Cash flow statement session 1
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Transcript of Cash flow statement session 1
Non-cash items
• Depreciation expense
• Amortization expense
• Credit purchases
• Outstanding expenses
• Credit sales
• Accrued incomes
Illustration –Profit & loss Account for the year ended 31st March, 2010
Particulars Rs.
Sales in cash 1,00,000
Purchases in cash (51,000)
Gross Profits 49,000
Salaries paid in cash (10,000)
Rent paid in cash (10,000)
Depreciation (42,000)
Net loss 13,000
• It does highlight how cash is moving through various operations ofthe business
• Does not account for working capital changes like receipts fromcustomers, payments to suppliers, expenses paid in cash, incomesreceived in cash.
Profit and Loss Account of X Ltd. for the Year Ended 31st
March, 2011
Sales -
Less: Cost of Good Sold (-)
Gross Profits -
Less: Operating Expenses (-)
Operating profits -
Less: Non operating expenses and losses (-)
Add: Non operating incomes (other revenues) and gains -
Profits Before Taxes (PBT) -
Less: Taxes/Provision for taxes (-)
Net profits/ Profits after taxes (PAT) -
• Does not make any demarcation between incomefrom operating, investing and financing activities.Hence may include non-operating expenses andincomes viz.
Non- operating expenses/losses
Non-operating incomes
Loss on sale of non-current assets
Profit on sale of non-current assets
Loss on sale of investment Profit on sale of investment
Interest paid Interest received
Dividend received
Statement of Cash Flows
• The statement that aids management inanalyzing the changes in cash flowposition of the company between twobalance sheet dates is called cash flowstatement.
• It does so by dividing all activities of thecompany into three categories viz. cashfrom operating activities, cash frominvesting activities and cash fromfinancing activities
Meaning of Cash flows
• ‘Cash flows’ means inflow and outflow ofcash and cash equivalents arising out ofoperating, investing and financing activities.
• Cash comprises cash in hand and demanddeposits.
• Cash equivalents are short-term, highlyliquid investments that are readilyconvertible to known amounts of cashwithout risk of decline in its realizable value(as per Ind-AS 7)
Cash flows from Operating Activities
It shows cash flows related to thefundamental operations/lines ofbusinesses that company is in, andalso from the operations incidentalto the main lines of operations.
Cash inflows from Operating activities
Cash sales
Cash received from debtors (ARs)
Cash received as commission, fees, royalty, rent
Cash outflows from Operating activities
Cash purchases
Cash paid to creditors (APs)
Cash operating expenses viz. wages, salaries, commissions, rent, taxes etc
Cash flows from Investing ActivitiesInvesting activities shows cash flows from
sale or purchase of long lived assets andinvestments that are not held for resale.
Include cash inflows arising as incomefrom investing activities such as
Interest received
Dividends received
Investing activities Cash inflows from investing activities
Sale of fixed assets (PPE)/intangible asset
Sale of long term investment (shares of some company )
Cash received on maturity of term deposit
Interest received
Dividends received
Investing activities
Cash outflows from investing activities
Purchase of fixed assets
Purchase of long term investment (shares of some company)
Advancing loan to a subsidiary
Acquisition of a new company
Acquisition of a brand, or any other intangible asset
Investing Activities
• In general, -ve cash flows from investing activities is asign of good health of company as it highlights thatcompany is continually investing more in PPE, landand other fixed assets to replace the assets that havebeen used up or have become technologicallyobsolete.
• Also sign of expansion/growth
• May have +ve cash flows when companies aredivesting whole or part of business.
Financing Activities
Cash flows arising out of the activities that result inchanges in the size and composition of the capitalstructure (equity and borrowings) of the entity.
These highlight the sources from where a company israising funds and how it is redeeming those funds
These also highlight the cost of funds raised that isinterest and dividend paid
Financing activities Cash flows from financing activities
Cash inflows Cash outflows
Issue of equity shares in cash Buy-back of equity shares
Issue of preference shares in cash
Redemption of preference shares
Issue of debentures in cash Re-payment of long term loans
Proceeds of long term borrowings
Re-payment of debentures
Dividends paid
Interests paid
Financing activities
May be positive or negative
If CFO < funds required for investments = positivecash from financing activities (Why?)
