FINANCIAL ACCOUNTING FOR

MANAGEMENT (FAM)

PROF. (DR.) RANJAN DASGUPTA

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 SESSION 16-18-

STATEMENT OF CASH FLOWS

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 Learning Objectives -
➢ Understanding the purpose, uses
and structure of cash flow statement
(CFS)
➢ Know how to report cash flow from
operating activities under indirect
method
➢ Understanding of cash flow from
investing activities
➢ Understanding of cash flow from
financing activities
➢ Understanding of reporting and
interpreting cash flows
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 Understanding the
Purpose, Uses and
Structure of Cash Flow
Statement (CFS)
The Cash Flow Statement (CFS) -
reflects an enterprise’s major sources
of cash receipts and cash payments.
It reports the cash effects during a
period of an enterprise’s operations, its
investing transactions and its
financing transactions.
The statement provides information to
understand the movements over the
period in cash and cash equivalents.

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Statement of Cash Flows/CFS -
Relevance of Cash
• Cash is the most liquid of assets.
– Offers both liquidity and flexibility.
– Both the beginning and the end of a company’s
operating cycle.
• Contrast: Accrual accounting and Cash basis
accounting.
– Net cash flow as the end measure of profitability.
– Cash flow analysis helps in assessing liquidity, solvency,
and financial flexibility.

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 Purposes of Statement of Cash
Flows/CFS -
• Addressing questions such as:
How much cash is generated from or used in
operations?
What expenditures are made with cash from
operations?
How are dividends paid when confronting an
operating loss?
What is the source of cash for debt payments?
How is the increase in investments financed?
What is the source of cash for new plant assets?
Why is cash lower when income increased?
What is the use of cash received from new
financing?
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 Definitions as per IndAS 7:
Cash comprises of cash on hand and
demand deposits.

Cash equivalents are short-term, highly

liquid investments that are readily
convertible to known amounts of cash
and which are subject to an
insignificant risk of changes in value.

Cash flows are inflows and outflows of

cash and cash equivalents.
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Sources (inflows) and Uses (outflows)
of Cash & CE:
Sources Uses
Operations (cash sales & Payments for operations
collection from receivables) (wages, admin., payables)
Non-operating income Non-operating payments
(interest, dividends) (interest, dividends)
New borrowings Repayment of borrowings
New equity, preference, Buyback of equity,
debenture issues redemption of preference,
debenture
Sale of property, plant and Purchase of PPE
equipment (PPE)
Sale of other non-current Purchase of other non-
assets (long-term investment) current assets

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 Definitions as per IndAS 7:
Operating activities are the principal revenue-
producing activities of the entity and other
activities that are not investing or financing
activities.

Investing activities are the acquisition and

disposal of long-term assets and other
investments not included in cash equivalents.

Financing activities are activities that result

in changes in the size and composition of the
contributed equity and borrowings of the
entity.
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 STRUCTURE OF CASH FLOWS (13)
CASH INFLOWS ACTIVITIES CASH OUTFLOWS
Purchase of
Materials and
Sale of Goods Services
Operating
and Services
Government Levies
Sale of Fixed
Assets
Purchase of Fixed
Assets
Sale of
Investments Investing
Purchase of
Interest and Investments
Dividend
Interest and
Dividend
Share Issue
Financing Share Buy-back

Debt Issue
8/6/2019 GIM-FAM Prof. Ranjan Dasgupta Debt Repayment
11
 Foreign Currency Cash Flows
(IndAS 7:25-26) -
Cash flows arising from transactions in a foreign
currency should be recorded in an enterprise’s
reporting currency by applying to the foreign
currency amount the exchange rate between the
reporting currency and the foreign currency at the
date of the cash flow. A rate that approximates the
actual rate may be used if the result is substantially
the same as would arise if the rates at the dates of
the cash flows were used. The effect of changes in
exchange rates on cash and cash equivalents held in
a foreign currency should be reported as a separate
part of the reconciliation of the changes in cash and
cash equivalents during the period.
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 So, your first task is to -
➢ identify whether an activity is a
cash or non-cash activity

And, then, you have to –

➢ identify whether it is an operating, a

financing or an investment activity

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 Do it yourself -
Business Activity Cash/Non- Operating/
cash Financing/
Investing
1. Paid suppliers Cash Operating
2. Received dividend from an associate Cash Investing
3. Sold investments at a gain Cash Investing
4. Issued debentures to buy equipment Non-cash Investing/Financing

