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Module 6

Cash Flow

Cash Flow - Dr. varadraj Bapat, IIT Mumbai

Contents

Cash

Flow Statement
Fund Flow Statement
Cases on preparation and
Interpretation of Cash Flow
Statement
Cash Flow - Dr. varadraj Bapat, IIT Mumbai

Index

Introduction Cash Flow Statement


Meaning
Applicability
Cash and Cash equivalents
Cash Flow - Dr. varadraj Bapat, IIT Mumbai

Index

Meaning and Types Cash Flow

Operating Activities
Investing Activities
Financing Activities

Interest
Dividend
Cash Flow - Dr. varadraj Bapat, IIT Mumbai

Index

Foreign Currency transactions


Extraordinary items
Treatment of Tax
Investments in subsidiaries, associates
and joint ventures
Cash Flow - Dr. varadraj Bapat, IIT Mumbai

Index

Acquisitions
and
disposals
of
subsidiaries and other business units
Non-cash transactions
Disclosures
of
cash
and
cash
equivalents
Cash Flow - Dr. varadraj Bapat, IIT Mumbai

Introduction

Traditional financial statement fails to


inform
the
way
enterprise
has
generated cash and were utilised in the
accounting period.
The need for inclusion of cash summary
was therefore recognised.
Cash Flow - Dr. varadraj Bapat, IIT Mumbai

Meaning

The summary of cash transactions


(receipts and payments) during an
accounting period is called Cash
Flow Statement. The transactions

are catagorised as Operating,


Investing and Financing.
Cash Flow - Dr. varadraj Bapat, IIT Mumbai

Accounting
Standard

The Accounting Standards are


issued to establish principals and
policies which have to be complied
by
the
business
entities
in
preparing the financial statement.
Cash Flow - Dr. varadraj Bapat, IIT Mumbai

AS-3

AS-3/IAS-7/IndAS-7
deals
with
preparation of Cash flow Statement.
AS-3 applies to the enterprises:
Having turnover more than
Rs. 50
Crores in a financial year
Listed companies
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Cash and
Cash
Equivalents
Cash:Cash in hand and deposits
repayable on demand with any
bank or other financial institution
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Cash and
Cash
Equivalents
Cash Equivalents:Short term, highly liquid investments,
that are readily convertible into known
amounts of cash and are subject to
insignificant risk/change to value

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Meaning of
Cash Flow
Cash

flows are inflows (i.e.


receipts)
and
outflows
(i.e.
payments) of cash and cash
equivalents.
Movement in cash and cash
equivalents are not cash flows.
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Types of Cash
Flow
The cash flows generated through
various activities are classified as
Operating cash flow
Investing cash flow
Financing cash flow

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Cash
Flow
Activities

Operating
(From Day
to Day
Activities)

Investing
e.g.
Purchase of
Land
Cash Flow - Dr. varadraj Bapat, IIT
Mumbai

Financing
e.g. Loan
Taken
15

Operating
Activities
These

are
principal
revenue
producing
activities
of
the
enterprise.
Examples:
Cash receipts from sale of goods
or rendering services
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Operating
Activities
Cash

receipts from royalties, fees,


commissions and other revenue
Cash payments to suppliers of goods
and service;
Cash payments to and on behalf of
employees.
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Reporting of
Cashflow from
operating activities

It can be derived either from direct


method or indirect method

Direct method:
In this method, gross receipts
and gross payments of cash are
disclosed
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Direct Method
Cash receipts from customers
Cash paid to suppliers

XX
XX

Cash
Cash

XX
XX

paid
paid

to employees
for other operating expenses

Cash generated from operation


Income tax paid

XX
XX

Net cash from operating activities

XX

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Mumbai

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Indirect method:
In this method, profit and loss account
is adjusted for the effects of transaction
of non-cash and non-operating nature.
Cash flow statement of listed companies
shall be presented only under the
indirect method as prescribed in AS 3
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Retained Earning
Add: Dividend paid
Income Tax
Net Profit Before Tax
Add: Depreciation
Loss on sale of Asset/Investment
Interest Paid
Provision for Bad debts
Less: Interest/ Dividend Received
Profit on sale of Asset/ Investment
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Mumbai

XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
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Funds from operations

XX

Add: Decrease in Current Asset


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

XX
XX

Less: Decrease in Current Liabilities


Cash generated from operation
Income Tax Paid
Net Cash flow from operating
activities
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Mumbai

XX
XX
XX
XX
XX

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Investing
Activities

The activities of acquisition and


disposal of long term assets and other
investments not included in cash
equivalent are investing activities.
It includes acquiring and disposal of
debt and equity instruments, property
and fixed assets etc.
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Examples:
Cash payments for purchase of
fixed assets
Cash receipts from disposal of FAs
Cash payments to purchase shares,
or debt instruments of other
companies
Cash receipt from disposal of above
investments
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Financing
Activities

Those activities that result in changes


in size and composition of owners
capital
and
borrowing
of
the
organization.
It includes receipts from issuing shares,
debentures, bonds, borrowing and
payment of borrowed amount, loan etc.
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Financing Activities
Example:
Issue of equity shares
Buy back of equity shares
Issue/ Redemption of preference shares
Issue / redemption of debentures
Long term loan / payment thereof
Dividend / interest paid
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Interest
Interest Received
Received
on investment it is
investment inflow
Received
from
short
term
investment
classified,
as
cash
equivalents should be considered as
cash inflows from operating activities
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Received on trade advances and operating


receivables should be in operating inflows
For financial enterprises in operating inflow

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Interest Paid
On loans/debts is financing activities
On working capital loan or loan taken to
finance operating activities are included
in operating inflows
For financial enterprises in operating
outflow
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Dividend

Dividend Received
For
non-financial
enterprisesinvesting inflow
For financial enterprises operating
inflow
Dividend Paid
Always classified as financing inflow
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Foreign
currency
transactions

The effect of change in exchange rate in


cash and cash equivalents held in foreign
currency should be reported as separate
part of the reconciliation of cash and cash
equivalents.
Unrealized gain and losses arising from
changes in foreign exchanges rates are
not cash flows.
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Extraordinary
items
Ex. loss by Fire
The cash flows associated with
extraordinary items should be
classified
as
arising
from
Operating, Investing or Financing
activities as appropriate and
separately disclosed.
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Example:
Insurance claim received against loss
of stock or profits is extraordinary
operating cash inflow
Insurance claim received against loss
of fixed assets is extraordinary
investing cash inflow
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Treatment of tax

Cash flow for tax payments /


refund should be classified as cash
flow from operating activities.
Tax deducted at source against
income
are
operating
cash
outflows if concerned income are
operating.

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Treatment of tax

Cash flow for tax payments


identified with a specific investing
or financing flow should be
classified as investing or financing
flow respectively
E.g. Dividend Tax is recognised as
financing flow.

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Investments in
subsidiaries/
associates

Only the cash flow between


enterprise itself and the investee is
required to be reported
Example: Cash flow relating to
dividends and advances
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Acquisitions and
disposals of
subsidiaries/other
businesses
Cash flow on acquisition and
disposal of subsidiaries and other
business units should be :
Presented separately, Classified
as investing activities
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Total purchase and disposal should


be disclosed separately
The position of the purchase /
disposal consideration discharged
by means of cash and cash
equivalents should be disclosed
separately

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Non-cash
transactions

These should be excluded from the


cash flow statement.
These transactions should be
disclosed
in
the
financial
statements.
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Examples
Acquisition of assets by assuming
directly related liabilities
Acquisition of an enterprise by
means of issue of equity shares
Conversion of debt to equity
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Disclosures of cash and


cash equivalents

The components of cash and cash


equivalents should be disclosed
Reconciliation of the amount in the
cash flow statement with the
equivalent items reported in the
balance sheet
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Disclosures of
cash and cash
equivalents

The amount of cash and cash


equivalent
balance
held
by
the
enterprises that are not available for
use (with explanation by management)
The amount of undrawn borrowing
facilities that may be available for
future operating activities (indicating
any restriction on use of these
facilities)
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