Cash Flow Statement

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 (usually one year)

Inflows and outflows are reported for:

Operating activities

Investing activities

Financing activities
Cash Inflows and Outflows
Classification of Business Activities :
Inflow and Outflow of Cash

Operating Activities

Cash Inflow Cash Outflow

1) Cash Sales 1) Cash Purchases

2) Received from Debtor 2) Payment to Creditors
3) Commission & Fees 3) Cash Operating Expenses
4) Payment of Wages
5) Income Tax
6) Manufacturing Expenses
Classification of Business Activities :
Inflow and Outflow of Cash

Investing Activities

Cash Inflow Cash Outflow

1) Sale of Fixed Assets 1) Purchase of Fixed Assets

2) Sale of investments 2) Purchase of Investments
3) Interest Received 3) Buying shares of other
4) Dividend Received Companies etc.
Classification of Business Activities :
Inflow and Outflow of Cash

Financing Activities

Cash Inflow Cash Outflow

1) Issue of Shares in Cash 1) Payment of Loans

2) Issue of Debentures in 2) Redemption of Preference
Cash Shares
3) Proceeds from long-term 3) Payment of Dividends
borrowings 4) Interest Paid
5) Repayment of Finance/
Lease Liability
Objectives of Cash Flow Statement

1. Highlighting cash flow from different activities

2. Short-term Planning

3. Cash Flow information helps to understand liquidity

4. Efficient cash management

5. Prediction of sickness

6. Comparison with budget

7. Cash position
 Cash Flow Statement : Limitations

Does not show the entire liquidity position of the firm

It is not a substitute of income statement

Does not show the financial position of the firm in totality

Preparing a Statement of Cash Flows

Use net operating income as the starting point to get net operating cash flow
Add back any non-cash expense
(Example - Depreciation)

Net Cash Flow = Cash Inflow - Cash Outflow

Net Operating Cash Flow = Income after Taxes

+ Depreciation
Preparing a Statement of Cash Flows

Order of Presentation:
Direct Method
1. Operating activities.
Indirect Method
2. Investing activities.
3. Financing activities.

Three Sources of Information:

1. Comparative balance sheets
2. Current income statement
3. Additional information