5. Paid interest on bank overdraft Cash Financing

6. Converted debentures into equity shares Non-cash N/A
7. Received payments from customers Cash Operating
8. Purchased a 60-day certificate of deposit with cash
Cash None
9. Paid advance to a supplier of equipment Cash Investing
10. Earned a net profit Non-cash Operating
11. Sold machinery at a gain Cash Investing
12. Paid instalments for the purchase
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GIM-FAM Cash
Prof. Ranjan Dasgupta Operating
14
inventories
 Assignment 1:
H Ltd. entered into the following
transactions:
(a) Deposited cash in current account.
(b) Paid bonus to employees.
(c) Acquired equipment on credit.
(d) Paid cash on maturity of bills payable.
(e) Paid income tax.
(f) Paid cash to settle a suit for trademark
infringement.
(g) Purchased a 60-day certificate of deposit.
(h) Issued equity shares on conversion of
debentures. GIM-FAM Prof. Ranjan Dasgupta
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i) Acquired a machine on hire purchase.
j) Issued equity shares at par.
k) Wrote off a receivable when a customer
became insolvent.
l) Issued equity shares in exchange for
preference shares.
m) Received cash on maturity of bills
receivable.

You are required to classify each of the

above activities as an operating activity,
financing activity, non-cash activity or none
of these.
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 Know How to Report
Cash Flow from
Operating Activities
under Indirect Method
Determining Net Cash Flow (NCF)
from Operating Activities -
ACCRUAL SYSTEM CASH SYSTEM

Revenue Eliminate
Non-cash
Revenue

NCF from
Net Profit Operating
Activities

Eliminate
Expenses Non-cash
Expenses
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There are two ways of reporting
NCF from operating activities –
(21)(22)
➢ The direct method

➢ The indirect method

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 Operating Activities: Direct or
Indirect Method? (21)(22)

Direct Method Indirect Method

Reconstructs the Accrual net

income income is
statement on a adjusted to a
cash basis from cash basis; Used
top to bottom by 99%
Both methods result in the exact same amount
of cash provided by operating activities.
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Converting net profit into operating cash flow requires
three kinds of adjustments (25)
Non-cash items Non-operating Working Capital
items items
+ Depreciation + Interest + Decrease in Trade
+ Depletion expense Receivables
+ Amortization + Loss on Sale of + Decrease in
Inventories
+ Bad Debt Fixed Assets +Increase
Decrease inin CA = CF
Prepaid
Expense + Loss on Sale of Expenses
- Excess Investments +Decrease inTrade
Increase in CA = CF
Provision -Interest Income Payables
written back -Gain on Sale of -Increase
IncreaseininTrade
CL = CF
Fixed Assets Receivables
-Gain on Sale of -Increase in
Decrease in CL = CF
Inventories
Investments -Increase in Prepaid
Expenses
8/6/2019 GIM-FAM Prof. Ranjan Dasgupta -Increase
Decrease in Trade 21
 Calculation of Operating Cash
Flow (OCF) from Net Income
(i.e. PAT) or EBIT:
❑ Depreciation/
❑ Decrease in
Amortization/
deferred taxes
Depletion expense
NET ❑ Increase in
❑ Increase in deferred
accounts receivable
INCOME taxes -
+ ❑ Increase in
Or ❑ Decrease in accounts
inventories
EBIT receivable
❑ Increase in prepaid
❑ Decrease in inventories
expenses
❑ Decrease in prepaid
❑ Decrease in
expenses
payables*
❑ Increase in payables*
❑ Gain on disposal
❑ Loss on disposal

* Includes accounts payable, outstanding expenses (wages, interest, taxes, etc.),

does not include notes payable (bank loan), short-term borrowings or current
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portion of long-term debt.
Determining Net Cash Flow (NCF)
from Operating Activities
(Indirect Method) – An Example:

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D Company’s Profit and Loss A/c. for the
year ended June 30, 2014 is as follows:
D Company: Profit and Loss A/c.
for the year ended June 30, 2014
Sales Rs.75,800
Gain on sale of investments 1,200
Interest Income 900
Dividend from Subsidiaries 300
Cost of Goods Sold 43,900
Depreciation Expense 6,700
Selling and Administrative Expenses 8,500
Interest Expense 1,100
Loss on Sale of Plant and Machinery 800
Profit before Income Tax 17,200
Income Tax 8,300
Profit after Tax 8,900

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Relevant Balance Sheets as on June 30,
2013 & 2014 are as follows:(21)
June 30, June 30,
2014 (Rs.) 2013 (Rs.)
Inventories 9,300 7,900
Debtors (net of Provision for 6,600 5,300
Doubtful Debts, Rs.1,600 and
Rs.800)
Prepaid Expenses 1,100 800
Creditors 8,400 6,300
Bills Payable 2,100 6,500
Income Tax Payable 2,100 2,800
Selling and Administrative Expenses include bad
debt expenses of Rs.1,500. During the year ended
June 30, 2014, debtors totalling Rs.700 were written-
off.
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You are required:

Compute Net Cash Flow (NCF) from

operating activities using the Indirect
Method.

