Cash Flow Statement

Session 14
 Learning Goals for the Week
• Preparing, Understanding & Analyzing Cash
Flow Statements
– Usefulness & Format of Cash Flow Statement (Indian
format – Schedule III)
– Cash and Cash Equivalents
– Classification cash flows into Operating, Investing or
Financing flows
– Cash Flow from Operating Activities: Indirect & Direct
Method
– Cash flow from Investing Activities
– Cash Flow from Financing Activities
– Use of Cash Flow Statement to evaluate a company
 Motivation/Rationale for Cash Flow
• Profit alone is not sufficient.
– accrual & matching concept
– accounting assumptions
 Cash Flow Statement
• CFS presents the inflows and outflows of cash to
& from an organization due to various
transactions in a given accounting period.
• Helps assess the ability of an enterprise to generate
cash & cash equivalents and to utilize the same.
• Also helps to assess the liquidity and solvency of the
entity.
• Preparation
• Ind AS 7 issued by the ICAI guides about the
preparation of cash flow statement in India.
• Reporting
• SEBI – Clause 32 of the listing agreement of stock
exchanges
 Basic Elements

• Cash flow from operating activities:

– Principal revenue producing activities of the
enterprise
• Cash flow from investing activities:
– Acquisition and disposal of long term assets and
investments (other than those considered in cash
equivalents)
– Investment Income (Interest & Dividend Received)
• Cash flow from financing activities:
– Activities that result in change in size and
composition of owners’ capital (equity) and
borrowings of the enterprise
– Financing Costs (Interest & Dividend Paid)
 Cash Flow Statement Format
• Cash Flows from Operating Activities [A]
• Cash flows from Investing Activities [B]
• Cash Flows from Financing Activities [C]
• Net increase/(decrease) in cash and cash
equivalents [A+B+C] [D]
• Opening balance of cash and cash
equivalents [E]
• Closing balance of cash and cash equivalents
F =[D+E]
 Operating Activities

• It is the principle revenue generating activities of

an entity
• Two ways of calculating it
Direct method
• Major classes of gross cash receipts and
gross cash payments are disclosed -changes
that cash transactions cause in revenue &
expense accounts are analyzed.
Indirect method
• The Profit and Loss Account (Inc/Stt) is
adjusted for the effects of transactions of non-
cash and non-operating nature
• Also known as “Reconciliation to Net Income”
 Indirect Method:Determining Net
Cash Flows from Operating Activities
Cash flow from Operating Activities: Indirect
Method - Format
• A. Start with Net Income / Profit before tax from P&L a/c
• B. Adjust for Non cash items:
» Add Non cash expenses -Depreciation & other non cash
amortizations, provisions for liabilities
• C. Adjust for Non operating items
» Add Non operating expenses - Interest costs and other
non operating expenses/losses
» Deduct Non operating income
» Deduct Non recurring income/gains
• D. Operating Profit before Working capital adjustment
(Adjusting A B & C)
• E. Working capital adjustments
• Changes in current assets and current liabilities (other than cash
and cash equivalents)
• Cash flow from operating activities before tax (D +/- E)
• Deduct Actual cash tax paid
• Cash flow from operating activities
 Recap…CFO
Indirect Method FORMAT
A. Profit Before Taxes (PBT) from P&L a/c
B. Adjust for Operating but Non cash items:
• Add Non cash expenses: Depreciation, Amortizations,
provisions for liabilities

C. Adjust for Non operating items

• Add Non operating expenses: Interest Exp
• Deduct Non operating income: Interest & Dividend Income
• Deduct Non recurring income: Gain on Sale of Investment,
PPE
• Add Non Recurring Losses: Loss on Sale of Investment, PPE

D. Operating Profit before working capital

adjustment (A+/-B+/-C)
CFO (Indirect method) continues..
E. Adjustment for changes in Working capital
(Operating WC excluding Cash & Cash
Equivalents)
 Less Increases in Operating CA items
 Add Decreases in Operating CA items
 Add Increases in Operating CL items
 Less Decreases in Operating CL items
F. Cash flow from operating activities before paying
taxes (D +/- E)
G. Less Taxes Paid
H. Cash flow from operating activities (F – G)
 Illustration – KK Ent.
Profit & Loss Account
For the Year ending 31st March 2022

Particulars Rs. Particulars Rs.

