Discussion Questions

1. What is a Cash Flow Statement? What is the main purpose of such a statement? A cash
flow statement is a statement that presents the flow of cash to and from the
organization due to various transactions, during an accounting period. It separately
shows the flow of cash under operating activities, investing activities and financing
activities.
A cash flow statement serves a number of purposes:-
 Cash flow statement highlights the cash generated from operations.
 It helps to ascertain the liquidity position of the firm.
 It helps in effective and efficient management of cash.
 The management generally looks into cash flow statement to understand the
internally generated cash which is better utilized for payment of dividends.
 It helps in evaluating the cash position of the firm.
2. Cash equivalents are short term, highly liquid investments that are readily
convertible into known amounts of cash and which are subject to an insignificant risk
of changes in value. Cash equivalents are held for the purpose of meeting short-term
cash commitments rather than for investment or other purposes. For an investment
to qualify as a cash equivalent, it must be readily convertible to a known amount of
cash and be subject to an insignificant risk of changes in value. Therefore, an
investment normally qualifies as a cash equivalent only when it has a short maturity
of, say three months or less from the date of acquisition. Investments in shares are
excluded from cash equivalents unless they are, in substance, cash equivalents; for
example preference shares of a company acquired shortly before their redemption
date (provided there is insignificant risk of failure of the company to repay the
amount of maturity).
3. Cash flow statement is very important to the investors, creditors and management
mainly due to the fact that it shows just how liquidity generating is the company
through its operation. It helps to identify, in a timely manner, cash flow problems as
well as cash flow opportunities. It translates the earning reported on the income
statement – which is subject to reporting regulations and accounting decisions – into
a simple summary of how much cash the company has generated during the period
in question. “Cash flow measures real money flowing into, or out of, a company’s
bank account. It helps us to answer crucial questions such as the following:
 Is the company generating sufficient positive cash flows from its ongoing
operations to remain viable?
 Will the company be able to repay its debts?
 Will the company be able to pay its usual dividends?
 Why is there a difference between net income and net cash flow for the
year?
  To what extent will the company have to borrow money in order to make
needed investments?
4. The suggested response to the queries on SBI Cash flows at the start of the chapter
are as follows :
 How can a company increase its cash balance and sit idle?
Cash & Cash Equivalents are kept by large organizations for three purposes –
operating reasons, speculative reasons and precautionary reasons. In a
bank’s case a fourth reason would be regulatory requirements. These will
also be reasons for SBI to keep more cash in FY2019. We believe the macro-
disruptions that happened in the Indian economy (esp. demonetization and
GST) have led to the bank keeping a larger cash balance.
 Which popular adage should we believe in— “holding idle cash is dangerous”
or “cash is not king but also strategic”?
While the response for the above is going to be context specific to an
organization – depending on the level of competition and disruption faced,
stage of the industry and the plans of the organization.
 How can a company that has negative net cash from investing activities and
still end with a net profit?
While for other type of organizations (such as, manufacturing), net cash flow
from investing activities (and their trends) is going to be important as a figure
to analyze. In the case of a bank, investing activities are relatively
unimportant. You can do banking without having to do any major capex (one
can easily outsource things like computers, office space and furniture). And,
that explains the given case of SBI as well.
 Where was the need for such a giant to raise money through capital
instruments and just sit on more cash?
We believe the macro-disruptions that happened in the Indian economy (esp.
demonetization and GST) have led to the SBI keeping to keep a larger cash
balance.
 What could be the reason behind investors still willing to value this company
so highly?
A company is valued not based on only its current cash flows. A company’s
value is a sum of its present and future cash flows. That also explains the
valuations of SBI.
 How would that augur for the future of the Organization?
This will depends on SBI’s capability to make use of the opportunities before
hand. As of now, it looks not bad.

5. Liquidity refers to the ability of the business firm how fast it can convert its assets to
cash. Overall it refers a company’s ability to pay its short term obligations. A balance
sheet reflects a company’s financial position. It includes all the current assets and
current liabilities also. From which we can easily assess its liquidity by comparing
 whether the current assets are sufficient to pay the current liabilities as and when
the need arises.

Numerical 1 Solution:

Ruks Industries Ltd.

Balance Sheet      
Previous Year Current Year
Assets (Rs. In million) (Rs. In million) Change
Cash 10 30 20
Loans & Advances 5 10 5
Investments 40 30 (10)
Machinery 25 40 15
Other Fixed Assets 35 50 15
Total assets 115 160  
       
Liabilities FY2010 FY2011  
Short term loans 10 5 (5)
Long term loans 30 50 20
Pref. Share capital 10 10 0
Equity share capital 50 60 10
General Reserves 10 10 0
Retained Earnings 5 25 20
Total Liabilities 115 160  

Profit and Loss Statement

Sales 80  
Interest Received 12  
Dividend Received 8  
    100
CoGS 25  
Salary 15  
Ad. Exp 15  
Income Tax 2  
Dividend Payments 13  
Interest Exp 10  
    80
Net Profit   20
     

Amount Amount
(Rs. In (Rs. In
millions millions
Cash flow Statements, Direct Method ) )
Cash flow fom Operations    

