Cash Flow Statement

Cash plays a very important role in the economic life of a business. A firm
needs cash to make payment to its suppliers, to incur day-to-day expenses
and to pay salaries, wages, interest and dividends etc. In fact, what blood
is to a human body, cash is to a business enterprise. Thus, it is very
essential for a business to maintain an adequate balance of cash. For
example, a concern operates profitably but it does not have sufficient
cash balance to pay dividends, what message does it convey to the
shareholders and public in general. Thus, management of cash is very
essential. There should be focus on movement of cash and its equivalents.
Cash means, cash in hand and demand deposits with the bank. Cash
equivalent consists of bank overdraft, cash credit, short term deposits and
marketable securities.

Cash Flow Statement deals with flow of cash which includes cash
equivalents as well as cash. This statement is an additional information to
the users of Financial Statements. The statement shows the incoming and
outgoing of cash. The statement assesses the capability of the enterprise to
generate cash and utilize it. Thus a Cash-Flow statement may be defined
as a summary of receipts and disbursements of cash for a particular
period of time. It also explains reasons for the changes in cash position of
the firm. Cash flows are cash inflows and outflows. Transactions which
increase the cash position of the entity are called as inflows of cash and
those which decrease the cash position as outflows of cash. Cash flow
Statement traces the various sources which bring in cash such as cash from
operating activities, sale of current and fixed assets, issue of share capital
and debentures etc. and applications which cause outflow of cash such as
loss from operations, purchase of current and fixed assets, redemption of
debentures, preference shares and other long-term debt for cash. In short,
a cash flow statement shows the cash receipts and disbursements during a
certain period. The statement of cash flow serves a number of objectives
which are as follows :
• Cash flow statement aims at highlighting the cash generated from
operating activities.

• Cash flow statement helps in planning the repayment of loan

schedule and replacement of fixed assets, etc.

• Cash is the centre of all financial decisions. It is used as the basis for
the projection of future investing and financing plans of the enterprise.

• Cash flow statement helps to ascertain the liquid position of the firm
in a better manner. Banks and financial institutions mostly prefer cash
flow statement to analyse liquidity of the borrowing firm.
• Cash flow Statement helps in efficient and effective management of
cash.
• The management generally looks into cash flow statements to
understand the internally generated cash which is best utilised for
payment of dividends.
 Cash Flow Statement

• Cash Flow Statement based on AS-3 (revised) presents separately cash

generated and used in operating, investing and financing activities.
• It is very useful in the evaluation of cash position of a firm.

Cash and relevant terms as per AS-3 (revised)

As per AS-3 (revised) issued by the Accounting Standards Board
1. (a) Cash fund :
Cash Fund includes (i) Cash in hand
(ii) Demand deposits with banks, and
(iii) cash equivalents.
(b) Cash equivalents are short-term, highly liquid investments, readily
convertible into cash and which are subject to insignificant risk
of changes in values.
2. Cash Flows are inflows and outflows of cash and cash equivalents.
The statement of cash flow shows three main categories of cash
inflows and cash outflows, namely : operating, investing and financing
activities.
(a) Operating activities are the principal revenue generating
activities of the enterprise.
(b) Investing activities include the acquisition and disposal of long-
term assets and other investments not included in cash
equivalents.
(c) Financing activities are activities that result in change in the
size and composition of the owner’s capital (including
Preference share capital in the case of a company) and
borrowings of the enterprise.
As per AS-3 the inflow and outflow of cash are :
Cash Flow Statement

Investing Activities

Cash inflow Cash outflow

Sale of fixed assets Purchase of fixed assets

Sale of investment Purchase of investment
Interest received
Dividend received

Financing Activities

Cash inflows Cash outflows

Issue of shares Cash repayments of amounts

Issue of debentures in cash borrowed
Interest paid on loans/debentures
Proceeds from long term
short term borrowings Dividends paid on equity and
preference share capital
 Cash Flow Statement

• Indirect Method
Format of Cash Flow Statement for the year ended ................
As per Accounting Standard - 3 (Revised)
Particulars Rs

(i) Cash flows from operating Activities xxx xxx

Net Profit as per Profit and Loss A/c or difference

between closing balance and opening balance of Profit
and Loss A/c

Add : Transfer to reserve xxx

Proposed dividend for current year xxx
Interim dividend paid during the year xxx
Provision for tax made during the current year xxx
Extraordinary items, if any, debited to Profit and Loss A/c xxx xxx
xxx xxx

Less : Extraordinary Items, if any, credited to Profit xxx

and Loss A/c

Refund of Tax credited to Profit and Loss A/c xxx xxx

xxx

A. Net profit before taxation and Extra ordinary items

Adjustment for Non-Cash and Non-Operating Items.

B. Add :

– Depreciation xxx
– Preliminary expenses xxx
– Discount on issue of shares and debentures written off xxx
– Interest on borrowings and debentures xxx
– Loss on sale of fixed assets xxx xxx
xxx

C. Less :
– Interest income/received xxx
– Dividend income received xxx
– Rental income received xxx
– Profit on sale of fixed asset xxx xxx
xxx
Cash Flow Statement

