Cash Flow

Module 6 Module 6

Cash Flow

Cash Flow

Contents Contents

 Cash Flow StatementCash Flow Statement

 Fund Flow StatementFund Flow Statement

 Cases on preparation and Cases on preparation and Interpretation of Cash Flow Interpretation of Cash Flow

Statement Statement

Index Index

•

Introduction Introduction

•

Meaning Meaning

•

Applicability Applicability

•

Cash and Cash equivalents Cash and Cash equivalents

Index Index

• Meaning and Types Cash FlowMeaning and Types Cash Flow

• Operating ActivitiesOperating Activities

• Investing ActivitiesInvesting Activities

• Financing ActivitiesFinancing Activities

• InterestInterest

Index Index

• Foreign Currency transactionsForeign Currency transactions

• Extraordinary itemsExtraordinary items

• Treatment of TaxTreatment of Tax

• Investments in subsidiaries, associates Investments in subsidiaries, associates and joint ventures

and joint ventures

Index Index

• Acquisitions Acquisitions and and disposals disposals of of subsidiaries and other business units subsidiaries and other business units

• Non-cash transactionsNon-cash transactions

• Disclosures of cash and cash Disclosures of cash and cash equivalents

equivalents

Introduction Introduction

generated cash and were utilised in the generated cash and were utilised in the

accounting period.

accounting period.

The need for inclusion of cash summary The need for inclusion of cash summary was therefore recognised

was therefore recognised

. .

Meaning Meaning

The summary of cash transactions The summary of cash transactions (receipts and payments) during an (receipts and payments) during an

accounting period is called Cash accounting period is called Cash

Flow Statement. The

Flow Statement. The transactions transactions are catagorised as

are catagorised as Operating, Operating, Investing and Financing.

Accounting Accounting

Standard Standard

The ‘Accounting Standards’ are The ‘Accounting Standards’ are issued to establish principals and issued to establish principals and

policies which have to be complied policies which have to be complied

by the business entities in by the business entities in

preparing the financial statement.

preparing the financial statement.

AS-3 AS-3

AS-3/IAS-7/IndAS-7 deals with AS-3/IAS-7/IndAS-7 deals with

preparation of Cash flow Statement.

preparation of Cash flow Statement.

AS-3 applies to the enterprises:

AS-3 applies to the enterprises:

 Having turnover more than Rs. 50 Having turnover more than Rs. 50 Crores in a financial year

Crores in a financial year

 Listed companiesListed companies

Cash and Cash and

Cash Cash

Equivalents Equivalents

Cash:- Cash:-

Cash in hand and deposits Cash in hand and deposits repayable on demand with any repayable on demand with any

bank or other financial institution bank or other financial institution

Cash and Cash and

Cash Cash

Equivalents Equivalents

Cash Equivalents:- Cash Equivalents:-

Short term, highly liquid investments, Short term, highly liquid investments, that are readily convertible into known that are readily convertible into known amounts of cash and are subject to amounts of cash and are subject to

insignificant risk/change to value insignificant risk/change to value

Meaning of Meaning of

Cash Flow Cash Flow

• Cash flows are inflows (i.e. Cash flows are inflows (i.e.

receipts) and outflows (i.e.

receipts) and outflows (i.e.

payments) of cash and cash payments) of cash and cash

equivalents.

equivalents.

• Movement in cash and cash Movement in cash and cash equivalents are not cash flows.

equivalents are not cash flows.

Types of Cash Types of Cash

Flow Flow

The cash flows generated through The cash flows generated through

various activities are classified as various activities are classified as

• Operating cash flowOperating cash flow

• Investing cash flowInvesting cash flow

• Financing cash flow Financing cash flow

Cash Activities Flow

Operating (From Day

to Day

Investing e.g.

Purchase of

Financing e.g. Loan

Taken

Operating Operating

Activities Activities

• These These are are principal principal revenue revenue producing activities of the producing activities of the

enterprise.

enterprise.

• Examples:Examples:

Cash receipts from sale of goods Cash receipts from sale of goods or rendering services

or rendering services

Cash receipts from royalties, fees, Cash receipts from royalties, fees, commissions and other revenue

commissions and other revenue

Cash payments to suppliers of goods Cash payments to suppliers of goods and service;

and service;

Cash payments to and on behalf of Cash payments to and on behalf of employees.

employees.

