STATEMENT OF CASH FLOWS By Sangeeta Pandit

HELLO!
Sangeeta Pandit PhD, CA
Sydenham Institute of Management Studies, Research
& Entrepreneurship Education (SIMSREE), Mumbai
CASH IS KING

 Growing Profits may not lead to high cash balance

 Net Income is important but cash flow is critical

 Business success depends on positive cash flows

 Activities like expansion, replacement of worn assets etc. is possible by cash flows
QUESTIONS THAT CASH FLOW STATEMENTS ANSWER ???

 Will the company have enough cash to pay its creditors?

 How much cash is locked up in inventory and debtors and is that prudent?

 What are the company’s investments, will they increase productivity?

 Is enough cash generated internally and how much external sources are used?

Is Accrual system distorting state of affairs

CLASSIFICATION OF CASH FLOWS

OPERATING

FINANCING

INVESTING
CASH FLOW STATEMENTS

 The Cash Flow Statements are prepared in Direct Method or Indirect Method

 In Direct Method, operating activities cash flows include actual in flow and
outflow of cash due to revenue earning activities, investment activities include
purchase and sale of long term assets, financing activities include cash inflows and
outflows due to changes in sources of long term funds and costs associated with
them
DIRECT METHOD & INDIRECT METHOD

 For Financing Activities, only Direct Method is used

 For Operating Activity either Direct or Indirect Method is used

 Cash generated in any activity can be negative but cash balance can never be negative

 The cash generated from all the three activities is the difference between opening cash
balance and closing cash balance
EXAMPLE OF FORMAT OF STATEMENT
Opening Cash Balance 5000
ADD:
Cash generated from
1. Operating activities 6000
2. Investing activities 4000
3. Financing activities -1000 9000
Closing Cash Balance 14000
EXAMPLE OF CASH FLOW STATEMENT
Cash generated from
1. Operating activities 4000
2. Investing activities -2000
3. Financing activities -1000
Increase in cash balance 1000
Opening cash balance 4000
Closing cash balance 5000
OPERATING ACTIVITIES
Operating activities cash flows are:

 Cash flows from core activity

 Revenues and expenses

 Cash received from Customers, cash paid to suppliers, cash received on sales, cash paid
for purchases, cash paid for salaries and office expenditures and so on

 In the indirect method, to the net profit figure non cash items are excluded and cash
generated is arrived at, also increase/decrease in working capital is considered
OPERATING ACTIVITIES

 Operating activities are the main revenue generating activities

 They include the activities due to the core business of the organization other than
investing and financing activities
INVESTING ACTIVITIES
Cash Flows from Investing Activities are:

 Cash Flows from sale and purchase of long term assets, M/A activities, financial
securities

 In the direct method, cash flows due to sale of assets like machinery, building etc and
purchase of machinery, furniture etc are considered

 Balance Sheet can tell the cash outflow due to new purchases and Income statement
can tell cash position due to sale of assets by reconciling the loss/profit on sale with
opening figures of the said assets in Balance Sheet
INVESTING ACTIVITIES

 Investing Activities are those that result in purchase and sale of long term assets

 They do not include increase or decrease in current assets

FINANCING ACTIVITIES

Cash Flows from financing activities, (involving capital markets) are:

 Cash Flows from Issue of Shares, Debentures, Receiving loans, Repayment of loans,
Payment of Dividends and Interest
FINANCING ACTIVITIES

 Financing Activities impact the Capital structure of an organization

 It reflects to what extent an organization is “Leveraged”

Equity Share Capital

Loan Capital
INTERPRETATION OF CASH FLOW STATEMENTS
Cash Flows from
1. Operating Activities reflect the Income ratios
2. Investing Activities reflect the Growth and Expansion strategies
3. Financing Activities reflect the policy of raising capital and cost of capital
 MINI CASE STUDY

PY CY PY CY
ASSETS LIABILITIES
Trade Rec. 14900 17700 Trade Pay. 11060 12640
Inventories 49200 42700 Bonds 12000 6000
Bank Bal 9000 7800 Retained Earn.10040 10560
Land 20000 30000 Common St. 70000 74000
Goodwill 10000 5000
Total 103100 103200 Total 103100 103200
3500 was paid as dividend
 THANKS
You can find me at
 sangeetapandit@simsree.net
 sangeeta@pdkunte.com