1. Cash Flow - Dr. varadraj Bapat, IIT Mumbai1 Module 6 Cash Flow

2. Cash Flow - Dr. varadraj Bapat, IIT Mumbai2 Contents Cash Flow Statement Cash Flow Statement Fund Flow Statement Fund Flow Statement Cases on preparation and Interpretation of Cash Flow Statement Cases on preparation and Interpretation of Cash Flow Statement

3. Cash Flow - Dr. varadraj Bapat, IIT Mumbai3 Index Introduction Cash Flow Statement Introduction Cash Flow Statement Meaning Meaning Applicability Applicability Cash and Cash equivalents Cash and Cash equivalents

4. Cash Flow - Dr. varadraj Bapat, IIT Mumbai4 Index Meaning and Types Cash FlowMeaning and Types Cash Flow Operating Activities Operating Activities Investing Activities Investing Activities Financing Activities Financing Activities InterestInterest DividendDividend

5. Cash Flow - Dr. varadraj Bapat, IIT Mumbai5 Index Foreign Currency transactions Foreign Currency transactions Extraordinary items Extraordinary items Treatment of Tax Treatment of Tax Investments in subsidiaries, associates and joint ventures Investments in subsidiaries, associates and joint ventures

6. Cash Flow - Dr. varadraj Bapat, IIT Mumbai6 Index Acquisitions and disposals of subsidiaries and other business units Acquisitions and disposals of subsidiaries and other business units Non-cash transactions Non-cash transactions Disclosures of cash and cash equivalents Disclosures of cash and cash equivalents

7. Cash Flow - Dr. varadraj Bapat, IIT Mumbai7 Introduction Traditional financial statement fails to inform the way enterprise has generated cash and were utilised in the accounting period. Traditional financial statement fails to inform the way enterprise has generated cash and were utilised in the accounting period. The need for inclusion of cash summary was therefore recognised. The need for inclusion of cash summary was therefore recognised.

8. Cash Flow - Dr. varadraj Bapat, IIT Mumbai8 Meaning The summary of cash transactions (receipts and payments) during an accounting period is called Cash Flow Statement. The transactions are catagorised as Operating, Investing and Financing. The summary of cash transactions (receipts and payments) during an accounting period is called Cash Flow Statement. The transactions are catagorised as Operating, Investing and Financing.

9. Cash Flow - Dr. varadraj Bapat, IIT Mumbai9 Accounting Standard The ‘Accounting Standards’ are issued to establish principals and policies which have to be complied by the business entities in preparing the financial statement. The ‘Accounting Standards’ are issued to establish principals and policies which have to be complied by the business entities in preparing the financial statement.

10. Cash Flow - Dr. varadraj Bapat, IIT Mumbai10 AS-3 AS-3/IAS-7/IndAS-7 deals with preparation of Cash flow Statement. AS-3 applies to the enterprises:  Having turnover more than Rs. 50 Crores in a financial year  Listed companies

11. Cash Flow - Dr. varadraj Bapat, IIT Mumbai11 Cash and Cash Equivalents Cash:- Cash in hand and deposits repayable on demand with any bank or other financial institution Cash in hand and deposits repayable on demand with any bank or other financial institution

12. Cash Flow - Dr. varadraj Bapat, IIT Mumbai12 Cash and Cash Equivalents Cash Equivalents:- Short term, highly liquid investments, that are readily convertible into known amounts of cash and are subject to insignificant risk/change to value

13. Cash Flow - Dr. varadraj Bapat, IIT Mumbai13 Meaning of Cash Flow Cash flows are inflows (i.e. receipts) and outflows (i.e. payments) of cash and cash equivalents. Cash flows are inflows (i.e. receipts) and outflows (i.e. payments) of cash and cash equivalents. Movement in cash and cash equivalents are not cash flows. Movement in cash and cash equivalents are not cash flows.

