Cash Flows Statement: Two Examples1

Mr. Tor Raj joined a multinational credit rating company immediately after his
graduation from a university college. After joining the organization, he had an induction
programme on financial reporting and financial statements analysis for 30 days. He was very
inquisitive to learn and he could upgrade his skills of financial statements analysis about credit
rating.

After completion of his induction he was posted in corporate credit rating. Then, he was
asked to analyse financial statements of Alpha Company Limited and Beta Company Limited.
He took three days to collect the data and apply techniques of financial statements analysis in
these two companies. He also compared the analysis of these two companies with comparable
companies from the industry under different scenarios of economic conditions.

After three days, he prepared his power point presentation to a group of senior managers
for their comments and approval. The focus of Mr. Tor’s analysis was based on Balance Sheet,
Income Statement and accounting policies adopted by the companies. The presentation was not
substantive and it was unsatisfactory. The senior managers felt that he should also use cash
flows statement for analysis and come back with new presentation on next day.

Subsequently, Mr. Tor recalled what he studied about Cash flow topic in the accounting
class. He remembered that cash flows statement is a one of the useful statements for analysis
along with balance sheet and income statement. This statement presents cash in-flows and cash
out flows classified under three categories such as cash from operating activities, cash from
investing activities and cash from financing activities.

Cash from Operations represents the cash inflows and outflows generated out of core
business activities of the organization. Cash sales and collection from the clients are the
examples of cash inflows from operations. Cash outflows are related to payment to employees,
vendors, tax authorities and others required for day-to-day operations are the examples of cash
outflows from operations. Indian Accounting standard (Ind AS 7) allows the entity to report
the cash flows from operating activities using either the direct or indirect method2. The
company is free to select the suitable method.

1
This case is developed by Dr Rachappa Shette, IIM Kozhikode for classroom discussion only.
2
http://mca.gov.in/Ministry/pdf/INDAS7.pdf - accessed on 26 March 2019

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 Cash Flows from Investing activities consists of cash inflows and outflows related to
purchase/sale of non-current assets and non-current investments. Payment for purchase of
property, plant and equipment, acquisition of patents are the examples of cash outflows of
investing activities. Collection of cash on sale of property, plant and equipment and other
investments are cash inflows of investing activities. Finally, net of these cash inflows and
outflows represent the cash flows from investing activities.

Cash Flows from Financing activities consists of cash inflows and cash outflows related
to long-term and short-term source of financing. Issue of equity shares, issue of bonds,
borrowings from banks are examples of cash inflows of financing activities Redemption of
bonds, repayment of borrowings, payment for share buyback and payment of interest on
borrowed capital and dividend to equity shareholders are the examples of cash outflows of
financing activities. cash outflows. Finally, net of these cash inflows and outflows represents
the cash flows from investing activities.

Analysis of cash flows statement is a big challenge to Mr. Tor because much of his
understanding of the tools and techniques are confined to the analysis of balance sheet and
income statement. He was wondering how to start the analysis of cash flow statements. He is
contemplating on some of the questions like why cash flow statement, how it is different from
other two financial statements like Balance sheet and Profit and loss statement and this
statement and how to interpret the same. He was thinking what additional analysis can be made
based on Cash flow statements to substantiate his earlier analysis. The senior manager’s
dissatisfaction is roaming in his head.

