CHAPTER -1

INTRODUCTION

1
 INTRODUCTION

In financial accounting, a cash flow statement or statement of cash flows is a

financial statement that shows a company's incoming and outgoing cash during
a time period. All three statements are arranged from the same accounting
information, but each statement serves its individual function. The statement of
cash flow reports the movement of cash into and out of your business in a given
year. Cash is the lifeblood of your company. The cash flow statement reports
your business' sources and uses of cash and the beginning and ending values for
cash and cash equivalents each year. It also includes the combined total change
in cash and cash equivalents from all sources and uses of cash.

Cash flow statements format planning involves forecasting and tabulating all
significant cash inflows and analyzing the timing of expected payments in
detail. We have highly skilled cash flow financing professionals prepare
comprehensive periodic cash flow projections that can assist you in tasks such
as budgeting, business planning and fund raising.

1 What Does Cash Flow Mean?

1. A revenue or expense stream that changes a cash account over a given period.

Cash inflow usually arises from one of three activities - financing, operations or
investing - although this also occurs as a result of donations or gifts in the case
of personal finance. Cash outflows result from expenses or investments.

2. An accounting statement called the "statement of cash flows", which shows

the amount of cash generated and used by a company in a given period. It is
calculated by adding noncash charges (such as depreciation) to net income after
taxes. Cash flow can be attributed to a specific project, or to a business as a
whole. Cash flow can be used as an indication of a company's financial strength.

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Cash flow Plan is a range of powerful, easy-to-use software packages for
preparing comprehensive monthly cash flow projections for 12 months ahead.
You can use it for cash flow planning, budgets, business planning, fund raising
etc. for young & established businesses of all sizes and types. It incorporates a
roll-forward facility to help you to speedily update the projections every month.
More powerful versions also include a tool for consolidating projections.

Cashflow Plan will help plan your business's cash requirements, improve
control over cashflows and conserve cash resources. It will be especially
useful if you need to forecast cashflows in the context of:

 1 tight cash/profit margins

 2 limited financial resources
 3 planning for growth or radical change
 4 compiling cash budgets

2. When to Use Cashflow Plan

Cashflow Plan is a software tool for preparing cashflow projections for a

business. It will be especially useful to your business if you need to improve its
future net cashflow. Cashflow Plan will help you to plan cash requirements and
thereby improve control over your business's cashflows and to conserve its cash
resources

In addition to compiling detailed monthly cash flow forecasts, Cash flow Plan
automatically generates fully-integrated income statements (profit and loss
accounts) and balance sheets on a monthly basis. This makes Cash flow Plan
very suitable for many other purposes where you may need 12-month
projections:

 1 preparing shorter term business plans,

 2 exploring development options,
 3 constructing budgets,
 4 assessing strategies,

5 raising external finance and so on........

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 CHAPTER – 2

CASH FLOW STATEMENT

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THE CASH FLOW STATEMENT

The cash flow statement & analysis have become so important that more
extends coverage is required. In essence cash flow statement is fund statement
prepared on the basis of fund defined in term of cash equivalent. The cash flow
analysis have however been extended to certain uses that are more or less
foreign to prior fund statement usage. Usually cash flow statement is prepared
in “T” format. Cash flow statement summaries sources of cash inflow & uses of
cash out flow of the firm during a particular period of Time. The projected cash
flow statement is prepare month wise, so that it can be useful in presenting
information of excess cash in some month & shorted of cash in others. By
making available such information in advance, the cash flow statement unable
the management to revise the it plans, in the month when cash receipts are
expected to be greater than such payment. Bank overdraft can be repay, short
term government security can be purchased, and cash discount can be availed &
so on. Likewise, in the month when cash payments are expected to exceed
receipt, the firm would be required to arrange for bank overdraft or sale it
marketable security.

The cash flow statement includes some important terms, which are as under;

 “CASH” means cash balance on had & deposited with

bank.

