Cash Flow Statement

Presented By: Naveen Kr SainiVansh kapoorGarima YadavManisha AnandMohit PaliwalAnuj GuptaKaran Rana

ICFAI Business School

GurgaonClass of 2016

What is Cash flow statement ?

In simple language we can define it like , how much a business gets in cash and how much it pays in cash.

The purpose of cash flow statement is to provide relative information about cash receipts and cash payments of an enterprise during a period .

Let’s make it more clear by following video

Why we need “CASH FLOW STATEMENT “ ???

Lets try to understand this with the help of following Question :

What does an organization do with the huge profits it makes every year ?

Answer to such a question ,you will not find in an enterprise’s balance sheet or profit & loss account . Again WHY?

Because Balance sheet provides you the information about an enterprise’s assets & how those assets have been financed.

Whereas Profit & Loss A/c provides you the information about financial performance of an enterprise.

Thus to answer this question ,we need a statement that provides information on the major sources of cash receipts & cash payments i.e cash flow statement .

Cash Flow Statement allows us to understand :

how a company’s operations are running

Where its money is coming from & how it is being spent

Cash Flow Statement helps in assessing

Enterprise’s liquidity

Financial flexibility

Profitability

Risk

Importance

To determine enterprise’s rate of return or value

To assess the ability of an enterprise to generate cash and cash equivalents.

Helps to identify the sources from where cash inflows have arisen within a particular period and also shows the various activities where in cash was utilised.

It shows if a business is running out of money even if it is profitable.

It makes clear how much money was used to purchase property and equipment

Objectives

Comparison with the cash budget :A cash budget is prepared at the commencement of the year ,where as cash flows is prepared at the end of the year

It helps in planning the repayment of loan schedule and replacement of fixed assets ,etc.

It helps in efficient and effective management of cash.

It is very useful in the evaluation of cash position of a firm.

Based on AS-3, it presents cash generated & used in operating , investing & financing activities.

The Structure of the Cash Flow Statement

Cash Flow is determined by looking at three activities by which cash enters and leaves a company :

Operating Activities

Investing Activities

Financing Activities

Operating Activities

Payments to suppliers & Employees for Materials & Services.

Payments to Government for taxes & Duties.

Receipts from Customers for sales of goods & Services.

Cash Inflow

Activities

Cash Outflow

Investing Activities

Payments for purchase of Fixed Assets

Payments to Government for taxes & Duties.

Receipts from interest & dividends on loans & investments.

Receipts from Sales of Fixed Assets

Receipts from Sales of investments & Collection of Loans.

Financing Activities

Payments for dividends on share capital.

Payments for Interest on debentures & other borrowings.

Receipts from issuance of share capital.

Cash Inflow

Activities

Cash Outflow

Payments for buy-back of share capital and redemption of debentures & loans.

Receipts from other borrowings

Receipts from issuance of debentures.

Indian Accounting Standard

Indian accounting standards are a set of accounting standards notified by the ministry of corporate Affairs which are converged with international financial reporting Standards(IFRS)

These accounting standards are formulated by accounting standards boards of Institute of Chartered Accountants of India

Objectives of Indian Accounting Standard To remove variations in the treatment of several accounting aspects

To bring about standardization in presentation

They Intent to harmonize the diverse accounting policies followed in the preparation & presentation of financial statements by different reporting enterprises so as to facilitate intra-firm and inter –firm comparison..

Accounting Standard (AS) 3

“Cash Flow Statements”(revised 1997) comes into effect in respect of accounting periods commencing on or after 1-4-1997.

This Standard supersedes AS-3 ,’Changes in Financial Position’, issued in 1981.

This standard is mandatory in nature in respect of accounting periods commencing on or after 1-4-2004 for the enterprises which fall in any one or more of the categories in the next slide, at any time during the accounting period .

• Enterprise whose equity or debt securities are listed whether in India or outside India.

• Enterprise which are in the process of listing their equity or debt securities as evidenced by the board of directors.

• Banks including co-operative banks.

• Financial institutions .

• Enterprises carrying on insurance business.

• All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 50 crore. Turnover does not include ‘other income’.

•All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs.10 crore at any time during the accounting period.

• Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

The enterprises which do not fall in any of the above categories are encouraged, but are not required, to apply this Standard.

Types of Methods For Operating Cash Flows

Cash Flow Statement can be derived either from Direct Method or Indirect Method

Direct Method:Major classes of gross cash receipts & gross cash Payments are disclosed.

Indirect Method :Profit or Loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments.

Users of Cash Flow Statement

Internal Users (Primary Users) – includes

• Management – For analyzing the organisation’s performance & position and taking appropriate measures to improve the company results .

• Employees – for assessing company’s profitability and its consequences on their future remuneration & job security.

• Owners – For analyzing the viability & profitability of their investment & determining any future course of action.

External Users(Secondary Users) – includes

• Creditors – For determining the credit worthiness of the organization.

•Tax authorities – For determining the credibility of the tax returns filed on behalf of the company.

• Investors – For analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company.

• Customers – For assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term.

What do Users use the Cash Flow Statement For ???

Investors ,analysts ,managers and creditors etc use cash flow information for :

Risk Assessment : Auditors can also use these cash flow ratios to identify discrepancies between the cash flow statement and other financial statements

Liquidity & Solvency :To provide information on a firm’s liquidity and solvency and its ability to change cash flows in future circumstances.

