INTRODUCTION
A cash flow statement is an important tool used to
manage finances by tracking the cash flow for an
organization. This statement is one of the three key
reports (with the income statement and the balance
sheet) that help in determining a company’s
performance. It is usually helpful for making cash
forecast to enable short term planning.The cash flow
statement shows the source of cash and helps you
monitor incoming and outgoing money. Incoming
cash for a business comes from operating activities,
investing activities and financial activities. The
statement also informs about cash outflows, expenses
paid for business activities and investment at a given
point in time. The information that you get from the
cash flow statement is beneficial for the management
to take informed decisions for regulating business
operations.
Companies generally aim for a positive cash flow for
their business operations without which the company
may have to borrow money to keep the business
going.In financial accounting, a cash flow statement is
a financial statement that shows how changes in
balance sheet accounts and income affect cash and
cash equivalents, and breaks the analysis down to
operating, investing and financing activities.
People and groups interested in cash flow statements
include:
1> Accounting personnel, who need to know whether
the organization will be able to cover payroll and
other immediate expenses.
2> Potential lenders or creditors, who want a clear
picture of a company's ability to repay
3> Potential investors, who need to judge whether the
company is financially sound.
4> Potential employees or contractors, who need to
know whether the company will be able to afford
compensation.
5> Company Directors, who are responsible for the
governance of the company, and are responsible
for ensuring that the company does not trade
while insolvent.
6> Shareholders of the company.
OPERATING ACTIVITIES
Operating activities include the production, sales and
delivery of the company's product as well as
collecting payment from its customers. This could
include purchasing raw materials, building inventory,
advertising, and shipping the product.Operating cash
flows include
* Receipts for the sale of loans, debt or equity
instruments in a trading portfolio.
* Interest received on loans
* Payments to suppliers for goods and services.
* Payments to employees or on behalf of employees.
* Interest payments (alternatively, this can be reported
under financing activities in IAS 3).
* Purchases of merchandise.
Items which are added back to (or subtracted from, as
appropriate) net income (which is found on the
Income Statement) to arrive at cash flows from
operations generally include.
- Depreciation (loss of tangible asset value over time).
- Deferred tax.
- Amortization (loss of intangible asset value over
time).
- Any gains or losses associated with the sale of a non-
current asset, because associated cash flows do
not belong in the operating section (unrealized
gains/losses are also added back from the income
statement).
- Dividends received general reserves.
INVESTING ACITIVITIES
Examples of investing activities are:-
* Purchase or sale of an asset.
* Loans made to suppliers.
* Payments related to mergers and acquisitions.
FINANCING ACTIVITIES
Financing activities include inflows and outflows of
cash between investors and the company, such as:-
* Dividends paid.
* Sale or repurchase of the company's stock.
* Net borrowings.
* Repayment of debt principal, including capital
leases.
* Other activities which impact the company's long-
term liabilities and equity.
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OBJECTIVE OF STUDY
To know how to manage current assets and curent
liabilities so that satisfactory level of working capital
is manintained.
* To know how to manage receivable, inventory and
cash.
* To study the different source of financing capital.
* To study the operating cycle of company.
* To study liquidity position of company.
* To look at possible remedial measure if any on the
basis of which tied-up funds in working capital could
be used effectively and efficiently.
* To suggest, if possible on the basis of conclusion
some modification to meet the situation.
SCOP OF STUDY
* The study covers all the components of current
assets and liabilities for the year.
* The study also deals with the various ratios
imparted in the organization.
* The working capital is one of the dynamic and vital
aspect of the business operation.
NEED FOR THE STUDY
Cash play very important role in economic life of a
business. A firm need cash to make payments to its
supplier, to incur day-to-day life expenses and to pay
salaries, wages, interest and dividends etc, the study
helps student to understand how to maintain the
adequate cash balance.
HOW TO PREPAR A CASH FLOW
STATEMENT
To prepare a cash flow statement:
1. Information is considered from the income
statement for the current year.
2. Balance sheet for the past two year.
3. Adjustments of net income deferrals.
4. Accrulas take place.
This is applied to convert the accruls basis income
statement into a cash flow statement. The statement of
cash flow follows acitivity format and includes,
operating cash flow , investing cash flow and
financing cash flow. There are two method to control
the cash flow statement . For both method , investing
cash flow and financing cash flow remain identical.
The operating section of the statement can be
produced through either direct or indirect method.
The direct method shows the major classes of gross
cash receipts and gross cash payments. On the other
hand, the direct method follows net income and
adjustment of profit/loss by the effect of transaction.
The underlying accounting ideas remain the same.
