Duration: 180

mins
Slides:
15
MANAGEMENT,
THAPAR

LMT SCHOOL OF
UNIVERSITY
Masters of Business Administration

Course: Financial Reporting and Analysis

Faculty: Dr. Sonia Garg (Email:
sonia.garg@thapar.edu)

Session 18, 19, 20: Cash Flow Statement

Cash flow statement AS-3

weblink
SEBI made CFS mandatory in 1995
It is a derived statement
It is a flow report of cash inflows and
outflows during the accounting period
It is prepared in accordance with AS-3
It is drawn vertically
Cash flows are classified into those from
operating, investing and financing activities
Cash comprises of cash and cash equivalents
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Cash Flow Statement

Important terms
Cash comprises cash on hand and demand deposits with banks.
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.
Operating activities are the principal revenue-producing activities of
the enterprise and other activities that are not investing or financing
activities.
Investing activities are the acquisition and disposal of long-term assets
and other investments not included in cash equivalents.
Financing activities are activities that result in changes in the size and
composition of the owners capital (including preference share capital in
the case of a company) and borrowings of the enterprise.
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Cash Flow Statement

Examples of Operating Cash

flows

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Cash Flow Statement

Examples of Investing Cash

flows

Interest received and dividend received are investing cash

inflows for a non-financial enterprise but operating cash
inflows for a financial enterprise
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Cash Flow Statement

Examples of Financing Cash

flows

Dividends paid, Dividend tax and Interest paid are

financing cash outflows for a non-financial enterprise but
operating cash outflows for a financial enterprise
In case of installment paid on fixed asset including both
interest and principal payment, first is financing activity
and the other is an investing activity
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Cash Flow Statement

Other special considerations

Hedging contracts: classify it same as the position
hedged
Foreign currency: classify it same as parent
transaction
Extraordinary Items: disclose separately
Taxes on income: operating activity in general
Acquisition and disposal of subsidiaries: show
separately under investing activities
No consolidation is attempted for cash flow statement
Non-cash investing or financing activity: e.g.
acquisition of asset by assuming some liability show
in footnotes
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Cash Flow Statement

Methods of reporting operating cash

flows
Direct Method

Indirect Method

Start with gross cash receipts

and gross cash payments
Adjust for changes in
inventories, a/c receivables
and a/c payables
Adjust for non-cash items like
depreciation, provisions,
deferred tax, unrealized
gains
Adjust for cash effects of
investing and financing
activities

Start with net income from

P/L
Adjust for changes in
inventories, a/c receivables
and a/c payables
Adjust for non-cash items
like depreciation,
provisions, deferred tax,
unrealized gains
Adjust for cash effects of
investing and financing
activities

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Cash Flow Statement

Disclosure in F/S

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Cash Flow Statement

Preparation of Cash Flow Statement:

Indirect Method
Cash flow from Operating activities
Start with net income before extra-ordinary income
and tax
Adjust for interest, dividend income and gain/loss on
sale of fixed asset (investing activities); interest and
dividend expense (financing activities); depreciation,
deferred tax expense, miscellaneous expenses written
off (non-cash expenses)
Adjust for current assets (add on decrease in CA) and
current liabilities (add on increase in CL) (CA:
Inventory, A/c receivable, prepaid expense CL: A/c
payable, wages/salaries payable, tax payable)
Add corporate tax paid
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Cash Flow Statement

10

Investing and Financing

Cash flows
Cash flow from investing activities are due to
Sale/purchase of fixed asset
Sale/purchase of investments
Interest and dividend income
Tax paid on interest income

Cash flow from financing activities are due to

Share capital raised or repaid
Secured loans raised or repaid
Interest and dividend expense
Corporate dividend tax paid
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Cash Flow Statement

11

XYZ Balance Sheet

As of December 31, 2009 and 2010 (in thousand
dollars)

Assets
Cash and Cash
equivalents
A/C Receivables
Inventory

2009

2010

Change

2876

3436

560

230

326

96

586

673

87

XYZ Income Statement

For the year ended December 31,
2010 (in thousand dollars)

Operatin
g

47

Operatin
g

Fixed Assets at cost

2000

2350

350

Investing

Acc. Depreciation

(1000
)

(970)

30

Net Fixed Assets

1000

1380

380

450

400

(50)

2876

3436

560

332

388

56

Operatin
g

10

Operatin
g

Short-term borrowings

147

126

(21)

Financing

Long-term
debt
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500

835

Deferred taxes

65

70

Accounts Payable
Income tax payable

Investing

335 Flow
Financing
Cash
Statement
5

Cost of Sales

2290
900

Expenses:

657

Liabilities and Owners

Equity

3190

Gross Profit

610

Investments

Sales Revenue

Operatin

Depreciation

120

Other Expenses

497

Gain on disposal of asset

20

Income Taxes

103

Net Income

200

Dividends paid in cash

60

Surplus balance from P/L

140

Additional Information:
Purchased new fixed asset
for $500,000
Sold old fixed asset with a
GBV of $150,000 and Acc.
Dep. Of $150,000 for
$20,000

12

XYZ Cash Flow Statement

For the year ending 31 December, 2010 (in thousand dollars)
Cash flow from operating activities
Net Income

200

Add: Depreciation

120

Add: Deferred Taxes

Less: Increase in A/c receivables

(87)

Less: Increase in inventories

(47)

Add: Increase in a/c payables

56

Add: Increase in taxes payable

Less: Gain on sale of equipment

(20)

Net Cash flow from operating activities

228

Cash flow from investing activities

Acquisition of plant and equipment

(500)

Proceeds from sale of plant and equipment

20

Purchase/Proceeds from sales of investment securities

50

Net Cash flow from investing activities

(430)

Cash flow from financing activities

Proceeds from/payments to short term debt

(21)

Proceeds from/payments to long term debt

335

Proceeds from issuing stock

44

Dividends paid

(60)

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Net Cash flow from financing activities

Cash Flow Statement

298

13

Manipulations in Cash Flow

Statement
Inflating Cash flow from Operations
Shifting financing cash inflows to operating cash inflows,
e.g. giving inventory to a bank on collateral and
showing it as a sale of inventory
Selling accounts receivables and shifting future period
cash flows to current period

Deflating cash flow from operations

Improperly capitalizing operating costs, recording
operating costs as an asset and not an expense thus
decreasing operating cash flows
Recording purchase of inventory as an investing outflow
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Cash Flow Statement

14

Be careful about
Big margin expansion shortly after an inventory
write-off
Sudden swings in cash flow
Companies providing less disclosure than prior
period
Rapidly growing fixed asset accounts may signal
aggressive capitalization
Unexpected increase in capital expenditure
Differences in accounting policies when
comparing peers
New or unusual assets cropping on the B/S
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Cash Flow Statement

15