The document "Cash Flow Statement of Non-Financial Firms" covers various aspects of

preparing and understanding cash flow statements for non-financial firms. Here's a
breakdown of the key topics, explained in layman's terms with examples:

1. **Why We Need a Cash Flow Statement**:

- **Explanation**: It shows how much cash a company has on hand, where it comes from,
and how it's being spent. It's important because even profitable companies can fail if they
run out of cash.
- **Example**: Imagine your household finances. You need to know how much money is
coming in (income), what your expenses are, and how much cash you have left at the end of
the month.

2. **Uses and Structure of the Cash Flow Statement**:

- **Types of Activities**: The cash flow statement is divided into three sections:
- **Operating Activities**: Money made or spent in the company’s core business. For
example, a bakery's sales of bread and the cost of flour and wages.
- **Investing Activities**: Money spent on long-term investments, like buying new
machines or selling old ones. For instance, a car manufacturer investing in new production
equipment.
- **Financing Activities**: Money transactions related to the company's investors or debt,
like issuing shares or taking a bank loan.

3. **Cash Flow from Operating Activities (CFO)**:

- **Explanation**: CFO shows the cash inflows and outflows from a company's core
business activities. It indicates whether a company can generate enough cash from
operations to maintain and grow its operations.
- **Example**: For a clothing store, cash inflows would be from customers buying clothes,
while outflows include payments for buying fabric and paying employees.

4. **Cash Flow from Investing Activities (CFI)**:

- **Explanation**: CFI represents the cash used for investments in assets and the cash
received from selling those assets. It indicates a company’s investment in its future growth.
- **Example**: A tech company selling an old office building (cash inflow) or buying new
software (cash outflow).

5. **Cash Flow from Financing Activities (CFF)**:

- **Explanation**: CFF includes cash flow related to raising capital (like issuing stocks) and
repaying debts. It shows how a company funds its operations and growth.
- **Example**: A startup receiving investment from venture capitalists (inflow) or paying
back a bank loan (outflow).

6. **Non-Cash Activities**:
- **Explanation**: These are important transactions that don't involve cash directly, like
issuing stocks to buy an asset.
- **Example**: A company issuing new shares to acquire another company.

7. **Format of the Cash Flow Statement**:

 - **Explanation**: The cash flow statement is structured to show the net increase or
decrease in cash for the period. It starts with cash flow from operating activities, followed by
investing and financing activities.
- **Example**: The statement might start with cash generated from product sales, then list
cash used to buy new equipment, and end with cash raised from a new share issue.

8. **Calculating Cash Flow**:

- **Direct Method**: Lists all cash receipts and payments, including cash received from
customers and cash paid to suppliers.
- **Indirect Method**: Starts with net income and adjusts for non-cash transactions and
changes in working capital.
- **Example of Indirect Method**: A company earned a profit of $100,000. However, it also
increased its inventory by $20,000 (not a cash expense). So, the actual cash flow would be
$100,000 minus $20,000 = $80,000.

9. **Adjusting Working Capital Items**:

- **Explanation**: Changes in working capital (like accounts receivable, inventory,
accounts payable) can impact cash flow.
- **Example**: If a company's inventory increases, it means cash has been spent to
acquire more inventory, leading to a cash outflow.

Each topic is crucial for understanding a company's financial health, particularly its liquidity
and ability to sustain and grow operations. For your MBA semester exam in Accounting for
Managers, grasping these concepts with real-world examples can be incredibly beneficial.

A cash flow statement is essentially a financial report that tells you how much cash a
company has received and spent over a certain period. This statement is critical because
cash is like the oxygen for a company—it needs cash to operate, invest, and grow.

**Why do we need a cash flow statement?**

To understand the importance of a cash flow statement, let’s consider a simple example:
Imagine you have a lemonade stand. You might want to know:
- How much money you're making from selling lemonade (cash inflows).
- How much you're spending on buying lemons and sugar (cash outflows).

At the end of the day, you count your cash to see if you’ve made more money than you
spent. This helps you decide if you can afford to buy more supplies, save some money, or if
you need to find ways to cut costs.

Similarly, for businesses, a cash flow statement provides a detailed breakdown of how the
business earned money (like selling products or services) and how it spent money (like
buying inventory or paying salaries). By looking at this statement, managers, investors, and
creditors can evaluate the company's financial health and make informed decisions.

A business might be profitable on paper, but if all its sales are on credit and it hasn't received
the cash yet, it might not have the cash needed to pay its immediate bills. That’s why the
cash flow statement is important—it tells you about the actual cash situation, not just the
profits.

Let’s look at the key sections of a cash flow statement:

1. **Operating Activities**: This section shows the cash generated or used in the normal
business operations. For example, a bookstore’s cash receipts from selling books and cash
payments for purchasing new inventory would be listed here.

2. **Investing Activities**: Here, you’ll see the cash used for investments like buying new
equipment or the cash received from selling assets. For instance, if our bookstore bought
new bookshelves or sold an old delivery van, it would appear in this section.

3. **Financing Activities**: This part records the cash movements related to borrowing
money, repaying loans, or changes in the company’s equity like issuing new shares. If our
bookstore took a loan to expand its business or paid dividends to its shareholders, it would
be reported here.

A cash flow statement is vital because it can reveal trends in how a company is making and
spending money, which isn’t always apparent from just looking at the income statement or
balance sheet. It can answer questions like:
- Is the company generating enough cash from its sales?
- Is it spending too much on investments?
- Does it rely heavily on borrowing?

Understanding these aspects is key to managing a company's finances effectively, which is

why it's an essential topic in your MBA Accounting for Managers exam.

The cash flow statement is organized into three main types of activities: Operating,
Investing, and Financing. Each category tells a different story about the company's cash flow
and provides insights into its financial health.

**Operating Activities**
These are the day-to-day activities that a business performs to operate. This includes:
- Cash received from customers (cash inflows).
- Cash paid for supplies, salaries, rent, and utilities (cash outflows).

*Example*: A coffee shop makes money from selling coffee and pastries (inflow). It spends
money on buying coffee beans, paying baristas, and covering the rent (outflow).

