Cash Flow Statement

A Cash Flow Statement is a financial statement that shows the inflows and outflows of cash and cash equivalents during an accounting period. It is prepared as per Accounting Standard 3 (AS-3) and is mandatory for listed companies. It helps assess a company's ability to generate cash and manage liquidity.

Meaning of Cash and Cash Equivalents

• Cash: Cash on hand and demand deposits with banks.
• Cash Equivalents: Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value (e.g., treasury bills, short-term government securities, commercial paper with maturity up to 3 months).
• Bank overdraft is treated as a financing activity if it is repayable on demand and forms part of the company's cash management.

Classification of Activities

1. Operating Activities

Activities that constitute the principal revenue-producing activities of the company and other activities that are not investing or financing.

• Examples of cash inflows from Operating Activities:
• Cash receipts from sale of goods / rendering of services.
• Cash receipts from royalties, fees, commissions.
• Insurance proceeds (non-capital).

• Examples of cash outflows from Operating Activities:
• Cash payments to suppliers for goods and services.
• Cash payments to and on behalf of employees.
• Income tax paid (if not identifiable with financing/investing).

2. Investing Activities

Activities related to acquisition and disposal of long-term assets and investments not classified as cash equivalents.

Cash inflows: Sale of fixed assets; sale of long-term investments; interest and dividend received (AS-3 classifies these as investing for companies).
Cash outflows: Purchase of fixed assets; purchase of investments; loans given to others.

3. Financing Activities

Activities that result in changes in the size and composition of owners capital and borrowings.

Cash inflows: Issue of shares; issue of debentures/loans borrowed.
Cash outflows: Repayment of loans/debentures; buy-back of shares; payment of dividends; payment of interest on borrowings (for a company, interest paid may be shown as financing).

Methods of Preparing Cash Flow from Operating Activities

Direct Method

Lists all cash receipts from operating activities and deducts all cash payments. Cash collected from customers is computed, then payments to suppliers, employees, and others are deducted.

Cash from Customers = Revenue from Operations + Decrease in Debtors/B.R. (or - Increase)
Cash paid to Suppliers = Purchases + Decrease in Creditors/B.P. (or - Increase)

Indirect Method (More commonly used)

1. 1.Starts with Net Profit Before Tax and makes adjustments:
2. 2.Add back non-cash charges: Depreciation, Goodwill written off, Amortisation.
3. 3.Add back non-operating losses: Loss on sale of asset, interest paid (if classified as financing).
4. 4.Deduct non-operating income: Profit on sale of asset, interest received, dividend received.
5. 5.Adjust for working capital changes:
6. 6.Increase in Current Assets → deduct (use of cash).
7. 7.Decrease in Current Assets → add (source of cash).
8. 8.Increase in Current Liabilities → add (source of cash).
9. 9.Decrease in Current Liabilities → deduct (use of cash).
10. 10.Deduct tax paid to get Net Cash from Operating Activities.

Format (Indirect Method — Operating Activities)

Net Profit Before Tax: Rs. XXX
Add: Depreciation / Amortisation: Rs. XXX
Add: Loss on sale of assets: Rs. XXX
Less: Profit on sale of assets: (Rs. XXX)
Less: Interest / Dividend received (investing): (Rs. XXX)
Add: Interest paid (if financing): Rs. XXX
Operating Profit Before Working Capital Changes: Rs. XXX
Add: Decrease in Current Assets / Increase in Current Liabilities: Rs. XXX
Less: Increase in Current Assets / Decrease in Current Liabilities: (Rs. XXX)
Cash Generated from Operations: Rs. XXX
Less: Tax Paid: (Rs. XXX)
Net Cash from Operating Activities (A): Rs. XXX

Worked Example 1: Depreciation Add-back
Net Profit Before Tax = Rs. 5,00,000. Depreciation charged = Rs. 80,000.
Adjusted Profit = 5,00,000 + 80,000 = Rs. 5,80,000. Depreciation is added back because it is a non-cash expense — it reduced profit but did not reduce cash.

Worked Example 2: Working Capital Adjustment
Debtors increased from Rs. 60,000 to Rs. 90,000 (increase = Rs. 30,000) → deduct Rs. 30,000 (cash tied up in debtors).
Creditors increased from Rs. 40,000 to Rs. 55,000 (increase = Rs. 15,000) → add Rs. 15,000 (cash retained by not paying creditors).

Worked Example 3: Investing Activities — Fixed Assets
A machine costing Rs. 2,00,000 (book value Rs. 1,20,000; accumulated depreciation Rs. 80,000) was sold for Rs. 1,40,000.
Profit on Sale = Rs. 1,40,000 - Rs. 1,20,000 = Rs. 20,000 (deducted from operating activities).
Cash inflow from Investing = Rs. 1,40,000.
New machinery purchased for Rs. 4,00,000 → cash outflow from Investing = Rs. 4,00,000.

Worked Example 4: Financing Activities — Shares
Company issues 10,000 equity shares of Rs. 10 each at Rs. 15 per share.
Cash inflow = 10,000 x Rs. 15 = Rs. 1,50,000 (shown under financing activities).

Worked Example 5: Financing Activities — Debenture Repayment
Debentures of Rs. 3,00,000 redeemed at par.
Cash outflow from Financing = Rs. 3,00,000.

Worked Example 6: Direct Method — Cash from Customers
Revenue from Operations = Rs. 12,00,000; Opening Debtors = Rs. 80,000; Closing Debtors = Rs. 1,20,000.
Cash collected from customers = 12,00,000 + 80,000 - 1,20,000 = Rs. 11,60,000.
(Debtors increased by Rs. 40,000 → less cash collected than sales.)

Worked Example 7: Net Change in Cash
Net Cash from Operating Activities = Rs. 3,00,000
Net Cash from Investing Activities = -Rs. 5,00,000
Net Cash from Financing Activities = Rs. 3,50,000
Net increase in Cash = 3,00,000 - 5,00,000 + 3,50,000 = Rs. 1,50,000
Opening Cash = Rs. 50,000; Closing Cash = Rs. 2,00,000. (Reconciles with Balance Sheet.)

• Dividends received — classified as Investing Activity (AS-3 for companies).
• Interest received — classified as Investing Activity.
• Dividends paid — classified as Financing Activity.
• Interest paid — classified as Financing Activity (for companies).
• Tax paid — generally classified as Operating Activity.
• Purchase of investments (non-cash equivalent) — Investing Activity.

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A Cash Flow Statement classifies all cash movements into operating, investing, and financing activities. It is prepared using either the Direct or Indirect method (Indirect is more common). The net cash change reconciles opening and closing cash balances. Non-cash items (depreciation, amortisation) are added back under the indirect method. Correct classification of interest, dividends, and taxes is critical for exam accuracy.