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Dear students, Namaste, today we are going to start one very exciting and new topic thatis titled as Cash Flow Statement. If you remember there are three important statements in anannual report which are mandatory for all the companies and in fact, they are requiredfor almost all the undertakings. Do you remember what are the three statements? The first onegoing by how we have learnt it is balance sheet, then profit and loss account and thethird one is cash flow statement. In the first session, we had seen the purposes of eachof these statements. So, can you tell what does the balance sheet tell you?Balance sheet is a statement of financial position. So, it lists the assets and liabilitiesas on a particular date. A profit or loss account is a statement showing incomes andexpenses, the net result is profit or loss for a particular period. Traditionally, thesetwo statements were considered as the final statements showing the results of any entity.Entity can be of any type it may be profit making or non-profit making or it can be apartnership firm or say proprietary concern or a corporate; almost every undertaking hadto prepared these two statements. Gradually, it was realized that these twostatements though are very important; they do not give all the information which is requiredby the stakeholders because stakeholders are equally interested in knowing about the movementof cash in the entity. So, a third statement was made mandatory in 90’s and that is knownas cash flow statement. So, today we are going to discuss the cash flow statement and wewill also take a look at a few cases involving cash flow statement ok.So, these are the contents.And we are going to discuss various topics as are listed in the index.I have just inform you that the traditional financial statements, they fail to give informationabout generation and utilization of cash, and users of the statement usually want toknow what are the ways an enterprise is able to generate the cash and they also want toknow how that cash is utilized in a particular period.So, there is a need to give a summary of movement of cash in a period and there comes the importanceof cash flow statement.Now, the meaning of cash flow statement is it is a summary of cash flows both receiptsas well as payments during an accounting period. Further it categorizes the flows under thethree heads that is operating, investing and financing. If you want to read more details,these are the accounting standards on the basis of which cash flows are made. The currentone which normally companies are using is called as IndAS-7, it is similar to internationalaccounting standard that is IAS-7 and the old set of standard for this is AS-7; AS-3which deals with preparation of cash flow statement.Now, you already know balance sheet you also know P and L account. Now can you think cashflow statement is similar to which of these two statements? Is anyone of you able to thinknow based on whatever we are discussed now? I think some of you are able to guess it.This is somewhat similar to P and L because P and L is also for a particular accountingperiod; cash flow statement is also for a particular accounting period unlike a balancesheet. Balance sheet is not for a period, it is prepared at the end of the period, butit is a cumulative statement. So, if the balance sheet is for 31st March2020, it will give the assets and liabilities which are purchased or which are acquiredin all the earlier years, not just this year; right from the starting of the business till31st March 2020, if any asset is purchased and not yet sold it will be shown in the balancesheet. But if you consider a profit and loss accountfor year ended March 2020, it will only show profits or sales or expenses from first April19 to 31st March 2020. Are you getting so, it is a period statement; profit and lossis a period statement, similarly cash flow is also a period statement. Now the balancesheet gives you all assets and liabilities. This is not the case with cash flow; cashflow is giving you summary of receipts and summary of expenses. In that sense, some ofthe items would be similar to profit and loss account, but mind well there are several itemsin the balance sheet which do not come in P and L, but which are directly reflectedin cash flow statement. Can you think of any such example that a particularitem is in balance sheet and because it is in balance sheet, it will come in cash flowwithout coming in P and L? Just think a bit. Suppose, company purchases machinery and payscash for it; will it go in cash flow statement? Answer is yes, because company has paid cashfor it; will it go in P and L? Answer is no, because it is neither income nor expense.Will it go in balance sheet? Yes because it is a asset so, machinery is a new asset whichis purchased. So, it is reflected in balance sheet and because it comes in balance sheetand there is a payment of cash involved, it will also come in cash flow.So, mind well though I am saying it is somewhat similar to P and L, it is not that it is givingsame information as in P and L because there are several items which would be coming frombalance sheet to cash flow statement. Any item where cash movement is involved willbe shown in the cash flow. We will just have a look at the categorization now because thatis very important every flow has to be categorized into three heads as we can see here whichare operating, investing and financing. Now to begin with what do you mean first ofall by cash? Because we are saying that it is a cash flow statement. Always keep in mindthat when we say cash it refers to cash and cash equivalents. Now, what is cash is cashin hand.But of course, cash which you keep in your pocket; in the form of currency notes is notthe only cash; it is cash in hands and demand deposits. Now, demand deposits are normallykept with bank. So, in financial statements many times we call it as bank balance so,cash balance plus bank balance both are considered. Bank balance in which type of accounts, ifit is in a savings account, yes; if it is in current account, yes; if it is in fixeddeposit, no. Because as per our definition, it should be a demand deposit; that means,it should be possible for the company or an enterprise to withdraw it or use it wheneverit wants. That is why bank balance is in saving and current accounts will be considered notin the FD account; are you getting? Ok. Now, other term here used is cash and cashequivalent. Now, what is at cash equivalent? Cash equivalent refers to short