Cash Flow Statement

Cash Flow Statement: • A financial statement that shows the sources and uses of cash and cash equivalents during an accounting period • Shows how cash moves into and out of the business through three types of activities: Operating, Investing, and Financing • Governed by AS 3 (Accounting Standard 3 — Cash Flow Statements) issued by ICAI • Mandatory for: companies listed on stock exchange, companies with paid-up capital ≥ ₹50 lakhs or turnover ≥ ₹200 lakhs Cash and Cash Equivalents: • Cash: coins, notes, bank balances (current and savings accounts) • Cash Equivalents: Short-term, highly liquid investments convertible to known amounts of cash with low risk — usually maturity ≤ 3 months (e.g., Treasury bills, short-term government bonds, commercial paper) Objectives of Cash Flow Statement: 1. Assessment of liquidity and solvency: • Shows whether the firm generates sufficient cash to meet its current and future obligations 2. Prediction of future cash flows: • Historical cash flows help predict future cash generation capacity 3. Assessment of ability to generate cash: • Helps evaluate whether operations generate sufficient cash (vs profits which may be accrual-based) 4. Comparison of operating performance: • Cash from operations vs reported profits — reveals quality of earnings 5. Identification of cash requirements: • For capital expenditure, loan repayment, dividend payment 6. Non-cash transactions disclosed: • Significant non-cash transactions disclosed separately (e.g., asset acquisition by issue of shares) 7. Financing and investment decisions: • Shows how the company raised money and where it invested

A Cash Flow Statement is divided into three sections: 1. Cash Flow from Operating Activities: • Cash flows from the principal revenue-producing activities of the company • The main business operations — selling goods/services • Examples of cash inflows: – Cash received from sale of goods and services – Cash receipts from royalties, fees, commissions – Recovery of loans given to employees/customers (if operating) • Examples of cash outflows: – Cash paid to suppliers for goods and services – Cash paid to employees (salaries, wages) – Income tax paid – Interest paid (can also be financing; choose consistently) – Insurance premium paid • Calculated using: Direct Method or Indirect Method – Indirect Method: Start with Net Profit Before Tax; adjust for non-cash items and working capital changes 2. Cash Flow from Investing Activities: • Cash flows from acquisition and disposal of long-term assets and investments • Shows how the company is investing for future growth • Examples of cash inflows: – Sale of fixed assets (land, machinery, furniture) – Sale of long-term investments (shares, debentures) – Proceeds from loans repaid (if lent to others) – Dividend received from investments – Interest received on investments • Examples of cash outflows: – Purchase of fixed assets – Purchase of long-term investments – Loans given to subsidiaries/others 3. Cash Flow from Financing Activities: • Cash flows from activities that change the capital structure and borrowings • Shows how the company raises and repays capital • Examples of cash inflows: – Issue of shares for cash – Issue of debentures/bonds for cash – Raising bank loans • Examples of cash outflows: – Repayment of long-term loans/debentures – Dividend paid to shareholders – Buy-back of shares – Repayment of bank loans – Interest paid on borrowings (can also be operating)

Indirect Method (most commonly used): • Start with Net Profit Before Tax and Extraordinary items • Adjust for: (a) Non-cash items (add back) (b) Non-operating items (remove — they go to investing/financing) (c) Changes in working capital • Then subtract tax paid to get net cash from operating activities Format — Cash Flow from Operating Activities (Indirect Method): Net Profit Before Tax ₹ XXX Adjustments for non-cash/non-operating items: Add: Depreciation on Fixed Assets + XXX Goodwill/Patents/Intangible Amortisation + XXX Preliminary Expenses Written Off + XXX Interest on Borrowings (Finance cost) + XXX (non-operating) Provision for Doubtful Debts + XXX Loss on Sale of Fixed Assets + XXX (non-operating) Less: Profit on Sale of Fixed Assets − XXX (non-operating) Dividend/Interest Received (if investing) − XXX Non-operating income − XXX Operating Profit Before Working Capital Changes = XXX Changes in Working Capital: Add (Sources of Cash): Decrease in Current Assets (Debtors, Stock, etc.) + XXX Increase in Current Liabilities (Creditors, etc.) + XXX Less (Uses of Cash): Increase in Current Assets − XXX Decrease in Current Liabilities − XXX Cash Generated from Operations = XXX Less: Income Tax Paid (net of refund) − XXX Net Cash from Operating Activities = XXX Key rule for Working Capital: • Any INCREASE in current assets = use of cash (deduct) • Any DECREASE in current assets = source of cash (add) • Any INCREASE in current liabilities = source of cash (add) • Any DECREASE in current liabilities = use of cash (deduct)

