Funds & Cash Flow

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    Funds Flow StatementFunds Flow Statement

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    Meaning of Funds Flow StatementMeaning of Funds Flow Statement Funds : Funds : Acc ording to Acc ounting Standard No.7, the term FundAcc ording to Acc ounting Standard No.7, the term Fund

    generally refers to c ash and c ash equivalents, or to workinggenerally refers to c ash and c ash equivalents, or to workingc apital.c apital.

    Working Capital:Working Capital: There are two c on c epts of working c apital :There are two c on c epts of working c apital : gross gross c on c ept andc on c ept and net net c on c ept. Gross working c apital refersc on c ept. Gross working c apital refersto the firms investment in c urrent assets, while net workingto the firms investment in c urrent assets, while net working

    c apital means ex c ess of c urrent assets over c urrentc apital means ex c ess of c urrent assets over c urrentliabilities. Funds is generally used to mean net workingliabilities. Funds is generally used to mean net workingc apital.c apital.

    Current Assets:Current Assets: A ssets whi c h are reasonably expe c ted to beA ssets whi c h are reasonably expe c ted to berealized in c ash or sold or c onsumed during the normalrealized in c ash or sold or c onsumed during the normaloperating c yc le of the business ex. Cash, a cc ountsoperating c yc le of the business ex. Cash, a cc ountsrec eivable, inventory, advan c es re c overable, prepaidrec eivable, inventory, advan c es re c overable, prepaidexpenses et c .expenses et c .

    Current Liabilities:Current Liabilities: A ll obligations that will require within theA ll obligations that will require within thec oming year or operating c yc le, whi c hever is longer,c oming year or operating c yc le, whi c hever is longer, i)i) thetheuse of existing c urrent assets or use of existing c urrent assets or ii)ii) the c reation of other the c reation of other

    c urrent liabilities ex. a cc ounts payable, outstandingc urrent liabilities ex. a cc ounts payable, outstanding

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    Meaning of Funds Flow Statement ( Contd)Meaning of Funds Flow Statement ( Contd)

    expenses, bank overdrafts, short term loans, advan c e paymentsexpenses, bank overdrafts, short term loans, advan c e paymentsrec eived, c urrent maturities of longrec eived, c urrent maturities of long- -term loans et c .term loans et c .

    N on Current Assets: N on Current Assets: A ll A ssets other than c urrent assets ex.A ll A ssets other than c urrent assets ex.goodwill, land, building, ma c hinery, furniture, debit balan c e ingoodwill, land, building, ma c hinery, furniture, debit balan c e inP & L a cc ount et c .P & L a cc ount et c .

    N on Current Liabilities:

    N on Current Liabilities:

    All liabilities other than

    current

    All liabilities other than

    currentliabilities ex. share c apital, long term loans, debentures, shareliabilities ex. share c apital, long term loans, debentures, share

    premium, c redit balan c e in P & L a cc ount. premium, c redit balan c e in P & L a cc ount. Flow of Funds: Flow of Funds: A ny in c rease or de c rease in working c apitalA ny in c rease or de c rease in working c apital

    means flow of funds. Flow of funds will not o cc ur for means flow of funds. Flow of funds will not o cc ur for

    transa c tions involving only Non Current assets or liabilities or transa c tions involving only Non Current assets or liabilities or only Current assets or liabilities. Cross transa c tions involvingonly Current assets or liabilities. Cross transa c tions involvinga fixed asset or liability and a c urrent asset or liability willa fixed asset or liability and a c urrent asset or liability willresult in a flow of funds.result in a flow of funds.

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    Pr epa r ation of the Funds Flow StatementPr epa r ation of the Funds Flow StatementS ources of FundsS ources of Funds

    I nternal Sour c esI nternal Sour c es: Following adjustments need to be made to the: Following adjustments need to be made to thefigure of Net Profit to c alc ulate the funds from operations:figure of Net Profit to c alc ulate the funds from operations:

