Cash Flow Statment

1. Cash Flow Statement

2. 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
The Cash Flow Statement

3. Cash Inflows and Outflows

4. Classification of Business Activities :
Inflow and Outflow of Cash
Operating Activities
Cash Inflow
1) Cash Sales
2) Received from Debtor
3) Commission & Fees
4) Royalty
Cash Outflow
1) Cash Purchases
2) Payment to Creditors
3) Cash Operating Expenses
4) Payment of Wages
5) Income Tax
6) Manufacturing Expenses
Cash effects the transaction on Net Income

5. Investing Activities
Cash Inflow
1) Sale of Fixed Assets
2) Sale of investments
3) Interest Received
4) Dividend Received
5) Working Capital Recovery
Cash Outflow
1) Purchase of Fixed Assets
2) Purchase of Investments
3) Working Capital
Classification of Business Activities :
Inflow and Outflow of Cash

6. Classification of Business Activities :
Inflow and Outflow of Cash
Financing Activities
Cash Inflow
1) Issue of Shares in Cash
2) Issue of Debentures in
Cash
3) Proceeds from long-term
borrowings
Cash Outflow
1) Payment of Loans
2) Redemption of Preference
Shares
3) Payment of Dividends
4) Interest Paid
5) Repayment of Finance/
Lease Liability

7. 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

8. • Does not show the liquidity position of the
firm
• It is not a substitute of income statement
• Does not show the financial position of the
firm in totality
Cash Flow Statement : Limitations

9. Causes of
Variation
It studies causes of Ch-
ange in working capital
Basis Of Difference Cash Flow Funds Flow
Basis of
Accounting
Of accounting Basis of accounting I.e
Working capital
Schedule of
Changes in
Working Capital
Schedule of changes in
Working capital is
Prepared separately
Significance
It is useful for short-
Term financial planning
It is useful for long-term
Financial planning
Distinction between Cash flow Statement and
Funds Flow Statement
Such a schedule is not
Prepared for preparing
Cash flow statement
It studies only the
Causes of cash
variation

10. 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

11. Preparing a Statement of Cash Flows
Order of Presentation:
1. Operating activities.
2. Investing activities.
3. Financing activities.
Three Sources of Information:
1. Comparative balance sheets
2. Current income statement
3. Additional information
Direct Method
Indirect Method

12. Cash Flow from Operating Activities : Direct Method
Cash Flow from Operating Activities Amount
(Rs.)
Amount
(Rs.)
Cash Receipts from :
Sales
Commission & Fees
Interest Received
Cash Payment for :
Purchases
Payments to and for employees
Operating Expenses
Interest Payments
Direct Taxes Paid
Net Cash Flow from Operating Activities
XXX
XXX
XXX
XXX XXX
XXX
XXX
XXX
XXX
XXX
XXX

13. Cash Flow from Operating Activities : Indirect
Method
Cash Flow from Operating Activities Amount
(Rs.)
Amount
(Rs.)
Net Profit before Tax
Adjustment for :
Depreciation
Loss on Sale of Fixed Assets
Loss on revaluation
Operating Profit before Working Capital Changes
Adjustment* for :
Trade and other Receivables
Inventories or Stocks
Trade Payments or (Creditors and B/P)
Cash Generated from Operations
Interest Paid
Taxes Paid
Net Cash Flow from Operating Activities
xxx
xxx
xxx
xxx
xxx
xxx xxx
xxx xxx
xxx
xxx xxx
xxx
XXX

14. Preparing the Statement of
Cash Flows
Indirect and Direct Methods
Companies favor the indirect
method for two reasons:
1. It is easier and less costly
to prepare, and
2. It focuses on the
differences between net
income and net cash flow
from operating activities.

15. +Net Income
+Depreciation
-Capital Investment
+Salvage Proceeds
-Gain Tax
-Working Inv Cap
+Working Cap Recovery
+Borrowed Funds
-Repayment of Principal
Revenues
Expenses
Cost of Goods Sold
Depreciation*
Operating Expenses
Taxable Income
Income Taxes
Net Income
Income Statement
Investing
Financing
Cash Flow Statement
Operating
+
+
Book Approach
*Assumes Tax Depreciation = Book Depreciation
Thus, no deferred taxes

16. Format for Cash Flow Statement