Dr.

Ajay Dwivedi
Professor
Department of Financial Studies
 A cash flow statement is the financial
statement that measures the cash generated
or used by a company in a given period.

Non Cash Transactions:

 Depreciation
 Amortization
 Depletion etc.
As prescribed by the Accounting Standard-3,
there are two methods which can be used to
prepare cash flow statements:

 A. Indirect method
 B. Direct method
Whichever method be used, the end result
under all three activities i.e. operating,
investing and financing will be the same.
I. Operating Activities
 The cash flow from operating activities are
derived under two stages;
 A. Calculating the operating profit before
changes in working capital
 B. The effect of changes in working capital
 xxx
Net profit before Tax and extra ordinary Items xxx

Add: Non-cash and non-operating Items which have already been debited to profit and
Loss Account like;

Depreciation xxx

Amortisation of intangible assets xxx

Loss on the sale of Fixed assets xxx

Loss on the sale of Long-term Investments xxx

Provision for tax xxx

Dividend paid xxx xxx

Less: Non-cash and Non-operating Items which have already been credited to Profit and
Loss Account like

Profit on sale of fixed assets xxx

Profit on sale of Long term investment xxx xxx

Operating profit before working Capital changes xxx

 a. Current Assets
 i. An increase in an item of current assets causes a decrease in
cash inflow because cash is blocked in current assets
 ii. A decrease in an item of current assets causes an increase in
cash inflow because cash is released from the sale of current
assets
 b. Current Liabilities
 i. An increase in an item of current liability causes a decrease in
cash outflow because cash is saved
 ii. A decrease in an item of current liability causes an increase in
cash outflow because of payment of the liability
 Thus, in a nutshell
 Cash from operating activities = Operating profit before working
capital changes + Net decrease in current assets + Net Increase
in current liabilities – Net increase in current assets – Net
decrease in current liabilities
 II. Investing Activities
 The cash flow from investing activities is derived by
adding all the cash inflows from the sale or maturity
of assets and subtracting all the cash outflows from
the purchase or payment for new fixed assets or
investments.
 Cash flow arising from investing activities typically
are:
 i. Cash payments to acquire Fixed Asset
 ii. Cash receipts from disposal of fixed asset
 iii. Cash payments to acquire shares or debenture
investment
 iv. Cash receipts from the repayment of advances and
loans made to third parties
 Furthermore,
 i. Cash sale of plant and machinery, land and
Building, furniture, goodwill etc
 ii. Cash sale of investments made in the shares and
debentures of other companies
 iii. Cash receipts from collecting the Principal amount
of loans made to third parties
 Examples of Cash outflow from investing activities
are:
 i. Purchase of fixed assets i.e. land, Building,
furniture, machinery etc
 ii. Purchase of Intangible assets i.e. goodwill,
trademark etc
 iii. Purchase of shares and debentures
 iv. Purchase of Government Bonds
 v. Loan made to third parties
 III. Financing activities
Cash flows from financing activities are the cash paid and received
from activities with non-current or long-term liabilities and
shareholder’s capital.
Cash flow arising from Financing activities typically are:
 1. Cash proceeds from the issue of shares or other similar
instruments
 2. Cash proceeds from the issue of debentures, loans, notes,
bonds, and other short-term borrowings
 3. Cash repayment of the amount borrowed
Examples of cash inflow from financing activities are:
 i. The issue of Equity and preference share capital for cash only
 ii. The issue of Debentures, Bonds and long-term note for cash
only
Examples of cash outflow from financing activities are:
 i. Payment of dividends to shareholders
 ii. Redemption or repayment of loans i.e. debentures and bonds
 iii. Redemption of preference share capital
 iv. Buyback of equity shares
Illustration of Indirect method:

Net profit before Tax and extra ordinary Items xxx

Cash flow from Operating activities

Add: Non-cash and non-operating Items which have already been debited to profit and Loss Account like;

Depreciation xxx

Amortisation of intangible assets xxx

Loss on the sale of Fixed assets xxx

Loss on the sale of Long-term Investments xxx

Provision for tax xxx

Dividend paid xxx xxx

Less: Non-cash and Non-operating Items which have already been credited to Profit and Loss Account like

Profit on sale of fixed assets (xxx)

Profit on sale of Long term investment (xxx) (xxx)

Operating profit before working Capital changes (A) xxx

Changes in working capital:

Add: Increase in current liabilities xxx

Decrease in current assets xxx xxx

Less: Increase in current assets (xxx)

Decrease in current liabilities (xxx) (xxx)

Net increase / decrease in working capital (B) xxx

Cash generated from operations (C) = (A+B) xxx

Less: Income tax paid (Net tax refund received) (D) (xxx)

Cash flow from before extraordinary items (C-D) = (E) xxx

Adjusted extraordinary items (+/–) (F) xxx

Net cash flow from operating activities (E+F) = (G) xxx

Cash flow from Investing activities

Proceeds from sale of fixed assets xxx

Proceeds from sale of investments xxx

Purchase of shares/debentures/fixed assets (xxx)

Net cash from investing activities (H) xxx

Cash flow from Financing activities

Proceeds from issue of shares xxx

Proceeds from issue of debentures xxx

Payment of dividend (xxx)

Net cash flow from financing activities (I) xxx

Net increase in cash and cash equivalents (G+H+I) = (J) xxx

Cash and cash equivalents and the beginning of the period (K) xxx

Cash and cash equivalents and the end of the period (J+K) xxx
 2. Preparation under the Direct method
 The fundamentals of preparation of cash flow
statement under Direct method is more or
less same as in Indirect method with only a
few exceptions in terms of its presentation.
 Illustration of an Indirect method:
 The Cash flow statement under Direct
method is prepared as follows:
Cash flow from Operating activities

Add: Operating cash receipts: (A)

Cash sales xxx

Cash received from customers xxx

Trading commission received xxx

Royalties received xxx xxx

Less: Operating cash payments: (B)

Cash purchase (xxx)

Cash paid to suppliers (xxx)

Cash paid for business expenses (xxx) (xxx)

Cash generated from operations (A-B) = (C) xxx

Less: Income tax paid (Net of tax refund received) (D) (xxx)

Cash flow before extraordinary items (C-D) = (E) xxx

Adjusted extraordinary items (+/–) (F) xxx

Net cash flow from operating activities (E-F) = (G) xxx

Cash flow from investing activities (calculation same as under indirect method) (H) xxx

Cash flow from financing activities (calculation same as under indirect method) (I) xxx

Net increase in cash and cash equivalents (G+H+I) = (J) xxx

Cash and cash equivalents and the beginning of the period (K) xxx

Cash and cash equivalents and the end of the period (J+K) xxx
Thank You