Hence working cash flows provide identical result
under the direct or indirect method of preparing the
cash flow statement. The difference lies in the
presentation. Although the direct method is set by
IASB, for providing useful information; more the 90%
companise use the indirect method.
Reporting Cash Flows from
Operating Activities
An enterprise should report cash flows from operating
activities using either:
(a) the direct method, whereby major classes of gross
cash receipts and gross cash payments are
disclosed; or
(b) the indirect method, whereby net profit or loss is
adjusted for the effects of transactions of a non-
cash nature, any deferrals or accruals of past or
future operating cash receipts or payments, and
items of income or expense associated with
investing or financing cash flows.
The direct method provides information which may be
useful in estimating future cash flows and which
is not available under the indirect method and is,
therefore, considered more appropriate than the
indirect method. Under the direct method,
information about major classes of gross cash
receipts and gross cash payments may be obtained
either:
(a) from the accounting records of the enterprise; or
(b) by adjusting sales, cost of sales (interest and
similar income and interest expense and similar
charges for a financial enterprise) and other items in
the statement of profit and loss for:
i) changes during the period in inventories and
operating receivables and payables;
ii) other non-cash items; and
iii) other items for which the cash effects are investing
or financing cash flows.
Under the indirect method, the net cash flow from
operating activities is determined by adjusting net
profit or loss for the effects of:
(a) changes during the period in inventories and
operating receivables and payables;
(b) non-cash items such as depreciation, provisions,
deferred taxes, and unrealised foreign exchange gains
and losses; and
(c) all other items for which the cash effects are
investing or financing cash flows.
Alternatively, the net cash flow from operating
activities may be presented under the indirect method
by showing the operating revenues and expenses
excluding non-cash items disclosed in the statement of
profit and loss and the changes during the period in
inventories and operating receivables and payables.
Reporting Cash Flows from
Investing and Financing
Activities
An enterprise should report separately major classes
of gross cash receipts and gross cash payments arising
from investing and financing activities, except to the
extent that cash flows described in paragraphs 22 and
24 are reported on a net basis.
Reporting Cash Flows on a Net
Basis
Cash flows arising from the following operating,
investing or financing activities may be reported on a
net basis:
(a) cash receipts and payments on behalf of customers
when the cash flows reflect the activities of the
customer rather than those of the enterprise; and
(b) cash receipts and payments for items in which the
turnover is quick, the amounts are large, and the
maturities are short.
Examples of cash receipts and payments referred are:
(a) the acceptance and repayment of demand deposits
by a bank;
(b) funds held for customers by an investment
enterprise; and
(c) rents collected on behalf of, and paid over to, the
owners of properties.
Examples of cash receipts and payments referred are
advances made for, and the repayments of:
(a) principal amounts relating to credit card
customers;
(b) the purchase and sale of investments; and
(c) other short-term borrowings, for example, those
which have a maturity period of three months or less.
Cash flows arising from each of the following
activities of a financial enterprise may be reported on
a net basis:
(a) cash receipts and payments for the acceptance and
repayment of deposits with a fixed maturity date;
(b) the placement of deposits with and withdrawal of
deposits from other financial enterprises; and
(c) cash advances and loans made to customers and
the repayment of those advances and loans.
Extraordinary Items
The cash flows associated with extraordinary
items should be classified as arising from
operating, investing or financing activities as
appropriate and separately disclosed.
The cash flows associated with extraordinary
items are disclosed separately as arising from
operating, investing or financing activities in the
cash flow statement, to enable users to understand
their nature and effect on the present and future
cash flows of the enterprise. These disclosures are
in addition to the separate disclosures of the
nature and amount of extraordinary items
required by Accounting Standard (AS) 5, Net
Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies.
Interest and Dividends
Cash flows from interest and dividends received and
paid should each be disclosed separately. Cash flows
arising from interest paid and interest and dividends
received in the case of a financial enterprise should be
classified as cash flows arising from operating
activities. In the case of other enterprises, cash flows
arising from interest paid should be classified as cash
flows from financing activities while interest and
dividends received should be classified as cash flows
from investing Cash Flow Statements activities.
Dividends paid should be classified as cash flows
from financing activities.
The total amount of interest paid during the period is
disclosed in the cash flow statement whether it has
been recognised as an expense in the statement of
profit and loss or capitalised in accordance with
Accounting Standard (AS) 10, Accounting for Fixed
Assets.
Interest paid and interest and dividends received are
usually classified as operating cash flows for a
financial enterprise. However, there is no consensus
on the classification of these cash flows for other
enterprises. Some argue that interest paid and interest
and dividends received may be classified as operating
cash flows because they enter into the determination
of net profit or loss. However, it is more appropriate
that interest paid and interest and dividends received
are classified as financing cash flows and investing
cash flows respectively, because they are cost of
obtaining financial resources or returns on
investments.