14. Cash Flow - Dr. varadraj Bapat, IIT Mumbai14 Types of Cash Flow The cash flows generated through various activities are classified as Operating cash flow Operating cash flow Investing cash flow Investing cash flow Financing cash flow Financing cash flow

15. Cash Flow - Dr. varadraj Bapat, IIT Mumbai 15 Cash Flow Activities Operating (From Day to Day Activities) Investing e.g. Purchase of Land Financing e.g. Loan Taken

16. Cash Flow - Dr. varadraj Bapat, IIT Mumbai16 Operating Activities These are principal revenue producing activities of the enterprise. These are principal revenue producing activities of the enterprise. Examples: Examples:  Cash receipts from sale of goods or rendering services

17. Cash Flow - Dr. varadraj Bapat, IIT Mumbai17  Cash receipts from royalties, fees, commissions and other revenue  Cash payments to suppliers of goods and service;  Cash payments to and on behalf of employees. Operating Activities

18. Cash Flow - Dr. varadraj Bapat, IIT Mumbai18 Reporting of Cashflow from operating activities It can be derived either from direct method or indirect methodIt can be derived either from direct method or indirect method Direct method:Direct method:  In this method, gross receipts and gross payments of cash are disclosed

19. Cash Flow - Dr. varadraj Bapat, IIT Mumbai 19 Direct Method Cash receipts from customers XX Cash paid to suppliers XX Cash paid to employees XX Cash paid for other operating expenses XX Cash generated from operation XX Income tax paid XX Net cash from operating activities XX

20. Cash Flow - Dr. varadraj Bapat, IIT Mumbai20 Indirect method:Indirect method:  In this method, profit and loss account is adjusted for the effects of transaction of non-cash and non-operating nature.  Cash flow statement of listed companies shall be presented only under the indirect method as prescribed in AS 3

21. Cash Flow - Dr. varadraj Bapat, IIT Mumbai 21 Retained Earning XX Add: Dividend paid XX Income Tax XX Net Profit Before Tax XX Add: Depreciation XX Loss on sale of Asset/Investment XX Interest Paid XX Provision for Bad debts XX Less: Interest/ Dividend Received XX Profit on sale of Asset/ Investment XX

22. Cash Flow - Dr. varadraj Bapat, IIT Mumbai 22 Funds from operations XX Add: Decrease in Current Asset XX Add: Increase in Current Liabilities XX Less: Increase in Current Asset XX Less: Decrease in Current Liabilities XX Cash generated from operation XX Income Tax Paid XX Net Cash flow from operating activities XX

23. Cash Flow - Dr. varadraj Bapat, IIT Mumbai23 Investing Activities The activities of acquisition and disposal of long term assets and other investments not included in cash equivalent are investing activities. The activities of acquisition and disposal of long term assets and other investments not included in cash equivalent are investing activities. It includes acquiring and disposal of debt and equity instruments, property and fixed assets etc. It includes acquiring and disposal of debt and equity instruments, property and fixed assets etc.

24. Cash Flow - Dr. varadraj Bapat, IIT Mumbai24 Examples:Examples:  Cash payments for purchase of fixed assets  Cash receipts from disposal of FAs  Cash payments to purchase shares, or debt instruments of other companies  Cash receipt from disposal of above investments

25. Cash Flow - Dr. varadraj Bapat, IIT Mumbai25 Financing Activities Those activities that result in changes in size and composition of owners capital and borrowing of the organization. Those activities that result in changes in size and composition of owners capital and borrowing of the organization. It includes receipts from issuing shares, debentures, bonds, borrowing and payment of borrowed amount, loan etc. It includes receipts from issuing shares, debentures, bonds, borrowing and payment of borrowed amount, loan etc.

26. Cash Flow - Dr. varadraj Bapat, IIT Mumbai26 Financing Activities Financing Activities Example: Example:  Issue of equity shares  Buy back of equity shares  Issue/ Redemption of preference shares  Issue / redemption of debentures  Long term loan / payment thereof  Dividend / interest paid

27. Cash Flow - Dr. varadraj Bapat, IIT Mumbai27 Interest Interest Received  Received on investment – it is investment inflow  Received from short term investment classified, as cash equivalents should be considered as cash inflows from operating activities

28. Cash Flow - Dr. varadraj Bapat, IIT Mumbai28  Received on trade advances and operating receivables should be in operating inflows  For financial enterprises – in operating inflow

29. Cash Flow - Dr. varadraj Bapat, IIT Mumbai29 Interest Paid Interest Paid  On loans/debts is financing activities  On working capital loan or loan taken to finance operating activities are included in operating inflows  For financial enterprises – in operating outflow

30. Cash Flow - Dr. varadraj Bapat, IIT Mumbai30 Dividend Dividend Received Dividend Received  For non-financial enterprises- investing inflow  For financial enterprises – operating inflow Dividend Paid Dividend Paid  Always classified as financing inflow

31. Cash Flow - Dr. varadraj Bapat, IIT Mumbai31 Foreign currency transactions The effect of change in exchange rate in cash and cash equivalents held in foreign currency should be reported as separate part of the reconciliation of cash and cash equivalents. The effect of change in exchange rate in cash and cash equivalents held in foreign currency should be reported as separate part of the reconciliation of cash and cash equivalents. Unrealized gain and losses arising from changes in foreign exchanges rates are not cash flows. Unrealized gain and losses arising from changes in foreign exchanges rates are not cash flows.

