CASH FLOW STATEMENT

- Dr. Manisha Singh

Statement depicting change in cash
position from one period to another.
It explains the reasons for inflow or
outflow of cash and helps the
management to plan for immediate
future.

Meaning:
 The Cash Flow Statement

The cash flow statement provides information about:

cash receipts (cash inflows)

uses of cash (cash outflows)
during a period of time

Inflows and outflows are reported for:

◦ Operating activities
◦ Investing activities
◦ Financing Activities
Cash Inflows and Outflows
 The change in the cash position from
one period to another is computed by
taking in account the Application and
Sources of cash.

In other words, change in cash position

= Sources of cash – Application of cash.

PREPARATION OF CASH FLOW STATEMENT

 Preparing a Statement of
Cash Flows

There are two methods of preparing the

statement of cash flows:

 Indirect method: derives cash flows from

accrual based statements
 Direct method: derives cash flows directly
for each source or use of cash
 Accrual Based Statements Cash Flow Statement

Income Statement Operating activities:

items & Changes in Adjust net income for accruals
Current Assets and and non-cash charges to get
Current Liabilities cash flows
Investing activities:
Balance Sheet: Changes in Inflows from sale of assets and
Non-Current Assets Outflows from purchases of
assets
Balance Sheet: Changes in Financing activities:
Non-Current Liabilities Inflows and outflows
and from loan and equity
Equity transactions
Steps in preparing Cash Flow statement:

Preparation of adjusted P/L Account to

find out cash from operation.
Comparison of current items (assets and
liabilities) to find out inflow and outflow of
cash.
Preparation of Cash Flow Statement.
 Sources of cash

Internal sources: External sources:

Cash from operation =
Net Profit +  Issue of new shares
 Depreciation (+)  Long term loans
 Loss on the sale of  Purchase of plant and
fixed assets (+) machinery on
 Amortization of deferred payment
intangible assets (+)  Short term
 Creation of reserves borrowings/ cash
(+) credits from banks
 Profit from sale of  Sale of fixed assets,
fixed assets (-) investments etc.
Purchase of fixed assets
Payment of long term loans
Decrease in deferred payment
liabilities
Loss on account of operation
Payment of tax
Payment of dividends
Decrease in unsecured loans,
deposits etc.
Computation of cash from
operation
When all transactions are cash
transaction:
Net profit as per P/L A/c will be taken as
the amount of cash from operations.
CASH FROM OPERATION = NET
PROFIT

When all transactions are not cash

transactions:
The computation of cash from operation
can be done in two stages:
7. Computation of fund from operation
8. Adjustments in the fund so calculated for
changes in CA and CL
Adjustments for changes in CA
and CL:
1. Effect of credit sales:
 If out of total sales of 30,000, credit sales
is Rs. 10,000 cash flow from sales
= 20,000
Thus while computing cash from operations, it
would be necessary that suitable adjustments for
the outstanding debtors are also made. Like
deducting the amt. of credit sale from the net
profit
Cashas debtors
from outstanding
operation at +the
= Net profit year end.
debtors
o/s at the beginning – debtors o/s at the end
of the year

Cash from operation = Net profit

OR+ Decrease
in debtors or – (increase in debtors)
 2. Effect of credit purchase:
 If sale = 30,000, Purchase = 25,000 out of which
credit purchase is 10000 Cash from
operation = 15,000
 Adjustments in the Net profit would be made by
adding the amt. of credit purchases to get the
cash from operation.
 Decrease in creditors from one period to another
would mean decrease in cash from operation and
vice versa. This is because more cash payments
have
Cashbeen
from made to the
operation creditors
= Net profit + which results in
creditors
outflow of cash.
at the end of the year – creditors at the
beginning

