cash flow statement analysis
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CASH FLOW STATEMENT ANALYSIS
Chapter 1: INTRODUCTION
Cash is an important component of working capital of business, which
provides speed and power to business. Keeping in view the present wealth dominated
scenario, it can be said that cash is the life blood of business, as it governs and
operates all the activities of business. For all the activities of business, continuous and
healthy flow of cash is the main pillar of business solvency, thus cash is both the
beginning and end of working capital cycle. In all the business organizations
monetary and non-monetary activities takes place and out of which monetary
transactions result in inflow and outflow of cash, so it is very important for business
to know that from what sources and in how much quantity cash has been used. The
cash flow statement is prepared to attain the above-mentioned objective.
WHAT IS A CASH FLOW STATEMENT?
For your business, the cash flow statement may be the most important
financial statement you prepare. It traces the flow of funds (or working capital) into
and out of your business during an accounting period. For a small business, a cash
flow statement should probably be prepared as frequently as possible. This means
either monthly or quarterly. An annual statement is a must for any business.
The cash flow statement’s primary purpose is to provide information regarding
a company’s cash receipts and cash payments. The statement complements the
income statement and balance sheet. It is important to note — cash flow is not the
same as net income. Cash flow is the movement of money into and out of your
company, and it can be affected by several noncash transactions. The cash flow
statement became a requirement for publicly traded companies in 1987. There are
various rules governing how information is reported on cash flow statements, as
determined by generally accepted accounting principles (GAAP). While your business
may not be a public company, a cash flow statement is still important to measure and
track the flow of cash into and out of your business.
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CASH FLOW STATEMENT ANALYSIS
Cash flow, simply, is the movement of money in and out of your business, or
the inflows and outflows. A reliable accounting system is in place in your business
and information typically recorded by small businesses is accessible to you.
The cash flow statement reports the cash provided and used by the operating,
investing, and financing activities of a company during an accounting period. In 1987,
the Financial Accounting Standards Board issued Statement No. 95, which requires
that a statement of cash flows accompany the income statement, balance sheet and
statement of retained earnings.
AN OVERVIEW
The cash flow statement explains the change during the period in cash and
cash equivalents. Cash includes currency on hand and demand deposits. Cash
equivalents are short-term, highly liquid investments that are readily convertible to
cash. Cash receipts and payments are required to be classified as operating, investing
and financing activities. The cash flow statement will summarize the cash flows so
that net cash provided or used by each of the three types of activities is reported.
Beginning and ending cash must be reconciled based on the net effect of these
activities.
DEFINITIONS OF CASH FLOW
According to I.C.W.A. (India), “Cash Flow Statement is a statement setting out the
flow of cash under different heads of sources and their utilization to determine the
requirements of cash during the given period and to prepare for its adequate
provisions.”
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CASH FLOW STATEMENT ANALYSIS
CLASSIFICATION OF CASH FLOWS ACCORDING TO AS-3
Cash flows or sources and applications of cash: According to accounting
Standard –3 cash flows has been divided into three parts:
CASH FLOWS FROM OPERATING ACTIVITIES
The operating section of the cash flow statement is most important because it
deals with the cash generated or used by the entity’s primary activities. These
activities, and the related cash flows, are recurring. The cash flow statement reports
past cash flows, but the same or similar activities and cash flows can be expected to
occur in the future. If an organization cannot sustain itself over the long run with the
cash generated from operations, it cannot survive.
CASH FLOWS FROM OPERATING ACTIVITIES
OPERATING ACTIVITIES
Cash in Flow Cash out Flow
Most companies present the operating section of the cash flow statement using
an indirect approach under which they start with accrual-basis net income and adjust
that figure to obtain the cash generated or used by operations. Although accrual-basis
income is regarded as the best measure of operating success, it does not tell us the
amount of cash flows from operating and must be adjusted for all items that affect
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CASH FLOW STATEMENT ANALYSIS
income and cash differently. Thus, this section of the cash flow statement includes the
following adjustments to net income to determine the cash generated or used by
operations:
Expenses that reduced net income this period but did not use cash must be added
back.
Cash payments made this period for expenses of other periods must be deducted.
Revenues that did not result in cash inflows during the current period must be
deducted.
Cash collections for revenues earned in other periods must be added.
Items reported in the income statement but not directly related to normal
operations must be removed.
Let’s consider a few of the more common adjustments to net income needed to
convert to a cash basis.
Depreciation and Amortization
Under accrual accounting, income is reduced for the cost of an operating
asset’s service potential used up during the period. As we have seen earlier,
depreciation, or the amount of cost recognized during the period under the matching
concept, is an allocation of the original cost of the asset. The depreciation expense
recognized during a period is not a cash expense; it does not result in a decrease in the
cash balance. Cash was reduced initially when the asset was first acquired. The
expense is simply an accountant’s allocation of a cost incurred previously.
Therefore, while income for the period is decreased by the amount of the
depreciation expense, cash is not. The difference in timing between the cash outflow
for the purchase of a fixed asset and the related income effects can be shown as
follows:
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CASH FLOW STATEMENT ANALYSIS
If we are interested in the amount of cash generated by a company’s
operations, then we need to add back the amount of depreciation expense to the
company’s net income. In other words, if all other revenues and expenses were cash
items, net income would understate cash generated by the amount of the depreciation
expense.
