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ACC501 - Lecture 20

This document discusses the cash flow statement, which reports the sources and uses of cash over a period of time. It summarizes cash inflows and outflows from operating, investing, and financing activities. The cash flow statement is important because it shows where a company's cash came from and how it was used, unlike the income statement which only shows profits. It allows analysis of whether earnings were actually turned into cash. The document defines the key components of the cash flow statement and provides examples of cash inflows and outflows for each section.

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Shivati Singh Kahlon
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110 views22 pages

ACC501 - Lecture 20

This document discusses the cash flow statement, which reports the sources and uses of cash over a period of time. It summarizes cash inflows and outflows from operating, investing, and financing activities. The cash flow statement is important because it shows where a company's cash came from and how it was used, unlike the income statement which only shows profits. It allows analysis of whether earnings were actually turned into cash. The document defines the key components of the cash flow statement and provides examples of cash inflows and outflows for each section.

Uploaded by

Shivati Singh Kahlon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Lecture-20

Cash Flow Statement

ACC 501- Accounting


for Managers

Dr. ARPIT SIDHU


(Ph.D, UGC-NET, HP-SET, MBA,
MCOM, BCOM)
Poll from the last lecture
• Which of the following statements are false?

A) When all the figures in a balance sheet are stated as percentage of the total, it is
termed as horizontal analysis.

B) When financial statements of several years are analyzed, it is termed as vertical


analysis.

C) Vertical Analysis is also termed as dynamic analysis.

a) Both A and B
b) Both A and C
c) Both B and C
d) A, B , C
•B
Objectives of the Chapter

To comprehend how the statement of cash flows is prepared

To be able to interpret the information presented in the cash flow


statement
Balance Sheet - Where does
business stand today

Income Statement – How


well business did this year

Cash Flow Statement –


From where did cash came and where
did it go
Statement of Cash Flows
“Joan and Joe: A Tale of Woe”
Joe added up profits and went to see Joan,
Assured of obtaining a much-needed loan.
When Joe arrived, he announced with good cheer:
“My firm has had an outstanding year,
And now I need a loan from your bank.”
Eyeing the statements, Joan’s heart sank.
“Your profits are fine,” Joan said to Joe.
“but where, oh where, is your company’s cash flow?
I’m sorry to say: the answer is ‘no’.”

--L. Fraser
Statement of Cash Flows
Why is it important???

“A positive net income on the income statement is ultimately insignificant


unless a company can translate its earnings into cash, and
the only source in financial statement data for learning about the
generation of cash from operations is the statement of cash flows”
Statement of Cash Flows

A summary of a firm’s receipts and payments during a


period of time.
This statement reports cash inflows and outflows based on the
firm’s
operating activities,
investing activities, and
financing activities.
Sources and Applications of Cash
Sources Applications (Outflows)
(Inflows)
Profitable Operations (R-E=NI) Unprofitable Operations

Sale of long-term assets Purchase of long-term assets

Owners invest in business Owners withdraw from business

Long term borrowings Repayment of Long term


borrowings
Sources and Applications of Cash
Sources Applications (Outflows)
(Inflows)
Profitable Operations Unprofitable Operations
(R-E=NI) Operating Activities
Sale of long-term assets Purchase of long-term assets
Owners invest in business Owners withdraw from business Investing Activities
Long term borrowings Repayment of Long term
borrowings
Financing Activities
Related questions
1. From which sources did the company raise cash last year? How was this cash used?

2. Were the normal operating activities capable of satisfying its need for cash during
the year?

3. If not, is the shortage of cash compensated by new borrowings, issuing new share
capital or by selling fixed assets?

4. Is a surplus of cash used for repayment of debt, for investments or for distribution of
dividends?

5. Why has the balance of cash available decreased, knowing that the company’s
operations have been profitable?
Cash Flow from Operating Activities
Shows impact of transactions not
defined as investing or financing
activities.

• These cash flows are generally the cash effects of


transactions that enter into the determination of net
income.
• Results from producing and providing goods or services
Cash Flow From Operating Activities

Cash Inflows
From sales of goods or services
From interest and dividend income

Cash Outflows
To pay suppliers for inventory
To pay employees for services
To pay lenders (interest)
To pay government for taxes
To pay other suppliers for other operating expenses
Statement of Cash Flows

Cash Flow from Investing Activities

Shows impact of buying and selling fixed


assets and debt or equity securities of other
entities.
Cash Flow From Investing Activities

Cash Inflows
From sale of fixed assets (property, plant, equipment)
From sale of debt or equity securities (other than
common equity) of other entities

Cash Outflows
To acquire fixed assets (property, plant, equipment)
To purchase debt or equity securities (other than
common equity) of other entities
Statement of Cash Flows

Cash Flow from Financing Activities

Shows impact of all cash transactions with shareholders


and the borrowing and repaying transactions with lenders.
Cash Flow From Financing Activities

Cash Inflows
From borrowing
From the sale of the firm’s own equity securities

Cash Outflows
To repay amounts borrowed
To repurchase the firm’s own equity securities
To pay shareholders dividends
Classifying balance sheet movements as inflows or
outflows of cash

Assets Equity/liabilities

Increase Outflow Inflow

Decrease Inflow Outflow


Incoming cash flows
Cash + Other assets = Liabilities + Owners’equity

(1) + -

(2) + +

(3) + +
Outgoing cash flows
Cash + Other assets = Liabilities + Owners’equity

(1) - +

(2) - -

(3) - -
THANK YOU

11

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