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 :
Depreciation
xxx
Loss on Sale of Fixed Assets
Loss on revaluation
Operating Profit before xxx xxx
Working Capital Changes
xxx
Adjustment* for :
Trade and other Receivables xxx
Inventories or Stocks
Trade Payments or xxx
(Creditors and B/P) xxx
Cash Generated from xxx
Operations
xxx
Interest Paid
Taxes Paid xxx
Net Cash 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
 Exercise-1 (Preparation of statement of cash flows – Indirect method)
The income statement and comparative balance sheet of Edison Corporation is given below:
You are required to prepare statement of cash flows of Edison Corporation using indirect
method.
• During the year 2017, a dividend of $130 was declared and paid by management
of Edison Corporation. Some plant assets were purchased during 2017 and the
payment was settled by issuing common stock amounting to $35.
Solution:
 Working Notes:
• Depreciation expenses for the year 2017:
Accumulated depreciation on December 31, 2017 – Accumulated depreciation on
December 31, 2016
= $600 – $585
= $15
• Issuance of capital stock for cash:
(Capital stock on Dec. 31, 2017 – Capital stock on Dec. 31, 2016) – Capital stock issued in
exchange of plant assets
= ($950 – $850) – $35
= $65
• Cash received from sale of investment:
Cost of investment sold + Gain on sale of investment
= ($710 – $650) + $40
= $60 + $40
= $100
• Cash paid for purchase of plant assets:
(Gross plant assets on Dec. 31, 2017 – Gross plant assets on Dec. 31, 2016) – Plant assets
acquired in exchange of common stock
= ($950 – $850) – $35
= $65
 End of Presentation
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