Some argue that dividends paid may be classified as a
component of cash flows from operating activities in
order to assist users to determine the ability of an
enterprise to pay dividends out of operating cash
flows. However, it is considered more appropriate that
dividends paid should be classified as cash flows from
financing activities because they are cost of obtaining
financial resources.
Components of Cash and Cash
Equivalents
An enterprise should disclose the components of cash
and cash equivalents and should present a
reconciliation of the amounts in its cash flow
statement with the equivalent items reported in the
balance sheet.
In view of the variety of cash management practices,
an enterprise discloses the policy which it adopts in
determining the composition of cash and cash
equivalents.
The effect of any change in the policy for determining
components of cash and cash equivalents is reported
in accordance with Accounting Standard (AS) 5, Net
Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies.
Illustration I
Cash Flow Statement for an Enterprise other
than a Financial Enterprise
This illustration does not form part of the
accounting standard. Its purpose is to illustrate the
application of the accounting standard
1. The illustration shows only current period amounts.
2. Information from the statement of profit and loss
and balance sheet is provided to show how the
statements of cash flows under the direct method and
the indirect method have been derived. Neither the
statement of profit and loss nor the balance sheet is
presented in conformity with the disclosure and
presentation requirements of applicable laws and
accounting standards. The working notes given
towards the end of this illustration are intended to
assist in understanding the manner in which the
various figures appearing in the cash flow statement
have been derived. These working notes do not form
part of the cash flow statement and, accordingly, need
not be
3. The following additional information is also
relevant for the preparation of the statement of cash
flows (figures are in Rs.’000).
(a) An amount of 250 was raised from the issue of
share capital and a further 250 was raised from long
term borrowings.
(b) Interest expense was 400 of which 170 was paid
during the period. 100 relating to interest expense of
the prior period was also paid during the period.
(c) Dividends paid were 1,200.
(d) Tax deducted at source on dividends received
(included in the tax expense of 300 for the year)
amounted to 40.
(e) During the period, the enterprise acquired fixed
assets for 350. The payment was made in cash.
(f) Plant with original cost of 80 and accumulated
depreciation of 60 was sold for 20.
(g) Foreign exchange loss of 40 represents the
reduction in the carrying amount of a short-term
investment in foreign-currency designated bonds
arising out of a change in exchange rate between the
date of acquisition of the investment and the balance
sheet date.
(h) Sundry debtors and sundry creditors include
amounts relating to credit sales and credit purchases
only.
Balance Sheet as at 31.12.1996
(Rs. ’000)
Assets 1996 1995
Cash on hand and balances with banks 200 25
Short-term investments 670 135
Sundry debtors 1,700 1,200
Interest receivable 100 –
Inventories 900 1,950
Long-term investments 2,500 2,500
Fixed assets at cost 2,180 1,910
Accumulated depreciation (1,450) (1,060)
Fixed assets (net) 730 850
Total assets 6,800 6,660
Liabilities
Sundry creditors 150 1,890
Interest payable 230 100
Income taxes payable 400
1,000
Long-term debt 1,110 1,040
Total liabilities 1,890 4,030
Shareholders’ Funds
Share capital 1,500 1,250
Reserves 3,410 1,380
Total shareholders’ funds 4,910 2,630
Total liabilities and shareholders’funds 6800 6660
Statement of Profit and Loss for the period
ended 31.12.1996
(Rs. ’000)
Sales 30,650
Cost of sales (26,000)
Gross profit 4,650
Depreciation (450)
Administrative and selling expenses (910)
Interest expense (400)
Interest income 300
Dividend income 200
Foreign exchange loss (40)
Net profit before taxation and extraordinary item 3,350
Extraordinary item – Insurance proceeds from
earthquake disaster settlement 180
Net profit after extraordinary item 3,530
Income-tax (300)
Net profit 3,230
Direct Method Cash Flow Statement
Rs(000)
Cash flows from operating activities 1996
Cash receipts from customers 30,150
Cash paid to suppliers and employees (27,600)
Cash generated from operations 2,550
Income taxes paid (860)
Cash flow before extraordinary item 1,690
Proceeds from earthquake disaster settlement 180
Net cash from operating activities 1,870
Cash flows from investing activities
Purchase of fixed assets (350)
Proceeds from sale of equipment 20
Interest received 200
Dividends received 160
Net cash from investing activities 30
Cash flows from financing activities
Proceeds from issuance of share capital 250
Proceeds from long-term borrowings 250
Repayment of long-term borrowings (180)
Interest paid (270)
Dividends paid (1,200)
Net cash used in financing activities (1,150)
Net increase in cash and cash equivalents 750
