Cash flow statement
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The document provides information about cash flow statements, including their purpose, components, and preparation process. A cash flow statement shows the inflows and outflows of cash from operating, investing, and financing activities during a specific period. It reconciles net income to the actual cash changes by adjusting for non-cash items and changes in balance sheet accounts. The statement consists of sections for operating activities, investing activities, and financing activities that report cash flows from changes in working capital accounts, long-term asset balances, and long-term debt or equity positions respectively.
Cash flow statement
- 2. A Statement prepared from the historical data (Income Statement and Balance Sheet) showing sources and uses of cash is called cash flow statement. It reveals the inflow and outflow of cash during the particular period. Cash flow statement can be prepared for a year, half year, and quarter of for any other duration. Cash: Cash means all cash + cash equitable + marketable securities + bank balance . Flow: Flow means flow of cash from business to economy and economy to business i.e. cash inflows and cash outflows. Statement : Statement is a performa prescribed by Charted Accountant Act,1948. MEANING:
- 3. •To show the causes of changes in cash balance between two balance sheet dates. •To indicate the factors contributing to the reduction of cash balance inspite of increase in profits and vice versa. OBJECTIVES: A cash flow statement summarizes the causes of changes in cash position of a business enterprise between dates of two balance sheets. A statement a cash flows reveals the movements of cash of a business enterprise for the given accounting period indicating specifically how the cash was generated. Statement of cash flow is required for short range financial planning. The cash flow statement simultaneously provides an explanation of why a firm’s cash position has changed between successive balance sheet dates and explains changes that have taken place in the firm’s noncash asset, liability, and stockholders’ equity accounts over the same time period.
- 4. The cash flow statement explains the reasons for low cash balance inspite of huge profits or large cash balance inspite of low profits. It helps in short-term financial decision relating to liquidity. It shows the major sources and uses of cash. The management with the aid or projected cash flow statement can know 1. How much cash will be needed 2. From which sources it can be obtained 3. How much can be generated internally 4. How much could be obtained from outside. It helps the management in planning the repayment of loans, replacement of assets, credit arrangements etc. It is also significant for capital budgeting decisions. On the basis of past years cash flow statement projections can be made for the future. The projected cash flow statement helps in planning for the investment of surplus or meeting the deficit. A Comparison of actual cash flow statement with the projected cash flow statement helps in understanding the variations and control of cash expenditure SIGNIFICANCE AND USES OF CASH FLOW STATEMENT:
- 5. Opening of Accounts for Non Current items Preparation of Adjusted Profit and Loss Account Comparison of Current Items to Determine Inflow and Outflow of Cash Preparation of Cash Flow Statement. PROCEDURE FOR THE PREPARATION OF CASH FLOW STATEMENT:
- 6. THREE COMPONENTS OF CASH FLOW STATEMENT… Cash Flow form Operating Activities Cash from financing Activities Cash from investing Activities
- 7. Operating activities are the principle revenue producing activities of the enterprise and other activities that are not investing and financing activities. Hence, these are the results of those transactions and events that determines the net profit or loss. Cash Flow form Operating Activities • Operating Activities: The cash flow from operating activities section of a cash flow statement can be presented using the direct format or the indirect format. The bottom line is the same, but the two begin at different points. Companies are free to use either format. Below is an example of both formats. Direct method: shows how much cash came in for sales and how much cash went out for inventory and other operating expenditures. Indirect method: starts with net income as a figure that summarizes most of the cash transactions for operating activities in a firm. However, net income also includes transactions that ere not cash, so we must eliminate the non-cash transactions from the net income figure to arrive at an accurate presentation of cash flow from operating activities.
