unit 4 accounting 1 20 (1)

8/6/2019 Unit 4 Accounting 1 20 (1)

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NIT4

Funds Flow Analysis

i s Sectio n includes:

e Meanin g and concept of Funds

e Meanin g and Definitio n of Fund Flow Statement

e Funds Flow Statement - Positio n in India

e Significance , Importance and Uses ofFunds Flow Statement

e Cash Flow Statement

TRODUCTION:

erybusines s concernprepare s two basic financial statement s at the end ofaccountin gperiod, namel y

Balance Sheet orpositio n Statement and Profit and Loss Account or Income Statement . Balance

et reveal s the financial positio n of the busines s concer n at a certain point of time. It reveal s the

ancial statu s of the busines s concern . The assets side of a Balance Sheet shows the deployment of

ource s of an undertakin g while the liabilitie s side indicates its obligation s i.e., the manne r in whic h

se resource s obtained . The Profit and Loss Account or Income Statement reveal s the net result s of

ration s over a period of time i.e. ,how much profit was earne d (or loss sustained ) by thebusines s

erprise durin g the accountin g period.

e Balance Sheet provide s only a static view of the business . It is a statement of assets and liabilitie sa particula rdate. It does not show the movement offunds. Inbusines sconcerns, funds flow from

ferent source s and similarl y funds are investe d in variou s source s ofinvestment . It is a continuou s

ocess. Thestud y and control of this funds flow proces s is the mai n objective offinancial management

assess the soundnes s and solvenc y of a busines s tell little about its flow of funds ,i.e. ,financin g and

estin g activities over the related period . Like the Balance Sheet, even the Profit and Loss Account

s not depict the change s that have taken place in financial conditio n ofa busines s concer n betwee n

dates . Hence there is a need to prepare an additional statement to know the change s in

ets ,liabilitie s and owners' equit y betwee n dates of two Balance Sheets. Such a statement is called

nds Flow Statement or Statement of Sources and uses of funds or where come and where gone

ement.


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efunds flow statement ,whic his also known as the Statement of Change s infinancial positio n, is yet

the rtool ofanalysi s offinancial statements.


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EANING AND CONCEPTS OF FUNDS :

nds Flow Statement is a widel y used tool in the hand s of financial executive s for analysing theancial performance ofa busines s concern. Funds keep on movin g in a busines s which itself is based

a going concer n concept.

e term Funds has a variet y ofmeanings.

In a narrow sense -Ina narro w sense fund mean s only cas h Funds Flow Statement prepared on this

sis is called as Cash Flow Statement . Inthi s type ofstatement only in flow and outflow of cash is taken

o account.

In a broader sense - Ina broade rsense the term fund refers to mone y value in whatever form it

y exist. Here funds mean all financial resource s in the form ofmen ,materials ,money, machiner y etc.

Popular sense -Ina popula rsense the term funds mean s Workin g Capital I.e.,the excess ofcurrent

ets over current liabilities. When the funds move inward s or outward s they cause a flow or rotatio nfunds. Here the word fund mean s net workin g capital. Inshort , iffunds mea nworkin gcapital , then

statement prepare d on the basis is called Funds Flow Statement.

e concept s offunds as workin g capital is the most popula rone and in this chapte rwe shall refer tod workin g capital and a funds flow statement as a statement of source s and applicatio n ofds.

EANING AND DEFINITION OF FUNDS FLOW STATEMENT:

nds Flow Statement is prepare d to stud y the change s in the financial positio n of a business over ariod of time generall y one year. Funds Flow Statement reveal sbot h inflow and outflow offunds. Theow offunds is known as source s of the funds and the outflo w offunds means

s or applicatio n of the funds. Funds flow statement is also known as Statement o fsources

Applications of funds orwhere got-where gone statement . Funds Flow Statement highlightsd change s in the financial structure of an undertaking . It determine s the financial

nsequence s ofbusines s operations.

nds Flow Statement gives detaile d analysi s of change s in distributio n of resource s between two

ance Sheet dates. This statement is widel y used by the financial analysist s and credit grantin g

titution s and financial and financial manager s inperformin g their jobs. Thus ,Fund s, Flow Statement ,in

neral is able to present that informatio n which either is not available ornot readil y apparent from an

lysi s of other financial statements.

finitions

tatement ofsource s and applicatio n offunds is a technical device designe d to analyse the change s infinancial conditio n of abusines s enterprise betwee n two dates. - Foulke

nds Flow Statement describe s the source s from whic h additional funds were derive d and the use toic h these source s were put. -Anthony


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statement ofchange s in financial positio n or statement ofsource s and applicatio n offunds in whic h

ment of net income and workin g capital contributio n to an understandin g of the whole offinancial

ration s durin g the reportin g period replace totals of theseitems.

tler

statement either prospective or retrospective ,settin g out the source s and application s of the funds ofenterprise . Thepurpos e of the statement is to indicate clearly the requirement s offunds and how they

propose d to be raised and the efficient utilisatio n and applicatio n of the same.

