Cash Flow

Statement

Dr. Rishi Taparia

CFS - Introduction
• It is the statement that shows the flow of Cash and Cash Equivalents in between
two balance sheet dates
• Cash & Cash Equivalents comprise two components: 1) Cash 2) Cash Equivalents
• Cash comprises Cash on hand and demand deposits with banks (Cash at bank)
• Cash Equivalents are short-term, highly liquid investments that are readily
convertible into cash
• Cash equivalents include current investments (short-term investments /
marketable securities), treasury bills, commercial papers, cheques and drafts on
hand, short-term deposits in banks
• Transactions that increase cash and cash equivalents are inflows whereas
transactions that decrease it are outflows
• CFS is prepared as per AS-3
• CFS is prepared using indirect method showing cash flow under three heads:
• Cash Flow from Operating Activities
• Cash Flow from Investing Activities
• Cash Flow from Financing Activities
Importanc
e of CFS
• Facilitates in ascertaining cash flow
from operating, investing and financing
activities also the net change in cash
and cash equivalents
• Helps in assessing the liquidity and
solvency position of the company
• Facilitate efficient cash management by
managing surplus/deficit of cash
• Facilitate capital budgeting decisions
• Facilitate dividend decision
• Highlight the reasons for lower and
higher cash balances
Classification of cash
flows
Operating Activities
• Revenue producing activities

Investing Activities
• Acquisition and disposal of long-term assets (not held for
resale) and other investments

Financing Activities
• Result in change in size and composition of owners’ capital
and borrowings of the company
 Classification of Business Activities as per AS-3 (Revised), showing the inflow and outflow of Cash
Operating Activities
Cash Inflow Cash Outflow
In case of non-financial companies In case of non-financial companies
 Cash sales  Cash purchases
 Cash received from Trade Receivables  Payment to Trade payables
 Royalty, fee, commission received  Payment to operating expenses
 Income Tax Refund  Payment of wages
 Income Tax paid (unless identified with investing or financing activities)
In case of financial companies In case of financial companies
 Receipt of interest and dividends  Payment for interest
 Proceeds from sale of securities  Payment for purchase of securities

Investing Activities
Cash Inflow Cash Outflow
• Proceeds from sale of fixed assets • Purchase of fixed assets
• Proceeds from sale of investments • Purchase of investments
• Interest received • Income Tax Paid (If related to investing activities)
• Dividend received
• Rent received from property held for investment

Financing Activities
Cash Inflow Cash Outflow
• Proceeds from issue of equity shares • Payment of loans
• Proceeds from issue of preference shares • Payment for redemption of debentures
• Proceeds from issue of debentures • Payment for redemption of preference shares
• Proceeds from long-term borrowings • Payment for buy-back of equity shares
• Increase in balance of bank overdraft or cash credit account • Payment of dividend
• Payment of Interest
• Decrease in balance of bank overdraft or cash credit account
• Income Tax paid (if related to financing activites
 Quiz
1. Koval Limited is a financing company. Under which activity
will the amount of interest paid on a loan settled in the
current year be shown?
A. Operating Activity
2. GSC Ltd. purchased machinery of RS.10,00,000 issuing a cheque
of Rs.2,50,000 and 10% debentures of Rs.7,50,000. In cash flow
statement, the transaction will be shown as:
B. Payment of cash Rs.2,50,000 under investing activities
and10% debentures worth Rs.7,50,000 issued under
investing activity
3. IDFC Bank Ltd. issued 1,00,000, 9% Debentures of Rs.100 each
for subscription. Issue was subscribed. The amount of receipt will
be shown as:
C. Financing Activity
4. Buy-back of shares is an extra-ordinary item for
D. Financing Activity
5. While preparing CFS, the accountant of a financing company
showed “Dividend Received Rs.50,000 on investments” as an
investing activity. Was he correct in doing so?
E. Operating Activity
 Transaction Effect on cash and cash
equivalents

Sale of fixed assets (BV Rs.50,000) at a loss of Rs.5,000 Inflow

Purchase of stock-in-trade for cash Outflow

Purchase of fixed assets against issue of equity shares No flow

Problem: State
Cash received from debtors Rs.10,000 Inflow
which of the
following Cash deposited into bank No flow
would result in Cash withdrawn from bank No flow
inflow / outflow
Issue of fully paid bonus shares No flow
/ no flow of
cash and cash Sale of marketable securities for cash at par No flow
equivalents Declaration of final dividend Rs.25,000 No flow