Operating Operating

Activities

Activities

Reporting of Reporting of

Cashflow from Cashflow from

operating activities operating activities

• It can be derived either from direct It can be derived either from direct method or indirect method

method or indirect method

• Direct method: Direct method:

In this method, gross receipts In this method, gross receipts and gross payments of cash and gross payments of cash

are disclosed are disclosed

Direct Method Direct Method

Cash receipts from customers

Cash receipts from customers XXXX Cash paid to suppliers

Cash paid to suppliers XXXX

Cash paid to employees

Cash paid to employees XXXX

Cash paid for other operating expenses

Cash paid for other operating expenses XXXX Cash generated from operation

Cash generated from operation XXXX Income tax paid

Income tax paid XXXX

• Indirect method: Indirect method:

In this method, profit and loss account In this method, profit and loss account is adjusted for the effects of transaction is adjusted for the effects of transaction

of non-cash and non-operating nature.

of non-cash and non-operating nature.

Cash flow statement of listed companies Cash flow statement of listed companies shall be presented only under the shall be presented only under the

indirect method

indirect method as prescribed in AS 3 as prescribed in AS 3

Retained Earning

Retained Earning XXXX

Add: Dividend paid

Add: Dividend paid XXXX

Income Tax

Income Tax XXXX

Net Profit Before Tax

Net Profit Before Tax XXXX Add: Depreciation

Add: Depreciation XXXX

Loss on sale of Asset/Investment

Loss on sale of Asset/Investment XXXX Interest Paid

Interest Paid XXXX

Provision for Bad debts

Provision for Bad debts XXXX Less: Interest/ Dividend Received

Less: Interest/ Dividend Received XXXX

Funds from operations

Funds from operations XXXX Add: Decrease in Current Asset

Add: Decrease in Current Asset XXXX Add: Increase in Current Liabilities

Add: Increase in Current Liabilities XXXX Less: Increase in Current Asset

Less: Increase in Current Asset XXXX Less: Decrease in Current Liabilities

Less: Decrease in Current Liabilities XXXX Cash generated from operation

Cash generated from operation XXXX Income Tax Paid

Income Tax Paid XXXX

Net Cash flow from operating Net Cash flow from operating

activities

activities XXXX

Investing Investing

Activities Activities

• The activities of acquisition and The activities of acquisition and disposal of long term assets and other disposal of long term assets and other

investments not included in cash investments not included in cash

equivalent are investing activities.

equivalent are investing activities.

• It includes acquiring and disposal of It includes acquiring and disposal of debt and equity instruments, property debt and equity instruments, property

and fixed assets etc.

and fixed assets etc.

• Examples:Examples:

 Cash payments for purchase of Cash payments for purchase of fixed assets

fixed assets

 Cash receipts from disposal of FAsCash receipts from disposal of FAs

 Cash Cash payments payments to to purchase purchase shares, or debt instruments of shares, or debt instruments of

other companies other companies

 Cash receipt from disposal of Cash receipt from disposal of above investments

Financing Financing

Activities Activities

• Those activities that result in changes Those activities that result in changes in size and composition of owners in size and composition of owners

capital and borrowing of the capital and borrowing of the

organization.

organization.

• It includes receipts from issuing shares, It includes receipts from issuing shares, debentures, bonds, borrowing and debentures, bonds, borrowing and

payment of borrowed amount, loan etc.

payment of borrowed amount, loan etc.

• Financing ActivitiesFinancing Activities

• Example:Example:

 Issue of equity sharesIssue of equity shares

 Buy back of equity sharesBuy back of equity shares

 Issue/ Redemption of preference sharesIssue/ Redemption of preference shares

 Issue / redemption of debenturesIssue / redemption of debentures

 Long term loan / payment thereofLong term loan / payment thereof

 Dividend / interest paidDividend / interest paid

Interest Interest

Interest Received Interest Received

 Received on investment – it is Received on investment – it is investment inflow

investment inflow

 Received from short term investment Received from short term investment classified, as cash equivalents should classified, as cash equivalents should

be considered as cash inflows from be considered as cash inflows from

operating activities operating activities

 Received on trade advances and operating Received on trade advances and operating receivables should be in operating inflows

receivables should be in operating inflows

 For financial enterprises – in operating inflowFor financial enterprises – in operating inflow

