CASH FLOW STATEMENT

A cash flow statement provides information about the

historical changes in cash and cash equivalents of an enterprise by
classifying cash flows into operating, investing and financing
activities.

Cash from Operating Activities

These are the principal revenue generating activities (or the
main activities) of the enterprise and other activities that are not
investing or financing activities.
Cash Inflows from operating activities
 Cash receipts from sale of goods and the rendering of
services.
 Cash receipts from royalties, fees, commissions and other
revenues.
Cash Outflows from operating activities
 Cash payments to suppliers for goods and services.
 Cash payments to and on behalf of the employees.
 Cash payments to an insurance enterprise for premiums and
claims, annuities, and other policy benefits.
 Cash payments or refunds of income taxes unless they can
be specifically identified with financing and investing
activities.
Cash from Investing Activities
Investing activities relate to purchase and sale of long-term
assets or fixed assets such as machinery, furniture, land and
building, etc.
Cash Outflows from investing activities
 Cash payments to acquire fixed assets including intangibles
and capitalised research and development.
 Cash payments to acquire shares, warrants or debt
instruments of other enterprises other than the instruments
other than those held for trading purposes.
 Cash advances and loans made to third party (other than
advances and loans made by a financial enterprise wherein it
is operating activities).
Cash Inflows from Investing Activities
 Cash receipt from disposal of fixed assets including
intangibles.
 Cash receipt from the repayment of advances or loans made
to third parties ( except in case of financial enterprise).
 Cash receipt from disposal of shares, warrants or debt
instruments of other enterprises except those held for trading
purposes.
 Interest received in cash from loans and advances.
 Dividend received from investments in other enterprises.
Cash from Financing Activities
Financing activities are activities that result in changes in the
size and composition of the owners’ capital and borrowings of the
enterprise.
Cash Inflows from financing activities
 Cash proceeds from issuing shares (equity or/and preference).
 Cash proceeds from issuing debentures, loans, bonds and
other long term borrowings.
Cash Outflows from financing activities
 Cash repayments of amounts borrowed.
 Interest paid on debentures and long-term loans and
advances.
 Dividends paid on equity and preference capital.
Extraordinary Items
Extraordinary items are non-recurring in nature and hence
cash flows associated with extraordinary items should be classified
and disclosed separately as arising from operating, investing or
financing activities. e.g. loss due to theft or earthquake or flood.
Interest and Dividend
Payment of interest and dividends are classified as financing
activities whereas receipt of interest and dividends are classified
as investing activities.
Taxes on Income and Gains
 Tax on operating profit should be classified as operating cash
flows.
 Dividend tax, i.e. Tax paid on dividend should be classified as
financing Activity along with dividend paid.
  Capital gains tax paid on sale of fixed assets should be
classified under Investing activities.
Non-cash Transactions
Investing and financing transactions that do not require the
use of cash or cash equivalents should be excluded from a cash
flow statement.

It is a statement that shows the cash flows. i.e. inflow and outflow
of cash and cash equivalents during the accounting period from
operating, investing and financing activities
It is prepared according to AS-3 (Revised)
Objective of cash flow statement is to determine the cash inflow
and outflow from operating, investing and financing activities
Issue of bonus share – no flow
Proposed dividend – no flow
Purchase of building other than cash- no flow
Importance of separate disclosure of cash flow under
a) Operating activities: key indicator of the extent to which the
business operations of the enterprise have generated cash it
indicates whether adequate cash is generated to maintain
business operations pay dividends, repay loans and make new
investment. it also helpful in forecasting future cash flow from
operations
b) Investing : expenditure for purchase of fixed assets and long
term investments
c) Financing : useful in assessing future claims
Cash flow statement is for non-financial companies
 Interest paid and received is operating activities for finance
company but for non-finance company interest paid is
financial activity and interest received is investing activity
  Dividend paid is always financial activity for every type of
company

Proposed dividend
 Proposed dividend ( as per As- 4 Revised ) – contingencies and
events occurring after the balance sheet date) previous year
added in operating and same deducted from financing activity
 Cash and cash equivalent : cash, bank, demand deposit with
bank and marketable securities
 Marketable securities are short term , highly liquid investment
that are readily convertible into known amount of cash
generally it has short maturity 3 months or less
For eg. Current investment, treasury bills, commercial paper

