 Last two three sessions, we are discussing about one of the very important statements known as cash flow statement. Today, we will do for a few major problems on the same followed by a slight variation known as fund flow statement. Before going for more problems, let us see what do you understand by cash flow statement to have a brief recap. Do you remember what do you see there? Perhaps, you will be remembering that cash flow statement as the name suggests gives a flow of cash and cash equivalence and the flow gives categories of money coming in and going out. There are three categories one is operating flows. So, these are the flows from day to day business operations. Second are investing flows as the name suggests. This is the money which is invested either in fixed assets or in buying securities of other concerns. So, either buying or selling of fixed assets purchasing of shares, selling of shares, receiving interest all these items are covered in I that is investing flows and the third are financing flows. This is the way the business has raised the funds. So, obtaining loans, issuing shares or redeeming shares, repaying loans all these are covered as financing flow. So, if you take total of O plus I plus F, we come to know what is a total cash received by business and that should match with the increase in the cash balance which is at the beginning and at the end both are given. So, let us do few more problems today and we will also do funds flow statement. Have a look at a new problem. So, here you have a balance sheet of RK limited and based on balance sheet you have been asked to work out cash flow statement. Now, first tell me how do we start? They have given a balance sheet, they have also given profit and loss account. A solution is also given, but we will ignore that solution for the time being we will try to solve it all our own. Anybody has a suggestion exactly how do you start for making the cash flow statement? I think most of you are getting it right. First what we do is we look at the changes in the balance sheet. Considering the changes in the balance sheet we try to mark them as O, I or F and based on that marking we will go ahead in making the cash flow statement. Now, the first item you have got equity share capital. So, if we start from liability side. So, what it is going to be? Is it O? Is it an operating item? Investing item or financing item? Anyone has any suggestions? I will just try to make some space for us to specify because last time we have done this, but that time we are done in a vertical format. Now, we are trying to understand to do it using a horizontal balance sheet. So, equity share capital under what category should I put? Anyone would like to comment? Is it a operating flow, investing flow or financing flow? It is F that is financing item. Should it be marked as inflow or outflow? You can see there is an increase in the capital from 2.5 lakhs to 4 lakhs. So, money has come in. So, it is an inflow. F inflow I have marked it that way, debentures what type it is amongst OIF? You are right again it is a financing flow because raising money by way of debenture is one of the examples of generating funds for the business. And is it an inflow or outflow? You can see the balance has gone down from 2 lakh to 150. So, it is not an inflow. It is an outflow for the concern. So, F outflow P and L account, should it be marked as a flow? And if yes under what category? You are right it is a operating flow because it represents the day to day business activities. And it is basically an inflow for the concern. Bank loan, bank loan again balance has gone down from 1 lakh to 75000. Bank loan is also one of the ways of financing. So, I will mark it as F and is it an inflow or outflow? Since the balance has reduced we have paid bank some money. So, it represents an outflow. So, it is F out. What about craters? Craters represent day to day activities. So, it is a operating item and you can see the balance of craters have increased. So, is it an inflow or outflow? Can you guess? So, you can give a thought that way if stock increases we pay money. So, stock increases in case of debtors when the in case of craters when the balance increases it represents an inflow. So, it is again O in operating inflow. Now, let us go to asset side. I will shift this pretty inside. So, that we can concentrate on assets. Now, have a look at machinery. You can see it a balance has increased from 4 lakh to 7 lakh. What type of flow does it represent? Amongst OIF you are right it is an investing flow. The money represents the investments made by business in the machinery. Is it an inflow or outflow? You can see it is an outflow because the money has been invested. So, from 4 lakhs the balance of machinery has increased to 7 lakhs. So, it shows that there is an investment made. Land again same thing it is I and it is an outflow because the balance has increased. Cash is a different item. It is neither an inflow nor an outflow. It represents the balance at the beginning and at the end. So, we will just mark it as cash debtors. Debtors is O item because it is a day to day item. The balance of debtors has gone down from 85 to 70. So, what does it show? The balance of debtors the balance has gone down from 85 to 70. That means you can say that debtors have paid us some money. That is why it is an inflow. In case of current assets you should know that increase in the current asset represents outflow. Decrease in the current assets represents inflow. Right now since the balance