It’s all about money,

Cash Flow Statement

Prof Padmini Srinivasan
Cash is Cash
 Cash is cash

 Rest is accrual accounting

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What the reason ?
 What is the secret of sustained growth of
companies?

 Which financial report is gaining favor

among analysts for stock valuations?

Why some startups close down so quickly?

 (cash burn)

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CASH FLOW STATEMENT
 Income statement and the Balance sheet may
not give the complete picture of the
enterprise.
 For eg: How did the company finance a
dividend of Rs. 150 mn, when the earnings
were just Rs.100mn
 How did a company purchase Equipment 1mn
when the overall profitability was a loss - 2mn
 How did they finance their acquisitions ?
 Why did the cash balance increase or decrease
?
 How did the company utilize the CFO
.

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CASH FLOW STATEMENT
 How much was the borrowings and how it was
utilized.
 Did the operations generate cash flow
 What is the quality of earnings of the company
 What financial flexibly does the company have ?
 Why did the cash balance increase or decrease ?

 Most analysts prefer to use cash flow statements

to other tools
.

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What is a Cash Flow Statement

 It is the cash inflow and outflow for a

period
 It Can be taken as the compact version
of a cash and bank account where
details are classified in an appropriate
format
 Cash flow statement should be
prepared and Presented for each
period for which financial Statements
are presented.
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Let us discuss the
components

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Cash and cash equivalents
 Cash = Includes demand deposits with
banks and Financial Institutions
 Cash Equivalents = Short term highly
liquid investments

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FORMAT FOR CASH FLOWS

BROAD GROUPS:
 CASH FLOW FROM OPERATING ACTIVITY
 CASH FLOW FROM INVESTING ACTIVITY
 CASH FLOW FROM FINANCING ACTIVITY

 Resulting in movements in Cash and Cash

Equivalents

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 OPERATING ACTIVITIES
 Includes the cash flows derived from principal
revenue –producing activities of enterprise.
 Cash receipts from main business of
company.
 Cash receipts from royalties, fees, etc.
 Cash payment to supplier.
 Cash payment to and behalf of employees.
 Cash payments or refunds of income tax.

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INVESTMENT ACTIVITIES
 Shows the expenditure that have been
made to generate future income and cash
flows.
 Cash payment to acquire fixed assets.
 Cash receipts from disposal of fixed
assets(including intangibles)
 Cash payment to acquire
shares ,warrants or debt instrument of
other firms.
 Cash receipts from disposal of shares
etc
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FINANCING ACTIVITIES
 Cash proceeds from issuing shares or
other similar instruments
 Cash received from debentures,loans
bonds and other borrowings
 Cash repayments of amount
borrowed.
 Interest paid
 Dividend paid

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CFS Format
COMPANY NAME
Statement of Cash Flows
Period Covered
Cash Flows from Operating Activities
(List of individual inflows and outflows) XXX
Net Cash Flow from Operating Activities XXX
Cash Flows from Investing Activities
(List of individual inflows and outflows) XXX
Net Cash Flow from Investing Activities XXX
Cash Flows from Financing Activities
(List of individual inflows and outflows) XXX
Net Cash Flow from Financing Activities XXX
Net Increase (Decrease) in Cash and Cash XXX
Equivalents
Cash and Cash Equivalents at Beginning of Period XXX
Cash and Cash Equivalents at End of Period XXX
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Profitable, yet in Trouble?
 A firm is defined as “profitable” if it has a
positive net income
 A positive net income results from accrual-
based revenues exceeding accrual-based
expenses
 A firm may have a positive net income,
but this does not guarantee that the firm
has the CASH to meet its obligations!