Revenues 80  
less CoGS (25)  
less salary (15)  
less ad (15)  
less income tax (2)  
Cash flow fom Operations   23
     
Cash flow from Investment    
Sale of investment 10  
Purchase of Machinery (15)  
Loans & Advances (5)  
Purchase of other fixed assets (15)  
Income from securities 12  
Income from securities 8  
Cash flow from Investment   (5)
     
Cash flow from Financing    
Repaid borrowings (5)  
Increased borrowings 20  
Increased share capital 10  
Interest expenses (10)  
Dividend Paid (13)  
Cash flow from Financing   2
     
Net cash flow   20

FY2010 Cash   10
FY2011Cash   30

Curren
Ruks Industries Ltd., Statement of Cash Flows t Year
Indirect Method  

Cash flows from operating activities  

Profit before taxation 35

Adjustments for:  

Depreciation -

Investment income (20)

Interest expense 10
Profit / (Loss) on the sale of property, plant & equipment
 -
Working capital changes:  

(Increase) / Decrease in trade and other receivables -

(Increase) / (Decrease) in inventories -

Increase / (Decrease) in trade payables -

Cash generated from operations 25

Interest paid (15)

Income taxes paid (2)

Dividends paid (13)

Net cash from operating activities (5)

   
Cash flows from investing activities  

Business acquisitions, net of cash acquired -

Purchase of property, plant and equipment (30)

Proceeds from sale of equipment -

Acquisition of portfolio investments 10

Investment income 15

Net cash used in investing activities (5)

   
Cash flows from financing activities  

Proceeds from issue of share capital 10

Proceeds from long-term borrowings -

Payment of long-term borrowings 20

Net cash used in financing activities 30

   

Net increase in cash and cash equivalents 20

   

Cash and cash equivalents at beginning of period 10

   
Cash and cash equivalents at end of period
 30

Numerical 2 Solution:

Pragati Exports Ltd.

Cash flow statement
Amount Amount
Particulars (Rs. In lakhs) (Rs. In lakhs)
A. Calculation of cash flow from operating
activities    
  Net profit for the year   500
Add: Depreciation on plant &
  equipment 5  
  Less: Profit on sale of land (15)  
  Less: Income from investments (10) (20)
Cash flow before working
  capital changes   480
  Add: Decrease in inventory 10  
  Add: Decrease in prepaid rent 3  
Add: Increase in advance from
  customers 50  
Add: Increase in salaries
  payable 7  
Less: Increase in Account
  receivable (100)  
Less: Decrease in Account
  payable (100) (130)
Cash flow from operating
  activities   350
           
B. Calculation of cash flow from Investing
activities    
  Purchase of securities (500)  
  Sale of land   55  
  Income from investments 10  
Cash flow from investing
  activities   (435)
           
C. Calculation of cash flow from Financing
activities    
  Dividend paid   (15)  
  Issue of common stock 100  
  Repayment of loan   (50)  
Cash flow from financing
  activities   35
  Net cash used during the year   (50)

From the above it is evident that the company is facing cash crunch even after earning a
net profit. Hence, the owners need to efficiently manage cash flows.
Numerical 3 Solution:

T.V. TODAY NETWORK LIMITED

CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended March 31, 2019
In
Billions
Particulars 2019 2018
Cash flow from operating activities    
2.0 1.8
Profit before income tax for the year
4 3
Adjustments to reconcile profit before tax for the year to net cash flows:    
0.3 0.3
Depreciation and amortisation expense
2 1
0.0
Bad debts net of adjustment with provision for doubtful debts and advances -
0
0.0 0.0
Fixed assets written off
0 0
0.0 0.0
Provision for impairment on investment property under construction
0 1
0.0 0.0
Allowance for doubtful debts - trade receivables
7 8
0.0
Allowances for doubtful debts- trade receivables on exchange of services -
0
0.0
Allowance for doubtful advances -
0
0.0 0.0
Net loss on disposal of property, plant and equipment
1 0
-0.0
Provisions / liabilities written back to the extent no longer required -
1
-0.0 -0.0
Unwinding of discount on security deposits
0 0
-0.2 -0.1
Interest income
6 8
0.0 0.1
Finance costs
1 8
-0.0 -0.0
Net exchange differences
0 0
Working capital adjustments    
0.0 -0.1
Decrease/ (Increase) in trade receivables
7 3
-0.0 -0.0
(Decrease)/ increase in trade payables
6 3
-1.0 -0.0
(Increase) in other financial assets and other bank balances
3 7
0.0 0.0
Decrease in other non - current assets
0 5
-0.0 -0.0
(Increase) in inventories
1 0
(Increase) in other current assets -0.1 -0.0
 2 6
-0.0 0.0
(Decrease)/ Increase in employee benefit obligations
2 2
-0.0 -0.0
(Decrease) / increase in other financial liabilities
6 1
0.1 0.1
(Decrease) / increase in other current liabilities
1 6
-0.0
(Decrease) in other non-current liabilities -
0
1.0 2.1
Cash generated from operations
6 5
-0.7 -0.6
Income tax paid (net of refunds)
6 3
0.3 1.5
Net cash inflow from operating activities (A)
0 2
Cash flows from investing activities    
-0.2 -0.8
Payment for acquisition of property, plant and equipment
4 4
-0.0
Payment for investment made -
0
0.0 0.0
Proceeds from sale of property, plant and equipment
1 0
-0.0
Funds withdrawn by holding company from ITGD Division -
3
-0.2
Consideration paid to holding company for acquisiton of ITGD Division -
0
0.0 0.0
Repayment of loans by employees (net)
0 0
0.2 0.1
Interest received on bank deposits
2 3
-0.0 -0.9
Net cash inflow from investing activities (B)
1 4
Cash flows from financing activities    
0.0 -0.0
Proceeds from issue of equity shares
0 0
0.0
Proceeds from borrowings -
3
-0.2
Repayment of borrowings -
7
-0.0 -0.1
Interest and other borrowing costs paid
1 7
-0.1 -0.1
Dividends paid to company's shareholders
3 2
-0.0 -0.0
Dividend distribution tax
3 2
-0.1 -0.5
Net cash outflow from financing activities (C)
4 9
0.1 -0.0
Net increase in cash and cash equivalents (A+B+C)
5 0
0.1 0.1
Cash and cash equivalents at the beginning of the financial year
2 3
0.0 0.0
Effect of exchange rate changes on cash and cash equivalents
0 0
Cash and cash equivalents at the end of the year 0.2 0.1
 7 2