**Investing Activities**
These activities reflect how a company invests in its future. This can include:
- Buying or selling assets like equipment or property (plant and equipment).
- Lending money and collecting on those loans.

*Example*: The same coffee shop might buy a new espresso machine (cash outflow for
investing) or sell an old piece of furniture it no longer uses (cash inflow from investing).
**Financing Activities**
Financing activities show how a company funds its operations and expansions. This can
include:
- Borrowing money (debt) or repaying it.
- Issuing new shares (equity) or buying back existing ones.
- Paying dividends to shareholders.

*Example*: If the coffee shop takes out a loan to open a new location, that's a financing
inflow. When it pays back the loan or pays dividends to its owners, those are financing
outflows.

Understanding the cash flow from these activities helps managers and investors see if the
company generates enough cash to fund its operations, invest in its growth, and manage its
financial structure. It's not just about how much profit the company makes but whether it can
maintain a healthy cash balance to keep running smoothly.

Cash Flow from Operating Activities (CFO) is a section on the cash flow statement that
shows how much cash a company has generated or used from its primary business
activities. This section is crucial because it gives an indication of the health and efficiency of
the company's core business operations.

Here’s a breakdown in layman's terms:

**Cash Inflows from Operating Activities**:

- **Cash sales of goods and services**: This is the money that a company receives from its
customers when they buy its products or services. For example, when you go to a grocery
store and pay cash for your groceries, this is a cash inflow for the store.
- **Advances from customers**: Sometimes, customers may pay in advance for a service or
product. For instance, if you pay a deposit for a catered event that is scheduled for the
future, this is an advance.
- **Collection of trade receivables**: This is when a company collects money that customers
owe from previous credit sales. If a bookstore sold books to a school on credit, when the
school pays up, it’s a cash inflow.

**Cash Outflows from Operating Activities**:

- **Materials and services**: This includes money spent to buy the raw materials needed to
create a product or to pay for services that help run the business. For instance, a restaurant
buying vegetables and meat, or paying for laundry services for their tablecloths.
- **Salaries and other employee benefits**: These are payments made to employees for their
work and might include wages, health insurance, or retirement plan contributions. For
example, the monthly salaries paid to the staff of a consulting firm.
- **Taxes and duties**: These are payments made to the government. It includes income
taxes, sales taxes, and other government fees. If a company earns a profit, part of that profit
must be paid as income tax – that’s a cash outflow.

Understanding these elements is important because they reveal whether the company's core
business is generating enough cash to sustain itself without relying on outside financing or
investing activities. For managers, this information is critical for making strategic decisions
like expanding operations, improving efficiency, or cutting costs.

The image details the various components and examples of cash flows arising from
operating activities, which are part of the cash flow statement. Let's break this down into
simpler terms:

1. **Key Indicator of Cash Flows**: This tells you if the business can:
- **Repay loans**: Use its cash to pay back money borrowed.
- **Maintain operating capability**: Have enough cash to keep the business running
smoothly without needing to find extra funds.
- **Pay dividends**: Give money back to shareholders.
- **Make new investments**: Spend on things that could help the business grow in the
future, like new equipment or technology.

2. **Derived from Principal Activities**: The cash flow should primarily come from what the
business does to make money (its main activities).

3. **Results from Transactions**: This is the cash that comes in or goes out because of the
everyday activities that aren't related to profits or losses directly.

Here are the examples given for each type of cash flow:

- **Cash receipts from sales (a)**: This is the money a business gets when it sells
something. For example, when a bookstore sells books.

- **Cash receipts from royalties, fees, commissions, and other revenue (b)**: This includes
money made from non-sale activities. For instance, a patent owner receiving royalties when
another company uses their invention.

- **Cash payments to suppliers for goods and services (c)**: The money a business pays to
get what it needs to operate. Like a restaurant paying for vegetables and meat.

- **Cash payments on behalf of employees (d)**: This is when a company pays for things
that benefit its employees, like health insurance or retirement funds.

- **Cash receipts and payments of an insurance entity (e)**: For insurance companies, this
would include receiving premiums from insured parties and paying out claims when
necessary.

- **Cash payments or refunds of income taxes unless they can be specifically identified with
financing and investing activities (f)**: This is about paying taxes or getting tax refunds that
aren't linked to investment or financing.

- **Cash receipts and payments relating to futures contracts, forward contracts, option
contracts, and swap contracts when the contracts are held for dealing or trading purposes
(g)**: This involves complex financial transactions that some businesses engage in, like a
bank trading in futures or options.
- **Cash flows arising from the purchase and sale of dealing or trading securities (h)**:
Similar to (g), this involves buying and selling investment products, like stocks or bonds, as
part of business operations.

- **Cash advances and loans made by financial institutions (i)**: This refers to banks or
lenders giving out loans or advances as part of their business.

Understanding these components is vital for managers to assess the operating efficiency
and short-term financial health of a business. They show if the company is making enough
money from its main operations to cover its expenses and if it's managing its cash
effectively.

Cash Flow from Investing Activities (CFI) is a section of the cash flow statement that reports
the cash that a company uses for investments in its long-term future and the cash it gains
from selling those investments. These activities are essential to understand because they
reflect a company’s strategy regarding growth and capital allocation.

**What Does CFI Include?**

1. **Buying long-term assets**: This is when a company spends money on things that will
last a long time and are used to produce goods or services, like buildings (plants) and
machinery (equipment).

2. **Investing in other businesses**: Sometimes, a company might use its cash to buy parts
of or entire other companies, seeing this as a good investment for future profits.

3. **Selling assets or businesses**: If a company sells off parts of itself or its assets, it
receives cash, which can be reinvested or used in other ways.

**Examples of Investing Activities**

*Cash Inflows*:
- **Sales of fixed assets**: When a company sells long-term assets it owns, like an office
building or machinery.
- **Collections of loans**: If a company has lent money to others, when it gets repaid, that’s
an inflow.
- **Sales of shares and bonds of other enterprises**: If a company has invested in another
company’s stocks or bonds and then sells those investments, it’s considered an inflow.
- **Interest and dividends received**: When a company receives interest from money it has
lent or dividends from stocks it owns, that’s also an inflow.

