Cash Flow Statement

Cash Flow Statement (Ind AS 7)

The cash flow statement provides information about a company’s cash

receipts and cash payments during an accounting period.
It reflects cash receipts or cash payments only when there is an actual
inflow or outflow of cash.
It was earlier prepared as per AS 3 issued by ICAI and now under Ind AS 7
issued by ICAI.
For example, Company X made a credit sales of Rs. 5000 on 31 st April,
2020. This transaction will be recorded in the income statement under the head of
credit sales of Rs. 5000 on 31st April, 2020.
However, the actual cash of Rs. 5000 is realized on 25 th July, 2020. The
cash flow statement will record the transaction on 25 th July, 2020 when the actual
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inflow of cash takes place.
 Objectives of a cash flow statement

• It enables to estimate the cash position of a firm.

• It explains the reason behind increase or decrease in cash balance
from one accounting period to another
• It provides information about the activities leading to inflow or
outflow of cash.
• It helps in estimating the liquidity position of the firm.

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 Components of a cash flow statement

Investing
Activities
Operatin
Financing
g
Activities
Activities

Cash
Flow
Stateme
nt
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 Operating Activities

Cash flows from operating activities are primarily derived from the principal
revenue-producing activities of the enterprise. Therefore, they generally result
from the transactions and other events that enter into the determination of net
profit or loss.
Examples of cash flows from operating activities are:
(a) cash receipts from the sale of goods and the rendering of services;
(b) cash receipts from royalties, fees, commissions and other revenue;
(c) cash payments to suppliers for goods and services;
(d) cash payments to and on behalf of employees;
(e) cash receipts and cash payments of an insurance enterprise for premiums and
claims, annuities and other policy benefits;
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(f) cash payments or refunds of income taxes unless they can be
specifically identified with financing and investing activities; and

(g) cash receipts and payments relating to futures contracts, forward

contracts, option contracts and swap contracts when the contracts
are held for dealing or trading purposes

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 Investing Activities

The separate disclosure of cash flows arising from investing

activities is important because the cash flows represent the extent
to which expenditures have been made for resources intended to
generate future income and cash flows. Examples of cash flows
arising from investing activities are:

(a) cash payments to acquire fixed assets (including intangibles).

These payments include those relating to capitalised research and
development costs and self-constructed fixed assets;

(b) cash receipts from disposal of fixed assets(including

intangibles);

(c) cash payments to acquire shares, warrants or debt instruments

of other enterprises and interests in joint ventures (other than7
payments for those instruments considered to be cash equivalents
and those held for dealing or trading purposes);
(d) cash receipts from disposal of shares, warrants or debt
instruments of other enterprises and interests in joint ventures (other
than receipts from those instruments considered to be cash
equivalents and those held for dealing or trading purposes);

(e) cash advances and loans made to third parties (other than
advances and loans made by a financial enterprise);

(f) cash receipts from the repayment of advances and loans made to
third parties (other than advances and loans of a financial enterprise);

(g) cash payments for futures contracts, forward contracts, option

contracts and swap contracts except when the contracts are held for
dealing or trading purposes, or the payments are classified as
financing activities; and

(h) cash receipts from futures contracts, forward contracts, option

contracts and swap contracts except when the contracts are held for
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dealing or trading purposes, or the receipts are classified as financing
activities
 Financing Activities

The separate disclosure of cash flows arising from financing

activities is important because it is useful in predicting claims on
future cash flows by providers of funds (both capital and
borrowings) to the enterprise. Examples of cash flows arising from
financing activities are:

(a) cash proceeds from issuing shares or other similar instruments;

(b) cash proceeds from issuing debentures, loans, notes, bonds, and
other short or long-term borrowings; and

(c) cash repayments of amounts borrowed.

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 Methods of preparing a cash flow statement

• Cash flow from operations (CFO)

• Direct method
Operating Receipts - Operating Payments

• Indirect Method
Adjusted Profit = PAT +/- (Non Cash Items, Non-Operating
items, Changes in the Operating WC)

• Cash flow from investment activities (CFI)

Direct method

• Cash flow from financing activities (CFF) 10

Direct method
 Format of cash flow statement

The format for preparing a cash flow statement depends on the method
we use to prepare it.
Thus, there is a direct cash flow statement format and an indirect cash
flow statement format.

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 Limitations

• It shows only cash inflow and cash outflow. the cash balance disclosed by
the statement cannot reveals the true liquid position of the business.
• It does not give complete picture of the financial position of the business
concern.
• It is not prepared on the basic accounting concept of accrual basis. Hence,
the accuracy of cash flow statement is questionable.
• It is not a substitute of Income Statement.

