CASH FLOW

STATEMENT
a
 Introduction
• Cash playsa very importantrole in the economic
life of a business.
A firm needs cash to make payment to its suppliers, to incur
• day-to-day expenses and to pay salaries, wages, interest
and dividends etc.
In fact, what blood is to a human body, cash is to a
• business enterprise.
Thus, it is very essential for a business to
• maintain an adequate balance of cash.
For example, a concern operates profitably but it does not
have sufficient cash balance to pay dividends, what
message does it convey to the shareholders and public in
general.
Thus, management of cash is very essential.
Cash flow statement
• Cash flow statement provides information about the
receipts
cash (Inflows) and payments (outflows) of a firm for a
given period.
• It is a statement depicting change in cash position from one
period to another.
• For example, if the cash balance of business is shown by
its Balance sheet on 31st December, 2012 at $20,000
while the cash balance as per its balance sheet on 31st
December, 2013 is $ 30,000. There has been an inflow of
cash of $10,000 in the year 2013 as compared to the year
• 2012.
It explains the reasons for such inflows or outflows of cash, as the case
may be.
•
It also helps management in making plans for the immediate future.
 Purpose of the Statement
 To provide relevant information about the cash
receipts and cash payments of an enterprise during
a period.
 The statement provide answers to the following
questions:
1. Where did the cash come from?
2. What was the cash used for?
3. What was the change in the cash
balance?
 Why cash flow
•
Analysis ???
Its an important analytical tool for creditors, investors and
other users of financial statement data.

• Firm’s ability to generate cash flows in the future

• Firm’s capacity to meet cash obligations

• Firm’s future external financing needs

• Firm’s success in productively managing investing activities

• Firm’s effectiveness in implementing financing and investing
strategies
Objectives of Cash Flow Statement
 Cash Flow Statement : Limitations

• Does not show the liquidity position of the firm because

an income statement takes into account both cash as
well as non-cash items

• It is not a substitute of income statement

• Does not show the position of the firm in

totality financial
 Distinction between Cash flow Statement and
Funds Flow Statement

Basis of Difference Cash Flow Funds Flow

It recognizes Cash It is based upon accrual
Basis of basis 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
Causes of cash
Variation variation
change in working
capital
Where from: Where to?
 Classification of
Cash Inflows and Outflows
Operating activities
It includes receiving cash from customers for the sale of goods and
services, receiving interest and dividends on loans and investments,
and making cash payments for wages, goods and services purchased,
interest, and taxes.

Operating Activities

Cash Inflow Cash Outflow

1) Cash Sales 1)Cash Purchases

2) Received 2)Payment to
from Debtor Creditors
3) Commission 3)Cash Operating
& Fees Expenses
4) Royalty 4)Payment of
Wages
5)Income Tax
Cash effects the transaction on Net Income
6)Manufacturing
Expenses
Investing activities
It includes purchasing and selling long-term assets and marketable
securities (other than cash equivalents), as well as making and
collecting on loans.

Investing Activities

Cash Inflow Cash Outflow

1) Sale of Fixed
Assets 1)Purchase of
2) Sale of Fixed Assets
investments 2)Purchase of
3) Interest Received Investments
4) Dividend Received 3)Working Capital
5) Working Capital
Recovery
Financing activities
It includes issuing and buying back capital stock, as well as borrowing
and repaying loans on a short- or long-term basis (issuing bonds and
notes). Dividends paid are also included in this category.

Financing Activities

Cash Inflow Cash Outflow

1)Redemption of
1)Issue of Shares Preference
in Cash Shares
2)Issue of 2)Payment of
Debentures in Dividends
Cash 3)Interest Paid
3)Proceeds from 4)Repayment of
long-term Finance/ Lease
borrowings LiabilityPayment
of Loans
Decrease hjjk,..kj.,.j
Prepare a Cash Flow Statement on the basis of information given in the Balance
Sheet of P.S. Ltd.

LIABILITIES 2011 2012 ASSETS 2011 2012

Share Capital 2,00,000 2,50,000 Goodwill 10,000 2,000
12% Debentures 1,00,000 80,000 Land & Building 2,00,000 2,80,000
General reserve 50,000 70,000 Machinery 1,00,000 1,30,000
Creditors 40,000 60,000 Debtor 40,000 60,000
Bills payable 20,000 1,00,000 Stock 70,000 90,000
Outstanding Exp. 25,000 20,000 Cash 15,000 18,000
4,35,000 5,80,000 4,35,000 5,80,000
i) Cash From Operating Activities Rs. Rs.
Profit during the year tr. To Gen. Res. 20,000
(70,000- 50,000)
Add-Goodwill written off 8,000
Increase in Creditors 20,000
Increase in Bills Payable 80,000
1,28,000
Less- Increase in Debtors (20,000)
Increase in Stock (20,000)
Decrease in Outstanding Expenses (5,000)
Cash Inflow from Operating Activities 83,000
ii) Cash From Investing Activities
Purchase of land & building (80,000)
Purchase of machinery (30,000)

Cash From Investing Activities (1,10,000)

i) Cash From Financing Activities Rs. Rs.
Issue of Shares 50,000
Redemption of Debentures (20,000)
Cash Inflow from Financing Activities 30,000
Net Increase in Cash 3,000
Add- Cash balance in the beginning of the 15,000
year
Cash Balance at the end of the Year 18,000
The Balance Sheets of XYZ Ltd.for two years are given below-

Assets 2011 2012

Cash Balance 50,000 60,000
Trade Debtors 75,000 1,00,000
Inventory 1,40,000 1,20,000
Land 1,00,000 80,000
Plant & Machinery 2,00,000 2,50,000
Total 5,65,000 6,10,000
Liabilities & Capital
Trade Creditors 30,000 40,000
Debentures 1,50,000 90,000
Prov. For Depreciation on 60,000 80,000
Plant
Equity Share Capital 2,00,000 2,40,000
General Reserve 1,25,000 1,60,000
Total 5,65,000 6,10,000
Cash Dividend of Rs. 25,000 has been paid during the year.
The balance sheet of X Ltd.as on 31st march, 2011 and 2102 were as follows-
Assets 2011 2012
Land & Building 80,000 1,20,000
Plant & machinery 5,00,000 8,00,000
Stock 1,00,000 75,000
Sundry debtors 1,40,000 1,50,000
Prepaid Exp. 14,000 12,000
Cash at Bank 16,000 18,000
8,50,000 11,75,000

Liabilities & Capital

Share Capital 5,00,000 7,00,000
P & L A/c 1,00,000 1,60,000
Gen. res. 50,000 70,000
Sundry Creditor 1,63,000 2,00,000
Bills Payable 30,000 40,000
Outstanding expense 7,000 5,000
8,50,000 11,75,000
Additional Information-
i)Rs. 50,000 depreciation has been charged to plant &
machinery during the year, 2012.
ii)A piece of machinery was sold for 8,000 during 2012. it had
cost Rs. 12,000, depreciation of 7,000 has been provided on it.

Prepare Cash Flow Statement.