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7/21/2019 Cash Flow Statement Conceptsa
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Cash Flow Statement – Conceptual FrameworkPaper 3B: Financial Management Chapter 3 Unit II
CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA),
EPBM (IIMC), MCT
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Learning Objectives
1. Concept of Cash Flow statement(as per Revised AS 3)
1. Concept of Cash Flow statement(as per Revised AS 3)
2. Format of Cash Flow Statement
2. Format of Cash Flow Statement
3. Preparation and Presentation ofCash Flow Statement
3. Preparation and Presentation ofCash Flow Statement
2
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Introduction to Cash Flow Statement
•Introduction•Background
•Important terms
3
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Cash Flow Introduction
1. A statement which discloses the changes in theposition of cash and cash equivalents between twoperiods.
1. A statement which discloses the changes in theposition of cash and cash equivalents between twoperiods.
2. According to Revised AS 3 – issued by ICAI, anorganization should prepare a cash flow statementand present it for each period
2. According to Revised AS 3 – issued by ICAI, anorganization should prepare a cash flow statementand present it for each period
3. Revised AS 3 deals with the provision of informationabout changes in cash and cash equivalents of anenterprise by means of Cash Flow statement
3. Revised AS 3 deals with the provision of informationabout changes in cash and cash equivalents of anenterprise by means of Cash Flow statement
4
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Cash Flow Background
1. Cash flow statement is an important tool for shortterm analysis1. Cash flow statement is an important tool for shortterm analysis
2. It ascertains the changes in balance of cash in
hand and at bank.
2. It ascertains the changes in balance of cash in
hand and at bank.
3. Also analyses the reasons for such changes3. Also analyses the reasons for such changes
4. Two areas of analysis are – Cash generatingefficiency and free cash flow4. Two areas of analysis are – Cash generatingefficiency and free cash flow
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Cash Flow – Important Terms
1 • Cash – cash on hand and demand deposits with banks
2
• Cash equivalents – short term, highly liquid investments that
are readily convertible in to known amounts of cash andwhich are subject to insignificant risk of changes in value(example – Government securities)
3• Cash flow – inflows and outflows of cash and cash
equivalents
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Classification of Cash Flows
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Cash Flow Classification
1• Cash flow from Operating Activities
• Principal revenue generating activities
2
• Cash flow from Investing Activities
• Acquisition and disposal of long term assets andother investments not included in cash equivalents
3• Cash flows from Financing activities
• Activities that has an impact of owner’s capital andborrowings
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1. Cash Flow from Operating Activities
Cash receipts from sale of goods or services
Cash payments to suppliers
Cash payment to employees
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2. Cash flow from Investing Activities
Cash paymentto acquire
fixed assetsincluding
intangibles
Cash receiptsfrom disposalof fixed assets
Cash paymentto acquire
shares, debtinstruments of
othercompanies,
etc
Cash receiptsform disposal
of shares,debentures,
etc
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3. Cash Flows from Financing activities
Cash proceeds from issuing shares, debentures, etc
Cash repayments of amounts borrowed - debentures
Payment of dividend
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Cash Flows – Special Items
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Foreign Currency & Extraordinary Items
• To be disclosed separately as arising fromoperating / investing / financing activities
• Unrealized gains or losses from foreignexchange transactions are not cash flows
ForeignCurrency
Cash Flows
• To be disclosed separately as arising fromoperating / investing / financing activities
• Examples – Insurance claims, Bad debtrecovered, etc
Extraordinaryitems
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Interest and Dividends – Financial Enterprises
• Interest Paid• Cash flow from
Operating activities
• Interest Received andDividend Received
• Cash flow fromOperating activities
Financialenterprises
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Interest and Dividends – Other Enterprises
• Interest Paid on Long Termborrowings
• Cash flow from Financing Activities
• Interest Paid on Working Capitalborrowings
• Cash flow from Operatingactivities
• Interest Received and DividendReceived
• Cash flow from Investing activities
OtherEnterprises
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Dividends Paid
• Dividend Paid
• Cash flow fromFinancing activitiesIn allcases
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Taxes and Acquisition/ Disposition
• Should be separatelydisclosed under Operatingactivities unless identified,otherwise
Taxes onIncome
• Should be separatelydisclosed under Investingactivities
Acquisition anddisposition ofsubsidiariesand other
business units
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Non Cash Transactions
• Investing and financingtransactions that do not requirethe use of cash or cashequivalents should be excluded
from cash flow statement
• Example – Purchase of Fixed Assets by Issue of Shares /
Debentures
Non-cashtransactions
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Cash Flow Statement Information Required for preparation
19
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Cash flows – Information Required
1. Comparative Balance Sheets
2. Profit and Loss Account
3. Additional information
Availability of 2 and 3 are optional
20
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Cash Flow Statement Two Methods – Direct & Indirect
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Financial Statements
22
Generally preparedon accrual basis ofaccounting where in
• Net Income does not mean netcash received or
• Net Loss does not mean netcash used in operating activities.
