Various Cash and Non-Cash Transactions ***

Purpose of the Cash Flow Statement

A Cash Flow Statement shows how cash and cash equivalents enter and leave a business over a specific period. It links the balance sheet and income statement, offering a clear picture of a company’s liquidity and financial health.

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Three Sections of the Cash Flow Statement

1. Operating Activities

• Definition: Core business operations (e.g., sales, expenses).
• Includes: Changes in current assets and current liabilities.
• Methods of Presentation:
  • Direct Method: Lists actual cash received and paid (rarely used).
  • Indirect Method (common):
    • Starts with net income
    • Adjusts for:
      • Non-cash items (e.g., depreciation)
      • Working capital changes (inventory, receivables, payables)

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2. Investing Activities

• Definition: Cash flow from buying/selling long-term assets and investments.
• Examples:
  • Purchase/sale of property, plant & equipment (PP&E)
  • Investments in other companies
• Capital Expenditures (CapEx): Cash spent on acquiring long-term assets.

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3. Financing Activities

• Definition: Transactions affecting equity and long-term liabilities.
• Examples:
  • Issuing/repurchasing shares
  • Taking/repaying loans
  • Paying dividends

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Key Terms and Concepts

Term	Definition
Cash Flow	Inflows and outflows of cash and equivalents
Cash Equivalents	Short-term, liquid investments (e.g., T-bills, commercial paper)
Cash Balance	Cash on hand and demand deposits (balance sheet)
Free Cash Flow (FCF)	Cash remaining after CapEx: FCF = Operating Cash Flow – CapEx

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Cash Flow Classification Summary

Type	Typical Examples
Operating	Cash received from customers, paid to suppliers, interest paid/received (U.S. GAAP)
Investing	Sale/purchase of fixed assets, marketable securities
Financing	Equity issuance, loan proceeds/repayments, dividends paid

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Treatment of Interest (IFRS vs U.S. GAAP)

Item	IFRS	U.S. GAAP
Interest Paid	Operating or Financing	Operating
Interest Received	Operating or Investing	Operating

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Example of Cash Flow Statement (Simplified)

Operating Activities (Indirect Method)

• Net Income ……………………………………… ₹xx,xxx
• Add: Depreciation ……………………………….. ₹x,xxx
• Less: Increase in Accounts Receivable …………….. ₹x,xxx
• Add: Increase in Payables ………………………… ₹x,xxx
  Net Cash from Operating Activities ……………… ₹xx,xxx

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Investing Activities

• Purchase of Equipment ……………………………. (₹x,xxx)
• Sale of Investment ………………………………. ₹x,xxx
  Net Cash Used in Investing Activities …………… ₹(x,xxx)

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Financing Activities

• Loan Taken ……………………………………… ₹x,xxx
• Dividend Paid …………………………………… (₹x,xxx)
  Net Cash from Financing Activities ……………… ₹x,xxx

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Net Change in Cash

• Operating + Investing + Financing = ₹xx,xxx

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Analysis of Cash Flow Statement

Section	Interpretation
Operating	Positive cash flow → sustainable operations
Investing	Negative cash flow → business expansion/investments
Financing	Negative cash flow → repaying obligations; Positive → raising funds

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Important Considerations

• Non-Cash Transactions:
  Not included in the cash flow statement but disclosed separately (e.g., stock-for-assets, depreciation, asset revaluation).
• Reconciliation:
  The indirect method reconciles net income to cash from operations by adjusting for non-cash and working capital changes.

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Conclusion

Understanding the cash flow statement helps:

• Evaluate short-term liquidity
• Analyze investment and financing decisions
• Measure financial flexibility
• Complement the income statement and balance sheet for a complete financial view