Cash Flow Statement

The Cash Flow Statement

The cash flow statement provides

information about:
• Cash Receipts (cash inflows)
• Uses of Cash (cash outflows)
• During a Period of Time
Inflows and outflows are reported for:
• Operating activities
• Investing activities
• Financing activities
Cash Inflows and Outflows
Classification of Business Activities :
Inflow and Outflow of Cash

Operating Activities

Cash Inflow Cash Outflow

1) Cash Sales 1) Cash Purchases

2) Received from Debtor 2) Payment to Creditors
3) Commission & Fees 3) Cash Operating Expenses
4) Royalty 4) Payment of Wages
5) Income Tax
6) Manufacturing Expenses

Cash effects the transaction on Net Income

Classification of Business Activities :
Inflow and Outflow of Cash

Investing Activities

Cash Inflow Cash Outflow

1) Sale of Fixed Assets 1) Purchase of Fixed Assets

2) Sale of investments 2) Purchase of Investments
3) Interest Received 3) Working Capital
4) Dividend Received
5) Working Capital Recovery
Classification of Business Activities :
Inflow and Outflow of Cash

Financing Activities

Cash Inflow Cash Outflow

1) Issue of Shares in Cash 1) Payment of Loans

2) Issue of Debentures in 2) Redemption of Preference
Cash Shares
3) Proceeds from long-term 3) Payment of Dividends
borrowings 4) Interest Paid
5) Repayment of Finance/
Lease Liability
Objectives of Cash Flow Statement

1. Highlighting cash flow from different

activities
2. Short-term Planning
3. Cash Flow information helps to
understand liquidity
4. Efficient cash management
5. Prediction of sickness
6. Comparison with budget
7. Cash position
 Cash Flow Statement : Limitations

• Does not show the liquidity position of the

firm

• It is not a substitute of income statement

• Does not show the financial position of the

firm in totality
 Distinction between Cash flow Statement and
Funds Flow Statement

Basis Of Difference Cash Flow Funds Flow

It recognizes Cash basis It is based upon accrual
Basis of Of accounting Basis of accounting I.e
Accounting Working capital

Significance It is useful for short- It is useful for long-term

Term financial planning Financial planning

Schedule of Such a schedule is not Schedule of changes in

Changes in Prepared for preparing Working capital is
Cash flow statement Prepared separately
Working Capital
It studies only the
Causes of Causes of cash
It studies causes of Ch-
Variation ange in working capital
variation
 Preparing a Statement of Cash Flows

• Use net operating income as the starting

point to get net operating cash flow
• Add back any non-cash expense
(Example - Depreciation)

Net Cash Flow = Cash Inflow - Cash Outflow

Net Operating Cash Flow = Income after Taxes

+ Depreciation
Preparing a Statement of Cash Flows

Order of Presentation:
Direct Method
1. Operating activities.
Indirect Method
2. Investing activities.

3.Financing activities.
Three Sources of Information:
1. Comparative balance sheets

2. Current income statement

3. Additional information
Cash Flow from Operating Activities : Direct Method

Cash Flow from Operating Activities Amount Amount

(Rs.) (Rs.)
Cash Receipts from :
XXX
Sales
XXX
Commission & Fees XXX
Interest Received
XXX
Cash Payment for :
Purchases XXX
XXX
Payments to and for employees
XXX
Operating Expenses XXX
Interest Payments XXX
Direct Taxes Paid XXX

Net Cash Flow from Operating Activities XXX

 Cash Flow from Operating Activities :
Indirect Method
Cash Flow from Operating Activities Amount Amount
(Rs.) (Rs.)
Net Profit before Tax xxx
Adjustment for :
Depreciation xxx
Loss on Sale of Fixed Assets
xxx
Loss on revaluation
xxx xxx
Operating Profit before Working Capital Changes
xxx
Adjustment* for :
Trade and other Receivables
Inventories or Stocks xxx
Trade Payments or (Creditors and B/P) xxx xxx
Cash Generated from Operations xxx
Interest Paid xxx xxx
Taxes Paid xxx
Net Cash Flow from Operating Activities
XXX
 Preparing the Statement of
Cash Flows
Indirect and Direct Methods
Companies favor the indirect
method for two reasons:
1. It is easier and less costly
to prepare, and
2. It focuses on the
differences between net
income and net cash flow
from operating activities.
Format for Cash Flow Statement
LEARNING IS FUN COMPANY
CASH FLOW STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016

Cash flows from Operating Activities

Receipts from Customers P 1,000,000
Payments to Suppliers and Employees (700,000)
Net Cash generated by Operating Activities P 300,000

Cash flows from Investing Activities

Purchases of Property and Equipment (P 150,000)
Net Cash used in Investing Activities (P 150,000)

Cash flows from Financing Activities

Long term loan from a bank P 300,000
Additional investment from owner 100,000
Withdrawals by owner (80,000)
Net cash generated by Financing Activities P 320,000

Net increase in cash and cash equivalents P 470,000

Cash, January 1, 2016 100,000
Cash, December 31, 2016 P 580,000
 KEYPOINTS

• CASH FLOW STATEMENT – Provides an analysis

of inflows and/or outflows of cash from/to
operating, investing and financing activities.

• Different parts of the Cash Flow Statement

Operating Activities – Activities that are directly
related to the main revenue-producing activities
of the company such as cash from customers
and cash paid to suppliers/employees.
 KEYPOINTS

• Investing Activities – Cash transactions related

to purchase or sale of non-current assets

• Financing Activities – Cash transactions related

to changes in equity and borrowings.
 KEYPOINTS

• Net change in cash or net cash flow

(increase/decrease) – The net amount of
change in cash whether it is an increase or
decrease for the current period. The total
change brought by operating, investing and
financing activities.
• Beginning Cash Balance – The balance of the
cash account at the beginning of the accounting
period.
 KEYPOINTS

• Ending Cash Balance – The balance of the cash

account at the end of the accounting period
computed using the beginning balance plus
the net change in cash for the current period.
 End of Presentation
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