© PHI Learning, All rights reserved.1 Financial Accounting: A Managerial Perspective Third Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore

© PHI Learning, All rights reserved.2 Cash Flow Statement Chapter 12

© PHI Learning, All rights reserved.3 Cash Flow Statement in Perspective  Why the cash flow statement is needed in addition to the balance sheet and the profit and loss account?  Evolution of the cash flow statement  “Cash is king”  Statement of cash flows for listed companies is mandatory  Cash and cash equivalents Chapter 12

© PHI Learning, All rights reserved.4 Purpose and Uses of the Cash Flow Statement  Purpose  To provide relevant information about the cash receipts and payments of an enterprise  Uses  Assess an enterprise’s  liquidity  financial flexibility  profitability  risk  Provide feedback about previous assessments Chapter 12

© PHI Learning, All rights reserved.5 Structure of the Cash Flow Statement  Operating activities  Investing activities  Financing activities Chapter 12

© PHI Learning, All rights reserved.6 Cash Flows from Operating Activities Chapter 12

© PHI Learning, All rights reserved.7 Cash Flows from Investing Activities Chapter 12

© PHI Learning, All rights reserved.8 Cash Flows from Financing Activities Chapter 12

© PHI Learning, All rights reserved.9 Format of the Cash Flow Statement Chapter 12

© PHI Learning, All rights reserved.10 Preparing the Cash Flow Statement  Determining net cash flow from operating activities  Determining net cash flow from investing activities  Determining net cash flow from financing activities Chapter 12

© PHI Learning, All rights reserved.11 Converting Net Profit to Net Cash Flow from Operating Activities Chapter 12

© PHI Learning, All rights reserved.12 Determining Net Cash Flow from Operating Activities: Direct Method  Cash received from customers  Cash paid to suppliers and employees  Income tax paid  Extraordinary items Chapter 12

© PHI Learning, All rights reserved.13 Determining Net Cash Flow from Operating Activities: Indirect Method Chapter 12

© PHI Learning, All rights reserved.14 Determining Cash Flow from Investing Activities  Plant and machinery  Acquisition  Disposals  Investments  Purchases  Sales  Interest received  Dividend received Chapter 12

© PHI Learning, All rights reserved.15 Determining Cash Flow from Financing Activities  Equity share capital  Issuance  Buy-back  Dividends paid  Secured loan and unsecured loan  Issuance  Repayment and redemption  Interest paid Chapter 12

© PHI Learning, All rights reserved.16 Reporting Cash Flows  Direct method  Reconciliation of net profit and net cash flow from operating activities  Indirect method  Supplemental schedule of non-cash investing and financing activities  Disclosure of accounting policy Chapter 12

© PHI Learning, All rights reserved.17 Interpreting the Cash Flow Statement: Some Questions to Ask  Did the company generate cash from operations?  What did the company do with the cash?  Did the company lose cash in operations?  How did the company finance the loss of cash?  How did the company finance capital expenditure and acquisitions?  Did the company engage in major disposals?  Does the company have reasonable financial flexibility?  Did the company draw heavily on its cash?  Does the company have large cash?  How do you rate the company’s earnings quality? Chapter 12