MANAGEMENT ACCOUNTING

FINC001
Cash Flow Statement
Unit 4
Imagine yourself to be an
investor in the company
• Will you be interested in knowing
the sources from which the cash is
generated and used?
• What are the prospects of
company paying you cash
dividend?
• Will the company be able to pay
its interest and loan obligations?
• You would be able to find the
answers to these questions after
going through this chapter.
Cash Flow Statement
• Cash Flow Statement summarizes the inflow and
outflow of cash over a period for a company. Ind As 7
issued by Institute of Chartered Accountants of India
details the process for preparing the cash flow
statement.
• As per Ind As 7 : ‘An entity shall prepare a statement of
cash flows in accordance with the requirements of this
Standard and shall present it as an integral part of its
financial statements for each period for which financial
statements are presented.’
Objectives of cash flow
statement
• The basic objective of cash flow statement is to provide
information about cash flows of a firm during a
particular period.
Meaning of key terms
• Cash comprises of cash on hand available with firm and
balances with banks in the form of demand deposits.
•  Cash equivalents are highly liquid investments that
can be readily converted to cash. Cash equivalents are
short term investments, with relatively lesser exposure
to changes in value. Some examples of cash
equivalents are marketable securities, commercial
papers, treasury bonds and time deposits with banks
with a maturity of less than 3 months. 
• Cash flows are inflows and outflows of cash and cash
equivalents during the given period.
Uses of Cash Flow Statement

• Facilitates financial analysis

• Assessing the effectiveness of financial planning
• Enables comparison
• Helpful in financial management
Limitations of cash flow
statement
• Equivalence to Income Statement
• Impact of management policies and decisions
• Lead to misconceptions
• Dependent on other financial statements
Quiz
• Cash flow statement will enable users to understand
(a)Cash generated during the year
(b)Liquidity position of the company
(c)The reasons for change in cash position during the
year
(d)All of these
Comparison with fund flow and
cash budget
• Fund: The term fund means working capital in the
business. Working capital is calculated as the difference
between current assets and current liabilities. Fund
Flow Statement: It compares the source of inflow and
outflow of funds during the concerned accounting period
and analyses how it affects the working capital of an
organization.
• Cash Budget: It is a plan of estimated cash receipts
and disbursements during the period. 
Basis of difference Cash Flow Statement Fund Flow Statement
Meaning Cash flow depicts the inflow and Fund flow statement depicts the
outflow of cash and cash movement of funds, i.e. inflow or
equivalents during a given period outflows of the firm’s financial
of time. assets for a given period of time.

Purpose Purpose of the cash flow It is useful in long range planning

statement is the identification of of the firm.
gaps in the liquidity position and
correcting gaps thereby.

Component It is divided in three sections: It is prepared in two sections:

Cash from operating activities, Application and Sources of funds.
cash from financing activities and
cash from investing activities.

Reporting It is mandatory to report cash It is not mandatory to report fund

flow statement in financial flow statement in financial
statements under GAAP. statements under GAAP.

Basis of accounting Cash system of accounting is Accrual system of accounting is

followed in the preparation of followed in the preparation of fund
cash flow statement. flow statement.
Cash Flow Statement Cash Budget
Cash flow depicts the inflow and It shows the expected cash receipts
outflow of cash and cash equivalents and payments for the particular
during a given period of time. period.

It’s prepared for the past It’s a forward-looking statement and

transactions. prepared for expected cash receipts
and payments.

It is mandatory to report cash flow It is not mandatory to report cash

statement in financial statements
under GAAP.
It starts with the opening balance of
cash and cash equivalents at the
beginning of period and ends with
the closing balance of cash and cash
equivalents at the end of reporting
period.
budget in financial statements under
GAAP.
It starts with the opening balance of
cash in hand and at bank at the
beginning of period and ends with
surplus or deficit which may arise
during the period.
Classification of cash flows

Business activities result in the movement of

cash ,inflows or receipts and outflows or payments. As
per Ind As 7, these activities can be divided into three
categories:
•Operating Activities
•Investing Activities
•Financing Activities
Operating activities