*Cash Outflows*:
- **Buying fixed assets**: If a company purchases new equipment or buildings, that’s an
outflow.
- **Disbursing loans**: When a company lends money to others, it’s an outflow until that loan
is paid back.
- **Buying shares and bonds of other enterprises**: If a company invests in another
company by buying its shares or bonds, that’s an outflow.

**Why is CFI Important?**

Understanding the cash flow from investing activities helps managers and investors gauge a
company's growth prospects. For instance, if a company is regularly investing in new
technology, it might be positioning itself for future growth. Conversely, if a company is selling
off assets, it could be a sign that it's gathering cash to fund other projects, or it could be a
sign of financial trouble.

For your MBA exam, you might not need to do calculations for CFI, but you should
understand what these activities represent and what they can tell you about a company's
strategy and financial health.

The provided image describes different types of cash flows that arise from investing activities
and provides examples for each. Here is a simplified explanation:

1. **Expenditures for Future Benefit**: When a company spends money, it's usually with the
hope that this will help them make more money in the future. For example, if a company
invests in developing a new product, they're hoping it will lead to future sales and income.

**Examples of Cash Flows from Investing Activities**:

- **(a) Buying assets and investments**: This includes spending cash to buy long-term
assets like machinery or buildings, and investments in other companies. For instance, a tech
company might invest in new computers or buy a stake in a startup.
- **(b) Selling assets and investments**: This is when a company sells off parts of its
business or investments. For example, if a car manufacturer sells a factory it no longer uses,
that's a cash inflow.
- **(c) Payments to and from joint ventures**: If a company is part of a joint venture, it might
make payments into that venture or receive payments from it. An example could be two
companies partnering to develop new technology, and sharing the costs and profits.
- **(d) Selling equity or debt instruments**: When a company sells stocks or bonds, it
receives cash. Conversely, if it buys back its own stocks or bonds, it pays cash.
- **(e) Giving or receiving loans**: If a company lends money to someone else, that's a cash
outflow. When it gets repaid, that's an inflow.
- **(f) Repayments made to the company**: This is the money the company gets back from
loans it has given out, not including loans made by financial institutions.
- **(g) Payments related to financial contracts**: This includes cash flows from complex
financial agreements like futures contracts or swap contracts. These are usually done by
companies as part of managing financial risks.
- **(h) Receipts from financial contracts**: This is the cash a company gets from financial
contracts when they are settled.

When studying for your MBA exam, it's important to understand not just the definition of
these terms, but also to be able to recognize examples of cash flows in real-world scenarios.
No calculations are needed here, but you should be able to identify whether a certain
transaction will result in a cash inflow or outflow for investing activities.
Cash Flow from Financing Activities (CFF) reflects a company's financial transactions that
are intended to finance the business. This includes changes in debt, equity, and distributions
to owners, and it affects the company's capital structure—essentially, how a company
finances its overall operations and growth.

**What Does CFF Include?**

1. **Proceeds from issuing equity**: When a company needs more money to operate or
grow, it can sell shares to investors. Selling shares is a way of raising money without
incurring debt. For example, if a tech startup issues new shares and investors buy them, the
money paid by the investors to the company is a cash inflow.

2. **Dividends paid to shareholders**: If a company makes a profit, it might give some of this
money back to the shareholders as a reward. This is called a dividend. For instance, if a
well-established company with steady profits pays out dividends, it's a cash outflow.

3. **Repurchase of equity**: Sometimes, a company might decide to buy back its own
shares from investors. This could be because it believes the shares are undervalued or to
reduce the number of shares available and increase the value of remaining shares. This is a
cash outflow.

4. **Incurring and repaying debt**: Companies often borrow money to help finance their
operations. This can be through bank loans or by issuing bonds. When a company borrows
money, the cash it receives is an inflow. When it pays back the debt, the repayment is an
outflow.

**Examples of Financing Activities**

*Cash Inflows*:
- **Issuing shares and bonds**: This is the money a company receives when it sells part of
its ownership (shares) or when it borrows money through bonds.
- **Proceeds from loans**: When a company takes out a loan, the money it receives is an
inflow.

*Cash Outflows*:
- **Buying back shares**: If a company uses cash to buy its own shares back from investors,
it’s spending money to reduce its share count.
- **Repaying the principal on bonds and loans**: When a company pays back the original
amount it borrowed, it's a cash outflow.
- **Paying interest**: Interest is the cost of borrowing money. When a company pays interest
on its debts, it’s a cash outflow.
- **Paying dividends**: As mentioned earlier, dividends are a way to return profits to
shareholders and represent a cash outflow.

Understanding these transactions is important because they show how a company manages
its long-term funding. It tells you if a company is getting more financing or paying off its
debts, which can affect its financial stability and growth potential. For your MBA exam, you
should understand each type of transaction and its impact on a company's cash flow. No
calculations are needed for these descriptions, but you should understand the flow of cash in
and out of the business due to financing decisions.

The image outlines the cash flows related to financing activities, detailing how they are
useful in predicting future claims on cash by providers of capital to the entity. Here’s a
simplified explanation with examples:

1. **Predicting Future Claims on Cash**: This helps in estimating how much money the
company will need to pay back to those who have financed it, whether through equity (like
shares) or debt (like loans or bonds).

**Examples of Cash Flows from Financing Activities**:

- **(a) Issuing Shares or Equity Instruments**: When a company needs money, it can sell
shares to investors. The cash it receives from selling these shares is an inflow. For example,
if a startup sells 10,000 shares at $10 each, it gets $100,000 in cash.

- **(b) Payments to Acquire or Redeem Shares**: If a company buys back its shares, it's
spending money, which is a cash outflow. For instance, if the company decides to buy back
1,000 shares at $10 each, it spends $10,000 from its cash reserves.

- **(c) Issuing Debentures, Loans, Notes, Bonds, Mortgages**: These are different types of
debt. When a company borrows money, it's an inflow. For example, if a company issues
bonds worth $1 million, it receives $1 million in cash.

- **(d) Repayments of Borrowed Amounts**: Paying back the borrowed money is an outflow.
If the above company pays back $100,000 of its bonds in a year, that's a $100,000 cash
outflow.