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Prepare Cash Flow statement
 Introduced capital of Rs. 50000 in cash
 Borrowings of Rs.10000 in cash
 Purchased goods for Rs. 50000: paid in cash Rs.
30000 and credit Rs.20000
 Sold goods costing 40000, for Rs. 100,000 on
credit
 Bought Investments of Rs.2000 in cash
 Bought furniture for Rs.15000 paid cash.
 Depreciation of Rs. 3000 on Equipment
 Dividend on investments received Rs. 1200 in
cash
 Interest paid Rs. 1000 in cash
Prepare the cash flow statement
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FORMAT FOR CASH FLOWS

BROAD GROUPS:
 CASH FLOW FROM OPERATING ACTIVITY
 CASH FLOW FROM INVESTING ACTIVITY
 CASH FLOW FROM FINANCING ACTIVITY

 Resulting in movements in Cash and Cash

Equivalents during the year
Add: Opening Balance
Result : Closing Balance

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METHODS
 PREPARING THE CASH FLOW
 DIRECT METHOD
 (summarize the cash and bank
transactions under the various heads)

 INDIRECT METHOD
 - Need to reconcile a few things as shown

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Cash Flow : Direct Method
1.Cash flow from operations
Paid Creditors (30000)
2 Cash flow from investing
Equipment (15000)
Investments (2000)
Dividend Received + 1200
3. Cash flow from Financing
Capital +50000
Borrowings +10000
Interest paid (1000)

Ending Cash Balance 13200

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DIRECT METHOD
The major cash receipts and payments are
disclosed
Ie. A summary of the cash Book !!!

CFO: Inflows (i.e., cash collections from

customers).
 Outflows (i.e., payments).
 Net cash flow (i.e., receipts - payments).

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Cash Flow from operations
 Collections from Customers Sales – Increase in
accounts receivable
 Payments to Suppliers; Cost of goods sold +
increase inventories – increase in accounts
payable.
 Cash paid for payroll = Salaries and wages
expense – increase in salaries and wages payable.
 Cash paid for taxes = Taxes expense – increase in
taxes payable.

 Challenge Question: Can you calculate the cash

collected from customers during the year &
reconstruct the Ledger ??
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 Indirect method

Investing and Financing activities are

same
Operating Activities need to be prepared in
a different way.

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What is the Profit
 Revenue 100,000
 Other income 1,200
Exp
 Cost of Goods Sold 40,000
 Depreciation 3,000
 Interest 1000

 Profit before tax 57,200

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INDIRECT METHOD

 Usually followed by companies as the present

system of maintaining records does have the flexibility/
information to prepare CFO using direct Method.
 Method require the following adjustments:
The PBT is adjusted for effects of:
I. non cash nature
II. any deferrals or accruals from the past or
future
III. items of income/expense associated with
investing or financing cash flows
IV Adjustment for working capital changes

Finally Tax paid must be accounted 23

Indirect Method
•Profit Before Tax 57200
•Add Depreciation 3000
•Add: Interest expenses 1000
•Less: dividend income 1200

•Profits before working capital changes 60000

Working Capital Changes

•Increase in Receivables (100000)
•Increase in Inventory (10000)
•Increase in Creditors 20000 (90000)
•CFO (30000)
Cash flow from Investing Activities
Equipment purchased (15000)
Investments purchased
(2000)
Dividend income 1200 (15800)
Cash Flow from Financing Activities
Capital Received 50000
Borrowings inflow 10000
Interest paid (1000) 59000
13200
Ending Cash Balance
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Map HUL with above
Indirect Method: CFO

Step 1 start with Profit before tax

 Make adjustments for NON OPERATING AND
NON CASH ITEMS
Interest, Dividend Incomes, Depreciation etc.
Step 2: Adjustment for Working Capital
changes
 Changes in inventory, operating receivables
and payables
 Arrive at the net operating cash before tax
 Adjust for income tax payments
 Finally arrive at CFO

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Product Life Cycle and Cash Flow

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Some Ratios: Using Cash
**Cash Gap = PBWCC /Cashflow before
tax
** my version

Other ratios
Cash+Cash Equivalents+CFO
Current Liabilities
(ability to pay Current Liabilities from cash)
Cash flow from operating activity
Net Sales
(ability of the firm to generate cash from sales)
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Analysis of Cash Flow Statement

Sources and uses calculated as a percent

of total sources.

Cash realization ratio = (cash generated by

operations)/(Net income)

Cash Debt Coverage Ratio: Ratio of cash

generated by operations to total debt.

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“Free” Cash Flow
 Cash from operations less:
 Fixed asset replacement necessary to maintain
existing capacity.

 CFO – Net PPE expenditure during the year

 = Free cash flow to the Firm

 Do note Free cash flow to Equity is different

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Cash is King !!

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