WELCOME

Arun Jaitley National Institute of

Financial Management
On the topic
Cash Flow Statement

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 Cash Flow Statement

Cash flow statement is a statement showing the

changes in financial position of a business
concern during different intervals of time in terms
of cash and cash equivalents.
The Revised Accounting Standard-3 has made it
mandatory for all listed companies to prepare
and present a cash flow statement along with
other financial statements on annual basis.

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Cash flows are inflows and outflows of
cash and cash equivalent. It implies
movement in and movement out of
cash and cash equivalents. Receipt
of cash from a non-cash item is
termed as ‘cash inflow’, while cash
payment in respect of such item is
termed as ‘cash outflow’.

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 A cash flow statement (CFS) is a financial statement
that summarizes the amount of cash and cash
equivalents entering and leaving a company.
 The CFS measures how well a company manages its
cash position, meaning how well the company
generates cash.
 The CFS complements the balance sheet and the
income statement.
 The main components of the CFS are cash from three
areas: operating activities, investing activities, and
financing activities.
 The two methods of calculating cash flow are the direct
method and the indirect method.

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 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

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 Cash Flow Statement
As per para 5 of Accounting Standard – 3 (Revised), cash
flows are inflows and outflows of cash and cash
equivalents.
Though cash flow statement, an attempt is being made to
focus on cash and cash equivalents.
Inflows (sources) may be due to issue of share capital,
sale of fixed assets, sale of investments, etc.
Outflow (usage) may be due to purchase of fixed assets,
redemption of preference shares or debentures, etc.
Difference between Inflows and outflows of cash and
cash equivalents is termed as net increase or decrease in
cash and cash equivalents as the case may be.

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 Objective of Cash Flow Statement

 Mandatory
 Provides users with basis to assess how entity
generates and uses cash
 Users can assess effect activities had on
financial position
 Information has predictive value
– Amounts, timing and certainty of future cash
flows
– Future cash requirements
– Sustainability of activities
Presentation: Cash Flow Statement 7
Objectives of Cash Flow Statement
 Useful in short-term financial planning
 Useful in efficient cash management.
 Helpful in formulation of business
policies.
 Assists in preparation of cash budget.
 Used for assessment of cash flow
from various activities, viz operating,
investing and financing activities.

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 Reporting Cash Flows
The statement of cash flows reports cash flows by
three types of activities:
1. Cash flows from operating activities
– transactions that affect net income.
2. Cash flows from investing activities –
transactions that affect noncurrent
assets.
3. Cash flows from financing activities –
transactions that affect equity and debt
of the entity.
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 Reporting Cash Flows
Increases in Cash Decreases in Cash

Operating Operating
(receipts from (payments for
revenues) expenses)

Investing Investing
(receipts from sales of (payments for acquiring
noncurrent assets) noncurrent assets)

Financing Financing
(receipts from issuing (payments for treasury stock,
equity and debt securities) dividends, and redemption of debt
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securities)
 Cash Flows from Operating Activities
Typical cash inflows Typical cash outflows
What are some of the What are some of the
typical cash inflows from typical cash outflows from
operating activities?` operating activities?
Sales of goods Merchandise
and services purchases
Interest Payments of
revenue wages and
other expenses
Dividend
revenue Tax payments 12
Cash Flows from Investing Activities

Typical cash inflows Typical cash outflows

What are some of the typical What are some of the
cash inflows from investing typical cash outflows
activities? from investing
activities?
Sales of fixed
assets Purchase of
fixed assets
Sale of long-
term Purchase of
investments long-term
investments
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Cash Flows from Financing Activities

Typical cash inflows Typical cash outflows

What are some of the What are some of the
typical cash inflows from typical cash outflows from
financing activities? financing activities?
Issuing bonds Paying cash
and long-term dividends
notes payable Repaying debt
Issuing Acquiring
preferred and treasury stock
common stock
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 Noncash Investing and
Financing Activities
 Issuing bonds to acquire land

 Issuing common stock for

convertible preferred stock
 Issuing a long-term note to
acquire equipment
 Issuing a stock dividend

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Cash Flow from Operating Activities

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Cash Flow from Investing Activities

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Cash Flow from Financing Activities

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Format of Cash Flow Statement

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 Methods of Cash Flow Statement

Direct Methods: Here, the notable

titles of cash outflows and inflows
(namely employee benefits expenses
paid, cash received from trade
receivables, etc.,) are contemplated. It
is significant to perceive here that
items are reported on accrual data in
the statement of profit and loss.
Therefore, some changes are made to
transform them into a cash basis.
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Indirect Method: Indirect method of determining
cash flow from operating pursuits starts with the
amount of net profit and loss. This statement
includes the results of all operating activities of a
firm. However, an account of profit and loss is
outlined on an accrual base and not on a cash
basis. It involves non-operating items (such as profit
and loss on the sale of fixed assets, interest paid,
etc. Non-cash items such as goodwill to be written-
off, depreciation, etc.). Hence, it becomes vital to
regulate the amount of net profit and loss as
depicted by a statement of profit and loss for landing
at cash flows from operating activities.
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Uses of Funds and Cash Flow Statements…
Liquidity position
Capital expenditures
Dividends paid
Retained earnings
External financing
Repayment of loans
Non-performing assets

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Uses of Cash Flow Statement

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 Limitations of Cash Flow Statement
Based on historical cost principle.
Based on secondary data.
 Ignores non-cash transactions.
 No adherence of basic accounting
principles.
 Cash flow statement is not a
substitute for income statement.

