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Namaste. In the last session, we were discussing case number 2 of Cash Flow Statement. Thoseof who have missed it, I will request you to see the session, also take the printoutof the case which we where solving. We were half way through so, we will continue fromthere, but just we will look at the case once again.So, this is a we are asked to prepare cash flow statement for Keshav Limited. Now, profitor loss account for March 2020 was given ok.Then, the balance sheet was given for last year and this year or opening balances andclosing balances ok. So, this is liabilities, assets.And, now based on this figure information we were asked to prepare cash flow statement.Now, as a process of preparing it as a working note what I had ask you to do was take everyitem of balance sheet then P and L mark the change and mark it as O, I or F.Once that marking is done the rest of the work is very simple; actual preparation ofcash flow. So, we have done marking last time just have a look once again.So, we started with balance sheet liabilities, these were the markings. So, profit and lossaccount was marked as O, debenture being a financing item F, creditors CACL, differedtax liability O.Assets, equipment and long term investments were I and sundry debtors CACL bank balance,this is a cash and cash equivalent item. So, it should be marked as C. It will not be shownas a flow in the cash flow statement.Now, P and L; P and L items like sales or revenue from services are not to be shownin cash flow. So, I have written here as no adjustment or you can say no item of cashflow. For items like profit on sale of investment there will be two adjustments.Now, this is related to investment so, it is I, profit is there so, money is comingin so, it is plus. But, it has a second effect in O, keep in mind. O because it is alreadyadded in P and L we want to remove it from P and L. It is not regular day to day activity.So, we will reduce it from O that is why I have marked it as I and O and plus and minusok. This plus and minus etcetera is not to be written in cash flow, but it will helpus in making the cash flow, getting it?Now, all these are expense items in P and L. So, day-to-day items like consumption,manufacturing, wages, general expenses are NA, but depreciation it is a non cash expense,so, O plus. Discount on issue of debentures OF plus taxation OO, because it will comeunder operating items twice plus and minus interim dividend FO plus and minus. If youhave still not understood it please read it two three times. It is very important; oncethat is done remaining job is simple.Now, based on this we went for preparation of cash flow statement. The first part isoperating activities. There is a specific format. So, please go through the format twothree times. We calculate net profit after tax, net profit before tax and then do adjustmentsfor certain items. Now to calculate NPAT we started with retained earnings, add interim,dividend, add taxes provided, we got NPBT, then depreciation and discount and debentureswas added. Keep in mind, these are non-cash items they do not bring in cash, but becausewe do not pay cash for it we are adding it because it is a indirect method, then profiton sale of investment is to be reduced.So, we get fund from operations 34600, to these we will make adjustment for workingcapital items or CA and CL items. Now, sundry debtors had gone down reduction of sundrydebtor means they have paid us money so, it is added. Creditors have also gone down. Now,to creditors for them to go down we pay them money. So, reduction in creditors is in bracketso, it is a outflow ok. So, CA and CL is be tricky, keep track ofit, I will once again just remind what I told you last time. For CL it is simple; additionto CL that is current liabilities also addition to cash reduction of CL is reduction of cashI think you keep that in mind ok. For even more simple you can remember that cash andCL have affection with each other, they will go together whereas, cash and CA are competing,they would go opposite just remember CL and its opposite movement is for current assetsok. Now, after adjusting debtors and creditorswe get cash generated from operations, but before tax. So, I am marked it as BT whichis 29300. Now, the income tax paid is to be reduced that is 1000. Now, from where yougot 1000? 1000 was not given anywhere, but we had two figures we will go to P and L.You can see here in P and L that taxes provided was 6000. Weather Actual payment has doneor not, we do not know, but that much of tax were charged in P and L.Of that we had to go to balance sheet now. If you see balance sheet in the liabilitythere is a item called differed tax liability and it has increased from 7 to 12; that means,there is a increase of 5000 these are taxes provided, but not paid. Do you remember whatis differed tax? As the name suggests differed means this is this times item, but to be paidlater on any tax which is not to be paid in the current year if it is to be paid in currentyear it is called current tax. If it is not to be paid in current year, but can be paidafter 2, 3, 4 years it is called as a differed tax.Now, the differed tax liability has gone up by 5000 we have marked it has O. So, out ofthe total taxes of 6000 for the year as you can see from P and L, 5000 are differed; thatmeans they would be paid later on. They are not to be paid now. So, 6 minus 5 