Everything about Cash Flow Statement and Financial Statement

The Cash Flow Statement

By understanding the cash flow statement, it is now evident that to assess the company’s capital, one has to review the cash flow statement.

When companies present their cash flow statement, they generally divide it into three components to demonstrate the amount of cash their enterprise has acquired from its three activities. Using our illustration from prior chapters, below is Amara Raja Batteries Limited’s (ARBL) cash flow statement:

I will not go into detail about every element, as most are apparent. However, one thing to observe is that ARBL has made Rs.278.7 Crs from operations. This indicates the company is doing well financially since it has a positive cash flow from operating activities. Here is the summary of ARBL’s cash flow from investing activities:

ARBL’s investing activities have consumed Rs. 344.8 Cr, which is intuitive as it requires cash to invest. However, the level of investment done by the company reflects its commitment towards expanding the business, which can be judged during this module.

To conclude, here is an overview of the cash balance from the financing activities of ARBL:

ARBL consumed Rs.53.1Crs in its financing activities, with the majority of that being paid out as dividends. As the balance sheet reflects, no new debt was taken on, thus leaving cash balances unchanged. To sum up, all financial operations resulted in a net loss of Rs.53.1Crs for the company.

For the financial year 2013-14, ARBL consumed total cash of Rs.119.19 Crs. Going back one year, it generated Rs.179.986 Crs from all its operations. An extract of its cash flow statement brings this to light.

By looking at the section highlighted in green (for the year 2013-14), one can see that the opening balance for the year is Rs. 409.46 Crs. This is due to the closing balance of the previous year, as indicated by the arrow marks, as well as the current year’s cash equivalents and a minor forex exchange difference amounting to Rs. 119.19 Crs and Rs. 2.58 Crs, respectively. 

Altogether, this adds up to an overall cash position of Rs. 292.86 Crs for the company – which goes to show that despite each consecutive year’s expenditure, they remain financially stable with their carry forward from last year’s balance sheet.

Note that the 2013-14 closing balance will transfer over and become the opening balance for 2014 – 15. To view these changes, one can keep an eye out for ARBL’s cash flow numbers at the end of FY 2015.

Now, let’s examine some interesting questions and their corresponding answers.

1. What does the amount of Rs.292.86 Crs signify? 

This represents the total funds held by ARBL in its various bank accounts.

2.           What is meant by cash? 

Cash refers to physical currency as well as funds held in demand deposit accounts, making it a highly liquid asset for the company.

3.           What are liquid assets? 

Liquid assets are resources that can be easily converted into cash or cash equivalents, providing financial flexibility.

4.           Are liquid assets similar to the “current items” mentioned in the Balance Sheet? 

Yes, they can be viewed from a similar perspective, as they both represent assets that can be readily converted into cash within a short period.

5.           If cash is considered a current asset, shouldn’t it be included in the Balance Sheet’s current asset section? 

Let’s examine the balance sheet extract below, which provides all the relevant information.

It is evident that the cash flow statement and the balance sheet are interrelated. This follows from our prior discussions, in which we noted that all three financial statements are intertwined.

– – A note on financial statements

In the past few chapters, we investigated the company’s three major financial statements, namely the Profit and Loss (P&L) statement, Balance Sheet and Cash Flow statement. The latter two are presented as individual documents (exhibiting each year’s finances), while the Balance Sheet is compiled in a running manner.

The P&L statement examines the company’s revenues and expenses, and its retained earnings (or surplus) are transferred to the balance sheet. Furthermore, the depreciation amount stated in the P&L is also included in the balance sheet.

A Balance Sheet shows the company’s assets and shareholders’ funds as liabilities. In order for it to be considered balanced, the two must be equal. An essential part of this document is the cash and equivalents figure, indicating how much money the firm has in its bank account. This number can also be taken from the Cash Flow Statement.

The cash flow statement gives the users of its financial statements insight into a company’s capacity to create cash and its equivalents, as well as identifying their financial needs. It also looks at historical data, categorising cash flows into operating, financing and investing activities. Lastly, it presents an account of the available funds in a firm’s bank account.

So far, we have discussed how to read and what to expect from financial statements. Now it’s time to examine how to analyse these figures; one method of doing so is by computing crucial financial ratios. We will concentrate on these ratios in the subsequent chapters.