- 8. Cash Flow From Operating Activities Cash Inflows From sales of goods or services From interest and dividend income Cash Outflows To pay suppliers for inventory To pay employees for services To pay lenders (interest) To pay government for taxes To pay other suppliers for other operating expenses
- 9. This section of the cash flow statement reports the company's net income and then converts it from the accrual basis to the cash basis by using the changes in the balances of current asset and current liability accounts, such as Accounts Receivable Inventory Supplies Prepaid Insurance Other Current Assets Notes Payable (generally due within one year) Accounts Payable Wages Payable Payroll Taxes Payable Interest Payable Income Taxes Payable Unearned Revenues Other Current Liabilities In addition to using the changes in current assets and current liabilities, the operating activities section has adjustments for depreciation expense and for the gains and losses on the sale of long-term assets.
- 10. Examples are: Cash receipts from the sale of goods and the rendering of services Cash receipts from royalties, fees, commissions and other revenues Cash payments to suppliers of goods and services Cash payments to and on behalf of employees Cash receipts and cash payments of 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 receipts and payments relating to future contracts, forward contracts, option contracts and swap contracts when the contracts are held for dealing or trading purposes.
- 11. Investing activities include the acquisition and disposal of long-term assets and other investments not included in cash equivalents. The separate disclosure of cash flows arising from investing activities is important. Cash Flow from Investing Activities: An item on the cash flow statement that reports the aggregate change in a company's cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries, and changes resulting from amounts spent on investments in capital assets such as plant and equipment. If fixed assets and investments increased, it means, there is application of cash If fixed assets & investments reduced, it means there is source of cash and so cash from investing should increase.
- 12. Cash Flow From Investing Activities Cash Inflows From sale of fixed assets (property, plant, equipment) From sale of debt or equity securities (other than common equity) of other entities Cash Outflows To acquire fixed assets (property, plant, equipment) To purchase debt or equity securities (other than common equity) of other entities
- 13. This section of the cash flow statement reports changes in the balances of long-term asset accounts, such as Long-term Investments Land Buildings Equipment Furniture & Fixtures Vehicles In short, investing activities involve the purchase and/or sale of long-term investments and property, plant, and equipment.
- 14. WHAT TO ADD TO PROFIT (INDIRECT METHOD)? Depreciation Loss on sale of fixed assets Amortisation of intangible assets Impairment Bad debt Interest (it will go to cash from investing or cash fro financing acticity) (all other non – cash expenses/ provisions). WHAT TO DEDUCT FROM PROFIT (INDIRECT METHOD) Profit on sale of fixed assets
- 15. Examples are: Cash payments to acquire fixed assets (including intangibles) Cash receipts from disposal of fixed assets (including intangibles) Cash payments to acquire and cash receipts from disposal of shares, warrants or debt instruments of other enterprises and interests in joint ventures. Cash advances and loans made to 3rd parties Cash payments and receipts for future contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities
- 16. The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims of future cash flows by providers of funds (both capital and loan)to the enterprise. Financing activities are activities that result in changes in the size and composition of the owners capital (including preference share capital in the case of a company) and borrowings of the enterprise. Cash Flow from Financing Activities: Accounts for external activities such as issuing cash dividends, adding or changing loans, or issuing and selling more stock. The formula for cash flow from financing activities is as follows: Cash Received from Issuing Stock or Debt - Cash Paid as Dividends and for Re-Acquisition of Debt/Stock
- 17. Cash Flow From Financing Activities Cash Inflows From borrowing From the sale of the firm’s own equity securities Cash Outflows To repay amounts borrowed To repurchase the firm’s own equity securities To pay shareholders dividends
- 18. This section of the cash flow statement reports changes in balances of the long-term liability and stockholders' equity accounts, such as Notes Payable (generally due after one year) Bonds Payable Deferred Income Taxes Preferred Stock Paid-in Capital in Excess of Par-Preferred Stock Common Stock Paid-in Capital in Excess of Par-Common Stock Paid-in Capital from Treasury Stock Retained Earnings Treasury Stock In short, financing activities involve the issuance and/or the repurchase of a company's own bonds or stock. Dividend payments are also reported in this section.
- 19. Examples are: Cash proceeds from issuing shares or other similar instruments Cash proceeds from issuing debentures, loans, notes, bonds and other short or long term borrowings, and Cash repayments of amounts borrowed such as redemption of dentures, bonds, preference shares.
