CASH FLOW (7TH AUG) Cash Flow Statement is an account of inflows and outflows of cash and cash equivalents.

A cash flow statement shows how a company is generating cash from its operations, paying for the growth and managing various sources of funds. Cash flow statement provides valuable information to various stakeholders. Cash flow activities: The cash flow statement is partitioned into three segments, namely:
y

Cash flow resulting from operating activities; o Principal revenue producing activities of the enterprise

Cash flow resulting from investing activities; o Acquisition and disposal of long term assets and investments (other than those considered in cash equivalents)

Cash flow resulting from financing activities. o Activities that result in change in size and composition of owners capital (equity) and borrowings of the enterprise The money coming into the business is called cash inflow, and money going out from the business is called cash outflow. Operating activities: Operating activities include the production, sales and delivery of the company's product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising, and shipping the product. Under IAS 7, operating cash flows include: 1. Receipts from the sale of goods or services 2. Receipts for the sale of loans, debt or equity instruments in a trading portfolio 3. Interest received on loans 4. Dividends received on equity securities 5. Payments to suppliers for goods and services 6. Payments to employees or on behalf of employees 7. Interest payments (alternatively, this can be reported under financing activities in IAS 7, and US GAAP)

Other items include: 1. Cash payment of income tax (other than distribution tax) 2. Receipts from royalties, fees and commission 3. Cash receipts relating to futures, forwards, options and swap contracts where the contract are held for trading purposes. Items which are added back to [or subtracted from, as appropriate] the net income figure (which is found on the Income Statement) to arrive at cash flows from operations generally include: 1. Depreciation (loss of tangible asset value over time) , Deferred tax 2. Amortization (loss of intangible asset value over time) 3. Any gains or losses associated with the sale of a non-current asset, because associated cash flows do not belong in the operating section.(unrealized gains/losses are also added back from the income statement) This section of the cash flow statement reports the company's net income and then converts it from the accrual basis to the cash basis by using the changes in the balances of current asset and current liability accounts, such as: 1. Accounts Receivable, Inventory, Supplies, Prepaid Insurance, Other Current Assets 2. Notes Payable (generally due within one year), Accounts Payable, Wages Payable 3. Payroll Taxes Payable, Interest Payable, Income Taxes Payable, Unearned Revenues 4. Other Current Liabilities In addition to using the changes in current assets and current liabilities, the operating activities section has adjustments for depreciation expense and for the gains and losses on the sale of long-term assets. 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 company s shares and debentures Examples of Investing activities are: 1. Purchase or Sale of an asset (assets can be land, building, equipment, marketable securities, etc.) 2. Loans made to suppliers or received from customers 3. Payments related to mergers and acquisitions

4. 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 5. Also includes investments made by business entities in other company s shares and debentures 6. Examples of investment activities include cash payments or receipts to acquire or dispose fixed assets, shares, debt instrument, etc. 7. Cash used in Purchase of Property, Plant & Equipment, Intangible Assets & Investments 8. Interest and / or dividend receipts This section of the cash flow statement reports changes in the balances of long-term asset accounts, such as: 1. Long-term Investments 2. Land, Buildings, Equipment&Furniture & FixturesVehicles In short, investing activities involve the purchase and/or sale of long-term investments and property, plant, and equipment. Financing activities: Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement. 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: cash received from issue of share capital, issue of loans and cash payment on dividend, redemption, etc. Under IAS 7, 1. Proceeds from issuing short-term or long-term debt 2. Payments of dividends 3. Payments for repurchase of company shares 4. Repayment of debt principal, including capital leases For non-profit organizations, receipts of donor-restricted cash that is limited to long-term purposes Items under the financing activities section include:

1. Dividends paid 2. Sale or repurchase of the company's stock 3. Net borrowings 4. Payment of dividend tax 5. Proceeds from borrowings, Repayment of borrowings 6. Interest/Divident paid 7. Dividend tax paid This section of the cash flow statement reports changes in balances of the long-term liability and stockholders' equity accounts, such as: 1. Notes Payable (generally due after one year) 2. Bonds Payable 3. Deferred Income Taxes 4. Preferred Stock 5. Paid-in Capital in Excess of Par-Preferred Stock 6. Common Stock 7. Paid-in Capital in Excess of Par-Common Stock 8. Paid-in Capital from Treasury Stock 9. Retained Earnings Treasury Stock In short, financing activities involve the issuance and/or the repurchase of a company's own bonds or stock. Dividend payments are also reported in this section. The following transactions have no impact on cash flow: 1. Issue of bonus shares 2. Conversion of loan to equity 3. Acquisition of business with shares