Chapter - 6

1. Introduction
Definition: A Cash Flow Statement is a financial statement that shows the inflows and outflows of cash and cash equivalents within a company over a specified period.

• Purpose:

  • To assess the liquidity, solvency, and financial flexibility of a company.

  • To provide information about cash receipts and cash payments.

  • To help users evaluate changes in net assets and financial structure.

 

2. Components of a Cash Flow Statement

• Operating Activities: Cash flows from the primary revenue-generating activities of the company.

• Investing Activities: Cash flows from the acquisition and disposal of long-term assets and investments.

• Financing Activities: Cash flows related to changes in the size and composition of the equity capital and borrowings of the company.

 

3. Methods of Preparing Cash Flow Statement

• Direct Method: Shows the specific cash flows associated with items that affect cash flow.

• Indirect Method: Starts with net income and adjusts for changes in non-cash items, working capital, and other items to reconcile net income to net cash provided by operating activities.

 

4. Cash Flow from Operating Activities

• Direct Method:

  • Cash receipts from customers

  • Cash payments to suppliers and employees

  • Cash generated from operations

  • Cash paid for income taxes

  • Cash paid for interest

Example:
Cash Receipts from Customers XXX
Less: Cash Payments to Suppliers and Employees (XXX)
Cash Generated from Operations XXX
Less: Income Taxes Paid (XXX)
Net Cash from Operating Activities XXX

• Indirect Method:

  • Start with net profit before tax.

  • Adjust for non-cash items (depreciation, amortization, etc.).

  • Adjust for changes in working capital (inventories, receivables, payables, etc.).

Example:
Net Profit before Tax XXX
Adjustments for:
Depreciation XXX
Amortization XXX
Loss on Sale of Fixed Assets XXX
Interest Expense XXX
Increase in Receivables (XXX)
Decrease in Inventories XXX
Increase in Payables XXX
Cash Generated from Operations XXX
Less: Income Taxes Paid (XXX)
Net Cash from Operating Activities XXX
 

5. Cash Flow from Investing Activities

• Cash Inflows:

  • Sale of property, plant, and equipment (PPE)

  • Sale of investments

  • Interest received

  • Dividends received

• Cash Outflows:

  • Purchase of property, plant, and equipment (PPE)

  • Purchase of investments

  • Loans advanced

Example:
Cash Inflows from Sale of PPE XXX
Cash Inflows from Sale of Investments XXX
Interest Received XXX
Dividends Received XXX
Less: Cash Outflows for Purchase of PPE (XXX)
Less: Cash Outflows for Purchase of Investments (XXX)
Net Cash from Investing Activities XXX

6. Cash Flow from Financing Activities

• Cash Inflows:

  • Proceeds from issuing shares

  • Proceeds from issuing debentures, loans, bonds, and other borrowings

• Cash Outflows:

  • Repayment of borrowings

  • Payment of dividends

  • Payment of interest

Example:
Proceeds from Issuing Shares XXX
Proceeds from Borrowings XXX
Less: Repayment of Borrowings (XXX)
Less: Dividends Paid (XXX)
Less: Interest Paid (XXX)
Net Cash from Financing Activities XXX

7. Format of Cash Flow Statement
A. Cash Flow from Operating Activities
Net Profit before Tax XXX
Adjustments for:
Depreciation XXX
Amortization XXX
Loss on Sale of Fixed Assets XXX
Interest Expense XXX
Operating Profit before Working Capital Changes XXX
Changes in Working Capital:
Increase in Receivables (XXX)
Decrease in Inventories XXX
Increase in Payables XXX
Cash Generated from Operations XXX
Less: Income Taxes Paid (XXX)
Net Cash from Operating Activities XXX

B. Cash Flow from Investing Activities
Sale of PPE XXX
Sale of Investments XXX
Interest Received XXX
Dividends Received XXX
Less: Purchase of PPE (XXX)
Less: Purchase of Investments (XXX)
Net Cash from Investing Activities XXX

C. Cash Flow from Financing Activities
Proceeds from Issuing Shares XXX
Proceeds from Borrowings XXX
Less: Repayment of Borrowings (XXX)
Less: Dividends Paid (XXX)
Less: Interest Paid (XXX)
Net Cash from Financing Activities XXX

D. Net Increase/(Decrease) in Cash and Cash Equivalents
(A + B + C) XXX
Cash and Cash Equivalents at the Beginning of the Period XXX
Cash and Cash Equivalents at the End of the Period XXX
 

8. Practical Illustrations
Example Problems: Various scenarios demonstrating the preparation of cash flow statements using both direct and indirect methods.
 

Key Terms

• Operating Activities: Core business activities that generate revenue.

• Investing Activities: Activities related to the acquisition and disposal of long-term assets.

• Financing Activities: Activities that result in changes in the size and composition of the equity and borrowings of the company.

• Cash Equivalents: Short-term, highly liquid investments readily convertible to known amounts of cash.

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These notes cover the essential aspects of the cash flow statement, focusing on its components, methods of preparation, and practical examples to illustrate the preparation and analysis of cash flows.