THE CASH FLOW STATEMENT
FROM THE DESL OF: M.ZEESHAN MUMTAZ
Introduction & Purpose:
In financial accounting, a cash flow statement or statement of cash flows is a financial
statement that shows how changes in balance sheet and income accounts affect cash and
cash equivalents, and breaks the analysis down to operating, investing, and financing
activities. As an analytical tool, the statement of cash flows is useful in determining the
short-term viability of a company, particularly its ability to pay bills. International
Accounting Standard 7 (IAS 7) is the International Accounting Standard that deals with
cash flow statements and it follows,
• The cash flow statement provides information about:
FROM THE DESL OF: M.ZEESHAN MUMTAZ
the cash receipts (cash inflows) and
uses of cash (cash outflows) during the year
• Inflows and outflows are reported for:
operating,
investing and
financing activities during the year
People and groups interested in cash flow statements include:
Accounting personnel, who need to know whether the organization will be able to
cover payroll and other immediate expenses
Potential lenders or creditors, who want a clear picture of a company's ability to repay
Potential investors, who need to judge whether the company is financially sound
Potential employees or contractors, who need to know whether the company will be able
to afford compensation
Statement of Cash Flows
Inflows
Operating Activities
Investing activities
Outflows
Financing activities Cash Pool
Operating activities
Investing activities
Financing activities
Cash Inflows
• Operating Activities:
– Cash from customers
• Investing Activities:
– Sale of property, plant and equipment
– Sale of debt and equity securities of other entities
– Collection of principal on loans
• Financing Activities:
– Issuance of equity securities (company’s own stock)
– Issuance of debt (bonds and notes)
Cash Outflows
• Operating activities:
– Payments to suppliers, employees, etc.
• Investing activities:
– Purchase property, plant and equipment
– Purchase debt or equity securities of other entities
– Make loans to other entities
FROM THE DESL OF: M.ZEESHAN MUMTAZ
• Financing activities:
– Pay dividends to stockholders
– Pay cash to redeem long-term debt or reacquire capital stock
Preparing a Statement of Cash Flows
• There are TWO methods of preparing the statement of cash flows:
– the indirect method and
– the direct method
• The indirect method derives cash flows from accrual basis statements.
• The direct method determines cash flows directly for each source or use of cash
• These methods differ ONLY in their approach to operating activities. The
investing and financing sections are identical.
Usefulness of Statement of SCF
• How successful is company in generating net cash provided by operating
activities?
• What are the trends in net cash flow provided by operating activities over time?
• What are the major reasons for positive/negative net cash provided by operating
activities?
Activity Description in detail
1: Operating activities
Operating activities include the production, sales and delivery of the company's product
as well as collecting payment from its customers. This could include purchasing raw
materials, building inventory, advertising, and shipping the product.
Under IAS 7, operating cash flows include:
Receipts from the sale of goods or services
Receipts for the sale of loans, debt or equity instruments in a trading portfolio
Interest received on loans
Dividends received on equity securities
Payments to suppliers for goods and services
Payments to employees or on behalf of employees
Interest payments (alternatively, this can be reported under financing activities in
IAS 7, but not in US GAAP)
Items which are added back to [or subtracted from, as appropriate] the net income figure
(which is found on the Income Statement) to arrive at cash flows from operations
generally include:
Depreciation (loss of tangible asset value over time)
Deferred tax
Amortization (loss of intangible asset value over time)
Any gains or losses associated with the sale of a non-current asset, because
FROM THE DESL OF: M.ZEESHAN MUMTAZ
associated cash flows do not belong in the operating section. (Unrealized
gains/losses are also added back from the income statement)
2: Investing activities
Examples of investing activities are
Purchase of an asset (assets can be land, building, equipment marketable
securities, etc.)
Loans made to suppliers or customers
3: Financing activities
Financing activities include the inflow of cash from investors such as banks and
shareholders, as well as the outflow of cash to shareholders as dividends as the company
generates income. Other activities which impact the long-term liabilities and equity of the
company are also listed in the financing activities section of the cash flow statement.
Under IAS 7, financing cash flows include:
Proceeds from issuing shares
Proceeds from issuing short-term or long-term debt
Payments of dividends
Payments for repurchase of company shares
Repayment of debt principal, including capital leases
For non-profit organizations, receipts of donor-restricted cash that is limited to
long-term purposes
Items under the financing activities section include:
Dividends paid
Sale or repurchase of the company's stock
Net borrowings
Cash Flow Statement
For the year ended December 31st, 200X
Using Direct Method
Rs. Rs.
Cash Flows From Operating Activities
Cash receipts from customers (actual cash received) XXX
Cash paid to suppliers and employees (actual cash paid) (XXX)
Cash generated from operations XXX
Interest paid (actual cash paid) (XXX)
Income taxes paid (actual cash paid) (XXX)
FROM THE DESL OF: M.ZEESHAN MUMTAZ
Cash flow before extra ordinary items XXX
Proceeds from earthquake disaster settlement (actual cash) XXX
Net cash from operating activities XXX
Cash Flows From Investing Activities
Purchase of fixed assets (actual cash paid) (XXX)
Sale of fixed assets (actual cash received) XXX
Interest received (actual cash received) XXX
Dividend received (actual cash received) XXX
Net cash from investing activities XXX
Cash Flows From Financing Activities
Issue of share capital (actual cash received) XXX
Issue of debenture (actual cash received) XXX
Received from long term loans (actual cash received) XXX
Payment of long term loans (actual cash paid) (XXX)
Dividend paid (actual cash paid) (XXX)
Net cash from financing activities XXX
Increase (Decrease) in net cash during the period XXX
Add: Cash and cash equivalent at beginning of period XXX
Cash and cash equivalent at ending of period XXX
Indirect Method Rs. Rs.
Cash Flows From Operating Activities
Net profit before interest & tax and extra ordinary items
Adjustment for: (non-cash items) XXX
Add:
Depreciation (for the period)
Bad debts expense XXX
XXX
Amortization of goodwill, patent or intangible assets
XXX
Amortization of discount on debenture or share XXX
Loss on sale of fixed assets XXX
FROM THE DESL OF: M.ZEESHAN MUMTAZ
XXX
Less:
Gain on sale of fixed assets XXX
Dividend and interest received on investment XXX (XXX)
Operating Profit XXX
Increase in Current Assets (except cash / bank) (XXX)
Decrease in Current Assets (except cash / bank) XXX
Increase in Current Liabilities (except tax, interest and
dividend payable) XXX
Decrease in Current Liabilities (except tax, interest and
dividend payable) (XXX) XXX
Cash generate from operations XXX
Interest paid (actual cash paid) (XXX)
Income paid (actual cash paid) (XXX)
Net cash from operating activities XXX
Cash Flows From Investing Activities
Purchase of fixed assets (actual cash paid) (XXX)
Sale of fixed assets (actual cash received) XXX
Interest received (actual cash received) XXX
Dividend received (actual cash received) XXX
Net cash from investing activities XXX
Cash Flows From Financing Activities
Issue of share capital (actual cash received) XXX
Issue of debenture (actual cash received) XXX
Received from long term loans (actual cash received) XXX
Payment of long term loans (actual cash paid) (XXX)
Dividend paid (actual cash paid) (XXX)
Net cash from financing activities XXX
Increase (Decrease) in net cash during the period XXX
Add: Cash and cash equivalent at beginning of period XXX
Cash and cash equivalent at ending of period XXX
