Statement of Cash Flows

Tutorial
23rd Nov 2019
 Cash Flow Statement
 Flow statement
 Periodic
 Provides information regarding the liquidity of a firm
 explains the reasons for increase or decrease in cash balance
from one balance sheet date to the next
 classifies the reasons for the change as an operating, investing
or financing activity.
 amount of net income in a period is usually different than the
amount of increase in cash in the same period (Accruals
Concept)
 reconciles net income with cash flow from operations.
Financial statements are prepared under the Accruals Concept of
accounting which requires that income and expense must be recognized in
the accounting periods to which they relate rather than on cash basis. An
exception to this general rule is the cash flow statement whose main
purpose is to present the cash flow effects of transaction during an
accounting period.
Under Accruals basis of accounting, income must be recorded in the
accounting period in which it is earned. Therefore, accrued income must
be recognized in the accounting period in which it arises rather than in the
subsequent period in which it will be received. Conversely, prepaid income
must be not be shown as income in the accounting period in which it is
received but instead it must be presented as such in the subsequent
accounting periods in which the services or obligations in respect of the
prepaid income have been performed.
Expenses, on the other hand, must be recorded in the accounting period in
which they are incurred. Therefore, accrued expense must be recognized
in the accounting period in which it occurs rather than in the following
period in which it will be paid. Conversely, prepaid expense must be not be
shown as expense in the accounting period in which it is paid but instead it
must be presented as such in the subsequent accounting periods in which
the services in respect of the prepaid expense have been performed.
Accruals basis of accounting ensures that expenses are "matched" with
the revenue earned in an accounting period. Accruals concept is therefore
very similar to the matching principle.
 Classification of Cash Flows

Operations -- cash flows related to selling goods and

services; that is, the principle business of the firm.
Investing -- cash flows related to the acquisition or sale of
noncurrent assets.
Financing -- long term and short term cash flows related
to liabilities and owners’ equity; dividends are a
financing cash outflow.
External Uses of CFS
 To assess the ability of a firm to manage cash flows
 To assess the ability of a firm to generate cash
through its operations
 To assess the company’s ability to meet its
obligations and its dividend policy
 To provide information about the effectiveness of the
firm to convert its revenues to cash
 To provide information to estimate or anticipate the
company’s need for additional financing
Internal Uses of CFS
 Along side with cash budget CFS is used:
 To assess liquidity
 Determine if short-term financing is necessary

 To determine dividend policy

 Decide to distribute; or increase or decrease

 To evaluate the investment and financing

decisions
Cash flow from operating
activities
 Examples (IAS No.7):
 cash received from customers through sale of
goods or services performed;
 cash received from non-operating activities such
as dividends from investments, interest revenue,
commissions, and fees;
 cash payments to suppliers or employees;
 cash payments for taxes and other expenses;

In effect, the income statement is changed from

accrual basis to cash basis
Investing Activities
Examples of investing activities include:
 cash payments to acquire property, plant, and equipment
(PPE), other tangible or intangible assets, and other long-term
assets; and sale of such assets
 loans extended to other companies; and collection of such
loans;
Financing Activities
Examples of financing activities are :
 cash received from issuing share capital;
 cash proceeds from issuing bonds, loans, notes,
mortgages and other short or long-term borrowings;
 cash repayment of loans and other borrowings; and
 cash payments to shareholders as dividends.
 Classification of Cash in-flows and outflows
From sales of goods and To wages salary
services to customers payments
From receipt of customer To suppliers for
advances purchases of inventories
Operating Activities
From receipt of interest To other operating
revenue or dividends or expenses
rent revenue or similar To interest payments
revenue items To tax payments
To advance payments to
suppliers
From sale of PPE and other To purchase PPE and
long-term assets other long-term assets
Investing Activities
From collection of loans To make loans and to
collect such loans

From sale of common or

preferred stock Financing Activities To repay debt
From issuance of short To pay dividends
or long term debt
Determination of Cash Flows From
Operating Activities

Direct Method
Income Statement items are converted to cash flows
individually

Indirect Method
Net income or loss is adjusted for accruals such as
accounts receivable and payable, and for non-cash
expenses such as depreciation
reconciliation of the accrual based and cash based
accounting
 Comparison of Methods
 Direct method of presentation calculates cash flow from
operations by subtracting cash disbursements to supplies,
employees, and others from cash receipts from customers.
 The indirect method calculates cash flow from operations by
adjusting net income for non-cash revenues and expenses.
 Most firms present their cash flows using the indirect method.