- **(e) Lease Payments**: When a company leases equipment or property, the lease
payments are cash outflows. For example, if a company leases a vehicle and pays $500 a
month, that's a cash outflow.

For your MBA semester exam in accounting for managers, it's crucial to understand that
financing activities are related to how a company funds its business. You need to be able to
identify whether a transaction will result in a cash inflow or outflow and what that means for
the company's future cash obligations. No complex calculations are required for the basic
understanding of these concepts, but you should be comfortable with the general direction of
cash flow in each instance.

Non-cash activities are important transactions that don’t involve immediate cash flows but
still significantly affect the company's financial position. Here's what each term means, along
with examples:

1. **Issuance of Common Stock to Purchase Assets**:

- **Explanation**: Sometimes, instead of paying cash for an asset, a company might issue
new shares of its stock as payment.
 - **Example**: A car manufacturer wants to acquire a tech company to enhance its car
software. Instead of paying cash, it issues shares worth $1 million to the tech company as a
purchase price.

2. **Conversion of Bonds into Common Stock**:

- **Explanation**: Investors holding bonds (loans to the company) may have the option to
convert these bonds into shares of the company.
- **Example**: An investor holds $10,000 worth of bonds from a pharmaceutical company.
When the bond matures, instead of taking cash, the investor converts the bonds into 500
shares of the company.

3. **Issuance of Debt to Purchase Assets**:

- **Explanation**: A company may take on debt to acquire an asset instead of using its
cash reserves.
- **Example**: A bookstore wants to expand and open a new branch. It takes out a loan
(debt) to purchase the new shop location instead of using its savings.

4. **Exchanges of Plant Assets**:

- **Explanation**: Companies might trade assets with each other instead of buying and
selling them for cash.
- **Example**: Two manufacturing companies trade machinery. One company gives the
other a piece of older equipment in exchange for a newer model, with an agreement to
balance the value difference with additional assets in the future.

These non-cash activities are crucial in accounting because they change the company's
assets and liabilities without immediately affecting its cash position. However, they have
long-term implications for the company's operations and financial health.

For your MBA exams, understanding these transactions will help you analyze a company's
financial strategies and potential future cash flows. There are no direct cash calculations
involved with these transactions at the time they occur, but they will have future cash flow
implications, such as when the debt must be repaid or when new shares dilute the stock's
value.

The image appears to be a flowchart depicting the structure of cash flows within a company,
categorized into operating, investing, and financing activities. I'll explain each section with
examples:

1. **Operating Activities**:
- **Cash Inflows**: Money received from the company's main business activities, like
selling products or services.
- **Example**: A bakery sells bread and cakes to customers.
- **Cash Outflows**: Money spent on running the business day-to-day, like purchasing
materials or paying for services, and government taxes or levies.
- **Example**: The bakery buys flour and pays its bakers' salaries.

2. **Investing Activities**:
 - **Cash Inflows**: Money received from selling long-term assets or investments the
company has made.
- **Example**: The bakery sells an old delivery van it no longer uses.
- **Cash Outflows**: Money spent on purchasing fixed assets like property or equipment,
or making investments.
- **Example**: The bakery buys a new oven or invests in a coffee shop.

3. **Financing Activities**:
- **Cash Inflows**: Money received from issuing shares (equity) or taking on debt (like
loans or bonds).
- **Example**: The bakery issues new shares to investors or takes a loan to fund
expansion.
- **Cash Outflows**: Money spent to pay back debt, buy back shares from investors, or
pay dividends.
- **Example**: The bakery repays part of its loan or pays dividends to its shareholders.

In this flowchart, "Interest and Dividend" are circled in both the cash inflow and outflow
sections under financing activities. This indicates that:
- **Interest and Dividend Inflows**: The company may receive interest from loans it has
given or dividends from investments it owns.
- **Example**: The bakery receives interest from a loan it provided to a supplier.
- **Interest and Dividend Outflows**: The company pays interest on its own debt and
dividends to its shareholders.
- **Example**: The bakery pays interest on the loan it took to expand.

Understanding the cash flow structure is crucial for anyone studying accounting as it gives a
clear picture of how cash is generated and used within a business. This knowledge is
important for making financial decisions and for evaluating a company's financial health.
There are no calculations involved in explaining this flowchart; it's more about understanding
the flow of money in and out of a company.

The image you've uploaded describes the typical format of a cash flow statement. This
financial statement is one of the core documents used in both financial reporting and
management accounting. Here's a breakdown of each section in simple terms:

1. **Cash Flows from Operating Activities (a)**:

- This section details the cash that comes in and goes out due to the company's main
business activities.
- **Example**: For a bookstore, cash inflows include money received from selling books,
and outflows include money spent on buying books from publishers and paying rent for the
store space.
- The "Net cash provided by/used in operating activities" line shows whether the company
made or spent more cash in its operations during the period.

2. **Cash Flows from Investing Activities (b)**:

- This section reports the cash from buying or selling long-term investments, property, or
equipment.
 - **Example**: If the bookstore buys a new building for a new branch, that's a cash outflow.
If it sells an old vehicle it no longer uses, that's a cash inflow.
- The "Net cash provided by/used in investing activities" line indicates the total cash impact
of the company's investing actions.

3. **Cash Flows from Financing Activities (c)**:

- Here, you'll find transactions related to funding the business, like getting loans or issuing
shares.
- **Example**: If the bookstore issues new shares to raise money, it’s an inflow. If it pays
back a loan or pays dividends to shareholders, those are outflows.
- The "Net cash provided by/used in financing activities" line shows the net cash impact
from financing.

4. **Net Increase (Decrease) in Cash and Cash Equivalents**:

- This line shows the overall change in the company's cash balance over the period,
summing up the operating, investing, and financing activities.
- It starts with the cash and cash equivalents at the beginning of the period, adds the net
increase or decrease from all cash flow activities, and ends with the cash and cash
equivalents at the end of the period.

5. **Schedule of Non-cash Investing and Financing Activities**:

- Some transactions don't involve immediate cash but are important for understanding the
company's financial activities. These are listed here.
- **Example**: If the bookstore exchanges some of its shares for a property instead of
paying cash, this non-cash transaction would be reported in this section.