NDS FLOW STATEMENT - POSITION IN INDIA:

e Funds Flow Statement is now regarde d as an important part offinancial reporting . The necessit y of

statement is now undoubtedl y realise d by all owners ,managements,investors and others. In India ,

ug h the funds flow statement or statement of change s in financial positio n has not so far become a

t of the financial reporting ,bank s and financial institutions are insistin g whe n a compan y approache s

m for loans.

India , unde r the existin g legal requirements , companie s are unde rno legal obligatio n topublis h aement of change s in financial positio n along wit h their financial statement. Howeve r there is a

win g practice to publis h such statement along with financial statement especiall y in the case of

mpanie s listed on the stock exchange s and other large commercial, industrial and busines s concern s in

public and private sectors.

GNIFICANCE, IMPORTANCE AND USES OF FUNDS FLOW STATEMENT:

nds flow statement isprepare d to know the change s in assets ,liabilitie s and owner s equity betwee n

es of two Balance Sheets.lt is a statement ofsource s and uses offunds. Funds Flow Statement is also

own as Statement of Sources and Applicatio n offunds or movement ofFunds Statement etc.

nds flow statement reveal s both inflow and outflo w offunds. The inflow offunds is known as Sourcesthe funds and the outflo w offunds mean s uses orApplicatio n of the funds.

other words Financial Statement gives detaile d analysi s of change s in the distributio n ofresource swee n two dates.

is very useful tool in the financial manager s analytical kit. It provide s a summar y ofnagement decision s on financin g activities of the firm and investment policy. Thefollowing are the

vantage s ofFunds Flow Statement.

Analysis of financial operations - The Funds Flow Statement reveal s the net affect ofvariou s

transaction s on the operational and financial positio n of the busines s concern. It determine s the

financial consequence s of busines s operations . This statement discloses the causes for change s in

the assets and liabilitie s betwee n two different points of time. It highlight s the effect of these change son the liquidit y positio n of the company.

Financial policie s - Funds Flow Statement guide s the management in formulatin g the financial

policies such asdividend ,reserve etc.


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Control device -It serves as a measure of control to the management . If actual figures are comparedwithbudgeted/projecte d figures ,management can take remedial actionifthere are any deviations.

Evaluatio n of firm's financin g -Funds Flow Statement helps in evaluatin g the firm's financing.It shows how the funds were obtained from various sources and used in the past. Based on this,

the financial manager can take corrective action.

Acts as a future guide -Funds Flow Statement acts as a guide forfuture ,to the management.

It helps the management to know various problems it is going to face in near future forwant offunds.

Appraisin g the use of workin g capital - Funds Flow Statement helps the management in knowinghow effectively the working capital put into use.

Reveal s financial soundnes s - Funds Flow Statement reveals the financial soundnes s of thebusiness to the creditors, banks, financial institutions.

Change s in workin g capital -Funds Flow Statement highlights the changes in working capital.This helps the management in framing its investment policy.

Assessin g the degree of risk - Funds Flow Statement helps the bankers, creditors,finandalinstitution s in assessing the degree of risk involved in grantin g the credit to thebusiness concern.

Net result s -This statement reveals the net results of operations durin g the year in terms ofcash.

tional Associatio n of Accountant s (NAA)-National Association ofAccountant s states the followings of Funds Flow Statement :

Estimating the amount offunds needed forgrowth. (ii)

Improvin g the rate of income on assets.

) Planning the temporar y investment of idle funds. (iv)

Securing additional working capital when needed.

Securin g economie s in the centralise d management of cash in organisatio n whosemanagement is centralised.

) Planning the payment ofdividend s to shareholder s and interest to creditors. (vii)

sing the effects of an insufficient cashbalance.

mitation s of Funds Flow Statement

e following are the important limitations of Funds Flow Statement

Funds Flow Statement is not a substitute of Income Statement or a Balance Sheet. It furnishe donly some additional informatio n as regards changes in workin g capital.


