Cash Flow Statement

Why Cash Flow Statement

• To assess the ability of the business to generate cash and its
utilization.
• P&L based upon accrual concept doesn’t reveal cash from
operations
• Basis of economic decisions.
✓ Investment/takeover.
✓ Lending.
✓ Payment of dividend.
✓ Buyback of shares.
• Required under Companies Act, 2013.
Where To Enter The Balance Sheet Changes
 What is Cash
• Cash comprises cash on hand and deposits with banks
• Cash Equivalents
• Short term, highly liquid investments
• Readily convertible into cash
• Insignificant risk of changes in value

• For example, deposits held with bank for short duration,

investment in money market instruments, like treasury bills, debt
mutual funds, etc., will qualify as cash equivalents.
• Investment in equity shares or equity mutual fund though highly
liquid is not considered as cash equivalents since there is significant
risk of change in value even in short-term.
• Investment of surplus cash in long-term investments will be shown
as a cash flow from investing activities.
Ques.: Which of the following will be treated as cash and
cash equivalents?

a. Balance in the current account with State Bank of India.

b. Investment in the shares of a subsidiary company.

c. Investment in 10 year government bonds maturing

after two months.

d. Investment in equity mutual funds.

e. Fixed deposits with Canara Bank maturing after one

year.
 Cash Flow Statement
• To be prepared and presented for each period for which
financial statements are prepared.
• Cash flow should be classified into:
• Operating Activities
• Investing Activities
• Financing Activities
• The sum of cash flow from these activities should explain
change in cash balance over the accounting period

Cash and Cash Cash Flow during the year Cash and Cash
From
Equivalents in the Equivalents in the
previous Year’s + • Operating Activities = Current Year’s Balance
Balance Sheet • Investing Activities Sheet
• Financing Activities
 Summarized Cash Flow Statement of XYZ Ltd.
(Rs. in Crores)
Particulars
2010 2009
Cash and cash equivalent at the end of the year 1300 600

Less: Cash and cash equivalent at the beginning of the year 600 200

Increase in Cash 700 400

(Rs. in Crores)
Particulars
2010 2009
Cash flow during the year
a. Operating activities 1600 600
a. Investing activities (500) (700)
a. Financing activities (400) 500
Net cash flow 700 400
As on 31st March 2011, the cash and cash
equivalents of Muscles Power Limited stood at Rs.
945 million as compared to Rs. 1,014 million in the
previous year's balance sheet. During the year. the
company generated a net cash flow of Rs. 844
million from its operating activities and used a net
amount of Rs. 1,235 million towards investing
activities.
What are the net cash flows from financing
activities?

Ans. Rs. 322 million

 Operating Activities
• Principal revenue-generating activities.
• Generally result from the transactions and other events that enter
into the determination of net profit or loss.
• Examples
❑ Receipts from sale of goods or rendering of services
❑ Payments to suppliers for goods and services
❑ Payment to employees
❑ Payment of income tax

• The cash generated from operating activities is a key indicator of

company’s ability to meet its cash requirements for various
purposes.
• If the enterprise generates strong cash flows under this head, it will
have sufficient resources to pay dividend, acquire assets and
reduce dependence on external sources of finance.
 Profit and Loss account vs Cash Flow Statement
• P&L a/c is prepared using accrual principle both for revenue as well as expenses. In cash flow
statement actual inflow or outflow is recorded.
• Due to matching concept followed in preparing P&L a/c a number of non-cash expenses are
recorded.
For example,
❖ Depreciation and amortization of assets, provisions for retirement benefits, etc. As there
is no cash outflow involved, these non-cash expenses are not considered while arriving at
cash flow from operating activities.
❖ Likewise in the P&L a/c material consumed is treated as an expense, after adjusting for
change in stock, whereas for cash flow from operating activities material purchased may
be more relevant.
• P&L a/c also includes income and expenses which are not of operating nature but are either
result of financing activities or investing activities.
For example,
❖ Interest or dividends received on investments are included in the P&L a/c as other income
but the same being in the nature of investing activities are not included in the cash flow
from operating activities.
❖ Likewise, interest paid on loans though included in the P&L a/c as an expense, is not
considered in cash flow from operating activities being related to financing activities.
Cash Flow from Operating Activities – Direct Method

Particulars Amount

Inflow:
• Cash Sales
• Collection from customers for credit sales
• Other operating receipts
Total Inflow (A)

Outflow:
• Cash Purchases
• Payment to suppliers for credit purchases
• Salaries paid
• Other operating expenses paid
Total Outflow (B)

