FD Presentations

Cash Flows Statement : 

Cash Flows Statement

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Are cash flows sufficient to support ongoing operations? Can we meet our obligations to creditors? Can we pay dividends? Why is there a difference between net income and net cash flow? Will the company have to borrow money to make needed investments? Purpose of CFS

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The term cash on the statement of cash flows refers broadly to both currency and cash equivalents. Cash T-bills Money Market Funds Commercial Paper Currency and Bank Accounts Cash

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CFS attempts to analyze transactions generating cash and using cash CFS provides summary of Sources and uses of Cash

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Sources Cash Profits Issue of Capital Issue of securities Borrowings Sale of Assets investments Uses Purchase of Assets Investments Redemption Loan repayment Payment of Tax Dividend

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FFS & CFS Ffs based on concept of WC, cfs on Cash Cfs considers actual movement of cash, Ffs considers movement of WC

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IMPORTANCE AND RELEVANCE IAS-7 -Cash flow Statement which summarizes cash receipts, cash payments and net cash resulting from operating, investing and financing activities

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CFS Investing activities Operating activities Financing activities

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Operating Activities— Cash flows CR from sale of goods and services CR from fees, royalties, commission and other revenues CP to suppliers for goods and services CP to and on behalf of the Employees CR & CP of an insurance enterprise for premiums and claims CP or refund of income tax CR and CP for future contracts, forward contracts, Swaps and Options

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Investing Activities— Cash flows CP to acquire Fixed Assets, including intangible CR from disposal of fixed Assets including intangibles CP to acquire shares, debt instruments of other enterprises CR on disposal of the above Cash advances and Loans made to third parties CR from repayment of Loans and Advances

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Financing Activities— Cash flows Cash Proceeds from issue of shares Cash Proceeds from issuing debentures, bonds….. Cash repayments of amount Borrowed Payment of dividend

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PREPRATION OF CFS Direct Method Indirect Method

Direct Method or Indirect Method? : 

Indirect Method Net income is reconciled to cash flow from operating activities. No supplemental schedule is required. Used by 99% of companies. Direct Method or Indirect Method? Direct Method Net income is reconstructed on a cash basis. Requires a supplemental reconciliation of net income to cash flow from operating activities. Used by 1% of companies.

Preparing a Simplified Statement of Cash Flows : 

Preparing a Simplified Statement of Cash Flows Cash flows are divided into three categories.

Preparing a Simplified Statement of Cash Flows : 

Preparing a Simplified Statement of Cash Flows { A reconciliation of beginning cash to ending cash is also required.

Operating Activities : 

Operating Activities Cash flow from operating Activities N P before Tax & Extraordinary items xxxxx Adjustment for +depreciation xxxxx +loss on sale of fixed asset xxxx +Foreign Exchange loss xxxx +Interest income xxxx -Dividend Income xxxx -Interest received xxxx Operating Profit before WC changes xxxxx

Operating Activities : 

Operating Activities Increase in Sundry Debtors xxxxx Decrease in Inventories xxxxx Decrease in Sundry creditors xxxxx Cash generated from operations xxxxx Income Tax Paid (xxxx) Cash flow before extra ordinary items xxxxx (+ or – )extra ordinary item xxxx Net Cash from operating Activities xxxxx

Investing Activities : 

Includes transactions that involve the acquisition or disposal of non current assets. Investing Activities

Financing Activities : 

Includes transactions involving receipts from or payments to creditors and owners. Financing Activities

Other Cash Flow Issues : 

Other Cash Flow Issues For investing activities and financing activities, like-kind inflows and outflows of cash must be shown separately on the statement of cash flows. Example: XYZ sells an old building for Rs70,00,000 and purchases a new building for Rs100,00,000. The Rs70,00,000 inflow of cash and the Rs100,00,000 outflow of cash must be shown separately.

Other Cash Flow Issues : 

Example: X company acquires a building in exchange for 2,000 shares of common stock. This is reported in a separate supplemental schedule attached to the statement of cash flows. Direct exchange transactions occur when noncurrent balance sheet items are swapped. Such exchanges must be disclosed. Other Cash Flow Issues

Interpretation of the Statement of Cash Flows : 

Interpretation of the Statement of Cash Flows Examine the operating activities section carefully. Negative cash flow is usually a sign of fundamental difficulties. Ultimately, a positive cash flow is necessary to avoid liquidating assets or borrowing money to pay for day-to-day activities.

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Net Cash Flows for a Period Preparing CFS using changes in Non Cash B Sheet Accounts

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Preparing CFS using changes in Non Cash B Sheet Accounts

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Example:Inventory is purchased on credit from a supplier. It is implied that cash was used to acquire the inventory. Increases in non cash asset accounts imply uses of cash. Preparing CFS using changes in Non Cash B Sheet Accounts

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Example: Inventory is purchased on credit from a supplier. It is implied that an increase in a payable has the effect of increasing cash available for other uses. Increases in liability accounts imply sources of cash. Preparing CFS using changes in Non Cash B Sheet Accounts

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Decreases in non cash assets accounts imply sources of cash. Example: Accounts receivable decreases when a customer pays their bill. When the customer pays his bill, the company’s cash increases. Preparing CFS using changes in Non Cash B Sheet Accounts

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Decreases in liability accounts imply uses of cash. When the company makes the payment, cash decreases. Example: The company made a payment on a note payable held by a creditor. Preparing CFS using changes in Non Cash B Sheet Accounts