Interest Paid Interest Paid

 On loans/debts is financing activitiesOn loans/debts is financing activities

 On working capital loan or loan taken to On working capital loan or loan taken to finance operating activities are included finance operating activities are included

in operating inflows in operating inflows

 For financial enterprises – in operating For financial enterprises – in operating outflow

outflow

Dividend Dividend

• Dividend ReceivedDividend Received

 For non-financial enterprises- investing For non-financial enterprises- investing inflow

inflow

 For financial enterprises – operating For financial enterprises – operating inflow

inflow

• Dividend PaidDividend Paid

Foreign Foreign

currency currency

transactions transactions

• The effect of change in exchange rate in The effect of change in exchange rate in cash and cash equivalents held in foreign cash and cash equivalents held in foreign

currency should be reported as separate currency should be reported as separate

part of the reconciliation of cash and cash part of the reconciliation of cash and cash

equivalents.

equivalents.

• Unrealized gain and losses arising from Unrealized gain and losses arising from changes in foreign exchanges rates are changes in foreign exchanges rates are

not cash flows.

not cash flows.

Extraordinary Extraordinary

items items

Ex. loss by Fire Ex. loss by Fire

The cash flows associated with The cash flows associated with

extraordinary items should be extraordinary items should be

classified as arising from classified as arising from Operating, Investing or Financing Operating, Investing or Financing

activities as appropriate and activities as appropriate and

Example Example::

 Insurance claim received against loss Insurance claim received against loss of stock or profits is extraordinary of stock or profits is extraordinary

operating cash inflow operating cash inflow

 Insurance claim received against loss Insurance claim received against loss of fixed assets is extraordinary of fixed assets is extraordinary

investing cash inflow investing cash inflow

Treatment of tax Treatment of tax

 Cash flow for tax payments / Cash flow for tax payments / refund should be classified as cash refund should be classified as cash

flow from operating activities.

flow from operating activities.

 Tax deducted at source against Tax deducted at source against income are operating cash income are operating cash outflows if concerned income are outflows if concerned income are

operating.

operating.

Treatment of tax Treatment of tax

 Cash flow for tax payments Cash flow for tax payments identified with a specific investing identified with a specific investing

or financing flow should be or financing flow should be

classified as investing or financing classified as investing or financing

flow respectively flow respectively

 E.g. Dividend Tax is recognised as E.g. Dividend Tax is recognised as financing flow.

financing flow.

Investments in Investments in

subsidiaries/

subsidiaries/

associates associates

• Only the cash flow between Only the cash flow between enterprise itself and the investee is enterprise itself and the investee is

required to be reported required to be reported

• Example: Cash flow relating to Example: Cash flow relating to dividends and advances

dividends and advances

Acquisitions and Acquisitions and

disposals of disposals of

subsidiaries/other subsidiaries/other

businesses businesses

Cash flow on acquisition and Cash flow on acquisition and disposal of subsidiaries and other disposal of subsidiaries and other

business units should be : business units should be :

• Presented separately, Classified Presented separately, Classified

• Total purchase and disposal should Total purchase and disposal should be disclosed separately

be disclosed separately

• The position of the purchase / The position of the purchase / disposal consideration discharged disposal consideration discharged

by means of cash and cash by means of cash and cash

equivalents should be disclosed equivalents should be disclosed

Non-cash Non-cash transactions transactions

• These should be excluded from the These should be excluded from the cash flow statement.

cash flow statement.

• These transactions should be These transactions should be disclosed in the financial disclosed in the financial

statements.

statements.

• ExamplesExamples

• Acquisition of assets by assuming Acquisition of assets by assuming directly related liabilities

directly related liabilities

• Acquisition of an enterprise by Acquisition of an enterprise by means of issue of equity shares

means of issue of equity shares

• Conversion of debt to equityConversion of debt to equity

Disclosures of cash and Disclosures of cash and

cash equivalents cash equivalents

• The components of cash and cash The components of cash and cash equivalents should be disclosed

equivalents should be disclosed

• Reconciliation of the amount in the Reconciliation of the amount in the cash flow statement with the cash flow statement with the

equivalent items reported in the equivalent items reported in the

balance sheet balance sheet

• The amount of cash and cash The amount of cash and cash equivalent balance held by the equivalent balance held by the

enterprises that are not available for enterprises that are not available for

use (with explanation by management) use (with explanation by management)

• The amount of undrawn borrowing The amount of undrawn borrowing facilities that may be available for facilities that may be available for

future operating activities (indicating future operating activities (indicating

any restriction on use of these any restriction on use of these

facilities) facilities)

Disclosures of Disclosures of

cash and cash cash and cash

equivalents

equivalents