32. Cash Flow - Dr. varadraj Bapat, IIT Mumbai32 Extraordinary items Ex. loss by Fire The cash flows associated with extraordinary items should be classified as arising from Operating, Investing or Financing activities as appropriate and separately disclosed.

33. Cash Flow - Dr. varadraj Bapat, IIT Mumbai33 Example:  Insurance claim received against loss of stock or profits is extraordinary operating cash inflow  Insurance claim received against loss of fixed assets is extraordinary investing cash inflow

34. Cash Flow - Dr. varadraj Bapat, IIT Mumbai34 Treatment of tax Cash flow for tax payments / refund should be classified as cash flow from operating activities. Cash flow for tax payments / refund should be classified as cash flow from operating activities. Tax deducted at source against income are operating cash outflows if concerned income are operating. Tax deducted at source against income are operating cash outflows if concerned income are operating.

35. Cash Flow - Dr. varadraj Bapat, IIT Mumbai35 Treatment of tax Cash flow for tax payments identified with a specific investing or financing flow should be classified as investing or financing flow respectively Cash flow for tax payments identified with a specific investing or financing flow should be classified as investing or financing flow respectively E.g. Dividend Tax is recognised as financing flow. E.g. Dividend Tax is recognised as financing flow.

36. Cash Flow - Dr. varadraj Bapat, IIT Mumbai36 Investments in subsidiaries/ associates Only the cash flow between enterprise itself and the investee is required to be reportedOnly the cash flow between enterprise itself and the investee is required to be reported Example: Cash flow relating to dividends and advancesExample: Cash flow relating to dividends and advances

37. Cash Flow - Dr. varadraj Bapat, IIT Mumbai37 Acquisitions and disposals of subsidiaries/other businesses Cash flow on acquisition and disposal of subsidiaries and other business units should be : Presented separately, Classified as investing activities Presented separately, Classified as investing activities

38. Cash Flow - Dr. varadraj Bapat, IIT Mumbai38 Total purchase and disposal should be disclosed separately Total purchase and disposal should be disclosed separately The position of the purchase / disposal consideration discharged by means of cash and cash equivalents should be disclosed separately The position of the purchase / disposal consideration discharged by means of cash and cash equivalents should be disclosed separately

39. Cash Flow - Dr. varadraj Bapat, IIT Mumbai39 Non-cash transactions These should be excluded from the cash flow statement. These should be excluded from the cash flow statement. These transactions should be disclosed in the financial statements. These transactions should be disclosed in the financial statements.

40. Cash Flow - Dr. varadraj Bapat, IIT Mumbai40 ExamplesExamples Acquisition of assets by assuming directly related liabilities Acquisition of assets by assuming directly related liabilities Acquisition of an enterprise by means of issue of equity shares Acquisition of an enterprise by means of issue of equity shares Conversion of debt to equity Conversion of debt to equity

41. Cash Flow - Dr. varadraj Bapat, IIT Mumbai41 Disclosures of cash and cash equivalents The components of cash and cash equivalents should be disclosed The components of cash and cash equivalents should be disclosed Reconciliation of the amount in the cash flow statement with the equivalent items reported in the balance sheet Reconciliation of the amount in the cash flow statement with the equivalent items reported in the balance sheet

42. Cash Flow - Dr. varadraj Bapat, IIT Mumbai42 The amount of cash and cash equivalent balance held by the enterprises that are not available for use (with explanation by management) The amount of cash and cash equivalent balance held by the enterprises that are not available for use (with explanation by management) The amount of undrawn borrowing facilities that may be available for future operating activities (indicating any restriction on use of these facilities) The amount of undrawn borrowing facilities that may be available for future operating activities (indicating any restriction on use of these facilities) Disclosures of cash and cash equivalents