D. Operating profits before working capital changes

(A + B – C) xxx

xxx

E. Decrease in current assets and increase in current liabilities xxx

F. Less : Increase in current assets and decrease in current liabilities xxx
G. Cash generated from operations (D + E – F) xxx
H. Less : Income tax paid (Net tax refund received) xxx
I. Cash flow from before extraordinary items xxx
Adjusted extraordinary items (+/–) xxx
J. Net cash from operating activities xxx
(ii) Cash from investing accounting
Add :
– Proceeds from sale of fixed assets xxx
– Proceeds from sale of investments xxx
– Proceeds from sale of intangible assets xxx
– Interest and dividend received xxx
xxx
Less :
– Rent income xxx
– Purchase of fixed assets xxx
Purchase of investment xxx
– Purchase of intangible assets like goodwill xxx xxx
xxx
Advanced extraordinary items (+/–) xxx
Net cash from (or used in) investing activities xxx
xxx
(iii) Cash flows from financing activities
Add :
Proceeds from issue of shares and debentures xxx
Proceeds from other long term borrowings xxx
xxx
Less :
Final dividend fund xxx
Interim dividend fund xxx
Interest on debentures and loans paid xxx
 Cash Flow Statement

Repayment of loans xxx

Redemption of debenture preference shares xxx xxx
Adjust extraordinary items (+/–) xxx xxx
Net cash from (or used in) financing activities xxx
xxx
(iv) Net increase/Decrease in cash and cash xxx
equivalent (i + ii + iii)

(ii) Add : cash and cash equivalents in the beginning of the year
– cash in hand xxx
– cash at bank overdraft xxx
– short term deposit xxx
– marketable securities xxx
(iii) Less : cash and cash equivalents in the end of the year
– cash in hand xxx
– cash at Bank (by bank overdraft) xxx
– short term deposits xxx
– Cash flow from operation xxx xxx
xxx

• Direct method
Format for Cash flow Statement for the year ended ...............
As per Accounting Standard-3 (Revised)
Particulars Rs

(i) Cash flow from operating activities

A. Operating cash receipts
– Cash sales xxx
– Cash received from customers xxx
– Trading commission received xxx
– Royalties received xxx xxx
B. Less : Operating cash payment
– Cash purchase xxx
– Cash paid to the supplier xxx
– Cash paid for business expenses like xxx xxx
office expenses, Manufacturing expenses,
selling and distribution expenses
C. Cash generated from operation ( A – B) xxx
D. Less Income tax paid (Net of tax refund received) xxx
E. Cash flow before extraordinary items xxx
Cash Flow Statement

F. Adjusted extraordinary items (+/–)/Receipt/payment xxx

G. Net cash flow from (or used in) operating activities xxx
(ii) Cash flow from investing activities (calculation same as xxx
under indirect method)
(iii) Cash flow from financing activities xxx
(Calculation same as under indirect method)
(iv) Net increase/decrease in cash and cash equivalents (i + ii + iii) xxx
(v) Add cash and cash equivalent in the beginning of the year xxx
(same as under indirect method)
(vi) Less cash under cash equivalent in the end of the year xxx

Some facts about cash flow statement :

xxx
(i) Only listed companies are required to prepare and present Cash
flow statement.
(ii) The Accounting period for the Cash Flow Statement is the same
for which Profit and Loss Account and Balance Sheet are
prepared.
(iii) Cash flow items are as (a) Cash flow from operating activities :(b)
Cash flow from investing activities (c) Cash flow from financing
activities.
(iv) Operating activities include revenue producing activities which
are not investing and financing activities.
(v) There are two methods of calculating cash flow from operating
activities namely Direct method and Indirect method. SEBI
(Securities Exchange Board of India) Guidelines recommend for
only indirect method.
(vi) Extra ordinary Items : The Cash flow associated with extra
ordinary items should be classified as arising from operating,
investing financing activities. For example, the amount received
from Insurance Company on account of Loss of Stock or loss
from earthquake should be reported as cash flow from operating
activities.
 Cash Flow Statement

30.3 PREPARATION OF CASH FLOW STATEMENT

(i) Operating Activities

Cash flow from operating activities are primarily derived from the
principal revenue generating activities of the enterprise. A few items of
cash flows from operating activities are :
(i) Cash receipt from the sale of goods and rendering services.
(ii) Cash receipts from royalties, fee, Commissions and other revenue.
(iii) Cash payments to suppliers for goods and services.
(iv) Cash payment to employees
(vi) Cash payment or refund of Income tax.

Determination of cash flow from operating activities

There are two stages for arriving at the cash flow from operating activities

Stage-1
Calculation of operating profit before working capital changes, It can be
calculated in the following manner.
Net profit before Tax and extra ordinary Items xxx
Add Non-cash and non operating Items
which have already been debited to profit and Loss Account i.e.
Depreciation xxx
Amortisation of intangible assets xxx
Loss on the sale of Fixed assets. xxx
Loss on the sale of Long term Investments xxx
Provision for tax xxx
Dividend paid xxx xxx
xxx
Cash Flow Statement

Less : Non-cash and Non-operating Items which have already been

credited to Profit and Loss Account i.e.
Profit on sale of fixed assets xxx
Profit on sale of Long term investment xxx xxx
Operating profit before working Capital changes. xxx

Stage-II
After getting operating profit before working capital changes as per
stage I, adjust increase or decrease in the current assets and current
liabilities.

The following general rules may be applied at the time of adjusting current
assets and current liabilities.

A. Current assets

(i) An increase in an item of current assets causes a decrease in cash

inflow because cash is blocked in current assets.

(ii) A decrease in an item of current assets causes an increase in cash

inflow because cash is released from the sale of current assets.

B. Current liabilities

(i) An increase in an item of current liability causes a decrease in cash

outflow because cash is saved.

(ii) A decrease in an item of current liability causes increase in cash out

flow because of payment of liability.

Thus,
Cash from operations = operating profit before working capital
changes + Net decrease in current assets + Net Increase in current
liabilities – Net increase in current assets – Net decrease in current
liabilities.