Because depreciation is added back to net income to get the cash generated
from operations, financial analysts sometimes mistakenly refer to depreciation as a
source of cash. But this is silly because firms cannot generate cash just by
depreciating. If depreciation were a source of cash, a change to a more rapid
depreciation method would cause the cash balance to go up. But, that will not happen.
The addition of depreciation in the cash flow statement is simply a way of adding
back an amount that was deducted from income but did not use cash. Depreciation is
neither a source nor a use of cash.
The amortization of intangible assets and the depletion of natural resources
also result in noncash expenses. As with depreciation, these expenses are deducted to
get net income, but do not use cash. Therefore, they are added back to net income to
get the amount of cash generated from operations.
Changes in Deferred Income Taxes
Companies must report income tax expense on an accrual basis by matching
tax expense to reported income. If temporary differences exist between the income
reported in the income statement and that reported on the tax return, a deferred tax
liability or asset is affected. In addition, the tax expense reported in the income
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CASH FLOW STATEMENT ANALYSIS
statement is different from cash tax payments. Therefore, the cash flow statement
must report an adjustment to bring net income to the amount of cash generated from
operations.
Amortization of Debt Discount and Premium
Debt discount arises when debt is issued for less than its maturity value.
Because the debt ultimately must be repaid at maturity value, the actual (effective)
interest costs are higher than the current cash interest payments. A portion of the
discount is charged to interest expense each period under accrual accounting.
However, the amount of discount expensed each period represents a noncash charge
against income.
When will cash actually be paid? When the debt matures, its maturity value
will be paid in cash. The difference in timing between the cash flows and expense
recognition can be shown as follows:
Because the company’s interest expense contains a noncash portion, the net
income figure must be adjusted to arrive at the cash generated from operations. Thus,
when interest expense has been increased by the amortization of bond discount, an
amount must be added to net income in the cash flow statement to determine the
amount of cash generated from operations.
If interest expense has been decreased by the amortization of bond premium,
an amount must be deducted from net income in the cash flow statement to arrive at
cash generated from operations.
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CASH FLOW STATEMENT ANALYSIS
Gains and Losses
Companies often include in their income statements gains and losses that are
not directly related to their regular operations. For example, companies often report
gains and losses from disposing of investments or fixed assets, and from retiring debt.
Because these gains and losses are not related to regular operations, they must be
eliminated from the operating section of the cash flow statement. Gains must be
deducted from net income in the operating section of the cash flow statement to arrive
at cash generated from operations, and losses must be added back. The cash effects of
the transactions giving rise to the gains and losses are reported in the investing or
financing sections of the cash flow statement.
Changes in Current Assets and Liabilities
Current assets and current liabilities are important in the operations of a
company and facilitate the flow of resources through the operating cycle. We
discussed the operating or cash cycle in Chapter 3 and how changes in receivables,
inventories, payables, and other current accounts can affect the amount of cash
received. Because current assets and liabilities play such an important role in the way
that cash moves through the operating cycle, changes in these items must be
considered in determining the cash generated from operations. For example, sales
increase income, but if the sales are on credit and the receivables are not immediately
collected, no cash is generated. Thus, the cash generated from operations during the
period can be determined only after adjusting net income for the change in receivables
during the period: if receivables increase, less cash is collected than if receivables
decrease.
Similarly, if a company does not pay its bills as quickly as in the past, and
payables increase, less cash is used in operations. Because the expenses reduce
income even though the cash has not been paid, the cash flow statement reports an
adjustment added to net income in the cash flow statement to reflect more cash being
generated from operations. A decrease in trade payables would indicate that more
cash was being used to pay off bills and less was generated by operations. This would
call for a negative adjustment to be reflected in the cash flow statement. Changes in
current liabilities not directly related to sales or normal operating expenses, such as
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CASH FLOW STATEMENT ANALYSIS
short-term bank loans or dividends payable, are reported in the financing section of
the cash flow statement. The direction of adjustments for changes in all current assets
is the same, and that for current liabilities is the opposite. Keep in mind that the
purpose of these adjustments in the cash flow statement is to convert accrual-basis net
income to cash generated from operations.
Assessing Cash Flows from Operations
Why do companies report detailed information about operating cash flow?
Why not just report the total? The answer is that, while the total operating cash flow is
important, providing the details allows decision makers to develop a better
understanding of a company’s cash situation and, in turn, make better projections of
future cash flows.
Starting the operating section of the cash flow statement with net income
provides a comparison between accrual-basis income and cash flows and ties the cash
flow statement to the income statement. Reporting individual adjustments allows
decision makers to see precisely how a company’s operations generate cash and why
cash might be more or less than expected based on reported income.
The individual adjustments might show that cash is reduced because
receivables and inventories are building, or perhaps that cash flow is increased
through increases in payables. For example, Kellwood Company’s fiscal 1998 net
income was $42.7 million, but operating activities used $75.2 million of cash. An
examination of individual adjustments in the cash flow statement showed that during
the year receivables had increased by $48.5 million, inventory had increased by $75.5
million, and accounts payable had decreased by $14.4 million, all having a significant
negative effect on the cash flows from operations.
By examining the elements of the operating section of the cash flow statement,
decision makers might be able to identify cash, receivables, and inventory
management problems that could ultimately affect liquidity. Or, they might be able to
spot an impending credit crisis by determining that cash flow is being maintained by
not paying bills. Whatever this section of the statement shows, the key is
understanding the relationships between cash and the elements reported, and using
that information to project future cash flows.
