Cash Flow Statement

Analysis
Presented by – Abhishek nag (11)
Rupam Mitra (12)
Subhadeep de (13)
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 Index
1. Introduction

2. Cash and Cash Equivalents

3. Uses or Importance of CFS

4. Limitations of CFS

5. Objectives of Cash Flow Statement

6. Classification of Cash inflows and Cash Outflows Activities

7. Cash Flows From Operating activities

8. Cash Flows From Investing activities

9. Cash Flows From Financing activities

10. Q/A

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Cash Flow Statement
A cash flow statement is a financial statement that provides aggregate data
regarding all cash inflows a company receives from its ongoing operations
and external investment sources.
In other words, “ It is a summary of all sources and applications of cash
during a particular span of time”
A cash flow statement can be for the past or can be projected for the future
period.

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Cash and Cash Equivalents
• As per AS-3, ‘Cash’ comprises cash in hand and demand deposits with banks, and ‘Cash
equivalents’ means short-term highly liquid investments that are readily convertible into
known amounts of cash and which are subject to an insignificant risk of changes in
value.
• An investment normally qualifies as cash equivalents only when it has a short maturity,
of say, three months or less from the date of acquisition. Investments in shares are
excluded from cash equivalents unless they are in substantial cash equivalents.

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Uses or Importance of CFS
• Useful for short time financial planning.
• Useful in preparing the cash budget.
• Comparison with the cash budget.
• Study of trend of cash receipts & payments.
• It explains the deviations of cash from earnings.
• Helps in ascertaining cash flow from various activies.
• Helps in making dividend decisions.
• Test for managerial decisions.
• Useful to outsiders.

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Limitations of CFS
• Not suitable for judging the liquidity.
• Possibility of window dressing.
• It ignores non cash transactions.
• It ignores the accrual concept of accounting.
• No substitute for an income statement.
• Historical in nature.

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Objectives of Cash Flow Statement
• To ascertain the sources (receipts) and applications (payments) of cash and
cash equivalent.
• To ascertain the net change in cash and cash equivalents.
• To highlight the major activities that have provided cash and that have used
cash during a particular period and to show their effect on the overall cash
balance.

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Classification of Cash inflows and Cash
Outflows Activities

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Cash Flows From Operating activities

• OPERATING ACTIVITIES ARE THE PRINCIPAL REVENUE - PRODUCING

ACTIVITIES OF THE ENTERPRISE & OTHER ACTIVITIES THAT ARE NON
INVESTING OR FINANCING ACTIVITIES.
• THEY GENERALLY RESULT FROM THE TRANSACTIONS & OTHER EVENTS
THAT ENTER INTO THE DETERMINATION OF NET PROFIT OR LOSS.
• CASH RECIEPTS AND CASH PAYMENTS OF OPERATIONS AND SOME
ADDITIONAL FACTORS RELATED TRANSACTION OF THE COMPANY.

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Direct Method
• As the name suggests, under direct method, major heads of cash inflows and outflows are
considered.
• It is important to note here that items are recorded on accrual basis in statement of profit and
loss. Hence, certain adjustments are made to convert them into cash basis such as the
following :
• 1. Cash receipts from customers = Revenue from operations + Trade receivables in the
beginning – Trade receivables in the end.
• 2. Cash payments to suppliers = Purchases + Trade Payables in the beginning – Trade
Payables in the end.
• 3. Purchases = Cost of Revenue from Operations – Opening Inventory + Closing Inventory.
• 4. Cash expenses = Expenses on accrual basis + Prepaid expenses in the beginning and
Outstanding expenses in the end – Prepaid expenses in the end and Outstanding expenses in
the beginning.

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Cash Flows from Operating Activities
(Direct Method)

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Indirect Method
• Indirect method of ascertaining cash flow from operating activities begins with the
amount of net profit/loss. This is so because statement of profit and loss incorporates
the effects of all operating activities of an enterprise.
• As per AS-3, under indirect method, net cash flow from operating activities is
determined by adjusting net profit or loss for the effect of :
• Non-cash items such as depreciation, goodwill written-off, provisions, deferred taxes,
etc., which are to be added back.
• All investing and financing incomes are to be deducted from the amount of net profits
while all such expenses are to be added back.
• Increase in current assets and decrease in current liabilities are to be deducted while
increase in current liabilities and decrease in current assets are to be added up.

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Cash Flows from Operating
Activities(Indirect Method)

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Cash Flows From Investing activities

• INVESTING ACTIVITIES ARE THE ACQUISITION AND DISPOSAL OF LONG

TERM ASSETS AND OTHER INVESTMENTS THAT ARE NOT INCLUDED CASH
EQUIVALENTS.
• IT REPRESENTS THE EXTENT TO WHICH THE EXPENDITURE HAVE BEEN
MADE FOR RESOURCES INTENDED TO GENERATE FUTURE INCOME AND
CASH FLOWS.
• CASH RECIEPTS AND CASH PAYMENTS RELATED TO INVESMENTS MADE
AN FIRM.

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• Cash payments to acquire fixed assets.
• Cash receipts to acquire sale of fixed assets.
• Cash payments to acquire shares, warrants and debt instruments.
• Cash advances and loans made to third parties.
• Cash receipts from repayment of loans and advances.
• Cash receipts of insurance, interest and dividend.

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Cash Flows From Financing

• FINANCING ACTIVITIES ARE THE ACTIVITIES THAT RESULT IN CHANGESIN

THE SIZE AND COMPOSITION OF THE OWNER’S CAPITAL (including
preference capital) AND BORROWINGS OF THE ENTERPRISE.
• IT HELPS IN PREDICTING CLAIMS ON FUTURE CASH FLOWS BY FUND
PROVIDERS (both capital & borrowings)
• CASH PROCEEDS AND CASH REPAYMENTS RELATED TO SHARES,
DEBENTURES, BONDS, ETC.

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• Proceeds from borrowings (both short-term and long-term)
• Repayments of borrowings.
• Repayments to owners.
• Cash payments of buy back equity shares.
• Change in bank overdraft and cash credit.

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Ascertainment of Cash Flow from
Investing and Financing Activities
• The details of item leading inflows and outflows from investing and financing activities
have already been outlined. While preparing the cash flow statement, all major items of
gross cash receipts, gross cash payments, and net cash flows from investing and
financing activities must be shown separately under the headings :
• ‘Cash Flow from Investing Activities’ and ‘Cash Flow from Financing Activities’
respectively.

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You are required to prepare a cash flow statement of the company
for the period ended 31st March, 2016 in accordance with the
Indian Accounting Standard-3

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(a) During 2006, the business of a sole trader was purchased by issuing shares for Rs. 2, 00,000. The assets
acquired from him were: Goodwill Rs. 20,000, Machinery Rs. 1, 00,000, Stock Rs. 50,000 and Debtors Rs.
30,000.
(b) Provision for tax charged in 2006 was Rs. 35,000.
(c) The debentures were issued at a premium of 5% which is included in the retained earnings.
(d) Depreciation charged on machinery was Rs. 30,000.

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Working notes

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 Sources
• http://www.accountingnotes.net
• http://www.charteredclub.com
• http://www.ncert.nic.in
• http://www.yourarticlelibrary.com
• Analysis of Financial statement – D.K.Goel, Rajesh Goel & Shelly Goel

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Thank you

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