 Dear students, in our earlier sessions, we have discussed cash flow statement. We have also seen some of the cases in cash flow statement. Today, I propose to do a few more cases, so that the concepts are more clear to you. Before that, let us do a bit of revision. Now, what do you understand by cash flow statement? Just try to remember, there are three important financial statements. One is a balance sheet, second is income statement, third is a cash flow statement. As the name tells you, cash flow statement is a statement which gives inflows and outflows of cash in a particular period. It just does not give inflow and outflow of cash, it also classifies the inflow and outflow into three categories. So, all the flows of cash are categorized and summarized under three categories and are presented for a period and such statement is known as cash flow statement. Now, what is the advantage of cash flow statement? When you want to understand a particular entity, activities of the entity, it becomes very important for us as users to know how much cash is generated and in what ways it has been spent. Such information is available from cash flow statement. Hence, cash flow statement is found very important for shareholders, investors, analysts. It is also useful for managers and for employees. Now, what do you mean by cash in cash flow statement? How is cash defined? So, cash here does not mean only notes or hard currency, it includes bank balances, it also includes cash equivalents. Now, what is cash equivalent? These are such investments which can be converted into cash in very, very short notice and there is insignificant risk of market fluctuations. So, if these two conditions are met, one it should be highly liquid, second there should not be any risk of price fluctuations. If these two conditions are met, then a particular short term investment will be categorized as cash equivalent. Can you give an example of cash equivalent? One easiest example could be short term FDs in bank. Suppose we keep FD for let us say 45 days, it is highly liquid, we can convert it even before 45 days, there would not be any risk of market fluctuation. So, this FD in bank is as good as bank balance, so it can be treated as cash equivalent. Can you think of any other example? Can gold be treated as cash equivalent? The answer is no, because though gold is highly liquid, the prices keep on fluctuating. So, items like gold or shares are not considered as cash equivalent. In the same way bonds cannot be treated as cash equivalent. Anyway, so when we talk about cash in cash flow statement, we include cash plus bank balances plus investments which are cash equivalents. So, we look at the flow of these three items. As we discussed just now cash flow statement just does not give inflows and outflows. It categorize them under the three types or three categories. So, what are these three categories? Do you remember? The three categories include number one operating activities. This is the prime category in which all day to day business transactions are recorded. The second category is investing activities. As the name suggests here we give the inflows and outflows which are of investing nature. So, they give the transactions related to fixed assets as well as investments. So, buying and selling of shares of other companies, buying and sharing of bonds, buying and selling of fixed assets, let us say land machinery that is all covered in investing activities. What is shown in financing activities? The third category financing is raising of money for the business. So, issue of shares, taking loan, returning or repaying loan, issuing bonds, returning bonds or redemption of bonds, paying of interest on bonds, paying of dividend on shares. All this is a financing activity. When we look at operating activities, these are the principal business activities of an entity or these are the two-day activities of an entity. But we do not show all activities. So, we will not show sale, purchase, buying of raw materials, payment of salaries. If you go on showing all these items, there will be duplication because they are already shown in income statement. So, income statement or P and L account gives us net result in the form of profit. Those profits are taken as a starting point for cash from operations and then necessary adjustments are made to get cash from operations, then cash from investing and financing we have already discussed. So, cash flow statement broadly has these three categories. The total will be the total cash generated during a particular period to which we add opening cash equivalent, we must get closing cash equivalent automatically. This is the overall structure of cash flow statement. I hope you have understood it when we discussed it earlier. In case you have not attended earlier sessions, I would advise you to go to the web course. All these details are available in the form of text documents, please read them. Today, we would like to look at a few more cases. Before that, let us also look at the formats. So, as we discussed the first item is cash generated from operating activities. These are shown in the indirect method, so please have a look at the format in which they are shown. So, we start with profit, then adjust for non-cash items, next