Cash Flow Statement Conceptual Framework

Paper 3B: Financial Management Chapter 3 Unit II

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

1. Concept of Cash Flow statement

(as per Revised AS 3)

2. Format of Cash Flow Statement

3. Preparation and Presentation of

Cash Flow Statement
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Introduction to Cash Flow Statement

Introduction
Background
Important terms
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Cash Flow - Introduction

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

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
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Cash Flow - Background

1. 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.

3. Also analyses the reasons for such changes

4. Two areas of analysis are Cash generating

efficiency and free cash flow
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Cash Flow Important Terms

Cash cash on hand and demand deposits with banks

1
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
2 (example Government securities)

Cash flow inflows and outflows of cash and cash

equivalents
3
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Classification of Cash Flows

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Cash Flow - Classification

Cash flow from Operating Activities

Principal revenue generating activities
1
Cash flow from Investing Activities
Acquisition and disposal of long term assets and
2 other investments not included in cash equivalents

Cash flows from Financing activities

Activities that has an impact of owners capital and
3 borrowings
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1. Cash Flow from Operating Activities

Cash receipts from sale of goods or services

Cash payments to suppliers

Cash payment to employees

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2. Cash flow from Investing Activities

Cash payment
Cash payment to acquire Cash receipts
to acquire Cash receipts shares, debt form disposal
fixed assets from disposal instruments of of shares,
including of fixed assets other debentures,
intangibles companies, etc
etc
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3. Cash Flows from Financing activities

Cash proceeds from issuing shares, debentures, etc

Cash repayments of amounts borrowed - debentures

Payment of dividend
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Cash Flows Special Items

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Foreign Currency & Extraordinary Items

To be disclosed separately as arising from

Foreign operating / investing / financing activities
Currency
Unrealized gains or losses from foreign
Cash Flows exchange transactions are not cash flows

To be disclosed separately as arising from

operating / investing / financing activities
Extraordinary
items Examples Insurance claims, Bad debt
recovered, etc
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Interest and Dividends Financial Enterprises

Interest Paid
Cash flow from
Operating activities
Financial
enterprises Interest Received and
Dividend Received
Cash flow from
Operating activities
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Interest and Dividends Other Enterprises

Interest Paid on Long Term

borrowings
Cash flow from Financing
Activities

Other Interest Paid on Working Capital

borrowings
Enterprises Cash flow from Operating
activities

Interest Received and Dividend

Received
Cash flow from Investing activities
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Dividends Paid

In all Dividend Paid

Cash flow from
cases Financing activities
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Taxes and Acquisition/ Disposition

Should be separately
Taxes on disclosed under Operating
Income activities unless identified,
otherwise

Acquisition and
disposition of Should be separately
subsidiaries disclosed under Investing
and other activities
business units
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Non Cash Transactions

Investing and financing

transactions that do not require
the use of cash or cash
equivalents should be excluded
Non-cash from cash flow statement
transactions
Example Purchase of Fixed
Assets by Issue of Shares /
Debentures
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Cash Flow Statement

Information Required for preparation
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Cash flows Information Required

1. Comparative Balance Sheets

2. Profit and Loss Account

3. Additional information

Availability of 2 and 3 are optional

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Cash Flow Statement

Two Methods Direct & Indirect
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Financial Statements

Net Income does not mean net

cash received or

Generally prepared Net Loss does not mean net

on accrual basis of
accounting where in cash used in operating activities.
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Cash Flow from Operating Activities

Cash from Operating

activities can be
reported in two ways

Direct Method

Indirect Method
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Cash Flow Statement Direct Method

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
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Cash Flow Statement Direct Method Continued

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

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Cash Flow Statement Direct Method Continued

A: Cash flow from operating activities

B: Cash flow from investing activities

C: Cash flow from financing activities

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

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Cash Flow Statement Indirect Method

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
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Cash Flow Statement Indirect Method Continued

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

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Cash Flow Statement Indirect Method Continued

A: Cash flow from operating activities

B: Cash flow from investing activities

C: Cash flow from financing activities

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

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Practical Illustrations
Example 1: Direct Method
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Example 1: Balance Sheet and P&L Account