Cash Flow from operating activities (A-B)

 Cash Flow from Operating Activities – Indirect Method
(A) Cash From Operating Activities Amount
Net profit as per Profit and Loss account
Add:
• Transfer to Reserves
• Interim dividend paid during the year
• Proposed dividend for the current year
• Provision for tax made during the year
• Extra ordinary items debited to profit and loss account (if any)
Less: Tax refund
Less: Extraordinary items credited to profit and loss account (if any)
Net Cash Before Tax and Extraordinary Items
Adjustment for non-cash and non-operating items:
Add: Non-Cash & Non-Operating Expenses
Less: Non-Operating Income
Operating Profit before Working Capital Changes
Add: Decrease in Current Assets & Increase In Current Liabilities
Less: Increase in Current Assets & Decrease in Current Liabilities
Cash Generated from Operations
Less: Income Tax paid (Less refund if any)
Cash Flow before Extraordinary Items
Add/Less: Extraordinary Items
Net Cash from/used in Operating Activities (A)
 Non-Cash & Non-Operating Expenses and Income

Add: Non-Cash & Non-Operating Expenses Less: Non-Operating Income

• Depreciation • Dividend earned during the year
• Goodwill, patents, trademarks etc. • Interest earned during the year
written off • Rent earned during the year
• Discount on issue of shares, debentures • Profit on sale of Fixed Assets/Inv.
or loss on issue of debentures written off • Provision no longer required.
• Preliminary expenses written off • Any other non-cash/non-
• Interest on debentures or other operating Income.
borrowings
• Loss on sale of fixed assets/investments
Ques.: From the given profit and loss account and additional information from the
balance sheet ascertain the cash flow from operating activities for XYZ ltd. for the year
2016-17.
Income (Rs. in Additional Information:
Crores)
Sales Revenue 168.75
• The company paid Rs 8 crore
towards taxes during the year.
Interest Earned 22.43
Total Income 191.18
• The following details were extracted
from the balance sheet of the
Less: Expenses company.
Material Consumed 67.47
Particulars 31.3.2016 31.3.2017
Employee Cost 23.34
Inventories 43.24 55.15
Administrative and 37.89
marketing expenses Trade Rec. 39.77 30.43
Depreciation and 18.56 Trade Pay. 26.89 20.45
amortization Other Current Lia. 7.75 11.34
Interest and finance charges 13.45
Profit before tax 30.47
Provision for tax 10.00
Profit after tax 20.47 Ans.: Rs. 26.63
 Investing Activities
• Acquisition and disposal of long-term assets and other
investments
• For acquiring resources intended to generate future income
and cash flow
• Examples
• Purchase of Fixed Assets
• Purchase of Long Term Investments
• Purchase of Goodwill/Patents/Trademarks etc.
• Cash advances and loans made
• Recovery of cash advances and loans
• Proceeds from sale of Fixed Assets
• Proceeds from sale of long term investments
• Proceeds from sale of Goodwill/Patents/Trademarks etc.
• Rent received
• Interest/Dividend received (in case of non-financial companies)
Cash flow from investing activities for Maruti Suzuki limited for the year
2009-10 and 2008-09
Ques.: How will the following transactions be recorded while
presenting cash flow from investing activities?
a. Asset with an original cost of Rs. 12 million and
accumulated depreciation of Rs. 9.5 million is sold for Rs. 1
million in cash.
b. Amount spent on construction of a factory building during
the year is Rs. 30 million.
c. Machinery bought for Rs. 10 million. Consideration paid by
issuing one million equity shares of Rs. 10 each.
d. Investment made in short-term investments (considered as
cash equivalents) amounting to Rs. 2 million.
e. Loans given by ABC Finance Limited engaged in the business
of lending amounting to Rs. 120 million. Interest received on
these loans amounted to Rs. 13.5 million.
 Financing Activities
• That result in changes in the size and composition of the
owners’ capital and borrowings of the enterprises
• Useful to predict claim on future cash flow by the providers of
funds
• Examples
• Cash proceeds from issue of shares.
• Cash proceeds from issuing debentures/bonds and other long term
borrowings.
• Premium received in issue of shares and debentures.
• Cash proceeds from short term borrowings.
• Share Issue expenses.
• Cash repayments of amount borrowed (debentures, bonds, preference
shares).
• Payment of interest on loans and debentures.
• Premium paid on redemption of debentures.
• Dividend paid (equity and preference).
• Dividend distribution tax paid during the year.
Cash flow from Financing activities for Maruti Suzuki
limited for the year 2009-10 and 2008-09
Ques.: How will the following transactions be recorded while
presenting cash flow from financing activities?
a. Issue of 10 million equity shares of the face value Rs. 10 each at a
premium of Rs. 40 each. Issue expenses amounted to Rs. 10
million.
b. Debentures issued five years back with a face value of Rs. 100
crore are converted into one crore equity shares of the face value
Rs. 10 each at a conversion price of Rs. 100 each during the year.
c. Fresh loan taken during the year from SBI amounting to Rs. 430
million. Earlier loan of Rs. 280 million repaid during the year. The
net increase in loan from SBI amounts to Rs. 150 million.
d. Debentures of face value Rs. 50 crore redeemed during the year
at a premium of 10%.
e. Company bought back two million shares from the market at Rs.
120 per share.
f. 10 million equity shares of Rs. 10 each issued as bonus shares to
existing shareholders.
 Non-cash Transactions
• Investing and Financing Transactions that do not require use of cash
• Exclude from cash flow statement
• Disclose separately elsewhere in the financial statements

