CASH FLOW

STATEMENT
Shagun Thukral, CFA

Cash Flow Statement

Why do we need a Cash Flow

Statement?

Earnings/Profits can be significantly

different from cash generated by
operations
Accrual based statements consider items
which have no effect on cash, eg.
Depreciation
Earnings suffer from biases on provisions,
accounting methods and estimates. Cashflows have no such issues
In the short-run, ability of a company to pay

Use and structure of Cash Flow Statement

Provides major sources of cash receipts and

cash payments
Helps understand the movements in cash and
cash-equivalents during the year
Helps analysts/bankers/managers assess
Companys :

Ability to generate future positive cash flows

Ability to meet obligations, pay dividends and
need for external financing
Reasons for difference in profits and cash receipts

Structure of Cash Flow

Statement

It provides information on changes

during an accounting period by cash and
to classify cash flow under three
activities:
Cash Flow from Operating Activities
Cash Flow from Investing Activities
Cash Flow from Financing Activities

Structure of Cash Flows

Format of the Cash Flow

Statement

Operating Activities

It is the principle revenue generating

activities of an entity
Nature of cash-flows will be different
depending on the business of the
company
Eg. Financial Institutions and
Manufacturing company

Preparing the Cash Flow

Statement

Determining net cash flow from

operating activities

Direct method
Indirect method

Direct method

Cash received from customers

Cash paid to suppliers and employees
Income tax paid

Preparing the Cash Flow

Statement

Indirect method

Non-cash items
Net operating items

Changes in working capital items

Understanding Working
Capital

Working Capital = Current Assets Current Liabilities

All the assets held by the business with the

objective of conversion to cash during an
operating cycle of the business
Part of the assets is financed by short-term
credits or borrowing which are to be met or
repaid during the operating cycle these are
current liabilities
Fund implies amount of resources invested in
current assets from sources of finance other
than current liabilities

From Accrual to Cash

Illustration Kanishk Ent.

Profit & Loss Account
For the Year ending 31st March 20X7
Particulars
Purchases for the Year
Direct Expenses
Gross Profit
Total
Rent
Salary
Depreciation
Provision for Bad Debts
Proposed Dividends
Provision for Taxes
Preliminary Exp. written off
Net Profit

Rs.

Particulars

80,000 Sales
20,000
65,000
1,65,000

Rs.
1,65,000
Total

8,000 Gross Profit B/d

20,000 Profit on sale of old
15,000 machinery
5,000
10,000
2,500
1,500
16,000

Financial Accounting for Management by Ramachandran & Kakani

Copyright with McGraw-Hill Education( India) Ltd., 2007"

1,65,000
65,000
13,000

12

Solution Direct Method

Kanishk Enterprises
Cash Flow Statement
For the Year ending 31st March 20X7 (all figures in Rs)

Cash Flow From Operating Activities:

Cash received on account of sale of goods
Less: Payment made on account of
Purchases of goods
Freight and Cartage
Salary Paid
Rent Paid
Cash Inflow
Financial Accounting for Management by Ramachandran & Kakani
Copyright with McGraw-Hill Education( India) Ltd., 2007"

1,65,000
80,000
20,000
20,000
8,000

1,28,000
37,000

13

Solution Indirect Method

Kanishk Enterprises

Cash Flow From Operating Activities:

Net Profit as per Profit & loss Account
Add: Non-cash transaction
Provision for Bad Debts
Depreciation
Proposed Dividends
Provision for Taxes
Preliminary Expenses written off
Less: Non-operation incomes
Profit on sale of machinery
13,000
Cash Inflow

16,000
5,000
15,000
10,000
2,500
1,500

Financial Accounting for Management by Ramachandran & Kakani

Copyright with McGraw-Hill Education( India) Ltd., 2007"

34,000

37,000
14

Investing Activities

Activities related to acquisition and disposal of

long-term assets and other investments, which are
not taken into consideration under the cash
equivalents head are investing activities
Also includes investments made by business
entities in other companys shares and debentures
Examples:

Purchase and sale of fixed Assets

Purchase and sale of investments
Interest received and dividend received (IFRS/Ind
AS/AS)

Illustration - Kanishk

The following transactions occur at Kanishk

Enterprises:

Particulars
Purchased a machinery for
Sold shares worth
Received interest on debentures purchased
earlier
Received dividend on shares held
Sold old machinery
Financial Accounting for Management by Ramachandran & Kakani
Copyright with McGraw-Hill Education( India) Ltd., 2007"

Amount
(Rs.)
1,50,000
2,00,000
10,000
20,000
50,000
16

Solution
Kanishk Enterprises
Cash Flow Statement

Cash Flow from Investing Activities:

Sale of Shares
Interest received
10,000
Sale proceeds of old machinery
Dividend received
Less: Outflow on account of machine purchase
Cash flow from Investing Activities
Financial Accounting for Management by Ramachandran & Kakani
Copyright with McGraw-Hill Education( India) Ltd., 2007"

2,00,000
50,000
20,000
2,80,000
1,50,000
1,30,000

17

Financing activities

The activities that result in the change in size and

composition of the long-term capital employed in the
firm are known as financing activities
Includes both owner(s) capital and long-term borrowing
of the entity
Example:

Issuance and buyback of shares

Dividends paid
Raising loans and their repayment
Interest paid (IFRS/Ind AS)

Supposing during the year Kanishk Enterprises has taken

a loan of Rs 1,50,000 and paid an interest of Rs 15,000
thereon, the cash flow from financing activities for the
year comes to Rs 1,35,000 (i.e., 1,50,000 - 15,000)

Interpreting the Cash Flow Statement

Increase (decrease) in cash despite net

loss (net profit)
Paying for acquisitions and capital
Expenditure
Utilizing the proceeds of a share issue
Effect of expansion and growth on cash
Prospects for shareholders and lenders

Illustration

Classify each of the following transactions under a. operating

activity, b. investing activity c. financing activity and d. noncash activity

Purchased a 90D Treasury Bill

Redeemed Debentures
Sold Plant
Purchased Building
Issued equity shares at a premium
Recd interest on debentures
Received dividend on equity shares
Paid dividend
Collected cash from customers
Paid suppliers
Paid interest