Importance of Cash Flow statement:

 helps in finding cash flow from operating, investing and
financing
 helps management in planning
 helps in maintenance of liquidity and determine solvency
 it helps in efficient cash management
 helps in comparison
 investment and dividend decision are taken by the finance
manager by help of cash slow statement
 SMALL FORMAT

Net profit (closing balance – opening balance)

……………………
Add
Transfer to General reserve
Proposed dividend of the previous year
Provision for taxation for current year
Extra ordinary loss
Less
Income tax refund
Extra ordinary profit
1 cash flow from operating activities
A)Net profit before tax and extra ……………
ordinary items (small format) ……
Adjustment for non cash and non ……………
operating items ….
B ADD
Depreciation
Goodwill patent and trademark
amortised (written off)
Interest on bank overdraft/ cash credit
Interest on borrowings and debentures
Writing off underwriting commission or
share issue expense
Loss on sale of fixed assets
Increase in provision for doubtful debts
c) LESS
Interest income
Dividend income
Rental income
Gain on sale of fixed assets
Decrease in provision for doubtful debts
D) operating profit before working
capital changes
E) ADD DCA and ICL
Decrease in inventory
Decrease in trade receivable
Decrease in accrued income
Decrease in prepaid expense
Increase in trade payable
Increase in outstanding expense
F) LESS ICA and DCL
Increase in inventories
Increase in trade receivable
Increase in accrued incomes
Decrease in trade payables

G) cash generated from operations `

Less income tax paid (after deducting
income tax refund)
Add extra ordinary profit and deduct
extra ordinary loss
Cash flow from / used operating
Activities (A)

Cash flow from investing activities

Proceeds from sale of fixed assets
Sale of investment
Purchase of fixed asset
Purchase of investment
Interest received
Dividend received, rent received
Payment for purchase of goodwill ,
patent , trademark
Extra ordinary profit (+) and extra
ordinary loss (-)
Cash flow from investing activities (B)

Cash flow from financing activities

Proceeds from shares, debentures, bank
loan, cash credit, overdraft
Payment of share, debenture bank loan
cash credit overdraft
Payment of interest, dividend , share
issue exp, underwriting commission
Cash flow from financing activities

A+B+C (net increase or decrease in

cash and cash equivalents
Cash and cash equivalents at beginning
of the year
Cash bank short term deposit, current
investment marketable securities

Closing cash and cash equivalents

Cash flow statement notes

 Cash flow statement divides in three activities operating,
investing and financing
 Operating activities means activities which are related to
regular business like purchase, sale, and cash received and
payment for trade receivable and payable, royalties, fees,
commission, commission, wages salaries.
 Investing activities means which is related to purchase or sale
of assets like Machinery building , and non-current
investments and interest received on loan given, rent
received on assets etc. if from last year current year it is
increasing it means purchase of asset so deducted and if
closing is less means asset sold so it will be added
 Financing activities means which is related to borrowing
money in the form of loan , debenture, equity share
preference share and redemption of debenture and shares
 when money is borrowed it is added and paid back it is
deducted. Interest paid on such borrowing, dividend paid
 Bank overdraft or cash credit is not considered as current
liability it is considered as financing activity. If from opening
balance closing is more it means money borrowed so plus and
if closing is less then it means borrowed money is paid back
so deducted
 Current investment is considered as cash and cash
equivalent.
 Loss by fire for goods are taken as extra-ordinary item of
operating activity and if money is received from insurance
company.
 But if loss by fire is of machinery it is considered as extra
ordinary items of investing activities
 Extra ordinary loss is added in small format and income is
deducted in small format and in cash flow statement loss is
deducted and income is added either in operating or in
investing as the case may be.
 If the value of goodwill is reduced it is goodwill written off as it
is non cash item it is added in operating activity but if the
value of goodwill is increased then it is purchase of goodwill
then it is deducted from investing activity.
 If shares are issued as bonus it means free of cost so no effect
on cash flow
 In operating activity from income tax paid income tax refund
is deducted
 Decrease in Current Assets and increase in current liabilities
(DCA and ICL) is added and reverse (ICA and DCL) is
deducted.
 If only provision for taxation is given it is considered as
provision also and payment of income tax also
 If last year and current year provision for tax is given and no
adjustment is given then last year will be considered as
 income tax paid and current year will be considered as
provision for tax
 If adjustment is given provision for taxation account is to be
prepared
Particulars Amoun Particulars Amoun
t t
Bank a/c- income ? Balance b/d
tax paid (opening balance)
P/l A/c-current year ?
provision
Balance c/d
(closing balance)
Total total
If debit side shows the balance it is income tax paid and if
credit side it is shown it is provision for current year
 If provision for depreciation is maintained the following way
account is to be prepared
Fixed assets A/c
Particular Amoun Particular Amoun
t t
Balance b/d Bank-sale
(opening
balance)
P/L A/c –[profit] p/l A/c –loss
Pro for dep. –dep till
date of sale
Bank A/c- ?
purchase
Balance c/d- closing
balance
Total total
Debit side balance is considered as purchase of asset
Provision for depreciation A/c
Particular Amoun Particular Amoun
t t
 Balance b/d --------
Opening balance

