CASH FLOW STATEMENT

COURSE – ACCOUNTING FOR MANAGERS

COURSE COORDINATOR – DR. KAVITA WADHWA
 INTRODUCTION
• Cash Flow Statement (Ind AS 7): An important financial statement (IIIrd) besides Income Statement and
Balance Sheet
• Income Statement shows the financial performance of the business during a particular period; Balance
Sheet shows the financial position of the business at a particular point of time; and Cash Flow
Statement shows the inflows and outflows of cash of the business during a particular period.
• It provides information about cash receipts & cash payments during an accounting period. In other
words, it explains the net increase (or decrease) in cash during an accounting period.

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 WHY CASH FLOW STATEMENT?
• Income has no direct relationship with the amount of cash.
• In addition to operations, you also need to know about investing & financing activities. Shows how a
company’s Operating, Investing and Financing Activities have affected cash.
• Cash flow statement (CFS) is important for shareholders, lenders & other stakeholders like employees,
suppliers, etc.
• CFS is objective unlike Income Statement and Balance Sheet. Cash is cash, the amounts of cash are not
influenced by the judgments and estimates. However, we can’t forget that Income Statement & Balance
Sheet provide better information.
• It enhances the comparability of the reporting of the performance of different companies as it eliminates
the effects of using different accounting treatments for the same transactions & events.
• It helps in assessing the ability of the enterprise to generate cash & needs of the entity to utilize cash
flows.
• It shows sources and uses of cash.

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 FORMAT OF CASH FLOW STATEMENT
Cash Receipts and Cash Payments are classified into three categories: Operating, Financing and Investing
 Operating Activities:
• Principal revenue generating activities or core operations/main activities which are directly involved in
generating revenue of an entity: Income Statement items
• Cash inflows and outflows from activities that determine Net Income like acquiring and selling of goods and
services
Examples of Operating activities:
(a) Cash receipts from the sale of goods and the rendering of services;
(b) Cash receipts from royalties, fees, commissions and other revenue;
(c) Cash payments to suppliers for goods and services;
(d) Cash payments to and on behalf of employees;
(e) Cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy
benefits;
(f) Cash payments or refunds of income taxes unless they can be specifically identified with financing and
investing activities; and
(g) Cash receipts and payments from contracts such as loans and investments held for dealing or trading purposes
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 CONTD…FORMAT OF CASH FLOW STATEMENT
 Investing Activities:
• Activities relating to changes in size and composition of long term assets and other investments (not included
in cash equivalents)
• Cash transactions concerned with Purchase and Sale of Long term assets like PPE or tangible fixed assets,
Intangible Assets, Inter-corporate Investments (stocks/bonds of another company)
• Cash lent to borrowers & collection of Loans, Acquisition of business
Examples of Investing activities:
a) Cash payments to acquire property, plant and equipment, intangibles and other long-term assets;
b) Cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;
c) Cash payments to acquire investments;
d) Cash receipts from sales of investments;
e) Cash advances and loans made to other parties;
f) Cash receipts from the repayment of advances and loans;
g) Interest and Dividend Received.
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 CONTD…FORMAT OF CASH FLOW STATEMENT
 Financing Activities :
• Activities relating to change in capital structure of the entity - that cause changes in size and composition
of an entity’s borrowings and stockholders’ equity -Transactions with Fund providers.
• Borrowings and repayments of loans (or issue and retirement of bonds/debentures/ notes), Issue and
repurchase of shares (treasury stock), paying dividends and interest.
Examples of Financing activities:
a) Cash proceeds from issuing shares or other equity instruments;
b) Cash payments to owners to acquire or redeem the entity’s shares;
c) Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or long-
term borrowings;
d) Cash repayments of amounts borrowed; and
e) Interest and Dividend paid.
f) Cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease
(similar to loan taken).
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 FORMAT OF CASH FLOW STATEMENT

Cash includes Cash and Cash equivalents (C&CE):

Cash Equivalents: Short term, highly liquid investments that can be quickly converted into cash
• which are subject to insignificant risk of changes in value, Like Treasury bills
• which have maturity < 3 Months (90 days) from date of purchase (CP)
Cash Credit, Bank Overdraft (which is repayable on demand) is part of C&CE
• So if Cash=10 and Bank Overdraft= 100 -> Cash and Cash equivalent = 10 -100 = -90

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CLASSIFICATION DIFFERENCES UNDER US GAAP, IFRS
AND INDIAN GAAP

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DISCLOSE: SIGNIFICANT FOR NON CASH TRANSACTIONS
Significant transactions that involve only long-term assets, long-term liabilities, or stockholders’ equity
 Simultaneous Investing and Financing Activities
• Exchange of long-term asset for a long-term liability or stockholders’ equity
• Issuance of bonds or common stock to purchase Land
• Take out a long-term mortgage to purchase real estate
 Exchange of old equipment for a new one
 Settle a debt by issuing capital stock, Conversion of bonds into common stock

• No Cash inflows or Outflows involved

• So, not reflected on either of the three sections in the statement of cash flows
• To be disclosed in a separate schedule (bottom of the statement) (US), or as a separate note to the
financial statements (IFRS)
• Since these have potential to impact future cash flows ->Full Disclosure
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CLASSIFY TRANSACTIONS INTO OP, FIN & INV OR CC&E

