Financial Statement Analysis

Understanding Cash Flow Statement Part 1

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Agenda for the session
⮚ Understand what is cash flows – inflows and outflows
⮚ Understand about Cash Flow Statement and discuss about its various
components and its format.
⮚ Need for Cash Flow Statement
⮚ How Cash Flow Statement is different from Balance Sheet and Income
Statement
⮚ Use of Cash Flow Statement information to the users of financial data

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IMAGINE

Imagine you want to know what a firm does with its cash. Then, from will
you get such information?

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THINK

Assume that you are an owner of a business. If you want to know what
are the sources FROM WHERE your firm has received cash during an
accounting period and WHERE the same is used. From which financial
statement you will get this information?

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THINK

Do you believe that profit earned by a company will lead to corresponding

increase in a firm’s bank balance/cash? Do you have a mechanism to
know what a company is doing with its CASH?

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THINK

How will you come know whether a firm is capable of meeting its own
requirement of funds? Is it generating sufficient cash to meet its
investment and repaying loans to the lenders?

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 If you are curious to know the
answers of the issues raised, then
this session on Cash Flow
Statement will be of a great help
to you.

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Cash Flow Statement
➢A statement providing a summary of cash-inflows and cash-outflows for an
accounting period.

➢Explains the reasons for the changes in cash position of a firm.

➢A statement that provides information about the sources from where a firm
has received cash and the uses where the cash is used.

➢Cash Flow Statement shows how a firm is managing its cash – how it is
generating cash and how it is using its cash.
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Cash Flow Statement

CASH ENTERING FIRM CASH LEAVING

• Positive Cash • Negative Cash

Flows Flows – shown
• Cash Inflows in brackets ()
• Cash Outflows
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Meaning of Cash in Cash Flow Statement

➢Cash in Cash Flow Statement means Cash-in-hand, Cash at Bank and

Cash Equivalents.

➢Cash Equivalents include short-term, highly liquid investments that are

readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value. It may include:
○ Short-Term Deposits
○ Marketable Securities

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Cash and Cash Equivalent
-As per the Accounting Standard – IND-AS 7

➢Cash comprises cash on hand and demand deposits (Current Account +

Saving Account).
➢Cash equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.
➢Normally, an investment qualifies as a cash equivalent only when it has a
short maturity. This may be three months or less from the date of
acquisition.
➢Equity investments are excluded from cash equivalents.

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Components of a Cash Flow Statement

➢Cash Flow Statement reports inflows and outflows of cash and cash
equivalents in terms of the following:

○ Cash Flow from Operating Activities

○ Cash Flow from Investing Activities

○ Cash Flow from Financing Activities

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Components of a Cash Flow
Statement(contd)

➢Cash Flow from Operating Activities: cash flows from transactions that are
related to the operating activities of a firm.
○ Examples: Cash flows related to buying of raw material, salaries, administrative
expenses and revenues.

➢Cash Flow from Investing Activities: These are the cash flows from buying
and selling non-current assets and investments.
○ Examples: Cash flows related to buying of machinery, investing in bonds, selling
old assets and withdrawing from long term investment.

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Components of a Cash Flow
Statement(contd)

➢Cash Flow from Financing Activities: cash flows from transactions related
to borrowing of funds, raising capital, repayment of loans and distribution
of profits.

○ Examples: Cash flows related to taking loan from a bank, issue of bonds, raising
capital, repaying a bank loan, paying dividend.

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Components of a Cash Flow
Statement(contd)
INCREASE IN DECREASE IN
CASH CASH
OPERATING OPERATING
(Receipts from (Payment for
Revenue) expenses)

INVESTING
(Receipts from sale of
Firm’s INVESTING
(Payment for acquiring
fixed assets)
Cash assets)

FINANCING FINANCING
(Receipts from issue of (Repayment of loans &
bonds & shares) Dividend)

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 Cash Flow
Statement of
Britannia Industries
Limited

Source: Annual Report of Britannia

Industries Limited, 2019-20

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Cash Flow Behaviour of Britannia
Industries Ltd.

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