 “CASH” equivalent are short-term and mostly liquid

investment that are readily convertible in to known
amount of cash and which are subject to less risk of
changes in value.

 “CASH FLOW” consist cash inflow & cash out flow

of cash & cash equivalent.

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CHAPTER – 3

COMPANY PROFILE

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Brief information about the company
Name of the company – Odisha State Co-operative Milk Federation
Ltd. (OMFED)

Headquarters – D-2, Saheed Nagar, Bhubaneswar, Odisha, India.

Founded- 1985

Industry- Dairy

Founder Type- Cooperative

Area served- Odisha

Accounting Year- 1st April – 31st March

Key People- Smt. Sarojini Mishra (Chairperson)

Shri. Vishal Gagan (IAS)
Managing Director, OMFED

Product- Milk and Milk Products,

Horticulture Products,
Kandahamal Organic Products,

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1. OMFED: An Introductory Framework
The history of Indian Milk Products is perhaps as old as Indian civilisation
itself. Even as our ancestors began to domesticate milch animals, they found
innovative ways to convert highly perishable milk into more stable and longer
lasting milk products. It is a part of Indian culture to revere cows, and Kings of
yore often gifted cattle as rewards to their kinsmen. Therefore, it is not
surprising that Indians have a deep rooted tradition of using milk and milk
products.
Orissa State Co-operative Milk Producers’ Federation Limited (OMFED)
operates in Odisha, which is an eastern state of India. OMFED deals with milk
and milk products and from years it has been engaged in providing livelihood to
rural farmers and milk producers and safe and hygienic milk to the urban
households of Odisha. Apart from this, it is known to bring a customary practice
to grace the Indian ceremonies and functions with ghee, butter, and sweets.

The Orissa State Cooperative Milk Producers' Federation Limited

(OMFED) is an apex level Dairy Cooperative Society registered under
Cooperative Society Act – 1962. It is the leading organized milk producer of
Odisha and has come into existence to integrate the milk producers in rural
areas with consumers in the urban areas with an enterprising aptitude. It got
registered in 1980 and started working since 1981. It took over OMPAC in
1988.
Its main activities include promoting, production, procurement, processing
and marketing of milk & milk products for economic development of the rural
farming community in Orissa.

2. Background

Odisha can be considered as one of the poorest states in India from the
perspective of industrial development. In Odisha, we can find the majority of
the population being dependent on agriculture, animal husbandry and other such
related activities as its primary means of occupation cum livelihood and chief
source of income.

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 Incidentally though there is a large concentration of milch cattle such as
cows and buffaloes in rural areas of Odisha, but the per capita ownership of
cattle isn’t large enough to justify organized milk generation and selling.
Therefore, this was never considered as a feasible and viable alternative to
provide means of livelihood to the rural masses.
OMFED came into existence after conceiving the novel idea to start a collective
work with farmers/milk producers through milk generation and marketing. So,
OMFED, to shortly describe, forms a rural-urban development continuum by
providing livelihood to rural Odisha and offering the urban middle class with a
safe, secured and hygienic source of milk.

5. The Major Objectives of “OMFED”

• To carry out activities for promoting production, procurement,
processing and marketing of milk and milk products for economic development
of the rural farming community.
• Development and expansion of such allied activities as may be conducive for
the promotion of the dairy industry. Improvement and protection of milch
animals and economic betterment of those engaged in milk production. In
particular and without prejudice to the generality of the forgoing objective, the
federation may:-
• Purchase and/or erect building, plant machinery and other ancillary objects to
carry out business.
• Study problems of mutual interest related to procurement, marketing of dairy
and allied products.
• Advice, guide and assist the Milk Union in all respects of management,
supervision audit functions.
• Render technical, administrative, financial and other necessary assistance to
the member unions and enter in to collaboration agreement with someone, if the
need arises.
• Provide veterinary aid and artificial insemination services and to undertake
animal husbandry activities so as to improve animal health care disease control
facilities.