remaining1000 is paid in the current year. Are you getting me? Here I have shown in bracket 6minus 5 or you can say 6000 minus 5000 so, it is 1000, getting it.So, tax you have to keep in mind always it will come two times. First, tax provided willadd on net profit after tax because this is charged in the year and what is actually paidis to be deducted. That is why taxes are to be shown twice in the cash flow because whatis provided is not paid it is to be added and what is actually paid is to be deductedbecause it represents outflow ok. And, government also wants to keep track on at provisionsand actual payments; that is also one reason why in the format specifically these itemsare to be shown twice. You cannot show net effect, you have to add 6 and reduce 1. Gettingit? So, this was the last item this gives us net cash flow from operating activitieswhich is 28300 positive; that means, that much cash we have got from our normal businessactivities. Now, this was bit complicated remaining isvery simple. Next is cash flow from investing activities. Now, go to balance sheet, we hadmarked many items as I. So, just take those items I means investing and put them here.So, now we will go back to balance sheet. Balance sheet if you remember there was investmentlong term. It was marked as I minus 2000 minus means from 5000 it has gone down to 3000.So, we have sold investment and we have received 2000, but we cannot directly write this 2000in cash flow because there will be some profit or loss on sale of investment; getting it?So, these 2000 plus in P and L there was one item called as profit on sale of investment2000; we had marketed it as I O plus minus. See, in I it is plus so, 2000 rupees is thecost of investment plus 2000 rupees of profit, total sale value is 4000. You were not giventhe sale value; we have to calculate the sale value. So, sale of investment 2000 plus 2000,4000 is the inflow for the year. Getting it? Ok.Next is purchase of equipment. If you go to balance sheet there was equipment 21000 increasingto 55600 so, 34600 of increase. We had marked it as I. This represents purchase; gettingit? But, this may not be the actual amount of purchase. increased means there is whichhave been purchase but it is reducing because of depreciation. So, we have to consider boththe effect of purchase and that is the addition and reduction due to depreciation and thenet effect will be this 34600. So, let us calculate the purchase amount,getting it? I have worked out 39600. How it is worked out, can you guess? See, the neteffect is 34600 and if you go to P and L there was a depreciation of 5. So, 34 plus 5 youget 39600.I have also shown equipment account here. Those of who are familiar with ledger accountshave a look at the account. The opening balance was 21, closing balance was 55, reductiondue to depreciation is 5. We don’t know how much is a purchase. We only knows thatthere is a reduction overall increase of 34600 plus 5000; that means, there is a cash bankfor purchase of 39600. So, either you make a account like I have made it here or youcan make a working note, but arrive at this amount of 39600. It is in bracket becauseit is a minus, it is a reduction in cash flow; are you getting?So, two item in investing plus 4000 and minus 39600 net cash flow from investing activities35600, are you getting? So, from operating there was a addition or positive figure of28300 that is cash generated from operating activities. This is the cash invested in investingactivities 35600 in minus. Now, the third heading is financing activity.So, go to balance sheet look at F type of items ok. Balance sheet normally you haveto go to liabilities because that is where you will get F items you can see there isonly one item debenture 10000 was opening, 27 was closing, increase of 17 F. So, it representswhat? A financing inflow, We issue debentures. So, we have got cash and we have given debentures;getting it? So, inflow is 17, but do not write 17 directly in cash flow because there couldbe some item in P and L. If you remember in P and L there was one itemcalled as discount on issue of debentures. We had marked it as OF plus, getting it? Itis F because it is a financing item of 3000 it is related to issue of debenture; thatmeans debentures of the face value of 17 are issued at discount. Company did not received17. Company received 17 minus 3 that is 14, that is your inflow of from debentures; gettingit? So, I have written it here as issue of debentures 17 minus 3, 14000, got it?So, only one item was there in the balance sheet, but there was one item in P and L,that is this interim dividend we had marked is as FO minus plus. What is F? Because dividendis always a financing activity. We have issued shares and we are giving dividend to the shareholdersduring the same here it is given. So, it is called interim; that means, it is declaredand paid. See the amount is 5000, that 5000 we added here in P operating and we will reduceit in financing, got it? So, in financing there are only two items issue of debenturesand interim dividend paid plus 14 minus 5. So, net cash flow from financing activities9. So, you have got all the three headings now,28300 plus minus 35600 plus 9000. So, net increase in cash this is a total of O plusI plus F that is 1700, are you getting it? Now, this can be cross checked with the balancesin the balance sheet. So, to this we add cash and cash equivalents at the beginning whichis 5000 