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CASH FLOW ANALYSISPRESENTATION
BY
S.CLEMENT
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Sales is vanity
Profit is sanity
Cash is reality
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What is cash ? Currency/coins or
Balances held at bank or
Short term investments or
What constitutes cash for a layman maybe different for a finance guy
In terms of AS3, any thing convertiblein to cash is deemed as cash.
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Cash Flow statement Cash flow statement- it is a summary of
cash inflows and outflows during a
particular period for a business unit
Captures the impact of varioustransactions on the cash position of the
firm the net change in cash position
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Cash Flow Analysis - why Cash is life line of business
Cash position is not equal to that ofprofit which denotes fund position
Profit with out cash generation ?
Financial needs assessed on cash flows-lenders look at the cash position of thebusiness unit
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PROFIT VS CASH
PROFIT CASH
Accounting principles No such principles
Affected by Intangibleitems
Not affected
Accrual basis Actual basis
Revenue nature Capital+revenue
Affected by inventory
valuation
No such treatment
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Cash flow vs balance sheet Cash flow
Cash position
Actual position Changes in cash
position
Shorter or longer
period Summary of inflow
and outflow
Balance sheet
Funds position
Accrual position
Changes in A/L
Normally for a year
Position on aparticular day
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Cash flow Vs Fund flow Cash flow
No such restrictions
Actual basis
For shorter period Indicates cash position
Not affected by intangible items
Fund flow
Refers to changes in WCchanges
Accrual basis Normally useful for longer
period
Indicates fund position
E.g. debentures converted in
to equity will not figure incash flow.
Includes intangible items
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Non cash transactions Depreciation
Amortization of intangible expenses
Profit or loss on sale of fixed assets
Profit or loss on revaluation of FA
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Cash flows Inflow
Cash sales
Cash from debtors
Sale of fixed assets
Interest/dividendreceived
Loans
Shares/Debentures
Out flow
Cash purchases
Operating expenses
Taxes & duties
Purchase of FA
Loans given & repaid
Int.& Dividend paid
Redemption ofPref.shares anddebentures
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What decides flow of cash ? Credit worthiness of the firm
Management policy liquidity
preference,level of inventory etc Terms of purchase and sale credit given
and taken
Nature of product- consumer goods/capital
goods etc Market conditions inflation/deflation
Relation with the banks
Efficient management of cash flow
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AS
3 Cash flow statement AS 3 defines cash flow statement cash flow
statement is a statement setting out cash
under different heads of sources andutilization to determine the requirements ofcash during the given period and to preparefor its adequate provisions
Listed companies /company with a turn overof RS 50 cr and above CF mandatory
Cash or its equivalent
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Accounting standards - 3 Cash flow
Three parts operating, investing & financing
Operating
cash flow from Principalrevenue activities
Investing Purchase & sale of assets and
raising of funds and redemption of liabilities. Financing Equity & borrowings
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OPERARTING CASH FLOW Operating flows from principal revenue
producing activities
It includes
cash sales & receipts from debtors,
Payment to suppliers of goods & employees,
Receipts from royalties fees etc,insurancepremium,payment and refund of IT .
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CF statement as per AS 3 CF from Operating activity
PBT
add
depreciation +int.paid+ forex lossless Int. received+dividend received+Forexprofit
add - decrease in CA(other than cash) &
increase in CL less incre.in CA & decre. In CLless - tax paid
add extraordinary items
Net cash from OPR. activity
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Investing cash flow Purchase and sale of fixed assets
Purchase and slae of investments
Changes in loan position
Interest income
Dividend income Net cash flow
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Financing cash flow Issue of share capital
Buy back of shares
Proceeds from long term borrowings Repayment of long term borrowings
Short term loans
Dividends paid Interest paid
Net cash flow
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Net cash flow a) Operating +
B) Investing +
C) Financing +
net increase or decrease in cash
balance cash &equivalents (opening) balance cash &equivalents ( closing)
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Cash flow
(Re in crore)
2004 2005 2006
Operating 11778 17289 10302
Investing (10563) (8162) (12131)
Financing (1137) (5742) 367
Opening
balance
147 224 3609
Net change 77 3385 (1463)
Closing balance 224 3609 2146
RELIANCE INDUSTRIES LTD
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Preparation of c/f
Direct method
accounting actual cashinflow and out flow and arriving at cashbalance.
Indirect method (AS 3)
also called netprofit method. under this method ,calculation starts from net profit aftereffecting changes in non cash transactionssuch as depreciation.
For preparing CF, Two balance sheets and aP & L a/c is required.