- 20. Format : 1
- 23. Statement of Cash Flows Cash Flow from Operating Activities Net Income XXX,XXX Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization XX,XXX Changes in other accounts affecting operations: (Increase)/decrease in accounts receivable X,XXX (Increase)/decrease in inventories X,XXX (Increase)/decrease in prepaid expenses X,XXX Increase/(decrease) in accounts payable X,XXX Increase/(decrease) in taxes payable X,XXX Net cash provided by operating activities XXX,XXX Format : 2
- 24. Cash Flow from Investing Activities Capital expenditures (XXX,XXX) Proceeds from sales of equipment XX,XXX Proceeds from sales of investments XX,XXX Investments in subsidiary (XXX,XXX) Net cash provided by investing activities (XXX,XXX) Cash Flow from Financing Activities Payments of long-term debt (XX,XXX) Proceeds from issuance of long-term debt XX,XXX Proceeds from issuance of common stock XXX,XXX Dividends paid (XX,XXX) Purchase of treasury stock (XX,XXX) Net cash provided by financing activities (XX,XXX) Increase (Decrease) in Cash XX,XXX
- 25. METHOD USED TO ANALYZE THE CASH FLOW Scan the big picture Check the power of the cash flow engine Pinpoint the good news and the bad news Put the puzzle together
- 26. STEP 1: SCANNING THE BIG PICTURE First, place your company in context in terms of its age, industry, and size. (Mature companies have different cash flows from start-up companies. And service industries look different from heavy manufacturing industries.) Flip through the annual report and other accounting records to determine how management believes the year progressed. Was it a good year? Perhaps a record-breaking year in terms of revenue or net income? Or is management explaining how the company has had some rough times? Look at net income. Does it show income or losses over the past few years? Is income (or loss) shrinking or growing?
- 27. STEP 2: CHECKING THE POWER OF THE CASH FLOW ENGINE The cash flow from operating activities section is the cash flow engine of the company. When this engine is working effectively, it provides the cash flows to cover the cash needs of operations. To check the cash flow check if the cash flow from operating activities is greater than zero. Also check whether it is growing or shrinking. Assuming it is positive, the next question is can it cover important, routine expenditures? An exception is start-up companies often have negative cash flow from operating activities because they had to spend a lot to get the company started and their cash flow engines are not yet up to speed. Examine the operating working capital accounts. Inventories, receivables, and accounts payable usually grow in expanding companies.
- 28. STEP 3: PINPOINTING THE GOOD NEWS AND THE BAD NEWS Begin with cash flow from investing activities. One systematic observation is to check whether the company is generating or using cash in its investing activities. A healthy company invests continually in more plant, equipment, land, and other fixed assets to replace the assets that have been used up or have become technologically obsolete. You must look at the entire package to evaluate whether your cash flows from financing are in the “good news” or “bad news” categories. One systematic way to begin is to compare borrowing and payments on debt with each other across the years and note the trends. Another way in uncovering the news in this section is to check the activities in the stock accounts.
- 29. STEP 4: PUTTING THE PUZZLE TOGETHER It would be rare to find a company in which all of the evidence is positive, or in which all of the evidence is negative. To make a balanced evaluation, you must use both the good news and the bad news identified in each section of the statement. Sometimes there are unusual or unknown items that may need further looked into (possibly by a professional).
- 30. ASSET LIABILITY CASH INFLOW - + CASH OUTFLOW + - SUPPLEMENTAL INFORMATION
- 31. A CHANGE IN THIS BALANCE SHEET CATEGORY CHANGES REPORTED IN THIS SECTION OF THE CASH FLOW STATEMENT Current Assets Other than Cash Operating Activities Current Liabilities Operating Activities Long-term Assets Investing Activities Long-term Liabilities Financing Activities Stockholders' Equity Financing Activities
- 33. THANK YOU DESIGNED BY: D. SAMUEL MANIRAJ., MBA., M.Com., M.Phil., MA., PGDCA., ADCHN., CHENNAI, TAMIL NADU, INDIA.