FINANCIAL ANALYSIS WITH CASH FLOW
STATEMENT AND FUND FLOW STATEMENT
Cash Flow Fund Flow Pitfalls of
Statement Statement Financial Analysis
• Advantages/Need of the statement
• Accounting/Legal Requirement
• Format and preparing the statement
CASH FLOW STATEMENT
ADVANTAGES/NEED OF CASH FLOW STATEMENT
It is statement that provides all the aggregate data related to cash inflow and
outflow in the company in a year
Helps to evaluate short-term financial position of company
Assess current cash position of the company
Financial institutions can asses the repayment capacity of the company
Projected cash flow statement helps in preparing future investment plans
Explains the cause of poor cash position (even under profitable conditions)
Provides view on the cash accounting as compared to accrual basis of accounting
LEGAL/ACCOUNTING REQUIREMENT
Companies Act 1956 has no provision for Cash flow statement
Companies (Accounting standards) Rules, 2006 provided applicability of cash flow
statement
Earlier mandatory only for listed companies under listing agreement clause 32
Mandatory for all companies under Companies Act 2013 Sec 2(40) provided
“financial statement” to include (i) Balance sheet (ii) statement of income and
expenditure (iii) Cash flow statement (iv) changes in equity (v) explanatory notes
annexed
Companies need to follow AS3 for this
STATEMENT OF CASH FLOW
Summarizes company’s inflows and outflows of cash over a period of time
Three major categories under which cash activities are organized:
Cash Flow Statement
+/- Cash flow from/to operating activities
+/- Cash flow from/to investment activities
+/- Cash flow from/to financing activities
Net increase/decrease in cash
+Cash in beginning of year
= Cash at the end of year
Cash flow from Cash flow from Cash flow from
operating activities Investment activities Financing activities
• Cash flow • Cash flow from • Associated with
associated with sale/purchase of generation and
company’s revenue fixed assets or return of capital.
and expenses investments E.g., inflow from
• We compute this issuance of bonds
with two methods: or equity
Direct Method, • Outflow for
Indirect Method retirement of debt
or repurchase of
equity
• Dividend payout
Additional Disclosures: 1. related to non-cash investment and financing activities
2. Payment of interest and tax (though in India required to be shown in operating activities)
PREPARING CASH FLOW STATEMENT
Asset = Liability + Equity
Cash + Non-cash assets = Liability + Equity
Cash = Liability + Equity – Non-cash assets
Change (Cash) = Change (Liability) + Change (Equity) – Change (non-cash assets)
Required:
1. Balance sheet for two years
2. Income statement for current year
3. Additional information on changes in account balances
CASH FLOW FROM OPERATING
ACTIVITIES
DIRECT METHOD
Cash Sales or Cash Revenue
From Income statement Adjustment from B/S of two years To Cash flow statement
Sales (-) If increase in account receivables = cash from sales
(+) if decrease in account receivables
Cash Paid for Inventory
From income Adjustment from B/S of Adjustment from B/S of two To Cash flow
statement two years years statement
CoGS (+) increase in inventory =Purchases (-) increase in accounts payable = cash paid for
(-) Decrease in inventory (+) Decrease in accounts payable inventory
Cash Paid for taxes
From Income statement Adjustment from B/S of two years To Cash flow statement
Income tax expense (-) increase in tax payable = cash paid for taxes
(+) decrease in tax payable
Cash paid for operating expenses
From Income statement Adjustment from B/S of two years To Cash flow statement
Salary expense (-) If increase in salaries payable = cash paid to salaries
(+) if decrease in salaries payable
Utilities expense (-) If increase in utilities payable =cash paid to utilities
(+) if decrease in utilities payable
Insurance expense (+) If increase in pre-paid insurance =cash paid for insurance
(-) if decrease in pre-paid insurance
Any operating expense (+) Increase in Current asset =cash paid for operations
(-) decrease in current asset
OR
(-) increase in Current liability
(+) decrease in current liability
INDIRECT METHOD
In this method, adjustments are mainly made on Net Profit from Income statement
Adjustments can be categorized under three,
1. Non-cash effects on net income
2. Gains and losses from investment/financing activities
3. Changes in current assets and liability
Adjustment rule for non-cash expenses
Add back all non-cash expenses to PAT
Adjustment for gains/losses from investment and financing
activities
(-) any gains from investment/financing activity
(+) any losses from investment/financing activity
Adjustment rules for current assets and current liability
(+) decrease in current assets
(-) increase in current assets
(+) increase in current liability
(-) decrease in current liability
CASH FLOW FROM INVESTMENT
ACTIVITIES
Accounts to Look for
Equipment
Investments
Cash Flows from Investing Activities
(-) Purchase of Equipment/property
(+) Sale of Equipment/Property
(-) Purchase of investment
= Net Cash used/flow from investment activities
CASH FLOW FROM FINANCING
ACTIVITIES
Accounts to Look for
Long term Debt
Common Stock
Retained earnings
Cash Flows from Financing Activities
(+) Issuance of Bonds/Equity
(-) Payment of bonds/Repurchase of Equity
(-) Dividend payment
= Net Cash used/flow from financing activities
FUND FLOW STATEMENT
NEED/ADVANTAGES OF FUND FLOW STATEMENT
The purpose is to reveal the changes in working capital on the two balance sheet
dates
It describes sources and uses related to working capital
Reveals net effect of various transactions on the operational and financial position. It
shows effect of these on liquidity position of company
Helps in deciding the dividend policy of the company
Projected fund flow statement is required by financial institutions/credit granting
institutions
FORMAT AND PREPARATION OF FUND FLOW
STATEMENT
Rules
1. Increase (decrease) in current assets Increase (decrease) in Working capital
2. Increase (decrease) in current liability decrease (increase) in working capital
3. Increase (decrease) in CA and increase (decrease) in CL No change in working
capital
4. change in non-current assets and non-current liability affects working capital
STEP 1: PREPARE CHANGES IN WORKING CAPITAL
STEP 2: FUNDS FROM OPERATIONS
STEP 3: PREPARE FUND FLOW STATEMENT
PITFALLS OF FINANCIAL ANALYSIS
LIMITATIONS OF CASH FLOW STATEMENT
Only reveals cash inflow and outflow and net position does not depict overall
liquidity position of company as there may be many cash equivalents considered in
the cash
Cash does not mean net income for the company.
Position of the working capital cannot be assessed
LIMITATIONS OF FUND FLOW STATEMENT
It only provides additional information with regard to changes in working capital
It cannot reveal continuous changes
Changes in cash position are usually more important that changes in working capital