of debtors has decreased it is an inflow. Last one is closing stock or inventory. Again it is an O item. Now the balance has increased. So, it represents an outflow. I hope you are all getting all the items. Now let us look at P and L items. We have seen most of the balance sheet items. Now come to P and L items. So, sales interest received dividend all are given. Let us start with sales. What will you mark sales as? I will just try to push it this side. What will you mark for sales? Any guesses? O, I, F it is nothing. You should mark it as XX because it is neither an inflow nor an outflow. It is a day to day item. So, we do not record it in the cash flow statement. Interest received should it be recorded? It should be recorded because we receive interest when we make investment. So, it is an investing flow, but it will have some impact on O that is operating items also. Interest received represents an inflow. So, I marked it as IO and inflow. Dividend income again same thing. It is an IO because it is an inflow from investment, but it has some impact on operations. So, I marked it as IO and inflow. Now let us go to expenses side or debit side. Now cost of goods sold, how will you mark it? It is nothing. It is just XX because it has no impact on cash flow depreciation. It will need to be recorded because depreciation though in itself is neither inflow nor outflow. It has some impact on operating items. So, mark it as O. It also has some other effect. We will discuss it later. Expenses expenses, how will you record? Which type of item it is? It is nothing. It is just an XX item. Dibenture interest, shall I record it? Yes, because when we raise money by way of debentures, we have to pay them interest. So, it represents a financing item. It will have some impact on O also and it represents an outflow. That is why I have marked it as FO outflow. Income tax, shall it be considered? Yes, it is an operating item. So, initially it will be added and again it will be shown as an outflow. Interim equity dividend, it represents the money which business has paid that is paid to shareholders because we have raised funds from them. So, it represents a financing item. It is F. It also has some impact on O because it has some impact on operating items and it is an outflow. So, it is FO outflow and net profit. What does it represent? Net profit is again O. So, let us have a view at all the items once again. You can see some of the items have come two times. For example, P and L account. P and L account, the balance of P and L increase from 3 lakh to 589. That has increased because of net profit for the year which is 289. So, we do not have to take these items twice. They actually represent one and the same thing this and this. I hope it is clear to you. So, we will first start with balance sheet items. Whenever required, we will make an adjustment. So, now we have made all the recordings. Let us go to cash flow statement. First, we start with the operating items. So, we have retained profit of 289, 289,000. The item comes from balance sheet. You can also see it in P and L, but do not take it two times. You have to just take it once. I will try to solve it along with you. So, we will start with, as you all know, the first heading is cash from operating activities. Now, look at all the O items which we are going to mark. So, the first O item which we will start with is the profit and loss account balance that is known as retained earnings or increase in P and L account. We will write it in the inner column. The amount is 289,000. To this, we need to add the income tax. If you remember, basically we take profit before tax. To this, we also need to add interim dividend. So, these three together gives us the profit before tax earned during the year. This I have written in the inner column of our cash flow statement. Now, we can make various adjustments. Take a look at other O items. If you remember, the first item which we do is we add depreciation. Why do we add depreciation? Do you remember? Because, it is a non-cash item. So, we do not have to pay any cash, but it is deducted from profit while calculating the profit. You can have a look at P and L. You will see that depreciation of 31,000 was reduced for calculating profit, but since it is a non-cash item, we have to add it back because that represents the cash which is earned by the business. So, add depreciation. Second, we have to make some adjustments. Do you remember which adjustments we make next? We make adjustments for non-operating items. So, we do have items which are there in P and L, but we actually are non-O. They have to be I or F. So, take a look at P and L. You will see that on credit side, we have interest received and dividend which are received, but actually they do not represent the P and L items. So, the amount of 62 and 39 is taken. Now, the question is whether they should be added or deducted. You are right. Since, interest received is our income. We many times feel it should be added, but actually it is not right. What we have to do is we have to deduct it. Why we have to deduct? Anyone can guess? What happens is these items have been already added when calculation of profit was done, but actually they represent I. That is they represent investing flows. That is why they should be deducted while we are trying to calculate operating flows. Now, on debit side also we have got item known as debenture interest. So, this represents the interest which is paid on debentures. So, I will have to consider it. Should it be added