cash and cash equivalents at the end are 6700. So, has it has it tallied?Now, from where we got this 5 and 6700, we will go back to balance sheet. See there isa item in balance sheet, bank, which we had marked as C and we had discussed that this1700 is not inflow or outflow. This is the change of balance; in fact, we are calculatingwhole cash flow statement to see whether our total matches with the changes in the cashflow statement in the cash and cash equivalent. So, all other changes together was 1700. Itmatches with the change in the bank; that means our statement is correct. It is tallying;are you getting? So, 1700 plus 5000 you get 6700.Now, there is something more also. Now, go to cash and cash equivalent we have to makea reconciliation statement. Show the cash and cash equivalent at the beginning and atthe end. Here we have only one. This problem only has one item, but sometime there canbe two, three items of cash and cash equivalent. So, show them take the total; so, bank opening5, closing 6700 the total is same 5 and 6700 and equipment was a working note.So, for the whole cash flow statement as for the format start with operating item, showthem here, then go for investing, go for financing, add opening, less closing and also show thereconciliation of cashless of cash and cash equivalent then our cash flow statement isover; is it clear? Now, also we would discuss just a bit fromthe financing angle. What are your comments? Is it a good cash flow statement for the company?Does it represent sound and well running company? What do you feel from these three totals?Operating activities is a positive figure, is it a good sign? Of course, yes, we aregetting cash, what is bad in it. We are able to generate 28300 from our normal business.You can see here. This is a very good sign. This shows the strength of business. Now,we have a negative cash flow in investing; is it a good sign? We are giving cash. cashis going out, is it a good sign? Some may fail it is not good sign our cash is goingoutside, but actually it is a positive sign because unless we make investment how willbusiness grow. So, you can see here company is generatingcash 28300 and they are investing in purchase of new equipment. So, if you want a healthygrowth of the company, company has to continuously make investments in new equipment, new software,new technology or at least in new investments. So, you can see here they have sold some ofthe old investments at profit which is also good sign and all that money they have putin the new equipments that would give them coming years it will be good for generatingmore profits and more cash flows. So, keep in mind negative cash flow of investingactivities not bad. In fact, that should be negative if it is positive; that means, youare selling your existing asset which may not be good. It is good if new assets aregetting created. So, negative cash flow in investing activities healthy. Next is financing.Financing is plus 9000, is it good? Should be Positive negative? Actually both is finein financing because sometimes it will be negative because of payments of dividend likehere they have paid 5000 shareholder should get some money. So, is it is a positive sign,but company has to grow. So, you can see here they have raised somenew money by the way of debentures. That 14000 is used to finance the purchase of investmentpartly. Partly it has come from the operating flows and partly from this. So, no problemthis 9000 can be either or positive or negative it is a healthy sign, overall looking at theand also look at the cash and cash equivalents at the beginning and end it also shows a goodsign. If you have too much of cash it is not good, if you have too little cash not eventhe money to pay regular activities that is also not sound. So, you can see here companyhas slightly increased their balances, but not too much of cash not too less of cash.So, overall from the cash flow statement I am not looking at P and L and balance sheet.We will later on discuss the ratios and how to analyze the segments, but just by lookingat the cash flow which we have made overall comments if you make we can say that it isa healthy sign. They have generated a positive cash flow from operations, they have investedduring the year so, negative cash flow from investing and a small positive from financing.So, company as a healthy cash policy they are able to have a good cash flow from operations.So, I hope you have over all understood cash flow statement.Now, we have already discussed balance sheet first, then we discussed P and L, today wehave also discuss cash flow. I hope now the basic financial statements are clear to you.In coming sessions we will discuss some conceptual and theoretical aspects, like corporate governance,like ethical part of accounting or like how was the accounting evolved, how are the entriesrecorded. And, in last part of our course, in last 4-5 sessions we will again go backto financial statements wherein we will go for preparation of balance sheet, P and Land cash flow and we will also try to analyze them by way of ratios.But, to do all that you need to do a lot of homework. Now, that you have understood allthe three statements please read the statements of various companies, at least of your companyand also try to prepare simple P and Ls and balance sheets and maybe after one or twoweeks we will go for preparation of some more statements ok.Thank you so much. Namaste.