Preparation of Cash flow statement/Various activities under cash flow statement (AS-3)
Cash flow statement is a statement which shows the movement of cash and cash equivalents over a particular period of time. It comprised of three sections: Operating activities, investing activities and financing activities. There are two methods of preparing cash flow statement: the direct method preferred by FASB and indirect method preferred by most businesses because of its simplicity. The difference between the two methods lies in the operating section only. Investing and financing activities calculation are same under both the methods.
A) Section one: Cash flow from operating activities: Operating activities are the principal revenue generating activities of the business. These are cash flows from regular course of operations such as manufacturing, trading etc. All activities that are not investing or financing activities are included under operating activities.
Examples of Operating Activities:
Ø Cash receipts from the sale of goods and rendering of services. (Source)
Ø Cash payments to suppliers of goods and services. (application)
Ø Cash receipts from royalties, fees, commission and other revenue. (Source)
Ø Cash payments to and on behalf of employees for wages, etc. (application)
Ø Cash payments and refunds of income taxes. (application)
Under indirect method cash flow from operating activities is calculated with the help of net profit before tax and extraordinary items. Non-cash and non-operating expenses and losses are added and non-cash and non-operating incomes are deducted from net profit before tax and extraordinary items to find net cash flow from operating activities before working capital change. After this changes in working capital is adjusted and payment of taxes during the year is deducted to find cash flow from operating activities.
B) Section two: Cash from investing activities: The investing activities of a business include all cash flow arises due to acquisition and disposal of long term assets (whether tangible and intangible) and investments. Acquisition or disposal of companies also comes under investing activities. These are separately discloses in cash flow statement.
Examples of Investing Activities:
Ø Cash payments to acquire long term fixed assets (tangible and intangible) and investments. (application)
Ø Cash receipts from the disposal of long term fixed assets (including intangibles) and investments. (Source)
Ø Cash payments for purchase or of shares, warrants, or debt instruments of other enterprises and interest in joint ventures. (application)
Ø Cash receipts from sale of shares, warrants, debt instruments of other enterprises and interest in joint ventures. (source)
Ø Cash receipts from repayments of advances and loans made to third parties. (source)
All the sources of cash from investing activities are added and all the applications of cash in investing activities are deducted to find net cash flow from investing activities.
C) Section three: Cash flows from financing activities: Financing activities are the activities which results in changes in the size and composition of the owner’s capital and borrowings of the enterprises from other sources. The financing activities of a firm include issuing or redemption of share capital, issue and redemption of debentures, raising and repayment of long term loans etc. Dividends and Interest paid are also come under financing activities. 2
Examples of Financing Activities: (Sources and applications of cash flow)
Ø Cash proceeds from the issue of shares or other similar instruments. (source)
Ø Cash proceeds from the issue of debentures, loans, bonds and other short term borrowings. (source)
Ø Buy-back of equity shares. (application)
Ø Cash repayments of the amounts borrowed including redemption of debentures. (application)
Ø Payments of dividends and interest on borrowings. (application)
All the sources of cash from financing activities are added and all the applications of cash in financing activities are deducted to find net cash flow from financing activities.
Last section – Bottom line: All the cash flows from three sections are added to find net cash flow during the year. Thereafter opening balance of cash and cash equivalent s are added with this amount and the resulting amount will be the closing balance of cash and cash equivalents. Here cash and cash equivalents means:
Cash: Cash comprises cash on hand and demand deposits with banks.
Cash Equivalents: Cash Equivalents are short-term, highly liquid investments that are readily convertible cash. Examples of cash equivalents are: (a) treasury bills, (b) commercial paper, (c) money market funds and (d) Investments in preference shares and redeemable within three months. (2018)
Format of Cash Flow Statement under Direct Method
Particulars
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Amount
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A. Cash Flow from operating activities:
Ø Cash receipts from the sale of goods and rendering of services. (Source)
Ø Cash receipts from royalties, fees, commission and other revenue. (Source)
Ø Cash payments to suppliers of goods and services. (application)
Ø Cash payments to and on behalf of employees for wages, etc. (application)
Ø Cash payments and refunds of income taxes. (application)
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1. Cash Flow from operating activities
B. Cash Flow from Investing activities: (Examples of sources/Applications given above)
Sources of cash
Applications of cash
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+++/---
++++++
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2. Cash flow from investing activities
C. Cash Flow from Financing activities: (Examples of sources/Applications given above)
Sources of cash
Applications of cash
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+++/----
++++++
---------
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3. Cash flow from Financing activities
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+++/---
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D. Cash Flow during the year (1 + 2 + 3)
Add: Opening balance of cash & cash equivalent
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++++/----
+++++++
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Closing balance of cash & cash equivalent
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+++++++
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Format of Cash Flow Statement under Indirect Method
Particulars
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Amount
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A. Cash Flow from operating activities:
Net Surplus before tax and extraordinary items
Add: Non operating/non-cash expenses
Less: Non operating/non-cash income
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Net cash flow from operating activities before change in W.C
Effect of change in working capital:
Increase in current assets
Decrease in current assets
Increase in Current Liabilities
Decrease in current liabilities
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++++++++
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+++++++
+++++++
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Less: Payment of taxes net of tax refund
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+++++++
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1. Cash Flow from operating activities
B. Cash Flow from Investing activities:
Sources of cash
Applications of cash
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+++/---
++++++
---------
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2. Cash flow from investing activities
C. Cash Flow from Financing activities:
Sources of cash
Applications of cash
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+++/----
++++++
---------
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3. Cash flow from Financing activities
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+++/---
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D. Cash Flow during the year (1 + 2 + 3)
Add: Opening balance of cash & cash equivalent
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++++/----
+++++++
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Closing balance of cash & cash equivalent
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+++++++
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