2
 Exhibit 1: Alpha Company Limited
CASH FLOW STATEMENT FOR THE YEAR ENDED 2016, 2015 & 2014 (INR in Lakhs)
PARTICULARS Mar 31, 2016 Mar 31, 2015 Mar 31, 2014
A. CASH FLOW FROM OPERATING ACTIVITIES:
Net Profit Before Tax and Extraordinary items 85026.33 61418.86 50858.82
Adjustment for:
Depreciation and Amortisation 4980.49 6928.87 4140.78
Interest income (30873.48) (39208.25) (41584.99)
Interest expense 52.74 31.08 44.46
Profit on sale of fixed assets – (1.76) 0.47
Operating Profit Before Working Capital Changes 59186.08 29168.80 13459.54
(Increase)/Decrease in Trade Receivables (74943.00) (46691.06) (11726.26)
(Increase)/Decrease in Inventories (58039.04) (9761.72) (37597.17)
(Increase)/Decrease in Loans and Advances (Excluding advance
tax and interest accrued) (28092.59) (3953.49) (10185.78)
(Increase)/Decrease in Sundry Creditors, Liabilities &Provisions 109023.69 (23266.09) 84794.26
Cash generated from operations 7135.14 (54503.56) 38744.59
Income tax paid (29160.56) (21965.94) (18567.43)
Net cash from operating activities (A) (22025.42) (76469.50) 20177.16
B. CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (22328.23) (17794.52) (12367.50)
Proceeds from sale of assets – 3.35 3.67
Interest received 36492.32 41719.79 35214.13
Net cash from investing activities(B) 14164.09 23928.62 22850.30
C. CASH FLOWS FROM FINANCING ACTIVITIES:
Interest paid (52.74) (31.08) (44.46)
Dividends paid (12328.71) (7190.19) (12554.11)
Buyback of shares (19885.80) – –
Net cash from financing activities(C) (32267.25) (7221.27) (12598.57)

Net increase/(decrease) in cash and cash equivalents (40128.58) (59762.15) 30428.89

Cash and cash equivalent as at end of the year 326763.72 366892.30 426654.45
Source: Annual Report for the year 2015-16 & 2014-15

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 Exhibit 2: Beta Communications Limited
Consolidated Statement of Cash Flows for the year ended March 31, 2018, 2017 and 2016 (INR in Crore)
Mar 31, Mar 31, Mar 31,
Particulars 2018 2017 2016
A. CASH FLOWS FROM OPERATING ACTIVITIES
Profit/(Loss) before tax from Continuing operations (3) 155 232
Profit/(Loss) before tax from discontinuing operations (25811) (2542) -
Adjusted for:
Provision for doubtful debts, loans and advances 399 143 136
Depreciation and amortization 2867 4221 4484
Provision for impairment 21255 - -
Inventory written off 92 - -
Effect of changes in foreign exchange rate (net) 116 7 (23)
(Profit)/Loss on sale of assets and capital work in progress (net) 134 (82) (213)
Net gain on sale of investments - - (3)
Finance cost 1339 3561 2924
Share of Profit/(Loss) on investment in associates (5) (3) (2)
Write back of provision for liabilities no longer required (347) (3) (48)
Interest income (91) (148) (106)
Operating Profit before working capital changes (55) 5309 7381
Adjusted for:
Receivables and other advances 2178 (1864) 4012
Inventories 65 (27) 193
Trade payables and other liabilities (1551) (4280) 2718
Cash generated from operations 637 (862) 14304
Income tax refund 389 695 154
Income tax paid (62) (221) (352)
Net cash from/ (used in) operating Activities (A) 964 (388) 14106
B. CASH FLOW FROM INVESTING ACTIVITIES
Additions of property, plant and equipment, intangible assets and (591) (3920) (15330)
capital work in progress / intangible assets under development
Proceeds from sale of property, plant and equipment / intangible assets 20 4246 247
Investment in bank deposits (with maturity for more than 3 months) 211 337 (622)
Purchase of investments - - (2680)
Sale of investments - - 3320
Interest income 92 149 115
Net cash from/ (used in) Investing Activities (B) (268) 812 (14950)
C. CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from / (repayment) of borrowings - Current (net) 1260 5158 2801
Realized foreign exchange loss withdrawn from general reserve (72) (164) (123)
Proceeds from borrowings - Non current 3052 4367 5851
Repayment of borrowings - Non current (3681) (6211) (4917)
Dividend paid - (2) (2)
Finance cost (includes interest capitalization) (1463) (3321) (3174)
Net cash from / (used in) financing activities (C) (904) (173) 436
Net increase / (decrease) in cash and cash equivalents (208) 251 (408)
Opening balance of cash and cash equivalents 815 564 972
Closing balance of cash and cash equivalents 607 815 564
Source: Annual Report for the year 2015-16 & 2014-15