term highlyliquid investments, we are saying it is cash equivalent. So, it is just like cash; anytimeyou want you should be able to convert it into cash that is why, those which are ultrashort term something which is convertible in less than 48 hours is considered as cashequivalent. There is one more condition attached that it should not be subject to changes inthe value. So, can you think of any examples of cash equivalent now? Suppose there is afixed deposit in bank, will you consider it as a cash equivalent? If the time period isshort and there are no conditions attached for its conversion into cash, then you canconsider it as a cash equivalent. What other items? You can sell shares easilyin the stock market; can you consider shares balance as the cash equivalent? The answeris no because though you can sell it, it is highly liquid investment, but the second conditionis not fulfilled because it is not subject to in significant risk of change. There isa sizeable chances of change in the value so, you know all know that stock prices keepon changing, not only every day, every minute; so, stocks are not considered as cash equivalent.What else can be considered as cash equivalence? There are debt instruments like debentures;will you consider them as cash equivalent? Even then, the answer is no because debentureprices do not change as frequently as share prices, but never the less they can also changethat is why debentures are also not considered as cash equivalent.Any other marketable security like one which is bonds corporate bonds will not be considered;however, if there are government securities or treasury securities which you can sellwithout a loss in the price, without a loss of or change of price; then, such investmentscan be considered as cash equivalence. Normally, banks accept deposits which are called asdeposits which are for extremely short period like money at call or money at short notice,they are considered as correct example of cash equivalent ok. So, whenever in cash flowstatement, hence forth we will use the term cash, it includes balances of cash plus cashequivalence; are you getting me? Now, let us go ahead. Now what do you understandby cash flow? Now it is a common sense, any cash flows in the form of inflow that is receiptof cash or bank out flows that is payments of cash and cash equivalent, these are allincluded in cash flow.Nevertheless, movement inside the cash and cash equivalent is not considered as cashflow. Now what is a moment in cash and cash equivalent; can you give any example. Suppose,we are having 3 lakh rupees in bank balance and we withdraw it and we received cash frombank, will you consider it as a cash flow? The answer is no, because though you are receivingcash, you are just converting bank balance into cash. So, bank balance is any way anexample of cash or if you sell your short term security and converted it into bank balance,there again it is a movement between cash equivalent to cash.So, we will not consider such movements as a part of cash; got it. So, these are notconsidered as movement is cash and hence, they are not considered as cash flows. Now,let us go to the types of cash slow.Now the cash flows which are generated through various activities are actually required tobe classified, we have already discussed it. There are three heads operating investingand financing. I think these heads are very much self explanatory, but there are somespecific meanings attached, but right now at the outset, what do you feel would be consideredas an operating cash flow. Just think of what items should be included; are you able tomake any judgment? As the name suggest something which is todo with operations; operation means our day to day business activities. We generate severalitems of cash coming in and going out. Now they are all considered as operating; thisis also a residuary head. So, whatever cannot be considered as investing or financing willalso be included in operating and now think of the examples of operating flows, but Iwould just show it here for your clarity.So, now, in the form of figure your all the cash flow activities are divided into operating,investing, financing. Operating means something related to day today activities, I have deliberatelynot given any example because you can easily think of 30-40 examples related to day today activities. Next are investing; now what example you canthink of? Obviously, on the screen you can see that very easy example is purchase ofland. So, when you purchase land, you pay cash, you receive land. Land is a fixed assetor a property, plant and equipment kind of item; that is why it is an investing activity.Financing, example is loan taken. So, we have obtained loan from bank so, we receive; ourbank balance increases and a new liability in the form of bank loan is created. Thisis an example of financing activity. So, are you getting all the three activities?Now, let us look at operating activities little more in detail.So, these are defined as principal revenue generating activities of the enterprise ok.So, this is the technical term for normal activities or day-to-day activities and anyother activity which cannot be defined as of investing and financing will also fallin it. Now, I have given very easy example that obviously, the most important activityfor generating cash will be cash received from customers, against either sale of goodsor provision of services. So, suppose you are a taxi operating agencyand you provide taxi customers pay you either cash or through credit card or through bankthen, you are generating revenue. In which statement will you show the revenue? Obviously,you will show it in P and L account, but you will also show in cash flow statement. Becauseyou are also generating or you are receiving cash in the process. So, this is a very clearcut and very simple example of cash in flow from operating activities.Now, think of another 5-6 examples. These are very easy as I said you can even list30 examples. Can you think of some more examples? Suppose you go to some restaurant to havesay some lunch so, what will happen? You will have lunch make payment, Now make paymentmeans cash outflow will happen, either in the form of cash or through credit card orby cheque or by some means, means of payment, but in any case since the cash is moving out,we will consider it as a operating cash flow because it is a day-to-day activity it isnot an investing or financing activity. Any other example, lot of expenses I thinkyou might be thinking of like salaries, like a rent paid, they all will