Cash Flow Statement[1]

CASH FLOW STATEMENT

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According to AS 3 every company should along with the Balance sheet and Profit and Loss Account provide information on Cash flows of the organization during the period •CFS profits information about the changes in cash and cash equivalent of an enterprise. •It is based on cash concept of profit. •It identifies cash generated from operations,

•the operating cash surplus • which can be applied for investments in fixed assets. •What an be ploughed back is directly identifiable from cash flow statement. •CFS is prepared to explain the cash movements between two points of time.

Meaning of

‘Cash Flows’

Cash flows are inflows and outflows of cash and cash equivalents.

When does the flow of Cash arise? It arises when the net effect of a transaction is either to increase or to decrease the amount of cash or cash 3

MEANING OF CASH FLOW STATEMENT  The

Cash Flow Statement means the statement of changes in Cash and  Cash equivalents. Net Cash flows It shows the following for the period covered by it:— from Operating Activities

Net Cash flows from Financing Activities

Net Cash flows from Investing Activities

Net Change in Cash and Cash Equivalents

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Meaning of 'Cash' Cash comprises Cash on hand and Demand Deposits with Banks.

Meaning of ‘Cash Equivalents’ Cash Equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. 5

Computation of Cash and Cash Equivalents Cash and Cash Equivalents at the Beginning of Period Rs. Cash in hand 5,000 Cash at Dena Bank 10,000 Marketable Securities3,000 Less: Bank Overdraft ( 10,000) Less: Cash Credit

(9,000)

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Meaning of Operating Activities (a)These are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. (b)Cash flows from operating activities are primarily derived from the principal revenueproducing activities of the

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Cash Flows from Operating Activities Cash Inflows • Cash Sales • Cash Receipts from Debtors • Trading Commission Received • B/R collected

Cash Outflows • Cash Purchases • Cash Paid to Suppliers • Wages Paid • Mfg. Oh.Paid • Admin.& Selling Expenses 8

Meaning of Investing Activities Investing activities are the

acquisition and disposal of long-term Assets and other Investments not included in Cash equivalents. 9

Cash Flows from Investing Activities Cash Inflows Sale of……….. -Machinery -Land & Building -Furniture & Fixtures - Investments -Non

Operating Incomes

Cash out flows

Purchase of…….

-Machinery -Land & Building -Furniture & Fixtures -Investments

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Meaning of Financing Activities These are the activities that result in changes in the size and composition of the owners’ capital and borrowings of the enterprise. Cash flow from financing activities is ascertained by analyzing the changes in Equity Share Capital, Pref.

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Cash Flows from Financing Activities Cash Inflows due To Issue of -Equity Share Capital - Pref. Share Capital - Debentures -Raising of other borrowings.

Cash Outflows -Buy back of Equity Shares -Redemption of Preference Shares -Repayment of Long-term borrowings -Dividend paid - Interest paid 12

How to Compute Cash Flow from

Operating Activities?

Direct O Method R

Indirect Method

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Cash Flow from Operating Activities (Direct Method ) Particulars A. Operating Receipts in Cash: Cash Sales Cash receipts from customers Trading Commission received B.

Operating Payments in Cash: Cash Purchases Cash paid to suppliers Trading Commission paid Manufacturing Exp. paid Admin & Selling Exp. paid

C.Cash generated from Operations before taxes [A – 14

Cash Flow from Operating Activities (Indirect Method) Particulars A. Net Profit as per Profit & Loss A/c Add: Proposed dividend for the current year Add: Interim dividend paid during the year Add: Transfer to reserve Add: Provision for Tax made during

Current Year

Less: Refund of Tax Less: Extraordinary items (i.e., Insurance proceeds15

.B.

C.

Net profit before taxation, and extraordinary item Add: Items to be added: Depreciation Interest on Long term borrowings Discount on Issue of Debentures w/o Patents written off Loss on sale of Machinery Premium on redemption of Pref. shares

D. Less: deducted:

Non operating g incomes to be

E. Operating Profit before working capital changes F. Add:

Decrease in C. Assets & Increase in C.

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H. Cash generated from operations I. Less: Income taxes paid (Net of Refund) J. Cash flow before extraordinary item [H – I] K. Extraordinary items L.Net Cash from Operating Activities

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Practical Guidelines for the computation of Cash from

 

Operating Activities from the Items of

Balance Sheet without additional information

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.

Proposed Dividend for the Current Year Add back to current year’s Net Profits after appropriations

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Provision for Tax made during the Current Year

.

Add back to current year’s Net Profits after appropriations

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Increase in Reserve .

Add back to current year’s Net Profits after appropriations

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Decrease in Reserve .

