Cash Flow Statement as the name suggests is the summary of cash transactions of a company during the financial year. Cash Flow Statement, popularly known as CFS is a very important document in the hands of investors who want to know the changes in cash balances of the company year after year. The Profit & Loss Statement does not give a complete picture of financial wellbeing of a company because profits are not equivalent to cash. Profits are calculated using accrual principle where as for the investor eventually what matters is the liquidity position of the business.
In order to comprehend what a CFS tries to present to its readers let us take a quick look at Tata Motors CFS for financial year 2014-15 and 2013-14.
|Amounts (Rs. Crore)|
|Particulars||Mar 2015||Mar 2014|
|Profit Before Tax||(47,390)||3,345|
|Changes In working Capital||(15,171)||30,823|
|Cash Flow after changes in Working Capital||(24,851)||25,195|
|Cash Flow from Operating Activities||(25,627)||24,635|
|Cash Flow from Investing Activities||6,017||25,529|
|Cash Flow from Financing Activities||26,315||(50,338)|
|Net Cash Inflow / Outflow||6,706||(174)|
|Opening Cash & Cash Equivalents||1,987||2,056|
|Effect of Foreign Exchange Fluctuations||(73)||106|
|Closing Cash & Cash Equivalent||8,620||1,987|
Source: Tata Motors Annual Reports.
As highlighted using bold fonts the main components of any CFS are the three sources of cash inflows and outflows –
Cash Flow from Operating Activities, Cash Flow from Investing Activities and Cash Flows from Financing activities. Let us discuss these in detail.
Cash Flow from Operating Activities:
Operating activities are activities which the company performs to carry out its usual business. Under this section CFS calculates cash receipts from sales of goods and services and cash payments to suppliers, employees and other expenses. Changes in working capital i.e. Current Assets less Current Liabilities is also considered as a source of operating cash.
Cash Flow from Investing Activities:
For long-term growth of its business a company needs to make several investments in fixed assets. This section of CFS involves (a) purchase and sale of investments and tangible assets and (b) Interest or dividends received on investments. The net change in cash under this category will tell investors whether the company has gained cash or lost cash during the financial year on account of investments.
Cash Flows from Financing Activities:
A company needs funds to make investments as well as to run normal operations of the business. This section of CFS deals with cash flows from raising and repaying funds. It involves (a) Long term borrowings and repayments and (b) Payment of interest and dividend to suppliers of funds. A negative cash flow implies the company is repaying its past borrowings at a rate faster than the rate of borrowing new loans.
Uses of Cash Flow Statement:
- CFS shows entity’s ability to generate future cash flows.
- CFS also shows entity’s ability to pay dividends and meet obligations.
- It reveals the reasons for the difference between net income and net cash flows for the period.
- It reports changes in cash due to Operating, Investing and Financing activities.
- It helps the managers in business planning, financial management and control.
The primary purpose of the statement of cash flows is to provide information about an entity’s cash receipts and cash payments during a period. A secondary objective is to provide information about the company’s operating, investing and financing activities.
Thus the statement of cash flows reports cash receipts, cash payments, and net change in cash. It therefore reconciles the beginning and ending cash balances. As someone who is planning to invest your money in a company, CFS is the first document you must look at before taking a leap.
About the author: Prof. Anil Kshatriya works as Assistant Professor in the area of Finance at Institute of Management Technology, Nagpur. His teaching and research interests include Managerial Accounting, Management Control Systems and Strategic Management. Prof. Kshatriya is a professional accountant (CMA India) having associate memberships of Institute of Cost Accountant of India (ICAI) and Chartered Institute of Management Accountants (CIMA UK). His industry experience includes working as cost accountant with the Auto Sector at Mahindra Group. Prof. Kshatriya teaches courses in Accounting and Strategy at IMT.