Module III

CASH FLOW STATEMENT

 CASH FLOW STATEMENT

• Statement reporting inflows and outflows of cash and cash

equivalents of an organisation during a particular period
• Reports cash receipts and cash payments classified according to the
firm’s major activities – operating , investing and financing
• Shows the net cash inflow and outflow for each activity and for
overall business of the firm
• It reports from where cash has come and how it has been utilised
• Explain the causes of change in cash balance by reconciling the
opening balance of cash with the closing balance of the same period
Usefulness of statement of cash
flows
• Final accounts give limited information about cash flows,
CFS reports cash receipts, payments and Net change in
cash
• CFS helps to know:
• The entity’s ability to generate future cash flows
• The entity’s ability to pay dividends and meet obligations
• The reasons for difference between net income and cash from
operating activities
• Cash investing and financing transactions over a period
 CASH FLOW STATEMENT
• Accounting standard - 3 : Cash Flow Statement
• Dealt with the financial statement which summarises the sources
and application of cash and cash equivalents
Meaning of cash and cash equivalents
• Cash: cash in hand and demand deposits with bank
• Cash equivalents: short term highly liquid investments, readily
convertible into cash(Eg. T Bills, Commercial paper…)
• Cash flow: can be inflow and outflow
Classification of Cash Flows
Operating Investing Financing
Activities Activities Activities

Income Changes in Changes in

Statement Items Investments Long-Term
and Long-Term Liabilities and
Asset Items Stockholders’
Equity Items

LO 1
 Flow of Cash

• Movement of cash or cash equivalents

• Inflow – cash comes into the business [source]
• Outflow – cash goes out of the business [application]
 Classification of cash flows

• Cash flows from operating activities

• Cash flow from investing activities
• Cash flow from financing activities
 Classification of cash flows
Operating activities
• Principal revenue producing activities of the organisation [sale of products and
services, payments to suppliers, remuneration to employees, tax, other expenses]
Investing activities
• Acquisition and disposal of long term assets [purchase/sale of land, building….]
Financing activities
• Activities result in changes in the composition of owner’s capital [Eg. Issuing
shares, debentures, payments of amount borrowed, payment of dividend and
interest]
Format of the Statement of Cash Flows

Order of Presentation:
Direct Method
1. Operating activities.
Indirect Method
2. Investing activities.
3. Financing activities.

LO 1
Significant Noncash Activities

1. Direct issuance of common stock to purchase assets.

2. Conversion of bonds into common stock.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.

Companies report noncash activities in either a

 separate schedule (bottom of the statement) or
 separate note to the financial statements.

LO 1
 Cash Flow Statement
Particulars Amount
Cash flow from operating activities Xxx

Cash flow from Investing activities Xxx

Cash flow from financing activities Xxx

------
Net increase/decrease in cash Xxx
Add: Cash at the beginning of period (opening cash) Xx
------
Cash at the end of the period (closing cash] Xxx
===
Illustration 17-2
Format of statement of cash flows

LO 1
DO IT! 1 Classification of Cash Flows

Illustration: Classify each of these transactions by type of cash

flow activity.

1. Issued 100,000 shares of $5 par value

Financing
common stock for $800,000 cash.
2. Borrowed $200,000 from Castle Bank, signing Financing
a 5-year note bearing 8% interest.
3. Purchased two semi-trailer trucks for $170,000 Investing
cash.
4. Paid employees $12,000 for salaries and
Operating
wages.
5. Collected $20,000 cash for services performed. Operating

LO 1
LEARNING
2
Prepare a statement of cash flows
OBJECTIVE using the indirect method.

Three sources of information:

1. Comparative balance sheets

2. Current income statement

3. Additional information

LO 2
 Cash Flow Statement (Indirect Method)
Cash From Operating Activities
Net Income Xxx
Adjustments to reconcile NI to net cash from operations:
Add: Depreciation expense Xx
Loss on sale of fixed asset Xx
Decrease in current assets Xx
Increase in current liabilities Xx
Less: Increase in Current assets (xx)
Decrease in Current liabilities (xx)
-------
Net cash from operating activities Xxx
Cash flows from investing activities Xx
Cash flows from financing activities Xx
-----
Net increase/decrease in cash Xxx
Add cash at the beginning of the period Xx
---
Cash at the end of the period Xx
 Adjustments for CAs and CLs

• Decrease in current assets – increases cash receipts

• Eg. Decrease in accounts receivable, increases cash
receipts, so add back to NI
• Increase in current assets - decreases cash receipts
• Eg. Increase in accounts receivable, decreases cash
receipts, so deduct it from NI
 Cash Flow Statement
Cash flow from investing activities
Purchase of fixed assets (Xxx)
Sale of fixed assets Xx
Interest received Xx
Dividend received Xx
-----
Net cash flow from investing activities Xxxx
Cash flow from financing activities
Issue of share capital Xxx
Long term borrowings Xx
Repayment of long term borrowings (xx)
Interest paid (xx)
Dividend paid (xx)
-----
Net cash from financing activities xxx
 Cash from operating activities

Cash receipts from sale of goods/services

Cash receipts from royalties, fees, commissions and other
revenues
Cash payments to suppliers for goods/services
Cash payment to and on behalf of employees
Cash receipts and cash payments of an insurance enterprise
for premiums and claims annuities and other policy benefits
Cash payment or refunds unless specifically identified with
financing/investing activities
Cash receipts and payments relating to futures, forward,
options or swap contract (if contract is for trading purpose)
 Cash from investing activities

Cash payments to acquire FAs

cash receipts from disposal of FAs
Cash payments to acquire shares, warrants or debt
instruments
cash receipts from disposal of shares, warrants or debt
instruments
Cash advances and loans made to third parties
cash receipts from repayment of advances and loans made
to third parties
Cash receipts and payments relating to futures, forward,
options or swap contract (if contract is not for trading
purpose)
 Cash from financing activities

Cash proceeds from issuing shares or other similar

instruments
Cash proceeds from issuing debentures, loans, notes bonds
and other short/long term borrowings
Cash repayments of amounts borrowed
 Cash Flow Statement(Direct Method)
Cash from Operating Activities
Cash receipt from customers Xxxx
Less: cash paid to suppliers/employees Xxx
--------
Cash generated from operations Xxxx
Less: income tax paid Xx
-----
Cash flow before extra ordinary items xxx
Less: extra ordinary items Xx
-------
Net cash from operating activities Xxx
Cash flows from investing activities xx
Cash flows from financing activities xx
------
Net increase/decrease in cash xxx
Add cash at the beginning of the period xx
------
Cash at the end of the period xx
 Free Cash Flow

• Describes the net cash provided by operating activities after

adjustment for capital expenditures and dividends
FCF=CFO - Capital Expenditure – Cash Dividends
• Capital expenditure – expenditure on plant, property
equipment etc.
• Indicates the cash generating capability of the organization