Important Topics:
- Meaning, Objectives, and Benefits of Cash Flow Statement
- Definitions: Cash, Cash Equivalents, Cash Flows
- Classification of Activities: Operating, Investing, Financing
- Treatment of Peculiar Items (Interest, Dividend, Tax, Extraordinary Items)
- Preparation of Cash Flow Statement using Indirect Method
- Preparation of Cash Flow Statement using Direct Method
- Comprehensive Illustrations (Preparation from Balance Sheets and Additional Information)
Meaning of Cash Flow Statement
A cash flow statement is the financial statement that measures the cash generated or used by a company in a given period. A cash flow statement provides information about the historical changes in cash and cash equivalents of an enterprise by classifying cash flows into operating, investing and financing activities. A Cash-Flow statement may be defined as a summary of receipts and disbursements of cash for a particular period of time.
Objectives of Cash Flow Statement
- To provide useful information about cash inflows and outflows from operating, investing, and financing activities.
- To help users assess the ability of the enterprise to generate cash and cash equivalents.
- To assess the needs of the enterprise to utilise those cash flows.
- To evaluate the financial structure (liquidity and solvency) and the ability to adapt to changing circumstances.
- To help in checking the accuracy of past assessments of future cash flows.
Benefits of Cash Flow Statement
- Provides information about the exact figure of cash inflows and outflows from various operations.
- Used in preparing cash budget for future needs.
- Provides information about investing and financing cash transactions.
- Reveals key changes required for financial positioning.
- Useful in assessing the ability to generate cash and cash equivalents.
- Enhances comparability of reporting operating performance across different enterprises.
Cash and Cash Equivalents
As per AS-3, 'Cash' comprises cash in hand and demand deposits with banks. 'Cash equivalents' means short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. An investment normally qualifies as cash equivalents only when it has a short maturity of, say, three months or less from the date of acquisition. Investments in shares are excluded from cash equivalents (except preference shares acquired shortly before redemption).
Cash Flows
'Cash Flows' implies movement of cash in and out due to some non-cash items. Receipt of cash from a non-cash item is termed as cash inflow while cash payment in respect of such items as cash outflow.
Classification of Activities for the Preparation of Cash Flow Statement
As per AS-3, cash flow activities are classified into three categories:
1. Cash from Operating Activities
Operating activities are the activities that constitute the primary or main activities of an enterprise. These are the principal revenue generating activities. The amount of cash from operations indicates the internal solvency level of the company.
Cash Inflows from operating activities:
- Cash receipts from sale of goods and rendering of services.
- Cash receipts from royalties, fees, commissions, and other revenues.
Cash Outflows from operating activities:
- Cash payments to suppliers for goods and services.
- Cash payments to and on behalf of employees.
- Cash payments of income taxes (unless identified with financing/investing).
2. Cash from Investing Activities
Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
Cash Outflows from investing activities:
- Cash payments to acquire fixed assets (including intangibles).
- Cash payments to acquire shares, warrants, or debt instruments of other enterprises (other than trading purposes).
- Cash advances and loans made to third parties.
Cash Inflows from investing activities:
- Cash receipts from disposal of fixed assets (including intangibles).
- Cash receipts from repayment of advances or loans made to third parties.
- Cash receipts from disposal of shares, warrants, or debt instruments of other enterprises.
- Interest received and dividends received on investments.
3. Cash from Financing Activities
Financing activities are activities that result in changes in the size and composition of the owners' capital and borrowings of the enterprise.
Cash Inflows from financing activities:
- Cash proceeds from issuing shares (equity or preference).
- Cash proceeds from issuing debentures, loans, bonds, and other borrowings.
Cash Outflows from financing activities:
- Cash repayments of amounts borrowed.
- Interest paid on debentures and long-term loans.
- Dividends paid on equity and preference capital.
- Operating: Cash received from selling cars, cash paid to buy steel, salaries paid to workers.
- Investing: Cash paid to buy a new robotic welding machine, cash received from selling an old factory.
- Financing: Cash received from issuing new shares, cash paid to repay a bank loan, dividends paid to shareholders.