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This statement lacks originality . It is simpl y rearrangement of data appearin g in account books.

It indicate s only the past changes . It can not reveal continuou s changes.

When bot h the aspect s of the transactio n are current , they are not considered.

When both the aspect s of the transactio n are non-current , even then they are not included in fundsflow statement.

Some Management Accountant s are of the opinio n that this statement is not ideal tool for financialanalysis.

Funds Flow Statement is historic in nature . Hence this projecte d funds flow statement cannot beprepare d with much accuracy.

urce s ofFunds

Issue of share capital -If there is any increase in share capital it denote s issue ofadditional share s

durin g the period . Issue of share s is a source offunds as it constitute s inflow offunds. Even callsreceived on partl y paid share s constitute an inflow of funds. Ifshare s are issue d at premium , the

premium will also become a source offund.

Note -Ifshare s are issue d and allotte d for other than cash, consideratio n do not generate fund.

Issue of debentures of long tenn loans - Issue ofdebentures , acceptin gpublic deposits, and raisin glong term loans result s in the flow offunds.

Note -Ifdebenture s like share s have bee n allotte d to some body other than cash,

consideratio n do not generate fund.

Sale of fixed assets or long term investment s -Whe n any fixed asset like Land, Building, Machinery ,

Furniture on long term investment s etc. are sold,it generate funds andbecomes a source offunds.

Non-tradin gincome -Any non-tradin g receipt s like dividends , rent, interest etc.,

Decrease in working capital -If workin g capital is decrease d durin g the accountin gperiod, whencompare d with previou s period , it denote s release offunds from workin g capital and it constitute s

a source offunds.

PLICATIO N OR USE OF FUNDS:

Redemption ofpreferenceshare capital - If there is any decrease in preference share capital durin gcurrent year , whe n compare d with previou s year , we must assume that the preference share s

are redeemed .Itresults in the outflow offunds and is taken as Application offunds. Redemption of debentures - If any debenture s are redeeme d durin g the account period ,it constituteapplicatio n offunds.


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Repayment of long-term loans- Repayment oflong-termloanals o constitute an application offunds.

Purchaseof fixed assets or long term investments -If any fixed assets like land ,buildings, furniture ,long-term investment s etc., are purchase d for cash, funds outflow from thebusiness.

Note - Ifany fixed asset ispurchase d for a consideratio n of issue of shares ordebenture s,

it doesnot involve any funds and hence not an applicatio n offunds.

Non-tradingpayment - Payment of dividend s and tax etc. reduce the working capital and is anapplicatio n of funds. Mere declaration of dividend or creating a provisionfor taxation, do not betreated as an outflow offunds.

Any other non-trading payment-Any payment or expense not related to the trading operationsof the business amounts to outflow of funds and also taken as applicatio n offunds.

Funds lost in operations -If there is any loss durin g the accountin g period,it amounts to loss offunds in operations . Such loss of funds in trading operation s treated as outflow offunds.

ASH FLOW STATEMENT:

underline the importance of Funds Flow Statement the Institute of Chartered Accountants of IndiaCAI) issued in June 1981Accountin g Standard-3 dealing with thepreparation o fStatementchanges in financial position during a particularperiod. Whilepreparin g this statement the term funds wasined as Cash and Cash equipments or working capital.The main purpos e ofpreparing the Funds Flowtement is to provide a meaningful linkbetwee n the Balance Sheet at the beginning and at the end ofriod and the Profit and Loss Account for theperiod.

spite of its importance Accounting Standard - 3 suffers from the following limitations.

Accounting Standard - 3 did not provide any standard format for the preparation ofFunds

Flow Statement.

When Funds Flow Statement is prepare d on cash basis, it did not disclose cash flows fromoperating,investing and financial activities separately. It nearly provided information regarding inflowsand outflows offunds.

Accounting Standard - 3 allowed considerable flexibility regardin g the meaning of the termFunds. As a result some business concerns prepare d this statement on working capital basis, whereasothers prepared it on cash basis. However most of the business firms prepared this statement onworking capital basis. Working capital includes items like inventories and prepaid expenses whichare not easily convertible into cash within a short period. Further these items do not contribute to theability of the firm to pay the short term obligations as and when they become due.

ue to these limitations there was a need for cash flow statement prepare d in standar d format. The

ancialAccountin g Standard Board, U.S.A . also stressed the need of preparing the cash flow statement inndardform.


