I discussed in my previous content the importance of the cash flow statement and the requirement of the cash flow statement. As I told you that it has become nowhere, since 1997 after the introduction of an accounting standard, which was developed by the Institute of Chartered Accountants. So after the safe introduction of this standard by the International Accounting standard committee by 2002. First, in 1994, the Institute of Chartered Accountants accepted this change, under accounting standard 3 and since 1997, this statement has become important. This statement has become mandatory and now apart from the income statement and balance sheet. So today, our topic of discussion is Cash Flow Statement.
Cash Flow Statement
The cash flow statement also has to be prepared by the companies. Especially by the joint-stock companies public limited companies and has to be submitted to the different stakeholders. So as I was talking to you in the previous content. How the change in the new cash flow statement and the as compared to the old cash flow statement. The cash flow statement has to be prepared under three broad say headings are the activities that are operating activities. The investing activities and then the financing activities. So that we are easily able to make out how much cash is flowing in from operations or operating activities? How much cash is coming in from investing activities?
How much cash is coming in from the financing activities? So that the companies, who are the manufacturing organizations. If they are incurring a loss under the operations and having a profit from investing and financing activities they are exposed. They can mean they are not able to hide this fact that their operations are poor but from the other sources. Many people may be investors lenders or suppliers. So now under this process, when this new statement we are going to prepare and learn how to prepare? We will find it out that what have that activity is called as the operating activities what are the activities. We should be very clear before learning it because of tomorrow. If you have to prepare the cash flow statement yourself under as3. You then should be glared at what is the s3? What is the requirement of an s3?
What are the activities called as operating activities under this standard The operating activities are these activities, which we have to consider the cash coming in from these activities as the cash flow from the operations. To discuss this side, it is talking about the inflows. So this is the inflows of the cash and these are the activities or heads on account of which the cash is flowing out. So say for example cash inflow is on account of the cash receives from the sale of goods and rendering of services. If it is a manufacturing organization then the sale of course. It is a service rendering organization then any cash is flowing in on the sale of services. For-example some companies giving the IT services now.
Whatever then is not manufacturing any product. So whatever the services they are giving to us some say to their clients the cash flowing in from those is considered as the cash from operations. This is the first activity, then cash receipts from the royalties fees Commission. The other revenues any kind of say patrons company. It means some company that has better manufacturing production process. Somebody else is using that. For-example, of drug manufacturing companies, now drug manufacturing companies supply. If they have some good say patents of the drugs and if they have given those drugs rented them out and other companies are manufacturing the drugs by using those patents then in that case that income for the supply or the dr.
Reddy’s lab will be considered as if income from operations. Similarly caches shields from often insurance enterprise for premiums and claims annuities and other policy benefits. It is the insurance company then the premium incomes claims or any kind of the other incomes they are receiving. Which is basically insurance type of the income and largely their source of income is the premium and then the some annuities say for example some government policies. They have sold and annually their normal is paying then the big amount of the premium say. For-example from the railways if LIC receives the largest chunk of premium from the railways in the form of the annuities that all income is called as the income from operations for the insurance company similarly cash refunds of income tax unless they can be specifically identified with functioning financing and the investing activities because in India there is a system of the advanced tax payment quarterly tax .
Famers companies do means considering their sales labor or expected level of the sales every quarter the companies pay tax in advance companies do not pay tax at the end of the air they mega payment of the Iowans tax to the government so they keep on paying the tax on the basis of the estimated sales and at the end of the year they calculate.
Total sale And Total profit
How much total sales are there how much total profit is there how much tax was due to be paid by that company to the government and for example under advanced tracks some say under advanced text process.
If more text has been paid then what is actually due at the end of the year in that case that advanced tax has means that extra tax surpassed explained by this company has to be refunded back by the income tax department to the company so if it is relating to the manufacturing business which the company is involved in – then that refund of the tax is also the considered as income from operations gas receipts relating to the futures forwards options and swap contracts.
When these are held for dealing or trading purposes if any cash is received on account of these these are the derivative products these are futures forwards options and swaps these are the derivative products and any cash received on account of these derivative products.
we will have to consider it say say for example now the company is entering into to say protect its share price in the market or if the company has some investment and means they have that kind of the CAC forward agreements or some future agreements or options agreement say for example there is a interest rate swaps now companies say say boring want to borrow at the fixed rate of interest.
Fluctuating rate And Company Loan
The bank is ready to give the loan to the company or the fluctuating rate of interest or the variable rate of interest so what the company has to do company has to us to to borrow from the banker the variable rate of interest and to swap the interest with the other company who is entrusted to take the loan from the bank er the variable rate of interest for the bank is ready to give them to the at the fixed rate of interest so if there is any kind of this because of that interest rate swaps.
If any income is there that income will be derivatives income and that will be considered as but that swap with that borrowing that load and the swap should have been for that trading purpose not for the investing or financing purpose or for the speculations in that case if it is for the trading purpose then there is no issue it can be considered as the cash from operations and here are the sources of or may be the avenues of the outflow.
Cash Payments Through Suppliers
They are in terms of cash payments through the suppliers for goods and services when it’s a manufacturing organization they are buying the raw material they are maybe getting some services so maybe it’s a service rendering organization for example it’s AIT service rendering organization and this company before giving the services towards their their final clients they also get some software’s developed from their say suppliers so in that case if they are getting any service or or material or any purchases they are making that is also the operating out flow then cash payments.
On behalf of the employees when salaries are paid to employees wages are paid to workers any bonus any kind of the other benefits say for example if the company’s employees are insured and the company is making the payment of their insurance premium to the insurance company maybe on the behalf of their employees for the company’s employees companies getting them insured then that payment is also considered as the operating outflow cash payments of income taxes unless they can be specifically identified with the finance handling and investing activities all kind of the income tax payments.
Taxes paid And their derivatives
If they are only on the profit from the operations any profit from the operations and any taxes paid on account of that that has to be considered as the operating cash flow and that has can be taken into account and similarly here as inflow is there on account of derivatives here outflow can be there for their derivatives so any account any any any outflow of the interest on account of the derivatives.
If it is flowing out any payment of the interest of the government company has to make on account of any derivative products your company has to pay some cash and cash outflow takes place and those derivatives which are used for the trading purpose then that outflow is also considered as a say cash outflow on account of the operating activities then we talk about the cash flow from investing activities here again we have to look at the same thing investing what are the investments basically.