• As per Ind As 7 ‘Operating activities are the principal

revenue-producing activities of the entity and other
activities that are not investing or financing activities.’
In other words, operating activities include the cash
impact of transactions and events that determines the
net profit or loss of a firm.
• Examples of cash flows from operating activities are:
 cash receipts from the sale of goods and the rendering of services;
 cash receipts from rendering of services like royalties, fees, commissions and other services;
 cash payments to suppliers for services;
 cash payments to employees
Investing activities
• As per IndAs7: ‘Investing activities are the acquisition
and disposal of long-term assets and other investments
not included in cash equivalents.’ Cash flows arising
from the acquisition and disposal of non-current assets
gives rise to cash flows used or invested in investing
activities.
• Examples of Investing activities
 cash payments made for acquiring property, plant and equipment, intangible assets and other long-term
assets.
 cash receipts from sales of property, plant and equipment, intangible assets and other long-term assets;
 cash payments made for long term investments like equity or debt instruments of other entities
 cash receipts from long term investments
Financing activities

• As per IndAs7: ‘Financing activities are activities that

result in changes in the size and composition of the
contributed equity and borrowings of the entity.’ Cash
flows from financing activities are those cash inflows
and outflows which are related with capital employed in
the firm.
• cash receipts from issue of shares;
• cash payments to equity shareholders for redemption of shares
• cash receipts from issue of debentures, loans, notes, bonds, and other short-term or long-term borrowings;
• cash payments for loans and other borrowings
• cash payments by a lessee for finance lease liability.
Methods of preparation of cash
flow statement
• Direct Method: Direct method is based on the
aggregation of cash receipts from operating revenues
and gross cash payments from operating expenses.
• Indirect Method: Cash flows from operating activities
are calculated by adjusting net income from accrual
basis to cash basis under indirect method. This method
will not directly report cash inflows and outflows from
operations, hence called indirect method.
Treatment of special items
• Non-Cash transactions
• Taxes on Income
• Interest and Dividend
• Gain or loss arising from the sale of non-current
assets
• Purchase and sale of trading securities
Preparation of cash flows under
operating activities
• Direct Method

Cash received from customers xxx

Less: Cash payment to suppliers and employees xxx

Less: Cash paid for operating expenses xxx

Less: Cash paid for Taxes xxx

Cash generated/used from operations xxx
Preparation of cash flows under
operating activities
• Indirect Method
Net Profit/Loss before tax xxx
Add: Impact of non-cash items like depreciation, provisions etc xxx
Add: Impact of non-operating items like interest, dividends etc xxx
Less: Additions in Profit and Loss account for non-operating items xxx
like interest and dividends
Operating cash flow before working capital changes xxx
Working capital changes xxx
Add: Increase in Current liabilities xxx
Add: Decrease in current assets xxx
Less: Increase in current assets xxx
Less: Decrease in current liabilities xxx
Cash flows from Operating activities before Tax xxx
Less: Income Tax paid xxx
Net Cash generated/used in Operating activities xxx
Quiz
• The net profit for the year ended 2018 is Rs 20,000.
Depreciation charged during the year was Rs 5,000.
Rent paid charged to PL was Rs 7,000. Calculate the
cash profit from operations.
• (a) 25,000
• (b) 20,000
• (c ) 18,000
• (d) 15000
Preparation of cash flows under
investing activities
• For calculating cash flows from investing all changes in
non-current assets must be analysed. Generally, an
increase in non-current assets will lead to cash outflows
as it means acquisition and decrease will result in cash
inflows as it means disposal. However, it is necessary to
be sure that the increase and decrease in non-current
assets is resulting in cash flow. There might be
instances that increase or decrease in non-current
assets is because of reasons other than cash inflow and
outflow.
Preparation of cash flows under
financing activities
• For calculating cash flows from financing all changes in
capital employed must be analysed. Generally, an
increase in capital employed means capital raised
assets will lead to cash inflows and decrease will result
in cash outflows as it means repayment. However, it is
necessary to be sure that the increase and decrease in
capital employed is resulting in cash flow. There might
be instances that increase or decrease in capital
employed is because of reasons other than cash inflow
and outflow.
Preparation of comprehensive
cash flow statement
Cash flow from operating activities (A) XXX
Cash flow from financing activities (B) XXX
Cash flow from investing activities ( C) XXX
Net cash flows during the year (A+B+C) XXX
Add: Cash and cash equivalents at the beginning XXX
of the year

Cash and cash equivalents at the end of the year XXX

Quiz
• Which of the following activities will not be considered
in cash flow statement.
• (a) Issue of shares for cash
• (b) Issue of shares for other then cash
• (c ) Cash paid for purchase of building
• (d) Cash received as dividend from investment