Cash Flow

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
Index
Introduction Cash Flow Statement

Meaning
Applicability
Cash and Cash equivalents
Index
Meaning and Types Cash Flow
Operating Activities
Investing Activities
Financing Activities
Interest
Dividend
Index
Foreign Currency transactions

Extraordinary items
Treatment of Tax
Investments in subsidiaries, associates
and joint ventures
Index
Acquisitions
and
disposals
of
subsidiaries and other business units
Non-cash transactions
Disclosures
of
cash
and
cash
equivalents
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.
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.
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.
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
10
Cash and
Cash
Equivalents
Cash:Cash in hand and deposits
repayable on demand with any
bank or other financial institution
11
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
12
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.
13
Types of Cash
Flow
The cash flows generated through
various activities are classified as
Operating cash flow
Investing cash flow
Financing cash flow
14
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
16
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.
17
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
18
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

Mumbai
19
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
20
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
Mumbai
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
21
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
Mumbai
XX
XX
XX
XX
XX
22
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.
23
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
24
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.
25
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
26
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
27
Received on trade advances and operating

receivables should be in operating inflows
For financial enterprises in operating inflow
28
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
29
Dividend
Dividend Received
For
non-financial
enterprisesinvesting inflow
For financial enterprises operating
inflow
Dividend Paid
Always classified as financing inflow
30
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.
31
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.
32
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
33
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.
34
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.
35
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
36
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
37
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
38
Non-cash
transactions
These should be excluded from the

cash flow statement.
These transactions should be
disclosed
in
the
financial
statements.
39
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
40
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
41
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)
42

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Module 6

Cash Flow - Dr. varadraj Bapat, IIT Mumbai

Introduction Cash Flow Statement

Meaning and Types Cash Flow

Foreign Currency transactions

Traditional financial statement fails to

The summary of cash transactions

are catagorised as Operating,

The Accounting Standards are

Cash Flow - Dr. varadraj Bapat, IIT Mumbai

flows are inflows (i.e.

Cash Flow - Dr. varadraj Bapat, IIT Mumbai

receipts from royalties, fees,

It can be derived either from direct

Cash generated from operation

Net cash from operating activities

Cash Flow - Dr. varadraj Bapat, IIT

Funds from operations

Add: Decrease in Current Asset

Less: Decrease in Current Liabilities

The activities of acquisition and

Those activities that result in changes

Received on trade advances and operating

Cash Flow - Dr. varadraj Bapat, IIT Mumbai

The effect of change in exchange rate in

Cash flow for tax payments /

Cash Flow - Dr. varadraj Bapat, IIT Mumbai

Cash flow for tax payments

Cash Flow - Dr. varadraj Bapat, IIT Mumbai

Only the cash flow between

Total purchase and disposal should

Cash Flow - Dr. varadraj Bapat, IIT Mumbai

These should be excluded from the

Disclosures of cash and

The components of cash and cash

The amount of cash and cash

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