Cash Flow Statement

(What is a CFS?)

Simply, a CFS is a summarization of

the cash receipts & payments during a
given period of time.
 Cash Flow Statement
(CFS – Why??; The purposes of CFS)

• explains the difference between the cash balances of this

yr & last yr.
• explains why a profitable firm may be cash poor.
• explains (addl. to the P & L) the sources & uses of cash in
investing & financing activities.
• A prospective lender will be particularly interested to
examine the projected CFS of the prospective borrower to
know the latter’s ability to service his debt. Moreover banks
prefer to lend to firms that anticipate the need for cash as
it reflects good financial mgmt. They are hesitant to lend
to firms that have been taken by surprise by a cash
shortage.
 Cash Flow Statement
(Is the Statement Mandatory?)

• Not as per the Companies Act

• As per AS-3 issued by ICAI, the
statement is recommendatory only.
• For listed companies, the statement is
obligatory.
Cash Flow Statement
(Cash Flows – Sources - Examples)

Source
1. Operations
How much cash was generated by the
normal operations of the enterprise?

To what extent are the company’s

investments being financed by
internally generated cash?
Cash Flow Statement
(Cash Flows – Sources - Examples)

Source

2. Sale of Fixed Assets

In what other ways were significant

amounts of cash raised?
Cash Flow Statement
(Cash Flows – Sources - Examples)

Sources
3. Issue of Shares
4. Borrowings
In what other ways were significant
amounts of cash raised?
What was the proportion of debt & equity in
the cash obtained externally?
Cash Flow Statement
(Cash Flows – Uses - Examples)

Uses

1. Buy back of shares

2. Purchase of Fixed Assets
Is the company reinvesting excess cash in
productive assets, or is it using cash to
reduce share capital?
Cash Flow Statement
(Classification of Cash Flows)

Cash receipts & payments are

classified into 1. Operating; 2.
Investing; and 3. Financing activities
Cash Flow Statement
(Classification of Cash Flows)

I Operating Activities
These are the principal revenue producing activities
of the enterprise. Examples –

* cash receipts from the sale of goods

* cash receipts from fees, commission etc.
* cash payments to suppliers, and employees etc.
* cash payment or refund of income-tax
Cash Flow Statement
(Classification of Cash Flows)

II Investing Activities
These are cash payments & receipts towards purchase / sale
of fixed assets, and investments. Examples –

* Cash payments to acquire fixed assets, shares, debentures

etc.
* Cash receipts from the sale of fixed assets, shares,
debentures etc.
* Long-term loans given to third parties.
* Dividends & interest received on the above investments.
 Cash Flow Statement
(Classification of Cash Flows)

III Financing Activities

These represent sourcing of funds.
Examples –

* Cash receipts from issue of shares,

debentures etc.
* Dividend & interest payment on the above
* Cash repayments of amounts borrowed.