AS 3: Cash Flow Statement Cash includes money in bank and cash equivalents which consist of instruments of short maturity

(3 months or less) readily convertible to known amount of cash with little risk as to change in value (exc equity) Excludes movement within cash and cash equivalent components The effect of change in year-end exchange rate on cash and cash equivalents held in foreign currency is shown separately from the Cash Flow Statement in a reconciliation between beginning and end cash balances Extraordinary items with respect to each type of activities should be separately disclosed Interest/Dividend Paid Financing activities Interest/Dividend Received Investing activities Cash flows relating to taxes should be separately disclosed within operating cash flows Cash and cash equivalent components and any restriction on their usage with a commentary by management should be disclosed Analysis of Cash Flow Statement Cash flow from operation Internal, most reliable and longest term source of funds Expected to be positive Should finance at least part of the growth; i.e., should cover part or whole of negative cash flow from Investment activity and also the pre-commitments like interest & dividend Should also contribute towards reducing excessive leverage Should grow across time period vis--vis revenue growth possibly at a faster rate Components of Operating Cash flow regular vs. extraordinary Sustainability of Operating Cash Flow when it arises due to severe reduction in inventory or other components or increase in creditors Level and change in working capital/cash should commensurate with level of activity Earnings quality is reflected by the gap between the Net Income and Operating Cash Flow impact of accruals and non-operating items (sale of fixed assets) Cash Flow from Investment Expected to be negative barring major restructuring Long-term assets should be financed out of long-term sources of funds Kind of investments being made

Purchase of assets pursuant to plan of expansion/acquisition ability to fund future commitment on this count Strategic investment in related companies Investment as a means of perking financial slack availability of future investment opportunity to justify maintaining financial slack Cash Flow from Financing May be either positive or negative usually the positive for a high-growth company A negative cash flow may indicate absence of investment opportunity and thus future growth may be at risk; it may also be due to a conscious effort to reduce/increase leverage Dividend payment may not be omitted despite funds requirement; however, increased/special dividend may be questioned Extent to which cash inflow contributing towards financial slack Tenure of instruments being repaid and liabilities being assumed Cash flow pattern should conform to the overall business strategy Change in business strategy may be identified by examining the relationship between assets acquired and assets disposed off Key issues: Future cash need Sustainability of current cash level and growth Cash generation ability of new investments Level of financial leverage and tenure of debts A few Ratios using CFS Free Cash Flow = CFO Investment Net Cash Contribution =CFO Interest Cost of Equity Debt Coverage = CFO / (Interest + Principal due within 1 year) Cash Flow per Share = (CFO Interest - Preference Dividend)/ Weighted Average No. of Equity Cash Flow ROI = CFO / Total Investment Cash Flow ROE = (CFO Pref Div) / Average Shareholders Equity