For an MBA exam, it's important to understand not just what each section represents but
also how they interact. A company with positive cash flow from operations is generally seen
as healthy, but if it has negative cash flow from investing and financing activities, it may not
be a concern if those activities are investments in future growth. No calculations are needed
to explain this format, but you should understand how to interpret the figures presented in
each section.

The image you uploaded is a proforma of a cash flow statement prepared using the direct
method. Here's a breakdown of the sections:

**A. Cash Flows from Operating Activities**:

- **Cash receipts from Customers**: Money the company receives from its customers for
selling goods or services. For example, a coffee shop receives cash when it sells coffee to
customers.
- **Cash paid to Suppliers and Employees**: Money the company pays out to its suppliers
for inventory and to employees for their wages. For example, the coffee shop pays for coffee
beans and pays its baristas.
- **Cash Generated from Operation**: This is the net cash that the company has after paying
for operating expenses, before considering any extraordinary items.
- **Income Tax Paid**: Taxes the company pays on its earnings.
- **Proceeds from any Disaster Settlement**: If the company receives insurance money, for
instance, after a natural disaster damages its property, this would be included here.
- **Net Cash Flow from Operating Activities**: The total cash inflow or outflow from the core
business operations.

**B. Cash Flows from Investing Activities**:

- **Proceeds from Sale of Fixed Assets including Investments**: Cash received from selling
long-term assets or investments. For example, selling a piece of machinery that's no longer
needed.
- **Purchase of Fixed Assets including Investments**: Money spent on buying long-term
assets or making investments.
- **Interest Received**: Money received as interest, perhaps on loans the company has
made.
- **Dividends Received**: Money received as dividends from investments in other
companies’ stocks.
- **Net Cash Flow from Investing Activities**: The total cash inflow or outflow from all
investing activities.

**C. Cash Flows from Financing Activities**:

- **Proceeds from Issuance of Share Capital**: Cash received when the company issues
new shares. For example, if a company goes public and sells its shares in an IPO.
- **Proceeds from Long-term Borrowings**: Money received from taking out long-term loans.
- **Repayment of Long-term Borrowings**: Money paid back against long-term loans.
- **Interest Paid**: Cash paid as interest on loans.
- **Dividend Paid**: Money distributed to shareholders as a part of the company’s profits.
- **Net Cash Flow from Financing Activities**: The total cash inflow or outflow from financing
activities.

At the bottom, you have the **Net Increase in Cash and Cash Equivalents**, which is the
sum of the net cash flows from operating, investing, and financing activities. This tells you
how the company's cash position has changed over the period.

Finally, you have the **Cash and Cash Equivalents at the Beginning and End of the Period**.
This shows how much cash the company started with and ended with after all the
transactions in the period.

For MBA exams, it's important to understand not just what these terms mean, but also how
to calculate and interpret them. Each line item affects the company's cash position, and
understanding the cash flow statement is essential for making financial decisions. No
specific calculations are required from the information provided here, but generally, you
would fill in the actual numbers for each line item to calculate the net cash flows.

The problem statement and answer key provided detail how certain transactions should be
categorized in the cash flow statement for Intelligent Ltd., a non-financial company. Let's go
through them one by one:

1. **Loans and Advances Given**:

- **To Suppliers**: If these are expected to be repaid shortly, they could be considered as
part of operating activities. The interest earned on these is also typically an operating activity
since it's related to the company's main operations.
 - **To Employees**: Generally, these are also considered operating activities because they
relate to the core business operations of the company.
- **To Subsidiaries**: This is more likely an investing activity because it represents an
investment into another company which is part of the business group.

2. **Investment in Subsidiary Smart Ltd.**:

- This would be classified under investing activities as it is an outlay of cash to acquire a
stake in another company.

3. **Dividend Received**:
- Dividends received from investments are typically classified as investing activities
because they result from putting money into another entity.

4. **Dividend Paid**:
- Paying dividends is a financing activity because it represents a return of profits to
shareholders.

5. **TDS (Tax Deducted at Source) on Interest Income**:

- This is essentially a deduction from the interest income the company earns, which would
typically be an operating activity.

6. **TDS on Interest Earned on Advance Given to Suppliers**:

- Similar to TDS on interest income, this would be an operating activity.

7. **Insurance Claim Received Against Loss of Fixed Asset by Fire**:

- This is usually treated as an extraordinary item and would be disclosed separately in the
cash flow statement because it’s not a regular occurrence in the business's operations.

The answer key image suggests categorizing the transactions as follows:

- **Operating Activities**:
- Loans to suppliers and employees, since these are part of the company's day-to-day
business operations.
- TDS on interest earned on advances, as this relates to the operational aspect of the
business.

- **Investing Activities**:
- Loans to subsidiaries, as this is more of an investment in another company.
- Investment in subsidiary Smart Ltd. for the same reasons.

- **Financing Activities**:
- Dividend paid, because this involves the distribution of earnings to shareholders.

- **Extraordinary Item**:
- Insurance claim received against loss of fixed asset by fire, because this is not a regular
business operation and is not expected to recur frequently.
When preparing for an MBA exam, it's important to understand the nature of each
transaction to classify them correctly in the cash flow statement. The cash flow statement is
a financial document that shows how changes in balance sheet accounts and income affect
cash and cash equivalents, and breaks the analysis down to operating, investing, and
financing activities. The goal is to understand how the company generates and uses cash,
which is vital for assessing its liquidity, flexibility, and overall financial performance.

The image you uploaded discusses two methods for estimating cash flow from operating
activities: the indirect method and the direct method.

**Indirect Method**:
- The indirect method starts with net income, which is the company’s profit reported on the
income statement.
- You then make adjustments for all non-cash items like depreciation and changes in working
capital accounts (like accounts receivable and payable). This means you add back non-cash
expenses to net income and account for the changes in balances of operational current
assets and liabilities.
- The goal is to reconcile net income, which is based on accrual accounting, with cash flow
from operations, which is based on actual cash transactions.

