of changes in value</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comOperating Activities are the principal revenue producing activities of the enterprise and other activities that are not investing or financing activities.</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comInvesting Activities are the acquisition and disposal of long-term asset and other investments not included in cash equivalent.</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comFinancing Activities are the activities that result in changes in the size and composition of equity capital and borrowings of the enterprise.</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comWhat do these Activities indicate?</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comOperating Activities </p> <p>It indicates to what extent the operations of entity have generated cash flows which are available for use in other activities. </p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comInvesting Activities</p> <p>It indicates extent of expenditure made in resources intended to generated future income and cash flows.</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comFinancing Activities </p> <p>It is useful in predicting the claims that outside providers of capital will have over the future cash flows.</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comHow to evaluate cash flows from these activities?</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comOperating Activities </p> <p>Since this activity represents internal cash generation it is always better to have positive and increasing cash flows from operating activity.</p> <p>Negative cash flows from this activity indicates that the entity is incurring cash losses</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comInvesting Activities</p> <p>Since this activity indicates flow of investment in and out of business for future profit generation, it is better to have negative cash flow here i.e. outflow.</p> <p>Positive cash flow or inflow of cash in this activity indicates that the entity is selling its resources to generate cash, which is not good.</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comFinancing Activities </p> <p>This activity indicates change in capital structure i.e. equity or borrowing. While there is a limit to increase the equity capital (authorised share capital) the major volatile component here is borrowing</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comFinancing Activities </p> <p>Negative cash flow i.e. outflow in this activity would mean that the entity is reducing its debt, there by reducing interest burden which is quite good.</p> <p>Positive cash flow here indicates increasing debt burden, which should be avoided.</p> <p>Roshankumar S PimpalkarEmail: roshankumar.2007@rediffmail.comComparison of cash flow statement of more than one year can easily help to assess the solvency and liquidity position of an entity. </p> <p>Roshankumar S Pimpalkar</p>