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Cash Flow StatementMeaning of CashFor the purpose of preparation and presentation of cash flow statement, Cash includes

Cash in HandCash at BankShort Term Investment or Marketable SecuritiesMeaning of Cash Flow StatementCash Flow Statement is a summarised statement showing sources of cash inflows and application of cash outflow of an enterprise during a particular period of time Features of Cash Flow StatementImportance of Cash Flow StatementAssess the ability of an enterprise to generate cash resources from its different activities

Assess the need of an enterprise to utilizes those cash resources into its different activities.

Enables to prepare the reliable cash flow projections for the future planning

Useful for short term planning

Identification of stronger or weaker activity.

A tool of comparative study

CASH FLOW STATEMENTFUND FLOW STATEMENT1. Cash refers to cash in hand, cash at bank and short term investments1. Funds refers to the working capital (current assets Current Liabilities)2. It exhibits inflows and outflows of cash and cash equivalents2. It exhibits inflows and outflows of funds ( Working capital)3. It is prepared on the cash basis of accounting.3. It is prepared on accrual basis of accounting.4. It is the important tool for short term analysis4. It is the important tool for long term analysis.5. Different activities of an enterprise are separately exhibited5. Different activities of an enterprise are not separately exhibited It starts with opening balance of cash & cash equivalents & close with closing balance of cash & cash equivalentsIt shows the amount changes between the opening working capital balances of an accounting periods 7. It shows reasons for change in cash7. It shows reasons for change in working capitalLimitations of Cash Flow StatementOnly includes cashOnly ascertain net cash flow , not net profitNot a substitute of p&lPrepared at the end, not usefull for rectification.

Accounting standards-3 (AS-3)The Institute of Chartered Accountant of India issued AS-3 in march 1997.Cash Flow Statements have replaced Statement of Changes in Financial Position. Accounting Standard (AS -3)AS-3 have become mandatory w.e.f 1.4.2001 for the following enterprises.Enterprises whose equity or debt securities are listed or going to be listed on a recognized stock exchange in India.

All other commercial, industrial & business reporting enterprises whose turnover for the accounting period exceeds 50 crores. Accounting Standard (AS -3)Classification of Cash Flow Statement

Cash Flow From Operating ActivitiesCash Flow From Investment ActivitiesCash Flow From Financing ActivitiesCash Flow From Operating ActivitiesOperating Activities are principal revenue-producing activities.

Example : In case of a book publishing company, its operating activities are printing and publication of books and their sale.

All cash receipts and cash payment for printing publication and sales of books are to be considered as cash flow from operating activities

ILLUSTRATION

Cash sale of Goods 1,50,000Collection from Debtors 3,50,000Cash Purchase of Goods 90,000Payment to Creditors 2,20,000Payment of Wages 50,000Payment of Factory Expenses 40,000Payment of Office & Administration expenses 25,000Payment of selling and distribution expenses 35,000Payment of tax on operating Profit 15,000 Rs.Rs.Cash Inflow from Operating Activities Cash Sales of Goods1,50,000 Collection from debtors3,50,0005,00,000Less : Cash Out flow from Operating activities Cash purchase of Goods90,000 Payment to Creditors2,20,000 Payment of wages50,000 Payment of Factory expenses40,000 Payment of Office and Administration expenses25,000 Payment of Selling and Distribution expenses35,0004,60,000 Cash Generated from operations40,000Less : Payment of Tax on operating Profit15,000 Net cash Flow From Operating Activities25,000Calculation of Net Cash flow from Operating ActivitiesCash Flow From Investing ActivitiesInvesting Activities are the acquisition and disposal of long term assets and other investments not included in the cash equivalents

Example : If a book publishing company, invests its funds for acquisition of fixed assets or shares of another company.

Any cash inflows or outflows from these activities of the company are to be treated as cash flows from investing activities

Sale Proceeds of Fixed assets5,50,000Sale Proceeds of Long term investments2,50,000Income received from investments1,00,000Purchased of fixed assets4,20,000Long term investment made3,00,000Payment of Tax on investing income20,000ILLUSTRATIONCalculation of Net Cash flow from INVESTING ActivitiesRs.Rs.Cash Inflow from Investing Activities Sales proceeds of fixed assets5,50,000 Sale proceeds of long term investments2,50,000 Income received from investments1,00,0009,00,000Less : Cash Out flow from Investing activities Purchase of Fixed Assets4,20,000 Long term investment3,00,0007,20,000 Cash Generated from investment activities1,80,000Less : Payment of Tax on investment profit20,000 Net cash Flow From Investment Activities1,60,000Cash Flow From Financing ActivitiesFinancing Activities are those activities which result in changes in size and composition of the owners capital & long term borrowing of that enterprise

Example : If a book publishing company, issues its equity shares, redeem its debentures etc.

Proceeds received from the issue of equity shares5,50,000Proceeds received from the issue of preference shares2,50,000Proceeds from the long term loans1,00,000Redemption of Preference shares4,20,000Redemption of Debentures3,00,000Payment of Dividend20,000ILLUSTRATIONCalculation of Net Cash flow from FINANCING ActivitiesRs.Rs.Cash Inflow from Financing Activities Proceeds received from the issue of equity shares5,50,000 Proceeds received from the issue of preference shares2,50,000 Proceeds received from the long term loans1,00,0008,50,000Less : Cash Out flow from Financing activities Redemption of Preference shares4,20,000 Redemption of debenture3,00,000 Payment of dividend 20,0007,40,00 Net cash Flow From Investment Activities1,10,000A. Cash Flow From Operating ActivitiesRs.Rs.Rs. Cash Receipts from CustomersLess : Cash paid to Suppliers & Employees Cash Generated from OperationsLess : Income Tax Paid Cash Flows from operations before extraordinary ItemsAdd : Proceeds from any Disaster Settlement Net Cash Flow From Operating ActivitiesB. Cash Flow from Investing Activities Proceeds from Sale of Fixed Assets including investmentsLess : Purchase of Fixed Assets including investmentsAdd : Interest Received Dividend Received Net Cash Flow From Investing ActivitiesB. Cash Flow from Financing Activities Proceeds from issuance of Share Capital Proceeds from Long-term BorrowingsLess : Repayment of Long term Borrowings Less : Interest paid Dividend Paid Net Cash Flow From Financing Activities Net increase in Cash and Cash EquivalentsAdd : Cash and Cash Equivalents at the beginning of the period Cash and Cash Equivalents at the end of the periodProforma of Cash Flow Statement under Direct MethodA. Cash Flow From Operating ActivitiesRs.Rs.Rs. Net Profit for the period before taxation and extra-ordinary items Add : Adjustment for non-current & non operating items charged to P/L a/c Depreciation Interest Paid Foreign Exchange Loss Loss on sale of Fixed Assets and Investments Less : Adjustment for non-current& non operating items credited to P/L a/c Interest Earned Dividend Earned Profit on sale of Fixed Assets and Investments Operating Profit before working capital changes Add : Increase in operating current liabilities Decrease in operating current assets Less : Increase in Operating current Assets Decrease in operating current liabilities Cash generated from operations Less : Income Tax PaidAdd : Proceeds from disaster settlement Net Cash flow from operating ActivitiesProforma of Cash Flow Statement under Indirect Method21