**Example**: Let’s say a company has a net income of $100,000. However, this includes
$10,000 of depreciation (a non-cash expense) and an increase in accounts receivable
(money owed by customers) of $5,000. To find the cash flow from operations, you’d add
back the depreciation to net income and subtract the increase in accounts receivable,
because that $5,000 is income that hasn’t actually been received in cash. So, the cash flow
from operations would be $100,000 + $10,000 - $5,000 = $105,000.

**Direct Method**:
- The direct method involves listing all the cash transactions for operating activities directly.
This includes all the cash received from customers and all the cash paid out to suppliers and
employees.
- You report the actual cash inflows and outflows from the company’s operations, rather than
starting with net income and making adjustments.

**Example**: If the company received $120,000 in cash from customers and paid $15,000 to
suppliers and employees during the period, the cash flow from operations would be
$120,000 - $15,000 = $105,000.

**Important Note**: Whether you use the indirect or direct method, the end result for the
cash flow from operating activities should be the same. The difference lies in the
presentation and the process to arrive at the cash flow.

For the indirect method, it's also worth noting that in certain jurisdictions, like India, listed
companies are required to use the indirect method for preparing their cash flow statements.

In preparing for an MBA exam, understanding these methods is critical because they provide
different perspectives on how a company's operations are generating cash. The direct
method can give a clearer picture of the actual cash transactions, while the indirect method
can offer more insight into how net income and working capital affect cash flow.

In the direct method of estimating Cash Flow from Operating Activities (CFO), you're
basically working out how much cash a company's day-to-day operations have generated
over a certain period. Here's how it works, step by step:

1. **Cash Received from Customers**: This is the amount of money the company receives
from selling its goods or services. For example, if a bookstore sold $20,000 worth of books,
that's the cash inflow from customers.

2. **Cash Paid to Suppliers and Employees**: This represents the cash going out of the
business to pay for things like raw materials, goods, and employee wages. If the same
bookstore paid $5,000 to its suppliers for books and $8,000 in wages to its staff, that would
be the cash outflow.

3. **Cash Generated from Operations**: This is the net cash flow from the core business
operations, which is calculated by subtracting the cash paid to suppliers and employees from
the cash received from customers. So for our bookstore, it would be $20,000 - ($5,000 +
$8,000) = $7,000.

4. **Income Tax Paid**: This is the amount of money the company pays to the government in
taxes. If the bookstore had to pay $2,000 in taxes, this would be subtracted from the cash
generated from operations.

5. **Net Cash Flow from Operations**: This is the final number representing the total cash
that the company has either gained or lost from its operating activities during the period.
Continuing with the bookstore example, the net cash flow from operations would be $7,000 -
$2,000 = $5,000.

The 'xxxx' placeholders are where the actual numbers would go in a real cash flow
statement. For your MBA exam, understanding this concept is crucial because it shows the
actual liquidity position of the business - how much cash it really has on hand, which is vital
for maintaining operations and for assessing the overall financial health of the company.

The provided image seems to contain an account ledger or a list of transactions related to
the calculation of cash flow from operating activities. Let's go through each item and explain
it in simple terms:

1. **Balance b/d (brought down)**: This is the opening balance of cash at the beginning of
the period.

2. **Cash Sales**: The amount of money received from selling goods or services in cash.

3. **Trade Receivables**: Money that the company is due to receive from its customers for
sales made on credit.

4. **Trade Commission**: Fees or income earned from commission-based transactions.

5. **Sale of Investment**: Cash received from selling investment assets like stocks or bonds.

6. **Loan from Bank**: Money borrowed from the bank during the period.

7. **Interest & Dividend**: Cash received from interest on investments or dividends from
shares held in other companies.

On the right side of the ledger:

1. **Cash Purchases**: Money spent on buying goods or services in cash.

2. **Trade Payables**: Money that the company owes to its suppliers for purchases made on
credit.

3. **Office & Selling Expenses**: Cash spent on general administrative and selling
expenses.

4. **Income Tax**: Taxes paid in cash during the period.

5. **Investment**: Cash used to buy investment assets.

6. **Repay of Loan**: Money paid back to the bank or other lenders for loans taken.

7. **Interest on Loan**: Interest payments made on borrowed money.

8. **Balance c/d (carried down)**: The closing balance of cash at the end of the period.

To calculate the net cash flow from operating activities, you would start with the cash
received items and then subtract the cash paid items:

- Start with **Cash Sales** (which are direct inflows of cash).

- Add **Trade Receivables** (if they were collected during the period, meaning they turned
into actual cash).
- Add other cash inflows such as **Sale of Investment**, **Loan from Bank**, and **Interest
& Dividend**.
- Then, subtract cash outflows such as **Cash Purchases**, **Trade Payables** (if they were
paid off during the period), **Office & Selling Expenses**, **Income Tax**, **Investment**,
**Repay of Loan**, and **Interest on Loan**.

The net result will give you the net cash flow from operating activities. Note that some items
like loans from banks or sale of investments might actually belong to financing or investing
activities rather than operating activities in a standard cash flow statement. The ledger also
includes the opening and closing balances of cash which are used to reconcile the cash
flows during the period.
For the MBA exam, understanding the movement of cash and the ability to categorize
transactions correctly is crucial. Each item affects the company's cash position and its ability
to continue operations, invest in opportunities, or manage its financing.

The image you've provided looks like a section of a cash flow statement showing the
operating activities of a company, with figures in Indian Rupees (Rs.). Here's a step-by-step
explanation of each line item:

1. **Cash received from sale of goods (Rs. 1,40,000)**: This is the money the company
earned from selling its products. Imagine a store selling furniture; when customers pay for
the furniture in cash, this is recorded here.

2. **Cash received from Trade receivables (Rs. 1,75,000)**: Trade receivables are amounts
that customers owe to the company. When the company collects this money, it's recorded
here. For example, if customers who bought on credit pay back, the company records the
collection here.

3. **Trade Commission received (Rs. 50,000)**: If the company earns commission by selling
products or services on behalf of another business, it's recorded here. Suppose the
company is an agent that sells electronics and gets a commission for each sale.

