Cash flow statement

Classification of Activities
Operating Activities
The principle, revenue generating activities of the enterprise and other activities that are
not investing or Financing Activities are called as Operating Activities.
Cash Flow generated from Operating Activities is a key indicator of the firm’s ability to
generate sufficient cash flows from main business activities of the firm.
These cash flows help the firm to maintain its operating capabilities, repay loans and
make new investments without accessing to external/alternative source of financing.
Examples are
 Cash receipts from sale of goods and rendering of services.
 Cash receipts from royalties, fee, commission & other revenue.
 Cash payments to suppliers for goods & services.
 Cash payments to and behalf of employees.
 Cash payments / receipts of an Insurance enterprise for premium & claims,
annuities and other policy benefits.
 Cash payments or refunds of income tax unless they can be specifically identified
with financing and Investing Activities.
 Cash receipts / payments relating to future contracts, forward contracts, option
contract when the contracts are held for dealing or trading purposes.

Investing Activities
Acquisition and disposal of long term assets and other investments not included in cash
equivalents come under Investing Activities. Cash flow generated from Investing
Activities is a key indicator of the extent to which Organization has made expenditure for
resources intended to generate future Income and Cash Flows. Examples are
 Cash payments to acquire fixed assets (including intangibles).Also include
capitalized R&D costs and self-constructed Fixed Assets.
 Cash receipts from disposal of fixed assets.
 Cash payments to acquire shares, warrants or debt instruments of other enterprises
and interest in Joint Ventures.
 Cash advances and loans made to External Parties.
 Cash receipts from External parties for repayment of advances & Loans.
 Cash receipts / payments from / to future contracts, forward contracts, option
contract except when the contracts are held for dealing or trading purposes, or the
receipts / payments are classified as Investing Activities.
 Receipt of Interest/Dividend on account of Investments made.

Financing Activities
The activities which result in changes in the size and composition of the owner’s capital
(including preference share capital in the case of a company) and borrowings of the
enterprises are Financing Activities. Financing Activities are useful in predicting claims
of Fund Providers on future cash flows .Examples are
 Cash proceeds from issuing shares or other similar instruments.
 Cash proceeds from issuing Debentures, Loans, Bonds and Short/Long Term
Borrowings.
 Cash repayments of amounts borrowed.
 Payment of Interest/Dividend on account of shares/debentures issued; Loans
taken.
 Points to remember
1. Net cash flow within an activity – operating, investing, or financing- can be positive
or negative.
2. The sum of cash flow from all the activities taken together, along with the opening
cash and cash equivalents, shall be equal to the closing cash and cash equivalents.
3. A single transaction may include cash flow belonging to two different activities; for
instance, if machinery has been purchased on hire purchase instalments, each
instalment will include interest and part of principal. The cash paid for interest is a
financial activity whereas the cash payment for principal amount is an investing
activity.
4. Issue of shares and debentures for consideration other than cash and also the
conversion of debentures into shares or other types of securities are not cash flows.
Therefore, they are not taken into account while preparing the Cash Flow Statement.
5. Any inflow or outflow between cash and cash equivalents is also not taken into
account while preparing the cash flow statement.
6. Tax on Operating Profit should be classified as operating cash flow. Corporate
dividend tax is classified as financing cash flow. Capital gain tax paid on sale of fixed
assets should be classified as investing cash flow.
7. Given below is the format of Profit & Loss Account giving an expanded view of
Revenue and Expense. This format can be used in a reverse manner to reach to
PBITDA while starting from Profit before Tax or Profit after Tax.

