- ROHIT SHARMA

WHY?
Mandatory part of a company's financial reports to

Shareholders Not as per the Companies Act but as per Clause 32 of the Listing Agreement
CLAUSE 32 : The Cash Flow Statement (CFS) will be prepared in accordance with the Accounting Standard on Cash Flow Statement (AS-3) issued by the Institute of Chartered Accountants of India the Cash Flow Statement shall be presented only under the Indirect Method as given in AS-3

LIQUIDITY
Liquidity - The ability of an asset to be converted into

cash quickly and without any price discount

(ASSETS PERSPECTIVE)

Liquidity - is a measure of the ability of the current

assets to pay off the current liabilities (FIRMS PERSPECTIVE)

P/L & CFS

Profit and Liquidity (cash position) are two different

aspects A company may be incurring losses but may have liquid resources to meet obligations without any difficulty A company may be making profits but struggling to meet its obligations, such as payment to lenders or creditors / suppliers If a business makes a net profit of Rs. 1,00,000 it does not automatically result in an increase in the cash balance of Rs. 1,00,000 A company making profit may find its working capital or cash reduced

ACCRUAL SYSTEM
Only in the case of a firm which prepares its net

income on cash basis the income reported and cash generated by operations would equal
But normally ACCRUAL SYSTEM of Accounting is

used
Revenues reported may not have been collected Expenses reported on the income statement might not

have been paid

INTRODUCTION
P/L discloses the profit made by the firm Cash Flow Statement (CFS) indicates different sources

and uses / applications of cash Similar purpose is also served by Funds Flow Statement (FFS) In recent years more importance is given to CFS than FFS Users want to know how the firm generated the cash resources and how it applied such resources during a given period The answers to such questions can be obtained only from CFS not from the income statement or a balance sheet

 Primary purpose of cash flow statement is to provide a

summary of cash receipts and payments during the period, i.e., a summary of the CASH INFLOWS & CASH OUTFLOWS A cash flow statement may be defined as "a financial statement that summarizes the cash receipts and payments and net change in cash resulting from operating, financing, and investing activities of an enterprise during a given period." To increase the utility of a CFS, the cash flows are divided into
OPERATING FINANCING INVESTING

activities of the business.

CFS is broken down into 3 parts

Cash Flows from Operating Activities: Money received from its actual business operations. To calculate the cash flow from operating activities, the company starts with net income (from the income statement), to which items are added and subtracted, to reach CASH FROM OPERATING ACTIVITIES Cash Flows from Investing Activities: Money received or paid w.r.t. to its investing activities. Cash Flows w.r.t. the Acquisition & Disposal of the following items are recorded here:

Investments Fixed Assets

Cash Flow from Financing Activities: Money that it took in and paid out in order to finance its activities. Money spent or received from its stocks and bonds.

Dividend payments Issue / Buy Back of Shares Any Debt taken or Repaid. Interest Paid on Debt

SUMMARY
One of the main financial statements Analyses changes in cash and cash equivalents during

a period The cash flow statement reports the cash generated and use during the time interval specified in its heading It is difficult for companies to use accounting tricks to obscure the facts Cash flows of the period are reconciled with the beginning and ending cash balances

USES
Some financial models are based upon cash flow The cash from operating activities is compared to the

company's net income

CFO > Net Income the company's net income or earnings are said to be of a

high quality
CFO < Net Income a red flag is raised as to why the reported net income is

not turning into cash

 Some investors believe that cash is king CFS identifies the cash that is flowing in and out of the company
If a company is consistently generating more cash than it is

using the company will be able to

Pay its interest Pay debt installments increase its dividend invest in / acquire another company buy back some of its stock reduce debt

All of these are perceived to be good for shareholders

DETAILS
CASH FROM OPERATING ACTIVITIES II. CASH FROM INVESTING ACTIVITIES III. CASH FROM FINANCING ACTIVITIES IV. CASH & CASH EQUIVALENTS
I.