Statement of Changes in Financial Position : Cash Flow Statement

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Definitions

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

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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Meaning of cash flow statement Chandigar

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The Statement of Cash Flow (formerly Statement of Changes in Financial Position) shows the changes in Cash and Cash Equivalents arising from the operating, financing and investing activities of the enterprise. This information is useful for: 1. understanding effects of operating, financing and investing activities on cash; 2. assessing liquidity and solvency; and 3. assessing the firms ability to generate

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Cash and cash equivalents Chandigar

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Cash and cash equivalents include cash, plus temporary investments that are highly liquid (e. g., maturities of three months or less, like treasury bills). Investments in equities are excluded (no maturity date). Bank overdraft can be considered negative cash equivalent if bank balance fluctuates regularly between positive and negative.

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Objectives of Cash Flow

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1. Highlighting cash flow from different activities 2. Short-term Planning 3. Cash Flow information helps to understand liquidity 4. Efficient cash management 5. Prediction of sickness 6. Comparison with budget 7. Cash position

The Cash Flow Statement

The cash flow statement provides information about:
Cash Receipts (cash inflows) Uses of Cash (cash outflows) During a Period of Time

Inflows and outflows are reported for:

Operating activities Investing activities Financing activities

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Operating Activities

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These are principal revenue producing activities of the enterprise. Examples:

Cash receipts from sale of goods / rendering services; Cash receipts from royalties, fees, commissions and other revenue; Cash payments to suppliers of goods and service; Cash payments to and on behalf of employees.

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Investment Activities Chandigar

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The activities of acquisition and disposal of long term assets and other investments not included in cash equivalent are investing activities. It includes making and collecting loans, acquiring and disposal of debt and equity instruments, property and fixed assets etc. Examples of cash flows arising from investing activities are as follows:
Cash payments to acquire fixed assets
Cash receipts from disposal of fixed assets Cash payments to acquire shares, warrants or debt instruments of other enterprises and interest in joint ventures Cash receipt from disposal of above investments

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Financing Activities

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Those activities that result in changes in size and composition of owners capital and borrowing of the organization. It includes receipts from issuing shares, debentures, bonds, borrowing and payment of borrowed amount, loan etc.
Sale of share Buy back of shares Redemption of preference shares Issue / redemption of debentures Long term loan / payment thereof Dividend / interest paid

Cash Inflows and Outflows

Classification of Business Activities : Inflow and Outflow of Cash

Operating Activities

Cash Inflow
1) 2) 3) 4) Cash Sales Received from Debtor Commission & Fees Royalty 1) 2) 3) 4) 5) 6)

Cash Outflow
Cash Purchases Payment to Creditors Cash Operating Expenses Payment of Wages Income Tax Manufacturing Expenses

Cash effects the transaction on Net Income

Classification of Business Activities : Inflow and Outflow of Cash

Investing Activities

Cash Inflow
1) 2) 3) 4) 5) Sale of Fixed Assets Sale of investments Interest Received Dividend Received Working Capital Recovery

Cash Outflow
1) Purchase of Fixed Assets 2) Purchase of Investments 3) Working Capital

Classification of Business Activities : Inflow and Outflow of Cash

Financing Activities

Cash Inflow
1) Issue of Shares in Cash 2) Issue of Debentures in Cash 3) Proceeds from long-term borrowings

Cash Outflow
1) Payment of Loans 2) Redemption of Preference Shares 3) Payment of Dividends 4) Interest Paid 5) Repayment of Finance/ Lease Liability

Distinction between Cash flow Statement and Funds Flow Statement

Basis Of Difference Basis of Accounting Cash Flow
It recognizes Cash basis Of accounting It is useful for shortTerm financial planning Such a schedule is not Prepared for preparing Cash flow statement It studies only the Causes of cash variation

Funds Flow
It is based upon accrual Basis of accounting I.e Working capital It is useful for long-term Financial planning Schedule of changes in Working capital is Prepared separately It studies causes of Change in working capital

Significance
Schedule of Changes in Working Capital Causes of Variation

Preparing a Statement of Cash Flows

Use net operating income as the starting point to get net operating cash flow Add back any non-cash expense (Example - Depreciation)
Net Cash Flow = Cash Inflow - Cash Outflow
Net Operating Cash Flow = Income after Taxes + Depreciation

Preparing a Statement of Cash Flows

Order of Presentation:
1. 2. 3.