Purchases for the Year 80,000 Sales 1,65,000
Direct Expenses 20,000
Gross Profit 65,000
Total 1,65,000 Total 1,65,000

Rent 8,000
Salary 20,000 Gross Profit 65,000
Provision for tax 2,000 B/d
Net Profit 35,000
 Solution – Direct Method
Kk Enterprises
Cash Flow Statement
For the Year ending 31st March 2022 (all figures in Rs)

Cash Flow From Operating Activities:

Cash received on account of sale of goods 1,65,000
Less: Payment made on account of
Purchases of goods 80,000
Freight and Cartage 20,000
Salary Paid 20,000
Rent Paid 8,000
Tax paid during the year 2,000 1,30,000
Cash Inflow  35,000
 Illustration – KK Ent.
Profit & Loss Account
For the Year ending 31st March 2022
Particulars Rs. Particulars Rs.
Purchases for the Year 80,000 Sales 1,65,000
Direct Expenses 20,000
Gross Profit 65,000
Total 1,65,000 Total 1,65,000
Rent 8,000
Salary 20,000
Depreciation 15,000
Provision for Bad Debts 5,000
Provision for retirement Gross Profit B/d 65,000
benefits 10,000 Profit on sale of old
Interest on debt 2,500 machinery 13,000
Amortization exp 1,500
Profit before taxes 16,000
Provision for taxes 2,000
Profit after taxes 14,000
 Solution – Direct Method
Kk Enterprises
Cash Flow Statement
For the Year ending 31st March 2022 (all figures in Rs)

Cash Flow From Operating Activities:

Cash received on account of sale of goods 1,65,000
Less: Payment made on account of
Purchases of goods 80,000
Freight and Cartage 20,000
Salary Paid 20,000
Rent Paid 8,000
Tax paid 2,000
Cash Inflow  35,000
 Solution – Indirect Method
Kk Enterprises
Cash Flow Statement
For the Year ending 31st March 2022 (all figures in Rs)

Cash Flow From Operating Activities:

PBT as per Profit & loss Account 16,000
Add: Non-cash transaction
Provision for Bad Debts 5,000
Depreciation 15,000
Provision for retirement benefits 10,000
Amortization exp 1,500 31,500
Less: Non-operation incomes
Profit on sale of machinery 13, 000
Interest on debt 2,500
Tax paid during the year 2,000
Cash Inflow before working capital changes 35,000
Working capital changes NIL
Operating Cash Flow 35,000
 Illustration – KK Ent.
Profit & Loss Account for the Year ending 31st March 2022
Particulars Rs. Particulars Rs.
Purchases for the Year 80,000 Sales
(cash– 60000, credit – 20000) (Cash – 100000 1,65,000
Direct Expenses 20,000 Credit – 65000)
(Cash 12000, due – 8000)
Gross Profit 65,000 1,65,000
Total 1,65,000 Total

Rent 8,000
Salary 20,000
(Paid – 15000,Due - 5000)
Depreciation 15,000
Provision for Bad Debts 5,000
Gross Profit B/d 65,000
Provision for retirement
Profit on sale of old
benefits 10,000
machinery 13,000
Interest on debt 2,500
Amortization exp 1,500
PBT 16000
Provision for taxes 2,000
Profit after taxes 14,000
 Solution – Direct Method
Kk Enterprises
Cash Flow Statement
For the Year ending 31st March 2022 (all figures in Rs)

Cash Flow From Operating Activities:

Cash received on account of sale of goods 1,00,000
Less: Payment made on account of
Purchases of goods 60,000
Freight and Cartage 12,000
Salary Paid 15,000
Rent Paid 8,000
Tax paid 2,000
Cash Inflow  3,000
 Solution – Indirect Method
Kk Enterprises
Cash Flow From Operating Activities:
PBT as per Profit & loss Account 16,000
Add: Non-cash transaction
Provision for Bad Debts 5,000
Depreciation 15,000
Provision for retirement benefits 10,000
Amortization exp 1,500 34,000
Less: Non-operation incomes
Profit on sale of machinery 13,000
Interest on debt 2,500
Tax paid 2,000
Cash Inflow before working capital changes 35,000
Increase in Debtors (outflow) - 65,000
Increase in Creditors (Inflow) + 20,000
Increase in Accruals (Inflow) + 8,000
Increase in Accruals-salary (Inflow) + 5,000 32,000
Operating Cash Flow 3,000
 Investing Activities

• Activities related to acquisition and disposal

of long-term assets and other investments,
which are not taken into consideration
under the cash equivalents head are
investing activities
• Also includes investments made by
business entities in other company’s shares
and debentures
• Examples of investment activities include
cash payments or receipts to acquire or
dispose fixed assets, shares, debt
instrument, etc.
 Illustration - Kanishk
The following transactions occur at Kk Enterprises:

Particulars Amount
(Rs.)
Purchased a machinery for 1,50,000
Sold shares worth 2,00,000
Received interest on debentures
10,000
purchased earlier
Received dividend on shares held 20,000
Sold old machinery (including profit on
50,000
sale 13,000)
 Solution
Kk Enterprises
Cash Flow Statement

