Cash Flow Statement

Cash flow statement

Meaning:  Cash Flow Statement It is a statement that shows flow of cash and cash equivalents during the period under report. The statement net increase or decrease of cash and cash equivalents under each activity separately- operating, investing and financing as well as collectively.(As per Accounting standard-3 revised)

Objectives

[  This statement gives an indication of the size and quantity of cash inflow from operating activities in order to judge whether these inflows are sufficient to meet the commitments like payment of interest and dividends.

[  This statement also shows whether these inflows commensurate with the outflows in terms of investment in the business. Do they justify the investment in terms of growth?

[  It discloses the amount invested in fixed assets. It also discloses whether this cash invested in fixed assets is financed by long term funds or short term funds. Fixed assets should always be financed by long term funds. It should also be noted that the amount of funds received from the sale of fixed assets should be utilized in purchasing new assets or repaying the loan taken to pay that asset. If these proceeds are utilized for any other purpose, it is bad for the business.

[  It also shows odd situations where dividends are paid in case of negative cash inflow from operating activities or in case when dividends are not paid in spite of having huge inflows of cash from operating activities.

[  This statement helps in cash management.

[  It also helps in ascertaining the solvency position of the company in better way

[  A continuous cash crunch is an indication of sickness of the firm. This statement helps in explaining the reasons for cash crunches.

[  Separate disclosure of cash flows from financial activities is useful in predicting the claims on future cash flows by the providers of the capital and the borrowed funds so that a better planning of the refund of these claims can be facilitated.

Limitations

§    This statement does not provide a full indication of the overall financial position of the company than the funds flow statement which is based on a wider concept of working capital. A cash flow statement is based on cash which is a single element of working capital.

§    It ignores many important transactions like conversion of debentures into shares etc.

§    It is prepared on the basis of recorded historical information and not on the basis of projected information.

Steps in the preparation of CFS:

I.        Ascertain cash flows from operating activities

II.      Ascertain cash flows from  investing activities

III.    Ascertain cash flows from financing activities

IV.    Steps I, II AND III are added and the resultant figure is net increase or decrease in cash and cash equivalents.

V.      Cash and cash equivalents of the beginning is added to the cash flow arrived under step IV.

VI.    In the last we  get  cash and cash equivalents at the end

Ø CASH AND CASH EQUIVALENTS: It includes cash, bank balance, marketable securities  etc

1.         Why is Cash Flow Statement prepared?

2.         Give the classification of the Cash Flow for preparing Cash Flow Statement.

3.         Give any two items of cash equivalent used while preparing Cash Flow Statement.

4.         How are non-cash items dealt in Cash Flow Statement?

5.         Give an example of non-cash transaction.

Cash Flow statement

Particulars		Details	Amount
I.     Cash flows from operating activities (indirect method) Net profit (after tax) Add: provision for tax (current year) Add: proposed dividend (previous year) Add: transfer to reserves (increase) Add: interim dividend (adj.) Less: refund of tax/extraordinary receipts = Net profit before tax Add: non-operating/non-cash expenses: Depreciation on fixed assets Loss on sale of assets Premium on redemption of shares and debentures Discount on shares and debentures w/o Provision for doubtful debts Share issue expenses w/o Goodwill w/o Preliminary expenses w/o Patents and copyrights w/o Deferred expenses w/o Interest on debentures and loans Provision for legal damages etc. Less: non-operating incomes: Rent received Interest received Dividend received Profit on sale of assets etc. = Net operating profit before changes in working capital Add: decrease in CA Add: increase in CL Less: increase in CA Less: decrease in CL = Net cash flow before tax Less: Tax paid (previous year) Add: refund of tax/extraordinary receipts = Net cash inflow/outflow from operating activities II.      Cash flows from Investing activities Add: Sale of fixed assets Sale of investment (non-current and current) Interest received Rent received Dividend received etc. Less: Purchase of fixed assets Purchase of investment (non-current and current) Purchase of goodwill, patents and copyrights etc. = Net cash inflow/outflow from investing activities III. Cash flows from Financing activities Add: Issue of shares Issue of debentures Increase in bank overdraft Loans raised etc. Less: Redemption of shares Redemption of debentures Loans repaid Repayment of bank overdraft Drawings Interest paid Proposed dividend paid (Previous year) Interim dividend paid etc. = Net cash inflow/outflow from financing activities Net increase/decrease in cash and cash equivalents Add: Cash and cash equivalents in the beginning = Cash and cash equivalents at end	Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx	Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx	Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx

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