we adjust for non-operating items. Here, we get funds from operations, then we adjust for working capital items like current assets and current liabilities. The total you get is cash generated from operations, then we deduct the income tax. What we get is cash flow from operating activities. The next heading is cash flow from investing activities. This is pretty straightforward, we know that buying and selling of fixed assets, investments is covered in investing activities. The third is cash flow from financing activities which cover issue of shares, interest paid, dividend paid. In investing activity, we also show interest and dividend received, just keep in mind. So, three categories we started with operating, then investing, then financing. The total of these three is considered as net increase or decrease of cash to which we adjust the cash equivalents at the beginning and then we get cash equivalent at the end. So, I hope now overall structure is clear in your mind. Now, let us look at a few real life cases. I would request you to take printouts of these problems, they are available in the web course and try to solve it along with me. That will make a better understanding for you. Let us have a look at the first case. This is about Crompton Greaves Ltd. You know one of the highly successful Indian companies. So, please read the case carefully, CG is a US dollar 2 billion engineering coglomerate with an impressive and diverse portfolio of products solutions. They enjoy a lot of reputation and they have manufacturing facilities today in 9 companies. Lot of details are available which you can read on your own. Then based on the information below, we are asked to make cash flow statement for year ended March 12. This is the balance sheet for 2 years, March 11 and 12. Please read the items carefully. You know the headings under assets, gross block, then we have capital work in progress, investments, total current assets, minus current liabilities we get net current assets, then we have total assets. Some more information from P&L is also available like sales turnover, net sales, operating expenses, material consume, interest, interim dividend, taxes. Of course, these details are not full P&L account. The balance sheet in full is available. Some of the important extract of P&L account is made available. Now, using this data, we are asked to make cash flow statement. Do you remember how do we make it? Just try to remember. I think some of you would have rightly guessed. We should start first with finding the difference. If there is a difference between March 11 and March 12 figures, it indicates that there is some change and that change is because of flow of cash. So, let us try to find the difference between the two items. Please do it with me. I am doing it slowly. So, we get zero difference in share capital, 411 in reserves and surplus, some minor difference in secured, unsecured loans and so on. So, as a starting point, we have tried to find the difference between all the items. Now, each of the different items, each of the item where there is a difference is likely to represent some flow of cash. What are the three categories? They are operating, investing and financing. Now, to make your way of solving it easy, it is better to mark each item under these three categories. As O, I or F, in case it is not from these categories, you can mention it. We will also see whether a particular difference represents inflow or outflow and try to mention it. So, let us make two columns. In first column, I have written O, I, F. O, I, F means it would not be all the three. It will be either operating or investing or financing. In next column, I have written in or out. So, we will try to mention in or out because inflow or outflow. So, we will try to mention whether it is inflow or outflow. As I have told you, please take printout of this sheet, keep it in front of you, start marking with me. That will really make it a better understanding for you. So, first item, anyway there is no change. So, we can ignore it. Reserves, they are moved up from 2162 to 2573. So, there is an increase in reserves of 411, we have found a difference. Is it an operating, investing or financing activity? I hope you all know that reserves come from profit. As such, it is an operating activity. So, I have tried to mark it as O. Is it an inflow or outflow? It is an inflow. Basically what happens in the reserves is these items are, in case of operating items, we do it by indirect method. So, it is not directly, does not mean that reserve means so much of cash has come in. But overall, it contributes to operating flows. So, we have marked it as an inflow. Subsequently, we will put it in the proper format. Right now, just let us just try to understand and mark it. So, I have tried to mark it as O and in. I hope it is clear to you. Now, next item is net worth. Net worth we need not put, because we have already separately considered reserves. So, I have put it as xx. So, any item which should not be taken, I am just marking it as xx. So, even share capital I have marked as xx. Secured loan, you can see in last year it was 8. Now, it has become 0. So, the loan has been repaid. So, minus 8, it will fall in which category? O, I or F? It is F. It is a financing