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Module 1: Cash Flow Statement

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Namaste. Welcome everybody we have been discussing about Cash Flow Statement. I hope you havegone through the given notes and understood what is a cash flow statement; please alsohave a look at cash flow statement for your own company. Today we will do second caseon cash flow statement which will cover various aspects related to preparation of the statement,a small revision before that.If you remember in the cash flow statement there are three sections, one is cash fromoperations cash flows from operations, second is cash flows from investing activities andthird is cash flows from financing activity. In the first part we calculate the cash generatedfrom day to day activities of the business and normally it is done using indirect method.So, we start with profit, then add back noncash items or non operating items, we make adjustmentfor some of the items which need to be deducted.So, in short we can say that the depreciation should be added or items like loss or interestexpenses are added, while items like interest income or profit on sale of investments arereduced.That gives you funds from operations, then we also have to make adjustment for workingcapital items, we need to make adjustment for income tax that gives you cash flow fromoperating activities.Next one is pretty simple all those items which are related to investment both inflowsand outflows like purchase or sale of assets or interest received, they are all shown underthe head investing activities.Third one is financing activities, where we show all those items related to raising offunds by the business like issue of shares or issue of debentures or taking loan andthe reverse of this, that is redemption of share or redemption of debenture or repaymentof loan interest or dividend paid there on.So, these are the three headings, then we take the total of the three and that we matchwith the increase or decrease of cash during that particular period. We have already doneone case now we will go for the second case.So, with this introduction now we prepare for the second case, it will be better ifyou take the printout of this particular case so, that you can actually solve as I am alsosolving it ok. Now look at the given data, we have been given profit and loss accountfor year 31st March 2020. So, sales profit on sale of investment andrevenue from services total is 98000.Now, from these there are deductions like consumption of material, manufacturing expenses,wages, depreciation, general expenses, discount on issue of debentures, tax, interim dividendand we have got profit retained which is 17600. We have also been given 2 years figures ofbalance sheet for March 19 and March 2020.So, again you can see certain items of liabilities and certain items of assets. Now using thisinformation you are required to prepare cash flow statement ok. So, how shall we go about?You all know that if there is a change in the balance sheet between the 2 years thatshould be considered as most likely item of impact on cash. So, let us start with balancesheet, take every item of balance sheet and we will mark it as inflow or outflow and alsoas either as O, I or F if we feel that some moment has happened.So, let us start with share capital share; capital you can see there is no moment, generalreserve again no moment for profit and loss account we do see increased from 8000 to 25600.Now, this change is more slightly to have some impact on cash flow.Now, it is what type of item? I will just take you to the solution. So, normally makefive columns like this particular than 2 years figures change and OIF. Now, is there a changehere in case of cash flow? Yes now we want to mark it as O,I or F. Now you all know thatthe change in the profit and loss account is due to the profit accumulated during theyear and it is mainly the operating related item. So, we have marked it as O; now thisis our working, this does not mean exact amount will go in cash flow statement, but to startwith we are going to mark every change. We will also have a look at P and L items andthen after considering both we will go for preparation of cash flow.Now, the next one is debentures; you can see debentures there is a increase from 10000to 27000. So, it is what type of item? You know that debenture is for raising of fundsand from 10000 it has increased to 27. So, 17000 increase; that means, new debenturesare issued. So, we will consider it as a what type of item? O or I or F, it is a F typeof item that is financing item. Next one is creditors. Creditors you can see16 to 10. So, it is a fall of 6000. Now it is what type of item? Is it operating, investingor financing or none of the above? Actually only three categories so, none of the abovedoes not exists, but it is not investment, it is not finance also and this is a itemwhich is related to normal activities of the business. So, we will mark it as O particularlyit is a working capital item ok. So, you can see here 16 to 10. So, minus 6 and this isI have marked it as CA or CL; that means, I know it is a current liability, but I havemarked it as CACL because it is something to do with current assets and liabilities;actually how to treat it we will go in the next step.Next is differ tax liability it is gone up from 7 to 12. So, plus 5000 and taxation isa operating item. So, I have marked it as O. Are you clear? So, like this for everyitem in balance sheet assigned O, I or F or CACL; CACL is a part of O actually now thiswill help us for preparation of cash flow let us go to assets.Now, in assets again there are changes. So, land there is no change equipment it has