Treatment of Some Peculiar Items
Extraordinary Items: Cash flows associated with extraordinary items (e.g., loss due to theft, earthquake) should be classified and disclosed separately as arising from operating, investing, or financing activities.
Interest and Dividend:
- For a financial enterprise (bank, NBFC): Interest paid, interest received, and dividend received are operating activities. Dividend paid is financing.
- For a non-financial enterprise: Interest paid and dividends paid are financing activities. Interest received and dividends received are investing activities.
Taxes on Income and Gains:
- Tax on operating profit → Operating cash flows.
- Dividend distribution tax (tax on dividend) → Financing activity (along with dividend).
- Capital gains tax paid on sale of fixed assets → Investing activity.
Non-cash Transactions: Investing and financing transactions that do not involve cash (e.g., acquisition of machinery by issue of shares, conversion of debentures into shares) are excluded from the cash flow statement. They should be disclosed elsewhere in the financial statements.
Ascertaining Cash Flow from Operating Activities
As per AS-3, an enterprise should report cash flows from operating activities either by using:
- Direct Method: Major classes of gross cash receipts and gross cash payments are disclosed.
- Indirect Method: Net profit or loss is adjusted for the effects of non-cash items, deferrals/accruals, and items of income/expense associated with investing or financing cash flows.
Indirect Method - Proforma
Cash Flows from Operating Activities (Indirect Method) Net Profit/Loss before Tax and Extraordinary Items xxx + Deductions already made for Non-cash items (e.g., Depreciation, Goodwill written-off) xxx + Deductions for Non-operating items (e.g., Interest, Loss on sale) xxx - Additions for Non-operating incomes (e.g., Profit on sale, Dividend received, Interest received) (xxx) = Operating Profit before Working Capital changes xxx Adjustments for Working Capital: + Decrease in Current Assets (other than cash) xxx + Increase in Current Liabilities xxx - Increase in Current Assets (other than cash) (xxx) - Decrease in Current Liabilities (xxx) = Cash generated from Operations before Tax xxx - Income Tax Paid (xxx) +/- Extraordinary Items (xxx)/xxx = Net Cash from Operating Activities xxx
Direct Method - Proforma
Cash Flows from Operating Activities (Direct Method) Cash receipts from customers xxx (-) Cash paid to suppliers and employees (xxx) = Cash generated from operations before tax xxx (-) Income tax paid (xxx) +/- Extraordinary items (xxx)/xxx = Net Cash from Operating Activities xxx
To calculate cash receipts/payments:
- Cash receipts from customers = Revenue from operations + Trade receivables (beginning) - Trade receivables (end)
- Cash payments to suppliers = Purchases + Trade payables (beginning) - Trade payables (end)
- Purchases = Cost of Revenue from Operations - Opening Inventory + Closing Inventory
- Cash expenses = Expenses on accrual basis + Prepaid expenses (beginning) + Outstanding expenses (end) - Prepaid expenses (end) - Outstanding expenses (beginning)
Net Profit before Tax: ₹2,70,000. Depreciation: ₹20,000. Loss on sale of equipment: ₹5,000. Interest on bank loan: ₹10,000. Increase in Trade Receivables: ₹40,000. Increase in Inventories: ₹80,000. Decrease in Trade Payables: ₹5,000. Increase in Outstanding Rent: ₹2,000. Tax Paid: ₹30,000.
Answer: (Based on Illustration 7, Working Notes).
Preparation of Cash Flow Statement (Comprehensive)
The cash flow statement is prepared by combining net cash flows from operating, investing, and financing activities. The net increase/decrease in cash and cash equivalents is added to the opening balance to arrive at the closing balance, which should match the cash and cash equivalents figure in the balance sheet.