BalanceSheetofMColimitedason31Mar2011
31.03.2010 31.03.2011 31.03.2010 31.03.2011
Liabilities Rsin000 Rsin000 Assets Rsin000 Rsin000
ShareCapital 360 444 Land 48 96
RetainedEarnings 151.8 163.8 Buildings&Equipments 360 576
Accountspayable 240 234 Cash 60 72
Outstandingexpenses 24 48 Receivables 168 186
Incometaxpayable 12 13.2 Inventories 264 96
AccumulatedDepn 120 132 Advances 7.8 9

907.8 1035 907.8 1035

ProfitandLossAccountfortheyearended31Mar2011
Rsin000
NetSales 2520
Less:COGS 1980
Depreciation 60
Salariesandwages 240
Operatingexpenses 80
Provisionfortax 88 2448
GrossProfit 72
Profitonsalesofequipment(Cost:72) 12
84
Dividend 72
RetainedEarnings 12
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Example 1: Identification of Working Notes

Receipts
from Sales of
Cash Equipments
Payments Investment (for this
Cash
to in purchase purpose we
Receipts Income
Suppliers of Building need to know
from Tax Paid the
and and
Customers Accumulated
Employee Equipments
Depreciation
s of Equipment
sold)
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Example 1: Direct Method Working Note 1

WorkingNote:1 (Rs.In000)
CashReceiptsfromCustomers
NetSales 2520
Add:OpeningReceivables 168
2688
Less:ClosingReceivables 186
2502
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Example 1: Direct Method Working Note 2

WorkingNote:2 (Rs.In000)
CashPaidtoSuppliersandEmployees
COGS 1980
SalariesandWages 240
OperatingExpenses 80
2300
Add:
OpeningAccountsPayable 240
OpeningOutstandingExpenses 24
ClosingInventories 96
ClosingAdvances 9 369
2669
Less:
ClosingAccountsPayable 234
ClosingOutstandingExpenses 48
OpeningInventories 264
OpeningAdvances 7.8 553.8
2115.2
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Example 1: Direct Method Working Note 3

WorkingNote:3 (Rs.In000)
IncomeTaxesPaid
ProvisionforTaxduringtheyear 88
Add:OpeningIncomeTaxpayable 12
100
Less:ClosingIncomeTaxpayable 13.2
86.8
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Example 1: Direct Method Working Note 4

WorkingNote:4 (Rs.In000)
PurchaseofBuildingsandEquipments
OpeningBalanceofBuildingandEquipments 360
Less:CostofsoldEquipment 72
288
ClosingBalanceofBuildingandEquipments 576
PurchaseofBuildingandEquipments 288
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Example 1: Direct Method Working Note 5

WorkingNote:5 (Rs.In000)
AccumulatedDepreciationonEquipmentssold
AccumulatedDepreciation Opening 120
Add:Depreciationduringtheyear 60
180
Less:AccumulatedDepreciation Closing 132
48
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Example 1: Direct Method Working Note 6

WorkingNote:6 (Rs.In000)
CashReceiptsfromSaleofEquipments
CostofsoldEquipment 72
AccumulatedDepreciationonEquipmentssold 48
WrittenDownValueofEquipmentsold 24
Add:Profitonsales 12
36
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Example 1: Direct Method - Solution

CASHFLOWSTATEMENT

(Rs.In000)
CashflowsfromOperatingactivities:
CashReceiptsfromCustomers 2502
CashPaidtoSuppliersandEmployees 2115.2
CashGeneratedfromOperations 386.8
Less:IncomeTaxPaid 86.8
NetCashfromOperatingactivities 300
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Example 1: Direct Method Solution - Continued

(Rs.In000)
CashflowsfromInvestingactivities:
PurchaseofLand 48
PurchaseofBuildingandEquipment 288
336
CashreceivedonsaleofEquipment 36
NetCashfromInvestingactivities (300)
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Example 1: Direct Method Solution - Continued

(Rs.In000)
CashflowsfromFinancingactivities:
IssueofShares 84
DividendPaid 72
NetCashfromFinancingactivities 12
NetincreaseinCashandCashequivalents 12
CashandCashequivalentsatthebeginning 60
CashandCashequivalentsattheend 72
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Practical Illustrations
Example 2: Indirect Method
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Example 2: Balance Sheet and P&L Account

