Cash Flows Statement Analysis

Concept of Cash Flows Statement:

This statement reports cash inflows and outflows based on the firm’s operating activities, investing
activities, and financing activities during an accounting period. In other words, this report shows what
activities generated money and what activities spent money during the course of the period. A cash flow
statement is a financial report that tells the reader the source of a company’s cash and how it was spend
over a specific time period. This is an important indicator of financial soundness because it is possible for
a company to show profits while not having enough cash to sustain operation. The cash flow statement
also tell s the reader how much money was spent for items that do not appear on the income
statement, such as loan repayments, long term assets purchases and payment of cash dividends.

The statement separates activities into three categories:

 Operating activities: The operating cash flows are cash flows directly related to sales and
production of the firm’s products and services. Example: produce sales, commission, supplier
and lender payment and payroll.
 Investing activities: The investment cash flows are cash flows associated with acquire or
purchase long term fixed assets as well as cash received from their sales.
 Financing activities: The financing cash flow is cash flow that results from debt and equity
financing transactions. Example: The sale of company share, the repurchase of share and
dividend paid.

Purpose of the Statement of Cash Flows:

i. To report on the cash receipts and cash disbursements of an entity during a financial year.

i. To report on the entity’s operating, investing and financing activities for the period.

Importance of Cash Flow Statement:

The cash flow statement provides information regarding inflows and outflows of cash of a firm for a
period of one year. Therefore cash flow statement is important on the following grounds.

 Cash flow statement helps to identify the sources from where cash inflows have arisen within a
particular period and also shows the various activities where in the cash was utilized.
 Cash flow statement is significant to management for proper cash planning and maintaining a
proper matching between cash inflows and outflows.
  Cash flow statement shows efficiency of a firm in generating cash inflows from its regular
operations.
 Cash flow statement reports the amount of cash used during the period in various long-term
investing activities, such as purchase of fixed assets.
 Cash flow statement reports the amount of cash received during the period through various
financing activities, such as issue of shares, debentures and raising long-term loan.
 Cash flow statement helps for appraisal of various capital investment programs to determine
their profitability and viability.
 It helps the internal management to determine the financial policy to be adopted in future since
it supplies information relating to funds, e.g., taking decision about the replacement of fixed
assets or repayment of long- term liabilities etc.

Uses of the Statement of Cash flows:

i. Management:

 To see the effects of its past major policy decisions in quantitative form.

 To know whether a flow of cash from operating activities large enough to finance all projected
capital needs internally rather than having to incur long-term debt or issue additional stock.

 In case of cash shortage, management can use this statement to determine why such shortages
are occurring.

ii. Investors & Creditors: It assists investors, creditors, and others to assess the following:

 Enterprise’s ability to generate positive future net cash flows.

 Enterprise’s ability to manage the cash efficiently.

 Enterprise’s ability to meet it obligation.

 Enterprise’s ability to pay dividends.

 Enterprise’s need for external financing.

 Reasons for differences between net income and associated cash receipts & payments.

 Effects on an enterprise’s financial position of both its cash and non-cash investing and financing
transactions during the period.

Cash Flows from Operating Activities:

These cash flows are generally the cash effects of transactions that enter into the determination of net
income.
  Cash Inflows

i. Sales of goods or services

ii. Interest and dividend income

iii. Sale of trading securities.

 Cash Outflows

i. To pay suppliers for inventory

ii. To pay employees for services

iii. To pay lenders (interest)

iv. To pay government for taxes

v. To pay other suppliers for other operating expenses

Cash Flows from Investing Activities:

These cash flows show the impact of buying and selling fixed assets and debt or equity securities of
other entities.

 Cash Inflows

i. Sales of fixed assets (property, plant, equipment)

ii. Sale of debt or equity securities of other entities

 Cash Outflows

i. Purchase of fixed assets (property, plant, equipment).

ii. Purchase debt or equity securities of other entities.

Cash Flows from Financing Activities:

Shows impact of all cash transactions with shareholders and the borrowing and repaying transactions
with lenders.

 Cash Inflows

i. Borrowing

ii. Issue of securities.

 Cash Outflows

i. Repayment of debt.
ii. Repurchase of treasury – stock.
iii. Cash dividend.
 Preparation of Cash Flows Statement

………………………..
Statement of Cash Flows
For the Year …………

Particulars Amount Amount

Cash Flows from Operating Activities:
Net Income (Loss) * (*)
Depreciation *
Capital loss *
Decrease in Current Assets *
Increase in Current Liabilities *
Capital gain (*)
Increase in Current Assets (*)
Decrease in Current Liabilities (*)
Net Cash Flows from Operations- A **
Cash Flows from Investment Activities:
Purchase of fixed assets (*)
Purchase of securities of other entities (*)
Sale of fixed assets *
Sale of securities of other entities *
Net Cash Flows from Investments - B **
Cash Flows from Financing Activities:
Increase in notes payable *
Issue of securities *
Borrowings *
Loan repayment (*)
Decrease in notes payable (*)
Repurchase the firm’s own equity securities (*)
Dividend payment (*)
Net Cash Flows from Financing - C **
Change in Cash : D = (A+B+C) ***