or deducted? Now, it should be added because it was already deducted while calculating P and L account, but since it is a financing item we need to add it back. There is also an item known as interim dividend. So, should I add it or deduct it? Intrim dividend also represents the amount which was deducted. So, I will add it, but if you observe keenly, it has already been taken while calculating retained earnings. You do not have to take it twice. Be careful about this item. That is why I have shown that it should be taken, but it should be taken only once. So, we have already adjusted it while calculating PBT. So, do not adjust it again. So, I hope you are clear. So, what we have done now is we have taken first calculated PBT. Then we have done adjustment number 1 that is add depreciation. Adjustment number 2, we have adjusted for non-operating items. There is one more adjustment required. Can you tell me which adjustment is adjustment number 3? Any guesses? I think most of you would have guessed it correctly. This is the adjustment for current assets and current liabilities. So, current assets and current liabilities actually represent operating items, but they do cause indirect effect on the cash in the hand. So, we will adjust for them. Now, we will have to go to balance sheet. If you look at balance sheet on asset side, we have got two items, debtors and stock. And on liability side, there is one item known as crater. So, these items need to be adjusted. So, first let us start with debtors. Debtors you can see here, there is a difference reduction from 85 to 70. So, I should account for the difference only. I cannot take the whole figure. So, there is a fall of 15,000 and it represents an inflow. So, stock there is an increase from 40 to 65. It represents an outflow. Why it represents an outflow? Because I must have paid cash to get stock. So, it is an outflow. By the same logic, I have received cash from debtors, because the debtors balance have received a come down. That is why debtors was an inflow, whereas stock there is an increase in balance. So, it represents an outflow. So, I will take the difference. So, minus 25,000. Now, take a look and liability side. There is an item known as crater. So, craters you can see, there is an increase in the balance from 14 to 29. It represents an inflow. I hope it is clear to you. So, from 14, the balance has increased to 29. It is an inflow. So, all the three adjustments are over. We have done adjustment number 1 for depreciation, adjustment number 2 for non operating items and adjustment number 3 for current assets and current liabilities. If all the adjustments are over, we can take some of PBT with all these items. This represents the cash from operating activities. Now, we will go for the next heading. What is the next heading? You are right. It represents cash from investing activities. Now, take a look at balance sheet. We would have marked some items as I. They are basically investing. First is machinery. Next is land. So, if you start with the first one, that is machinery. So, there is an increase in the balance from 4 lakh to 7 lakhs, which represents an outflow. This is very common sense. The balance of machinery has increased. So, naturally we have paid some money, but there is a catch. If you see, there is a difference of 3 lakhs. There is an increase of 3 lakhs, but it is not necessary that this 3 lakh is all your outflow, because we also have to make some adjustment for depreciation, because the balance has increased by 3 lakhs, but there is also depreciation of 31000, which we will have to add here. So, the total increase in the machinery is represent is 3 lakhs, 31000 and this is nothing but an outflow for me. I hope it is clear to you. So, what has happened is we have purchased machinery of 331. Of that 31 of depreciation goes away. The balance increases by 3 lakhs. So, I will record as outflow 3 lakhs, 31000. Next item is land. Land you can see again there is an increase, but this is relatively simple, because all the increase in land is nothing but an outflow. It is there is no problem of depreciation. So, land increase is an outflow. So, minus 62 has come, because it is an outflow. Now, take a look at balance sheet. All the items are I think covered. Balance sheet items nothing of I has remained. Now, take a look at P and L. So, P and L see if there is any item, which is marked as I. So, you will observe two items. One is interest received and other is dividend income. So, I will just paste them first. So, interest received was 62000. It is an I O. We have already adjusted it in O. It will be also at it will be shown as I. You all know it is an inflow. So, there is no need to find any difference. 