Cash from operation = Net profit + Increase in

 creditors OR -(DecreaseOR
in creditors)
Ex: Sales = 50,000, debtors o/s at the beginning =
8000, debtors o/s at the end = 15000, creditors at
the beginning = 12000, creditors at the end = 15000,
Purchases = 30000, expenses = 5000
Sol: Cash from operation
Rs.
Sales
50000
Less: Purchase 30000
Expenses 5000
35000
Net Profit
15000
Add: debtors at the beginning 8000
creditors at the end 15000
23000

38000
 3. Effect of opening and closing
stock:
 The amt. of opening stock is charged to the
debit side of P/L a/c. thus it reduces the profit
without reducing the cash from operation.
Similarly, amt. of closing stock is put on the
credit side, which increases the net profit
without increasing the cash from operation.
 Hence suitable adjustments to the net profit is
made in the form of adding back the opening
stock and deducting the closing stock to get
cash from operation. Thus :
Cash from operation = Net profit + Opening
stock -
closing stock

 Cash from operation = Net

OR profit + Decrease
in stock OR -(Increase in stock)
Ex: Opening stock = 5000, Purchases = 20000,
Sales = 35000, Expenses = 5000, Closing stock =
10000

Sol: Profit and Loss a/c

Particulars Amount Particulars
Amount
Opening stock 5000 Sales
35000
Purchases 20000 Closing stock
10000
Expenses 5000
Net Profit 15000
45000
45000
Cash from operation:
Net profit for the year
15000
Add: Opening stock
4.Effect of change in Outstanding expenses, Income
received in advance etc.
 If certain expenses are not paid (i.e., o/s) or some income is
received in advance, it will result in decrease in net profit
without actually decreasing the cash. This is because net
profit is computed after charging to it all expenses whether
paid or outstanding. Therefore cash from operation will be
higher than the actual profit as per P/L account. Thus :

Cash from operation = Net profit + (Expenses o/s

+ Income received in advance) at the end –
(Expenses o/s + income received in advance) at
the beginning
 OR

Cash from operation = Net profit +Increase in

(o/s expenses and income received in advance)
OR – Decrease in (o/s expenses and income
received in advance)
Ex: Gross Profit = 30000, Expense paid = 10000,
Interest received = 2000
Rs 2000 are o/s on account of expenses while Rs 500
has been received as Interest for the next year

Sol: Profit and Loss account

Particulars Amount Particulars
Amount
Expenses paid 10000 Gross profit
30000
Add: o/s exp. 2000 12000 Interest received
2000
Net Profit 19500 Less: interest rece-
-ived in advance
500 1500
31500
31500

Cash from operation:

Net profit for the year
19500
5.Effect of Prepaid expenses and
outstanding income:
 It is similar to the effect of debtors.
 While computing net profit from operations, the
expenses only for accounting period are charged to
P/L a/c. This means pre-paid expenses (since not
charged) do not decrease net profit for the year
but actually reduces the cash from operation.
 Similarly income earned during the year is credited
to P/L a/c, whether received or not. Thus o/s
income increases the profit but not the cash from
operation. Thus:
Cash from operation = Net profit + (Prepaid
expenses + o/s income) at the beginning of the
year - (Prepaid expenses + o/s income) at the
end of the year

 Cash from operation = Net profit

OR + Decrease in
(Prepaid expenses + o/s income) OR – Increase
in (Prepaid expenses + o/s income)
Ex: Net Profit = 20000, Prepaid Expenses as on 1/1/07
= 2000, Prepaid Expenses as on 31/12/07 = 3000, O/S
(accrued) income on 1/1/07 = 1000, O/S (accrued)
income on 31/12/07 = 2000. Calculate cash from
operation.

