 Dear students, in the last session, we were doing a revision of cash flow statement. We have already done cash flow statement. Those who are seeing the video for the first time, I will request you to see the earlier videos, where in cash flow statement has been dealt with in detail. In the last session, we had again done a bit of revision on cash flow and started solving a case on crompton creeps. Let us continue with the case. But before that, a brief recap, so what do you understand by cash flow statement? What does that statement give you? This is a statement, which shows the flows of cash categorized into operating, investing and financing flows. Operating flows represent day to day business activities of the concern. Investing are the flows related to fixed assets, investments or receiving of interest dividends. Financing flows are the flows related to raising of funds by an entity, so they represent issue of shares, issue of bonds, taking loan, repaying loan, paying dividend and so on. So cash flow statement gives all flows of cash categorized into investing, operating investing and financing. With this brief background, let us look at the case carefully. We have done it half way through in the last session, so I would continue from there. But those who are new, who are seeing it for the first time, please have a look at the case first. So initially, we were given the balance sheet of crompton creeps for two years. Then some extra information from PNL account, please read the problem carefully. You can take a print out of the problem from the web course, from the website and then solve it along with me. So here two years data is available and some extract from PNL is also available. Now how to start solving it? Can you think over how to start solving it? We look at the difference. So we calculate the difference between the two years figures, because usually the difference represents flows, particularly for the balance sheet items. Say for example, unsecured loan is 8, it has become 0. That means the loan to the tune of 8 crore has been repaid during the year. So that should be marked as a flow. So we will calculate the difference. What is the step number 2? In step number 2, we will mark the difference as O, I or F. So we categorize it into operating, investing and financing. We also mark it as inflow or outflow. In the last session, we had done it in detail. So let us go to that marking. Please see it carefully. So we started with share capital. It was anyway 0, so it was marked as xx. Payment and surplus was marked as O, because it represents the profits and it is inflow. Secured loans minus 8, so marked as F out, unsecured loans marked as F out, out means outflow. So because that repayment of loan of 3 is an outflow for the company, so marked as F out, gross block, I in, because you can see there is a sale of assets. So cash must have come in. So it is marked as I in, depreciation was marked as O plus, capital work in progress marked as I out. Now I will not repeat all the markings. Please see earlier video wherein we have discussed why these mark items were marked in a particular way. If you look at P and L items, most of the items are marked as xx. Now why they are marked as xx? Because they do not actually get reflected in cash flow statement. I am not saying that they are not flows. For example, when the sales turnover happened, company would have received cash or when the manufacturing expenses are paid, company would have paid cash. But under operating items, we directly take profit. We do not take each item individually. That is why for convenience they have been marked as xx. So keep in mind for operating items, we follow an indirect method. One more thing for this P and L items, the difference is not important. The current year figure is important. Now let us go to the next stage now with having marked all the items into OIF and now we go for preparation of cash flow statement. This is the format for cash flow statement. It starts with operating activities. The first item is profit before tax. Then adjust for non-cash items, adjust for non-operating items, adjust for working capital items. The total gives you the total cash from operating activities. Up till this we had done in the last some. Now to calculate PBT, we are not given directly the amount of PBT. So we had to make a working note. So I have a look at working note. For calculation of PBT, we started with increase in reserves. Then add tax, add dividend gives us PBT. So PBT was 643. Then we adjusted for non-cash item that is depreciation which is 5. Then we added, we went to non-operating items, we have only one non-operating item that is interest received and it is marked as minus 28. Then adjust for working capital items. So each of the current assets and liabilities should be marked, inventories it is minus 443, sundry debtors minus 225, loans and advances is plus 2151. Why it is a plus figure? You will realize that inventories have increase. So increase in inventories is a outflow for the concern. It has a negative effect on outflow. I do not mean that actually when the inventory increases the cash goes down. These are the year end figures but during the year because the inventories have increased they have led to negative impact on operating flows. So it is marked as minus 43. I will specify it for more clarity. So we have increase in inventories which is minus 43, then increase in sundry debtors which is minus 225. But when it comes to loans and advances you will realize that there is a decrease in loans and advance. So it is plus 2151. I am going little slow because many times in operating flows there is a confusion. Investing and financing you will find it very much straight forward. Next is current liabilities. If you go to balance sheet you will