Only operating activities section is different between the

methods, investing and financing sections are the same.
How to prepare cash flow
statement
 Firms could prepare their own cash flow
statement directly from the cash account.
 however, we need two consecutive balance
sheets and the income statement that covers
the period between the two balance sheets
Indirect Method- operating activities-
Adjustments to net income

Net income
+ noncash expenses: depreciation, amortization,
uncollectible account expense,etc
+ loss on sale of asset
+ increases in current liabilities
+ decreases in current assets
- gain on sale of asset
- decrease in current liabilities
- increase in current assets
= Cashflow from operating activities
Noncash Expenses- Why non cash
added back
 Noncash expenses, such as depreciation expense,
are added back – because they were deducted to
measure net income but did not require any cash
payment in the current period
 They are not truly sources of cash, even though
they are associated with cash inflows but reversal
of an accrued expense
Here is a compilation of top nine problems on cash flow
statements along with its relevant solutions.
Problem 1:
The bank balance of a business firm has increased during the
last financial year by Rs.1,50,000. During the same period it
issued shares of Rs.2,00,000 and redeemed debentures of
Rs.1,50,000. It purchased fixed assets for Rs.40,000 and
charged depreciation of Rs.20,000. The working capital of the
firm, other than bank balance, increased by Rs.1,15,000 during
the period. Calculate the profit of the firm for the year.
=

Problem 2:

A chemical company has net sales of Rs.50 lakhs, cash expenses

(including taxes) of Rs.35 lakhs and depreciation expenses of
Rs.5 lakhs. If debtors decrease over the period by Rs.6 lakhs,
what is its cash from operations?
Here is a compilation of top nine problems on cash flow
statements along with its relevant solutions.
Problem 1:
The bank balance of a business firm has increased during the
last financial year by Rs.1,50,000. During the same period it
issued shares of Rs.2,00,000 and redeemed debentures of
Rs.1,50,000. It purchased fixed assets for Rs.40,000 and
charged depreciation of Rs.20,000. The working capital of the
firm, other than bank balance, increased by Rs.1,15,000 during
the period. Calculate the profit of the firm for the year.
=

Solution:
1,50,000 = Profit + 2,00,000 – 1,50,000 – 40,000 + 20,000 –
1,15,000
∴ Profit = Rs.2,35,000
Problem 2:
ADVERTISEMENTS:

A chemical company has net sales of Rs.50 lakhs, cash expenses

(including taxes) of Rs.35 lakhs and depreciation expenses of
Rs.5 lakhs. If debtors decrease over the period by Rs.6 lakhs,
what is its cash from operations?
Solution:
 1 In case of other enterprises cash flow arising from interest paid
should be classified as cash flow from ________ while dividends
and interest received should be stated as cash flow from ____.

a) Operating activities, financing activities

b) Financing activities, investing activities
c) Investing activities, operating activities
d) None of the above
3 When a fixed asset is bought as hire
purchase, interest element is classified
2 Issue of bonus shares and conversion under ______ and loan element is
of debentures into equity are shown as classified under________.
a footnote to the Cash Flow Statement.
a) Operating activities, financing activities
a) True b) Financing activities, investing activities
b) False c) Investing activities, operating activities
d) None of the above
1 In case of other enterprises cash flow arising from interest paid
should be classified as cash flow from ________ while dividends
and interest received should be stated as cash flow from ____.

a) Operating activities, financing activities

b) Financing activities, investing activities
c) Investing activities, operating activities
d) None of the above
2 Issue of bonus shares and
conversion of debentures into equity
are shown as a footnote to the Cash
Flow Statement.
a) True
b) False
3 When a fixed asset is bought as hire
purchase, interest element is classified
under ______ and loan element is
classified under________.
a) Operating activities, financing activities
b) Financing activities, investing activities
c) Investing activities, operating activities
d) None of the above
4 Which of the following statements are
false?

A) Old Furniture written off doesn’t affect

cash flow.
B) Cash flow statement is a substitute for
cash account. 5 Which of the following is not a cash
C) Appropriation of retained earnings is not inflow?
shown in Cash flow statement.
D) Net cash flow during a period can never a) Decrease in debtors
be negative. b) Issue of shares
c) Decrease in creditors
a) A, B, C d) Sale of fixed assets
b) B, C, D
c) C, D, A View Answer / Hide Answer
d) None of the above
6 of the following is not a cash
outflow?

a) Increase in Prepaid expenses

b) Increase in debtors
c) Increase in stock
d) Increase in creditors
4 Which of the following statements are
false?

A) Old Furniture written off doesn’t affect

cash flow.
B) Cash flow statement is a substitute for
cash account. 5 Which of the following is not a cash
C) Appropriation of retained earnings is not inflow?
shown in Cash flow statement.
D) Net cash flow during a period can never a) Decrease in debtors
be negative. b) Issue of shares
c) Decrease in creditors
a) A, B, C d) Sale of fixed assets
b) B, C, D
c) C, D, A
d) None of the above
6 Which of the following is not a cash
outflow?

a) Increase in Prepaid expenses

b) Increase in debtors
c) Increase in stock
d) Increase in creditors