goneup from 21 to 55600. Now, it is what type of item? Is it F? Is it? I? I think the answeris yes we have made investment in the equipment new equipments have been purchased. So, writethe change here and mark that change as I item ok 34600 I. Next is investment long termyou can see investment has gone down from 5000 to 3000. So, minus 2000 it is investmentso; obviously, it is a investing item; so, I category of item: sundry debtors. Sundrydebtors you can see has gone down from 15000 to 14300.So, it is minus 700, what type of item it is? You know it is a current asset. So, itis marked as CACL, next one is bank. Bank has gone up from 5000 to 6700. So, 1700 whattype of item it is? O, I or F I think many would have marked it as O because it is acurrent asset or you can mark it as CACL, but in reality it is not be caution becausebank balance is a part of your cash balance. So, we are making a cash flow statement anychange in the cash balance is not to be shown in the cash flow.We will take it in the last part of cash flow statement as a reconciliation ok. So, whatI have done is for convenience, you can see here sundry debtors are marked as CACL andbank is marked as C; C means cash. So, it is cash and cash equivalent kind of item goodwillthere is no change so 0. I hope you are getting, once again I am taking you to balance sheetliabilities, have a look at all the items you will realize that normally in the liabilityside there are F type of items or O type of items.And normally in assets there will be I type of items because there will be investmentslike fixed assets or investments and there would be O type of items or CACL type of itemsare you getting? Now let us go back to P and L from profit or loss account have a lookat those items which will have impact on cash flow. So, suppose sales is 90000 will it haveimpact on cash flow? So, we would have received 90000 is it O I or F type of received?Again many of you would have marked it as O, but keep in mind that is a not the correctanswer then what type of item it is? Is it I or f the answer is no because it is an normalday to day item and in the indirect method we do not show normal items related to operationsI will just take you to the actual calculation.So, this is how I have made the format, first is sales very tricky item because many timespeoples feel that sales means cash has come in keep in mind we do not follow a directmethod. So, we are going to take profit and loss as a starting point and only we are goingto mark three category of items. Items like depreciation which are non-cash, items likeprofit on sale of investments which are related to not operation something else, that is nonoperating items and CACL type of items are you getting me? So, in the sales the firstitem sales I have written it has no adjustment. The next is profit on sale of investmentswhich is 2000. You all know that since this is a profit on sale of investment it is ainvesting flow. So, I have marked it as I it will have one impact on operating flowas well because we have already considered it in P and L account, we have already addedit in profit. So, we will have to reduce it from profit that is why it is a marked asboth I and O. Remember balance sheet items have only one impact P and L items are goingto have two impacts because balance sheet is already balance P and L accounts are comingfrom outside in the cash flow statements. So, they will have two impacts on cash flow.So, they have been marked as 2; either it will not have any impact no adjustment orit will have two impacts. So, I and O in I it is plus, plus means cash is coming in andin O it is minus. This is just a working note for our understanding, but it will ease ouractual making of cash flow are you getting me? Next is revenue from services you knowthat any revenue earn is a day to day item it is just like sales is from sale of goods.They might have also provided some services, for which they have earned 6000 this is nota cash flow item so, I have marked it as no adjustment ok.Let us go to the next one. So now, consumption of material 40000: where we need go OIF? Iwill request you to mark all the items; manufacturing, wages, depreciation, general expenses andso, on are you able to make up your mind? Even if it go goes wrong no problem mark itand then we will go to the next step just mark whatever you feel.So, consumption of raw material materials will go as a O item. Maybe few of you havemade mistake it is not a O item it is a no adjustment item. So, ignore it put a dashor write no adjustment; manufacturing expenses again same thing it is a normal day to dayitem. So, no adjustment; wages no adjustment: depreciation again no adjustment? No it has.Because it is a non-cash item though it is reduced from P and [laugher], it is not involvingany cash outflow. So, we will mark it as O it will also have some impact on the equipmentor the machinery account. So, in O that is in the operating flows it is going to be added.So, I have marked it as plus and in I that is in the machinery we will mark it as minus.So, depreciation OI plus and minus getting? This will be true for all non cash items theywill be added in the cash flow statement. General expenses no adjustment; discount onissue of debentures will it involve any cash flow? Indirectly yes because when we issuedebentures we should have got cash, but to the extent of discount we will not receivecash its a F type of item, it will also have impact on operating flows because it is oneof our expenses, but it does not involve any cash ok.So, I have marked it as OF getting it? In operations its plus and in F it will haveminus. Tax 6000 I think most of you are judged it correct it is a O type of item, but this6000 