Financial Accounting:

A Managerial Perspective
Sixth Edition

Prepared by
R. Narayanaswamy
Indian Institute of Management Bangalore

21 June 2017 © PHI Learning Private Limited New Delhi 1

 Chapter 13
Statement of Cash Flows

21 June 2017 © PHI Learning Private Limited New Delhi 2

 Purpose and Structure of the Statement
of Cash Flows

■ Purpose
■ Structure
■ Operating activities
■ Investing activities
■ Financing activities

21 June 2017 © PHI Learning Private Limited New Delhi 3

 Cash Flow Classification

21 June 2017 © PHI Learning Private Limited New Delhi 4

Non- Cash Investing and Financing Activities

Examples:

Converting debt into equity

Converting Preference shares into equity
Purchasing a building by incurring a mortgage to the seller
Obtaining an asset on a finance lease
Exchanging a non- cash asset for another non- cash asset
 Structure of Cash Flows

21 June 2017 © PHI Learning Private Limited New Delhi 6

Sangeeta Company entered into the following
transactions. Classify each as Operating activity,
investing activity, financing activity, non- cash
activity, or cash management activity.

1. Purchased a 90- day Treasury bill.

2. Redeemed Debentures.
3. Sold manufacturing plant.
4. Purchased building.
5. Issued equity in exchange for land.
6. Issued equity shares at a premium.
7. Received interest on deposits.
8. Paid dividend.
9. Received dividend on equity investments.
10. Collected bills receivable from customers.
11. Paid suppliers.
12. Obtained a computer on finance lease.
 Format of Statement of Cash Flows

21 June 2017 © PHI Learning Private Limited New Delhi 8

 Computing Net Cash Flow from
Operating Activities

■ Two methods
■ Direct method
■ Indirect method
■ Direct method
■ Cash received from customers
■ Cash paid to suppliers and employees
■ Income tax paid
Continue
d
21 June 2017 © PHI Learning Private Limited New Delhi 9
Computing Net Cash Flow from
Operating Activities - Direct Method

■Cash received from customers= Credit sales+

Decrease(- Increase in trade receivables)- Write
offs
= 925,000- 32,000- 10,000
=Rs. 8,83,000

21 June 2017 © PHI Learning Private Limited New Delhi 14

Computing Net Cash Flow from
Operating Activities- Direct Method

■ Cash paid to suppliers and employees=

Cost of goods sold
+ Selling and administrative expenses
-Depreciation expense
-Bad debt expense
+ Increase(- Decrease) in inventories
+ Increase(- Decrease) in Prepaid expenses
+ Decrease(- Increase)in trade payables
=6,69,000+ 58000+ 58,000- 2,000+ 14,000
=Rs. 7,97,000. © PHI Learning Private Limited New Delhi 15
21 June 2017
Computing Net Cash Flow from
Operating Activities- Direct Method

■Income tax paid

= Income tax expense
+ Decrease(- Increase in tax payable)
=27,000-15,000
=12,000.

21 June 2017 © PHI Learning Private Limited New Delhi 16

Cash Flows from operating activities-
Direct method

■Income tax paid

= Income tax expense
+ Decrease(- Increase in tax payable)
=27,000-15,000
=12,000.

21 June 2017 © PHI Learning Private Limited New Delhi 17

 Computing Net Cash Flow from
Operating Activities

■ Indirect method
■ Non-cash items
■ Non-operating items
■ Changes in working capital items

21 June 2017 © PHI Learning Private Limited New Delhi 19

Computing Net Cash Flow from Operating
Activities
 From Accrual to Cash

21 June 2017 © PHI Learning Private Limited New Delhi 22

 Computing Net Cash Flow from
Investing Activities

■ Investing activities
■ Purchase and sale of property, plant and
equipment
■ Purchase and sale of investments
■ Interest and dividend received
■ Non-cash investing

21 June 2017 © PHI Learning Private Limited New Delhi 23

 Computing Net Cash Flow from
Financing Activities

■ Financing activities
■ Issue and buyback of share capital
■ Dividends
■ Raising and repayment of borrowings
■ Interest paid
■ Non-cash financing

21 June 2017 © PHI Learning Private Limited New Delhi 26

 Reporting Cash Flows

■ Operating activities
■ Direct method
■ Indirect method
■ Investing activities
■ Financing activities
■ Net cash flow
■ Change in cash and cash equivalents
■ Non-cash investing and financing
activities
21 June 2017 © PHI Learning Private Limited New Delhi 28
 Interpreting the Statement of Cash
Flows

■ Increase (decrease) in cash despite net

loss (net profit)
■ Earnings quality
■ Paying for acquisitions and capital
expenditure
■ Utilizing the proceeds of a share issue
■ Effect of expansion and growth on cash
■ Financial flexibility (“Plan B”)
■ Prospects for shareholders and lenders
21 June 2017 © PHI Learning Private Limited New Delhi 30
 End of Chapter 13
Statement of Cash Flows

21 June 2017 © PHI Learning Private Limited New Delhi 31