item. Is it inflow or outflow? It is out, because the money has been repaid. The loan has been repaid. So, the loan which was of 8 crore has become 0 crore now. So, there is a outflow of 8 crore. So, I have put it as F and out. Next is unsecured loan. It has also gone down from 5 to 2. So, minus 3, it will come in which category? You are right. This is also F and out, because it is a repayment of unsecured loan. What about total liabilities? It is xx. That is the total. What is gross block? Now, we go to assets. The first item is gross block. You can see the gross block has gone down by 239. So, it will come in which category? O, I or F? You are right. It should be marked as I. It is an investing item. Is it in or out? This is in. So, keep in mind that the assets have been sold. So, the assets with the original cost of 239 have been sold. So, I am marking it as I and in. Next item is accumulated depreciation which has gone up from 743 to 748. So, it should be marked as the difference is 5. It should be taken as a flow or it is not a flow. Because this is a depreciation. So, what do you mean by depreciation? When the asset value is falling, it is provided in the form of depreciation and depreciation must be provided for all fixed assets. So, up to March 11, depreciation of 743 was provided. At March 12, depreciation of 748 is provided. So, there is an increase in accumulated depreciation of 5. The first question is, does it represent flow? Should it be marked as OIF? Now, this is slightly tricky. One can always argue that basically depreciation is a non-cash item. So, it should not come as a flow at all which is true, but at the same time it is true that in operating flows, we are not recording the flows directly. We are just calculating the cash received from operations. Since depreciation is a non-cash item, that needs to be calculated or taken into account for calculating cash from operations. So, we will mark it as O. There is no need to mark it as in or out, but basically I would like to mark it as plus. So, what does the plus represent? What plus means is, this needs to be added to profit. Why? Because it is a non-cash item. So, because the depreciation of 5 crore was provided, to that tune the cash was not paid. So, I am adding it to operating flows. We will discuss it in more detail when we make O. Right now, you mark it as O and mark it as plus. If you are highly confused with plus, you can even leave aside that. Next mark it as O. Next is net block. So, what it should be marked as OIF? It should be marked as XX, because net block is a non, is need not be taken net block is just gross block less depreciation. This is also known as written down value of fixed assets, but the difference need not be accounted. So, separately considered gross block as well as accumulated depreciation. Next is capital work in progress. What do you understand by capital WIP? These are the fixed assets under construction. So, land which is now land will be in fixed asset, but if you are constructing a building on a land, if you are constructing a new factory, all these will be coming as capital work in progress. So, shall it be marked as a flow and in what category? Most of you I think would have rightly guessed this should be marked as I. This is an investing item. Is it an inflow or outflow? This is an outflow, because I must have paid 11 crore, a company must have paid 11 crore, so it is an investing outflow. Next is investments. Investments you can see have gone up from 7482 to 1053, increase of 271. It should come in which category? It is obviously I and it is again out, because the cost of investment has gone up, so it represents an outflow. Investments is inventories or stock of goods in hand that has also increased by 44, so in which category it should come? This is a O item, because it is a day to day item, it is a operating item. Now, 44 should it be marked as inflow or outflow? Actually for operating items, you cannot directly say that there is inflow or outflow, but increase in the inventories indicates that the cash has been paid. So, it will have a negative impact on cash operating cash, that is why I have marked it as minus. You can see depreciation was marked plus, this has been marked as minus. We will discuss more in detail, we will discuss O, sundry debtors, again you can see the debtors have increased. This is very similar to inventories, again it is an O item, O minus cash and bank. You can see there is a increase of 170, it should come in which category? This is neither O nor I nor F, this is not a flow, this shows the balance of cash. So, I have just marked it as C, it is not to be categorized as a flow, after all flows are total, we will try to see if the difference comes to 170, so please mark it as C. Next item is loans and advances, you are not able to see full, I will just increase it. So, loans and advances, so it should come in which category, O, I or F is slightly tricky, some of you might have recognizes at F, but actually it is O. So, what happens is, the loans which were under liabilities, that is the secured loans, they are F, they are the source of financing, but this particular item is not a loan taken, this is the advance given by the company in the short term, keep in mind this is a part of current