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Cash Flow from Operating Activities
Cash from Operating
activities can bereported in two ways
Direct Method
Indirect Method
23
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Cash Flow Statement – Direct Method
24
A: Cash flow from Operating Activities
• Cash receipts from customers
• Less: Cash paid to suppliers and employees• Cash generated from operations
• Less: Income tax paid
• Cash flow before extraordinary item
• Add: Proceeds from earthquake disaster settlement
• Net cash from Operating Activit ies
B: Cash f low from investing activities
C: Cash flow from Financing activit ies
Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)
Cash and Cash equivalents at the Beginning of the period
Cash and Cash equivalents at the End of the period
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Cash Flow Statement – Direct Method Continued
25
A: Cash flow from operating activities
B: Cash f low from investing activit ies
• Purchase of fixed assets
• Sale of fixed assets
• Interest Paid
• Net cash from Investing Activities
C: Cash flow from financing activit ies
Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)
Cash and Cash equivalents at the Beginning of the period
Cash and Cash equivalents at the End of the period
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Cash Flow Statement – Direct Method Continued
26
A: Cash flow from operating activities
B: Cash f low from investing activit ies
• Proceeds from issue of shares / Long Term borrowings
• Repayment of Long Term borrowings• Dividend Paid
• Net cash from Financing Activi ties
C: Cash flow from financing activit ies
Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)
Cash and Cash equivalents at the Beginning of the period
Cash and Cash equivalents at the End of the period
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Cash Flow Statement – Indirect Method
27
A: Cash flow from operating activities
• Net Profit before tax and extraordinary items
• Adjustments for:• Depreciation
• Gain or Loss on sale of fixed assets
• Interest / Dividend
• Operating profit before working capital changes
• Adjustments for Increase / Decrease in
• Receivables
• Inventories
• Payables
• Cash generation from operations• Less: Interest paid
• Less: Direct Taxes paid
• Net cash from Operating Activit ies
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Cash Flow Statement – Indirect Method Continued
28
A: Cash flow from operating activities
B: Cash f low from investing activit ies
• Purchase of fixed assets
• Sale of fixed assets
• Interest Paid
• Net cash from Investing Activities
C: Cash flow from financing activit ies
Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)
Cash and Cash equivalents at the Beginning of the period
Cash and Cash equivalents at the End of the period
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29
A: Cash flow from operating activities
B: Cash f low from investing activit ies
• Proceeds from issue of shares / Long Term borrowings
• Repayment of Long Term borrowings• Dividend Paid
• Net cash from Financing Activit ies
C: Cash flow from financing activit ies
Net Increase (Decrease) in Cash and Cash equivalents (A + B + C)
Cash and Cash equivalents at the Beginning of the period
Cash and Cash equivalents at the End of the period
Cash Flow Statement – Indirect Method Continued
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Practical IllustrationsExample 1: Direct Method
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Example 1: Balance Sheet and P&L Account
31
Balance Sheet
of
M
Co
limited
as
on
31
‐Mar
‐2011
31.03.2010 31.03.2011 31.03.2010 31.03.2011
Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000
Share Capital 360 444 Land 48 96