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CASH FLOW STATEMENT ANALYSIS
CASH FLOWS FROM INVESTING ACTIVITIES
Organizations usually must invest cash so they can conduct the operating
activities needed to attain their goals. Thus, an understanding of an organization’s
investing activities is important for anyone analyzing the organization. Cash flows
related to the investing activities of a business typically involve either operating assets
(property, plant, and equipment) or investments in other companies. Cash outflows for
operating assets are usually quite large for companies that are replacing assets or
expanding. Cash inflows can be generated from selling operating assets no longer
needed. Cash outflows for investments in stock often involve the acquisition of a
controlling interest in other companies, referred to as affiliates. Sales of investments
usually result in cash inflows.
CASH FLOWS FROM INVESTING ACTIVITIES
INVESTING ACTIVITIES
Cash in Flow Cash out Flow
Analyzing the investing activities section of the cash flow statement can tell
decision makers whether a company is expanding or contracting its operating
capacity, and how. Is the company expanding by acquiring new plant and equipment,
or by investing in affiliated? Is the company generating a major portion of its cash
inflows by selling off its productive assets, and can such cash inflows be sustained?
Answers to these types of questions are crucial to understanding a company’s future
prospects and projecting future cash flows.
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Cash Sales of fixed assets
Sales of investments and collection of loan
Interest and dividend received on loan and
Investing Activities
Purchase of fixed assets
Purchase of Investments
Loan and advances to 3rd parties
CASH FLOW STATEMENT ANALYSIS
Examining the cash expended for plant and equipment in comparison with the
amount of depreciation expense and the amount of plant and equipment reported in
the balance sheet can provide some idea of the rate of growth or contraction. For
example, as can be seen in
CASH FLOWS FROM FINANCING ACTIVITIES
As we have seen, much of an existing company’s financing may come from
operations. However, many companies, especially new ones and those that are
expanding rapidly, need to rely on other sources to provide a stable financing base. As
we discussed in Chapters 11 and 12, this type of financing comes either through
borrowing or by selling ownership interests. The financing section of the cash flow
statement reports on the cash effects of
borrowing (other than trade payables)
repaying debt
issuing stock
repurchasing stock
paying dividends
CASH FLOW FROM FINANCING ACTIVITIES
FINANCING ACTIVITIES
Cash In Flow Cash out Flow
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Amount received from issue of share capital
Amount received from long-term loans
Amount received from issue of debentures
Financing Activities
Redemption of shares & Debentures
Payment of loans
Payment of finance and lease liabilities
Payment of interest and dividend
CASH FLOW STATEMENT ANALYSIS
Changes in Debt and Capital Stock
Changes in debt reported in the statement of cash flows are simple and
straightforward: increases in debt generate cash, and decreases use cash for
repayments. Changes in nontrade notes payable, including commercial paper (short-
term negotiable notes), and bonds payable are included in this section of the cash flow
statement. Decision makers are often especially interested in the financing employed
by companies because debt must be repaid and also usually requires periodic interest
payments. The issuance of stock, on the other hand, results in earnings being shared
by more owners and may result in pressure to use cash to pay dividends.
Payment of Cash Dividends
Owners of a corporation expect a return on their investments. One way they
receive a return on their stock investments is through corporate distributions of
income to the owners, or dividends. Cash dividends paid during the period are
reported in the financing section of the cash flow statement because they reflect a
payment to one group of capital suppliers, and, therefore, are related to financing.
Perhaps reflecting an inconsistency, interest expense—the return paid to suppliers of
debt financing—is not reported in the financing section of the cash flow statement; it
is included in the net income amount reported in the operating section of the
statement.
Decision makers are often interested in the portion of the cash generated from
operations that is used to pay dividends. Although the declaration of dividends is not
required, many companies have established dividend policies that place great pressure
on management to continue dividend payment trends. Thus, cash generated from
operations should, at least in the long run, be sufficient to provide for dividends, as
well as the replacement of assets.
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CASH FLOW STATEMENT ANALYSIS
OBJECTIVES OF CASH FLOW STATEMENT
PRIMARY OBJECTIVE
A primary purpose of cash flow statement is to provide information about the
cash receipts and cash payments of a business entity for the accounting period
covered by the income statement. It is necessary to maintain a record of cash flows on
a continuing basis in order to keep the business free of troubles is respect of liquidity
problems.
SECONDARY OBJECTIVE
A secondary purpose of cash flow statement is to provide information about a
business entity’s operating, investing and financing activities during the accounting
period.
USEFULNESS OF CASH FLOW STATEMENT
According to Accounting Standard –3 the main objective of preparation of
cash flow statement, is to provide information to users regarding cash flows which
gives description of changes in cash or cash equivalents. Following are the objectives
and uses of cash flow statement:
HELPFUL IN SHORT TERM POLICIES OF FINANCIAL PLANNING
Cash flow statement provides several information to finance managers for
formulating policies for short term financial requirements on the basis of which,
finance manager is able to ascertain the amount of cash which will be required in
future and how much cash will be available from internal sources and how much will
have to be arranged from external sources.
