Cash Flow Statement

Purposes of Cash Flow Statement

1.

Predict future cash flows

Evaluate management decisions

Determine the ability to pay dividends to stockholders

and payments to creditors

Show the relationship of net income to the businesss

cash flows

Cash Flow Statement

A Cash-Flow statement defined as a summary of receipts and
disbursements of cash for a particular period of time. It also explains
reasons for the changes in cash position of the firm between two dates of
Balance Sheets.
The term cash as used in the statement of cash flows refers to both cash
and cash equivalents.
Cash means, cash in hand and demand deposits with the bank.
Cash equivalent are short-term, highly liquid investments, readily
convertible into cash and which are subject to insignificant risk of
changes in values, consists of bank overdraft, cash credit, short term
deposits and marketable securities.
Cash flow statement provides relevant information in assessing a
company's liquidity, quality of earnings and solvency.
It is very useful in the evaluation of cash position of a firm.

Cash Flow Statement

Cash flows are both cash inflows and outflows of Cash and
Cash equivalents
Transactions which increase the cash position of the entity are
called as inflows of cash and those which decrease the cash
position as outflows of cash.
The statement of cash flow shows three main categories of
cash inflows and cash outflows, namely:
Operating Activities
Investing Activities
Financing Activities

Classification of Cash Flows

Investing
Activities
Operating
Activities

Cash Flow
Statement

Financing
Activities

Operating Activities
Operating Activities are the principal revenue generating
activities of the enterprise - create revenues, expenses,
gains, and losses.

Includes:

Current assets
Current Liabilities
Revenue and Expenses (includes interest expense and
revenue, and dividends received)

Operating Activities
Cash inflows

Cash outflows

Cash sale

Cash purchases

Cash received from Debtors

Cash payment to creditors & B/ P

Cash received from Commission

Cash payment for goods & services

& fees

Payment of wages & others

Interest & Dividend recd on loans

and investments

Other revenues
Other Operating cash receipts

Income Tax paid

Interest payments

Other operating expenses (cash

payments)

Net cash flows from operating activities

Investing activities
Investing Activities include the acquisition and
disposal of long term assets and other investments increase and decrease long-term assets
Includes:
Short-term and long-term investments

Long term assets - Property, Plant and Equipment

Intangible Assets

Investing activities
Cash inflows

Cash outflows

Cash Sale of fixed assets

Purchase of fixed assets

Cash Sale of investments - Shares,

Purchase of investments

Debentures & other securities

Interest received

Dividend received

Net cash flows from investing activities

Financing Activities
Financing Activities are activities that result in change in
the size and composition of the owners capital and
borrowings of the enterprise - obtain cash from investors
and creditors
Includes:
Share Capital
Short-term and long-term loans

Interest Paid
Dividends Paid

Financing Activities
Cash inflow
Cash received from Issue of
shares & debentures
Receipts of long term &

short term borrowings

Cash outflow
Cash repayments of loans
Redemption of debentures
Dividends paid on equity and preference

share capital
Interest paid on loans/debentures

Net cash flows from financing activities

Limitations of Cash Flow Statement

Cash Flow Statement has limited scope as it compares with Fund flow
statement. Because it discloses inflows and outflows of cash alone. It
does not reveal the overall financial position of the concern.
Cash Flow Statement cannot provide a comprehensive picture of a
financial position because non-cash items of expenses and incomes are
excluded.
The balances as disclosed by the cash flow statement may not be
treated as actual liquid position of a concern since it cannot be easily
influenced by postponing purchases and other payments.
Not suitable for Judging Profitability

Statement does not reflect real liquid position

Can not be equated with Income Statement

METHOD OF PREPARING CASH FLOW

STATEMENT
Indirect Method:
Under this method, the Net Profit for the year is taken as
base & adjust the items which appear in P&L A/C but do not
cause any cash inflow or outflow.

Non - cash items such as Depreciation, Provisions for Tax,

Proposed Dividend, Transfer to Reserves (Adjustment of
non-cash items)

Changes during the period in Inventories and Receivables

and payables (Adjustment of Working Capital items)

All other items for which the cash effects are Investing or
Financing cash flows

Rules of calculating Operating Cash Flow

Change

Adjustment to Net Income

Decrease in Current Asset

Add

Increase in Current Liability

Add

Decrease in Current Liability

Subtract

Increase in Current Asset

Subtract

Format of Cash Flow from Operating Activities

Indirect method
(A) Cash flows from Operating Activities
Closing balance of P&L A/c

xxxx

Add - Non- Cash items debited to P&L A/C

xxxx

Less - Non- Cash items credited to P&L A/C

xxxx

Add Interest Payment

xxxx

Less Interest/Dividend Income

xxxx

Profit before Tax

Operating profit before adjusting Working Capital items

xxxx

Add - Decrease in Current Assets & Increase in Current Liability

xxxx

Less - Increase in Current Assets & Decrease in Current Liability

xxxx

Less Tax paid

xxxx

Net Cash flow from Operating Activities

xxxx

Format of Cash Flow from Operating Activities

Indirect method
(A) Cash flows from Operating Activities

Closing balance of P&L A/c

Add - Non- Cash items debited to P&L A/C - Depreciation, Losses from
sale of assets
Less - Non- Cash items credited to P&L A/C - Gains from sale of assets
Add Interest Payment
Less Interest/Dividend Income
Profit before Tax
Operating profit before adjusting Working Capital items

Format of Cash Flow from Operating Activities

Indirect method

Add or Less

Add - increases in current liabilities & decreases in

current assets
Less - decreases in current liabilities & increases in
current assets
Less Tax paid

Net Cash flow from Operating Activities

Format of Cash Flow from Investing & Financing

Activities Indirect method
(B) Cash flows from Investing Activities
Add - Sales of fixed assets

Add - Sales of Investments

Less - Purchase of fixed assets
Less - Purchase of Investments
Net Cash flow from Investing Activities
(C) Cash flows from Financing Activities
Less - Repayment of Bonds & Debentures
Less - Dividends paid
Add - Issue of Shares

Net Cash flow from Financing Activities

Net Increase (Decrease) in Cash