Cash Flow

CASH FLOW STATEMENT

A cash flow statement is a financial report that shows incoming and outgoing money during a particular period (often monthly or quarterly). It does not include non-cash items such as depreciation. This makes it useful for determining the short-term viability of a company, particularly its ability to pay bills.

Interested Parties :-

People and groups interested in cash flow statements include:

[pic][pic]Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses

[pic][pic]Potential lenders/creditors, who want a clear picture of a company's ability to repay

[pic][pic]Potential investors who need to judge whether the company is financially sound

[pic][pic]Potential employees or contractors who need to know whether the company will be able to afford compensation

Cash flow statements are particularly important for start-up companies with limited liquid assets. These companies are vulnerable to devastating cash shortages, even when Accounts Receivable balances point to long-term financial health.

Accounting Standard: IAS 7 - Cash Flow Statements

Objective of IAS 7

The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement, which classifies cash flows during the period according to operating, investing and financing activities.

Fundamental Principle in IAS 7

All enterprises that prepare financial statements in conformity with IAS are required to present a cash flow statement. [IAS 7.1]

The cash flow statement analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an enterprise's cash management are also included as a component of cash and cash equivalents. [IAS 7.7-8]

Accounting Standard: AS 3 - Cash Flow Statements

The Institute of Chartered Accountants of India ( ICAI) issued the Accounting Standard (AS-3)(Revised) relating to the preparation of Cash Flow Statement in 1998. Initially it was recommendatory in nature; its preparation has been made mandatory for the accounting periods commencing on or after April 1, 2001 for the enterprise :-

(i) Which has the turnover more than Rs. 50 crore in a financial year ; or

(ii) Listed companies - shares of these companies listed in stock exchange, (cash flow statement of listed companies shall be presented only under the indirect method as prescribed in AS 3.)

Broad Categories

(i) Cash flow from Operating Activities - Cash flows directly related to production and sale of the firm's products/services.

(ii) Cash flow from Investing Activities- Cash flows associated with purchase / sale of both fixed assets and business interests.

(iii) Cash flow from Financing Activities - Cash flows that results from debt equity financing transactions and includes incurrence and repayment of debt cash inflows from the sale of shares and cash outflows to repurchase shares or pay cash dividends.

Sum of these three types of cash flow reflects net increase or decrease of cash and cash equivalents.

Important Terms

Cash: It consists of cash in hand and demand deposits.

Cash Equivalent: It consists of short-term highly liquid investments having maturity less than three months, which can be readily converted into cash without decline of its value. In other words, these investments can be converted into cash without any risk.

Cash Flow Statement: It exhibits the flow of incoming and outgoing of cash and cash equivalent.

Calculation of Cash Flow from Business Operations

(A) Profit from Business Operations (as per Fund Flow Operation)

(B) Adjustment to convert to Cash Basis :

Add : Decrease in WC (-CA or +CL)

Decrease in CA other than Cash (Item wise)

Increase in CL other than Bank O/D (Item wise)

Less : Increase in WC (+CA or -CL)

Increase in CA other than Cash (Item wise)

Decrease in CL other than Bank O/D (Item wise)

(C) Cash Flow or Cash Lost from Business Operation

Reporting Cash Flows

From Operating Activities The reporting of cash flows from operating activities can be either through the direct method or indirect method.

Direct Method It includes the gross cash receipts and gross cash payments for the major items are disclosed, such as cash receipts from customers and cash paid to suppliers.

Indirect Method Under this method, the P&L account is adjusted for (i) the effects of transactions of non-cash nature such as depreciation, amortization, deferred taxes, loss on sale of fixed assets and unrealized foreign exchange losses and gains (ii) changes during the period in inventories and operating receivables and payables; and (iii) for all other items for which the cash effects are shown either in financing or investing activities.

From Financing or Investing Activities Gross cash receipts and gross cash payments arising from financing and investing activities

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