    Add Add the following items that do not involve funds outflow:the following items that do not involve funds outflow:i.i. Depre c iationDepre c iation

    ii.ii. Preliminary expenses or goodwill et c . written off.Preliminary expenses or goodwill et c . written off.iii.iii. Contribution to debenture redemption fund, transfer toContribution to debenture redemption fund, transfer to

    general reserve et c .general reserve et c .iv.iv. Provision for taxation and proposed dividendProvision for taxation and proposed dividend

    v.v. Loss on sale of Fixed A ssetLoss on sale of Fixed A sset Deduct Deduct the following as no funds inflow is involved :the following as no funds inflow is involved :

    i.i. Profit on sale of fixed A ssetProfit on sale of fixed A ssetii.ii. Profit on revaluation of Fixed A ssetsProfit on revaluation of Fixed A ssets

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    Pr epa r ation of the Funds Flow StatementPr epa r ation of the Funds Flow Statement(Contd)(Contd)

    External Sour

    ces

    External Sour

    ces::

    i.i. Funds from long term loans : e.g debentures, borrowingsFunds from long term loans : e.g debentures, borrowingsfrom finan c ial institutions et c .from finan c ial institutions et c .

    ii.ii. Sale of fixed assets : Sale of land, building, longSale of fixed assets : Sale of land, building, long- -termterminvestments will result in generation of funds.investments will result in generation of funds.

    iii.iii. Funds from in c rease in share c apital : I ssue of shares for Funds from in c rease in share c apital : I ssue of shares for c ash or any other c urrent asset results in in c rease in workingc ash or any other c urrent asset results in in c rease in workingc apital and hen c e there will be flow of funds.c apital and hen c e there will be flow of funds.

    Application of funds: Application of funds:i.i. Pur c hase of Fixed A ssets: Results in de c rease of c urrentPur c hase of Fixed A ssets: Results in de c rease of c urrent

    assets without de c rease in c urrent liabilities. I n c ase sharesassets without de c rease in c urrent liabilities. I n c ase sharesor debentures are issued for a c quisition of fixed assets, thereor debentures are issued for a c quisition of fixed assets, therewill be no flow of funds.will be no flow of funds.

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    Pr epa r ation of the Funds Flow StatementPr epa r ation of the Funds Flow Statement(Contd)(Contd)

    ii.ii. Payment of dividendPayment of dividendiii.iii. Payment of fixed liabilities e.g redemption of debentures or Payment of fixed liabilities e.g redemption of debentures or

    redeemable preferen c e shares.redeemable preferen c e shares.iv.iv. Payment of tax liabilityPayment of tax liabilityS

    chedule for changes in Working Capital:S

    chedule for changes in Working Capital: Funds flow statementFunds flow statementdepi c ts c hanges in working c apital, hen c e it is advisable todepi c ts c hanges in working c apital, hen c e it is advisable to prepare a s c hedule for c hanges in working c apital, whi c h prepare a s c hedule for c hanges in working c apital, whi c hc an be done by c omparing c urrent assets and c urrentc an be done by c omparing c urrent assets and c urrentliabilities for two periods.liabilities for two periods.

    Rules:Rules:i.i. I nc rease in c urrent assets results in in c rease in workingI nc rease in c urrent assets results in in c rease in working

    c apital and vi c e versac apital and vi c e versaii.ii. I nc rease in c urrent liabilities results in de c rease in c urrentI nc rease in c urrent liabilities results in de c rease in c urrent

    liabilities and vi c e versaliabilities and vi c e versa

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    Pr epa r ation of the Funds Flow StatementPr epa r ation of the Funds Flow Statement(Contd)(Contd)

    Format for Schedule of

    changes in Working CapitalFormat for S

    chedule of

    changes in Working Capital

    I temI tem as onas on as onas on ChangeChange------ ------ I nc rease De c reaseI nc rease De c rease

    Current A ssetsCurrent A ssets::

    CashCashBank Balan c eBank Balan c eAcc ounts re c eivableAcc ounts re c eivableSto c k in tradeSto c k in tradePrepaid expensesPrepaid expenses

    Current Liabilities:Current Liabilities:Bank OverdraftBank OverdraftOutstanding E xpensesOutstanding E xpensesAcc ounts payableAcc ounts payable

    Net I nc rease/ De c rease in working c apital Net I nc rease/ De c rease in working c apital

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    Pr epa r ation of the Funds Flow StatementPr epa r ation of the Funds Flow Statement(Contd)(Contd)