Particulars Amount
REVENUE
Revenue from sales of Goods & Services
+ Operating Revenue
= Total Revenue from Operations (i)
EXPENSES
Cost of Material Consumed
+Purchase of Stock in Trade
+Change in the Inventory of WIP, Finished Goods and Stock in Trade
+Employee Benefit Expenses
+Other Operating Expenses1
= Total Expenses (ii)
Profit Before Interest, Tax, Depreciation & Amortization (i) – (ii)
[PBITDA]
- Depreciation & Amortization
Profit before Interest & Tax [PBIT] (Operating Profit)
+ Other Non Operating Revenue2
- Interest Expenses (Finance Cost)
- Other Non Operating Expenses3
Profit before Tax [PBT]
- Tax Expenses/Provision for Tax
Profit After Tax [PAT]

1
Manufacturing Exp, Office & Administration Exp, Sales, Distribution & Marketing Exp
2
Interest/Dividend received; Gain on sale of Fixed Assets.
3
Loss on sale of Assets, Preliminary Expenses written off,
 CASH FLOW STATEMENT (INDIRECT METHOD)

A1. Cash Flow from Operating Activities (when “Profit after Tax” in Profit & Loss
Account is given and “Total Cash available from Operating Activities” is to find
out).
Profit after Tax
Adjustments for Non-Cash/Non-Operating items
(+) Provision for tax made /Tax Expense during the year
(+) Interest Expenses
(+) Loss on sale of Investments/Fixed Assets
(+) Depreciation, Amortization
(-) Refund of tax, if any, recorded in Profit & Loss a/c
(-) Profit on sale of Investments/Fixed Assets
(-) Interest Income/Dividend Income/Any other Income
Operating Profit before working capital changes
(+) Decrease in Receivables, Inventory, Prepaid expenses, Income due not recd
(+) Increase in Payables, Outstanding expenses.
(-) Increase in Receivables, Inventory, Prepaid expenses, Income due not recd
(-) Decrease in Payables, Outstanding expenses.
Cash generated from operations
(-) Income Tax Paid
Net cash from Operating Activities
(+) Profit/ (-) Loss from extraordinary items
Total Cash available from Operating Activities

OR
A2. Cash Flow from Operating Activities (when “Profit transferred to Balance
Sheet” in Balance Sheet is given and “Total Cash available from Operating
Activities” is to find out).

Profit Transferred to Balance Sheet from “Surplus” Column

(-) Opening Balance of Profit (Previous Year Profit)
(+) Provision for Dividend
(+) Transfer to Reserves
= Profit after Tax
Adjustments for Non-Cash/Non-Operating items
(+) Provision for tax made during the year
(+) Interest Expenses
(+) Loss on sale of Investments/Fixed Assets
(+) Depreciation, Amortization
(-) Refund of tax, if any, recorded in Profit & Loss a/c
(-) Profit on sale of Investments/Fixed Assets
(-) Interest Income
Operating Profit before working capital changes
(+) Decrease in Receivables, Inventory, Prepaid expenses, Income due not recd
(+) Increase in Payables, Outstanding expenses.
(-) Increase in Receivables, Inventory, Prepaid expenses, Income due not recd
(-) Decrease in Payables, Outstanding expenses.
Cash generated from operations
(-) Income Tax Paid
Net cash from Operating Activities
(+) Profit/ (-) Loss from extraordinary items
Total Cash available from Operating Activities
B. Cash Flow from Investing Activities
(-) Purchase of fixed assets, Investments
(-) Loans, advances given
(+) Sale of fixed assets, investments
(+) Loans, advances received back
(+) Interest & Dividend received on investments
(+) Rental Income received
Net Cash available from Investing Activities (if +)/used (if -)

C. Cash Flows from Financing Activities

(+)Proceeds from issuance of Share capital/debenture/loans/public deposits
(-)Repayment of preference share capital/debenture/loans/public deposits
(-)Interest paid, dividend paid
Net Cash available from Financing Activities (if +)/used (if -)

Net Increase/Decrease in cash (and cash equivalents) (A+B+C)

Cash (and cash equivalents) at beginning of period
Cash (and cash equivalents) at end of period

NOTE

1. Interest paid is classified as cash flow arising out of financing activity whereas
interest and dividend received is classified as cash flow from investing activity.
2. Cash flows associated with extraordinary items should be classified as arising
from operating, investing or Financing Activities as appropriate and separately
disclosed.