Retained Earnings 151.8 163.8 Buildings & Equipments 360 576
Accounts payable 240 234 Cash 60 72
Outstanding expenses 24 48 Receivables 168 186
Income tax payable 12 13.2 Inventories 264 96
Accumulated Depn 120 132 Advances 7.8 9
907.8 1035 907.8 1035
Profit and Loss Account for the year ended 31‐Mar‐2011
Rs in 000
Net Sales 2520
Less: COGS 1980
Depreciation 60
Salaries and wages 240
Operating expenses 80
Provision for tax 88 2448
Gross Profit 72
Profit on sales of equipment (Cost: 72) 12
84
Dividend 72Retained Earnings 12
32
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Example 1: Identification of Working Notes
CashReceiptsfrom
Customers
CashPayments
toSuppliers
andEmployee
s
IncomeTax Paid
Investment
in purchaseof Building
andEquipments
Receiptsfrom Sales ofEquipments
(for thispurpose we
need to knowthe
AccumulatedDepreciationof Equipment
sold)
32
33
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Example 1: Direct Method – Working Note 1
33
Working Note:1 (Rs. In 000)
Cash Receipts
from
Customers
Net Sales 2520
Add: Opening Receivables 168
2688
Less: Closing Receivables 186
2502
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Example 1: Direct Method – Working Note 3
35
Working Note:3 (Rs. In 000)
Income Taxes
Paid
Provision for Tax during the year 88
Add: Opening
Income
Tax
payable 12
100
Less:
Closing
Income
Tax
payable 13.286.8
36
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Example 1: Direct Method – Working Note 4
36
Working Note:4 (Rs. In 000)
Purchase of Buildings and Equipments
Opening Balance of Building and Equipments 360
Less:
Cost
of
sold
Equipment 72288
Closing Balance of Building and Equipments 576
Purchase of
Building
and
Equipments 288
37
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Example 1: Direct Method – Working Note 5
37
Working Note:5 (Rs. In 000)
Accumulated Depreciation on Equipments sold
Accumulated Depreciation ‐ Opening 120
Add: Depreciation
during
the
year 60
180
Less: Accumulated Depreciation ‐ Closing 132
48
38
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Example 1: Direct Method – Working Note 6
Working Note:6 (Rs.
In
000)
Cash Receipts from Sale of Equipments
Cost of sold Equipment 72
Accumulated Depreciation
on
Equipments
sold 48
Written Down Value of Equipment sold 24
Add: Profit on sales 12
36
39
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Example 1: Direct Method - Solution
CASH FLOW STATEMENT
(Rs. In 000)
Cash flows from Operating activities:
Cash Receipts from Customers 2502
Cash Paid to Suppliers and Employees 2115.2
Cash Generated from Operations 386.8
Less: Income
Tax
Paid 86.8
Net Cash from Operating activities 300
40
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Example 1: Direct Method – Solution - Continued
(Rs. In 000)
Cash flows
from
Investing
activities:
Purchase of Land 48
Purchase
of
Building
and
Equipment 288
336
Cash received on sale of Equipment 36
Net Cash from Investing activities (300)
41
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Example 1: Direct Method – Solution - Continued
(Rs. In 000)
Cash flows
from
Financing
activities:
Issue of Shares 84
Dividend Paid 72
Net Cash from Financing activities 12
Net increase in Cash and Cash equivalents 12
Cash and
Cash
equivalents
at
the
beginning
60
Cash and Cash equivalents at the end 72
42
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Practical IllustrationsExample 2: Indirect Method
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Example 2: Balance Sheet and P&L Account
Balance Sheet
of
M
Co
limited
as
on
31
‐Mar
‐2011
31.03.2010 31.03.2011 31.03.2010 31.03.2011
Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000
Share Capital 360 444 Land 48 96
Retained Earnings 151.8 163.8 Buildings & Equipments 360 576
Accounts payable 240 234 Cash 60 72
