Cash Flow Statement

AS-3

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 Purpose of Cash Flow Statement

■ Provide information about cash receipts and

payments during an accounting period
■ Helps us see how financial position changes
during an accounting period
■ Only statement that collects and shows in
one statement the causes of changes in cash
during a financial reporting period

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 Cash and Cash Equivalents
■ Cash includes currency on hand and demand
deposits
■ Cash equivalents are short-term, highly liquid
investments that are
◆Readily convertible to known amounts of cash
◆So near maturity that they are not likely to
change in value due to changes in interest rates.

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 Classification of Cash Receipts &
Cash Payments

Operating
Activities
Investing
Activities

Financing
Activities
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 Operating Activities

Operating activities are the principal revenue-

producing activities of the enterprise .
■ Transactions that generally involve producing and
delivering goods and providing services
■ Inflows
◆ Selling goods and services, Receipts from debtors etc.
■ Outflows
◆ Purchase of RM, salary exp, Other operating exp.

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 Investing Activities
Investing activities are the acquisition and disposal
of long-term assets and other investments not
included in cash equivalents.
■ Inflows
◆ Selling of fixed assets and marketable securities,
receiving dividend on investments etc.
■ Outflows
◆ purchasing fixed assets, marketable securities etc.

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 Financing Activities
Financing activities are activities that result in
changes in the size and composition of the
owners’ capital and borrowings of the
enterprise.
■ Inflows
◆ Issuing shares, debentures, and long-term borrowing
■ Outflows
◆ Repayment of Long-term loans, redemption of
Debentures, payment of dividend & interest etc.

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 Basic Interpretation of
Statement of Cash Flows
■ Overall, how successful has management been in
generating and investing cash flows?
■ How does accrual basis net income compare with cash
basis?
■ What cash uses have been made for investing activities,
and to what extent has cash from operations been
sufficient to pay for these investments?
■ What sources and uses have been generated from
financing activities?

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 Direct versus Indirect Method for
Operating Activities

■ Direct shows major classes of gross cash

receipts and cash payments
◆Difference is net cash provided by,
used in, operating activities
■ Indirect starts with net income (loss) and
adjusts for revenues and expenses that did
not cause changes in cash

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 Direct Method of Cash Flow Statement
A) Cash Flows from Operating Activities Rs. Rs.

Cash sales XXX

Cash collected from customers/debtors XXX
Cash purchases (XXX)
Cash paid to suppliers/ creditors and
employees (XXX)
Cash paid for operating exp. (XXX)
Cash generated from operations XXX
Income Tax paid (XXX)
Net cash from operating activities (A) XXX

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 Indirect/Direct Method of Cash Flow
Statement
B) Cash Flows from Investing Activities Rs. Rs.

Purchase of Fixed Assets (XXX)

Proceeds from sale of Fixed Assets XXX
Interest & Dividend received on
investment out side the business XXX
Net cash from investing activities (B) XXX

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 Indirect/Direct Method of Cash Flow
Statement
C) Cash flows from Financing activities Rs. Rs.

Proceeds from issuance of share capital

Proceeds from long-term borrowings XXX
Repayment of long-term borrowings XXX
Interest & Dividend paid (XXX)
Net cash from financing activities (C) (XXX)
NET CASH FLOW(A+B+C) XXX
Add: Cash and cash equivalents at beginning XXX
of period
Cash and cash equivalents at end of period XXX
xxx
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 Indirect Method of Cash Flow Statement
A) Cash Flows from Operating Activities Rs. Rs.
Net profit before tax XXX
Add:
Depreciation XXX
Goodwill, Preliminary Exp. Written off XXX
Dividend paid XXX
Loss on sale of FA XXX
Less: Dividend & Interest on investment received (XXX)
Profit on sale of fixed assets (XXX)
Operating profit before working capital changes XXX
Less: Increase in CA & Decrease in CL (XXX)
Add: Decrease in CA & Increase in CL XXX
Less: Income taxes paid (XXX)

Net cash from operating activities (A) XXX

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 Adjustments
1) Accumulated Depreciation A/c

To Plant A/c XXX By Balance b/d XXX

(Accm. Dep. on plant sold)
By P& L A/c XXX
To Balance c/d XXX (Depreciation for CY)

XXX xxx

INVESTING INVESTING ACTIVITY-CI Add: To CFO

Less: CFO
ACTIVITY-CO
PLANT A/C
To Balance b/d XXX By Bank XXX
To Bank (purchase of XXX By P&L A/c (loss) XXX
plant)
By Accu.Dep.a/c XXX
To P&L A/c (profit)
XXX By Balance c/d XXX
xxx xxx
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 ADJUSTMENTS
2) Provision for Tax A/c

To Bank A/c XXX By Balance b/d XXX

(Tax paid during CY)
By P& L A/c XXX
To Balance c/d XXX (Balancing fig.)

XXX xxx

Add: To CFO
LESS:CFO(TAXPAID) (if EAT is given)

Consider Provision for Tax as a current liability and ignore

the related adjustment OR consider it as a provision and
prepared above account for adjustment.

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 Adjustments
3. Dividend
Current year’s dividend has to be added in the
CFO & previous year dividend has to be
shown in the financing activity as cash out
flow.
Interim dividend has to be added in the CFO & to
be shown as Cash out flow in financing
activity. FIN
AN
Balance Sheet CIN
G AC
Liabilities 2007 2006 Ad
TIV
I TY
:CI
Proposed 80,000 60,000 d:
CF
Dividend O
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 Adjustments
■ Increase in the Share Premium A/c will be shown in
the Financing activity as Inflow of cash.
■ Increase in the Goodwill a/c will be shown in the
Investing activity as Cash outflow for purchase of
Goodwill.
■ While preparing asset account opening and closing
balance should be taken at Gross Value of the asset.

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