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June 1995 the Securities and ExchangeBoardof India (SEBI)amended clause 32 ofthe listing agreement requiringry listed company to submit along with Balance sheet and Profit and Loss Account, a Cash Flow Statementpared in the prescribed format showing separately cash flow from operatingactivities, investin g activities and

ancing activities.

cognizin g the importance of cash flow statement , the Institute of Chartere d Accountant s of Indiaue d Accountin g Standard - 3 Revised in March 1997. This revised accountin g standard supercede scountin g Standard- 3 change s in financial positio n issued in 1981.

vised Accountin g Standard - 3 has given the objectives of the Cash Flow Statement are as under.

ormatio n about the cash flows of an enterprise is useful in providin g users of financial statement sh a basis to assess the abilit y of the enterprise to generate cash and cash equivalent s and theds ofenterprise s to utilize those cash flows. The economic decisions that are taken by users requireevaluatio n of the ability of an enterprise to generate cash and cash equivalent s and the timing andtaint y of their generation.

s statement deals with the provisio n of informatio n about the historical change s in cash and cash

uivalent s of an enterprise by mean s of a cash flow statement which classified cash flows durin g theio d from operating ,investin g and financin g activities.

anin g - Cash Flow Statement reveal s the causes of change s in cash positio n ofbusiness concernwee n two dates of Balance Sheets. Accordin g to Accountin g Standard - 3 (Revised) an enterpriseul d prepare a cash flow statement and shoul d present it for each period with financial statement spared . A5-3 (Revised) has also given the meanin g of the words cash, cash equivalent and cash flows.

Cas h -Thi s include s cash on hand and deman d deposit s with banks.

Cas h equivalent s -This include s purel y short term and highly liquidinvestment s which are readil yconvertible into cash and which are subject to an insignificant risk ofchange s in value. Therefore aninvestment normall y qualifie s as a cash equivalent only whe n it has a short maturity , of say three

month s orless.

Cas h flows - This include s inflow s and outflow s of cash and cash equivalents . If the effect oftransactio nresult s in the increase of cash and its equivalents,it is called an inflow (source) and if itresults in the decrease of total cash,it is known as outflo w (use cash of).

assificatio n Of Cash Flows

cordin g to A5-3 (Revised) cash flows are classified into three main categories:

Cash flows from operatin g activities.

Cash flows from investin g activities.

Cash flows from financin g activities.

Cash flows from operatin g activitie s - Operatin g activities are the principal revenue producin g

activities of the enterprise and other activities that are not investin g orfinancing activities.


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e arn.ount of cash flows arisin g from operatin g activitie s is a key indicatc.n vl lll


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Cash receipt s from disposal of shares , warrants , or debt instrument s of other enterprises and

interest s in joint venture.

Cash advance s and loans made to third partie s (other than advance s and loans made by a financial

enterprise ).

Cash receipt s from the repayment of advance s and loans made to third partie s (other than

advance s and loans of a financial enterprise ).

) Cash payment s for future contracts ,forwar d contracts ,option contracts ,and swap contracts except

whe n the contract s are held for dealin g or tradin g purpose s or the payment s are classifie d as

financin g activities and

i) Cash receipts from future contracts ,forwar d contracts ,option contracts and swap contracts except

whe n the contract s are held for dealin g or tradin g purpose , or the receipt s are classifie d as

financin g activities.

When a contract is accounte d for as a hedge of an identifiable position , the cash flows of the contract

are classified in the same manne r as the cash flows of the positio n being hedged.

Cash flows from financin g activitie s - Financin g activities are activitie s that result in changes inthe size and composition of the owners capital (includin g preference share capital in the case of a

company ) and borrowing of the enterprise.

The separate disclosure of cash flows arisin g from financin g activities is imporant because it is useful

in predictin g claims on future cash flows by provider s offunds (both capital and borrowing ) to the

enterprise.

amples Of Cash Flows Arising From Financing Activitie s Are

Cash proceed s from issuin g share s or other similar instruments.

Cash proceed s from issuin g debentures , notes , bonds and other short-o r long-termborrowing s and

Cash repayment s of amount s borrowe d such as redemptio n of debentures , bonds, preferenceshares.

eahnento fsome typical items -AS- 3 (Revised) has alsoprovide d for the treatment ofcash flows fromme peculia ritems as discusse d below :

Extraordinary Items - The cash flows associate d with extraordinar y items shoul d be classifie d asarisin g from operating , investin g or financin g activities as appropriate and separatel ydisclose d in

the cash flows statement to enable users to understan d their nature and effect on the present andfuture cash flows of the enterprise.