Outstanding expenses 24 48 Receivables 168 186
Income tax payable 12 13.2 Inventories 264 96
Accumulated Depn 120 132 Advances 7.8 9
907.8 1035 907.8 1035
Profit and
Loss
Account
for
the
year
ended
31
‐Mar
‐2011
Rs in 000
Net Sales 2520
Less: COGS 1980
Depreciation 60
Salaries and wages 240
Operating expenses 80
Provision for tax 88 2448
Gross Profit 72
Profit on sales of equipment (Cost: 72) 12
84
Dividend 72
Retained Earnings 12
44
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Example 2: Identification of Working Notes
Income Tax PaidInvestment in purchase
of Building andEquipments
Receipts fromSales of
Equipments (forthis purpose weneed to know
the AccumulatedDepreciation of
Equipment sold)
45
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Example 1: Indirect Method – Working Note 1
Working Note:1 (Rs. In 000)
Income Taxes
Paid
Provision for Tax during the year 88
Add: Opening
Income
Tax
payable 12
100
Less: Closing Income Tax payable 13.2
86.8
46
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Example 1: Indirect Method – Working Note 2
Working Note:2 (Rs. In 000)
Purchase of
Buildings
and
Equipments
Opening Balance of Building and Equipments 360
Less: Cost of sold Equipment 72
288
Closing Balance of Building and Equipments 576
Purchase of
Building
and
Equipments 288
47
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Example 1: Indirect Method – Working Note 3
Working Note:3 (Rs. In 000)
Accumulated Depreciation on Equipments sold
Accumulated Depreciation ‐ Opening 120
Add: Depreciation
during
the
year 60
180
Less: Accumulated Depreciation ‐ Closing 132
48
48
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Example 1: Indirect Method – Working Note 4
Working Note:4 (Rs.
In
000)
Cash Receipts from Sale of Equipments
Cost of sold Equipment 72
Accumulated Depreciation
on
Equipments
sold 48
Written Down Value of Equipment sold 24
Add: Profit on sales 12
36
49
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Example 2: Indirect Method - SolutionCASH
FLOW
STATEMENT
(Rs. In 000)
Cash flows from Operating activities:
Net Profit Before tax and extradinary items:
Gross Profit 72
Provision for Tax 88
160
Adjustments for:
Depreciation 60
Operating profit before working capital changes 220
Adjustments for Working Capital Changes:
Add: Decrease in Inventories 168
Less: Increase in Receivables ‐(18)
Less: Increase in Advances ‐(1.2)
Less:
Decrease
in
Accounts
Payable ‐
(6)Add: Increase in Outstanding expenses 24
166.8
Cash Generation from Operations 386.8
Less: Income Tax Paid 86.8
Net Cash
from
Operating
activities 300
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Example 2: Indirect Method - Solution- Continued
(Rs. In 000)
Cash flows
from
Financing
activities:
Issue of Shares 84
Dividend Paid 72
Net Cash from Financing activities 12
Net increase in Cash and Cash equivalents 12
Cash and
Cash
equivalents
at
the
beginning
60
Cash and Cash equivalents at the end 72
52
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Lesson SummaryWe have learnt important terms used in Cash Flow Statement -Cash, Cash Equivalents and Cash Flow StatementWe have learnt important terms used in Cash Flow Statement -Cash, Cash Equivalents and Cash Flow Statement
Cash Flow Classification - Cash Flow from Operating, Investingand Financing ActivitiesCash Flow Classification - Cash Flow from Operating, Investingand Financing Activities
Treatment of certain special items in Cash Flow StatementTreatment of certain special items in Cash Flow Statement
Format of Cash Flow Statement - Direct Method and IndirectMethodFormat of Cash Flow Statement - Direct Method and IndirectMethod
Preparation and Presentation of Cash Flow StatementPreparation and Presentation of Cash Flow Statement
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