    Funds Flow S tatement: Funds Flow S tatement: While preparing this statement, c urrentWhile preparing this statement, c urrent

    assets and liabilities are to be ignored. A ttention is to beassets and liabilities are to be ignored. A ttention is to begiven to c hanges in fixed assets and fixed liabilities:given to c hanges in fixed assets and fixed liabilities:

    A .A . Sour c es of fundsSour c es of funds: :I ssue of sharesI ssue of sharesIssue of debentures

    Issue of debenturesLong term borrowingsLong term borrowings

    Sale of fixed A ssetsSale of fixed A ssetsOperating ProfitOperating Profit

    B.B. A ppli c ation of funds:A ppli c ation of funds:

    Redemption of redeemable preferen c e sharesRedemption of redeemable preferen c e sharesRedemption of debenturesRedemption of debenturesPayment of other long term loansPayment of other long term loansPur c hase of fixed A ssetsPur c hase of fixed A ssetsOperating lossOperating lossPayment of dividends, tax et c .Payment of dividends, tax et c .

    Net I nc rease/ de c rease in Working Capital ( A Net I nc rease/ de c rease in Working Capital ( A --B)B)

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    Pr epa r ation of the Funds Flow StatementPr epa r ation of the Funds Flow Statement(Contd)(Contd)

    The c hange in working c apital dis c losed by the s c hedule of The c hange in working c apital dis c losed by the s c hedule of c hanges in working c apital will tally with the c hange inc hanges in working c apital will tally with the c hange inworking c apital dis c losed by funds flow statement.working c apital dis c losed by funds flow statement.

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    T r eatment of Pr ovision fo r T axationT r eatment of Pr ovision fo r T axation P

    rovision for Taxation P

    rovision for Taxation :: There are two options available:There are two options available:i.i. Treated as a c urrent liability: When provision for taxation isTreated as a c urrent liability: When provision for taxation is

    made, it involves P & L appropriation a cc ount, whi c h is amade, it involves P & L appropriation a cc ount, whi c h is afixed liability and Provision for taxation a cc ount, whi c h is afixed liability and Provision for taxation a cc ount, whi c h is ac urrent liability, resulting in a de c rease in working c apital.c urrent liability, resulting in a de c rease in working c apital.On payment of tax, there will be no c hange in workingOn payment of tax, there will be no c hange in workingc apital as it involves one c urrent liability ( Provision for c apital as it involves one c urrent liability ( Provision for Tax) and one c urrent asset ( Bank or c ash ).Tax) and one c urrent asset ( Bank or c ash ).

    ii.ii. I t may be taken only as an appropriation of profits: ThereI t may be taken only as an appropriation of profits: There

    will be no c hange in working c apital when the provision iswill be no c hange in working c apital when the provision ismade as two fixed liabilities are involved i.e P & Lmade as two fixed liabilities are involved i.e P & Lappropriation a cc ount and Provision for taxation a cc ount.appropriation a cc ount and Provision for taxation a cc ount.However, when taxes are paid, there is an appli c ation of However, when taxes are paid, there is an appli c ation of funds as it involves one fixed liability ( Provision for Tax )funds as it involves one fixed liability ( Provision for Tax )and one c urrent asset ( Bank or Cash ).and one c urrent asset ( Bank or Cash ).

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    T r eatment of Pr oposed DividendsT r eatment of Pr oposed Dividends P

    roposed Dividends: P

    roposed Dividends: Can be dealt with in the similar two ways :Can be dealt with in the similar two ways :i.i. May be treated as c urrent liability : I t will appear as one of May be treated as c urrent liability : I t will appear as one of

    the items de c reasing working c apital in the s c hedule for the items de c reasing working c apital in the s c hedule for c hanges in working c apital. I t will not be shown asc hanges in working c apital. I t will not be shown asappli c ation of funds when dividend is paid later on.appli c ation of funds when dividend is paid later on.

    ii.ii. May be treated as an appropriation of profits : I n this c ase,May be treated as an appropriation of profits : I n this c ase, proposed dividend for the c urrent year will be added ba c k to proposed dividend for the c urrent year will be added ba c k toc urrent years profits in order to find out funds fromc urrent years profits in order to find out funds fromoperations, if su c h amount of dividend has already beenoperations, if su c h amount of dividend has already been

    c harged to profits. Payment of dividends will be shown asc harged to profits. Payment of dividends will be shown asan appli c ation of funds.an appli c ation of funds.