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 DIFFERENCE BETWEEN AS-3 & IND AS
7
Basis AS- 3: Cash Flow Ind AS 7: Statement of
Statements Cash Flow

Bank Overdraft Bank borrowings are generally Ind AS 7 requires the bank
considered as a part of overdraft, which are
financing activities repayable on demand, to be
considered as a part of cash
and cash equivalents
Extraordinary Cash flows associated with No such requirement
items extraordinary activities are
classified as arising from
operating, investing or
financing activities as
appropriate, and separately
disclosed
Acquisition & No specific guideline Entities might routinely
Disposal of dispose items of property,
properties held plant & equipment that they
for rental to have previously held for
others rental to others. Cash
payments/receipts in respect
of acquisition or disposal of 13
such assets are classified as
cash flows from operating
activities
Basis AS- 3: Cash Flow Ind AS 7: Statement of
Statements Cash Flow

Change in No specific guideline The aggregate Cash flows

ownership arising from obtaining or
losing control of subsidiaries
or other business of an entity
shall be presented separately
and classified as investing
activities. Change in
ownership interest in a
subsidiary without loss of
control is treated as
Financing Activities.

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INDIRECT METHOD

 This method starts with profit before tax. Finance costs are added back and
investment income is deducted in order to work back to profit from
operations.
 Any non-cash items are then adjusted to find cash generated from
operations (the cash version of profit from operations).
 Non-cash expenses are added back to remove them (such as depreciation,
loss on disposal).
 Non-cash income items are deducted in order to remove them (such as
profit on disposal, release of government grants).
 Adjustments are also made to working capital, to remove the impact of
credit sales/purchases. When adjusting for these items, consider whether
the movements are good or bad for cash. For example, an increase in
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receivables is bad for cash, as it means this cash has not yet been collected
from the customers.
Adjustments to profit before tax

1. Depreciation
 Depreciation is not a cash flow.
 Depreciation has to be added back to reported profit in deriving cash from
operating activities.
 Capital expenditure will be recorded under ‘investing activities’ at the time
of the cash outflow.
2. Profits/losses on disposal of non-current assets
When a non-current asset is disposed of:
 The cash inflow from sale is recorded under ‘investing activities’
 A loss on disposal is added to profit in deriving cash from operating
activities similarly, a profit on disposal is deducted from profit .
3. Change in receivables
 an increase in receivables is a deduction from profit in deriving cash from
operating activities
 similarly, a decrease in receivables is an addition to profit.
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3. Change in inventory
 An increase in inventory is a deduction from profit in deriving cash from
operating activities
 similarly, a decrease in inventory is an addition to profit.

4. Change in payables
 an increase in payables is an addition to profit in deriving cash from
operating activities
 similarly, a decrease in payables is a deduction from profit.

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Working capital changes
 Change in receivables
Recognition of a sale creates income, irrespective of the date of the cash receipt. If
the cash has not been received by the reporting date, however, there is no cash
inflow from operating activities for the current accounting period. Similarly, opening
receivables represent sales of a previous accounting period, all of which should
have been received as cash in the current period.
The change between opening and closing receivables will thus represent the
adjustment required to move from reported revenue to net cash inflow from sales.
 An increase in receivables is a deduction from reported profit. Less sales from the
previous period are being received in cash than are being carried forward to the
next period.
 A decrease in receivables is an addition to reported profit.

 Change in inventories
Inventory at the reporting date represents a purchase which has not actually been
charged against current profits. However, as cash was spent on its purchase or a
payable incurred, it does represent an actual or potential cash outflow. Strictly, the
amount of inventory paid for in cash should be calculated and profit adjusted by the
movement in such inventories between the two reporting dates. A corresponding
adjustment would be made to payables (see below) to the extent that the expense 18
relating to such payables will not have been charged in the statement of profit or
loss.
Change in payables
A purchase represents the incurring of expenditure and a charge or potential charge
to the statement of profit or loss. It does not represent a cash outflow until paid. To
the extent that a purchase results in a charge to the statement of profit or loss:
 an increase in payables between two reporting dates is an addition to reported
profit
 a decrease in payables is a deduction from reported profit.

If the purchase does not result in a charge to the statement of profit or loss in the
current year, the corresponding payable is not included in the reconciliation of profit
to net cash inflow. For example, a payable in respect of a non-current asset is not
included. As stated earlier, a payable for purchases which form part of inventory at the
reporting date should not be included either, but in practice will be.

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