What is “Cash Flow Statement”?

 

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Definitions:

As per IndAS 7:

Cash Flow: – Cash flows are inflows and outflows of cash and cash equivalent

Operating Activities: – Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities.

Investing Activities: – Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Financing Activities: – Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.

As per IAS 7:

Cash Flow: – Cash flows are inflows and outflows of cash and cash equivalent

Operating Activities: – operating activities are the main revenue-producing activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees [IAS 7.14]

Investing Activities: – investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents [IAS 7.6]

Financing Activities: – financing activities are activities that alter the equity capital and borrowing structure of the entity [IAS 7.6]

Cash & Cash equivalents:

  • Cash equivalents are held for the purpose of meeting short-term cash commitments.
  • An investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition.
  • Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents, for example in the case of preference shares acquired within a short period of their maturity and with a specified redemption date.
  • Bank overdrafts which are repayable on demand form an integral part of an entity’s cash management, bank overdrafts are included as a component of cash and cash equivalents. A characteristic of such banking arrangements is that the bank balance often fluctuates from being positive to overdrawn.
  • Cash flows exclude movements between items that constitute cash or cash equivalents because these components are part of the cash management of an entity rather than part of its operating, investing and financing activities. Cash management includes the investment of excess cash in cash equivalents

Presentation of a statement of cash flows

The statement of cash flows shall report cash flows during the period classified by operating, investing and financing activities.

An entity presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business. Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the entity and the amount of its cash and cash equivalents. This information may also be used to evaluate the relationships among those activities.

A single transaction may include cash flows that are classified differently. For example, when the instalment paid in respect of an item of Property, Plant and Equipment acquired on deferred payment basis includes interest, the interest element is classified under financing activities and the loan element is classified under investing activities.

Methods of Cash Flow Statements:

Direct Method:

The direct method shows each major class of gross cash receipts and gross cash payments. The operating cash flows section of the statement of cash flows under the direct method would appear something like this:

Statement of Cash Flows

Particulars 2018

2017

Cash flows from operating activities
Cash receipts from customers  X,XXX  X,XXX
Cash paid to suppliers and employees  (X,XXX)  (X,XXX)
Cash generated from operations  X,XXX  X,XXX
Interest paid  (X,XXX)  (X,XXX)
Income taxes paid  (X,XXX)  (X,XXX)
Dividends paid  (X,XXX)  (X,XXX)
Net cash from operating activities  X,XXX  X,XXX
Cash flows from investing activities
Business acquisitions, net of cash acquired  X,XXX  X,XXX
Purchase of property, plant and equipment  (X,XXX)  (X,XXX)
Proceeds from sale of equipment  X,XXX  X,XXX
Acquisition of portfolio investments  X,XXX  X,XXX
Investment income  X,XXX  X,XXX
Net cash used in investing activities  X,XXX  X,XXX
Cash flows from financing activities
Proceeds from issue of share capital  X,XXX  X,XXX
Proceeds from long-term borrowings  X,XXX  X,XXX
Payment of long-term borrowings  (X,XXX)  (X,XXX)
Net cash used in financing activities  X,XXX  X,XXX
Net increase in cash and cash equivalents  X,XXX  X,XXX
 
Cash and cash equivalents at beginning of period  X,XXX  X,XXX
Cash and cash equivalents at end of period  X,XXX  X,XXX
 
Cash Balance Control Total X,XXX X,XXX

Notes to the Statement of Cash Flows

2018

2017

Cash flows from operating activities
Profit before taxation  X,XXX  X,XXX
Adjustments for:
Depreciation  X,XXX  X,XXX
Investment income  (X,XXX)  (X,XXX)
Interest expense  X,XXX  X,XXX
Profit / (Loss) on the sale of property, plant & equipment  X,XXX                   –
Working capital changes:
(Increase) / Decrease in trade and other receivables  X,XXX  X,XXX
(Increase) / (Decrease) in inventories  X,XXX  X,XXX
Increase / (Decrease) in trade payables  X,XXX  X,XXX
Cash generated from operations  X,XXX  X,XXX 

Indirect Method:

The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. The operating cash flows section of the statement of cash flows under the indirect method would appear something like this:

Statement of Cash Flows

Particulars 2018

2017

Cash flows from operating activities
Profit before taxation X,XXX X,XXX
Adjustments for:
Depreciation X,XXX X,XXX
Investment income (X,XXX) (X,XXX)
Interest expense X,XXX X,XXX
Profit / (Loss) on the sale of property, plant & equipment X,XXX X,XXX
Working capital changes:
(Increase) / Decrease in trade and other receivables X,XXX X,XXX
(Increase) / (Decrease) in inventories X,XXX X,XXX
Increase / (Decrease) in trade payables X,XXX X,XXX
Cash generated from operations X,XXX X,XXX
Interest paid (X,XXX) (X,XXX)
Income taxes paid (X,XXX) (X,XXX)
Dividends paid (X,XXX) (X,XXX)
Net cash from operating activities X,XXX X,XXX
Cash flows from investing activities
Business acquisitions, net of cash acquired X,XXX X,XXX
Purchase of property, plant and equipment (X,XXX) (X,XXX)
Proceeds from sale of equipment X,XXX X,XXX
Acquisition of portfolio investments (X,XXX) (X,XXX)
Investment income X,XXX X,XXX
Net cash used in investing activities X,XXX X,XXX
Cash flows from financing activities
Proceeds from issue of share capital X,XXX X,XXX
Proceeds from long-term borrowings X,XXX X,XXX
Payment of long-term borrowings (X,XXX) (X,XXX)
Net cash used in financing activities X,XXX X,XXX
Net increase in cash and cash equivalents X,XXX X,XXX
Cash and cash equivalents at beginning of period X,XXX X,XXX
Cash and cash equivalents at end of period X,XXX X,XXX
Cash Balance Control Total X,XXX X,XXX

This is all about cash flow.

We will discuss about how to analyse it after some time.

Till that happy learning.

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