fall in the operatingactivities.So, these are the examples, I am listing. You can receive some money apart from salesin the form of royalties, fees, commissions, their cash equivalents, cash paid to suppliersor cash which is paid to employees as salaries, allowances, for their expenses all these examplesof operating activities. Now, let us go to next one; next is which a head, that is investingactivities. Now how will you define investing activities and what are the examples?Just think of investing activities, now here you are making investment as the name suggest.So, if you are purchasing shares of some entity, it will be an investing activity. If you areputting a deposit in a bank, it will be an investing activity. If you are withdrawingthe money from bank deposit and converting it into cash, it is an investing activity.If you are selling your shares or debentures converting into cash, again it is a investingactivity. If you are purchasing any fixed asset as say land or building, again it isan investing activity. So, these are variety of examples of investing activity.Now before going to investing activities, we also would like to understand how are theoperating activities reported. Now, there are two methods of reporting of operatingactivities; one is a direct method, other is a indirect method.In the direct method, gross sales and gross payments of cash are reported.Now, this is a format of direct method, I hope just by observing it will be clear toyou that cash received from customers or cash paid to suppliers, to employees etcetera allare shown as a total amount of cash which is either received or paid. The net amountis considered as cash generated from operations before taxes minus income tax paid, you willget the net cash from operating activities. Are you getting; this is a direct method becausethe total amount of cash received and paid is shown. There is another method which isknown as indirect method.In indirect method, what happens is you start with profit as a starting point from P andL account and then, you make certain adjustments to calculate the cash which is generated fromoperating activities. In the beginning of the session, we had discussed that cash flowas lot of similarities with P and L. Actually, this part of cash flow that is operatingactivities part is very much similar to P and L. So, we assume that whatever is cashgenerated is in the form of profit; it is not true, but just start with whatever isyour profit is assumed to be cash from operating activities and those items which are differing.So, in P and L account there are some non-cash items they would be adjusted, there wouldbe a few non-operating items they would also be adjusted. That is why from your profit,you work back to calculate the cash generated from operating. Just have a look at the format,I think that would make many things clear to you.So, you can start with retained earnings, these are the reserves which are accumulatedin the year add the dividend paid because dividend is going out for financing reasons.We will look at it later on, then you also add the income taxes paid. So, you get netprofit before tax; then you add depreciation. Why do you add depreciation? Can somebodythink of because we have already discussed depreciation in last two sessions. We willadd depreciation because if you remember it is a non cash expense, it is debited to Pand L or it is charged to P and L, but no cash out flow was involved.So, we will add depreciation, we will add a few non-operating items like loss on saleof assets or interest paid, provisions for bad debts. So, we will deduct again non-operatingitems like interest dividend or profit on sale of assets and after making all adjustmentsrelated to P and L account. Keep in mind these adjustments are under two heads; one is ifyou find any item which is non-profit in nature sorry non-cash in nature, we are going toaccount for it. If there is any item which is non-operating in nature, but it is in Pand L. So, we will adjust for it.Now, after making both types of adjustments, we get fund from operations. Now, front fundfrom operations, funds here refers to working capital. So, it is not just cash it includesthe current assets and liabilities. So, we will remove the effect of current assets andliabilities. So, from funds from operations we add and reduce all decreases and increasesof current assets and liabilities. Here we get cash generated from operations, but beforetax. From that we will reduce income tax paid to finally get net cash flow from operatingactivities. Are you getting it, I know it is bit complicatedbecause this is a indirect method, this is a reverse method. I will just show the lastslide again. So, if you remember once again, I am just making you remember the P and Laccount. Please have a look at your P and L once again and if you have not understoodP and L I think, first you will have to study P and L topic properly before coming to this.But in P and L account there was a list of incomes list all the expenses giving you netprofit. Now here what we are doing is we are starting with net profit, adding all thoseitems which are non-cash or non-operating, they were deducted for calculating the profitfor example, depreciation. So, we add depreciation, we add income tax provided, we add loss onsale of asset etcetera; then, we deduct those items which are non-operating, but are addedfor calculating a profits like profit from sale of asset etcetera. And after making thisadjustment you use to get funds from operations. There we make adjustment for current assetsand liabilities. Now, why do we make that adjustment? Because every time you are madeprofit does not mean you have made cash. Suppose, you are there are credit sales; credit saleswill give you profit, but it will not generate any cash for you because the cash is stilllocked up in debtors, cash may be locked up in stock or your you have not yet receivedprofit, but you have already got money from creditors. All such scenarios need to be adjustedbecause here our focus is for calculating the cash from operations. Are you gettingme? So, we will stop here. What we have coveredtoday is we have started with cash flow statement, the importance of cash flow statement, thethree categories operating, investing and financing. Particularly today, we have discussedoperating activities. If it is bit difficult for you to understand, do not worry in nextsession we are going to revise operating and also look at investing and financing whichwill make the operating activities once again more clear. Namaste.