6. Omfed Vision –

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To be a leading milk producing organization of efficiency with widest and
satisfied customer base, maximizing wealth of stakes holders and contributing
to the state economy.

7. Omfed Mission-
1. Increase in capacity of milk processing facilities.
2. Change in urban markets from traditional raw milk supplies to modern dairies
Milks supplies to modern dairies milk supplies.
3. Resettlement of city base cattle in rural areas.
4. Development of long distance milk transport and storage facilities.
5. Improvement in dairy farming standard.
6. To be learning organization and responsive to changing environment.
FUNDS MANAGEMENT AT OMFED
Omfed is basically a dairy industry, therefore it require maintaining sufficient
current asset to meet its working capital needs because in order to pay its
obligation at the time as and when they are due. So in Omfed the management
of funds basically caters the needs of working capital through its funds
management policy. To ensure smooth flow of flow of funds, in order to carry
out business smoothly.

For the better understanding of working capital management at Omfed one has
to thorough the Sources and Application of funds. For the purpose of
monitoring working capital requirement, daily cash register in maintained. The
receipt of funds at each of the centre of Omfed is transferred to corporate office,
Bhubaneswar.

Credit Policy
OMFED strictly follows the cash basis of transactions. Retailers have to make
an advanced payment before milk is to be supplied. But in certain exceptional
cases, it provides credit. For example: S.C.B. Medical College, Cuttack, Capital
Hospital.

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Primary Activities of OMFED (The 5 P’s)
1. Procurement of milk.
2. Providing technical inputs to milk producers.
3. Providing training in new and scientific methods to increase productivity of
milk in the state.
4. Proper storing/chilling of milk.
5. Processing and marketing of milk.

Table 1. Product-Mix of OMFED along with Variants

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Table 2. OMFED Product Ranges with Pricing

Product Offerings
OMFED is known for providing a wide range of products namely
• Milk and Milk products
• Horticulture products
• Kandahamal organic products
• Cattle feed

The Distribution Channel of OMFED

The backbone of OMFED is its Supply Chain that is efficiently managed by
OMFED to suit to its customers’ needs and meet the stated objectives. It follows
a three-tier system which was originally pioneered by AMUL Dairy in Gujarat
state of India.
1. The Village Co-operative Society (The actual Milk Producers)
2. The District Milk Unions/MU’s (Collect milk from producers and provide
them the required inputs)

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3. The Milk Federation (Engaged in processing and marketing of milk)

Figure 1. Three-Tier Operational System of OMFED

In OMFED, farmers are the principal stakeholders or beneficiaries as they enjoy

the collective ownership and are ensured to get a fair price and return. So,
OMFED thwarts the traditional distribution system, wherein middlemen used to
dictate the terms to actual producers by offering lower prices to them.
Since 26th July 1981, when OMFED started functioning it has made its presence
felt in many districts of Odisha. It is present in majority of districts of Western
and Coastal Odisha.
Milk is procured from various village co-operative societies throughout these
districts twice daily from which it is sent to the chilling centres at the nearest
District Milk Union in hired trucks. From the MU’s it is sent to nearest Milk
Federation dairy for processing and marketing.

1. Village Co-operative Society

It represents the first tier in the whole system. It is a voluntary association
of milk producers in a village who are willing to sell milk on a collective basis.
Any milk producer can become a member by paying a nominal fee of Rs.1 and
buying a share of Rs.10. The milk producer is expected to sell only the surplus
milk to the society after meeting his personal needs. The members select a
Committee and a Chairman too to better manage and handle things. The
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Committee then selects some more people to act as aides (milk tester, secretary
etc.). Milk producers bring milk to the society every morning and evening. A
sample of milk from each producer is taken and tested by a Lactometer for
quality. The society sells milk only to the nearest District Milk Union.

