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Financial Statements - Cash Flow Statement

    IndianMoney.com Research Team | Saturday, February 21,2009, 06:51 PM
 

In financial accounting, a cash flow statement or statement of cash flows is a financial statement that shows a company's flow of cash. The money coming into the business is called cash inflow, and money going out from the business is called cash outflow.

Under cash flow analysis, all movements of cash, rather than the inflow and outflow of working capital would be considered. In other words, cash flow analysis focuses attention on cash instead of working capital. When the movements of cash i.e., cash inflow and cash outflow is depicted in a statement, it is called Cash Flow Statement. Thus, a cash flow statement summarizes the causes of changes in cash position of a business between two balance sheet dates. The flow of cash may be inflow or outflow. When cash inflows are more than the cash outflows, there would be an increase in cash balance. On the other hand, if cash outflows are more than the cash inflows, there would be decrease in cash balance. The term cash includes both cash and bank balances.

The change in the cash position is computed by considering ‘Sources’ and ‘Applications’ of cash which are as follows :

Sources of cash include :

  • 1. Cash from Operations
  • 2. Issue of Shares
  • 3. Issue of Debentures
  • 4. Long term Loans Raised
  • 5. Sale of Fixed Assets

Application (uses) of cash include :

  • 1. Redemption of Preference Shares
  • 2. Redemption of Debentures
  • 3. Repayment of Loans
  • 4. Purchase of Fixed Assets
  • 5. Payment of Dividends
  • 6. Payment of Taxes
A typical Statement of Cash Flow looks like this :

 

6 Months ended 30 June 2008

Cash flow from operating activities

 

Cash receipt from customers

A

Less: Cash paid to suppliers & other operating expenses

B

Cash generated from operation

C= A-B

Less: Interest paid

D

Income tax paid

E

Cash flow before Extraordinary items

F=C-D-E

Less: Extraordinary items

G

Net Cash from / (used in) operating activities (1)

CFO =F-G

   

Cash flow from investment activities

 

Purchase of fixed assets

H

Proceeds from sale of fixed assets

I

Investment in subsidiaries

J

Investment in trade investment

K

Loans and Advances Taken/(returned)

L

Current investments made

M

Interest/Dividend Received

N

   

Net cash used in investing activities (2)

CFI=H-I+J+K+L+M-N

   

Cash flows from financing activity

X

Proceeds from issue of share capital

Y

Proceeds from long-term borrowings

Z

Repayment of Loans

 
   

Net Cash used in financing activities (3)

CFF=X+Y-Z

   

Net Increase in cash & cash equivalents = 1+2+3

Net Cash=CFO-CFI+CFF

All the above values can be found on Balance Sheet and Income Statement. Thus, you can see a Cash Flow Statement can be easily dervied from Balance Sheet and Income Statement. The most important thing to note here is that Cash Inflow is recorded as negative (+) while cash outflow is recorded as (-) on the statetement.

Cash Flow from Operations

Measuring the cash inflows and outflows caused by core business operations, the operations component of cash flow reflects how much cash is generated from a company's products or services. Generally, changes made in cash, accounts receivable, depreciation, inventory and accounts payable are reflected in cash from operations.

Cash flow is calculated by making certain adjustments to net income by adding or subtracting differences in revenue, expenses and credit transactions (appearing on the balance sheet and income statement) resulting from transactions that occur from one period to the next. These adjustments are made because non-cash items are calculated into net income (income statement) and total assets and liabilities (balance sheet). So, because not all transactions involve actual cash items, many items have to be re-evaluated when calculating cash flow from operations.

Cash Flow from Investing

Changes in equipment, assets or investments relate to cash from investing. Usually cash changes from investing are a "cash out" item, because cash is used to buy new equipment, buildings or short-term assets such as marketable securities. However, when a company divests of an asset, the transaction is considered "cash in" for calculating cash from investing.

Cash Flow from Financing

Changes in debt, loans or dividends are accounted for in cash from financing. Changes in cash from financing are "cash in" when capital is raised, and they're "cash out" when dividends are paid. Thus, if a company issues a bond to the public, the company receives cash financing; however, when interest is paid to bondholders, the company is reducing its cash.

Cash Flow from Financing

Cash flow statement is very useful in the financial management. It is used as a tool for financial analysis for short term planning. The most important uses are as follows :

  • 1) Changes in cash balance between two points of time and the contributing factors for such change are clearly revealed.
  • 2) The cash flow statement explains the reasons for :
    a. The presence of very low cash balance inspite of huge operating profits or
    b. The presence of a higher cash balance inspite of a very low level of profits
  • 3) Projected cash flow statements help the management in short-term planning and several other ways like :

    a.Determination of additional cash requirements during a given period and making timely arrangements
    b. Identification of the size of surplus and the time for which such surplus funds are likely to be available
    c. Judging the ability of the firm to repay/redeem debentures/preferences shares.
    d. Examining the possibility of maintaining/increasing dividends
    e. Assessing the capability of finance, replacement of fixed assets
    f. Assessing the capacity of the firm to finance expansion.
    g. More efficient and effective management of cash flows

In the next article we will focus on different types of Financial Ratios which can be calculated from these three financial statements. These ratios are extremely important as each ratio has something to tell about the company.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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