USEFUL IN PREPARING CASH BUDGET
Cash flow statement helps managers in preparing cash budget, it gives
information about preparing cash budget, it gives information about surplus or
deficiency of cash to managers and on the basis of this managers can plan to invest
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CASH FLOW STATEMENT ANALYSIS
surplus of cash in short term investments or to cover the deficit from the search of
other sources of short term goodwill.
KNOWLEDGE OF SOLVENCY
Knowledge of solvency can be obtained with the help of cash flow statement,
as it provides the real information about the available cash in the organization.
HELPFUL IN CONTROL
Cash flow statement acts as a control device for finance managers. With
comparison of cash flows statement with cash budget management can come to know
about the extent, to which financial sources have uses, in accordance with plan.
HELPFUL IN INTERNAL FINANCIAL MANAGEMENT
On the basis of information available from cash flows statement payment of
long-term liabilities, formulation of dividend policy is facilitated.
USEFUL TO EXTERNAL INVESTORS
External investors are able to obtain information about liquidity of
organization with the help of cash flows statement on the basis of which they can take
their decision regarding lending loan to organization or not.
STUDY OF THE TRENDS OF CASH RECEIPTS AND PAYMENTS FROM
VARIOUS ACTIVITIES
With the help of this statement managers are able to obtain information about
the frequency of cash receipts from current assets and what is frequency of payments
of current liabilities so that future cash requirements can be ascertained.
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CASH FLOW STATEMENT ANALYSIS
LIMITATIONS OF CASH FLOW STATEMENT
Following are the main limitations of cash flow statement:
Incomplete Substitute: Cash flow statement is not a substitute of income statement
as net cash flow depicted by cash flows statement is not equal to net profit shown
by income statement.
It does not show the Liquidity Position of the Firm: This statement depicts the
inflow and outflow of cash, liquidity position of the firm cannot be ascertained
from this.
Accrual Basis: Cash flow statement does not pay attention to accrual basis concept
of accounting.
Misleading Comparison: Cash flows statement has proved to be misleading in
comparison of industry and firm.
DIFFERENCE BETWEEN FUND FLOW STATEMENT & CASH
FLOW STATEMENT
Basis of
Difference
Fund Flow Statement Cash Flow Statement
Meaning Fund Flow refers to the changes
in the Fund by business
transactions.
Cash Flow Statement is a
statement of cash flow and cash
flow signifies the movement of
cash in and out of a business
concern.
Uses It helps the reader to understand
not only the financial stability of
the business concern but also the
successful implementation of
financial policies of
management.
A cash flow statement is of
primary importance to the
financial management. It is an
essential tool of short-term
financial analysis.
Basis of
accounting
Fund Flow Statement is based
on accrual basis of accounting.
Cash Flow Statement is based
on cash basis of accounting.
Limitation Fund Flow Statement does not Working Capital being a wider
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CASH FLOW STATEMENT ANALYSIS
provide information about
changes in Cash; which are
more important and relevant
than Working Capital.
concept of funds, a funds flow
statement presents a more
complete picture than Cash
Flow Statement.
FORMATS OF CASH FLOW STATEMENT
Accounting Standard-3 (Amended) has not prescribed any format for cash
flows statement. Following is the pro forma of cash flows statement, prepared by
direct and indirect method and which has been prescribed by SEBI and is used by
maximum number of organizations.
Cash Flow Statement (Direct Method)
For the year ended 31st March,….
Particulars Rs. Rs.
A. Cash Flows 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
Sales of Fixed Assets
Purchase of Investment (Long-term)
Sales of Investment (Long-term)
Interest received
……
(……)
……
……
(……)
……
……
……
(……)
……
(……)
……
……
……
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CASH FLOW STATEMENT ANALYSIS
Dividend received
Net Cash from investing activities
C. Cash Flows 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(A+B+C)
Cash and Cash equivalents at the beginning of the period
Cash and Cash equivalents at the end of the period
……
……
……
……
……
(……)
(……)
(……)
……
……
……
Cash Flow Statement (Indirect Method)
For the year ended 31st March,….
Particulars Rs. Rs.
A. Cash Flows From Operating Activities:
Net profit before tax and extraordinary items
Adjustment For:
Depreciation
Loss on sale of fixed assets
Gain on sale of fixed assets
……
……
……
(……)
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CASH FLOW STATEMENT ANALYSIS
Interest paid
Interest received
Dividend received
Goodwill written off
Preliminary Exp. written off
Provision for taxation
Proposed Dividend (Current Year)
Operating profit before working capital Changes
Add: Decrease in Current Assets
Increase in Current Liabilities
Less: Increase in Current Assets ……
Decrease in Current Liabilities ……
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 (See Note-5)
Sales of Fixed Assets
Purchase of Investment (Long-term)
Sales of Investment (Long-term)
Interest received
Dividend received
Net Cash from investing activities
C. Cash Flows From Financing Activities
Proceeds from issue of share capital
……
(……)
(……)
……
……
……
……
……
……
……
……
……
……
……
……
……
……
(……)
……
(……)
……
……
……
……
……
……
……
……
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CASH FLOW STATEMENT ANALYSIS
Proceeds from long-term borrowings
Repayments of long-term borrowings
Interest Paid
Proposed Dividend Paid (Previous Year)
Net cash from financing activities
Net Increase (or decrease) in cash (A + B + C)
Cash and Cash equivalents at the beginning of the period
Cash and Cash equivalents at the end of the period
(……)
(……)
(……)
…… ……
……
……
……
Chapter 2: WAYS AND METHODS TO ANALYSE CASH
FLOW STATEMENT
HOW TO ANALYZE A CASH FLOW STATEMENT
While a balance sheet and income statement are tools for management,
without a cash flow statement they are limited barometers and may even be
misleading.