Operating activities. Investing activities. Financing activities.

Direct Method Indirect Method

Three Sources of Information:

1. Comparative balance sheets 2. Current income statement 3. Additional information

Cash Flow from Operating Activities : Direct Method

Cash Flow from Operating Activities Cash Receipts from : Sales Commission & Fees Interest Received Cash Payment for : Purchases Payments to and for employees Operating Expenses Interest Payments Direct Taxes Paid Net Cash Flow from Operating Activities
Amount (Rs.) Amount (Rs.)

XXX XXX XXX

XXX
XXX XXX XXX XXX XXX XXX

XXX

Cash Flow from Operating Activities : Indirect Method

Cash Flow from Operating Activities
Net Profit before Tax Adjustment for : Depreciation Loss on Sale of Fixed Assets Loss on revaluation Operating Profit before Working Capital Changes Adjustment* for : Trade and other Receivables Inventories or Stocks Trade Payments or (Creditors and B/P) Cash Generated from Operations Interest Paid Taxes Paid Net Cash Flow from Operating Activities
Amount (Rs.) Amount (Rs.)

xxx xxx xxx xxx

xxx xxx

xxx xxx xxx xxx

xxx xxx xxx XXX

Preparing the Statement of Cash Flows

Indirect and Direct Methods
Companies favor the indirect method for two reasons: 1. It is easier and less costly to prepare, and 2. It focuses on the differences between net income and net cash flow from operating activities.

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Cash Flow Statement :

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Does not show the liquidity position of the firm It is not a substitute of income statement Does not show the financial position of the firm in totality

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Indirect Method Chandigar Format of Cash Flow Statement for the year h ended ................

PARTICULARS Rs (i) Cash flows from operating Activities Net Profit as per Profit and Loss A/c or difference between closing balance and opening balance of Profit and Loss A/c A: Add : Transfer to reserve xxx Proposed dividend for current year xxx Interim dividend paid during the year xxx Provision for tax made during the current year B: Add: Depreciation xxx Preliminary expenses xxx Discount on issue of shares and debentures written off xxx Interest on borrowings and debentures xxx Loss on sale of fixed assets

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C. Less : Interest income/received xxx Dividend income received xxx Rental income received xxx Profit on sale of fixed asset xxx D. Operating profits before working capital changes (A + B C) E. Decrease in current assets and increase in current liabilities F. Less : Increase in current assets and decrease in current liabilities G. Cash generated from operations (D + E F) H. Less : Income tax paid (Net tax refund received) J. Net cash from operating activities

xxx

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(ii) Cash from investing accounting Add : Proceeds from sale of fixed assets xxx Proceeds from sale of investments xxx Proceeds from sale of intangible assets xxx Interest and dividend received xxx Less : Rent income xxx Purchase of fixed assets xxx _Purchase of investment xxx Purchase of intangible assets like goodwill Net cash from (or used in) investing activities

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xxx

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(iii) Cash flows from financing activities Add : Proceeds from issue of shares and debentures xxx Proceeds from other long term borrowings xxx Less : Final dividend fund Interim dividend fund Interest on debentures and loans paid Repayment of loans xxx Redemption of debenture preference shares xxx xxx Net cash from (or used in) financing activities (iv) Net increase/Decrease in cash and cash equivalent (i + ii + iii)

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xxx xxx

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(v) Add : cash and cash equivalents in the beginning of the year cash in hand cash at bank overdraft short term deposit marketable securities (vi) Less : cash and cash equivalents in the end of the year cash in hand cash at Bank (by bank overdraft) short term deposits Cash flow from operation

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