    I n c ase no spe c ific dire c tions are given with regard to theI n c ase no spe c ific dire c tions are given with regard to thetreatment of these two items, it is advised that assumptionstreatment of these two items, it is advised that assumptionsare c learly stated.are c learly stated.

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    Funds Flow Vs. Income StatementFunds Flow Vs. Income Statement

    Deals with finan c ialDeals with finan c ial

    resour c es required for resour c es required for running the business.running the business.E xplains how funds wereE xplains how funds wereobtained & used.obtained & used.Mat c hes funds raised andMat c hes funds raised andfunds applied during afunds applied during a

    parti c ular period. The parti c ular period. Thesour c es and appli c ations of sour c es and appli c ations of funds may be c apital or funds may be c apital or revenue in nature.revenue in nature.Sour c es of funds are many,Sour c es of funds are many,

    besides operations su c h as besides operations su c h asshare c apital, debentures,share c apital, debentures,sale of fixed assets et c .sale of fixed assets et c .

    Dis c loses the result of Dis c loses the result of

    business a c tivities i.e how business a c tivities i.e howmu c h has been earned andmu c h has been earned andhow it has been spent..how it has been spent..

    Mat c hes in c omes of aMat c hes in c omes of a

    period with the expenditure period with the expenditureof that period, both of whi c hof that period, both of whi c hare revenue in nature.are revenue in nature.

    A n in c ome statement whi c hA n in c ome statement whi c hdis c loses the results of dis c loses the results of operations c annot evenoperations c annot evenacc urately tell about theacc urately tell about thefunds from operations alonefunds from operations alone

    be c ause of non be c ause of non- -fund itemsfund itemslike depre c iation, beinglike depre c iation, being

    included therein.in

    cluded therein.

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    U ses Of Funds Flow StatementU ses Of Funds Flow Statement

    i.i.E

    xplains the Financial

    consequen

    ces of business operations

    Explains the Finan

    cial

    consequen

    ces of business operations: :Helps the finan c ial analyst in advising his employer / c lientHelps the finan c ial analyst in advising his employer / c lient

    regarding dire c ting of funds to those c hannels whi c h will beregarding dire c ting of funds to those c hannels whi c h will bemost profitable for the business.most profitable for the business.

    ii.ii. Ac ts as an instrument for allo c ation of resour c es:Ac ts as an instrument for allo c ation of resour c es: The fundsThe fundsshould be managed in su c h a way that the business is in ashould be managed in su c h a way that the business is in a

    position to make payment of interest and loan installments position to make payment of interest and loan installmentsas per the agreed s c hedule.as per the agreed s c hedule.

    iii.iii. I t is a test as to the effe c tive or otherwise use of c apitalI t is a test as to the effe c tive or otherwise use of c apital: The: The

    adequa c y or inadequa c y of working c apital will tell theadequa c y or inadequa c y of working c apital will tell thefinan c ial analyst about the possible steps that thefinan c ial analyst about the possible steps that themanagement should take for effe c tive use of surplusmanagement should take for effe c tive use of surplusworking c apital or make arrangements in c ase of working c apital or make arrangements in c ase of inadequa c y of working c apital.inadequa c y of working c apital.

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    Cash Flow StatementCash Flow Statement

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    Meaning of Cash Flow StatementMeaning of Cash Flow Statement

    A Cash Flow Statement is a statement depi c ting c hange inA Cash Flow Statement is a statement depi c ting c hange inc ash position from one period to another. The term Cashc ash position from one period to another. The term Cashhere stands for c ash and bank balan c es.here stands for c ash and bank balan c es.The c ash flow statement explains the reason for inflow or The c ash flow statement explains the reason for inflow or outflow of c ash, as the c ase may be and also helpsoutflow of c ash, as the c ase may be and also helpsmanagement in making plans for the immediate future.management in making plans for the immediate future.A proper planning of c ash resour c es will enable theA proper planning of c ash resour c es will enable themanagement to have c ash available whenever needed andmanagement to have c ash available whenever needed and

    put it to some produ c tive use in c ase there is surplus put it to some produ c tive use in c ase there is surplus

    available.available.