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CLASSIFY TRANSACTIONS INTO OP, FIN & INV OR CC&E

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CLASSIFY TRANSACTIONS INTO OP, FIN & INV OR CC&E

IA

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 PREPARATION OF CFS

 Three sources of information

• Income Statement to help us find the CFO
• Comparative Balance Sheets showing changes in A,L, SE
• Additional Information on how cash was used or provided

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 CFO: DIRECT VS INDIRECT METHOD
• In order to determine CFO, the Income figure in IS must be converted from accrual basis to cash basis.
 Direct Method
• Adjusts each item in the income statement (accrual basis) to its cash equivalent (cash basis)
• More easily understood by the average reader but costly to prepare
• US GAAP encourages it, Might become more important under IFRS because: Shows Operating Cash
Receipts and Cash Payments
 Indirect Method
• Lists necessary adjustments to convert Profit to net CFO
• Adjusts Profits to adjust the effect of all deferrals, accruals & non-cash
• Superior from an analyst’s perspective
• Used by most companies because:
• Easier and less costly to prepare.
• Reconciles Income Figure with CFO
• SEBI requires companies listed in Indian stock exchanges to use this
 Both methods produce same CFO figure Dr. Kavita Wadhwa
 COMPUTING CFO: DIRECT METHOD

• Under the direct method, each item in the income statement is adjusted from the accrual basis to the cash
basis
–Take each item of Revenue and Expense in the income statement
–Adjust it for its related deferrals/accruals like CA or CL to arrive at the related cash flow

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 CALCULATING CASH RECEIPTS FOR DIRECT METHOD

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CALCULATING CASH PAYMENTS FOR DIRECT METHOD

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CALCULATING CASH PAYMENTS FOR DIRECT METHOD

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CALCULATING CASH PAYMENTS FOR DIRECT METHOD

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 CFS: DIRECT METHOD

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 CFO: INDIRECT METHOD

Determine net cash provided/used by operating activities by converting income figure from accrual basis to cash basis
Common adjustments to Income figure (PBT) to move towards CFO:
• Non‐cash items ‐ Non‐cash expenses like depreciation, amortization, depletion expense, Provisions, unrealized
gains (like unrealized foreign exchange gains) etc
• Non‐Operating Items ‐ Gains or Loss on sale of PPE/ Investments, Interest expense, Interest income, Dividend
Income
• Changes in Operating/ Working capital items ‐ Operating assets (like Trade Receivables, Inventory, Prepaid
Expense, Accrued Income, Unbilled Revenue), Operating liabilities (like Trade Payables, Unearned Revenue,
Accrued Expenses)
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 CFO: INDIRECT METHOD
Cash flow from Operating Activities Amount
Profit Before Tax (PBT) XXX
Adjustments for non-cash & non-operating items:
(+) Depreciation XXX
From
Income (+/-) Loss/Gain on sale of any non-current asset XXX
Statement (+) Interest Expense XXX
(-) Dividend Income XXX
(-) Interest Income XXX
(+/-) Provisions (e.g. deferred tax) Increase (+) and Decrease (-) XXX XXX
Operating Profit before Working Capital Changes XXX
Working Capital Changes:
(+) Decrease in Current Assets XXX
(-) Increase in Current Assets XXX
(+) Increase in Current Liabilities XXX
(-) Decrease in Current Liabilities XXX XXX
Less: Income Tax XXX
Net Cash Flow from Operating Activities
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(A)
 CFO: INDIRECT METHOD (NON-CASH & NON-O/P ITEMS)

 Non-Cash and Non-Operating Items

 NON‐CASH ITEMS
• Depreciation Expense: Reduces profit, does not reduce cash -> Must be added back to PBT.
• Unrealized Gains: Increases profit, does not increase cash -> Must be deducted from PBT.
 NON‐OPERATING ITEMS
• Loss or Gain on Sale of Equipment: Full amount of cash received from the sale (including the gain or
excluding the loss)-> Reported as a source of cash in the investing activities section. So, to avoid
double counting:
• Any loss on sale is to be added to PBT in the operating section.
• Any gain on sale is to be deducted from PBT in the operating section
• Interest Expense -> Add to PBT
• Interest Income -> Deduct from PBT
• Dividend Income -> Deduct from PBT

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CFO: INDIRECT METHOD (WORKING CAPITAL CHANGES)
1. Decrease in Current Assets (is added to PBT)

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CFO: INDIRECT METHOD (WORKING CAPITAL CHANGES)
2. Increase in Current Assets (is subtracted from PBT)

Or COS understates cash outflow for purchases and had increased the profit

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CFO: INDIRECT METHOD (WORKING CAPITAL CHANGES)
3. Increase in Current Liabilities (is added to PBT)

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CFO: INDIRECT METHOD (WORKING CAPITAL CHANGES)
4. Decrease in Current Liabilities (is subtracted from PBT)

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 CASH FLOW FROM INVESTING ACTIVITIES (CFI)

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 CASH FLOW FROM FINANCING ACTIVITIES (CFF)

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 STATEMENT OF CASH FLOWS: SUMMARIZED

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THANK YOU