asset. So, it should be marked as O, it is just like inventories or debtors for us, it represents the advance or a loan given by the company in the short term. For example, company might have given some advance to employees, when they are on tour, that will come here as loans and advances. So, it is marked as O, should it be plus or minus, you can see in case of inventories and debtors what happened, their balance increased. So, company has paid cash to increase the inventory or company has got lesser cash from debtor, since debtor's balances have increased. In this case, the balance of loans and advances has gone down, so company has received cash for it, is it correct, so I have put it as plus, so this minus 51 or fall in the balance of loans and advances, will have a positive impact on the cash flow, so I have marked it as O plus, is it okay. Let us go to total current assets now, so what should it come as, ignore this, this is just the total, next is current liabilities, again an O item, should it be plus or minus, this is exactly opposite of inventories or debtors. You can see, increase in the inventory was marked as minus, so increase in current liability should be marked as minus or plus, it should not be marked as minus, it should be marked as plus. What happens is, current liability means let us say unpaid salary, so if the balance of unpaid salary increases, that means company has paid lesser cash for payment of salary, so it increases the cash flow of the company, that is why it is marked as O and plus. Next is provisions, provision balance you can see has gone down from 407 to 150, so the difference of minus 257, it should be marked under which category, again it is an O item, what do you mean by provisions, provisions are very similar to current liabilities, they also represent the amounts which are not yet paid, but there is some uncertainty about how much needs to be paid, so it is marked as, so it is called as a provision, but otherwise their treatment is same as current liabilities for us. Now the provision difference is minus 257, so it should be marked as what, it should be minus, so a fall in provision also means fall in cash, company has provided less, in other words it has paid more, so when they pay more the cash balance goes down, so I have marked it as O minus. Next item is total current liabilities, how would you treat it as, this is xx just a total net current assets, again xx total assets xx, we ignore these items because we have considered each item individually. Next is now our balance sheet items are over, please have a look at them once again, I hope the marking is very clear to you, now this we will transfer to cash flow statement, that time also you be attentive if you have any doubts, I hope they will get cleared at that time. So, I trust you have also marked along with me, if you are not solving it now, please take a print out of this problem and try to solve along with me, so that you can actually get into it and understand the funders. So this items are marked now in balance sheet, now let us go to other items which are mainly from piano, the first item is sales turnover, how should you mark it, is it O, I or F, sales turnover, is it an O item, shall I mark it as O, this is very tricky some of you would have really felt it is an O item, but keep in mind it is xx, it is true that sales turnover is a day to day item, but when it comes to preparation of cash flow statements, we are going to start with profits. So we will not record individual items from PNL account, that is why mark them as xx they should not be taken, they are just extra information available to us, we need not consider it for making of cash flow statement. So sales turnover is xx, xx is duty, again xx because we will give a separate treatment for income tax, but xx we need not include here, net sales xx, manufacturing expenses again xx, material consume xx, personnel expenses xx, selling expenses xx, interest xx no, interest is a item of different type, all these items manufacturing, material, personnel, selling, they were day to day items of operating nature, they were reflected in PNL account, and we take when we take profit we do not have to take these items again, so they were marked as xx, in case of interest it is slightly of different nature. So just think over what it will be, should I record it as OIF, now the first question is this interest, is it interest paid or received, what it could be? If we go up we will realize that company has very negligible amount of loans, so probably this interest represents interest received correct, I am making writing it very specifically for your benefit to avoid any confusion, so this interest represents interest received which has increased from 21 to 28, difference is 7, so it should be shown under which category, is it an investing flow or financing flow, basically interest received is a investing flow correct, when we make investment as a reward we receive interest, so we are going to categorize it as investing flow, but keep in mind that we have also to give its reflection in operations, because when we calculate profit we have already considered interest, but while making cash flow statement we are going to show it as an investing item, so we have to take it out