2. District Milk Union(DMU)

The Milk Union then carries the collected milk from the society by using hired
transport vehicles to their processing centres. Milk is chilled to 5 degree C in
the chilling centres. The collector of the district is the Chairman of the DMU. It
is also the job of the Milk Unions to provide technical inputs (new methods like
artificial insemination etc.), training and sometimes even to provide cattle feed
and fodder etc. to the village societies. The MU gives various technical inputs to
the producers to enhance their milk productivity. This is done in the hope that
excess productivity will result in excess of surplus milk with the producers
which he can then sell to the village society. Some of the prominent technical
input programs (TIP) are
• Embryo Transfer Technology (ETT)
• Artificial Insemination (AI)
• Feed and Fodder programs.
• Training (Odisha Milk Federation’s Integrated Training and Development
Centre, OMTDC).

Figure 2. Milk Unions of OMFED

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Figure3. Different Dairies of OMFED

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16
Comparing OMFED with National Dairy Giant AMUL

Amul is a cost leader in the dairy market and enjoys a developed market
demand for offering affordable and attractive products to customers and
guaranteeing value for money.
• Amul has a widespread distribution network of 10 lakh retailers and 5000
dealers in India.
• Apart from adding higher value products, it maintains the desired growth in
existing ones.
• Due to its strong co-operative roots, AMUL collects 3.45 billion litres of milk
from over 3 million farmers.
• Amul adopts the umbrella branding strategy and is the common brand for most
product categories produced by various Unions such as liquid milk, milk
powder, butter, ghee, cheese, cocoa products, sweets, ice-cream, and condensed
milk.
• Amul handles the distribution of end products and co-ordination with retailers
and dealers. The Unions co-ordinate the supply side activities. These include
monitoring of milk collection contractors, the supply of animal feed and other
supplies, provision of veterinary services and educational activities.

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 CHAPTER - 4
RESEARCH METHODOLOGY

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Research is the systematic collection, analysis and reporting of data and making
relevant finding to deal with a specific situation faced by the company. The data
can be collected and analyzed with the help of diagram and charts, which help
in arriving to a conclusion.

In general sense research methodology means how to research and which best
way select for finding out data from the company during the industrial training.
The main objective of the research methodology is choosing the best path for
collecting required data.
The report is on “cash flow statement” at OMFED. The following research
methodology is being followed for the project work.

Type of data used-

For the preparation of report the data used is secondary data.

Data collection

The following sources of data are used for preparation of the report.
Annual report of “OMFED”
Website of “OMFED”

RESEARCH DESIGN & METHODOGY-

Research design is blue print of data collection, measurement & analysis of
data. It indicates both structure of problem & plan of investigation used to
obtain empirical evidence on those relationships.
There are generally three types of research design which are as follows.
1 .EXPLORATORY STUDIES
2. DESCROPTIVE STUDIES
3. CAUSAL STUDIES

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For the research design I have selected DESCRIPTIVRE STUDIES because as
cash flow analysis is topic in which there must detail description of all
transaction are required to study so that we get idea how cash is collect from
various sources & utilized in organization . Further while doing in depth study
we get complete picture of process that follow in organization.
Significant of study

Aim of work help to reach destination by problems arises in the way .work
become more efficient if purpose for doing work is clear.
Limitations:

The limitation of my research work is

1) The time available was not sufficient enough to probe deeper for a more
detailed study.
2) Limitation of the secondary data used for making the study can be
considered as limitation of the study itself.
3) Similarly, the limitation of the various tools used for analysis can be a
limitation of the study.

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CHAPTER – 5

LITRATURE REVIEW

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As Jeffrey P. Davidson and Charles W. Dean indicated in their book Cash
Traps, cash flow can be a problem even when a small business has numerous
clients, offers a superior product touts customer, and enjoys a sterling reputation
in its industry. Companies suffering from cashflow problems have no margin of
safety in case of unanticipated expenses. They also may experience trouble in
finding the funds for innovation or expansion. Finally, poor cash flow makes it
difficult to hire and retain good employees.
Cash is the lifeblood of a [store]," wrote Richard Outcast and Patricia Johnson
in Playthings. "Without cash for inventory, payroll, and other expenses, an
emergency is imminent."