realize that current liabilities have actually gone up. So increase in current liabilities represents also increase in cash. Now why is it so? Increase in current liabilities. Why does it represent increase in cash? The fact that there are current liabilities means we have paid lesser cash. So an increase in current liability means the availability of the cash at the end of the year will increase. That is why it is a plus item. In case of provisions you will realize that there is a decrease in provisions. So it is very similar to current liability. A decrease in provision will improve the cash availability. So the increase in provision will improve the availability. In this case the provisions have gone down. So company has paid more money. So it is minus 251. Now using all these information we have got the total of cash from operating activities. It is clear to all. Please solve it with me so that the things become more apparent to you. Now what is the next heading after cash from operating activities? The next heading represents cash from investing activities. Now we have already marked in the balance sheet what some items as I. So have a look at balance sheet. Look at which items are I items. You will see that mostly the asset items are marked as I. So here you have a gross block which is marked as I. Should we take the current year's figure or the difference? That is 1366 should we take or 259 we should take. You should not take this year's figure for all balance sheet items. The difference is important. So we will take 239. Let us take each item. So gross block is 239. You will find that the gross block has gone down or there is a sale of fixed asset. Now this sale of fixed assets is it a inflow or outflow? This is an inflow. So I marked it as 2 plus 239. Now next item marked as I is capital working progress. You can see the capital working progress has increased from 48 to 58. So there is a difference of actually it should be 10. There is a rounding error I have marked it as 10 now. So there is an increase in capital working progress 10. Should it be plus or minus? It is a negative item because any increase as you know means the cash has been paid out. So it is a negative item. Next item which is of I category is investments. You can see there is a increase in investments. Increase in investment is to the tune of 271 minus 271 it is represents an outflow. Any other I item is there. You can see I items in the balance sheet are over but down below there is an item interest received. So you have 28, 21, difference 7 we have marked it as IO. So it is an I item. How much I should take here? Should I take 28 or 7? I should basically take this year's figure that is 28 and the interest is received. So it is an inflow. So I will mark it as interest received and inflow 28 it is a plus item. So go back to PNL and balance sheet. Now is any I item remaining? Have a look at all the items. You will realize that all items are over. So we can make a sum now of cash from investing activities. So how much amount you are getting now? Try to do it with me. So it is minus 14. Are you with me? You will see that in case of investing activities we follow a direct method. So it is very easy to understand that the fixed assets have been sold. We have received money. So we have marked it as 239. Working capital has increased, investment has increased, we have paid money. So it is minus 10, minus 239. Interest is received. So company has received money so it is plus 28. So actually investing and financing items very easy to do. Operating there was a problem because we followed indirect method. We started with tax, made some adjustments. So keep this in mind. That operating must be done by indirect method. For investing and financing it is very simple. You can directly mark the items under those categories. Now the third category. So what is the third category? Third category is cash from financing activities. Again go to PNL and balance sheet. Have a look at all the items. See which items were marked as F. You will see that from liabilities we have two items secured and unsecured loan 8 and 3. The loans were repaid. So they represent an outflow minus 8 minus 3 because it represents outflow. Is there any other item marked as F throughout? Just see it carefully. You will realize that second last item, interim equity dividend was marked as F. So the dividend has been paid. So basically it is an outflow. Shall I take 90, 141 or 51? I will only take 90 the current year's figure. So interim equity dividend I will add paid for more clarity. And this is also minus 90, it is not plus 90. So this is the total of cash from financing activities. So you can see we have taken three activities operating, investing and financing. Have we left any item? Have a look at PNL and balance sheet systematically. I think one of the items is left out. Next I would like you to tell me which item is left out. Look at everything carefully. You will observe if you look at the PNL and balance sheet you will realize that all items in balance sheet have only one effect. They were marked as OFI and so on. Just check whether everything has been accounted. So we have taken loans. We have also taken gross block, depreciation, capital WIP, investment, inventories, debtors, cash and bank we have not taken because that is to be taken subsequently. Then loans and advances, current liabilities, provisions, mind well every item had only one effect. PNL most of the items were XX but the few items which were there have two effects. So interest received was taken as IO. Since interest is received it is an investing in flow but it was reduced from PBT. Interim equity dividend it is a financing outflow but it is added for calculation of PBT. Tax paid is a unique item. It is OO. So it is added for calculating