Numerical 4 Solution:

M/s Little Flowers Imports Ltd.

Cash flow statement
           

Amount Amount
Particulars     (Rs. In lakhs) (Rs. In lakhs)
A. Calculation of cash flow from
operating activities    
Increase in reserves and
  surplus during the year   10
  Add: Depreciation   20  
  Add: Proposed dividends 50  
Cash flow before working
  capital changes   80
Less: Increase in Bills
  receivable (4)  
Less: Increase in Sundry
  Debtors (10)  
  Less: Increase in inventory (5)  
Cash flow from operating
  activities   61
           
B. Calculation of cash flow from Investing
activities    
  Investment in fixed assets (40)  
Cash flow from investing
  activities   (40)
           
C. Calculation of cash flow from
Financing activities    
  Dividend paid   (20)  
Cash flow from financing
  activities   (20)
  Net cash used during the year   1
Cash at the beginning of the year   4
Cash at the end of the year     5

The firm's performance was profitable and to the extent we agree with the view of Little Flower that
the firm is doing okay. But, as far as, liquidity is concerned one has to agree with Binoy. Though the
compnay has a positive cash balance of Rs. 5 lakhs, but there are two areas of concern.
(a) the increase in working capital requirements of the firm (especially all the current assets)
(b) we can see the firm will have problems when it pays the proposed dividend of Rs. 5,00,000
Numerical 5 Solution:

Aavas Financiers Limited

Consolidated Statement of Cash Flows
for the year ended March 31, 2019
Rs. In
Billions
  Particulars Year ended Year ended
March 31, March 31,
 
2019 2018
A Cash flow from operating activities:    
2.5 1.3
  Net profit before tax as per statement of profit and loss
8 4
  Adjustments for - -
0.1 0.0
  Depreciation and amortisation
0 6
Expenses incurred on increase in authorised capital and issue of 0.0
  -
shares 0
0.0 0.0
  Provision for expected credit loss (ECL)
6 1
0.0 0.0
  Provision for employee benefits
2 1
-0.0 -0.0
  Derivative mark to market gain
0 1
0.0 0.0
  Provision for CSR expenditure
0 0
0.0 0.4
  Share based payments
7 2
2.8 1.8
  Operating profit before working capital changes
2 4
  Changes in working capital - -
-14.8 -10.9
  Increase in financial and other assets
1 8
-0.0 0.2
  Decrease in financial and other liabilities
8 3
  Total of changes in working capital -14.90 -10.75
-0.6 -0.4
  Direct taxes paid
8 2
  Net cash flow used in operating activities (A) -12.76 -9.33
B Cash flow from investing activities: - -
  Inflow (outflow) on account of : - -
-3.1 -2.0
  Investment in fixed deposits
3 4
-0.1 -0.1
  Purchase of Property, plant and equipment (including capital
4 4
  work-in-progress)/ intangible assets - -
 0.0 0.0
  Sale of Property, plant and equipment (including capital work-in-
0 0
  progress) - -
  Net cash flow used in investing activities (B) -3.27 -2.18
C Cash flow from financing activities: - -
4.7 4.4
  Issue of equity shares (including share premium)
5 1
-0.1 -0.0
  Share / debenture issue expenses
3 3
14.6 12.7
  Proceeds from borrowings
5 7
-5.2 -4.7
  Repayment of borrowings
3 4
14.0 12.4
  Net Cash flow from financing activities (C)
4 0
0.9
  Net increase/(decrease) in cash and cash equivalents (A+B+C) -1.99
0
3.5 2.6
  Cash and cash equivalents as at the beginning of the year
8 9
1.6 3.5
  Cash and cash equivalents at the end of the year
0 8