University School of Business

DEPARTMENT - MBA
Master of Business Administration
Financial Reporting and Analysis 21BAT- 602
Chapter: 2.3

Faculty Name: Dr Charu Saxena

(Assistant Professor)

Topic: VERTICAL ANALYSIS DISCOVER . LEARN . EMPOWER

 CASH FLOW
STATEMENT
ANALYSIS
Course Outcome
To understand the methods of preparation of various
CO1 financial statements

To examine the impact of information obtained from

CO2 financial statements on the financial position of the
business
To compare the business organizations based upon Will be covered in this
CO3 various financial statement analysis techniques lecture
Financial decision making by evaluating different
CO4 financial statements

To create financial statements and annual reports in

CO5 accordance with the companies’ act
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 Meaning
• Cash: Cash means all cash + cash equitable + marketable securities + bank
balance.
• Flow: Flow means flow of cash from business to economy and economy to
business i.e. cash inflows and cash outflows.
• Statement : Statement is a Performa prescribed by Charted Accountant
Act,1948.
• Cash Flow Statement is a statement o f inflows (sources) and outflows
(uses) of cash and cash equivalents in an enterprise during a specified
period of time.

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Poll Question
A company that issues stocks and bonds to raise funds results in
A) Decrease in Cash
B) Increase in Cash
C) Increase in  Equity
D) Increase in Liabilities

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Features of Cash Flow Statement:

1. It is a periodical statement as it covers a particular

period of time, say, month or year.

2. It shows movement of cash in between two balance

sheet dates.

3. It establishes the relationship between net profit and

changes in cash position of the firm.

4. It does not involve matching of cost against revenue.

5. It shows the sources and application of funds during
a particular period of time.

6. It records the changes in fixed assets as well as

current assets.

7. A projected cash flow statement is referred to as cash

budget.

8. It is an indicator of cash earning capacity of the firm.

9. It reflects clearly how financial position of a firm

changes over a period of time due to its operating
activities, investing activities and financing activities.
Objectives of cash flow statement:

(a) Measurement of Cash:

Inflows of cash and outflows of cash can be

measured annually which arise from operating
activities, investing activities and financial activities.

(b) Generating Inflow of Cash:

Timing and certainty of generating the inflow

of cash can be known which directly helps the
management to take financing decisions in future.
(c) Classification of Activities:

All the activities are classified into: operating

activities, investing activities and financial activities
which help a firm to analyze and interpret its various
inflows and outflows of cash.

(d) Prediction of Future:

A Cash Flow Statement, no doubt, forecasts the

future cash flows which helps the management to take
various financing decisions since synchronization of cash
is possible.
(e) Assessing Liquidity and Solvency Position:

Both the inflows and outflows of cash and cash

equivalent can be known, and, as such, liquidity and
solvency position of a firm can also be maintained as
timing and certainty of cash generation is known, i.e. it
helps to assess the ability of a firm to generate cash.

(f) Evaluation of Future Cash Flows:

Whether the cash flow from operating activities

are quite sufficient in future to meet the various
payments e.g. payment of expenses/debts/dividends/taxes.
(g) Supply Necessary Information to the Users:

A Cash Flow Statement supplies various

information relating to inflows and outflows of cash to the
users of accounting information in the following ways:

(i) To assess the ability of a firm to pay its obligations as

soon as it becomes due;

(ii) To analyze and interpret the various transactions for

future courses of action;

(iii) To see the cash generation ability of a firm;

(iv) To ascertain the cash and cash equivalent at the end of

the period.
(h) Helps the Management to Ascertain Cash Planning:

No doubt a cash flow statement helps the

management to prepare its cash planning for the future
and thereby avoid any unnecessary trouble.
 Classification

• Cash Flow form Operating Activities

• Cash Flow from Investing Activities
• Cash Flow from Financing Activities

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These are the principal revenue generating activities (or the main activities)
of the enterprise and these activities are not investing or financing activities.

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Preparation of Cash Flow Statement
as:

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Direct Method: Cash Flow Statement

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Cash Flows Direct Method
• The cash flow statement presented using the direct method is easy to read
• because it lists all of the major operating cash receipts and
• payments during the period by source.
• In other words, it lists where the cash inflows came from,
• usually customers, and where the cash outflows went, typically employees,
vendors, etc.

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Format

List of the most common types of receipts and payments used in the direct method
format:
• Receipts received from Customers
• Payments paid to Suppliers
• Payments paid to Employees
• Income Tax Payments

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Problem 1.
• 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?

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Solution:
• Cash from operations = Rs.50 lakhs – Rs.35 lakhs + Rs.6 lakhs =
Rs.21 lakhs

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THANK YOU