Fixed asset A/c-

Total dep
till sale

Balance c/d P/l A/c –provision ?

Closing balance for depre.
Total total

If provision for depreciation is not given then

Fixed assets A/c
Particular Amoun Particular Amoun
t t
Balance b/c Bank-sale
(opening
balance)
P/L A/c –[profit] p/l A/c –loss
Dep- on asset sold of
current year
Bank A/c- ? Depreciation – other
purchase than asset sold
Balance c/d- closing
balance
Total total

 Last year proposed dividend is considered as dividend paid

and in small format also last year proposed dividend is to be
added. Current year proposed dividend is to be neglected
 Writing off bad debt against provision for bad debt will not
affect cash as provision for bad debt is already entered.
 Marketable securities are cash and cash equivalent so sale of
it will not affect cash flow.
 Compensation paid to employees under voluntary retirement
scheme is operating extraordinary items
 Claim received against damage of fixed assets say because of
earthquake is investing extra ordinary item
 Payment of buy back of shares is financing extra ordinary
item.
 For finance companies interest paid and received and
dividend received is operating activities and dividend
paid is financing activities.
 Premium on redemption of debenture is an item of balance
sheet it has not entered into statement of profit and loss
account so adjustment will not be made in operating activities
 A single transaction my include cash flow under two different
activities. If machinery is purchased under hire-purchase
system, each installment will include interest and a part of
principal. Amount paid for interest is a financing activity
whereas paid for installment is investing activities.
 Issue of shares and debentures for consideration other than
cash and also conversion of debentures into shares or other
types of securities are not shown in cash flow statement. For
ex. Purchase of building by issuing shares or debentures to
the vendor does not involve receipt or payment in cash
 An inflow or outflow between components of cash and cash
equivalents is not considered while preparing cash flow
statement. For ex. Cash deposited into bank

OPERATING INVESTING FINANCING

INFLOW( +) INFLOW ( +) INFLOW (+)
Cash sales, Sale of fixed asset, Issue of shares
providing service
Cash received Sale of investment Issue of
from trade debentures
receivables
Royalty, fee, Interest received Long term
commission borrowings
received
Income tax Dividend received Increase in bank
refund overdraft
or cash credit
Rent from property
Receipt of loan
given/advanced
Extra ordinary- Extra ordinary- claim
claim from ins. from ins. Company for
Company for machinery
stock

OUT FLOW (-) OUT FLOW (-) OUT FLOW(-)

Cash purchase Purchase of fixed Payment of loan
assets , goodwill,
patent, securities and
brokerage paid on that
Payment to trade Purchase of investment Redemption
payable (share warrant, preference
debenture and bonds share and
of other company) debenture
Payment of Income tax paid if Buy back of
operating investing equity share
expense
Payment of Loans and advance to Payment of
wages, salaries, third parties dividend
selling and
distribution
Income tax paid Payment of
if not related interest
To investing or
financing
Decrease in
 bank overdraft
Or cash credit
Income tax paid
if related to
finance
Extra ordinary- Loss by fire – building
loss of goods by or machinery
fire