1. UNIT – III CASH FLOW STATEMENT
DEPARTMENT OF MANAGEMENT STUDIES
UNIT – III CASH FLOW STATEMENT
7/19/2018
Dr. G. MAHESWARAN/AP
1/46

2. Cash Receipts (cash inflows)
The Cash Flow Statement
The cash flow statement provides information about: •
Cash Receipts (cash inflows)
Uses of Cash (cash outflows) During a Period of Time
Inflows and outflows are reported
for: •
Operating activities
Investing activities
Financing activities
Dr. G. MAHESWARAN/AP

3. Cash Inflows and Outflows
Dr. G. MAHESWARAN/AP

4. Classification of Business Activities : Inflow and Outflow of Cash
Operating Activities
Cash Inflow
1) Cash Sales
2) Received from Debtor
3) Commission & Fees
4) Royalty
Cash Outflow
1) Cash Purchases
2) Payment to Creditors
3) Cash Operating Expenses
4) Payment of Wages
5) Income Tax
6) Manufacturing Expenses
Cash effects the transaction on Net Income
Dr. G. MAHESWARAN/AP

5. Classification of Business Activities : Inflow and Outflow of Cash
Investing Activities
Cash Inflow
1) Sale of Fixed Assets
2) Sale of investments
3) Interest Received
4) Dividend Received
5) Working Capital Recovery
Cash Outflow
1) Purchase of Fixed Assets
2) Purchase of Investments
3) Working Capital
Dr. G. MAHESWARAN/AP

6. 1) Issue of Shares in Cash
Classification of Business Activities : Inflow and Outflow of Cash
Financing Activities
Cash Inflow
1) Issue of Shares in Cash
2) Issue of Debentures in
Cash
3) Proceeds from long-term borrowings
Cash Outflow
1) Payment of Loans
2) Redemption of Preference
Shares
3) Payment of Dividends
4) Interest Paid
5) Repayment of Finance/ Lease Liability
Dr. G. MAHESWARAN/AP

7. Objectives of Cash Flow Statement1.
Highlighting cash flow from different
activities
Short-term Planning 2. 3.
Cash Flow information helps
understand liquidity Efficient cash management Prediction of sickness Comparison with budget Cash position to 4. 5. 6. 7.
Dr. G. MAHESWARAN/AP

8. Cash Flow Statement : Limitations•
Does not show the liquidity position of the
firm •
It is not a substitute of income statement •
Does not show the financial position of the
firm in totality
Dr. G. MAHESWARAN/AP

9. Schedule of Changes in Working Capital
Distinction between Cash flow Statement and
Funds Flow Statement
Basis Of Difference
Cash Flow
Funds Flow
It recognizes Cash basis
Of accounting
It is based upon accrual Basis of accounting I.e Working capital
Basis of
Accounting
Significance
It is useful for short- Term financial planning
It is useful for long-term
Financial planning
Schedule of Changes in Working Capital
Such a schedule is not Prepared for preparing Cash flow statement
Schedule of changes in
Working capital is
Prepared separately
It studies only the Causes of cash variation
Causes of
Variation
It studies causes of Ch- ange in working capital
Dr. G. MAHESWARAN/AP

10. Preparing a Statement of Cash Flows•
Use net operating income as the starting
point to get net operating cash flow
Add back any non-cash expense
(Example - Depreciation) •
Net Cash Flow = Cash Inflow - Cash Outflow
Net Operating Cash Flow = Income after Taxes
+ Depreciation
Dr. G. MAHESWARAN/AP

11. Order of Presentation: Preparing a Statement of Cash Flows
Direct Method
1. Operating activities.
Indirect Method
2. Investing activities.
3. Financing activities.
Three Sources of Information:
1. Comparative balance sheets
2. Current income statement
3. Additional information
Dr. G. MAHESWARAN/AP

12. Cash Flow from Operating Activities : Direct Method
Amount
(Rs.)
Amount
(Rs.)
Cash Receipts from :
Sales
Commission & Fees
Interest Received
Cash Payment for :
Purchases
Payments to and for employees
Operating Expenses
Interest Payments
Direct Taxes Paid
Net Cash Flow from Operating Activities
XXX XXX
XXX
XXX
XXX
XXX
XXX
XXX
Dr. G. MAHESWARAN/AP

13. Cash Flow from Operating Activities : Indirect
Method
Cash Flow from Operating Activities
Amount
(Rs.)
Amount
(Rs.)
Net Profit before Tax
Adjustment for :
Depreciation
Loss on Sale of Fixed Assets
Loss on revaluation
Operating Profit before Working Capital Changes
Adjustment* for :
Trade and other Receivables
Inventories or Stocks
Trade Payments or (Creditors and B/P)
Cash Generated from Operations
Interest Paid
Taxes Paid
Net Cash Flow from Operating Activities
xxx xxx
xxx
xxx
xxx
xxx
Dr. G. MAHESWARAN/AP
XXX

14. Preparing the Statement of
Cash Flows
Indirect
and
Direct
Methods
Companies favor the indirect
method for two reasons: 1. It to
is easier and less costly
prepare, and
focuses on the 2.
differences between net
income and net cash flow from operating activities.
Dr. G. MAHESWARAN/AP

15. Book Approach Income Statement Cash Flow Statement +Net Income
+Depreciation Operating
-Capital Investment
+Salvage Proceeds
-Gain Tax Investing
-Working Inv Cap
+Working Cap Recovery +
+Borrowed Funds R E
T N
Revenues
Cost of Goods Sold
Operating Expenses
Expenses
Depreciation*
Income Taxes
Taxable Income
Net Income
-Repayment of Principal
Financing
*Assumes Tax Depreciation = Book Depreciation
Thus, no deferred taxes
Dr. G. MAHESWARAN/AP

16. Format for Cash Flow Statement
Dr. G. MAHESWARAN/AP

17. **********************
End of Presentation
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Thank You
Dr. G. MAHESWARAN/AP