62000 is received by way of interest and 39000 is received by way of dividend. So, if you take sum, you can see that overall minus 292 is a position as far as investing activities are concerned. Now, let us go to the last heading, which is nothing but financing activity. Now, go to balance sheet again. For F items, you will see on liability side. There are three items, equity capital, debentures and also bank loan. So, they represent the money raised by the business. Let us start with them and there could be some items from P and L as well. So, if you look at F items, I will just remove this P and L. So, there are three items now. So, there is an increase in the balance of equity capital. It represents the equity shares issued, which is nothing but an inflow. So, F inflow as far as debentures is concerned. There is a decrease in the balance. So, debentures have been redeemed. Money has been paid. So, it is an outflow and bank loan also, there is a decrease from 1 lakh to 75000. So, it also represents an outflow. So, minus 50, minus 25. Now, take a look at P and L. You will find there are two items of F. One is debenture interest and second is interim dividend. Let us consider them. We have two items. One is debenture interest other is interim dividend. You already know that we have to pay interest. So, it is nothing but an outflow. That is why it is a minus figure that we will consider. So, minus 25000 and minus 70000 represents the flow under investments. So, now, we have all the three totals in front of you. You have got total of operating items, which is 2867, then total of investing, which is minus 292 and total of financing, which is minus 20. Now, if we take the sum of all these items, we will come to know the total money, which the firm has raised, which is 55000. We have to cross check it with the cash. Now, look at the position of cash. So, cash is 19 and 26. So, you will realize that something is missing. Now, have a look at different items, which are there in piano or in the balance sheet, whether we have missed anything. Let us find the difference of cash. So, it is very clear that there is an increase of 7000 in the year. Whereas, we are getting the total of 55000. So, there are some items of 48000, which are leading to difference. Now, let us have a look at what has gone wrong. One by one, look at all the items. Ensure that in case of balance sheet, items are recorded only once. In case of other items, they are recorded twice. So, equity capital, it is an F item. It is an inflow. See whether it is correctly recorded. I think it is correctly done. Then debentures, F outflow, it is correctly done. The third item is P and L account. P and L, you know that there was an increase of 289, which has been correctly recorded. Next is bank loan. There is an outflow. So, bank loan, 1,75,000. So, there is an outflow of 25, again correctly done. Craters. So, craters, you know the balance has increased, which shows that we have paid less. So, it is an inflow for us. So, you can see creditors. It is shown as an inflow. So, these are the items on liability side. Now, take a look at items on asset side. So, machinery. You can see machinery, there is an increase. So, it is a high inflow. Have a look at investing activity. Machinery is increase of 3 lakhs. We have also made adjustment for depreciation. Now, look at the depreciation, 31,000. Now, this is a non-cash expense. So, what will happen is we will add depreciation here and we are also adding it in investing flow. So, what is happening is machinery balance has increased by 3 lakhs, despite depreciation of 31,000. So, actual purchase of machinery is 331. So, you can see that 31,000 was in a way deducted in the investing flow and it has been added in the operating flow. So, again it has been correctly dealt with. Now, look at land. Land is an investing item. So, difference of 62 represents the purchase of land, which is again correctly recorded by us. Cash, you know there is a difference of 7,000 that will come in the end. Debtors and closing stock, these represent CA and CL. So, we have taken them in the operating items. The debtors balance has decreased. You can see from 85 to 70. So, it represents an inflow. Whereas, closing stock balance has increased, which represents an outflow. So, we have taken all items from here. Now, take a look at P and L items. Interest and dividend received. This should be marked as I inflow. So, interest received and dividend income both are inflows. Now, on debit side of P and L, debenture interest and intream dividend, they are F outflows. Take a look under financing flows, both have been recorded as outflows. So, these are F outflows. Now, each of the P and L items will have second effect in the operating flows. So, now you can come to cash flow from operating activities. You will see that interest received has been deducted. Dividend income has also been deducted. Now, debenture interest has been added and intream dividend has been added. Now, only one item which we have added, but we have not adjusted anywhere is income tax. So, income tax we have added, because we want to calculate profit before tax. But in the end, we have to pay income tax. So, that is something which we had missed, which you have to record now. So, if you take sum of all these items, it comes to 367. We have to go for less income tax, because income tax paid is an outflow. In this case, you can see there are two effects done for income tax. So, income tax was once added, because we want to calculate PBT. And again it is shown as a deduction, because it represents an outflow. So, it is 319 is the funds from operations. Then, we adjust the investing activities, which is minus 292 and financing activities minus 20. Now, you can see the difference comes to 7000, which is exactly the difference in the cash. I hope you are getting clear. This is how you have to reconcile. In case you are not getting the answer, which is equal to difference, you have to go back, look at all balance sheet items, look at all P and L items and you will come to know where you have gone wrong or which item you have missed. So, here this 7000 represents cash generated by business or you can simply say cash generated, which is 7000. I will make it bold. To this, we add opening balance of cash, which we know is 19000. And now, if you take sum, it will be