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Cash Flow

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15 views9 pages

Cash Flow

Uploaded by

shreyanshi sharma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Cash- Flow Statement

• It measures how well a company generates cash to pay its debt


obligations, fund its operating expenses and fund investments.
• Cash- Flow is the ‘life blood of business’ or ‘cash flow is king’.
• It allows investors to understand how a company’s operations are
running, where is money coming from and how is money being spent.
• For this reason, capital market regulator, (SEBI), made it compulsory
for the companies in India to prepare and publish cash flow
statement. It helps in evaluating the liquidity position and short term
viability of business. This is helpful in understanding the sources and
application of cash flows.
• Cash- Flows are inflows and outflows of cash and cash equivalents
(demand bank deposits).
• Cash equivalents are short- term, highly liquid investments that are
readily convertible to cash.
• The preparation and presentation of the statement of cash flows is
governed by AS-3. it required the cash inflows and outflows should be
divided into three categories (operating, investing and financing ).
I. Operating Activities : Main revenue producing activities of the
business. Cash from operating activities is the result of the transactions
that are reported in the P&L Account. But it is prepared on accrual
basis (both cash and non cash items of revenue are recorded) . Cash
flow statement reports transactions that involve receipt or payment of
cash.
• It comprises of Operating activities (sources and uses of cash from
running the business and selling its product and services) , investing
activities (sources and uses of cash from a company’s investment in
the long term future of the company e.g. purchase of fixed assets
such as property, plant and equipment ) and financing activities
(sources of cash from investors, or banks as well as the use of cash
paid to the shareholders e.g. debt issuance, equity issuance, loans,
dividend paid).
• E.g. Inflows : cash receipts from customers for sale of goods and
services, cash received as fees and commission among others.
Outflows: payments made to suppliers of goods and services
purchased, payments made to employees, payment of taxes.

II. Investing Activities: related to acquisition and disposal of long- term


assets and other investments .
e.g. inflows: cash receipts from sale of assets like plant, equipment,
investments, recovery of loans, interest on loan received, cash dividend
on equity investments and so on.
Outflows : payment made for purchase of fixed assets, investments
III. Financing Activities : These activities relate to financing of business
through equity or debt.
Inflow E.g. cash received from issue of share capital, loans received
from banks, govt. grant.
Outflow: repayment of loans, cash paid redemption, payment of
dividend, payment of interest.
Note: interest paid (financing ), interest received (investing), dividend
paid (financing), dividend received (investing).
In case of financial institutions interest paid and interest and dividend
received are part of operating activities because borrowing, lending
and investments are part of their core business activities.
Indirect Method
• Begin with the profits reported in the P&L A/c and make adjustments
to convert profit figure into cash- flow.
• Non- cash expenses : Depreciation and other non-cash expenses
(amortization, writing off preliminary expenses, provision for doubtful
debts) should be added back to reverse the deduction. No cash
outflow resulted from these items in the current period.
• Interest expense is charged as an expense in the P&L account, so
must be added back to profits to calculate cash flow from operating
activities. It is shown as outflow under financing activities.
• Gain/loss from sale of fixed assets should be subtracted/added from
profits to calculate cash flow from operating activities.
• Changes in working capital :
Current Assets increase (-)
Current Assets decrease (+)
Current liabilities increase (+)
Current liabilities decrease (-)
• It is better to start with profits before taxes.
Sample of Cash- Flow

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