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CASH FLOW STATEMENT ANALYSIS
OPERATING ACTIVITIES
The cash flow statement will tell you where money came from and how it was
used. When analyzing cash flow, the first place to look is the cash flow from
operating activities. It tells you whether the firm generated cash or whether it needs a
cash infusion. A few periods of negative cash from operating activities is not by itself
a reason for alarm if it is based on plans for company growth or due to a planned
increase in receivables or inventories. However, if a negative cash flow from
operating activities is a surprise to managers and owners, it may be undesirable.
Over time, if uncorrected, it can foretell business failure. Managers and
owners should pay particular attention to increases in accounts receivable. The cash
flow statement gives the true picture of the account. A large increase in accounts
receivables may warrant new billing or collection procedures.
INVESTING ACTIVITIES
The cash flow statement puts investing activities into perspective. At one
glance, you can see whether or not a surplus in operations is being used to grow the
company. A lack of investing activities, which is few purchases of new equipment or
other assets, may indicate stagnant growth or a diversion of funds away from the
company.
FINANCING ACTIVITIES
The financing activities section of the cash flow statement will show
repayments of debt, borrowing of funds, as well as injections of capital and the
payment of dividends. As a company expands, this area of the cash flow statement
will become increasingly important. It will tell outsiders how the company has grown
and the financial strategies of management.
Together, the three sections of the cash flow statement show the net change in
cash during the period being examined. A comparison between past periods will give
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CASH FLOW STATEMENT ANALYSIS
owners and managers a good idea of the trend of their business. Positive trends in
cash flow may encourage owners to consider long-term financing as an aid to growth
and increase their comfort level concerning the company’s ability to generate cash for
repayment. Strong cash flow will also make it easier to acquire financing and to
negotiate with lenders from a position of strength. Preparation of a cash flow
statement is the first step toward financial management for long-term success.
METHOD USED TO ANALYZE THE CASH FLOW
STEP 1: SCANNING THE BIG PICTURE
First, place your company in context in terms of its age, industry, and size.
(Mature companies have different cash flows from start-up companies. And
service industries look different from heavy manufacturing industries.)
Flip through the annual report and other accounting records to determine how
management believes the year progressed. Was it a good year? Perhaps a record-
breaking year in terms of revenue or net income? Or is management explaining
how the company has had some rough times?
Look at net income. Does it show income or losses over the past few years? Is
income (or loss) shrinking or growing?
STEP 2: CHECKING THE POWER OF THE CASH FLOW ENGINE
The cash flow from operating activities section is the cash flow engine of the
company. When this engine is working effectively, it provides the cash flows to
cover the cash needs of operations.
To check the cash flow check if the cash flow from operating activities is greater
than zero. Also check whether it is growing or shrinking. Assuming it is positive,
the next question is can it cover important, routine expenditures?
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CASH FLOW STATEMENT ANALYSIS
An exception is start-up companies often have negative cash flow from operating
activities because they had to spend a lot to get the company started and their cash
flow engines are not yet up to speed.
Examine the operating working capital accounts. Inventories, receivables, and
accounts payable usually grow in expanding companies.
STEP 3: PINPOINTING THE GOOD NEWS AND THE BAD NEWS
Begin with cash flow from investing activities. One systematic observation is to
check whether the company is generating or using cash in its investing activities.
A healthy company invests continually in more plant, equipment, land, and other
fixed assets to replace the assets that have been used up or have become
technologically obsolete.
You must look at the entire package to evaluate whether your cash flows from
financing are in the “good news” or “bad news” categories. One systematic way to
begin is to compare borrowing and payments on debt with each other across the
years and note the trends. Another way in uncovering the news in this section is to
check the activities in the stock accounts.
STEP 4: PUTTING THE PUZZLE TOGETHER
It would be rare to find a company in which all of the evidence is positive, or in
which all of the evidence is negative.
To make a balanced evaluation, you must use both the good news and the bad
news identified in each section of the statement.
Sometimes there are unusual or unknown items that may need further looked into
(possibly by a professional).
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CASH FLOW STATEMENT ANALYSIS
Chapter 3: CASH FLOW STATEMENT ANALYSIS
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CASH FLOW STATEMENT ANALYSIS
Net Pro
fit Befo
re Ta
x
Cash Fr
om Opera
ting
Cash fr
om Inve
sting
Cash fr
om Finan
cing
Net incre
ase In
Cash
Op Cash &
Cash Eq
ui
Cl Cash
& Cash
Equi
-30000
-20000
-10000
0
10000
20000
30000
40000
CASH FLOW STATEMENT ANALYSIS OF RELIANCE INDUSTRIES LTD
Mar '12Mar '11Mar '10Mar '09Mar '08
Amt i
n Cr
ores
The above diagram shows the Cash Flow of Reliance Industries ltd from 2007-
08 to 2011-12 comparing its yearly profits with Cash and Cash equivalent held at the
year end and the Net Cash from/ used in different activities with each other.