Cash Flow Statement for the year ended ... (Main heads only) (A) Cash flows from operating activities xxx (B) Cash flows from investing activities xxx (C) Cash flows from financing activities xxx Net increase (decrease) in cash and cash equivalents (A + B + C) xxx + Cash and cash equivalents at the beginning xxx = Cash and cash equivalents at the end xxx
പ്രധാന പാഠഭാഗങ്ങൾ (മലയാളത്തിൽ):
- പണപ്രവാഹ പ്രസ്താവനയുടെ അർത്ഥവും ലക്ഷ്യങ്ങളും പ്രയോജനങ്ങളും
- പണം, പണത്തിനു തുല്യമായവ, പണപ്രവാഹം എന്നിവയുടെ നിർവചനം
- പ്രവർത്തനങ്ങളുടെ വർഗ്ഗീകരണം: പ്രവർത്തന, നിക്ഷേപ, ധനകാര്യ പ്രവർത്തനങ്ങൾ
- പ്രത്യേക ഇനങ്ങളുടെ കൈകാര്യം ചെയ്യൽ (പലിശ, ലാഭവിഹിതം, നികുതി, അസാധാരണ ഇനങ്ങൾ)
- പരോക്ഷ രീതി ഉപയോഗിച്ച് പണപ്രവാഹ പ്രസ്താവന തയ്യാറാക്കൽ
- നേരിട്ടുള്ള രീതി ഉപയോഗിച്ച് പണപ്രവാഹ പ്രസ്താവന തയ്യാറാക്കൽ
- സമഗ്ര ഉദാഹരണങ്ങൾ (ബാലൻസ് ഷീറ്റുകളിൽ നിന്നും അധിക വിവരങ്ങളിൽ നിന്നും തയ്യാറാക്കൽ)
പണപ്രവാഹ പ്രസ്താവന (Cash Flow Statement) - മലയാളം
ഒരു കമ്പനിയുടെ പണത്തിന്റെ (cash) വരവും (inflow) പോക്കും (outflow) കാണിക്കുന്ന സാമ്പത്തിക പ്രസ്താവനയാണ് പണപ്രവാഹ പ്രസ്താവന. ഇത് പ്രവർത്തനങ്ങളെ മൂന്നായി തരംതിരിച്ച് പണപ്രവാഹം വിശകലനം ചെയ്യുന്നു: പ്രവർത്തന പ്രവർത്തനങ്ങൾ (operating activities), നിക്ഷേപ പ്രവർത്തനങ്ങൾ (investing activities), ധനകാര്യ പ്രവർത്തനങ്ങൾ (financing activities).
പ്രവർത്തനങ്ങളുടെ വർഗ്ഗീകരണം
- പ്രവർത്തന പ്രവർത്തനങ്ങൾ (Operating Activities): കമ്പനിയുടെ പ്രധാന വരുമാനം നേടുന്ന പ്രവർത്തനങ്ങൾ. ഉദാ: ഉൽപ്പന്ന വിൽപ്പനയിൽ നിന്നുള്ള പണം, ജീവനക്കാരുടെ ശമ്പളം, അസംസ്കൃത വസ്തുക്കൾക്ക് നൽകുന്ന പണം.
- നിക്ഷേപ പ്രവർത്തനങ്ങൾ (Investing Activities): ദീർഘകാല ആസ്തികൾ വാങ്ങുകയും വിൽക്കുകയും ചെയ്യുന്നതുമായി ബന്ധപ്പെട്ട പ്രവർത്തനങ്ങൾ. ഉദാ: പുതിയ യന്ത്രം വാങ്ങാൻ പണം നൽകുക, പഴയ യന്ത്രം വിറ്റ് പണം വാങ്ങുക.
- ധനകാര്യ പ്രവർത്തനങ്ങൾ (Financing Activities): കമ്പനിയുടെ മൂലധനവും കടവുമായി ബന്ധപ്പെട്ട പ്രവർത്തനങ്ങൾ. ഉദാ: ഓഹരികൾ വിറ്റ് പണം വാങ്ങുക, ബാങ്ക് വായ്പ തിരിച്ചടയ്ക്കുക, ലാഭവിഹിതം (dividend) നൽകുക.