equal to closing balance. So, closing balance of cash is 7 plus 1926 and that is the correct amount as per balance sheet. I hope everyone is getting clear. Now, with this, I think we have got sufficient practice now of various cash flows problems. Let us go to a new concept, slightly modified concept of cash flow that is known as fund flow. So, I will stop the problems here. Let us go to PPT on fund flow statement. Now, before we go for more details of fund flow, let us try to understand exactly what is the difference between cash flow and fund flow. Both the statements are quite similar in nature. In cash flow statement, we focus on flow of cash. In case of fund flow statement, we focus on flow of funds. Now, what is funds? Funds are nothing but day to day capital available with us. So, instead of only looking at cash, we look at all the monies which are available for day to day operations which are nothing but fund flow. So, in cash flow, we used to list all the ways the money is the cash is coming in and going out. In case of fund flow, we will look at different ways in which working capital is coming in and going out. There is no categorization in the made in the fund flow statement like say operating, investing or financing. We simply list inflows on one side and outflows on other side. So, let us see what is fund flow statement a little more in detail. So, what is the meaning? It is defined as a statement which summarizes the sources from which the funds are obtained and what are the uses to which they are put. Now, this chart shows you some of the examples of funds. So, sources are fund from operations, sale of fixed assets, issue of cash, applications could be purchase of fixed assets, purchase of investment, increase in working capital and so on. Now, what was a need to have such a statement? We have already seen at the time of cash flow statement that though we have a P and L account, it shows the profit for the period. It does not show exactly how the cash has moved. Same way it also does not show how the funds have moved. So, fund flow statement seeks to show what is the movement of funds in that particular year. We also have a balance sheet, but it is a positional statement. It gives you financial position as on a day, whereas fund flow statement is trying to show from how the money was raised and how it is invested or how it is utilized. Now, how to prepare it? It is very similar to cash flow statement. We take a look at balance sheet. We find out where the differences are. So, we come to know the changes in the working capital and also changes in long term assets and liabilities. We also look at a P and L account to find out how much money was generated from operations. This is how fund flow statement is prepared. We will also solve some example, which will make it more clear to you. Now, this is how funds from operations is calculated. Now, if you compare it with a cash flow statement, in cash flow statement we use to calculate the cash from operating activities. This is very similar. Here, we are calculating funds from operations. So, we start with net profit after tax, adjust for non-cash items like depreciation and also adjust for non-operating items. Only difference is in cash flow statement, we also used to have third adjustment for working capital items or current assets and current liabilities. In this case, that third adjustment is not there. So, we adjust first two things and what we get is nothing but funds from operations. In case of cash flow statement, a separate statement known as statement of changes in working capital is prepared. This statement gives us what are the items, which have led to increases or decreases in working capital. So, we start with current assets as you can see here, stock, debtors, cash, they are compared for two years and we see the increase or decrease. We also take current liabilities, again look at increase or decrease. The total of all these items tells us what was a change in working capital. This is you can take a look at the final fund flow statement. So, we start from fund from operations. So, fund from operation is one of the important flows. Here, we are first listing out all the inflows, then decrease in the working capital. So, if the working capital has gone down, that means the money is released. So, that is also an inflow. Then sale of fixed assets, sale of investment, these are the inflows, issue of shares because money is received. If there is some non-operating income like say interest received, that will be an inflow, loan received will be an inflow. So, this is the example of various inflows. Now, take a look at outflows. In case of outflows, we look at loss from operations, increase in working capital because when the working capital increases for the business, the long term money is invested and working capital increases. So, it is treated as an outflow. Then naturally, there is a purchase of fixed asset, purchase of investment. If you redeem the shares or if you say pay dividend, they also represent outflows. So, let us go back. So, fund flow statement on one side lists out the inflows and also lists out the outflows. We have to see that the total inflows match the total outflows. So, this is a brief about fund flow statement. Now, let us try to solve a problem which I think will make you more clear on what is fund flow statement. So, this is a balance sheet of reliance industry for the two years. If you remember, we have solved for the same company a problem on cash flow. We will also try to