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    Pr epa r ation of Cash Flow StatementPr epa r ation of Cash Flow Statement

    Prepared on the same pattern as the Funds Flow Statement.Prepared on the same pattern as the Funds Flow Statement.The c hange in c ash position is c omputed by taking intoThe c hange in c ash position is c omputed by taking intoacc ount the sour c es and appli c ations of c ash.acc ount the sour c es and appli c ations of c ash.

    S ources Of CashS ources Of CashI nternal Sour c esI nternal Sour c esCash from Operations is the main internal sour c e. The NetCash from Operations is the main internal sour c e. The Net

    profit from the P & L a cc ount will be adjusted for the profit from the P & L a cc ount will be adjusted for thefollowing nonfollowing non- -c ash items to arrive at the c ash fromc ash items to arrive at the c ash fromoperations:operations:

    i.i. Depre c iationDepre c iation : Does not result in c ash outflow, hen c e: Does not result in c ash outflow, hen c eadded ba c k to net profit.added ba c k to net profit.

    ii.ii. A mortization of intangible assetsA mortization of intangible assets: Goodwill, preliminary: Goodwill, preliminaryexpenses et c . when written off, have to be added ba c k toexpenses et c . when written off, have to be added ba c k to

    the net profit.the net profit.

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    Pr epa r ation of Cash Flow Statement ( Contd)Pr epa r ation of Cash Flow Statement ( Contd)iii.iii. Loss on sale of fixed assetsLoss on sale of fixed assets : A dded ba c k to the net profit:A dded ba c k to the net profit

    iv.iv. Gain on sale of fixed assetsGain on sale of fixed assets : Dedu c ted from net profit.: Dedu c ted from net profit.v.v. Creation of reservesCreation of reserves: I f profit for the year has been: I f profit for the year has been

    arrived at after c harging transfers to reserves, the samearrived at after c harging transfers to reserves, the sameshould be added ba c k to the net profit.should be added ba c k to the net profit.

    Computation of c ash from operations c an be studied usingComputation of c ash from operations c an be studied usingtwo different situations:two different situations:

    i.i. When all transa c tions are c ash transa c tionsWhen all transa c tions are c ash transa c tions: I n this c ase: I n this c aseCash from operations = Net ProfitCash from operations = Net Profit

    ii.ii.When all transa

    ctions are not

    cash transa

    ctions:When all transa

    ctions are not

    cash transa

    ctions:

    In this

    In thisc ase, c ash from operations is c alc ulated in two stages:c ase, c ash from operations is c alc ulated in two stages:

    a)a) Computation of funds from operations as explainedComputation of funds from operations as explainedearlier.earlier.

    b) b) A djustment of funds so c alc ulated for c hanges in c urrentA djustment of funds so c alc ulated for c hanges in c urrentassets ( ex c luding c ash ) & c urrent liabilities.assets ( ex c luding c ash ) & c urrent liabilities.

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    Pr epa r ation of Cash Flow Statement ( Contd )Pr epa r ation of Cash Flow Statement ( Contd ) Adjustments for changes in Current Assets & Current Liabilities Adjustments for changes in Current Assets & Current Liabilities

    i.i. E ffe c t of c redit salesE ffe c t of c redit sales : Cash from operations c an be: Cash from operations c an bec alc ulated as per the following equation if there are debtorsc alc ulated as per the following equation if there are debtorsoutstanding at the end as in the beginning of the a cc ountingoutstanding at the end as in the beginning of the a cc ountingyear :year :

    Cash from Operations = Net Profit + Decrease in DebtorsCash from Operations = Net Profit + De

    crease in Debtorsor or -- I nc rease in DebtorsI nc rease in Debtors

    ii.ii. E ffe c t of c redit pur c hasesE ffe c t of c redit pur c hases ::Cash from operations = Net Profit + I nc rease in CreditorsCash from operations = Net Profit + I nc rease in Creditors

    or or -- De c rease in Creditors.De c rease in Creditors.iii.iii. E ffe c t of opening and c losing sto c ksE ffe c t of opening and c losing sto c ks: The amount of : The amount of

    opening sto c k is c harged to the debit side of the P& Lopening sto c k is c harged to the debit side of the P& Lacc ount. I t thus redu c es net profit without redu c ing c ashacc ount. I t thus redu c es net profit without redu c ing c ashfrom operations. Similarly, c losing sto c k whi c h appearsfrom operations. Similarly, c losing sto c k whi c h appears