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Interest andDividends -Cash flows from interest and dividend sreceive' bedisclose d separately .Further , the total amount of interest paid during

be disclose d in the cash flow statement whethe rit has been recognise d as an expense mthe statement of profit and loss or capitalised . The treatment of interest and dividends receive d

and pai d depend s upon the nature of the enterprise . For this purpose , the enterprise s are

classifie d as (i) Financial enterprises , and (ii) Other enterprises.

(i) Financial enterprise s -In the case offinancial enterprises , cash flows arisin g from interest

paid and interest and dividen d receive d shoul d be classified as cashflows arisin g from

operatin g activities.

(ii) Othe r enterprise s -In the case of other enterprises , cash flows arisin g from interest paidshoul d be classifie d as cash flows from financin g activitie s while interest and dividend s

received shoul d be classified as cash flows from investin g activities.

vidend spaid shoul dbe classifie d as cash flows from financin g activities.

Taxes on income - Cashflow s arisin g from taxes on income shoul d be separatel y disclosed andshoul d be classifie d as cash flow s from operatin g activitie s unles s they can be specificall y

identifie d with financin g and investin g activities.

xes on income arise on transaction s that give rise to cash flows that are classified as operating investin g

financin g activitie s in a cash flows statement . While tax expense may be readily identifiable wit h

estin g or financin g activities , the relate d tax cas h flow s are often impracticable toidentif y and

y arise ina different period from the cashflows of the underlying transactions . Therefore , taxes paid are

all y classified as cash flows from operatin gactivities. However ,whe n it is practicable to identif y the

cash flow with an individual transaction that gives rise to cash flows that are classified as investin g

financin g activities the tax cash flow is classifie d as aninvestin g or financin g activit y as appropriate .hen tax cash flows are allocate d to ever more than one class ofactivity , the total amount of taxes paid is

closed.

Acquisition s and disposal s of subsidiarie s and othe r busines s unit s - The aggregate cash flows

arisin g from acquisition s and from disposal s of subsidiarie s or other business units shoul d be

presente d separatel y and classifie d as investin g activities . An enterprise shoul d disclose ,inaggregate in respect of both acquisitio n and disposal ofsubsidiarie s orother busines s unit s durin gtheperio d each of the following:

(i) The totalpurchase or disposal consideratio n and

(ii) The portio n of the purchase or disposal consideratio n discharge d by mean s ofcash and cashequivalents.

e separate presentatio n of the cash flow effects ofacquisition s and disposal s ofsubsidiaries and othersines s unit s as single line items helps to distinguis h those cash flows from other cash flows , the cash

w effects ofdisposal s are not deducte d from those ofacquisitions.

Foreig n currenc y cash flows - Cash flows arisin g from transaction s ina foreig ncurrency shoul d berecorde d in an enterprise' s reportin g currenc yby applyin g to the foreign currenc y amount theexchant"' r:. h < = > h A T < = > < = > n h rnrwtinrr r11rrency and the foreign


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currenc y at the date of the cash flow. A rate that approximate s the actual rate may be used ifthe result

is substantiall y the same as woul d arise ifthe rates at the dates of the cash flows were used. The

effect ofchange s in exchange rates on cash and cash equivalents held in a foreig n currenc y shoul d

be reporte d as a separate part of thereconciliatio n of the change s in cash and cash equivalent s

durin g theperiod.

Umealise d gains and losses arisin g from change s in foreig n exchange rates are not cash flows.

However , the effect of exchange rate change s on cash and equivalent s held or due in a foreig n

currenc y is reporte d in the cash flow statement in order to reconcile cash and cash equivalent s at the

beginnin g and the end of the period . This amount is presented separatel y from cash flows from

operating ,investin g and financin g activities and includes the difference ,ifany had those cash flowsbeen reporte d at the end ofperiod exchange rates.

Non-cash transactions - Many investin g and financin g activities do not have a direct impact on

current cash flows althoug h they do affect the capital and asset structure ofan enterprise . Example s

ofnon-cas h transaction s are :

(a) The acquisitio n of assets by assumin g directl y relate d activities. (b) The

acquisitio n of an enterprise by means of issue ofshares; and (c) The conversio n

of debt to equity.

estin g and financin g transaction s that do not require the use of cash or cash equivalents shoul d be

lude d from a cash flow statement . Such transaction s shoul d be disclose d elsewhere in the financial

ement s in a way that provide s all the relevant informatio n about these investin g and financin g

vities.

thod s ofCalculatin g Cash flows (Used in) Operating Activities

ere are two method s of reportin g cash flows from operatin g activities namel y (1) Directtho d and (2) Indirect Method.