Cash Flow from Investing Activities:

Sale of Shares 2,00,000
Interest received 10,000
Sale proceeds of old machinery 50,000
Dividend received 20,000
2,80,000
Less: Outflow on a/c of machine purchase 1,50,000
Cash flow from Investing Activities 1,30,000
 Financing Activities
• The activities that result in the change in size and
composition of the long-term capital employed in the
firm are known as financing activities
• Includes both owner(s) capital and long-term borrowing
of the entity
• Example: cash received from issue of share capital,
issue of loans and cash payment on dividend,
redemption, etc.
• Supposing during the year Kk Enterprises has taken a
loan of Rs 1,50,000 and paid an interest of Rs 2,500
thereon, the cash flow from financing activities for the
year comes to Rs 1,47,500 (i.e., 1,50,000 - 2,500)
• Thus Net Cash Flow for Kk Ent. = CFO (3,000) + CFI
(1,30,000) + CFF (1,47,500) = 2,80,500
• Adjusting for Opening cash balance say Rs 5,000
would give closing cash balance of Rs 2,85,500
Nestle = CFO
Nestle = CFI

Nestle = CFF
Asian Paints
INFOSYS = CFO
INFOSYS = CFI

INFOSYS = CFF
 Recap
• Proceeds from the sale of equipment used in
the business – A/B/C or supplemental info
• The loss on sale of equipment as above
• Declaration and payment of dividends on
company's stock
• An increase in the balance in retailer's
merchandise
• Retirement of long term bonds payable
• The amortization of the cost of an intangible
asset
• The exchange/conversion of long-term bonds
into common stock
 Recap

A corporation reported the following information for the past year:

Net Income $200,000
Depreciation Expense 30,000
Gain on Sale of Truck 5,000
Proceeds from Sale of Truck 8,000
Decrease in Accounts Receivable 10,000
Assuming these are the only facts, what amount will the corporation report as the Cash Provided by
Assuming these are the only facts, what amount will the
corporation report as the CFO on the cash flow
statement?
 Stop & Review
A firm preparing CFS using Indirect method has the following balances:

1. Dividends paid a) As cash flows from

operating activities
2. Cash receipts from sales
b) As cash flows from
3. Decrease in accounts investing activities
receivable
c) As cash flows from
4. Sale of plant assets financing activities
5. Gain on sale of d) In the schedule of
investment noncash investing and
financing transactions
6. Issue of stock for plant
assets e) Not at all

7. Issue of common stock

8. Net income
 Exercise
Using the indirect method to prepare the statement of cash flows, tell where each of
items on the left would appear on the statement sections listed on the right:

a) As cash flows from operating activities

b) As cash flows from investing activities
c) As cash flows from financing activities
d) In the schedule of noncash investing and financing transactions
e) Not at all

1. Dividends paid 1. c
2. Cash receipts from sales 2. e
3. Decrease in accounts receivable 3. a
4. Sale of plant assets 4. b
5. Gain on sale of investment 5. a/b
6. Issue of stock for plant assets 6. d
7. Issue of common stock 7. c
8. Net income 8. a
Extra …Kimmel Chap 12 – E12-2
 Solution
• Payment of Interest on Notes Payable • Issuance of capital stock
• FINANCING ACTIVITY (CASH • FINANCING (CASH IN)
OUTFLOW)
• Amortization of patent
• Exchange of land for patent
• OPERATING (ADD operating non
• NON CASH INVESTING cash exp)
• Sale of Building at book value • Issuance of bonds for land
• INVESTING (CASH INFLOW) • NON CASH INVESTING &
FINANCING
• Payment of dividends
• Purchase of land
• FINANCING (CASH OUTFLOW)
• INVESTING (CASH OUT)
• Depreciation
• Receipt of dividends on investment
• OPERATING (ADD operating non cash in stock.
exp)
• INVESTING (CASH IN)
• Conversion of bonds into Common Stock
• Loss on sale of land
• NON CASH FINANCING • OPERATING (Add non operating
• Receipt of interest on notes receivable loss)

• INVESTING (CASH INFLOW) • Retirement of bonds

• FINANCING (CASH OUT)
 Cash & Cash Equivalents

• Cash & Bank

Cash & Cash Beginning Ending
Balance Equivalent Balance Balance

• Add Marketable Cash & Bank 12 9

Securities Marketable 8 17
Securities
• Add Fixed Deposits Less Bank -3 -4
available at short Cash Credits
notice Cash & Cash 17 22
Equivalent
• Less Bank Overdraft Balance
Net Change in C&CE (22-17) +5
/ Cash Credit
= Cash & Cash
Equivalent
 Hindalco

Infosys