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    Pr epa r ation of Cash Flow Statement ( Contd )Pr epa r ation of Cash Flow Statement ( Contd )

    On the c redit side of the P& L Acc ount in c reases net profitOn the c redit side of the P& L Acc ount in c reases net profitwithout in c reasing c ash from operations. The followingwithout in c reasing c ash from operations. The followingadjustment is made :adjustment is made :

    Cash from Operations = Net Profit + De c rease in Sto c k Cash from Operations = Net Profit + De c rease in Sto c k or or -- I nc rease in Sto c k I nc rease in Sto c k

    iv.iv. E ffe c t of Outstanding expenses, in c ome re c eived inE ffe c t of Outstanding expenses, in c ome re c eived inadvan c e et cadvan c e et c . : Net profit is c alc ulated after c harging all. : Net profit is c alc ulated after c harging allexpenses, whether paid or outstanding and in c ome re c eivedexpenses, whether paid or outstanding and in c ome re c eivedin advan c e is not c onsidered. Hen c e an in c rease inin advan c e is not c onsidered. Hen c e an in c rease in

    outstanding expenses and in c ome re c eived in advan c e willoutstanding expenses and in c ome re c eived in advan c e willinc rease the c ash from operations and vi c e versa. Theinc rease the c ash from operations and vi c e versa. Thefollowing adjustment is made:following adjustment is made:

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    Pr epa r ation of Cash Flow Statement ( Contd )Pr epa r ation of Cash Flow Statement ( Contd )

    Cash from operations =Cash from operations = Net Profit + in c rease in Outstanding E xpenses Net Profit + in c rease in Outstanding E xpenses

    + I nc rease in in c ome re c eived in advan c e+ I nc rease in in c ome re c eived in advan c e-- De c rease in Outstanding E xpensesDe c rease in Outstanding E xpenses

    -- Decrease in in

    come re

    ceived in advan

    ceDe

    crease in in

    come re

    ceived in advan

    ce

    v.v. E ffe c t of Prepaid E xpenses and outstanding I nc omeE ffe c t of Prepaid E xpenses and outstanding I nc ome : The: Theeffe c t on c ash from operations is exa c tly opposite to theeffe c t on c ash from operations is exa c tly opposite to theeffe c t of outstanding expenses and in c ome re c eived ineffe c t of outstanding expenses and in c ome re c eived inadvan c e . The following adjustment is made :advan c e . The following adjustment is made :

    Cash from Operations =Cash from Operations = Net Profit + De c rease in Prepaid expenses / Acc rued I nc ome Net Profit + De c rease in Prepaid expenses / Acc rued I nc ome

    -- I nc rease in Prepaid expenses/ Acc rued I nc ome.I nc rease in Prepaid expenses/ Acc rued I nc ome.

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    Pr epa r ation of Cash Flow Statement ( Contd )Pr epa r ation of Cash Flow Statement ( Contd )

    The above adjustments may be summarized as :The above adjustments may be summarized as :I nc rease in Current A sset / De c rease in Current LiabilityI nc rease in Current A sset / De c rease in Current Liabilityresults in De c rease in Cashresults in De c rease in CashDe c rease in Current A sset/ I nc rease in Current LiabilityDe c rease in Current A sset/ I nc rease in Current Liabilityresults in I nc rease in Cash.results in I nc rease in Cash.

    E xternal Sour c es of CashE xternal Sour c es of Cash : :i.i. I ssue of New SharesI ssue of New Sharesii.ii. Raising of long term loansRaising of long term loansiii.iii. Pur c hase of Plant & Ma c hinery on deferred payment : ThisPur c hase of Plant & Ma c hinery on deferred payment : This

    should be shown as a separate sour c e of c ash to the extentshould be shown as a separate sour c e of c ash to the extentof the deferred c redit. However, the c ost of ma c hineryof the deferred c redit. However, the c ost of ma c hinery

    pur c hased will be shown as an appli c ation of c ash. pur c hased will be shown as an appli c ation of c ash.iv.iv. Short term borrowingsShort term borrowings c ash c redit from banksc ash c redit from banksv.v. Sale of fixed A ssets , I nvestments et c .Sale of fixed A ssets , I nvestments et c .