The Direct Method - Unde r the direct method , cash receipt s (inflows) from operating revenue s

and cash payment s (outflows ) for operatin g expense s are calculate d to arrive at cash flows from

operatin g activities. The difference betwee n the cash receipt s and cash payment s is the net cash

flow provide d by (or used in) operatin g activities . The following are the example s of cash receipt s

and cash payment s (called cash flows) resultin g from operatin g activitie s :

(a) Cash receipt s from the sale ofgoods and the renderin g ofservices. (b) Cash

receipt s from royalties , fees commission s and other revenues (c) Cash payment

to supplier s for goods and services(d) Cash payment to and on behalf ofemployees.

(e) Cash receipt s and cashpayment of an insurance enterprise forpremium s and claims annuitie s

and other policy benefits.


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(f) Cash payment s or refun d of income taxes unless they can be specificall y indentified with

financin g and investin g activitie s and

(g) Cash receipt s and payment s relatin g to future contracts ,forwar d contract s,option contract s

and swa p contract s whe n the contract s are held for dealin g or trading purposes.

(h) The formatio n about major classes of gross cash receipt s and gross cash payments may beobtaine d either:

(i) From accountin g record s of the enterprise; or

(ii) By adjustin gsales ,cost of sales (interest and similar income and interest expense and similarcharge s for a financial enterprise ) and other items in the statement of profit and loss for;

(i) Change s durin g theperio d in inventorie s and operatin g receivable s and payables,

(j) Other non-cas h items ,and

(k) Other items for whic h the cash effects are investin g orfinancin g cash flows.

rmat of Cash Flow s Statement - AS-3 (Revised) has not provide d any specific format forpreparin g

ash flows statement . However , an idea of the suggeste d format can be inferred from the illustration s

pearin g in the appendice s to the accountin g standard . The cash flow statement shoul d report cash

ws durin g the period classifie dby operating , investin g and financin g activities; a widel y used format

cash flow statement is given below:

sh Flow Statemen t (for the year ende d.....)

Pa

ticulars Rs. Rs. Cash Flows

rom Operatin g Activities

ash receipt s from customers

ash paid to supplier s and employees

ash generate d from operations

Income taxpaid

ash flow before extraordinar y items

Extraordinar y items

Net cash from (used in) Operatin g activities

(Or)

Net profit before tax and extraordinar y itemsAdjustment s for non-cas h and non-operatin g items (Listof

individual items such as depreciation, foreig nexchange

loss, loss on sale of fixed assets,

X

XX

(xx

x)

XX

X

(xx)

XX

X XXX

XXX


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XXX

in

terest income , dividen d income ,interest expense etc.) xxx


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Format of Cash Flow Statemen t approve d by Sebi is give n below:

Cash Flow Statement

(for the yearende d.....)

articulars Rs. Rs.

(A) Cash Flow from operatin g activities

Net Profit ILoss before tax and extraordinar y items

Adjustment sfor:

Depreciation

Gain ILoss on sale of fixed assets

Foreign exchange

Miscellaneous expenditure written off

Investment incomeInterest

Dividend

Operatin gprofit before workin g capital changes

Adjustment sfor:

Trade and other receivables

Inventories

Tradepayables

Cash generated from operations

Interest paid

Direct taxespaid

Cash flow before items extraordinar y items

Net cash from operatingactivities

(B) Cash Flow from investin g activities

Purchase of fixed assets Sales of

fixed assets Purchase of

investments Sale ofinvestments

Interest received Dividend received

Net cashfrom Iused in investing activities


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C) Cash flow from financin g activities

Proceeds from issue of share capital

Proceeds from long-term borrowing s/banks

Payment oflong-term borrowingsDividen d paid

Net cashfrom/ used in financing activities

Net increase I(decrease) in cash and cash equivalents Cash and cash

equivalent s as at... (Openin g Balance) Cash and cash equivalent as at....