Cash Flow from Investing Activities: Inflows: Proceeds from sale of machinery ₹25,000 Dividend received ₹5,000 Interest received ₹3,000 Total inflows ₹33,000 Outflows: Purchase of Machinery ₹80,000 Purchase of Investments ₹30,000 Total outflows ₹1,10,000 Cash Flow from Investing Activities (Statement format): Particulars ₹ ----------------------------------------------- -------- Purchase of Machinery (80,000) Proceeds from sale of machinery 25,000 [Note: Book value ₹20,000; Profit = ₹5,000 This profit was already in net profit — adjusted under operating activities as non-cash] Purchase of Investments (30,000) Dividend Received 5,000 Interest Received 3,000 -------- Net Cash Used in Investing Activities (77,000) ======== Note on Profit on Sale of Machinery: • Profit = ₹25,000 (sale) − ₹20,000 (book value) = ₹5,000 • This ₹5,000 profit would have been included in Net Profit (Operating section) • Under Indirect Method (Operating Activities), ₹5,000 profit on sale of machinery is deducted (as it's an investing cash flow) • Under Investing Activities, full sale proceeds of ₹25,000 are shown (not just profit) • This avoids double counting

Cash Flow Statement for the year ended ________________ A. CASH FLOW FROM OPERATING ACTIVITIES: ₹ Net Profit Before Tax 60,000 Adjustments: Add: Depreciation 12,000 Operating Profit Before WC Changes 72,000 Changes in Working Capital: Increase in Debtors (8,000) [use of cash] Decrease in Inventory 5,000 [source of cash] Increase in Creditors 3,000 [source of cash] Net Working Capital Change 0 Net Cash from Operating Activities (A) 72,000 B. CASH FLOW FROM INVESTING ACTIVITIES: ₹ Purchase of Fixed Assets (40,000) Net Cash Used in Investing Activities (B) (40,000) C. CASH FLOW FROM FINANCING ACTIVITIES: ₹ Proceeds from Issue of Shares 30,000 Dividend Paid (10,000) Net Cash from Financing Activities (C) 20,000 Net Increase in Cash and Cash Equivalents (A+B+C) = 72,000 − 40,000 + 20,000 = ₹52,000 Opening Cash and Cash Equivalents 15,000 Closing Cash and Cash Equivalents 67,000 Verification: Opening ₹15,000 + Net increase ₹52,000 = Closing ₹67,000 ✓

Fund Flow Statement vs Cash Flow Statement: Fund Flow Statement: • Based on the concept of 'Working Capital' (difference between current assets and current liabilities) • Shows changes in working capital between two periods • Prepared using Sources and Uses of Funds • More comprehensive — covers all movements of funds • Based on accrual concept • Not mandatory under Companies Act 2013 • Less popular now; largely replaced by Cash Flow Statement Cash Flow Statement: • Based on actual cash and cash equivalents movement • Shows sources and uses of CASH (not working capital) • Divided into Operating, Investing, and Financing activities • Governed by AS 3 • Mandatory for certain companies (Schedule III requirement) • More useful for assessing liquidity and cash management • Internationally preferred and standardised (IFRS IAS 7) Comparison table: | Basis | Fund Flow Statement | Cash Flow Statement | |---|---|---| | Basis | Working capital | Cash and equivalents | | Concept | Accrual | Cash basis (receipts/payments) | | Standard | No specific AS | AS 3 | | Mandatory | No | Yes (for certain companies) | | Activities | Not classified | Classified into 3 activities | | Focus | Long-term financial changes | Short-term liquidity | | Preparation | Two Balance Sheets needed | One year's P&L + BS | | International use | Declining | Standard globally (IAS 7) | Both statements are supplementary; Cash Flow Statement is now preferred internationally.