BalanceSheetofMColimitedason31Mar2011
31.03.2010 31.03.2011 31.03.2010 31.03.2011
Liabilities Rsin000 Rsin000 Assets Rsin000 Rsin000
ShareCapital 360 444 Land 48 96
RetainedEarnings 151.8 163.8 Buildings&Equipments 360 576
Accountspayable 240 234 Cash 60 72
Outstandingexpenses 24 48 Receivables 168 186
Incometaxpayable 12 13.2 Inventories 264 96
AccumulatedDepn 120 132 Advances 7.8 9

907.8 1035 907.8 1035

ProfitandLossAccountfortheyearended31Mar2011
Rsin000
NetSales 2520
Less:COGS 1980
Depreciation 60
Salariesandwages 240
Operatingexpenses 80
Provisionfortax 88 2448
GrossProfit 72
Profitonsalesofequipment(Cost:72) 12
84
Dividend 72
RetainedEarnings 12
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Example 2: Identification of Working Notes

Receipts from
Sales of
Equipments (for
Investment in purchase this purpose we
Income Tax Paid of Building and
Equipments need to know
the Accumulated
Depreciation of
Equipment sold)
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Example 1: Indirect Method Working Note 1

WorkingNote:1 (Rs.In000)
IncomeTaxesPaid
ProvisionforTaxduringtheyear 88
Add:OpeningIncomeTaxpayable 12
100
Less:ClosingIncomeTaxpayable 13.2
86.8
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Example 1: Indirect Method Working Note 2

WorkingNote:2 (Rs.In000)
PurchaseofBuildingsandEquipments
OpeningBalanceofBuildingandEquipments 360
Less:CostofsoldEquipment 72
288
ClosingBalanceofBuildingandEquipments 576
PurchaseofBuildingandEquipments 288
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Example 1: Indirect Method Working Note 3

WorkingNote:3 (Rs.In000)
AccumulatedDepreciationonEquipmentssold
AccumulatedDepreciation Opening 120
Add:Depreciationduringtheyear 60
180
Less:AccumulatedDepreciation Closing 132
48
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Example 1: Indirect Method Working Note 4

WorkingNote:4 (Rs.In000)
CashReceiptsfromSaleofEquipments
CostofsoldEquipment 72
AccumulatedDepreciationonEquipmentssold 48
WrittenDownValueofEquipmentsold 24
Add:Profitonsales 12
36
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Example 2: Indirect Method - Solution

CASHFLOWSTATEMENT

(Rs.In000)
CashflowsfromOperatingactivities:
NetProfitBeforetaxandextradinaryitems:
GrossProfit 72
ProvisionforTax 88
160
Adjustmentsfor:
Depreciation 60
Operatingprofitbeforeworkingcapitalchanges 220

AdjustmentsforWorkingCapitalChanges:
Add:DecreaseinInventories 168
Less:IncreaseinReceivables (18)
Less:IncreaseinAdvances (1.2)
Less:DecreaseinAccountsPayable (6)
Add:IncreaseinOutstandingexpenses 24
166.8
CashGenerationfromOperations 386.8

Less:IncomeTaxPaid 86.8
NetCashfromOperatingactivities 300
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Example 2: Indirect Method - Solution- Continued

(Rs.In000)
CashflowsfromInvestingactivities:
PurchaseofLand 48
PurchaseofBuildingandEquipment 288
336
CashreceivedonsaleofEquipment 36
NetCashfromInvestingactivities (300)
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Example 2: Indirect Method - Solution- Continued

(Rs.In000)
CashflowsfromFinancingactivities:
IssueofShares 84
DividendPaid 72
NetCashfromFinancingactivities 12
NetincreaseinCashandCashequivalents 12
CashandCashequivalentsatthebeginning 60
CashandCashequivalentsattheend 72
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Lesson Summary
We have learnt important terms used in Cash Flow Statement -
Cash, Cash Equivalents and Cash Flow Statement

Cash Flow Classification - Cash Flow from Operating, Investing

and Financing Activities

Treatment of certain special items in Cash Flow Statement

Format of Cash Flow Statement - Direct Method and Indirect

Method

Preparation and Presentation of Cash Flow Statement

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Thank You