PBT and it should be also shown specifically as reduced for the amount of tax which is paid. So that aspect we have left out we have yet to discuss. So current year's tax of 172 you can see once we added it I have wrongly taken 142 you can see it is 172 actually. You can look at the PNL the amounts are 172 233. So 233 is for last year we should take 172 of this year. So where will you show this 172 in the cash flow statement? It was marked as OO because it is an operating item once it is added to calculate PBT it is deducted after all operating flows are calculated. That is something we have not yet done. So we need to do it I will insert a few columns few rows I am sorry those of you are doing in pen and paper you cannot insert it really. So we need two more lines we have already calculated cash flow from operating activities but it is not correct calculation is in a sense that this is before considering the tax. So I will just qualify it cash flow from operating activities but before tax. Now from this I need to deduct tax paid. The tax paid is 172 and after that I get the final cash flow from operating activities. So it is not 459 it is 459 minus 172. So you will get 287 as the final cash flow from operating activities. So we have started with operating activities we have gone by indirect method. So we started with PBT then made all the three adjustments reduce the tax. So we got 287. Next where investing activities the sum is minus 14 then we went to financing activities the sum comes to minus 201. Now we have all the three activities already recorded. So let us take the sum the total amount of the activities. So we have three flows which if you sum up you will get 172. So this is the total cash generated. Now how do we cross check whether it is correct? Go back to cash and cash equivalent which was categorized as C item. You will see that we have opening cash of 151 and closing cash of 321. So there is a increase of 170. This increase is basically being explained by making a cash flow statement. So we add opening and closing cash equivalent and show that all differences have been properly explained. So now to this cash generated you add the opening cash and cash equivalent. This is cash and cash equivalent as on the big as at the beginning of the year. So as on 142011 we basically had 151 in the beginning and at the end we should come to cash and cash equivalent as on 31 March 2012. So you will realize that we are getting the difference as required. There is a difference of 1 or 2 rupees that is basically because of rounding error but otherwise 172 plus 151 we will get the closing cash equivalent as 321. Is it clear to all? Any doubts? So we will go to the next case now. Once again I will advise you to solve it with me that will make the things easier for you. Now this is a problem of Dr. Reddy's laboratories. Now this is the second case for Dr. Reddy's laboratories comparatively it is a very easy case than the one which we did just now on Crompton Greaves. Those of you had some doubts I hope they will find this problem easier. Please have a look at the case systematically. We are given 2 years data for March 10 and March 11 from their PNL and also from their balance sheet. Of course from balance sheet the whole balance sheet is available PNL only some extract is available. Now how to solve this problem? We are asked to prepare a cash flow statement. The first step is we need to find the difference. I hope all of you remember in the last some we have done it. So first is try to find the difference between the 2. I have done it already. What is step number 2? Mark each of the item as O, I or F and also as in or out. In out because it can be either inflow or it can be or outflow. So let us start with the first item that is share capital. Should it come as inflow or outflow? Should it be marked as O, I, F? Actually it is xx because we are going to look at equity and preference share capital separately. So we need not consider total share capital. But we will look at equity share capital. It will fall in which category amongst O, I, F? It will be recorded as F it is a financing item. You can see the total capital has increased from 84 to 85. So increase of 1 it is a financing item. So it is F is it in or out it is an inflow. Company will receive money they will issue shares they will receive money. First item total share capital also you can mark it as F and in but do not mark both the items. Since we are going to mark equity share capital we have not marked total share capital. Next is reserves and surplus in which category will it fall O, I, F? It is O because reserves represents profits. So the fact that the reserves have increased means the profits are earned. So I will mark it as O. In general I can mark it as inflow basically I will use it for calculating PBT. Secured loans you can see there is no change. So we will just ignore it mark it as xx. If there was a change it would have been which category? It would have been F. Secured loans you can see have gone up from 562 to 1444. So there is an increase of unsecured loan we will mark it as F and it is in. Company has taken new loans. So it is F in the total ignore it xx gross block. Now we go to applications of funds we have already considered all sources of funds. Now let us go to applications of funds the first item is gross block means fixed assets at cost. So it should come in which category O, I, F? It should be I it represents an investing item you can see the gross block has increased from 24, 262, 3025. So is it an inflow or outflow? This in the gross block happens because we have paid cash to buy new furniture or machinery or plant and equipment. So it is an outflow. Next is accumulated depreciation it is an O item we would mark it as plus because it is added for