Cash Flow Statement

M B Raghupathy
Finance, Accounting and Control Area
School of Management and Entrepreneurship

Basic Financial Management

January April 2016
Profit vs. Cash

Profit is an accounting term

Sensitive to accounting policies
Cash is a universal language
Its close to being objective
At times
Highly profitable companies may run out-of-cash;
Loss making firms may have high cash balance
What is common among these transactions?

Depreciation for the year: Rs.100,000

Sale of finished goods on credit: Rs.1,000,000/-
Purchase of raw material on credit: Rs.200,000/-
Salary due for the current period is delayed, and will be paid in
the following period: Rs.50,000/-
What is common among these transactions?

The firm borrowed Rs.5,000,000/- from SBI

invested Rs.4,000,000 of the same on buying office space on
prime locality
The firm paid a final dividend of Rs.200,000 to its shareholders
A capital gain of Rs.100,000/- was earned by the sale of old
office equipment
Cash flow statement
Examines,
From where the cash comes into business, how it is being used to run the
operations, and capital projects
This is of major interest to stakeholders
Reasons,
Measure of liquidity
Measure of financial flexibility
Cash flow statement major components

Cash flow from operating activities

Cash generated from normal business operations
Adjusts net profit to reflect actual cash generated from operations
Calculating cash flow from operating activities:

Depreciation expenses Increase in current assets

Decrease in current assets Decrease in current liabilities
Net
Profit + Increase in current liabilities
Loss on disposal of assets
- Gain on disposal of assets
Decrease in deferred taxes
Increase in deferred taxes
Cash flow statement major components

Cash flow from investing activities

Reports changes in cash position as a result of a change in long term assets
Ex: purchase of machinery (an use of cash); Sale of company vehicle (a
source of cash)
Cash flow from financing activities
Exhibits the changes in cash position as a result of changes in long term
liabilities
Ex: Issue of new shares, additional borrowing etc. (Sources of cash);
payment of dividend, repayment of loans etc.
Preparing cash flow statement
Opening cash balance
+
Cash flow from operating activities
+
Cash flow from investing activities
+
Cash flow from financing activities
=
Net change in cash position
=
Closing cash balance
Cash flow statement some other examples
Issues common stock and receives Rs.100,000 if cash
Buys a building and pays Rs.20,000 cash
Pays a interim dividend of Rs.1200/-
Repaid Rs.30,000/- that were borrowed from banks
Earned Rs.5,000 profit through an open market sale of
Infrastructure bonds held by the company

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Classify the following cash flow activities

Deposited cash into current account

Paid bonus to employees
Acquired equipment on credit
Paid cash on maturity of bills payable
Paid income tax
Paid cash to settle a suit for trademark infringement
Purchased a 60-day certificate of deposit
Issued equity shares on conversion of debentures
Acquired a machine on hire purchase

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Classify the following cash flow activities

Issued equity shares at par

Wrote-off a receivable when a customer became insolvent
Issued equity shares in exchange for preference shares
Received cash on maturity of bills receivable

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