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 D Company
Cash Flow from Operating Activities
for the year ended June 30, 2014
Cash flow from operating activities
Profit before income tax Rs.17,200
Adjustments:
Depreciation 6,700
Bad debt expense 1,500
Gain on sale of investments (1,200)
Interest income (900)
Dividend income (300)
Loss on sale of plant and machinery 800
Interest expense 1,100
Operating profit before working 24,900
capital changes
Increase in inventories (1,400)
Increase in trade receivables (W.N.1) (2,800)
Increase in prepaid expenses (300)
Decrease in trade payables (W.N.2) (2,300)
Cash generated from operations 18,100
Income tax paid (W.N.3)
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Net cash provided by operating activities Rs.9,100
W.N.
1) Cl. Debtors + PDD + Bad debts W/O – (Op.
Debtors + PDD)
= Rs.(6,600 + 1,600 + 700 – [5,300 + 800])
= Rs.2,800
2) (Cl. Creditors – Op. Creditors) + (Cl. Bills
Payable – Op. Bills Payable)
= Rs.(8,400 – 6,300) + Rs.(2,100 – 6,500)
= Rs.(2,100 – 4,400)
= - Rs.2,300
3) Op. Income Tax Payable + Income tax – Cl.
Income Tax Payable
= 8/6/2019
Rs.(2,800 + 8,300 – Prof.
GIM-FAM 2,100)
Ranjan Dasgupta = Rs.9,000 28
 Assignment 2:
The Income Statement of S Ltd. for the year ended
September 2017 are as follows:
Sales Rs.76,900
Gain on sale of machinery 800
Dividend income 300
Interest income 200
Rs.78,200
Cost of goods sold Rs.58,300
Depreciation expense 9,500
Selling and administrative expenses 2,700
Interest expense 900
Loss on sale on investments 300
Rs.71,700
Profit before income tax 6,500
Income tax 2,800
Profit
8/6/2019 after tax GIM-FAM Prof. Ranjan Dasgupta Rs.3,700
29
During the period, inventories increased by
Rs.1,500, trade receivables (gross) decreased
by Rs.2,300, trade payables decreased by
Rs.1,600 and income tax payables
decreased by Rs.500. Selling and
administrative expenses include bad debt
expense Rs.700. Trade receivables in the
amount of Rs.300 were written off during
the period.
You are required to present the cash flows
from operating activities according to the
indirect method.

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Understanding of Cash
Flow from Investing
Activities
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Determining Net Cash Flow (NCF)
from Investing Activities
– An Example:

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H Company had the following investing
activities during the year ended March 31,
2015:
a) Purchased investments – Rs.6,500
b) Sold investments – (Book value - Rs.3,800,
loss – Rs.400)
c) Purchased a plant – Rs.15,800
d) Constructed a building for own use –
Rs.7,800 (including capitalized interest
Rs.150)
e) Sold a plant – Rs.5,200 (cost – Rs.9,500,
book value – Rs.4,300)
Required:
Compute net cash flow from investing
activities.
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 H Company
Cash Flow from Investing Activities
for the year ended March 31 2015
Cash flow from investing
activities
a) Purchase of investments (Rs.6,500)
b) Proceeds from sale of 3,400
investments Rs.(3,800-400)
c) Purchase of plant and (15,800)
machinery
d) Construction of building (7,800)
e) Proceeds from sale of plant 5,200
and machinery
Net cash provided by investing (Rs.21,500)
activities

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Understanding of Cash
Flow from Financing
Activities
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Determining Net Cash Flow (NCF)
from Financing Activities
– An Example:

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S Ltd. had the following financing activities
during the year ended December 31, 2014:
a) Paid dividends – Rs.1,200
b) Redeemed secured debentures – Rs.4,700
c) Repaid unsecured loans (BOD) – Rs.2,100
d) Converted secured debentures to equity
shares – Rs.11,000
e) Issued secured convertible debentures –
Rs.17,000
Required:
Compute net cash flow from financing
activities.

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 S Ltd.
Cash Flow from Financing Activities
for the year ended December 31 2014
Cash flow from financing
activities
a) Dividend paid (Rs.1,200)
b) Redemption of debentures (4,700)
c) Repayment of unsecured (2,100)
loans (BOD)
d) Converted secured debentures Nil
to equity shares
e) Proceeds from issue of 17,000
convertible debentures
Net cash provided by financing Rs.9,000
activities

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