The document summarizes the key components and purpose of a cash flow statement. It discusses that a cash flow statement provides information about cash inflows and outflows from operating, investing, and financing activities over a period of time. It also describes how to prepare a cash flow statement using both the direct and indirect method and the differences between the two. The objectives, limitations, and distinction between a cash flow statement and funds flow statement are also outlined.

2. Statement of Changes in Financial
Position : Cash Flow Statement
Presented by:
Muhammad IQBAL

3. The Cash Flow Statement
The cash flow statement provides
information about:
• Cash Receipts (cash inflows)
• Uses of Cash (cash outflows)
• During a Period of Time
Inflows and outflows are reported for:
• Operating activities
• Investing activities
• Financing activities

4. Cash Inflows and Outflows

5. Classification of Business Activities :
Inflow and Outflow of Cash
Operating Activities
Cash Inflow Cash Outflow
1) Cash Sales 1) Cash Purchases
2) Received from Debtor 2) Payment to Creditors
3) Commission & Fees 3) Cash Operating Expenses
4) Royalty 4) Payment of Wages
5) Income Tax
6) Manufacturing Expenses
Cash effects the transaction on Net Income

6. Classification of Business Activities :
Inflow and Outflow of Cash
Investing Activities
Cash Inflow Cash Outflow
1) Sale of Fixed Assets 1) Purchase of Fixed Assets
2) Sale of investments 2) Purchase of Investments
3) Interest Received 3) Working Capital
4) Dividend Received
5) Working Capital Recovery

7. Classification of Business Activities :
Inflow and Outflow of Cash
Financing Activities
Cash Inflow Cash Outflow
1) Issue of Shares in Cash 1) Payment of Loans
2) Issue of Debentures in 2) Redemption of Preference
Cash Shares
3) Proceeds from long-term 3) Payment of Dividends
borrowings 4) Interest Paid
5) Repayment of Finance/
Lease Liability

8. Objectives of Cash Flow Statement
• Highlighting cash flow from different
activities
• Short-term Planning
• Cash Flow information helps to
understand liquidity
• Efficient cash management
• Prediction of sickness
• Comparison with budget
• Cash position

9. Cash Flow Statement : Limitations
• Does not show the liquidity position of the
firm
• It is not a substitute of income statement
• Does not show the financial position of the
firm in totality

10. Distinction between Cash flow Statement and
Funds Flow Statement
Basis Of Difference Cash Flow Funds Flow
It recognizes Cash basis It is based upon accrual
Basis of Of accounting Basis of accounting I.e
Accounting Working capital
Significance It is useful for short- It is useful for long-term
Term financial planning Financial planning
Schedule of Such a schedule is not Schedule of changes in
Changes in Prepared for preparing Working capital is
Working Capital Cash flow statement Prepared separately
It studies only the
Causes of It studies causes of Ch-
Causes of cash
Variation variation
ange in working capital

11. Preparing a Statement of Cash Flows
• Use net operating income as the starting
point to get net operating cash flow
• Add back any non-cash expense
(Example - Depreciation)
Net Cash Flow = Cash Inflow - Cash Outflow
Net Operating Cash Flow = Income after Taxes
+ Depreciation

12. Preparing a Statement of Cash Flows
Order of Presentation:
Direct Method
1. Operating activities.
Indirect Method
2. Investing activities.
3. Financing activities.
Three Sources of Information:
1. Comparative balance sheets
2. Current income statement
3. Additional information

13. Cash Flow from Operating Activities : Direct Method
Cash Flow from Operating Activities Amount Amount
(Rs.) (Rs.)
Cash Receipts from :
Sales XXX
XXX
Commission & Fees
XXX
Interest Received
XXX
Cash Payment for :
Purchases XXX
XXX
Payments to and for employees
XXX
Operating Expenses XXX
Interest Payments XXX
Direct Taxes Paid XXX
XXX
Net Cash Flow from Operating Activities

14. Cash Flow from Operating Activities : Indirect
Method
Cash Flow from Operating Activities Amount Amount
(Rs.) (Rs.)
Net Profit before Tax xxx
Adjustment for :
Depreciation xxx
Loss on Sale of Fixed Assets
xxx
Loss on revaluation
xxx xxx
Operating Profit before Working Capital Changes
xxx
Adjustment* for :
Trade and other Receivables xxx
Inventories or Stocks
xxx xxx
Trade Payments or (Creditors and B/P)
xxx
Cash Generated from Operations
xxx xxx
Interest Paid
Taxes Paid xxx
Net Cash Flow from Operating Activities XXX

15. Preparing the Statement of
Cash Flows
Indirect and Direct Methods
Companies favor the indirect
method for two reasons:
1. It is easier and less costly
to prepare, and
2. It focuses on the
differences between net
income and net cash flow
from operating activities.

16. Book Approach
Income Statement Cash Flow Statement
Revenues +Net Income
Expenses +Depreciation Operating
Cost of Goods Sold
-Capital Investment +
Depreciation*
+Salvage Proceeds
Operating Expenses
-Gain Tax Investing
Taxable Income
-Working Inv Cap
Income Taxes +Working Cap Recovery
Net Income +
+Borrowed Funds
-Repayment of Principal Financing
*Assumes Tax Depreciation = Book Depreciation
Thus, no deferred taxes

17. Format for Cash Flow Statement

18. End of Presentation
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