does not mean it is cash tax paid, this much of tax has been charged for the yeardo you will have to look at the balance sheet item and then finally, decide how much taxis paid ok. So, right now I have marked it as O, O because it will come two times inthe operating flows and marked it as plus and minus.Because again it comes two times, exact amount we will determine later on. Interim dividenddo you remember what is interim dividend? Dividend represents the share of profit whichis paid to the shareholders. If it is paid during the year it is called as interim dividend.Now interim dividend is a F type of item it is a financing outflow, but it will have animpact on O because it is rooted through P and L. So, I have marked it as FO minus andplus. Minus because it is an outflow in financingwe will add it in O. So, I have written it as plus last item profit retained again itis O, because it comes from day to day activities and we will mark it as plus. If you rememberthe second effect of profit written is there in the balance sheet. So, now, we have markedall items of P and L we have also marked all items of balance sheet. I hope you have understoodit is very important for you to properly understand all these items.Once this is clear making of cash flow statement is really very simple. Are you getting allthe items? I will request you to practice a lot. Take 2 years balance sheet for anycompany, calculate the cash flow statement and check it with their actual cash flow statementok. So, now, look at the answer now actual answer is very simple if you have really understoodall these items, you can easily write down the final answer.Now, this is in front of you in final short, but I request you to properly solve it yourself.Now, I will try to explain every item it start you know there is a particular format. So,we are starting with retained earnings 17600 from where we did you got this item? Actuallyit came from 2 sources: first it was given in P and L it also I had a some impact onbalance sheet. Because balance sheet we had transferred the balance of P and L which isa increase of 17600 it is only one item, but it comes at two places ok. So, here retainearnings it is a inflow see if it is a outflow you should write in bracket if it is a inflow;that means, a positive figure. So, retained earnings 17600 to that add interimdividend paid. Now you know here we had written interim dividend 5000 as F and O. So, it isa financing item we are also going to add it for calculation of P and L. So, rememberit is paid actually it is a outflow, but in P and L we add it because right now we arenot showing it as a outflow, we are calculating it using it for calculation of profit. So,17600 plus 5000 I get NPAT or Net Profit After Tax which is 22600 then tax provided.See in P and L we had got 6000 OO of which the first effect is this the tax was reducedfrom profit and loss account we will add it back, we are going to take this item again,but we will look at it later on. Right now just add a back the tax we will get net profitbefore tax, which is 28600. Please try to solve with me so, that you also get the practice.Next is depreciation you know here in P and L we add a item of 5000 O plus. So, we arethis is a non cash expense. So, we will add back 5000 same way there wasa item discount on issue of debenture in P and L we had marked it as OF in any case this3000 is to be added in O. So, discount on issue of debenture is added. See this is onlyone effect the second effect we will see later on the effect related to operating activitieswe are looking right now. Next is profit on sale of investments. If you remember in Pand L we had added these 2000 to calculate the profit now, we are going to reverse it.So, we will reduce 2000 because it is a negative figure we will write in bracket are you getting?So, NPBT 28600 add 5000 add 3000 minus 2000. So, we are getting 34600 this is called asfunds from operations. This is the money which we have generated from our operations or fromour normal business that is why we have started with profit, we have removed non operatingtype of items now which items are yet to be shown in operating activities. Do you remember?Items which we are related to CA or CL or related to working capital they are yet tobe treated. So, we start with funds from operations, then make adjustment for debtor and creditorthere are only two adjustments let us go to balance sheet to have a look at it. So, youknow that in the liabilities there was a item creditors. From 16000 it has reduced to 10000minus 6000. So, I hope you understand that we have paid 6000 getting it? That is whythe creditors balance have come down we are going to reduce it from the cash flow as minus6000 getting it?But for debtors it is exactly opposite; in the assets the debtors have gone down nowdebtors are going down means, these are the balances with customers they have paid uswe have got more money that is why their balance has gone down. So, this minus 7000 is goingto be plus in the cash flow statement getting it? I know its slightly tricky keep in mindthat it will be exactly opposite for debtors and creditors.For creditor it is minus 6 for debtor there the figure was minus so, we converted intoplus or you can also remember it this way that whatever is a direction of movement ina current liability same will be for cash ok. So, current liability went down. So, cashalso went down, but for a debtor which is a current asset it competes with cash. So,debtors have gone down so, cash has gone up ok. So, it is a plus 700. So, at this stagewe get cash generated from operations which is 29300.So, we will stop here, we will continue the same assignment or the same case in the next session. Namaste.