1. Analysis of cash flow statements
By- Barkha
Harit
Rahul

2. Meaning of financial statement
analysis
• The analysis of financial statements is a
systematic process of the critical examination of
the financial information contained in the
financial statements in order to understand and
make decisions regarding the operations of the
firm.
• The analysis of financial statements is the study
of relationship among various financial facts and
figures as set out in the financial statements i.e.
balance sheet and profit and loss account.

3. • According to Myer, ‘’financial statement
analysis is largely a study of relationships
among various financial factors in a business
as disclosed by a single set of statements, and
a study of trends of these factors , as shown in
a series of statements.”

4. Tools of financial statement analysis
• Comparative financial statements
• Common size statements
• Trend percentages ratio analysis
• Fund flow statement
• Cash flow statement

5. Changes in the financial position
Balance sheet gives a summary of the firms resources and
obligations at a point of time, the profit and loss account
reflects the results of the business operations during a
period of time.
These statements fail to explain the changes in assets
, liabilities and owners equity.
So additional statement is needed to show the changes
and it as referred to as the statement of changes in
financial position.
1) Change in assets and liabilities resulting from financial
and investment transactions during the period.
2) The way in which the firm used its financial resources
during the period.

6. Meaning of cash flow statement
• Cash flows are inflows and outflows i.e. movement of
cash and cash equivalents.
• All transactions that lead to an increase in cash and
cash equivalents are classified as inflows of cash.
• All those transactions that lead to decrease in cash and
cash equivalents are classified as outflows of cash.
• Cash flow statement is prepared classifying the
transactions into:
1)Operating activities 2)investing activities 3) financing
activities

7. As per accounting standard-3
1) Cash –comprises cash on hand and demand
deposits with banks.
2) Cash equivalents- are short term , high liquid
investments that are convertible into known
amount of cash.
3) Cash flows- are inflows and outflows of cash
and cash equivalents.

8. Uses of cash flow statement
1. Short term planning
2. Understanding liquidity and solvency
3. Efficient cash management
4. Comparative study
5. Reasons for cash position
6. Test for the management decisions

9. Classification of cash flows
1) Operating Activities :
Operating activities are the principal revenue producing
activities of the enterprise and the other activities that are not
related to investing or financing activities.
Examples:
• Cash receipts from the sale of goods and services
• Cash received from royalties , fees and commission etc
• Cash payments to supplier of goods
• Cash payments to and behalf of employees for wages.
The net effect of the operating activities on the flow of cash is
reported as cash flow or cash used in operating activities in
the cash flow statement.

10. 2) Investing activities – investing activities are the
acquisition and disposal of the long term assets and
other investments, not included in cash equivalents.
These activities include transactions involving
purchase and sale of the long term productive assets.
Examples:
• Cash payments to acquire fixed assets.
• Cash receipts from disposal of the fixed assets.
• Cash payments to purchase shares, warrants and
debt instruments.
• Cash receipts from sale of shares , warrants or debt
instruments.
• cash receipts from future ,forward, option and
swap contracts.

11. 3) Financing activities :
Financing activities are the activities which result in
changes in the size and composition of the owners
capital and borrowings of the enterprise from other
sources.
Examples :
• Cash proceeds from the issue of the shares or
other instruments.
• Buy back of shares
• Cash proceeds from the issue of debentures and
other short term borrowings.
• Payment for interest on debentures and loans.
• Payments of dividends both equity shares and
preference dividends.

12. CASH FLOW STATEMENT for the year ending…..
( direct method )

13. A. Cash flow from operating activities :
Cash receipts from customers
cash paid to suppliers and employees
Cash generated from operating activities
Income tax paid
Cash flow before extraordinary items
(+) or (-) Extraordinary items
Net cash from operating activities
B. Cash flows from investing activities :
Purchase of fixed assets
sale of fixed assets
purchase of investments (long-term)
sale of investments (long –term)
interest received
dividend received
Net cash flow from investing activities
……………..
(……………)
……………..
(……………. )
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…………….
…………….
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(……………)
……………
(………….)
……………
…………..
…………..
……………
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……………

14. C. Cash flow from financing activities :
proceeds from issue of share capital
proceeds from long term borrowings
repayments of long term borrowings
Interest paid
Dividend paid
Net cash from financing activities
Net increase (or decrease) in cash and cash equivalents
(A + B + C)
Cash and cash equivalents at the beginning of the
period
Cash and cash equivalents at the end of the period
………………
……………..
(…………..)
……........
…………….
…………….
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15. Cash flow statement for the year ending….
(indirect method)
PARTICULARS AMOUNT AMOUNT
A. Cash flow from operating activities :
Net profit before tax and extraordinary items
Adjustments for :
Depreciation
Foreign exchange
Loss on sale of fixed assets
Gain on sale of fixed assets
Interest paid
Interest received
Dividend received
Operating profit before working capital changes
Add : Decrease in current assets
Increase In current liability
Less : Increase in current assets ……………
decrease in current liability …………..
……………
…………….
……………..
……………..
(……………)
…………….
(…………..)
(…………..)
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……………
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-
(…………….)

16. Cash generated from operating activities
Income tax paid
Cash flow before extraordinary items
(+) or (-) Extraordinary items
Net cash from operating activities
B. Cash flows from investing activities :
Purchase of fixed assets
sale of fixed assets
purchase of investments (long-term)
sale of investments (long –term)
interest received
dividend received
Net cash flow from investing activities
B. Cash flow from financing activities :
proceeds from issue of share capital
proceeds from long term borrowing
repayments of long term borrowings
……………..
(……………)
……………..
…………….
……………..
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(……………)
……………
(………….)
……………
…………..
…………..
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……………
(………….)
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……………

17. Interest paid
Dividend paid
Net cash from financing activities
Net increase (or decrease) in cash and cash equivalents
(A + B + C)
Cash and cash equivalents at the beginning of the
period
Cash and cash equivalents at the end of the period
(……………)
(……………)
……………..
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…………….
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…………….
…………….
…………….

18. The cash flow from the operating activities is
ascertained by the adjustment for non cash and
non operating items & adjustment of current
assets and liabilities related to operating activities
The cash flow from the investing activities is
ascertained by analysing the changes in fixed
assets and long term investments in the beginning
and end of the year.
The cash flow from the investing activities is
ascertained by analysing the change in equity and
preference share capital , debentures and other
borrowings.

19. Points To Be Taken Into Consideration-
 The net cash flow from the activities can e positive or
negative.
 The sum of the cash flow from all the activities taken
together , together with the opening cash and cash
equivalents , shall be equal to closing cash and cash
equivalents.
 A single transaction may include cash flows belonging
to the two different activities.
 Issue of shares and debentures for consideration other
than cash are not taken into account while preparing
cash flow statement.
 Any inflow and outflow of cash and cash equivalents
are also not taken into account.

20. Limitations of cash flow statement
1. Non cash transactions are ignored
2. Not a substitute for an income statement
3. Historical in nature

21. Relation between the three activities
OPERATING ACTIVITIES INVESTING ACTIVITIES FINANCING ACTIVITIES
The amount of the cash
flow arising from the
operating activities is the
key indicator of the extent
to which the operations of
the enterprise have
generated cash i.e. whether
the cash generation is
adequate to maintain
operating capability of the
enterprise , pay dividends ,
repay loans , and make new
investments. It is also
helpful in future cash flows
from operations.
The amount of the cash
flow arising from the
investing activities
represents the extent to
which expenditure has been
incurred to generate future
income and cash flows.
The amount of the cash
flows arising from financing
activities is useful in
assessing the claims of the
future cash flows by
providers of funds to the
enterprise.