calculating operating flows. Plant block just ignore it investments it is I as the name suggests these are investments investments have gone down. So it is an inflow or outflow it is an inflow company has received money by sale of investments. Inventories it is O item inventories have increased. So they will have a negative impact. So we are marking it as minus since operating items are not in the direct method you may not call them in out. If you want you can call them in out but I find it convenient if we mark them as plus or minus. So plus represents addition to the cash flow minus represents reduction of the cash flow. So it is marked as plus or minus inventory since inventory has gone up it is minus sundry data's same way they have gone up. So it is again O minus cash and bank balance that has also gone up. So is it O minus? No just mark it as C it is not a flow it represents the balance of cash. So current assets X X we have considered individual items loans and advances where should it come loans and advances again it is O you can see the loans and advances have gone up. So it is very similar to data's so it is operating item and actually it has gone up. So it has a negative impact on cash so O minus fixed deposits you can see carefully it is given in the problem that this fixed deposits are cash equivalent. So what to do in such cases since they are cash equivalent you should mark them as C right. If cash equivalent word would not have been there what will we do if they just give fixed deposits what will you do normally fixed deposits can be treated as an investment. So you can mark it as I if it is a short term fixed deposit you can treat it as a current asset in this case it is given fixed deposit cash equivalent. So we treat it as cash equivalent and mark it as C is it clear. Now total current assets loans and advances X X we need not consider it current liabilities how will we consider again it is a O item. Now the liabilities have increased so what will be the impact on cash it is plus you can see what happens is the liability has increased means company has paid a lesser amount that means the availability of cash will go up. So it is O plus it is exactly opposite of a current asset. So something like inventories we put O minus now we are putting O plus provisions you can see provisions have gone down. So it is O minus because decrease in the provision means more cash has been paid. So it has become O minus total current liabilities and provisions I have marked it as X X because that is a total net current assets yes again X X because it is just a general item. Now miscellaneous expenses a very peculiar item where will you take it you can see miscellaneous expenses have gone down from 340 745 to 570 this is a very tricky item where should I mark it is it O I or F it should be marked as O. So what has happened is these were some losses which were not written off earlier so in last year the balance was 745 now it has been written off and it has come down to 570. So it is just like provision for depreciation as we are writing off our fixed assets we are writing off these as these losses which are called as miscellaneous expenses. Now the balance has gone down so similar to depreciation I will add it for calculation of cash from operations. I do not mean that I have received cash since we follow indirect method in O it needs to be added to PBT because it has been provided for when the PBT was calculated. So it is O plus now they have given contingent liabilities here you can see contingent liabilities have gone down so it should be marked as nothing it is xx it is just off balance sheet item it is not a part of any cash inflow or outflow it is only a disclosure made. So mark it as xx book value again an extra disclosure we do not need it right now so mark it as xx sales turnover xx ignore it because we go by indirect method for operating flows so ignore sales turnover dividend income shall I mark it xx again no. Because dividend income is a income on investing activities or the investment made it should be marked as I it will also have an impact on O because it comes in P and L so please mark it as I O is it an inflow or outflow since it is an income it is an inflow. Raw material consumed xx it is operating item I do not write operating items individually so xx power and fuel again xx employee cost xx interest interest is not xx this interest represents interest paid. So it is a financing item F and you also mark it as O all P and L items will have 2 effects so for convenience we are marking them as I O or F O dividend income was marked as I O here this is a interest paid on loans taken so it is F also marked as O it is an outflow selling and admin xx miscellaneous expenses xx keep in mind these miscellaneous expenses are from P and L account whereas in the balance sheet miscellaneous expenses which we had we have already marked it. Now look at all the markings once again I hope they are all clear to you if you have marked the items correctly then rest of the work is very simple now just like in the last problem for crompton grieves we can go for preparation of cash flow statement I am copying the format for convenience I request you once again to do along with me now this is not for crompton grieves this is a problem of Dr. Reddy's so let us change the company's name Dr. Reddy's laboratories we are making cash flow statement for year ended March 2011 here the first working note which we had to make was for calculation of PBT same thing is true for this problem also from the reserves you can see that there is a increase of 105 then dividend paid and taxes paid was not given in this is not given in this problem you can look at the P and L account there is no item like dividend or interest paid. So, we will ignore those items that