Cash Flow Statement

The Cash Flow Statement

The cash flow statement

provides information about:
• Cash Receipts (cash inflows)
• Uses of Cash (cash outflows)
• During a Period of Time
Inflows and outflows are
reported for:
• Operating activities
• Investing activities
• Financing activities
Cash Inflows and Outflows
Classification of Business Activities :
Inflow and Outflow of Cash

Operating Activities

Cash Inflow Cash Outflow

1) Cash Sales 1) Cash Purchases

2) Received from Debtor 2) Payment to Creditors
3) Commission & Fees 3) Cash Operating Expenses
4) Royalty 4) Payment of Wages
5) Income Tax
6) Manufacturing Expenses

Cash effects the transaction on Net

Classification of Business Activities :
Inflow and Outflow of Cash

Investing Activities

Cash Inflow Cash Outflow

1) Sale of Fixed Assets 1) Purchase of Fixed Assets

2) Sale of investments 2) Purchase of Investments
3) Interest Received 3) Working Capital
4) Dividend Received
5) Working Capital Recovery
Classification of Business Activities :
Inflow and Outflow of Cash

Financing Activities

Cash Inflow Cash Outflow

1) Issue of Shares in Cash 1) Payment of Loans

2) Issue of Debentures in 2) Redemption of Preference
Cash Shares
3) Proceeds from long-term 3) Payment of Dividends
borrowings 4) Interest Paid
5) Repayment of Finance/
Lease Liability
Objectives of Cash Flow Statement

1. Highlighting cash flow from

different activities
2. Short-term Planning
3. Cash Flow information
helps to understand liquidity
4. Efficient cash management
5. Prediction of sickness
6. Comparison with budget
7. Cash position
 Cash Flow Statement : Limitations

• Does not show the liquidity position of

the firm

• It is not a substitute of income statement

• Does not show the financial position of

the firm in totality
 Distinction between Cash flow Statement
and Funds Flow Statement

Basis Of Difference Cash Flow Funds Flow

It recognizes Cash basis It is based upon accrual
Basis of Of accounting Basis of accounting I.e
Accounting Working capital

Significance It is useful for short- It is useful for long-term

Term financial planning Financial planning
Schedule of Such a schedule is not Schedule of changes in
Changes in Prepared for preparing Working capital is
Working Capital Cash flow statement Prepared separately

It studies only the

Causes of It studies causes of Ch-
Causes of cash
Variation variation
ange in working
capital
 Preparing a Statement of Cash Flows

• Use net operating income as the starting

point to get net operating cash flow
• Add back any non-cash
expense (Example -
Depreciation)
Net Cash Flow = Cash Inflow - Cash Outflow

Net Operating Cash Flow = Income after Taxes

+ Depreciation
Preparing a Statement of Cash Flows

Order of Presentation:
Direct Method
1. Operating activities.
Indirect Method
2. Investing activities.

3. Financing activities.
Three Sources of
Information:
1. Comparative balance sheets

2. Current income statement

Cash Flow from Operating Activities : Direct
Method
Cash Flow from Operating Activities Amount Amount
(Rs.) (Rs.)

Cash Receipts from :

XXX
Sales
Commission & Fees XXX
Interest Received
XXX

XXX
Cash Payment for :
Purchases XXX
Payments to and for employees XXX
Operating Expenses
Interest Payments XXX
Direct Taxes XXX
XXX
Paid
XXX
 Cash Flow from Operating Activities :
Indirect Method
Cash Flow from Operating Activities Amount Amount
(Rs.) (Rs.)

Net Profit before Tax xxx

Adjustment for :
Deprciation
xxx
DECREASE IN
CURRNET
AV xxx xxx
Loss on Sale of Fixed Assets
Loss on revaluation xxx
Operating Profit before
Working Capital Changes xxx

Adjustment* for : xxx

Trade and other Receivables xxx
Inventories or Stocks xxx
Trade Payments or xxx
(Creditors and B/P)
Cash Generated from
xxx
Operations xxx
 Preparing the Statement of
Cash Flows

Indirect and Direct Methods

Companies favor the indirect
method for two reasons:
1. It is easier and less costly
to prepare, and
2. It focuses on the
differences between net
income and net cash flow
from operating activities.
Format for Cash Flow Statement
Profit for the year

Add
Decrease in all current assets
Increase in all current liabilities
Less
Increase in current assets
Decrease in all current liabilities
Cash from operation