CASH FLOW ANALYSIS

Cash Flow statement:

Cash flow statement describes the inflows and outflows of the cash and cash equivalents in
an enterprise. A cash flow statement shows the net effect of various business transactions on
cash and cash equivalents and consideration of receipts and payments of cash. Cash flow is a
summary of change in cash position in between the dates of two balance sheets and revenue
statements.

“A statement prepared from the historical data (i.e. Income and Expenditure Statement and
Balance Sheet) showing sources and uses of cash is called Cash flow Statement. It reveals the
inflow and the outflow of cash during the particular period.”

Important terms used in Cash Flow Analysis:

Cash
The meaning of cash is cash in hand and cash at bank including deposits.

Cash and Cash Equivalents

Here, cash and cash equivalents imply readily convertible, highly liquid investments, the value
of which in cash is well-known to us without risk of change in its realization amount. The
purpose of keeping cash equivalents is to meet our current and short-term commitment rather
than for investments. Only those investments having short maturity terms qualify as cash
equivalents. Short maturity means maturity within three months.

Cash Flows
There are two types of flows: inflows and outflows. If the increase in cash is the effect of
transactions, it is called inflows of cash; and if the result of transactions is decrease in cash, it
is called outflows of cash.

Significance and uses of cash flow statement:

1. This explains the reasons for low cash balance inspite of huge profits or large cash
balance inspite of low profits.
2. It helps in short term financial decisions relating to liquidity.
3. It shows the major sources and uses of cash.
4. It helps the management in planning the repayment of loans, replacement of assets,
credit arrangements etc.
5. It helps is making future projections of cash by using the previous cash flow
statements.
Classification of Cash flows (or) Sources and Application of Cash:

Source- It is the term used to refer the receipt

Application – It refers to the payments and spending

According to AS-3 (Revised), cash flows should be classified in three main categories:

• Cash Flow from operating activities

• Cash Flow from investing activities
• Cash Flow from financing activities
Cash flow from operating activities
Inflow of cash from operating activities represents the level of sufficient cash generation
necessary to maintain operating capability without recourse to external resource of financing.

In other words, operating activities mean principal revenue-producing activities of a firm. It

represents the transactions those determine the profit or loss of a firm.

Examples of cash Flows from operating activities:

• Cash sale (goods or services)

• Cash receipts from commission, fees and royalties income etc.
• Cash payments to workers or employees in form of salary or wages.
• Cash payments to supplier of goods or services.
• Cash receipt on account of insurance premium by insurance companies.
• Cash payments in form of claims, annuity and other benefits.
• Cash payments or refund of income tax in case not included in investing or financing
activities.
• Cash payments on account of current and future contracts.

Cash flow from investing activities

Assets and long-term investments that do not come under cash equivalents are known as
investing activities. Investing activity represents how much investment in long-term assets has
been made to earn profit in future.

Examples of Cash Flows from investing activities:

 • Cash payments to acquire tangibles and intangibles assets including construction of
assets and capitalization of research and development cost.

• Cash receipts from sale of investments and disposal of fixed assets.

• Cash payment for investments in shares, warrants and debentures of other companies
etc. excluding those which are covered under cash equivalents or purchased for trading
purpose. If so, those come under operating activities.

• Cash received from disposal of or sale of shares, warrants or redemption of funds other
than those which are kept for trading purpose.

• Advances or loan made to third party other than by financing companies.

• Cash payment for future contracts other than trading purpose.

• Cash received from future contracts other than trading purpose.

Cash flow from financing activities

The activities which may result in change in size and composition of owner’s capital including
preference shares are called financing activities. Separate disclosure is important for financing
activities.

Examples of Cash flows from financing activities include cash received on issue of shares,
debentures, loans, bonds and other short- or long-term borrowings.

Cash payments on redemption of debentures bonds, preference shares etc.

CASH FROM OPERATION

Particulars Amount(Rs.) Amount(Rs.)

Net Profit or Closing balance of Profit and Loss Account ***

 Add: Non-cash and non-operating items
***
1. Depreciation
2. Transfer to reserves and provisions ***
3. Goodwill written off
***
4. Intangible assets written off
5. Loss on sale of fixed assets ***
6. Dividend paid *** ***

Less: Non cash and non operating items

1. Profit on sale or disposal of fixed assets ***

2. Non trading receipts such as dividend received, ***
rent received ***

Cash from operation ***

Managerial uses of Cash flow Analysis:

1. Planning and Co-ordination of Financial Operations. Cash Flow Statement is useful is

evaluating Financial policies and current cash position. Since cash is the basis for carrying
on operations, the Cash Flow Statement prepared on an estimated basis for the next
accounting period will enable the management to plan and co-ordinate the financial
operations probably. The management comes to know how much cash is needed in the
future and at what time and how can it be arranged-how much internally and how much
from outside. It is especially useful in preparing cash budgets.
2. A Control Device. Cash Flow statement is also a control device for the management. A
comparison of cash flow statement of previous year with the budget for that year would
indicate to what extent the resources of the enterprise were raised an applied according to
the plan. Thus a comparison of original forecast with actual results may highlights trends
of movement that might otherwise go undetected.
3. Useful to internal Financial Management. Since it gives a clear picture of cash inflow
from operations (and not income flow of operation), it is, therefore, very useful to internal
financial management in considering the possibility of retiring ling-term debts, in planning
replacement of plant facilities or in formulating dividend policies.
4. Profit and Cash Positions. It enables the management to account for situation when
business has earned huge profits yet run without money or when it has suffered a loss and
still has plenty of money at the bank.
5. Short-term Financial Decisions. Cash Flow Statement helps the management in taking
short-term financial decisions. Suppose, if firm wants to know its state of solvency after
one month from to date, it is possible only from Cash Flow analysis and not from Fund
Flow Statement. Shorter the period, greater is the importance of Cash Flow Statement.

Objective of Cash flow statement under AS3

1. To provide information about the cash flows of an enterprises for assessing its ability to
generate and utilise cash flows

2. To enable the users of financial statements to evaluate the timing and certainty of cash flows.

3. To classify the cashflows on the basis of Operating, Investing and Financing activities.