Lecture-21

Cash Flow Statement

ACC 501- Accounting

for Managers

Dr. ARPIT SIDHU

(Ph.D, UGC-NET, HP-SET, MBA,
MCOM, BCOM)
 Poll from the last lecture
• Which of the following statements are false?

A) When all the figures in a balance sheet are stated as percentage of the total, it is
termed as horizontal analysis.

B) When financial statements of several years are analyzed, it is termed as vertical

analysis.

C) Vertical Analysis is also termed as dynamic analysis.

a) Both A and B
b) Both A and C
c) Both B and C
d) A, B , C
•B
Objectives of the Chapter

To comprehend how the statement of cash flows is prepared

To be able to interpret the information presented in the cash flow

statement
Incoming cash flows
Cash + Other assets = Liabilities + Owners’equity

(1)
+ -
(2)
+ +
(3)
+ +
Outgoing cash flows
Cash + Other assets = Liabilities + Owners’equity

(1)
- +
(2)
- -
(3)
- -
 Cash Flow Analysis

Steps in preparation
1. Statement of cash from operation in this we will find out the cash
profit of the company
2. Preparation of cash flow statement in which we will explain various
in flows and out flows of cash.
3. Here we will take the opening cash balance of the company and add
various inflows to it and deduct various outflows.
4. Finally we will get the closing cash balance of the company.
Uses of Cash Flow Statement:

1. Helps in efficient cash management

2. Helps in Internal Financial Management

3. Discloses the movement of cash

4. Discloses success or failure of cash planning.

 CASH FLOW vs. FUND FLOW
Both are used in analysis of past transactions of a business firms. the major differences are:

1) Fund flow statements is based on the accrual accounting system. in case of preparation of cash
flow statements all transactions effecting the cash or cash equivalents is only taken into
consideration.

2) In Funds Flow Statement, net increase or decrease in working capital is recorded while in Cash
Flow Statement, individual item involving cash is taken into account.

3) Fund flow statements tallies the fund generated from various sources with variable uses to
which they are put. Cash flow statements starts with opening balance of cash and reach to the
closing balance of cash proceeding through sources and uses.
 Cash flows from operating activities
Operating activities are primarily the revenue-generating activities of a company

“Operating cash flow” is conceptually most near to “net profit”

• Main differences:
1. Non-cash expenses and non-cash revenues (f.i. depreciation expense)

2. Non-operating items (f.i. gain on disposal of tangible fixed assets)

3. Timing differences between net profit and underlying cash flow (f.i. changes in
the level of inventories, receivables, creditors, etc.)
 Operating cash flows –
Direct versus indirect method
2 methods for identifying and presenting the operating cash flow:

• Direct method: engenders the presentation of the most important categories of gross
operating cash inflows and cash outflows

• Indirect method: net operating cash flow is determined by adjusting the (net) profit figure for
the 3 types of differences
 Direct method - Example

Cash receipts from customers 30,150

Cash paid to suppliers and employees (27,600)

Cash generated from main operations 2,550

Income taxes paid (1170)

Net cash flow from operating activities 1,380

 Indirect method - Example
Net profit before tax 3,350
Adjustments for:
Depreciation 490
Investment income (100)
3,740

Working capital changes:

Increase in trade and other receivables (500)
Decrease in inventories 1,050
Decrease in trade payables (1,740)
Cash generated from main operations 2,550
Income taxes paid (1170)
Net cash flow from operating activities 1,380
Cash flow proxy

Net profit or loss after tax xxxxxxxxxxxxxx

Add back:
Depreciation charge for the year xxxxxxxxxxxxxxx
Provisions created in year xxxxxxxxxxxxxxx
Deduct:
(xxxxxxxxxxxxxx
Provisions released in year )
‘Cash flow proxy’ xxxxxxxxxxxxxx
 Constructing a cash flow statement
1. Determine the net change in cash
 Compare beginning and ending balance
2. Identify all transactions of the period leading to a change in
cash
 Direct: analyze movements in the accounts of cash (equivalents)
transaction by transaction
 Indirect: explain net change of cash by analyzing all other
accounts, knowing that each transaction with an impact on cash
also affects a non-cash account
3. Use the information (of step 1 and 2) to construct a cash
flow statement according to the formal rules
Applying step 2
• Information for operating cash flow is primarily derived from balances in the IS,
while information for the two other principal categories comes from the Balance
Sheet (and details in the Notes)
• Movements in the accounts indicate a change in financial position and further
examination is needed to determine if they had a cash impact
• Check if balances have been impacted by “accrual-based adjustments” or other
“non-cash activities”
 THANK YOU

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