പണപ്രവാഹ പ്രസ്താവന തയ്യാറാക്കുന്ന വിധം
പണപ്രവാഹ പ്രസ്താവന തയ്യാറാക്കാൻ രണ്ട് രീതികളുണ്ട്: പ്രത്യക്ഷ രീതി (Direct Method), പരോക്ഷ രീതി (Indirect Method). പ്രായോഗികമായി പരോക്ഷ രീതിയാണ് കൂടുതലും ഉപയോഗിക്കുന്നത്.
പരോക്ഷ രീതിയുടെ ഘട്ടങ്ങൾ:
- നികുതിക്കും അസാധാരണ ഇനങ്ങൾക്കും മുമ്പുള്ള അറ്റാദായം (Net Profit before Tax and Extraordinary Items) എടുക്കുക.
- പണമല്ലാത്ത ഇനങ്ങൾ (non-cash items) കൂട്ടിച്ചേർക്കുക (ഉദാ: മൂല്യത്തകർച്ച, ഗുഡ്വിൽ എഴുതിത്തള്ളൽ).
- നിക്ഷേപ/ധനകാര്യ പ്രവർത്തനങ്ങളുമായി ബന്ധപ്പെട്ട ചെലവുകൾ കൂട്ടിച്ചേർക്കുകയും വരുമാനങ്ങൾ കുറയ്ക്കുകയും ചെയ്യുക.
- വർക്കിംഗ് ക്യാപിറ്റലിലെ മാറ്റങ്ങൾ ക്രമീകരിക്കുക (നിലവിലെ ആസ്തികളിലും ബാധ്യതകളിലും വരുന്ന മാറ്റങ്ങൾ).
- അടച്ച ആദായ നികുതി (Income Tax Paid) കുറയ്ക്കുക.
Important Exam Questions
Short Answer Questions (2/3/4 Marks)
- What is a Cash flow statement?
- How are the various activities classified (as per AS-3) while preparing cash flow statement?
- State the objectives of cash flow statement.
- State the meaning of the terms: (i) Cash Equivalents, (ii) Cash flows.
- Prepare a format of cash flow from operating activities (indirect method).
- State clearly what would constitute the operating activities for a financial enterprise.
- "The nature/type of enterprise can change altogether the category into which a particular activity may be classified." Do you agree? Illustrate your answer.
Long Answer Questions (5/6/8 Marks)
- Describe the procedure to prepare Cash Flow Statement.
- Describe "Indirect" method of ascertaining Cash Flow from operating activities.
- Explain the major Cash Inflows and outflows from investing activities.
- Explain the major Cash Inflows and outflows from financing activities.
Numerical Questions (For Practice)
- Anand Ltd. arrived at a net income of Rs. 5,00,000 for the year ended March 31, 2017. Depreciation for the year was Rs. 2,00,000. There was a profit of Rs. 50,000 on assets sold. Trade Receivables increased by Rs. 40,000 and Trade Payables increased by Rs. 60,000. Compute the cash flow from operating activities by the indirect approach. (Refer to Q1)
- From the information given below you are required to calculate the cash paid for the inventory: (Refer to Q2)
- For each of the following transactions, calculate the resulting cash flow and state the nature of cash flow: (Refer to Q3)
- From the following Balance Sheet of Mohan Ltd., prepare cash flow Statement: (Refer to Q7)
| Item | Operating | Investing | Financing |
|---|---|---|---|
| Sale of goods for cash | ✓ (Inflow) | ||
| Payment to suppliers | ✓ (Outflow) | ||
| Salaries paid | ✓ (Outflow) | ||
| Purchase of machinery | ✓ (Outflow) | ||
| Sale of old machinery | ✓ (Inflow) | ||
| Interest received (non-finance co.) | ✓ (Inflow) | ||
| Dividend received (non-finance co.) | ✓ (Inflow) | ||
| Proceeds from issue of shares | ✓ (Inflow) | ||
| Proceeds from bank loan | ✓ (Inflow) | ||
| Repayment of loan | ✓ (Outflow) | ||
| Interest paid (non-finance co.) | ✓ (Outflow) | ||
| Dividend paid | ✓ (Outflow) | ||
| Income tax paid | ✓ (Outflow) |