Cash Flow Statements

Cfs

Cash Flows Statement

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Cfs

The term cash on the statement of cash flows refers broadly to both currency and cash equivalents. Currency

Cash

Bank Accounts

Cash

T-bills

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Commercial Paper

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•CFS attempts to analyze transactions generating cash and using cash •CFS provides summary of Sources and uses of Cash paramjit sharma

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Sources

Uses

Cash Profits Issue of Capital Issue of securities Borrowings Sale of Assets Investments

Purchase of Assets Investments Redemption Loan repayment Payment of Tax Dividend

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Uses of Cash Flows • Highlighting cash flow from different activities • Short- term planning • Cash flow information helps to understand liquidity • Efficient cash management • Prediction of sickness • Comparison with budget • Cash position paramjit sharma

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Are Arecash cash flows flows sufficient sufficient to to support supportongoing ongoing operations? operations?

Can Canwe we pay pay dividends? dividends?

Will Will the thecompany company have haveto toborrow borrow money moneyto to make make needed needed investments? investments?paramjit sharma

Can Canwe we meet meet our our obligations obligations to tocreditors? creditors?

CFS Answers!

Why Why is isthere thereaa difference difference between between net net income incomeand andnet net cash cashflow? flow?

Cfs

The Statement of Cash Flows Accrual Based Statements Income Statement items & Changes in Current Assets and Current Liabilities

Balance Sheet: Changes in Non-Current Assets Balance Sheet: Changes in Non-Current Liabilities and Equity paramjit sharma

Cash Flow Statement Operating activities: Adjust net income for accruals and non-cash charges to get cash flows Investing activities: Inflows from sale of assets and Outflows from purchases of assets Financing activities: Inflows and outflows from loan and equity transactions

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PREPRATION OF CFS

Indirect Method Direct Method

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Reporting Cash Flows from Operations • Direct Method —A method of reporting net cash flows from operations that shows cash receipts and payments for a period of time. This method is more straight forward. • Indirect Method —A method of reporting net cash flow from operations that involves reconciling net income to a cash basis. It shows how non cash flows affect net income. paramjit sharma

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Direct Method This method reports directly: • The major classes of operating cash receipts and payments of an entity during a period. • Accrual-basis revenues and expenses must be converted to equivalent cash receipts and payments. • The amount of cash actually collected or paid is determined.

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Indirect Method It makes the following adjustments: • Adjustments for receivables and other current operating assets. • Adjustments for payables and other current liabilities. • Adjustments for depreciation and other non cash items. • Adjustments for reserves and gains and losses.

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Operating activities

Investing activities paramjit sharma

Financing activities

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OPERATING ACTIVITIES Cash Cash Inflow Inflow

Cash Cash Outflow Outflow

•• Cash Cash receipt receipt of of sales •• Inventory sales Inventory payments payments •• Collection Collection of of •• Interest Interest payments payments receivables receivables • • Wages Wages •• Interest Interest revenue revenue •• Utilities Utilities •• Dividend Dividend revenue revenue •• Rent Rent paramjit sharma

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Investing Activities Cash Inflow • Sale of plant assets • Sale of securities, Cash Cash Outflow Outflow other than •• Purchase of plant assets Purchase of plant assets trading securities •• Purchase Purchase of of securities, securities, • Collection of other other than than trading trading principal on loans securities securities •• Making Making of of loans loans with with other other entities entities paramjit sharma

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Financing Activities Cash Cash Inflow Inflow •• Issuance Issuance of of own own stock stock •• Borrowings Borrowings

Cash Cash Outflow Outflow •• Dividend Dividend payments payments •• Repaying Repaying principal principal on on borrowing borrowing •• Treasury Treasury Stock Stock purchase purchase

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Preparing a Simplified Statement of Cash Flows

Cash Cash flows flows are are divided divided into into three three categories. categories.

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Operating Activities Cash sales Cash receipts from Sundry Debtors Trading commission received Less:-Operating Payments

xxxxx xxxxx xxxxx (xxxx)

Income Tax Paid

xxxxx (xxxx)

Cash flow before extra ordinary items (+ or – )extra ordinery item

xxxxx xxxx

Net Cash from operating Activities

xxxxx

Cash generated from operations before tax

Operating Operating activities activities are are principal principal revenuerevenueparamjit sharma producing activities producing activities of of the the enterprise. enterprise.

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Investing Activities Add:

Proce e ds from sa le of la nd, buildings, e quipm e nt, or othe r noncurre nt a sse ts Re ce ipt of inte re st,divide nd from inve stm e nts Le ss: Pa ym e nts to a cquire la nd, buildings, e quipm e nt, or othe r noncurre nt a sse ts Pa ym e nts to a cquire inve stme nts Ne t Ca sh Flow s from Inve stm e nt Activities

XXX XXX

(XXX) (XXX) XXX

Includes that involve the Includes transactions transactions that involve the paramjit sharma acquisition acquisition or or disposal disposal of of non non current current assets. assets.

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Financing Activities Add:

Proce e ds from borrow ings Proce e ds from issuing ca pita l stock Proce e ds from sa le of bonds Le ss: Principa l pa ym e nts on borrow e d funds Pa ym e nts re la te d to bond m a turitie s Divide nd pa ym e nts Ne t Ca sh Flow s from Inve stm e nt Activities

XXX XXX XXX (XXX) (XXX) (XXX) XXX

Includes Includes transactions transactions involving involving receipts receipts paramjit sharma from or payments from or payments to to creditors creditors and and owners. owners.

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Other Cash Flow Issues For investing activities and financing activities, like-kind inflows and outflows of cash must be shown separately on the statement of cash flows.

•• Example: Example:

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● ●XYZ XYZsells sellsan anold old building buildingfor for Rs70,00,000 Rs70,00,000and and purchases purchasesaanew new building buildingfor for Rs100,00,000. Rs100,00,000. ● ●The TheRs70,00,000 Rs70,00,000 inflow inflowof ofcash cashand andthe the Rs100,00,000 Rs100,00,000outflow outflow of ofcash cashmust mustbe beshown shown separately. separately.

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Interpretation of the Statement of Cash Flows –– Negative Negative cash cash flow flow isis usually usually aa sign sign of of fundamental fundamental difficulties. difficulties. –– Ultimately, Ultimately, aa positive positive cash cash flow flow isis necessary necessary to to avoid avoid liquidating liquidating assets assets or or borrowing borrowing money money to to pay pay for for day-to-day day-to-day activities. activities. paramjit sharma