from operating item and show it as an investing item, that is why I am marking it as IO, of course this marking are just for convenience, but these are to give you an hint that this item is to have two effects, one is in investing flows and also in operating flows, right now you need not mark it as inflow or outflow, but you will know that when interest is received, basically it is an inflow for us, I hope it is clear, so I have marked it as IO to make it easy, next is interim equity dividend, where should it go, interim equity dividend, is it a investing or financing item or it should be marked as XX, basically the dividend is paid to the shareholders of the company for, because they make give funds to the company, because they finance the company we give them dividend, so dividend is basically a financing outflow, but as far as cash flow statement is concerned we have to also consider it for calculating O, so I am marking it as FO and basically it is an outflow, actually the treatment for the final dividend is little more complicated, so I have made it simplified by calling it interim dividend, I hope everyone will understand it once we make the final calculation of cash flow statement, right now please mark it as F and O, because it is a financing item it will also have impact on operations and show it as an outflow, tax paid, tax paid again is basically an operating item, so shall I mark it as XX, I could have marked it as XX, because it is very similar to the items like material consumed or personal expenses etcetera, but only difference is accounting standards requires that a clear disclosure is made about taxes paid, so it will be treated twice in operating items, so I am just marking it as OO for convenience to make us remember that it is to be calculated or recorded at two times in operating items, so it is marked as OO basically it is an outflow, because when the tax is paid the cash will go out, so now look at the extra items which were marked, most of the items from P and L should not be considered in cash flow statement, so they are all marked as XX, however items like interest, dividend and taxes should be considered and they will have two effects, so I have marked it as IOF or OO, now with this basic calculations or basic recordings let us try to go for preparation of cash flow statement, is it ok, once again I request you to solve it along with me, because that will really give you easy way of doing it, so now this is the balance sheet, we have also marked every item into OOIF as well as inflow and outflow, now with this data we can make cash flow statement for crompton grids limited, so these are not the exact figures of crompton grids, but these are very close to real figures, this cash flow statement is for year ended 31st March 2012, keep in mind it is not as on a date, it is not like a balance sheet, it is like a P and L account, it is a statement for a period, so cash flow statement for year ended March 11, now in cash flow statements what items do we take, as I told please try to do it with me, please make two columns, when you are solving on pen and paper I would request you to make two columns with rupees, rupees and first column for particulars of course, take a full page, now the first item in cash flow statement is cash from, what are the three categories operating, investing and financing in the same sequence, so first is cash from operating activities, now in cash from operating activities it is slightly difficult than other two headings, because here it is as per indirect method, so we will start with profit before tax, this is the requirement of accounting standard that we start with PBT, then we make certain adjustments, so what adjustments will we make, the first adjustment which we make is for non-cash items, I am doing it very slowly, I hope you are also able to do with me, so we will make adjustment for non-cash items, then for non-operating items and then for working capital items. Let us first start with PBT, now how much is PBT, if you go to data, do we get from anything, any of this data will we get the profits, because profits are not given here in P and L, but if you take the figures of reserves, there is a increase in reserves and surplus by 411, that gives us some hint about the profit, so this can be used to calculate PBT, I am making a separate working note, so that it is easier to grasp, please try to solve it along with me, so working note for calculation of PBT, in this we will start with increase in reserves, how much is increase in reserves, look at the balance sheet, I think you have the print out with you, so 411 is a increase in reserves during the year, you know that increase in reserves basically comes from, it will come from profit, so we start with increase in reserves, to this we should add dividend and to this we will add tax, is it clear to all, so what happens is from profit before tax, we pay tax, we get PAT, from tax we pay dividend, what remains is a increase in reserves, here we are doing reverse calculation, so we are starting with increase in reserves, adding dividend adding tax, we will get profit before tax, now here from reserves we need to calculate PBT, so we are starting with increase in reserves and we will go on adding dividend and tax to get