If CFO > funds required for investments = negativecash from financing activities (Why?)
Areas of Confusion
• Interest received (MFs)
• Dividend received
• Interest paid (MFIs)
• Dividend paid
Cash flows from extraordinary transactions
• To be disclosed separately in cash flowstatement to enable the users tounderstand their nature and effect onpresent and future cash flows of theenterprise
• For instance, insurance proceeds fromearthquake disaster settlement from GIC.
•Cash outflow on account of guaranteegiven on behalf of subsidiary company
Non-cash transactions
Not reported in cash flows statement but may be given in notes to accounts.• Example:
• Repaying existing bonds by converting them into common stock
• Acquiring fixed assets by issuing notes payable/debentures.
Preparing a Cash Flow StatementCASH FLOW STATEMENT
Cash flows from operating activities 1
Add: cash flows from investing activities 2
Add: cash flows from financing activities 3
Cash generated/used during the year 1+2+3
Add: Cash at the beginning of the year 4 (FromBalance Sheet )
Cash at the end of the year 1+2+3+4
Cash Flows from Operating Activities
•Approaches to presentation•Direct method.• Indirect method.
•An entity can report cash flows fromoperating activities using either ofthe above stated method
Direct method of presenting cash flows from operating activities
In direct method, Cash from operatingactivities is computed as:
Gross cash receipts – Gross cash payments
Where, Gross cash receipts include
cash sales, cash collected from debtors,other operating revenues likecommissions received , rent received
Direct method of presenting cash flows from operating activities
While, Gross cash payments include cashpaid for purchasing inventory, cash paidto accounts payable for credit purchasesof inventory, operating expenses paid incash like salaries, wages, commissions,taxes etc.
Here emphasis is on cash receipts andcash payments
Just looks like cash account
Illustration – Profit & loss AccountFor the period ending 31-03-2009
Particulars Amount Rs.
Sales:
Cash: 40,000
Credit: 80,000
Cost of goods sold
Gross Profits
Depreciation
Other expenses paid in cash
Net Profit
1,20,000
(70,000)
50,000
(30,000)
(9500)
10,500
Additional information 31.03.08 31.03.09
Accounts receivable 20,000 24,000
Accounts payable 7,000 5,000
Inventory 22,000 27,000
Cash Purchases during the year = 70000
COGS
• COGS= Op inventory+ purchases – closing inventory
• COGS= Op inventory+ (cash purchases + credit purchases)– closing inventory
• 70000= 22000+(70000+ credit purchases)- 27000
• 70000= 65000 + credit purchases
• Credit purchases= 5000
Solution – Direct Method
Cash Flow From Operating Activities:
Cash sales 40,000
Cash received on account of sale of goods 76,000
Less:
Purchases of goods in cash 70,000
Cash expenses 9,500
Payment made on account of credit purchases 7,000
(86,500)
Cash Inflow 29,500
Cash from investing activities
Inflows: Sale of non-current assets -
Sale of long term investment -
Dividend received -
Interest received on long term investment -
Outflows: Purchase of non-current assets -
Purchase of long term investment -
Cash from investing activities -
Illustration - Kanishk• The following transactions occur at Kanishk
Enterprises:
Particulars Amount (Rs.)
Purchased a machinery for 1,50,000
Sold shares of X limited worth 2,00,000
Received interest on debentures 10,000
Received dividend on shares held 20,000
Sold old machinery 50,000
Solution
Cash Flow from Investing Activities:
Sale of Shares 2,00,000
Interest received 10,000
Sale proceeds of old machinery 50,000
Dividend received 20,000
2,80,000
Less: Outflow on account of machine purchase 1,50,000
Cash flow from Investing Activities 1,30,000
Kanishk EnterprisesCash Flow Statement