Then, the statement lists the cash outflows related to operating activities:

4. **Payment for Cash Purchases (Rs. 1,20,000)**: This is the amount the company spent to
buy goods or inventory in cash. If our furniture store buys wood and materials, the payment
is listed here.

5. **Payment to Trade payables (Rs. 1,57,000)**: These are payments the company makes
to its suppliers for goods or services received on credit. If the store orders furniture from a
manufacturer and pays later, the payment is recorded here.

6. **Office and Selling Expenses (Rs. 75,000)**: These are the costs associated with running
the office and selling goods, such as rent, utilities, and marketing expenses.

7. **Payment for Income Tax (Rs. 30,000)**: This is the amount of income tax the company
pays to the government.

Finally, the **Net Cash Flow used in Operating Activities (Rs. 17,000)** is calculated. This
figure is obtained by subtracting the total outflows (Rs. 3,82,000) from the total inflows (Rs.
3,65,000), which results in a negative number (Rs. 17,000). This means the company spent
more cash than it brought in from its operating activities during this period. It's a "net cash
used" because the company had to possibly dip into its cash reserves or borrow to cover
these operations.

For the MBA semester exam, it's important to understand that a negative net cash flow from
operating activities might indicate that the company is not generating enough cash from its
core business operations and might need to find additional funding sources. However, it's
also important to look at the cash flows in the context of the company's long-term
investments and financing activities to get a complete picture of its financial health.

The indirect method for estimating cash flow from operating activities involves adjusting net
profit to account for non-cash transactions and changes in working capital. Here's how it
works:

1. **Start with Net Profit**: This is the income left over after all expenses are paid, as
reported on the income statement.

2. **Adjust for Non-cash Revenue and Expenses**: You then make adjustments for any
revenue and expenses that didn't actually involve cash changing hands during the period.
- **Example**: If a company recorded revenue from sales made on credit, that revenue
didn't bring in any cash yet, so you would adjust for this by subtracting it from net profit.
Similarly, if depreciation was charged as an expense, it didn't reduce cash (since it's just an
accounting entry representing the loss in value of an asset over time), so you add it back to
net profit.

3. **Changes in Operating Assets and Liabilities**: You also adjust for changes in operating
assets and liabilities. If customers paid off their previous credit purchases (accounts
receivable decreased), this is a cash inflow and you add it to net profit. If the company
purchased more inventory (increased inventory), it's an outflow and you subtract it from net
profit.

4. **Resulting Net Cash Flow from Operating Activities**: After making all these adjustments,
you end up with the net cash provided by or used in operating activities.

In the provided diagram, it appears to illustrate that you take net profit from the
accrual-based accounting system, eliminate non-cash revenues and expenses, and then
arrive at the net cash flow from operating activities under the cash-based accounting system.

For your MBA exam, it's crucial to understand that the indirect method provides a link
between the income statement and the cash flow statement and helps explain why net
income from the income statement may not equal the cash provided by operating activities.

The image you've uploaded details the types of adjustments made when using the indirect
method to calculate cash flow from operating activities. Here's a breakdown of each type:

**Non-cash Items**: These are expenses or losses reported on the income statement that
don’t actually reduce cash during the period.

- **Depreciation/Depletion/Amortization**: These are methods of allocating the cost of a

tangible or intangible asset over its useful life. Since it's not an actual cash expense, you add
it back to net income.

- **Bad Debt Expense**: This is an estimate of the company's receivables that are expected
not to be collected. You add it back because it's a non-cash expense.
- **Excess Provision Written Back**: If a previously made provision (like for bad debts or
depreciation) is found to be too high and is reversed, you add this reversal back to net
income since it's not a cash inflow.

**Non-operating Items**: These are gains and expenses that are not related to the primary
operations of the business.

- **Interest Expense/Income**: Money paid as interest on loans or received from

investments. Interest expense is added back to net income since it's an expense, while
interest income is subtracted because it's a non-operating gain.

- **Loss/Gain on Sale of Fixed Assets/Investments**: These are the losses or gains from
selling long-term assets or investments. Losses are added back, and gains are subtracted
because they are not related to the core operating activities.

**Working Capital Items**: These involve changes in current assets and current liabilities
that affect the company's cash flow.

- **Decrease in Trade Receivables/Inventories/Prepaid Expenses**: These are indications

that cash has been received, thus, they are added to the net income.

- **Increase in Trade Payables**: This means less cash has been paid out to suppliers, so
it's added to net income.

- **Increase in Trade Receivables/Inventories/Prepaid Expenses**: This implies that cash

has been spent, which decreases the available cash, so they are subtracted from net
income.

- **Decrease in Trade Payables**: More cash has been paid out, so it's subtracted from net
income.

For an MBA exam, it’s crucial to understand these adjustments because they reconcile the
net income (which is based on accrual accounting) with the cash generated from the
company's operational activities. It gives a clear picture of how much actual cash is being
generated by the business operations, regardless of the non-cash accounting entries that
can affect net income.

The image outlines how changes in working capital items are adjusted in the indirect method
of cash flow statement preparation. Here's what each term means:

**Assets:**
- **Increase in non-cash assets**: If assets that don't represent cash increase, it means the
company has spent cash to acquire them. For example, if the company buys more inventory
but hasn't sold it yet, this is considered a cash outflow because cash was used to buy the
inventory.
- **Decrease in non-cash assets**: A decrease indicates the company has converted these
assets into cash, like selling off some of its inventory for cash. This is considered a cash
inflow because it increases the company's cash balance.
**Liabilities and Shareholders’ Equity (SHE):**
- **Increase in liabilities or SHE**: An increase here usually means the company has
received cash and has not had to spend it yet. For example, if more customers are buying
on credit, the accounts payable would increase, which is a cash inflow because the company
has the customers' money but hasn't provided the service or product yet.
- **Decrease in liabilities or SHE**: A decrease suggests the company has paid out cash.
For example, when the company pays down its debt, the liabilities decrease, indicating a
cash outflow because the company is using its cash to reduce what it owes.

When preparing for an MBA exam, it's important to understand these concepts because they
directly affect the cash flow from operations. These adjustments are necessary to convert
the net income from an accrual basis, which includes non-cash transactions, to a cash basis,
which reflects the actual cash that has come in and gone out of the business.