Closing Balance)

XXX XXX

XXX XXX

The Indirect Method - Unde rthe indirect method ,the net cash flow from operating activities is determined

adjustin gnet profit or loss for the effectof:

(a) Non-cas hitems such as depreciation ,provisions ,deferre d taxes ,and unrealise d foreign exchange

gains and losses ' and

(b) Change s durin g theperio d in inventorie s and operatin g receivable s and payables. (c) All

other items for whic h the cash effects are investin g orfinancin g cash flows.

e indirect metho d is also called reconciliatio n metho d as it involve s reconciliatio n of net profit or

s as given in the profit and loss account and the net cash flow from operating activitie s as shown

the cash flow statement . In other words, net profit or losses adjuste d for non-cas h and non-operatin g

ms whic h may have been debite d orcredite d to profit and loss account as follows.

alculatio n of Cash Flow From Operating Activities

Particulars Rs. Rs. Cash

Flows from Operating activities

Cash receipt s from customers XXX Cash paid

o supplier s and employees (xxx) Cash generate d from

operations XXX

Income tax paid (xx)

(Or)


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nancial Analysi s and Planning - -- f

w

et profit before tax and extraordinar y items xxx

dd: Non-cas h and non-operatin g items which have alread ybeen debited to P.L.Account

(a) Depreciation XXX

(b) Transfe r to reserve s and provisions

(c) Goodwill writte n off

(d) Preliminar y expense s writte n off

XXX XXX

XXX

(e) Other intangible assets writte n off such as discount orloss on

issue ofshare s Idebentures ,underwritin g comm ission etc. xxx

(f) Loss on sale ordisposal of fixed assets xxx(g) Loss on sale ofinvestments xxx

(h) Foreig n exchange loss xxx

ss:Non-cas h and non-operatin g items

whic h have alread ybeen credite d to P.L. Account

(a) Gain on sale of fixed assets

XXX XXX

XXX

(b) Profit on sale ofinvestments xxx (c) Income

from interest or dividend s on investments xxx (d) Appreciationxxx

(e) Reserve s writte n back

(f) Foreig n exchange gain

Operatin g Profit Before Workin g Capital Changes

XXX

XXX XXX

XXX

Adjustment s for change s in current operatin g assets and liabiliti es:

dd : Decrease in Account s ofCurrent Operatin g Assets


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(except cash and cash equivalents ) such as:

Decrease in trade debts

Decrease in bills receivables

Decrease in inventorie s Istock-in-trade

Decrease inprepai d expense s etc.

Add: Increase in account s ofcurrent operatin g liabilities

(except Bankoverdraft ) such as : Increase

in creditors

Increase in billspayable

Increase in outstandin g expenses

XXX

XXX

XXX

XXX

XXX

XXX

XXX XXX

xxxx

FIANANCIAL MANAGEMENT & INTERNATIONAL FINANCE


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Particulars Rs. Rs.ess : Increase in account s ofcurrent operatin g assets

(as stated above) XXX XXX

ess : Decrease in account s ofcurrent operatin g liabilitiesas state d above) XXX

XXX XXX

Cash generate d from (used in) operation sbefore tax

ess :Income taxpaid

Cash flows before extraordinar y items

dd/ Less : Extraordinar y items ifany

Net cash flow from (used in) operatin g activitiesImportan t note to Students

. Anincrease in liability

. A decrease in liability

. Anincrease in an asset

. A decrease in an asset

Cash inflow Outflo w

ofcash Outflo w of

cash

Cash inflow

XXX

XXX

XXX

XXX

XXX

ed of Preparin g Cash flow Statement

nds Flow Statement highlight s the change s that have taken place in the financial structure of thesines s concer n since the last reportin g date. In other words Funds Flow Statement takes into account

inflow and outflo w of funds in terms of workin g capital , durin g the perio d under consideration .

nds Flow Statement did not reveal the quantum of inflow and outflo w of cash. In short it did not

plai n the change s in cashbalance.

e cash plays an important role in thebusines s firm' s economic life. What blood is to human body, cash

to busines s enterprise . Therefore , the major responsibilit y of financial manage ment of the busines s

m is to maintai n adequate cash in the busines s is one of the prerequi sites for successful operation . A

sines s firm needs cash to make payment s forpurchase ofgoods or raw materials , to meet day to day

pense s and to pay salaries , wages , interest and dividend s etc. The movement of cash is of vital

portance to management . If the inflow s of cash are not sufficient to meet the outflow s of cash, the

m cannot meet its current obliga tions. Hence the need ofprope r plannin g and control of cash flowes. Cash constitute s the basic foundatio n of all busines s transaction s without which the other

mponent s of current assets have little significance . Hence there is a need for cash analysis . For

lysi s of cash, a separate statement is to beprepare d known as cash flow statement.

a narro w sense the term Funds mean s cash and the statement of change s in the financial positio npare d on cash basis is called a Cash Flow Statement.