solve a problem on fund flow, so that you can also make a comparison. So, this is about the balance sheet. Have a look at all the items first. Now, it starts with sources, applications and some extract of P and L is also given. Now, when you try to solve fund flow statement, you do not have to mark items as OIF because there is no categorization. What we will do is, we will simply mark the items as inflows or outflows and if any item has an impact on fund from operation or item has an impact on working capital, those required to be separately marked. So, we will make three statements. First, we will make a statement for fund from operation. Second, we will make a statement from working capital and then we will finally, make the what is known as finally, the funds flow statement. Let us look at one by one the items. The first item is equity share capital. You can see, there is an increase in the capital. So, what does it represent? Is it an inflow or outflow? I am just trying to find the difference for all the items. So, does it represent inflow or outflow? Pretty common sense. I have issued shares. So, definitely it represents an inflow. I hope everyone is clear about it. So, I have marked it already marked it as I because it represents an inflow. Is it clear? Next is reserve. There is a decrease in the reserve. So, it is an item going into FFO. FFO is fund from operations. That is why I have marked it as FFO. Secured loan. There is an increase in secured loan. Is it an inflow or outflow? It represents an inflow. I think I will write in full to make it more clear to you. Unsecured loan. There is a decrease in unsecured loan. So, loans have been repaid. They were 63. They have gone down to 50. So, it represents an outflow. Are you getting clear? Have a look at items once again. So, you can see that what we are trying to do here is we are simply marking all the items as inflows and outflows. We are not categorizing it. In case of cash flow, we had to mark them as OIF and also as inflows and outflows. Here, we are simply writing them as inflow or outflow. So, first item equity capital was marked as inflow. Reserves actually are neither inflows or outflows, but they represent the money coming from operations. So, it was marked as FFO. Secured loan is an inflow. Unsecured loans, the balance has gone down. So, it is an outflow. Gross block that means increase in the fixed assets. So, it represents an outflow. You must have correctly guessed because increase of fixed assets is only possible if I pay money. So, it is an outflow. Accumulated depreciation. So, the depreciation has been accumulated. In other words, it should be marked as FFO. It will have some impact on the funds, but it is neither inflow nor outflow. Net block that means gross block minus depreciation. It will be what inflow or outflow? Nothing. Simply mark it as XX because it is neither inflow nor outflow. Investment. You can see the investment balance has decreased from 20 to 19. So, it is an inflow. The money must have come in from sale of investments. Inventaries, that means the closing stock, the balance has increased. It is a working capital item. So, I will mark it as working capital or W cap. Sundry debtors, again it is a working capital item. Cash, again it is a working capital item. So, whatever is a current asset and liability, we are going to separately mark it. Total current assets, it is nothing we have already considered as assets separately. Loans and advances, what I should take? It is also an working capital item. Mind well, it is slightly tricky by reading the term loan. Sometimes, you may feel it is something to do with loan received. That is secured and unsecured loan, which we have already recorded. Right now, what loans and advances we are talking about are the advances given to employees or to customers, etcetera, which are day to day in nature. So, mark them as working capital. Total CAs, it is just a total. So, mark it as xx. Now, go to current liabilities. It is a working capital item. Provisions, can you guess? Again, it is a working capital item. Total is nothing, it is xx. Net current assets, also xx. Total assets, of course, we ignore them. So, we have marked all the balance sheet items as inflows or outflows. Then, contingent liabilities and book value, you do not have to consider at all. Now, go to PNL account. As you know, most of the items of PNL we do not consider. But, if you feel any item is important, we should look at it. Now, sales turnover, we will ignore. Excise duty, we should ignore. Net sales, of course, we ignore. Other income shall we consider? We should consider. It is an inflow. Money is coming out by way of interest, etcetera. And it will also have impact on FFO. Raw material, ignore. Power, ignore. Employee cost, other manufacturing, selling, we all ignore. But, interest, since it is a cost, interest paid. So, I will have to mark it as O. O here means outflow. And it will also have an impact on FFO. So, here we have tried to mark all the items. Now, let us, based on this, let us try to make a cash flow, sorry, fund flow statement. Now, what we have to do for fund flow statement is, based on inflows and outflows, we have marked, simply list out the inflows, outflows and take total of working capital items and calculate the fund from operations. And then those items will go into the main calculation. I think we will stop here. And next session, we will try to complete this. But, I will request you to try it on your own to make a fund flow statement. Thank you so much.