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FUND FLOW STATEMENT
 W h y we prepare fund flow statement?
To answer following question

What funds were available during the accounting
period and for what purpose these funds were
utilized?

Have long term sources been adequate to finance

fixed asset purchase?
Does the firm possess adequate working capital?
How much funds have been generated from
operations?
 The balance sheet is merely a static
statement.
It is statement of asset and liabilities of the
business as on particular date.

The fund flow statement overcomes

these limitations of basic financial
statement. Fund flow statement will
provide us information about different
sources of fund and their various uses in
particular time.
M E A N I N G OF F U N D

The term fund has a variety of meaning such as cash

fund, capital fund and working capital fund.
1. Cash fund –In a narrow sense, fund means only
cash.
This concept of preparing fund flow statement is not
accepted, as there are many such transactions
which do not affect cash but represent the flow
of fund .
for example: purchase of furniture on credit does not
affect cash but there is flow of fund.
2. Capital fund –Here fund means all financial
resources used in the business, whether in the form
of men, money, material, machine & others.
3. Net working capital -Net working capital means
difference between current asset and current
liabilities .Funds generally refers to cash or cash
equivalent or to working capital.
 M E A N I N G OF F L O W
 The term ‘flow’ refers to changes or transfer and
therefore the ‘flow of funds’ means transfer of
economic values from one asset to another, from one
liability to another, from one asset to liabilities or vice-
versa or a combination of these. So flow of fund refers
to increase or decrease in net working capital.
 The increase or decrease in net working capital will take
place only when one account, out of two accounts to be
affected in a transaction ,is a current account i.e.
current asset or current liabilities and the other account
is non current account i.e. fixed asset or long term
liability or capital.
 When a change in non current account is followed by a
change in another non current account, it does not
amount to flow of fund. It is because, in such case,
neither the working capital increase nor decrease.
In the above figure the dotted line displays there will be no flow
of fund & the dark line displays the flow of fund.
 Preparation of Fund Flow Statement
The changes which occurred in the current accounts as
a result flow of fund are reflected in a statement
known as
‘schedule of changes in working capital’ .
The similar changes in non current accounts are shown
in ‘Fund Flow Statement’.
Therefore, following two statements under this
techniques .
1.Statement or Schedule of Changes in Working
Capital.
2.Statement of Sources and Uses of Funds or Funds
Flow Statement.
Schedule of Changes in Working Capital
 Statement or Schedule of Changes in Working Capital.

Working captial
Previous Year Current Year Effect on
Item Decrease Rs.
Incraese Rs.
(A) Current Assets
Cash at bank Cash in hand Stock in
trade Debtors
Bills receivable Advance payment Short
term investment Prepaid expense
Accrued income
Total (A)
(B) Current Liabilities
(1) Short term loans
(2) Bank overdraft
(3) Creditors
(4) Bills payable
(5) Outstanding expenses
(6) Unclaim dividend Total (B)
Net Working Capital (A-B)
Incraese / Decrease in Working Capital
Total
 This fund flow statement has two parts :
2. Sources of fund
3. Application of fund

 The difference between these two parts that is

sources & uses of funds represents net changes in
working capital.


• The excess of sources of funds over uses of fund is the net

 increase in working capital & excess of uses over sources of fund
is net decrease in working capital.
• The amount of net increase or decrease as shown in fund flow
statement should be equal to the amount shown by schedule of
working capital changes.
 Fund Flow Statement
Sources of Fund Amount Uses Of Funds Amount

Fund from operation Loss from operation

Issue of share Issue of
Redemption of preference
debenture long term
shares Redemption of
loans
debentures Repayment of
Sale of fixed assets /
long term loans Purchase
Investment
of fixed assets
Non trading receipts
/ Investments
Decrease in working
Payment of dividend & taxe
capital
Increase in working capital
(if any) (if any)
s
 Fund from operations :

The profit made by a firm through normal

operations is a major source of funds.
The amount of sales as shown in the P&L
A/c is a source of funds by way of increase in cash ,
debtor and B/R.
 Advantages of Funds Flow Statement

 Helps in the Analysis of Financial Operations

 Helps in the Formation of a reasonable Dividend
Policy Helps in the Proper Distribution of
Resources
 Helps in Improving the Use of Working Capital
 Helps Knowing the Overall Creditworthiness of a
Firm
 Disadvantages of Funds Flow Statement

 Fails to Disclose Cash Position

Lack of Originality

Historic in Nature

Used Along with Financial Statements

Fund Flow Cash Flow
Funds flow statements record Cash flow statements record the
the changes in working capital. movement of cash only.
It helps understand the financial It helps understand the net cash
position of the company. flow of the company.
The fund flow statement The cash flow statement records
determines the source and changes in opening balance and
application of funds. closing balance of cash.
It works on the accrual basis of It works on a cash basis of
accounting. accounting.
The analysis is for the long term. The analysis is for a short
duration.
Fund flow is useful for capital Cash flow is useful for cash
budgeting. budgeting
Thank you
Bimal Anjum
[email protected]

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