is why in this case though we have a working note we do not need that way the working note the PBT is same as increase in reserves that is 105 next is depreciation look at the applications we have gross block accumulated depreciation you can see is increase by 2 to 4 so that much will be added here keep in mind here in this problem we have got one more non-cash item in the last case of crompton grieves there was only one non-cash item depreciation in this case we have also have miscellaneous expenses return off that also needs to be recorded here miscellaneous expenditure return off you can see there was a last item in assets how much amount we should take 570 or 175 we should take the difference because what is written off in the current year needs to be added back to calculate the cash from operating activities. So, we will take 175 then next is non-operating items in the P and L we have got an item called dividend income 137 that is a non-operating item. So, this represents the income on investment so it should come as an investing flow apart from that we have also reduced it from operating flows so we should record it as minus 137 since this income is already added for calculating P and L calculating the profit now we are reducing so it is minus 137 now let us look at each of the working capital items you can see here inventories they were going up by 166 so it is O minus so inventory is 166 daters is 710 I will try to copy both the items together so it is minus 166 so minus 166 please try to do it with me minus 210 now the next item from P and L sorry from working capital we have taken inventory we have taken daters next item is loans and advances it is 343 I will paste value only in this case it is minus because the loans and advances have not decreased but it has increased correct so if you look at the balance sheet once again we will realize that inventory daters and loans all of them had increased so our marking was O minus same thing has been recorded in cash flow statement we will not record fixed deposit because it is a it is a C item now go to current liabilities which is 21 and provisions is 81 so plus 21 and minus sorry 82 plus 21 and minus 82 there is a increase in current liabilities which means the cash availability also increases so it is plus 21 there is a decrease in provision so it is minus 82 so all the working capital items are over now we can go back and check if any of the O items has not been dealt with just look at it carefully so we start with reserves then accumulated depreciation inventories sundry daters loans and advances current liabilities provisions miscellaneous expenses all are accounted every time you also solve a case try to cross check you can put a tick mark there then there was one item IO that is dividend income that has also been accounted so one more item interest I think this we have not accounted so this represents interest paid it is 10 16 minus 6 so how much shall we record we should only record the current year figure which is 10 and that is f o so it is a financing outflow we will add it for calculating operating activities so we had here non operating items please insert a column there in the last problem we are interest received now we have got interest paid we should not take the difference we will go back again so for the additional item we are not bothered about 6 what we are interested is 10 same way for dividend income also we should take 117 just check if you have done it correctly so it is not 137 it is 117 and here we should take 10 is it correct for dividend income we said minus 117 but for interest paid we said plus 10 so we have recorded all items nothing about tax was given so tax paid we have recorded it as 0 if you take the sum of all the items you can see that minus 883 is a cash from operating activities now let us go to investing and financing activities so look at the balance sheet and P and L carefully and concentrate on the items which were marked as I so one of the items you can see is gross block difference is 599 in this case it is not the sale but it is purchase of fixed assets 599 should it be minus or plus it should be minus because it is a decrease of cash then we also have we do not have any work in progress here then we have investments which is I in 191 there is a sale of investment there is no interest received but there is dividend income of 117 now dividend income is an inflow so it is plus 117 here so you will get negative 291 as a total of investing activities the last category is financing activity very simple look at F items so you will see that there is equity capital difference is 1 this is a issue of shares so it is plus then secured loans there was no difference but unsecured loans increase of 882 so it is also representing an inflow there is no entry for dividend given just check there is one item for interest paid of 10 should it be plus 10 or minus 10 should be minus 10 because it is an outflow so we get total of 873 now the structure is ready so 883 291 and 873 cash generated is minus 301 look at the cash and cash equivalents we have two items here cash and bank balance is 6648 and we also have FD which was 320 now it has become 0 so cash equivalent in the beginning was 48 plus 320 and cash equivalent in the end represents only cash and bank balance which is 66 so 301 368 we get 671 is due to rounding error but otherwise all the items have been correctly dealt with look at the problem once again any queries you can look at the earlier video where more details have been discussed overall today we have to we have tried to cover the case on crompton grieves and we also started and completed case on doctor reddy's laboratories I hope with this now the concept of cash flow will become much more clear to you so we stop here thank you so much.