Cfs

Cash
Flows
Statement

paramjit sharma
 Can we meet
our obligations

Cfs
Are cash flows to creditors?
sufficient to
support ongoing
operations?

Can we pay
Purpose
dividends? of CFS

Will the company Why is there a

have to borrow difference
money to make between net
needed income and net
investments? cash flow?
paramjit sharma
 The term cash on the statement of cash flows
Cfs refers broadly to both currency
and cash equivalents.

Currency and
Bank Accounts
T-bills
Cash
Cash

Money Market Commercial

Funds Paper
paramjit sharma
Cfs
•CFS attempts to analyze
transactions
generating cash and using cash

•CFS provides summary of

Sources and uses of Cash

paramjit sharma
Cfs
Sources Uses

Cash Profits Purchase of Assets

Investments
Issue of Capital
Redemption
Issue of securities Loan repayment
Borrowings Payment of Tax
Sale of Assets Dividend
investments

paramjit sharma
 FFS & CFS
Cfs

Ffs based on concept of WC, cfs on Cash

Cfs considers actual movement of cash,

Ffs considers movement of WC

paramjit sharma
 IMPORTANCE AND RELEVANCE
Cfs
Sebi requirement- clause 32 of listing agreement

AS-3 -Cash flow Statement

which summarizes cash receipts, cash
payments and net cash resulting from
operating,
investing and
financing activities

paramjit sharma
Cfs CFS

Operating Investing Financing

activities activities activities

paramjit sharma
 Operating Activities— Cash flows

Cfs CR from sale of goods and services

CR from fees, royalties, commission and other revenues

CP to suppliers for goods and services

CP to and on behalf of the Employees

CR & CP of an insurance enterprise for

premiums and claims

CP or refund of income tax

CR and CP for future contracts,forward contracts,

Swaps and Options paramjit sharma
 Investing Activities— Cash flows

Cfs
CP to acuire Fixed Assets, including intangible

CR from disposal of fixed Assets including intangibles

CP to acquire shares,debt instruments of other enterprises

CR on disposal of the above

Cash advances and Loans made to third parties

CR from repayment of Loans and Advances

paramjit sharma
 Financing Activities— Cash flows

Cfs

Cash Proceeds from issue of shares

Cash Proceeds from issuing debentures, bonds…..

Cash repayments of amount Borrowed

Payment of dividend

paramjit sharma
 PREPRATION OF CFS
Cfs

Indirect
Method
Direct
Method

paramjit sharma
Cfs Direct Method or Indirect Method?
Indirect Method Direct Method
• Net income is • Net income is
reconciled to cash flow reconstructed on a cash
from operating basis.
activities.
• No supplemental • Requires a supplemental
schedule is required. reconciliation of net
income to cash flow from
operating activities.

• Used by 1% of
• Used by 99% of companies.
companies.
paramjit sharma
 Preparing a Simplified Statement of
Cfs Cash Flows

Cash flows are

divided into
three
categories.

paramjit sharma
 Preparing a Simplified
Cfs Statement of Cash Flows
A reconciliation
of beginning
cash to ending
cash is also
required.

{
paramjit sharma
 Operating Activities
Cfs
Cash flow from operating Activities

N P before Tax & Extraordinary items xxxxx

Adjustment for
+depreciation xxxxx
+loss on sale of fixed asset xxxx
+Foreign Exchange loss xxxx
+Interest income xxxx
-Dividend Income xxxx
-Interest received xxxx

Operationg Profit before WC changes xxxxx

paramjit sharma
 Operating Activities
Cfs
Increase in Sundry Debtors xxxxx
Decrease in Inventories xxxxx
Decrease in Sundry creditors xxxxx

Cash generated from operations xxxxx

Income Tax Paid (xxxx)

Cash flow before extra ordinary items xxxxx

(+ or – )extra ordinery item xxxx

Net Cash from operating Activities xxxxx

paramjit sharma
 Investing Activities
Cfs
Add: Proceeds from sale of land,
buildings, equipment, or other
noncurrent assets XXX
Receipt of interest,dividend
from investments XXX
Less: Payments to acquire land,
buildings, equipment, or other
noncurrent assets (XXX)
Payments to acquire
investments (XXX)
Net Cash Flows from Investment Activities XXX

Includes transactions that involve the

paramjit sharma
acquisition or disposal of non current assets.
 Financing Activities
Cfs
Add: Proceeds from borrowings XXX
Proceeds from issuing capital
stock XXX
Proceeds from sale of bonds XXX
Less: Principal payments on
borrowed funds (XXX)
Payments related to bond
maturities (XXX)
Dividend payments (XXX)
Net Cash Flows from Investment Activities XXX

Includes transactions involving receipts

paramjit sharma
from or payments to creditors and owners.
Cfs Other Cash Flow Issues
For investing • Example:
activities and ● XYZ sells an old
building for
financing activities, Rs70,00,000 and
like-kind inflows purchases a new
building for
and outflows of Rs100,00,000.
cash must be shown ● The Rs70,00,000
separately on the inflow of cash and the
Rs100,00,000 outflow
statement of cash of cash must be shown
flows. separately.
paramjit sharma
 Other Cash Flow Issues
Cfs
Direct exchange • Example:
transactions occur ●X company acquires a
when noncurrent building in exchange
balance sheet items for 2,000 shares of
are swapped. common stock.
Such exchanges ●This is reported in a
must be disclosed. separate supplemental
schedule attached to
the statement of cash
flows.
paramjit sharma
Cfs
Interpretation of the Statement
of Cash Flows

Examine the operating activities section

carefully.
– Negative cash flow is usually a sign of
fundamental difficulties.
– Ultimately, a positive cash flow is necessary to
avoid liquidating assets or borrowing money to
pay for day-to-day activities.

paramjit sharma
 Preparing CFS using changes
Cfs in Non Cash B Sheet Accounts

Changes in Changes in
Capital Stock Liabilities

Net Cash
Flows for a
Dividends Period Changes in
Paid to Noncash
Stockholders Assets

Net Income
paramjit sharma
 Preparing CFS using changes
Cfs in Non Cash B Sheet Accounts

paramjit sharma
 Preparing CFS using changes
Cfs
in Non Cash B Sheet Accounts

Increases in non cash asset accounts imply

uses of cash.
Example:Inventory is
purchased on credit from
a supplier.

It is implied that cash

was used to acquire the
inventory.
paramjit sharma
 Preparing CFS using changes
Cfs in Non Cash B Sheet
Accounts
Increases in liability accounts
imply sources of cash.
Example: Inventory is purchased on
credit from a supplier.

It is implied that an increase in a payable

has the effect of increasing cash available
for other uses.

paramjit sharma
 Preparing CFS using changes
Cfs in Non Cash B Sheet Accounts

Decreases in non cash assets accounts imply

sources of cash.
Example: Accounts receivable
decreases when a customer
pays their bill.

When the customer pays his

bill, the company’s cash
increases.
paramjit sharma
 Preparing CFS using changes
Cfs in Non Cash B Sheet Accounts

Decreases in liability accounts

imply uses of cash.
Example: The company made a
payment on a note payable held
by a creditor.

When the company makes

the payment, cash decreases.
paramjit sharma