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    Pr epa r ation of Cash Flow Statement ( Contd )Pr epa r ation of Cash Flow Statement ( Contd )

    Applications of Cash: Applications of Cash:i.i. Pur c hase of Fixed A ssetsPur c hase of Fixed A ssetsii.ii. Payment of LongPayment of Long- -term loansterm loansiii.iii. De c rease in deferred payment liabilitiesDe c rease in deferred payment liabilitiesiv.iv.

    Loss on acc

    ount of operationsLoss on acc

    ount of operationsv.v. Payment of taxPayment of taxvi.vi. Payment of DividendPayment of Dividendvii.vii. De c rease in Unse c ured loans , deposits et c .De c rease in Unse c ured loans , deposits et c .

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    Pr epa r ation of Cash Flow Statement ( Contd )Pr epa r ation of Cash Flow Statement ( Contd ) Format for the Cash Flow S tatement: Format for the Cash Flow S tatement:

    Cash Flow Statement for the yr ending..Cash Flow Statement for the yr ending..Bal. as on Jan 1..Bal. as on Jan 1..

    Cash Balan c eCash Balan c eBank Balan c eBank Balan c e

    A dd:A dd: Sour c es of CashSour c es of CashA dd/ Less: A djustments for NonA dd/ Less: A djustments for Non- - Cash I temsCash I temsA dd: I nc rease in Current LiabilitiesA dd: I nc rease in Current Liabilities

    De c rease in Current A ssetsDe c rease in Current A ssets

    Less: I nc rease in Current A ssetsLess: I nc rease in Current A ssetsDe c rease in Current LiabilitiesDe c rease in Current LiabilitiesTotal Cash A vailable (1)Total Cash A vailable (1)

    Less: A ppli c ations of Cash (2)Less: A ppli c ations of Cash (2)Closing Balan c e ( 1Closing Balan c e ( 1--2)2)

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    Cash Flow Vs. Funds Flow AnalysisCash Flow Vs. Funds Flow Analysis

    Cash flow analysis is c onc erned with the c hange in c ashCash flow analysis is c onc erned with the c hange in c ash position, while funds flow analysis is c on c erned with position, while funds flow analysis is c on c erned withc hange in working c apital between two balan c e sheet dates.c hange in working c apital between two balan c e sheet dates.Cash flow statement is merely a re c ord of c ash re c eipts andCash flow statement is merely a re c ord of c ash re c eipts anddisbursements. While studying short term solven c y of adisbursements. While studying short term solven c y of a

    business, one is interested not only in c ash balan c e but also business, one is interested not only in c ash balan c e but alsoassets whi c h c an be easily c onverted to c ash.assets whi c h c an be easily c onverted to c ash.Cash flow analysis is more useful as a tool for finan c ialCash flow analysis is more useful as a tool for finan c ialanalysis in short periods as c ompared to funds flowanalysis in short periods as c ompared to funds flow

    analysis.analysis.Cash is part of working c apital , hen c e inflow of c ashCash is part of working c apital , hen c e inflow of c ashresults in inflow of funds but reverse is not true.results in inflow of funds but reverse is not true.

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    U tility of Cash Flow AnalysisU tility of Cash Flow Analysis

    Helps in effi c ient Cash ManagementHelps in effi c ient Cash Management : The management c an: The management c anknow how mu c h c ash is needed, from whi c h sour c e it will beknow how mu c h c ash is needed, from whi c h sour c e it will beobtained, how mu c h c an be generated internally and howobtained, how mu c h c an be generated internally and howmu c h c ould be obtained from outside.mu c h c ould be obtained from outside.Helps in I nternal Finan c ial ManagementHelps in I nternal Finan c ial Management: Provides: Provides

    information about funds whi c h will be available frominformation about funds whi c h will be available fromoperations. This helps the management in determiningoperations. This helps the management in determining

    poli c ies regarding internal finan c ial management e.g poli c ies regarding internal finan c ial management e.gdividend poli c y, possibility of repayment of long term debts.dividend poli c y, possibility of repayment of long term debts.

    Discloses the movements of

    cashDis

    closes the movements of

    cashDis c loses the su cc ess / failure of c ash planningDis c loses the su cc ess / failure of c ash planning : This is: This is

    determined by c omparing proje c ted with a c tual c ash flowdetermined by c omparing proje c ted with a c tual c ash flowstatement.statement.

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