The above comparison shows that there has been stagnant increase in the
profits & cash balance expect for 2008-09 there has been decline in the profits from
23,010.14 crores to 18,433.23 crores where as the cash balance has increased from
4,280.05 crores to 22,176.53 crores and next year it declined to 13,462.65 crores even
after making a profit of 20,547.44 crores.
Observing the diagram we can say that there has been considerable increase in
the Net Cash from Operating activities expect for 2011-12 which has declined from
33,280.52 crores to 26,974 crores. There has been an equal amount of investments
during 2007-08 & 2008-09 which declined in 2009-10 from 24,084.20 crores to
Vivek College Of Commerce Page 23 of 36
CASH FLOW STATEMENT ANALYSIS
18,204.5 crores and again raised to 20,332.88 crore which intensely declined during
2011-12 to 3,046 crores.
RIL has raised funds during 2007-08 & 2008-09 continuously which was
8,973.04 crores & 23,732.58 crores respectively and which is being paid off
subsequently year by year.
ACCOUNTS RECEIVABLE INVENTORY
ACCOUNTS PAYABLE
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2009-10
2010-11
2011-12
RELIANCE INDUSTRIES LTD
2009-102010-112011-12
Amt i
n Cr
ores
The above diagram shows Reliance Group of Industries’ Accounts Receivable,
Inventory, and Accounts Payable position of last three years in the cash flow
statement.
The above diagram shows that RIL has a good credit policy as its accounts
receivable has been declined from 5,790.65 crores to 1,068 crores. It has maintained a
very lower level of stock i.e. the level of stock has declined from 14,396.67 crores to
7,724 crores. It has even a good level of credit payment policy as it has declined from
14,249.20 crores to 2,044 crores. This shows that RIL maintains good relationships
with its suppliers and customers.
Vivek College Of Commerce Page 24 of 36
CASH FLOW STATEMENT ANALYSIS
Net Pro
fit Befo
re Ta
x
Cash Fr
om Opera
ting
Cash fr
om Inve
sting
Cash fr
om Finan
cing
Net incre
ase In
Cash
Op Cash &
Cash Eq
ui
Cl Cash
& Cash
Equi
-30000
-25000
-20000
-15000
-10000
-5000
0
5000
10000
15000
20000
CASH FLOW STATEMENT ANALYSIS OF TATA STEEL LTD
Mar '12Mar '11Mar '10Mar '09Mar '08
Amt i
n Cr
ores
The above diagram shows the Cash Flow of Tata Steel Industries ltd from
2007-08 to 2011-12 comparing its yearly profits with Cash and cash equivalent held
at the year end and the Net cash from/used in different activities with each others.
The above diagram shows that the Profits and Cash balance of Tata Steel has
been increasing stagnantly expect for 2011-12’s cash balance which declined from
4,141.54 crores to 3900.53 crores where as profits increased from 9776.85 crores to
9,857.35 crores. The Net cash from operating activities has also been stagnantly
increasing from 6,254.2 crores to 10,256.47 crores.
Tata has invested about 29,318.58 crores during 2007-08 which declined
vigorously to 5,254.84 crores in 2009-10 which again raised the next year to
13,288.13 crores and again declined to 2,859.11 crores in 2011-12. Tata steel raised
Vivek College Of Commerce Page 25 of 36
CASH FLOW STATEMENT ANALYSIS
funds during 2007-08 for 15,848.07 crores thereafter it reduced raising funds to
7,599.35 crores in 2011-12.
A/C RE-CEIVABLE INVENTORY
A/C PAYABLE
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
4,000
5,000
2009-10
2010-11
2011-12
TATA STEEL INDUSTRIES LTD
2009-102010-112011-12
Amt i
n Cr
ores
The above diagram shows Tata steel Industries’ Accounts receivables,
Inventory, and Accounts Payable position of last three years in the cash flow
statement.
The above diagram says that there has been decrease in Accounts receivables
by 2,118.96 crores which means customers have paid the debts and next year there is
increase in Accounts receivable by 4,718.97 crores which means company has made
aggressive credit sale and next year again there is a decrease of Accounts receivables
by 889 crores which says that receivables are not managed properly. Inventory also
has a similar position i.e. decrease of stock by 1,884.24 crores in 2009-10 and
increase in stock during 2010-11 by 4,888.51 crores and again a decline by 407.72
crores in 2011-12. Accounts payable of Tata steel shows that it makes late payments
to its creditors or is provided with longer credit period as it has an increase of 898.51
crores and 2,432.58 crores in two subsequent years and made payment during 2011-
12 which is shown with a decline of 137.42 crores during 2011-12.
Vivek College Of Commerce Page 26 of 36
CASH FLOW STATEMENT ANALYSIS
Net Pro
fit Befo
re Ta
x
Cash Fr
om Opera
ting
Cash fr
om Inve
sting
Cash fr
om Finan
cing
increase
In Cash
Op Cash &
Cash Eq
ui
Cl Cash
& Cash
Equi
-5000
0
5000
10000
15000
20000
CASH FLOW STATEMENT ANALYSIS OF INFOSYS LTD
Mar '12Mar '11Mar '10Mar '09Mar '08
Amt i
n Cr
ores
The above diagram shows the Cash Flow of Infosys Ltd from 2007-08 to
2011-12 comparing its yearly profits with Cash and Cash equivalent held at the year
end and the Net Cash from/ used in different activities with each other.