Writing off bad debts against provision for doubtful debts No flow

Declaration of interim dividend Outflow

Sale of current investments No flow

Increase in bank overdraft Inflow

Decrease in cash credit Outflow

 • Extraordinary items are incomes and expenses
that arise from events or transactions that are
clearly different from the ordinary business
Extraordin activities of the company and, therefore, are not
expected to recur frequently or regularly.
ary Items • Examples of extra-ordinary items are:
Operating activities: Compensation paid to
employees under VRS
Investing activities: Claim received against
damage of fixed assets due to earthquake
Financing activities: Payment of buy-back of
shares
 I. Cash Flow from Operating Activities II. Cash Flow from Investing Activities
(A) Net Profit before Tax and Extraordinary Items (as per Working Note) — Proceeds from Sale of Fixed Assets ...
Adjustment for Non-cash and Non-operating Items — Proceeds from Sale of Investments (Other than Current Investments (to be included in
Cash and Cash Equivalents) and Marketable Securities)
(B) Add: Items to be Added
— Proceeds from Sale of Intangible Assets
— Depreciation
— Interest and Dividend received (For Non-financial Companies only)
— Goodwill, Patents and Trademarks Amortised
— Rent Received
— Interest on Bank Overdraft/Cash Credit
— Payment for Purchase of Fixed Assets (...)
— Interest on Borrowings (Short-term and Long-term) and Debentures
— Payment for Purchase of Investments (Other than Marketable Securities) (...)
— Loss on Sale of Fixed Assets
— Payment for Purchase of Intangible Assets like Goodwill (...)
— Increase in Provision for Doubtful Debts*
— Extraordinary Items (e.g., Insurance Claim on Machinery against Fire) (+/–) ...
(C) Less: Items to be Deducted Cash Flow from (or Used in) Investing Activities ...
FORMAT OF CASH — Interest Income III. Cash Flow from Financing Activities

FLOW STATEMENT — Dividend Income

— Rental Income
— Proceeds from Issue of Shares and Debentures
— Proceeds from Other Long-term Borrowings

(INDIRECT — Gain (Profit) on Sale of Fixed Assets — Increase/Decrease in Bank Overdraft and Cash Credit

METHOD) for the — Decrease in Provision for Doubtful Debts*

(D) Operating Profit before Working Capital Changes (A + B – C) .
— Final Dividend paid during the year (...)
— Interim Dividend paid during the year (...)

year ended ...[As (E) Add: Decrease in Current Assets and Increase in Current Liabilities — Payment of Interest on Debentures and Loans (Short-term and Long-term) (...)

per Accounting — Decrease in Inventories (Stock) — Repayment of Loans (...)

— Decrease in Trade Receivables (Debtors/Bills Receivable) — Redemption of Debentures/Preference Shares (...)

Standard-3 — Decrease in Accrued Incomes — Payment of Share Issue Expenses (...)

— Payment for Buy-back of Shares as Extraordinary Activity (...)
(Revised)] — Decrease in Prepaid Expenses
— Increase in Trade Payables (Creditors/Bills Payable) . Cash Flow from (or Used in) Financing Activities

— Increase in Outstanding Expenses IV. Net Increase/Decrease in Cash and Cash Equivalents (I + II + III)
V. Add: Cash and Cash Equivalents in the beginning of the year
— Increase in Advance Incomes
— Cash-in-Hand
(F) Less: Increase in Current Assets and Decrease in Current Liabilities
— Cash at Bank
— Increase in Inventories (Stock)
— Short-term Deposits
— Increase in Trade Receivables (Debtors/Bills Receivable)
— Current Investments
— Increase in Accrued Incomes
— Marketable Securities
— Increase in Prepaid Expenses
VI. Cash and Cash Equivalents at the end of the year
— Decrease in Trade Payables (Creditors/Bills Payable)
— Cash-in-Hand
— Decrease in Outstanding Expenses
— Cash at Bank
— Decrease in Advance Incomes
— Short-term Deposits
(G) Cash Generated from Operations (D + E – F)
— Current Investments
(H) Less: Income Tax Paid (Net of Tax Refund received)
— Marketable Securities
(I) Cash Flow before Extraordinary Items
— Extraordinary Items (+/–) ...
*Alternatively, increase/decrease in Provision for Doubtful Debts may be treated
(J) Cash Flow from (or Used in) Operating Activities under increase/decrease in Current Liabilities. In this situation, increase/decrease
in Provision for Doubtful Debts is adjusted after Operating Profit before Working
Net Profit before Tax and Extraordinary Items

• Net Profit as per Statement of Profit and Loss or Difference between Closing Balance and Opening Balance of
Surplus, i.e., Balance in Statement of Profit and Loss ...
Add:
• Transfer to Reserves ...
• Dividend (Proposed Dividend of previous year) paid during the year ...
• Interim Dividend paid during the year ...
• Provision for Tax for the current year ...
• Extraordinary Items, if any, debited to the Statement of Profit and Loss ...
Less:
• Extraordinary Items, if any, credited to the Statement of Profit and Loss ...
• Refund of Tax credited to the Statement of Profit and Loss ... ...
• Net Profit before Tax and Extraordinary Items