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?
 A cash flow statement presents information
about the cash flows associated with the
company’s main operations and those
associated with its investing and financing
activities of the period

 A cash flow statement functions in

conjunction with both the income statement
(performance dimension) and the balance
sheet (financial position)
 Ability to generate adequate cash flows
is a significant performance dimension
 Cash flow information clarifies the
dynamics of short-term liquidity and
long-term solvency
 Cash flow information is an essential
input for economic decision models
 Cash flow and profit are different
economic phenomena
 But linked through the mechanisms of accrual
accounting!
 Cash flows are factual details of incoming
and outgoing flows of cash, while the
balance sheet and income statement
emanate from professional judgement and
are not a direct projection of objective
economic data
 Liquidity
- Relates to “nearness to cash” of the structure of assets
- Determined by capacity to convert current assets into cash
 Solvency
- Relates to future availability of cash in order to settle
financial liabilities on due date
- Determined by timing and uncertainty of expected future
cash payments and cash receipts
 Liquidity and solvency ratios are determined
on static financial position data, while cash
flows reflect changes in financial position
Usefulness
Usefulness and
and Format
Format

Usefulness of the Statement of Cash Flows

Provides information to help assess:

1. Entity’s ability to generate future cash flows.

2. Entity’s ability to pay dividends and obligations.

3. Reasons for difference between net income and net

cash provided (used) by operating activities.

4. Cash investing and financing transactions during the

period.
Usefulness
Usefulness and
and Format
Format

Classification of Cash Flows

Operating Investing Financing

Activities Activities Activities
Income Statement Changes in Changes in Long-
Items Investments and Term Liabilities and
Long-Term Asset Stockholders’ Equity
Items
Usefulness
Usefulness and
and Format
Format

Classification of Cash Flows

Usefulness
Usefulness and
and Format
Format

Classification of Cash Flows

 Main operations
Inventory

Procurement Work in Progress Sales

Current payables Inventory Current receivables

Cash and cash

Payments Receipts
equivalents

Investing/
Productive External financing
infrastructure
 Adjusted profit and loss account (FFO)
 Statement of cash from operation
(CFO)
 Cash flow statement (CFS)
Particulars Rs Particulars Rs
To depreciation on FA a/c By balance b/d (opening)
To loss on sale of FS a/c By dividend a/c
To goodwill or trade mark or By commission a/c
patent written off a/c By interest received a/c
To preliminary expenses a/c By income tax refund a/c
To discount on issue of shares By profit on sale of FA or
written off a/c investments a/c
To provision for bad or doubtful By Inflow of Fund from
debts written off a/c operations a/c (bal.fig)
To provision for taxation a/c
To provision for general reserve or
any other reserve a/c
To provision for dividend a/c
To balance c/d (closing)
To outflow Or Lost in fund flow op.
(Bal.fig)
Total Total
Particulars Rs Rs
Fund from operations
Add: Increase in CL
Decrease in CA other than Cash and Bank
Less: Decrease in CL
Increase in CA other than Cash and Bank

Cash from operations (positive)

Or
Cash outflow operations (Negative)
 Equity/
Assets
liabilities

Increase Outflow Inflow

Decrease Inflow Outflow

Sources Rs Rs Applications Rs Rs
To Opening balances: By cash outflow
Cash a/c operations a/c
Bank a/c By Redemption of shares
To Issue of shares a/c or debentures a/c
To Issue of debentures By purchase of FA a/c
a/c By Repayment of loan a/c
To Sale of fixed assets By Tax or dividend paid
a/c a/c
To Loan borrowed a/c By Closing balances:
To cash from Cash a/c
operations a/c Bank a/c
Total Total
Liabilities 1989 Rs. 1990 Rs. Assets 1989 Rs. 1990 Rs.

Share capital 4,00,000 5,00,000 Cash 60,000 94,000

Trade creditors 1,40,000 90,000 Debtors 2,40,000 2,30,000
Profit & Loss 20,000 46,000 Stocks 1,60,000 1,80,000
A/c Land 1,00,000 1,32,000
5,60,000 6,36,000 5,60,000 6,36,000
 Particulars Rs. Particulars Rs.
To transfer to general reserve (1,40,000 – By balance b/d 50,000
1,00,000) 40,000 By Funds from operation (bal fig) 1,65,000
To depreciation on Building(50,000 – 20,000) 30,000
Machinery (55,000 – 30,000) 25,000
To balance c/d 1,20,000
2,15,000 2,15,000
 Statement of Cash Flow Operations

Particulars Rs. Rs.

Fund from operations (+ - inflow / - outflow ) 1,65,000

Add : Increase in current liabilities:
Trade creditors (70,000 – 40,000) 30,000
Outstanding expenses ( 12,000 – 10,000) 2,000
Decrease in CA other than Cash and Bank: -- 32,000
Less: Decrease in CL:
Bills payable (30,000 – 20,000) 10,000
Increase in CA other than Cash and Bank :
1,20,000
Closing stock (2,60,000 – 1,40,000) 1,00,000 2,30,000
Trade debtors (3,00,000 – 2,00,000)
Cash from operations (positive) -33,000
Or
Cash outflow operations (Negative)
 Sources Amount Application Amount

Cash at bank (Opening) 1,40,000 Cash out flow Or Lost in Cash flow 33,000
operations

Purchase of machinery 40,000

Cash at bank (Closing) 67,000

1,40,000 1,40,000
 Liabilities Rs. Rs. Assets Rs. Rs.

Share capital 1,50,000 1,00,000 Fixed assets 1,50,000 1,00,000

Profit & Loss A/c 80,000 50,000 Goodwill 40,000 50,000
General reserve 40,000 30,000 Stock 80,000 30,000
6% debentures 60,000 50,000 Debtors 80,000 50,000
Creditors 40,000 30,000 Bills receivable 20,000 30,000
Outstanding exp. 15,000 10,000 Bank 15,000 10,000

3,85,000 2,70,000 3,85,000 2,70,000

 Particulars Rs. Particulars Rs.
To transfer to general reserve By Balance b/d 50,000
(40,000 – 30,000) 10,000 By funds from operations
To Goodwill written off (50,000 – (bal. fig) 50,000
40,000) 10,000
To Balance c/d 80,000

1,00,000 1,00,000
 Statement of Cash Flow Operations

Particulars Rs. Rs.

Fund from operations (+ - inflow / - outflow ) 50,000

Add : Increase in current liabilities:
Creditors (40,000 – 30,000) 10,000
Outstanding expenses (15,000 – 10,000) 5,000
Decrease in CA other than Cash and Bank:
Bills receivable (30,000 – 20,000) 10,000 25,000
Less: Decrease in CL: --

Increase in CA other than Cash and Bank :

50,000
Stock (80,000 – 30,000) 30,000 80,000
Debtors (80,000 – 50,000)
Cash from operations (positive) -5,000
Or
Cash outflow operations (Negative) or Lost in CFO
 Sources Amount Application Amount

Opening balance at bank 10,000Outflow of cash on account 5,000

Issue of shares (1,50,000 of operations
– 1,00,000) 50,000Purchase of fixed assets
Issue of debentures (1,50,000 – 1,00,000) 50,000
(60,000 – 50,000) Closing balance at bank 15,000
10,000
70,000 70,000