Subtract from current year’s Net Profits after appropriations

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Decrease in Intangible Assets like Goodwill, Patent, Trademark, Copyright .

Add back to current year’s Net Profits before tax

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Increase in Provision for Depreciation Account .

Add back to current year’s Net Profits before tax

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Decrease in items of Miscellaneous Expenditure like Preliminary Expenses, Underwriting Commission, Discount on Issue of Debentures/Shares.

Add back to current year’s Net Profits before tax 25

Decrease in Current Assets other than Cash & Bank Balance and Marketable Securities .

Add back to current year’s Operating Profits before Working Capital changes. 26

Decrease in Current Assets other than Cash & Bank Balance and Marketable Securities Add back to current year’s Operating Profits before Working Capital changes. .

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Increase in Current Liabilities other than Bank Overdraft & Cash Credit Add back to current year’s Operating Profits before Working Capital changes. .

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Increase in Current Assets other than Cash & Bank Balance and Marketable Securities

Deduct from current year's Operating Profits before Working Capital changes. 29

Decrease in Current Liabilities other than Bank Overdraft & Cash Credit

Deduct from current year's Operating Profits before Working Capital changes. 30

Tax paid during the year (if not given separately then Provision for Tax for the previous year)

Deduct from cash generated from operations before tax. 31

Practical Guidelines for the computation of Cash from Investing Activities from the Items of Balance Sheet without additional information 32

Increase in Intangible Assets Opening Closing Trade Mark 1 LAC 3 LAC Cash Used in Investing Activity

Cash Flow Statement Cash used in Investing Activity Purchase of Trade mark 2 Lacs

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Increase in Gross/Net Depreciable Fixed Assets

Opening Closing 1 LAC

Machinery 3 LAC Cash Used in Investing Activity

Cash Flow Statement Cash used in Investing Activity Purchase of Machinery 2 Lacs

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Increase in Non-Depreciable Fixed Assets

Opening Closing Investments 1 LAC 3 LAC Cash Used in Investing Activity

Cash Flow Statement Cash used in Investing Activity Purchase of Investments 2 Lacs

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Increase in items of Misc. Expenditure

Opening Closing Pre. Expenses 1 LAC 3 LAC Cash Used in Investing Activity

Cash Flow Statement Cash used in Investing Activity Payment of Pre. Exp. 2 Lacs

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Decrease in Non-Depreciable Fixed Assets

Opening Closing Investments 3 LAC 1 LAC Cash inflow from Investing Activity

Cash Flow Statement Cash from Investing Activity Sale of Investments 2 Lacs

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Decrease in Gross Depreciable Fixed Assets

Opening Closing Machinery 3 LAC 1LAC Cash inflow from Investing Activity

Cash Flow Statement Cash from Investing Activity Sale of Machinery 2 Lacs 38

Interest on the Op.Bal. of Investments Opening Closing 10% Investments 3 LAC 1 LAC Cash inflow from Investing Activity

Cash Flow Statement Cash from Investing Activity Interest on Investments 0.3 Lacs

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Increase in Accrued Interest on Investments Opening Closing 10% Investments 1 LAC

3 LAC

Accrued Interest 0.10 It is subtracted from the 0.11 amount of interest on Opening balance of Investments Cash Flow Statement Cash from Investing Activity Interest on Investments 0.29 Lacs

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Practical Guidelines for the computation of Cash from Financing Activities from the Items of Balance Sheet without additional information 41

Increase in Equity Share Capital/Pref. Share Capital/Debentures

Opening Closing Equity Share Capital 1 LAC Cash3 LAC Inflow from Financing Activity

Cash Flow Statement Cash from Financing Activity Equity Share Capital 2 Lacs

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Decrease in Equity Share Capital/Pref. Share Capital/Debentures

Opening Closing Equity Share Capital 3 LAC 1 LAC Cash used in Financing Activity

Cash Flow Statement Cash used in Financing Activity Equity Share Capital 2 Lacs (Buy-Back )

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Premium Opening Closing Eq. Share capital 1 LAC 3 LAC It Premium is added to the Securities 0.25 increase in amount of 0.75 Share Capital

Cash Flow Statement Cash from Financing Activity Equity Share Capital 2.5 Lacs ( Incl. Premium)

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Increase in Discount on Issue of Debentures Opening Closing Debentures 1 LAC 3 LAC Discount 0.25 It is subtracted from the 0.75 increase in amount of Cash Debentures Flow Statement Cash from Financing Activity Debentures 1.5 Lacs ( Net Of Discount )

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Interest on Opening Balance of Debentures Opening Closing 10% Debentures 1 LAC 3 LAC Cash used in Financing Activity

Cash Flow Statement

Cash used in Financing Activity Interest on Debentures 0.10 Lacs

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