The above diagram shows that the profits & cash balance of Infosys Ltd has
been increasing stagnantly from 5,100 crores in 2007-08 to 11,096 crores in 2011-12
and 7,689 crores in 2007-08 to 19,557 crores in 2011-12 which is a good sign of
growth. Cash from operating activities has also been stagnantly increasing expect for
2010-11 when operating activities declined from 5,876 crores to 4,270 crores. Infosys
had made Investments of 978 crores which declined to 195 crores during 2008-09
which then had a boost of 3,314 crores during 2009-10. Thereafter, Infosys raised
funds through investing activities i.e. during 2010-11 to 3,235 crores and 565 crores
during 2011-12.
Vivek College Of Commerce Page 27 of 36
CASH FLOW STATEMENT ANALYSIS
Infosys has been paying off its debts subsequently year after year i.e. 777
crores during 2007-08, 2,430 crores during 2008-09, 1,486 crores during 2009-10,
3,642 crores during 2010-11, 2,298 crores during 2011-12.
ACCOUNTS RE-CEIVABLE
ACCOUNTS PAYABLE-200
0
200
400
600
800
1000
1200
2009-10
2010-11
2011-12
INFOSYS LTD
2009-102010-112011-12
Amt i
n Cr
ores
The above diagram shows Infosys Ltd’ Accounts receivables, Inventory, and
Accounts Payable position of last three years in the cash flow statement.
The above diagram shows that there has been a tremendous rise in Accounts
receivable during 2010-11 compared to the previous year 2009-10 i.e. from a decline
of 194 crore in 2009-10 to an increase of 1159 crore in 2010-11 which was continued
during 2011-12 by a growth of 1189 crore which means that there has been aggressive
credit sale to promote the product.
Accounts payable have also been subsequently increasing which means there
has been increase in the level of credit purchase from 204 crores in 2009-10 to 620
crores in 2011-12.
Vivek College Of Commerce Page 28 of 36
CASH FLOW STATEMENT ANALYSIS
Net Pro
fit Befo
re Ta
x
Cash Fr
om Opera
ting
Cash fr
om Inve
sting
Cash fr
om Finan
cing
Increase
In Cash
Op Cash &
Cash Eq
ui
Cl Cash
& Cash
Equi
-4000
-2000
0
2000
4000
6000
8000
CASH FLOW STATEMENT ANALYSIS OF WIPRO LTD
Mar '12Mar '11Mar '10Mar '09Mar '08
Amt i
n Cr
ores
The above diagram shows the Cash Flow of Wipro Ltd from 2007-08 to 2011-
12 comparing its yearly profits with Cash and Cash equivalent held at the year end
and the Net Cash from/ used in different activities with each other.
The above comparison shows that the profits & cash balance of Wipro Ltd has
been increasing stagnantly expect for the cash balance of 2010-11 which declined
from 5664.3 crores to 5203.3 crores in spite of the increase of profits from 5688.8
crores to 5705.5 crores. Comparison of Net cash from/used in different activities gives
us the conclusion that there has been less operating activities of 715.9 crores during
2007-08 and a very sharp increase in operating activities by 4,344.5 crores in the next
year which was then followed by a considerable growth of 1329 crores and then there
was a stagnant decline in Operating activities from 4477.4 crores to 2997.9 crores in
two years.
Vivek College Of Commerce Page 29 of 36
CASH FLOW STATEMENT ANALYSIS
There has been very less investments during 2007-08 i.e. 1,127.5 crores which
increased thereby to 3662.7 crores the next year but again declined to 339.8 crores in
three years. There has been lot of financing activity or in other words there has been
an increase of debt to the company during 2007-08 of 2,290 crores which has been
paid off during the subsequent years regularly each year.
A/C RE-CEIVABLE
INVENTORY A/C PAYABLE0
5,000
10,000
15,000
20,000
25,000
2009-10
2011-12
WIPRO LTD
2009-102010-112011-12
Amt i
n M
illio
ns
The above diagram shows Wipro Ltd’ Accounts receivables, Inventory, and
Accounts Payable position of last three years in the cash flow statement.
The above diagram says that there has been increase in the credit giving
percentage of Wipro where as it has maintained a good level of accounts payable
which has increased considerably from 650 million to 7,150 millions in two years.
As Wipro’s level of operation has increased this considerable increase can be
justified but accordingly Wipro has maintained very poor level of inventory i.e. 862
millions in 2011-12 & 1,781 millions in 2010 -11 which is not justified.
Vivek College Of Commerce Page 30 of 36
CASH FLOW STATEMENT ANALYSIS
Net Pro
fit Befo
re Ta
x
Cash Fr
om Opera
ting
Cash fr
om Inve
sting
Cash fr
om Finan
cing
Increase
In Cash
Op Cash &
Cash Eq
ui
Cl Cash
& Cash
Equi
-30000
-20000
-10000
0
10000
20000
30000
CASH FLOW STATEMENT OF 2007-08 ANALYSIS OF RELIANCE AND TATA STEEL
RILTS
AMT
IN C
ROES
The above diagram compares the Cash flow statements of Reliance Group of
Industries ltd and Tata steel industries ltd during 2007-08. Comparing their profit,
Cash and cash equivalent held at the year end and the Net cash from/used in different
activities.
The above diagram shows that Reliance Industries has earned higher level of
profits then Tata Steel Industries. Cash from Operating activities of Reliance
Industries is also more compared to Tata Steel Industries. But Tata Steel has
maintained a higher level of Investments than Reliance Industries during the year.