Cash and cash equivalents at beginning of period
(see note 1) 160
Cash and cash equivalents at end of period
(see note 1) 910
Indirect Method Cash Flow Statement
(Rs. ’000)
1996
Cash flows from operating activities
Net profit before taxation, and extraordinary item 3,350
Adjustments for :
Depreciation 450
Foreign exchange loss 40
Interest income (300)
Dividend income (200)
Interest expense 400
Operating profit before working capital changes 3,740
Increase in sundry debtors (500)
Decrease in inventories 1,050
Decrease in sundry creditors (1,740)
Cash generated from operations 2,550
Income taxes paid (860)
Cash flow before extraordinary item 1,690
Proceeds from earthquake disaster settlement 180
Net cash from operating activities 1,870
Cash flows from investing activities
Purchase of fixed assets (350)
Proceeds from sale of equipment 20
Interest received 200
Dividends received 160
Net cash from investing activities 30
Cash flows from financing activities
Proceeds from issuance of share capital 250
Proceeds from long-term borrowings 250
Repayment of long-term borrowings (180)
Interest paid (270)
Dividends paid (1,200)
Net cash used in financing activities (1,150)
Net increase in cash and cash equivalents 750
Cash and cash equivalents at beginning of period
(see Note 1) 160
Cash and cash equivalents at end of period
(see note 1) 910
Notes to the cash flow statement
(direct method and indirect method)
1. Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and
balances with banks,and investments in money-market
instruments. Cash and cash equivalents included in the
cash
flow statement comprise the following balance sheet
amounts.
1996 1995
Cash on hand and balances with banks 200 25
Short-term investments 670 135
Cash and cash equivalents 870 160
Effect of exchange rate changes 40 –
Cash and cash equivalents as restated 910 160
Cash and cash equivalents at the end of the period
include deposits with banks of 100 held by a branch
which are not freely remissible to the company
because of currency exchange restrictions.
The company has undrawn borrowing facilities of
2,000 of which 700 may be used only for future
expansion.
2. Total tax paid during the year (including tax
deducted at source on
dividends received) amounted to 900.
Alternative Presentation (indirect method)
As an alternative, in an indirect method cash flow
statement, operating profit before working capital
changes is sometimes presented as follows:
Revenues excluding investment income
30,650
Operating expense excluding depreciation (26,910)
Operating profit before working capital
changes 3,740
Working Notes
The working notes given below do not form part of the
cash flow statement and, accordingly, need not be
published. The purpose of these working notes is
merely to assist in understanding the manner in
which various figures in the cash flow statement have
been derived.
(Figures are in Rs. ’000.
1. Cash receipts from customers
Sales 30,650
Add: Sundry debtors at the beginning
of the year 1,200
31,850
Less : Sundry debtors at the end of the year 1,700
30,150
2. Cash paid to suppliers and employees
Cost of sales 26,000
Administrative and selling expenses 910
26,910
Add: Sundry creditors at the beginning
of the year 1890
Inventories at the end of the year 900
2,790
29,700
Less: Sundry creditors at the
end of the year 150
Inventories at the beginning of the year 1,950 2,100
27,600
3. Income taxes paid (including tax deducted at
source from dividends received)
Income tax expense for the year
(including tax deducted) 300
at source from dividends received)
Add : Income tax liability at
the beginning of the year 1,000
1,300
Less: Income tax liability at
the end of the year 400
900
Out of 900, tax deducted at source on dividends
received (amounting to 40) is included in cash flows
from investing activities and the balance of 860 is
included in cash flows from operating activities
4. Repayment of long-term borrowings
Long-term debt at the beginning
of the year 1,040
Add : Long-term borrowings
made during the year 250
1,290
Less : Long-term borrowings
at the end of the year 1,110
180
5. Interest paid
Interest expense for the year 400
Add: Interest payable at the beginning
of the year 100
500
Less: Interest payable at the end of the year 230
270
PREFACE
A cash flow statement is an important tool used to manage
finances by tracking the cash flow for an organization. This
statement is one of the three key reports (with the income
statement and the balance sheet) that help in determining a
company’s performance. It is usually helpful for making
cash forecast to enable short term planning.
The cash flow statement shows the source of cash and helps
you monitor incoming and outgoing money. Incoming cash
for a business comes from operating activities, investing
activities and financial activities. The statement also
informs about cash outflows, expenses paid for business
activities and investment at a given point in time. The
information that you get from the cash flow statement is
beneficial for the management to take informed decisions
for regulating business operations.
