Cash Flow Statement

MN 3043 – Business Economics and Financial

Accounting
By
Ms. Mahimi Kanchana

1
 Learning Outcomes
At the end of the session, you should be able to;

• Identify the cash inflows and

outflows of a business
organization
• Identify the operating, investing and
financing activities of a firm
• Preparing the cash flow for a company
• Recognize the advantages of preparing the
cash flow

2
Objectives of Cash Flow Statements
• To highlight cash inflow and outflows from
different activities
• To understand the liquidity
• To manage cash efficiently
• To predict the weaknesses
• To compare with budgets
• To determine the ability to pay dividends to
stockholders’ and payments to creditors
3
Definitions

• Cash – Cash on hand and demand deposits

• 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 changes in value

• Cash flows – Inflows and Outflows of cash and

cash equivalents
4
 Cash Flow Statement
• A statement prepared by the business at the end of the
accounting period which reports the cash inflows and
outflows under classification of operating, investing and
financing activities.

• This statement reports cash inflows and outflows

based on the firm’s
– Operating activities
– Investing activities
– Financing activities

5
Cash Flow from Operating Activities
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.

Cash inflows
• Cash sales of goods or services
• Cash receipt from debtors

Cashoutflows
• Payment to suppliers
• Cash purchases
• Tax payment
• Payment for operating expenses

It would seem more logical to classify interest and dividend income as and
“investing” inflow, while interest paid certainly looks like a “financing” outflow.
6
 Cash Flow from Investing Activities
Investing activities are the acquisition and disposal of long-term
assets and other investments that are not considered to be cash
equivalents.

Cash Inflows
• From sale of fixed assets (property, plant, equipment)
• Investment income received

Cash Outflows
• To acquire fixed assets (property, plant, equipment)

7
Cash Flow from Financing Activities
Financing activities that activity alter the equity capital and
borrowing structure of the entity

Cash Inflows
• From borrowing
• From the sale of the firm’s own equity securities

Cash Outflows
• To repay amounts borrowed
• To payinterest
• To pay shareholders dividends

8
Classification of CF statement
• The statement of cash flows is prepared by using;
– Direct Method
– Indirect Method

• The only difference between two methods is, how cash flows
from operating activities are calculated. Cash flows from
investing and finance activities are calculated identically in
both methods.
• The net cash inflow from operating activities is the same
whether statement prepared by direct or indirect method.

9
Exercise - 01
From the summarized cash book of Zenith Ltd. shown below, calculate net
cash flow from operating activities.
Exercise - 02
From the following profit and loss account of Samarth Ltd., calculate net cash flows
from operating activities.
Exercise - 03
From the following information extracted from the book of Max Ltd. for the year
2019-20, calculate net cash flow from investing activities.
Exercise - 03

Additional information is given as follows:

•Depreciation charged on furniture during the year was Rs.10,000

•Depreciation on machinery charged during the year was Rs.25,000

•Machinery, the carrying value of which was Rs.80,000, sold for Rs.75,000

•Land was sold at a profit of Rs.90,000

Exercise - 04
From the following information acquired from Tarapoore Ltd., calculate net cash
flows from financing activities for the year 2019-20.

Note: Interest on debentures paid during the year was Rs.30,000 and on bank loan Rs.40,000.
Exercise - 05
Base Ltd. provides the following information to you. Calculate net cash flows from
financing activities for the year 2019-20.

Further information is given as follows:

• The company issued 5,000 bonus shares during 2019-20 to shareholders at face value
• Interest on debentures paid, in total, during the year was Rs.60,000
• Interest on bank loan paid during the year was Rs.25,000
• Dividends paid during the year amounted to Rs.120,000
Direct Method
• Converts each item on the income statement
to a cash flow that is sales are converted to
cash receipts from sales etc.

16
 ……………………Company
Statement of Cash Flow – Direct Method for the year
ended…………….
Cash flow from operating activities
Cash received from customers xxx
Cash paid to suppliers (xxx)
Other operating expenses (xxx)
Cash generated from operations xxx/(xxx)
(-)taxation paid (xxx)

Net cash flow from operating activities xxx/(xxx)

Cash flow from investing activities
(-)purchase of non current assets (xxx)
(+)sale of non current assets xxx
(+)interest received xxx
(+) dividend received xxx
Net Cash flow from investing activities xxx/(xxx)
11
Cash flow from financing activities
Proceeds from the issue of shares xxx
Proceeds from long term borrowing xxx
Payment of finance lease liabilities (xxx)
Redemption of shares (xxx)
Repayment of shares (xxx)
Dividend paid (xxx)
Net cash flow from financing activities xxx
Net cash flow xxx/(xxx)
Cash and cash equivalent at the beginning xxx/(xxx)
Cash and cash equivalent at the end xxx/(xxx)

18
 Practice Question 01
The details of the cash book of Ray Ltd as at 31/12/2020 is as
follows. Prepare the cash flow statement under direct method

19
Indirect Method

Step 01
• Being with net income as reported on
the income statement.

Step 02
• Add back depreciation because these are
non - cash expenses added back to income.

20
Step 03
• Subtract gain on disposal of fixed assets and
Interest Income because these are reported in
investing activity of the statement.

Step 04
• Add back loss on disposal of fixed assets -
Report in investing activity.
• Add back interest expenses – Report in
financing activity.
21
Step 05
• Adjust for current assets and current liability.
• An increase in current asset is deducted from
net income
• An increase in current liability is added to
net income
• A decrease in current asset is added to
net income
• An decrease in current liability is deducted
from net income

22
 Step 06

• Arrive at net cash inflow or outflow from

operating activities.

23
 ……………………Company
statement of Cash Flow –Indirect Method

for the year ended

Cash flow from operating activities
Profit/(loss) before tax xxx/(xxx)
(+)depreciation xxx
(+) loss on disposal of non current assets xxx
(-)profit on disposal of non current assets (xxx)
(+)finance cost xxx
(-)investment income (xxx)
(increase)/decrease in inventories (xxx)/xxx
(increase)/decrease in receivables (xxx)/xxx
(increase)/decrease in trade payables xxx/(xxx)
(increase)/decrease in other payables xxx/(xxx)

24
Cash generated from operations xxx/(xxx)
(-)taxation paid (xxx)
(-)interest paid (xxx)
Net cash flow from operating activities xxx/(xxx)
Cash flow from investing activities
(-)purchase of non current assets (xxx)
(+)sale of non current assets xxx
(+)interest received xxx
(+) dividend received xxx
Net Cash flow from investing activities xxx/(xxx)
Cash flow from financing activities
Proceeds from the issue of shares xxx
Proceeds from long term borrowing xxx
Payment of finance lease liabilities (xxx)

25
Redemption of shares (xxx)

Repayment of shares (xxx)

Dividend paid (xxx)

Net cash flow from financing activities xxx

Net cash flow xxx/(xxx)

Cash and cash equivalent at the beginning xxx/(xxx)

Cash and cash equivalent at the end xxx/(xxx)

26
27