Reliance has even raised lesser rate of funds than Tata Steel. Reliance has maintained
a very higher level of cash balance than Tata Steel.
Vivek College Of Commerce Page 31 of 36
CASH FLOW STATEMENT ANALYSIS
Net Pro
fit Befo
re Ta
x
Cash Fr
om Opera
ting
Cash fr
om Inve
sting
Cash fr
om Finan
cing
Increase
In Cash
Op Cash &
Cash Eq
ui
Cl Cash
& Cash
Equi
-20000
-10000
0
10000
20000
30000
40000
CASH FLOW STATEMENT OF 2011-12 ANALYSIS OF RELIANCE AND TATA STEEL
RILTS
AMT
IN C
RORE
S
The above diagram compares the Cash flow statements of Reliance Group of
Industries ltd and Tata steel industries ltd during 2011-12. Comparing their profit,
Cash and cash equivalent held at the year end and the Net cash from/used in different
activities.
The above diagram shows that Reliance Industries has earned higher level of
profits then Tata Steel Industries. Cash from Operating activities of Reliance
Industries is also more compared to Tata Steel Industries. But Reliance Industries and
Tata Steel has maintained a same level of Investments during the year. Reliance has
even paid off a higher rate of debts than Tata Steel. Reliance has maintained a very
higher level of cash balance than Tata Steel.
Vivek College Of Commerce Page 32 of 36
CASH FLOW STATEMENT ANALYSIS
Net Pro
fit Befo
re Ta
x
Cash Fr
om Opera
ting
Cash fr
om Inve
sting
Cash fr
om Finan
cing
Increase
In Cash
Op Cash &
Cash Eq
ui
Cl Cash
& Cash
Equi
-2000
-1000
0
1000
2000
3000
4000
5000
6000
7000
8000
CASH FLOW STATEMENT OF 2007-08 ANALYSIS OF INFOSYS AND WIPRO
INFOSYSWIPRO
AMT
IN C
RORE
S
The above diagram compares the Cash flow statements of Infosys ltd and
Wipro ltd during 2007-08. Comparing their profit, Cash and cash equivalent held at
the year end and the Net cash from/used in different activities.
The above diagram shows that Infosys ltd has earned higher level of profits
then Wipro ltd. Cash from Operating activities of Infosys ltd is also more compared to
Wipro ltd. Infosys ltd had less investments compared to Wipro during the year.
Infosys ltd has even paid off some of its debts where as Wipro ltd has raised a higher
rate of funds. Infosys ltd has maintained a very higher level of cash balance than
Wipro ltd.
Vivek College Of Commerce Page 33 of 36
CASH FLOW STATEMENT ANALYSIS
Net Pro
fit Befo
re Ta
x
Cash Fr
om Opera
ting
Cash fr
om Inve
sting
Cash fr
om Finan
cing
Increase
In Cash
Op Cash &
Cash Eq
ui
Cl Cash
& Cash
Equi
-5000
0
5000
10000
15000
20000
CASH FLOW STATEMENT OF 2011-12 ANALYSIS OF INFOSYS AND WIPRO
INFOSYSWIPRO
AMT
IN C
RORE
S
The above diagram compares the Cash flow statements of Infosys ltd and
Wipro ltd during 2011-12. Comparing their profit, Cash and cash equivalent held at
the year end and the Net cash from/used in different activities.
The above diagram shows that Infosys ltd has earned higher level of profits
then Wipro ltd. Cash from Operating activities of Infosys ltd is also more compared to
Wipro ltd. Infosys ltd had earned higher profits compared to Wipro ltd through
investments. Infosys ltd has even paid off a higher rate of debts than Wipro ltd.
Infosys ltd has maintained a very higher level of cash balance than Wipro ltd.
Vivek College Of Commerce Page 34 of 36
CASH FLOW STATEMENT ANALYSIS
CONCLUSION
A cash flow statement is one of the most important financial statements for a
project or business. The statement can be as simple as a one page analysis or may
involve several schedules that feed information into a central statement.
A cash flow statement is a listing of the flows of cash into and out of the
business or project. Think of it as your checking account at the bank. Deposits are the
cash inflow and withdrawals (checks) are the cash outflows. The balance in your
checking account is your net cash flow at a specific point in time.
The above analysis shows that there has been equal level of increase of profit
earning for Reliance and Tata Steel even after four years. Reliance has very much
improved its cash holdings after four years compared to which Tata Steel has
increased to a little percentage.
Comparing Infosys and Wipro’s four years growth both the companies have
maintained equal level of growth and cash flow.
This shows that cash flow statement is one of the important statement for
analyzing a company’s cash flow.
Vivek College Of Commerce Page 35 of 36
CASH FLOW STATEMENT ANALYSIS
BIBLOGRAPHY
BOOKS
MANAGEMENT ACCOUNTING
By Bhattacharyya Debarshi
FUNDAMENTAL ACCOUNTING
By D. K. Flynn, Carolina Koornhof, David Flynn
WEBSITES
http://www.investopedia.com/
https://www.zionsbank.com/
http://shodhganga.inflibnet.ac.in/
http://www.accountingcoach.com/
http://www.cashflowspy.com/
http://bizfinance.about.com/
Vivek College Of Commerce Page 36 of 36
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