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Cash Flow Basics

Cash flow is the movement of money in and out of a business, crucial for funding operations and ensuring solvency. It is categorized into operating, investing, and financing activities, and is reported through a cash flow statement structured in three sections. Understanding cash flow is essential for financial health and strategic decision-making.

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26 views3 pages

Cash Flow Basics

Cash flow is the movement of money in and out of a business, crucial for funding operations and ensuring solvency. It is categorized into operating, investing, and financing activities, and is reported through a cash flow statement structured in three sections. Understanding cash flow is essential for financial health and strategic decision-making.

Uploaded by

sumitsingh4050i
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

Understanding Cash Flow

1. Introduction to Cash Flow

Cash flow refers to the movement of money into and out of a business. It represents the company's ability to

generate cash to fund operations, pay debts, and invest in future growth.

2. Importance of Cash Flow

- Measures liquidity

- Ensures business solvency

- Helps in planning and budgeting

- Useful for investors and creditors

3. Types of Cash Flows

- Operating Activities - Cash from core business operations

- Investing Activities - Cash from purchase/sale of assets

- Financing Activities - Cash from equity/debt and dividend payments

4. Cash Flow Statement Structure

A standard cash flow statement has three sections:

1. Cash Flow from Operating Activities

2. Cash Flow from Investing Activities

3. Cash Flow from Financing Activities

5. Format of Cash Flow Statement (Indirect Method)

A. Cash Flows from Operating Activities

Net Profit before Tax

+ Non-Cash Expenses (Depreciation, etc.)

+/- Changes in Working Capital

= Net Cash from Operating Activities


Understanding Cash Flow

B. Cash Flows from Investing Activities

- Purchase/Sale of Fixed Assets

- Investment Income

= Net Cash from Investing Activities

C. Cash Flows from Financing Activities

+ Issue of Shares/Debentures

- Loan Repayments

- Dividend Paid

= Net Cash from Financing Activities

Net Increase/Decrease in Cash

+ Opening Cash Balance

= Closing Cash Balance

6. Methods of Preparing Cash Flow

- Indirect Method (starts from net profit)

- Direct Method (lists actual cash receipts/payments)

7. Example:

Given:

- Net Profit: Rs.1,00,000

- Depreciation: Rs.10,000

- Increase in Debtors: Rs.5,000

- Sale of Equipment: Rs.20,000

- Loan Repaid: Rs.15,000

Operating Activities:

Net Profit = Rs.1,00,000

+ Depreciation = Rs.10,000
Understanding Cash Flow

- Increase in Debtors = Rs.5,000

= Rs.1,05,000

Investing Activities:

+ Sale of Equipment = Rs.20,000

Financing Activities:

- Loan Repaid = Rs.15,000

Net Cash Flow = Rs.1,05,000 + Rs.20,000 - Rs.15,000 = Rs.1,10,000

8. Conclusion

Cash flow is vital for maintaining financial health. It provides insights into a company's performance beyond

profit figures and helps in strategic financial decisions.

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