What is Cash Flow Statement and how is it different from Fund Flow Statement | ApnaCourse

Let’s say you have the following Profit and Loss Statement:

What should be profit?

Expenses             80.00 Crs

So Cash Balance should also be 20.00 Crs

Don’t you remember Financials are prepared following accrual concept wherein
Expenses will be accounted when accrued, whether it is paid or not;
Income will be recognized whether it is received or not.

50% of 75 Crs is Rs.37.50 Crs

You made sales of Rs.100 Crs where as you received only Rs.25 Crs.
You have incurred expenses of 75 Crs (excluding depreciation) where as you paid only 37.50 Crs.
So what is your cash balance?

I don’t have cash balance!!!!!!

Profit has relevance but it alone does not decide cash balance or say cash generation!

It is Negative 12.50 Cr.

Cash can never be negative figure.
What happened to you is you realised Rs.25 Crs from cash sales and PAID cash expenses of Rs.37.50 Crs.

You cannot pay 37.50 Crs without cash with you. Yes or No?

You had shortage of Rs.12.50 Cr

You should have managed that shortage with some other sources!

There are various other ways for mobilising cash for the business.

Cash can be brought into the business through

a.       Raising Capital;
b.      Raising Long Term Loans;
c.       Raising Short Term Loans;
d.      Selling Assets;
e.      Selling Investments.

What was your Shortage from Operations?

I have surplus of Rs.12.50.

Again I am landing in shortage.

The cash you generated from running or operating your business is called as Cash Generated from Operating Activity. In your case, it is deficit of Rs.12.50 Cr.

raised finance from two sources

Capital – 25 Crs

Loan – 7.50 Crs

They are Cash Generated from Financing Activity

Now you will appreciate why the companies can suffer despite making profits.

This is the purpose of preparing Cash Flow Statement. It would give much information which P&L and Balance Sheet will not give on the face of reading. That’s why Cash Flow Statement and its Analysis are given high importance by Investors and all stake holders.

a.       Credit Sales
b.      Credit Purchases
c.       Outstanding Expenses
d.      Accrued Incomes

Sales were Rs.100 Crs. whereas Debtors created out of Sales is 75 Crs.

Our profit is 20 Crs, No No…Cash profit is 25 Crs but it is calculated based on Total Sales (cash & credit) and so it will not reflect cash generation.

So we have to deduct non- cash sales from Cash Profits which is in the form of Debtors – 75 Crs.

Is that right?

By deducting increase in current asset (in our case, debtors) from cash profits, we are communicating to the readers, that though our company has earned cash profit of Rs.25 Crs from Sales of Rs.100 Crs, please bear in mind we have not realised 75 Crs worth of Debtors. So we are deducting it!!!

Is it correct?

Also remember you will see some more additions and subtractions in real cash flow statements.

Interest Expenses;

Loss on Sale of Asset;

Deductions for

Interest Income;

Dividend Income;

Profit on Sale of Asset;

But they are not out of operational activities of the business.

In cash flow from operating activity, focus is on finding cash generated from operating activity.

So any activity, which is not part of operating activity, but already included in profits will be removed by either adding back or deducting!

Let me understand that!

Interest is paid on Financing Source – So it is a Financing Activity. But it is already considered as expense for arriving at profit. So, we remove this interest by adding back! Is that right?

Loss / Profit on Sale of Asset are result of Investing Activity! So we remove them from profits either by adding / deducting under Cash Flow from Operating Activities.

Dividend / Interest income are also part of Investing Activity! So we should remove them from profits by deducting under Cash Flow from Operating Activities.

Interest added back in Operating Activity should be shown as deduction in Financing Activity.

Dividend / Interest Income deducted in Operating Activity should be shown as addition in Investing Activity.

captured and non-cash items are ignored.

Sometimes assets can be purchased by issue of shares instead of cash. Then in those cases, purchase of asset will not figure under Investment activity.

What would be the effect, if a company issues bonus shares?

Because of Bonus Issue, there may be increase in Share Capital but there will not be any cash inflow. So that will not find place in Cash Flow Statement!