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Liab. 2008 2009 Asset 2008 2009
Equity cap 80,000 80,000 FA 82.000 80,000
Pref.cap - 20,000 -depre. 22,000 30,000
Reserves 4,000 4,000 60,000 50,000
P & L 2,000 2,800 Debtors 40,000 48,000
Debentures 12,000 14000 Stock 60,000 70,000
Creditors 24,000 22,000 Pre.pd.exp.
600 1000
Prov.Tax 6,000 8,000 Cash 2,400 7,000
Dividend 10,000 11,600
Bank loan 25,000 13,600
Total 1,63,000 1,76,000 163000 176000
W ki
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Working notes
Cash from operations
Profit made during the year (2800-2000) 800
Add appropriations and non cash items
Provision for taxation 8000
Proposed dividend 11600
Depreciation 8000 27600
Profit from operations 28400
Less increase in CA except cash
Debtors 48000 - 40000 8000
Stock 70000 60,0000 10000
Prepaid expenses 1000
600 400
Less decrease in CL (Bank loan)
Creditors 24000 22000 2000 20400
8000
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Cash balance as on 2008 2400
Add sources/ inflow
Cash from operation 8000
Issue of preference shares 20000
Issue ofdebentures 2000
Sale of FA 82000 80000 2000 32000
34400
Less sources/outflow
Payment of dividend 10000
Payment of tax 6000
Payment of bank loan 11400 27400
Cash balance as on 2009 7000
Cash Flow Statement
Assumption provision for tax and dividend has been paid.
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Liability 2008 2009 Asset 2008 2009
Capital 70000 70000 Fixedassets
50000 91000
Loans - 40,000 Inventory 15000 40000
Creditors 14,000 39000 Debtors 5000 20000
Tax payable 1000 3000 Cash 20000 7000
Profit 7000 10000 Prepaidexpenses
2000 4000
Total 92000 162000 92000 162000
Prepare cash flow statement
P & L / 2009
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Op.stock 15000 cl.Stock 40,000
Purchases 98000 Sales 1,00,000
GP 27000
1,40,000 1,40,000
Gen.Exp. 11,000 GP /D 27000
Depre. 8000Tax. Prov. 4000
Net profit 4000
27000 27000
Dividend 1000 Bal.b/f 7000
Profit c/o 10000 Net profit 4000
11000 11000
P & L a/c 2009
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Cash sales 85000
Sales 100000 - 15000
(debtors 20000 5000)
Less cash purchase 73000
Purchases 98000 - 25000(creators 39000 -14000)
General expenses 13000 -86000
(11000+ prepaid 4000
prepaid 2000(2008)Cash flow from operation -1000
Direct method
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Taxes a/c
Cash a/c(balancing)
2000 Balanceb/d
1000
Balancec/d
3000 Taxprovision
4000
5000 5000
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Fixed Asset a/c
Balance b/d 50000 Depreciation 8000
Cash a/c -purchase
(balancing)
49000 Balnce c/d 91000
99000 99000
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Inflow Re Outflow ReOpening balance 20,000 Loss from
operations1000
Inflow Taxes paid 2000
Loans 40,000 Dividend paid 1000
Purchase of FA 49000
53,000
Closing balance 7,000
Total 60,000 Total 60,000
Cash flow statement (Direct)
I di t th d
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A cash flow from operating
Net profit 4000
Add non cash items
Depreciation 8000
Provision for taxes 4000 12000
Funds from operations 16000
Add increase in CL 39
14 2500041000
Less increase in CA
Debtors (20000 -5000) 15000
Inventory ( 40000-15000) 25000Prepaid Exp.(4000 2000) 2000 42000
Cash flow from operations (1000)
Net tax paid
Net cash from operating(outflow)
(2000)
(3000)
Indirect method
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Cash flow investing
Purchase of FA 49000
Calse of FA -
Interest/Dividend -
Net cash flow(outflow)
(49000)
CF - - Financing
Capital -
Loans 40000
Dividends (outflow) (1000)
Net cash flow 39000Net decrease incash
(13000)
Opening cash 20000
Closing cash 7000
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Operating cash flow (3000)
Investing cash flow (49000)
Investing 39000
Opening balance 20000
Net outflow 39000 -(49000+3000) -13000
Closing balance 7000
Summary indirect method
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CF what it reveals Segment wise cash flows surplus or deficit
management Receivables and paymentperiod
Ability to fund expansion plan/acquisition ofassets
Ability to meet debt/interest/dividendobligations
Reason for differences between cash andincome generation
Need for external financing
Useful for credit analysis,bankruptcyprediction,dividend policy etc
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Thank You
For your patient hearing
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