The image you provided shows a proforma for calculating 'Cash Flow from Operating
Activities' using the indirect method. Here's a step-by-step explanation of each part:

1. **Net Profit for the Year**:

- This is the starting point for the indirect method. It represents the profit the company has
made over the year after all expenses have been deducted from revenues, but it's not all in
cash because it includes non-cash transactions.

2. **Add: Non-Cash and Non-Operating Expenses**:

- **Depreciation**: This is an accounting method used to allocate the cost of a tangible
asset over its useful life. Since it's a non-cash expense, it is added back to the net profit.
- **Loss on Sale of Assets**: If the company sold an asset for less than its book value, it
would report a loss. This is a non-cash expense because it doesn't involve an outlay of cash,
so it's added back to net profit.
- **Provision for Taxation**: This is money set aside for future tax payments and is added
back because it is not an actual cash outflow until the tax is paid.

3. **Less: Non-Cash and Non-Operating Incomes**:

- **Profit on Sale of Assets**: If the company sold an asset for more than its book value, it
would report a profit. This is subtracted from net profit because it's a non-operating income.

4. **Net Profit after Adjustment for Non-Cash Items**:

- This is the net profit adjusted for all the non-cash transactions listed above.

5. **Cash from Operation**: To arrive at the actual cash flow from operations, further
adjustments are made for changes in current assets and liabilities.
- **Increase in Current Assets**: If current assets like inventory or accounts receivable
increase, this indicates that cash has been used, so it's subtracted from the net profit.
- **Decrease in Current Assets**: A decrease in current assets means cash has been
received, so it's added to the net profit.
- **Increase in Current Liabilities**: If accounts payable or other current liabilities increase,
this suggests that less cash has been paid out, so it's added to the net profit.
 - **Decrease in Current Liabilities**: A decrease in current liabilities means more cash has
been paid out, so it's subtracted from the net profit.

The final figure you get after all these adjustments will be the 'Net Cash Flow used in
Operating Activities', which represents the actual cash that the company generated or used
in its operations during the year.

For an MBA exam, you should understand how to prepare a cash flow statement using the
indirect method and be able to explain the rationale behind each adjustment. This
understanding is crucial because the cash flow statement provides insights into the
company's liquidity and cash-generating ability, which are key indicators of its financial
health.

The image you've provided seems to include a list of transactions from a company's financial
records over a year, which would be used to prepare a Cash Flow Statement (CFS). Let's go
through each item:

1. **Balance at 1.3.2018 (Rs. 35)**: This is the opening cash balance at the beginning of the
period, March 1st, 2018.

2. **Receipts from Customers (Rs. 2,783)**: Cash received from customers for sales or
services rendered during the year.

3. **Issue of Shares (Rs. 300)**: Cash received from issuing new shares to shareholders.

4. **Sale of Fixed Assets (Rs. 128)**: Cash received from the sale of long-term assets such
as property, plant, or equipment.

5. **Payments to Suppliers (Rs. 2,047)**: Cash paid to suppliers for materials or goods
necessary for the company's operations.

6. **Payments for Fixed Assets (Rs. 230)**: Cash spent on purchasing new fixed assets.

7. **Payments for Overheads (Rs. 115)**: Cash paid for general operating expenses of the
business.

8. **Wages and Salaries (Rs. 69)**: Cash paid to employees for their work.

9. **Taxation (Rs. 243)**: Cash paid for taxes to the government.

10. **Dividends (Rs. 80)**: Cash distributed to shareholders as a part of the company’s
profits.

11. **Repayments of Bank Loan (Rs. 250)**: Cash paid to the bank for the repayment of a
loan's principal amount.

12. **Balance at 31.3.2019 (Rs. 212)**: This is the closing cash balance at the end of the
period, March 31st, 2019.
To prepare a Cash Flow Statement using this information, you would categorize each
transaction into one of the three sections of the CFS: Operating Activities, Investing
Activities, and Financing Activities.

**Operating Activities**: Typically includes receipts from customers, payments to suppliers,

payments for overheads, wages, and taxation. You would calculate the net cash provided by
or used in operating activities by summing the receipts and subtracting the payments related
to operations.

**Investing Activities**: Includes the sale of fixed assets and payments for fixed assets. The
net cash from investing activities is the cash received from the sale minus any cash used to
purchase new assets.

**Financing Activities**: Encompasses the issue of shares, repayment of the bank loan, and
payment of dividends. You would calculate the net cash provided by or used in financing
activities by adding the cash received from issuing shares and subtracting the cash used to
repay loans and pay dividends.

Finally, the net increase or decrease in cash is determined by adding up the net figures from
operating, investing, and financing activities, which should reconcile with the change in the
cash balance from the start to the end of the year. In this case, it would be checked against
the closing balance of Rs. 212. If everything is accounted for correctly, the change in the
cash balance in the CFS should match the actual change in the cash balance between the
opening and closing figures.

Given the information in the provided images, here is a detailed explanation in table format
for the Cash Flow Statement (CFS) sections: Operating, Investing, and Financing activities.
Financing Activities:

To calculate the net cash from each activity, you would:

1. **For Operating Activities**:

- Add up all the cash inflows.
- Subtract all the cash outflows.
- Subtract income taxes paid from the cash generated from operations to get the net cash
from operating activities.

2. **For Investing Activities**:

- Subtract the payments for the purchase of fixed assets from the proceeds from the sale
of fixed assets to get the net cash used in investing activities.

3. **For Financing Activities**:

- Add the proceeds from the issuance of share capital.
- Subtract the bank loan repaid and dividends paid to get the net cash used in financing
activities.

Finally, the net increase in cash and cash equivalents is calculated by adding the net figures
from all three activities. This should match the difference between the cash and cash
equivalents at the end of the period and the beginning of the period.
For an MBA exam, you would need to understand how these activities affect the company's
cash flow and be able to perform these calculations. It's important to note that positive net
cash from operating activities is typically a sign of a healthy company, as it indicates the
company can generate enough cash from its business to sustain itself. Negative figures in
investing or financing activities can be normal, depending on the company's strategy and
stage of growth.