 Cash from operation:

Net profit
20000
Less: Prepaid expenses as on 31/12/07 3000
o/s income as on 31/12/07 2000
5000

15000
Add: Prepaid expenses as on 1/1/07 2000
o/s income as on 1/1/07 1000
3000
Cash from operation
Overall effect of current assets and
liabilities can be shown as:

+ Decrease in
debtors
+ Decrease in
stock
+ Decrease in
prepaid Expenses
+ Decrease in
accrued income
+ Increase in
creditors
+ Increase in
o/s expenses
Cash from operation = Net profit
- Increase in
debtors
- Increase in
Summary of findings:

 Increase in Current assets and

Decrease in current liability

Decrease in cash

 Decrease in Current assets and

Increase in current liabilities

Increase in cash
 CREDITORS
5000 7500
BILLS RECEIVABLE
5000 8000
O/S EXPENSES
3000 5000
BILLS PAYABLE
4000 2000
PREPAID EXPENSES
1000 500
 Trading and Profit and Loss account
Particulars Amoun Particulars Amoun
To, Purchases t20000 By, Sales t30000
To, Wages 5000
To, Gross profit 5000
30000 30000

To, Salaries 1000 By, Gross profit b/d 5000

To, Rent 1000 By, Profit on sale of building
To, Depreciation on plant 1000 Book value 10000
To, Loss on sale of Sold for 15000
furniture 500 5000
To, Goodwill written off 1000
To, Net Profit 5500

10000 10000
Sol: 1. Calculate fund from operation
2. Adjustments in fund amt to find out cash from operation

Fund from operation:

Net profit 5500
Add: Items that do not decrease the fund:
Depreciation 1000
Loss on sale of furniture 500
Goodwill written off 1000 2500
8000
Less: Items which do not increase the fund:
Profit on sale of building 5000
Fund from operation 3000

(Out of Net profit of Rs 5500, Fund from operation is only Rs. 3000)
Cash from operation:

Fund from operation as calculated 3000

Less: Increase in CA and decrease in CL:

Increase in stock (12000- 10000) 2000
Increase in debtors (20000- 15000) 5000
Increase in BR (8000- 5000) 3000
Decrease in BP (4000- 2000) 2000 (12000)
( 9000)
Add: Decrease in CL and increase in CA:
Decrease in prepaid expenses (1000-500) 500
Increase in O/S expenses (5000- 3000) 2000
Increase in creditors (7500- 5000) 2500 5000

Cash from operation (4000)

Format of Cash Flow Statement
Balance as on ….. Cash balance ----
Bank balance ---- xxx
Add: Sources of cash:
Issue of shares ---
Long term loans ---
Sale of fixed assets ---
Short term borrowings ---
Cash from operation --- xxx
Total cash available (1) xxxx
Less: Application of cash:
Redemption of Preference shares ---
Redemption of long term loans ---
Purchase of fixed assets ---
Decrease in deferred payment liability ---
Cash outflow from operation ---
Tax paid ---
Dividend paid ---
Decrease in unsecured loans, deposits.. ---
Total cash application (2) xxx
Closing cash balance = (1) – (2) xxxx
Importance of cash flow analysis:

Helps in an efficient cash management

Helps in internal financial management
Discloses the movement of cash
Discloses success or failure of cash
planning
 Cash flow statement can not be equated with the income
statement.
 The cash balance by CFS may not represent the real liquid
position of the business
 Cash flow statement can not replace the income statement or
the fund flow statement.

Limitations of Cash flow analysis

 Difference between CFS and FFS:
Cash Flow Analysis
• It is concerned only with change in cash
position
• Records only cash receipts and
disbursements and thus can’t show the
short term solvency of the business
• More useful in very short period for
financial analysis
• Cash is a part of working capital and
therefore improvement of cash position
results in improvement in fund position
• Decrease in current assets and increase
in current liability = Increase in cash
position and vice versa
Fund Flow Analysis
• Concerned with change in working
capital (which includes cash) position
• It shows the short term solvency of the
business as it takes into a/c other liquid
assets as well.
• Useful for short period as a tool for
financial analysis
• Reverse is not necessarily true, i.e.,
sound cash position = sound fund position
Sound cash position =/≠ sound fund
position
• Decrease in current assets and increase
in current liability = Decrease in
working capital and vice versa