Jensen (1989) states that when free cash flows are available to top managers,
they tend investing negative NPV projects instead of paying out dividends to
shareholders. He argues that the compensation of managers with an increase in
the firm’s turnover. Hence the objective of the company is to increase the size
of the firm by investing in all sorts of projects even if these projects have a
negative NPV. Doff (2007) argued that compensation of managers tend to
increase when there is an increase in the firm’s turnover.

Lang, Stutz and Walking (1991) uses the Tobin’s q as a proxy to determine the
quality of investment. Firms with a high µq¶ showed that firms were using their
free cash flows to investing positive NPV projects whereas firms with low µq¶
showed that firms were investing in negative NPV projects and therefore, the
free cash flows should instead be paid out dividends to the shareholders. As a
whole, this study is in line with the free cash theory and was considered as very
reliable among economists.

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 CHAPTER- 4

THEORATICAL FRAMEWORK

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Cash flow is the movement of cash into or out of a business, project, or
financial product. It is usually measured during a specified, finite period of
time. Measurement of cash flow can be used for calculating other parameters
that give information on a company's value and situation. Cash flow can e.g. be
used for calculating parameters:
To determine a project's rate of return or value. The time of cash flows into and
out of projects are used as inputs in financial models such as internal rate of
return and net present value.
To determine problems with a business's liquidity. Being profitable does not
necessarily mean being liquid. A company can fail because of a shortage of cash
even while profitable.
As an alternative measure of a business's profits when it is believed that accrual
accounting concepts do not represent economic realities. For example, a
company may be notionally profitable but generating little operational cash (as
may be the case for a company that barters its products rather than selling for
cash). In such a case, the company may be deriving additional operating cash by
issuing shares or raising additional debt finance.
Cash flow can be used to evaluate the 'quality' of income generated by accrual
accounting. When net income is composed of large non-cash items it is
considered low quality.
To evaluate the risks within a financial product, e.g. matching cash
requirements, evaluating default risk, re-investment requirements, etc.
Cash flow is a generic term used differently depending on the context. It may be
defined by users for their own purposes. It can refer to actual past flows or
projected future flows. It can refer to the total of all flows involved or a subset
of those flows. Subset terms include net cash flow, operating cash flow and free
cash flow.

Statement of cash flow in a business's financials-

The (total) net cash flow of a company over a period (typically a quarter or a
full year) is equal to the change in cash balance over this period: positive if the
cash balance increases (more cash becomes available), negative if the cash
balance decreases. The total net cash flow is the sum of cash flows that are
classified in three areas:

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 1. Operational cash flows- Cash received or expended as a result of the
company's internal business activities. It includes cash earnings plus
changes to working capital. Over the medium term this must be net
positive if the company is to remain solvent.
2. Investment cash flows- Cash received from the sale of long-life assets,
or spent on capital expenditure (investments, acquisitions and long-life
assets).
3. Financing cash flows- Cash received from the issue of debt and equity,
or paid out as dividends, share repurchases or debt repayments.

OBJECTIVE AND IMPORTANCE OF THE STATEMENT-

OBJECTIVE
The cash flow statement has become very useful in financial accounting for
more than reason. A cash flow statement provides information for planning of
short term needs of the firm. Cash flow statement highlight a changes in the
financial structure of enterprises changes in various sources of cash, debt &
equity in the statement.
Cash flow statement shows from where & to what extend cash has been
received from different sources. It helps in allocation of resources in the light of
the nature of cash available.
The information about the cash flow of on enterprise is useful in providing users
of financial statement with a basis to assess the ability of the utilize those cash
flow. The economic decisions that are taken by the user require an evaluation of
an enterprise to generate cash and cash equivalent and the timing and certainty
of their generation.

