Cash flow statement:

A tool kit analysis

Prepared by:
Divyesh Patel
IMI-Baroda.
 Introduction
• Cash flow statement reports cash receipts and payments classified according to the
entities major activities i.e.
1. Operating activities.
2. Investing activities.
3. Financing activities.

• It is prepared in line with stipulations given under AS-3

• Cash comprises cash on hand and demand deposits with banks.

• Cash equivalent are short term, highly liquid investment that can be readily
converted into cash.

• Cash flows are cash inflow and outflow of cash and its equivalents.

• Special attention or treatment is required for foreign currency cash flows, extra
ordinary items [e.g. bad debt recovered etc.],taxes and dividends.
Cash flow
 Procedure for preparation of cash flow
1. Calculation of net increase/decrease in cash and cash equivalents.

2. Calculation of net cash provided/used by operating activities.

3. Calculation of net cash provided/used by financing and investing

activities.

4. The net cash flow provided by/used in cash of three activities may be
highlighted

5. Ensure that aggregate of net cash flows from operating, investing and
financing activities is equal to net increase/decrease in cash and cash
equivalents.
 Methods for cash flow.
• Two methods namely
– Direct method
– Indirect method.
_______________________________________________________________
 Both the methods are used for converting net profit into cash flows from
operating activities.

 Under the direct method, cash receipts from operating revenues and cash
payments for operating expense are arranged and presented in the cash flow
statement and difference between cash receipts and payments is treated as the
net cash flow from operating activities.

 under indirect method, the net profit/loss is used as the base and convert it
to net cash provided/used in operating activities.
 Usefulness of cash flow
• Predict the future cash flow.

• Determine the ability to pay dividends and other commitments as it shows

availability of cash resources.

• Reflect the relationship of net income to changes in business cash .

• Analyze the efficiency in cash management.

• Disclose the cash movements.

• Disclose the success or failure of cash planning.

• Evaluate management decisions.

 limitations
• It ignores non cash transactions.[i.e. transactions that does not affect the
cash].

• It is totally secondary data based statements.

• It is historical statements.

• Not suitable to evaluate the profitability.

• Does not reflect the real liquid position of organization.

 Statements of cash & its equivalents
Cash and cash equivalents[opening]
Cash in hand Xxx
Cash at bank Xxx
Marketable securities xxxx xxxxxxx
Less: Bank overdraft - xx
cash credit xx

Cash and cash equivalents[closing]

Cash in hand Xxx

Cash at bank Xxx
xxxxx
Marketable securities xxxx
Less: Bank overdraft - xx
cash credit xx
 Calculation of cash collected from customers[sales]

Calculation of cash collected from customers.

Debtors and receivables [opening balance] Xxxx

Add: Credit sales Xxx

Less: Debtors and receivable [closing balance] Xxx

Cash collected from total credit sales xxx

 Calculation of cash paid to creditors[purchase]

Calculation of cash paid to creditors[purchase]

Creditors and bills payable [opening] Xxxx

ADD: Credit purchase Xxx

Less: creditors and bills payable[closing] Xxx

Cash paid to creditors xxxx

 Non cash items
• Non cash expense like
– Depreciation
– Goodwill
– Preliminary expense written off[P&L a/c]
 Cash flow statement
[A] CASH FLOW FROM OPERATING ACTIVITIES
Net profit before interest and tax Xxx
Adjustment for:
Depreciation xxx
Unrealized exchange difference xxx
Provision for contingencies[net] xxx
Deficit on fixed assets sold/scrapped xxx
Impairment loss on fixed assets xxx
Interest received xxx
Operating profit before working capital changes xxx
Adjustment for: xxx
Decrease/[increase] in trade and other receivealbles xxx
Decrease/[increase] in inventories xxx
Increase/[decrease] in payables xxx
Cash generated from operations xxx
Direct taxes paid xxx
Net cash inflow/[outflow] from operation xxx
[B] CASH FLOW FROM INVESTING ACTIVITIES xxx
Purchase of fixed assets xxx
Sale of fixed assets xxx
Interest received on inter corporate deposits xxx
Net cash flow from investing activities xxx
[C] CASH FLOW FROM FINANCING ACTIVITIES xxx
Proceeds from borrowing[net] xxx
Repayment of borrowing xxx
Dividend paid xxx
Corporate dividend tax xxx
Interest paid xxx
Net cash flow from financing activities xxx
Net increase/decrease in cash and cash equivalents[A+B+C] xxx
Add: cash & cash equivalents[opening] xxx
Cash and cash equivalents[closing] xxx
Assets 31.3.2007 31.3.2008
Property 200000 250000
Plant 400000 260000 450000 300000
Less: Dep’n -140000 -150000

Loans to subsidiary co. Nil 15000

Share in subsidiary co. 20000 20000
Stock 140000 150000
Debtors 100000 150000
Bank 35000 157000
TOTAL 755000 1042000
Liabilities
Equity share 300000 400000
Share premium Nil 10000
P&L appropriation a/c 100000 100000
Profit for the year Nil 200000
6% debenture 1500000 100000
Profit on redemption of debenture Nil 2000
Creditors 140000 110000
Provision for taxation 50000 100000
Proposed dividend 15000 20000
TOTAL 755000 1042000
• Additional information:
– During the year plant costing Rs.50000. was sold for
Rs.10000.Accumalted depreciation on this plant was Rs.30000.Loss on
sale of plant was charged to P&L A/C.

– Income tax paid during the year was Rs.60000.

Cash flow statement for the year ended 31.3.2008
Cash flow from operating activities Rs.
Net profit before tax and extraordinary items 200000
Adjustments for:
Depreciation 40000
Provision for taxation 110000
Proposed dividend 20000
Loss on sale of machinery 10000
Operating profit before working capital changes 380000
Adjustments for:
Increase in debtors [50000]
Increase in stock [10000]
Decrease in creditors [30000]
Cash generated from operation 290000
Tax paid [60000]
Net cash from operating activities 230000
Cash flow from investing activities
Purchase of property [50000]
Sale of plant 10000
Purchase of machinery [100000]
Loans to subsidiary [15000]
Net cash flow from investing activities [155000]
Cash flow from financing activities
issue of equity shares at premium 110000
Redemption of debenture [48000]
Dividend paid [15000]
Net cash flow from financing activities 47000
Net increase in cash and cash equivalents 122000
[230000-155000+47000]
Add: cash and cash equivalent[opening] 35000
Cash and cash equivalents[closing] 157000