• Some of the non-cash transactions are stated as follows:

a. Conversion of debentures or preference shares into equity
b. Issue of bonus shares.
c. Splitting shares of higher face value to lower face value.
d. Acquisition of assets by issuing debentures.
e. Acquisition of another enterprise by issue of shares
 Cash Flows at Different Stages of Life Cycle
Start-up and Initial stage:
• Operating Activities: Negative or low cash flow from operating activities as the
operations have just commenced.
• Investing Activities: As the enterprise is in the process of creating or acquiring
fixed assets and facilities, cash flow from investing activities is likely to be
significantly negative.
• Financing Activities: To meet the cash needs of operating and investing activities,
the enterprise has to resort to raising funds and resultant positive cash flows
from financing activities.
Maturity Stage:
• Once operating activities of the enterprise start generating significant cash
flows. it use these positive cash flows to meet its limited requirements for
investing activities.
• The enterprise will use the surplus cash flow to pay interest on borrowed funds,
dividend on equity and also for repayment of principal. At this stage, cash flow
from financing activities will be negative.
 Cash Flows at Different Stages of Life Cycle
Expansion Stage:
• If the enterprise decides to undertake a major expansion (by expanding
capacities, modernization of facilities or by acquisition), cash flow from investing
activities will turn negative.
• Cash flow from operating activities though positive may not be sufficient to
meet the cash needed for investing activities. The enterprise has to go for
another round of funding either by borrowings or issuance of shares, bonds,
debentures or similar instrument resulting is a positive cash flow from financing
activities.
Cash Rich:
• In case cash flows from operating activities far exceed the cash needed for
investing activities, the enterprise may decide to use the excess cash for
rewarding the shareholders by
✓ paying special dividends,
✓ repaying its loans to acquire zero debt status and
✓ also for buy-back of shares.
• The cash flow from financing activities in such a case will be significantly
negative.
 Disclosure
• Components of Cash and cash equivalents
• Reconciliation of amounts in the Cash Flow Statement
with the items reported in the Balance Sheet
• Amount of significant cash and cash equivalents held by
the enterprise that are not available for use by it.
Ans: Rs. 87.31
Ans.: a. Term loan repaid: Rs. 171.10, WC loan taken: Rs. 90.79
Based upon the above information:
a. Ascertain the depreciation charged for the current year and also profit or loss on
sale of asset.
b. Ascertain the cost of fixed assets purchased during the year.
c. How will the depreciation and profit/loss on sale of asset be treated while
calculating cash flow from operating activities (using indirect method)?
d. How will you show the above transactions under cash flow from investing
activities?
Ans.: a. Depreciation Rs. 141.43, Profit:3.95 b. Asset acquired: Rs. 225.09
Case 9.3: Analysis of Cash Flow Statement: Suzlon Energy Limited Limited

Q. What has happened to debtors' position in the year 2009 and 2010?
Q. Identify and analyse major uses of cash towards investing activities.
Q. Analyse the major financing activities of Suzlon during 2009 and 2010,
Q. For the year 2009, the company earned a profit before tax of Rs. 432.96 crore but its cash flow from operating activities was negative (- Rs. 391.17 crore).
In the next year, the company suffered a loss (-Rs. 799.67 crore) but the cash flow from operating activities was positive (Rs. 2423.62 crore). Identify the main
reasons for the same.
Ans.: Cash Flow from Operating Activities (29,750), Cash Flow from Investing Activities
(212,500), Cash Flow from Financing Activities 246,500