PBT, this figure will be PBT or profit before tax, now look at PNL to get dividend and tax, so you can see last 2 items, this is a interim dividend paid and the last item is tax, so now how much I should take, should I take the current year's figure 90 or I should take the difference for interim dividend paid, I must take the current year's figure and for tax also I will take current year's figure, I do not have to look at the difference, so interim dividend paid is 90 and tax paid is 142, I will take these figures, it is clear to everyone, so now PBT is 643 which we have done of course by reverse calculation, so what must have happened at the end, company's end was there was a profit of 643 from which they paid tax of 142, from the profit after tax they paid dividend and ultimately they are left with increase in reserve of 411, so by working note you come to know that the PBT is 643, now make adjustment for non-cash items, what are the non-cash items given, only non-cash item given is depreciation, you can go to balance sheet you will find gross block less accumulated depreciation, now which figure I should take, should I take 748 or I should take 5, I should only take 5 because 743 was already there, current year's depreciation is 5 and now the closing balance is 748, so depreciation is 5 is clear, now if there are any other non-cash items they would also be adjusted, like you might have amortization, you might have some non-cash transaction like payment made, an expense is done but no cash is paid and so on, so adjustment for depreciation is always plus because depreciation you do not pay cash, so it has a positive effect on cash, so adjustment for non-cash item is plus 5, next adjustment will be for non-operating items, basically we are under the heading cash from operating activities, so we do not want any non-operating items to get reflected, but non-operating items which are already there in P and L we need to remove, that is why go to P and L items, have a look whether there are any non-operating items, you will find that there is a item called interest received, that is a non-operating item but it is already there in P and L, so I want to make adjustment for it, should it be plus or minus interest received, we have received cash and it is already accounted for in tax profits, right now we are removing it from profit, so look at the amount, interest received is 21, 28, difference is 7, so shall we take 7 or 28, current year's interest received is 28, so we must take 28 but we will take it as minus 28, you can see this item was marked as I and O, so it is an investing inflow, currently we are looking at the operating part of it, so as far as the operating part is concerned, it is minus 28, so minus 28, I do not mean here that the cash was paid out, but because it was credited to P and L, right now I am removing it from P and L, so it is marked as minus 28, this is the only non-operating item, now the next adjustment will be for what is known as working capital items, so what do you mean by working capital items, basically these represent current assets and current liabilities, they have an impact on our operating flows, so if you go to balance sheet, you can see these items like inventories, sundry debtors, loans and advances, we have already marked them as O minus or O plus, so these items will be now transferred and taken into account as working capital items, should we take 450 or we should take only 44, we should take only 44, in case of all balance sheet items the difference is relevant, so from 406 inventories have increased to 450, so 44 is the increase in inventory that will have a negative impact on cash, so I will mark it as O minus, so for convenience I am copying all the items that does not mean all items need to be taken, we will just look at each item individually and discuss, if you are doing by pen and paper, keep on doing every item separately, if you are doing on computer you can do with me, so on inventories you can see it is not 44, 449 basically the entry is only for 43, so inventories the difference is 43, now the question is should it be plus 43 or minus 43, we have already discussed this, but again I will go back, so inventories you can see the difference I am sorry it is 44, it is O minus, so let us take it as minus, debtors was also 225 minus, why these two figures were negative, what was the logic, when inventories go up we have to pay cash for it, so they have a negative impact on cash flow, so I have marked it as minus 44, debtors are marked as minus 43, cash and bank balance need not be taken at all, loans and advances they are plus, current liabilities are plus 43, we are taking the rounded figures and provisions are minus 257, now all items under operating activities are over, let us take a sum of these items in the outer column, so we started with 643 and we have got a total of 429, have a look at it is it clear to all, we will continue with this sum in the next problem, in today's problem we have just come to the first part, so we were looking at the case on Crompton Greaves, we were given two years data and we have done the first part of cash flow statement that is cash from operating activities, let us continue with the case in the next sum, thank you so much for the time being.