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sh Flow Statement is a statement of cash flow. Cash flow studie s the movement s of cash in and out ofusines s concern. Inflow of cash is known as source and outflo w of cash is called use of cash. The term

sh here stand s for cash and bankbalance.

sh Flow Statement shows the change s in cash positio n betwee n two Balance Sheet dates . Itprovide sdetails in respect of cash generate d throug h operating , investin g and financial activitie s and utilise d

operating ,investin g and financial activities . The transaction s which increase the cash positio n of the

ines s are known as Inflows of cash (ex: Sale of current and fixed assets, Issue of share s and

benture s etc.) The transaction s which decrease the cash positio n are known as outflow s (ex:

chase of current and fixed asset s,redemptio n ofde bentures ,and preference share s and other long

m debts ). Cash Flow Statement concentrates on transaction s that have a direct impact on cash. Thisement depict s factor s responsible for such inflow and out of flow of cash. Inbrief_ cash flow

tement summarie s the causes ofchange s in cash positio n betwee n dates of two balance sheets.

. Cash Flow Statement reveal s the causes ofchange s in cash balance s betwee n two bal

ance sheet dates.

. This statement helps the management to evaluate its abilit y to meet its obligation s i.e., payment tocreditors , thepayment of bank loan ,payment ofinterest ,taxes ,dividen d etc.

. It throw s light on causes for poor liquidit y in spite of good profits and excessive liquid

ity in spite ofheavy losses.

. It helps the management in understandin g the past behaviou rofcash cycle and in controlling the use of cash in future.

. Cash Flow Statement s helps the management in plannin g repayment ofloans ,replace

ment of assets etc.

. This statement is helpful in short-term financial decision s relatin g to liquidity.

. This statement helps the management inpreparin g the cash budget s properly.

. This statement helps the financial institutio n who lends advance s tobusines s concerns inestimatin g their repayin g capacities.

. Since a Cash Flow Statement is based on the cash basis ofaccountin g it is very useful in evaluatio n

of cash positio n of a firm.

. Cash Flow Statement disclose s the complete stor y of cash movement . The increase in, ordecreaseof cash and the reaso n therefore can be known.

. Cash Flow Statement provide s informatio n of all activities such as operating , investing, and

financin g activitie s separately.

. Since Cash Flow Statement provide s informatio n regardin g the source s and utilisation of cashdurin g a particula r period ,it is easy for the management to plan carefull y for the cash requirement s

in the future , for the purpos e of redeemin g long-term liabilitie s or Iand replacin g some fixedassets.


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. A projecte d Cash Flow Statement reveal s the future cash positio n of a concern. Through this cash

flow statement the firm can know how muc h cash it can generate and how muc h cash will be

neede d to make variou s payments.

. Cash Flow Statement prepare d accordin g the AS-3 (Revised) is more suitable for mak ing

compariso n than the funds flow statement s as there is no standar d format s used forthe same.

Limitation s of Cash Flow Statement

Cash Flow Statement suffers from the followin g limitations.

. A Cash Flow Statement only reveals the inflow and outflo w of cash. The cash balance disclose d

by the Cash Flow Statement may not represent the real liqui d positio n of the concern.

. Cash Flow Statement is not suitable forjudgin g the profitabilit y of a firm as non-cash change s areignore d while calculatin g cash flows from operatin g activities.

. Cash Flow Statement is not a substitute for Income Statement orFunds Flow Statement.

Each of them has a separate functio n toperform . Net Cash Flow disclose d by cash flow statementdoes not necessaril y be the net income of thebusiness ,because net income is determine d by taking

into account bot h cash and non-cas h items.

. Cash Flow Statement is based on cash accounting . It ignore s the basic accountin g con

cept of and accrual basis.

. Cash Flow Statement reveal s the movement of cash only. In preparatio n it ignore s most liqui d

current assets (ex: Sundry debtors , Bills Receivable etc.)

. It is difficult toprecisel y define the term cash. There are controversie s among accoun tants over a

numbe r of near cash items like cheques , stamps ,postal order s etc., tobe include d in cash.

. Cash Flow Statement does not give a complete picture offinancial positio n of the con

cern.


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fference s Betwee n l'unds tlow Statemen t And Cash tlow Statement

The followin g are the main difference s betwee n a Funds Flow Statement and a Cash

Flow Statement.

unit 4 accounting 1 20 (1)

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