Trend Analysis : External users can use a company's cash flow statements from several accounting periods to determine trends. A positive trend of steady or increasing cash flow indicates financial health .

Enterprise’s ability to meet its obligations & ability to pay dividends & its needs for external financing .

The reasons for difference between net profit & associated cash receipts & payments.

Limitations

Cash flow statement cannot be equated with the Income Statement. An income statement takes into account both cash as well as non-cash items and, therefore, net cash flow does not necessarily mean net income of the business.

The cash balance as disclosed by the cash flow statement may not represent the real liquid position of the business since it can be easily influenced by postponing purchases and other payments.

Interpreting Data- Sometimes, it is difficult to interpret data in cash flow, for e.g - it may be difficult to gauge whether the company should be investing more in a plant.

A. Cash Flow from Operating Activities

Net Profit Before Tax XXX

Adjustments for :

Depreciation XXX

Loss on Sale of Fixed Assets XXX

Gain on Sale of Fixed Assets (XXX)

Interest Paid XXX

Interest Received (XXX)

Dividend Received (XXX)

Operating Profit Before Working Capital Changes XXX

ADD : Increase in Current Liabilities XXX

Decrease In Current Assets XXX

LESS : Increase in Current Assets XXX

Decrease In Current Liabilities XXX

Income Tax Paid (XXX)

Net Cash from Operating Activities XXX XXX

Cash flow Statement

B CASH FLOWS FROM INVESTING ACTIVITES.

Purchase of Fixed Assets (XXX)

Purchase of Long Term Investments (XXX)

Sale of Fixed Assets XXX

Sale of Long Term Investments XXX

Interest Received XXX

Dividend Received XXX

Net cash from investing Activities XXX XXX

C. CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issue of share capital XXX

Repayment of long- term borrowings (XXX)

Proceeds from long- term borrowings XXX

Interest paid (XXX)

Dividend paid (XXX)

Net cash from financing Activities XXX XXX Net Inc./Dec. in Cash & Cash Equivalent (A+B+C) xxx

Cash & Cash Equivalent at the beg. of the period xxx

Cash & Cash Equivalent at the End of the Period xxx

Analyzing with a following question ,

The summarized Balance sheet of XYZ Ltd. As at 31st March 2010 and 2011 are :

Liabilities

31st March 2010

31st March 2011 Assets

31st March 2010

31st March 2011

Share Capital 4,50,000 4,50,000 Fixed Assets 4,00,000 3,20,000General Reserve 3,00,000 3,10,000 Investments 50,000 60,000Profit and Loss A\c 56,000 68,000 Stock 2,40,000 2,10,000Creditors 1,68,000 1,34,000 Debtors 2,10,000 4,55,000Provision for taxation 75,000 10,000 Bank 1,49,000 1,97,000Mortgage - 2,70,000

10,49,000 12,42,000 10,49,000 12,42,000

Additional Information:Investments costing Rs 8,000 were sold during the year 2010-11 for Rs 8,500Provision for taxation made during the year was Rs 9,000During the year, part of the fixed assets costing Rs 10,000 was sold at Rs 12,000 and the profit was included in the Profit and Loss A\cDividend paid during the year amounted to Rs 40,000You are required to prepare Cash Flow Statement.

A. Cash Flow from operating activitiesClosing bal of P &L A/c (31st March 2011) 68000less : opening balance of P& L (31st March 2010) -56000Add: Innterim Dividend 40000Provision for tax 9000Transfer to reserve 10000Net Profit Before Tax 71000add: depreciation 70000less: profit on sale of investment -500 profit on sale of fixed assets -2000 67500operatoing profit before working capital change 138500Add : decrease in current asset & inc in current liability: decrease in stock (Rs.240000-rs.210000) 30000less : increase in current asset & dec in current liability: incresase in debtors (Rs. 455000-Rs.210000) -245000 dec in creditors (Rs.168000-rs.134000) -34000 -249000cash genrated from operations -110500less: incomme tax paid -74000Net Cash used in operating activities -184500

Solution : Cash Flow Statement For the year ended 31st march,2011

B. Cash Flow From Investing ActivitiesPurchase of investments -18000Sale of Fixed Assets 12000Sale of investments 8500Net cash from investing activities 2500C. Cash flow From Financing ActivitiesMortgage loan 270000Dividend Paid -40000Net cash from financing activities 230000D. Net inc in cash & cash equivalents (A+B+C) 48000Cash & Cash Equivalents in the beginning of yr 149000Cash & Cash Equivalents at the end of yr 197000

Working Notes :

1. Dr. CrParticulars Rs. Particulars Rs.To Balance b/d 400000 By bank A/c 12000To Profit & Loss A/c 2000 By Depreciation A/c(Bal Fig) 70000(profit on sale) By balance c/d 320000

402000 402000

2. Dr. CrParticulars Rs. Particulars Rs.To Balance b/d 50000 By BankA/c 8500TO profit and lossA/c 500 By Balance c/d 60000To Bank A/c(Bal.fig.) 18000

68500 68500

3. Dr. CrParticulars Rs. Particulars Rs.To Bank A/c 74000 By balance B/d 75000To Balance c/d 10000 By Profit and loss a/c(Provisions made)9000

84000 84000

Fixed Assets Account

Investments Account

Provision For Taxation Account

Any Questions ????

Thank You !!!!