IMPORTANCE

 Cash flow statement helps the management in taking short term financial
decision.

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 It enables the management to account for situation when business has
earned huge profit yet run without money or when it has suffered a loss &
still has plenty of money at the bank.
 It gives the clear picture of cash inflow & out from the operation. It is
there for, very useful to internal financial management the possibility of
retiring long term debts, in planning replacement of plant facility or
formulating dividend policy.
 Cash flow statement act like a controller for the management. A
comparison of cash flow statement of previous year with the budget for
that would indicate to that extend the resources of the enterprise where
raise it & applied according to the plan which may highlight trends of the
moment of cash of the company.
 Cash flow statement is useful in evaluating financial policy & current
cash position. The cash flow statement will enable the management in
planning & co-ordinate the financial operation probably because cash
flow statement is prepared on estimated bases for the next accounting
period.

 So, that the management come to know how much cash will be needed
and at which time period the recruitment of cash will be raised. What are
the internal sources & external sources of cash especially this statement is
important for the preparing the cash budget.

SOURCES AND USES OF CASH OF THE COMPANY

 In order to effectively manage its cash so as to sustain liquidity and

profitability, Omfed is basically managed from the head office situated at
Sahid Nagar, Bhubaneswar, Odisha.
 It is operating all over Odisha. All the cash transaction is controlled from
the head office of Odisha.
 For smooth management of cash, Omfed takes of UTI Bank, Union Bank,
UBI, Allahabad Bank, Axis Bank and ICICI Bank.

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 COMPARISION OF CASH FLOW AND FUND FLOW
STATEMENT

Fund flow statements (FFS) is prepared to show movement of funds during a

period, while the term funds used to denote net working capital (NWC). The
statement has mainly two segments –uses of funds and sources of funds. The
difference between sources and uses represent change in net working capital
(NWC).
One the other hand, cash flow statement (CFS) is prepared, in interpreting
the term funds as cash. The statement shows the sources and uses of cash and
cash equivalent and mainly it is used for short term cash planning.
Only changes in non-current items of the balance sheet appear in the body of
fund flow statement (FFS) and other changes effecting individual current assets
or current liabilities do not find place in the fund flow statement (FFS). This
involves preparation of a statement of changes in Net Working Capital.
Fund flow statement reflects the movement of changes in Net Working
Capital, while cash flow statement shows the movement in cash inflow and
outflow of the company.
Fund from operation in the fund flow statement contain net profit after
meeting all the expenses as shown in profit and loss account plus non-fund
expenses like depreciation.
On the other hand, cash from operation in the cash flow statement is the net
profit plus non-cash expenses like depreciation, writing off bad debts,
outstanding preliminary expenses, etc. adjustments for changes in the of current
assets and current liability are also made to compute cash from operations.
Cash flow statement is useful in short-term planning for making cash
budget, while fund flow statement is useful in long-term planning to know the
net working capital of the company.
Cash flow statement, reflecting movement in cash indicates liquidity of
the enterprise and is of interest of bankers and lenders. On the other hand, fund
flow statement indicates changes in working capital which is important for
internal management of the company.

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 LIMITATION OF THE CASH FLOW STATEMENT

Some of the limitations of the cash flow statement are as follows:

A As the enterprise shifts from strictly cash basis enters into credit
transactions as well takes into account prepared and accrued items, the
net income no doubt would generally represent an increase in working
capital. Yet equating net income in cash flow for such enterprise would
be inaccurate and misleading since a number of non-cash items affects
the net income of the firm.

B Cash flow is part of working capital. The volume of cost flowing in any
part of the system and the speed at which it flows determines the
amount of capital. Tied up sometimes in any segment of the enterprise or
business. At any given time cash flow analysis used in connection with
ratio analysis provided a barometer for measuring the aforesaid change
and financing problem of the business much more manageable.

C there are two methods of cash flow statement preparation;

1) DIRECT METHOD
2) INDIRECT METHOD
Sometimes it can be possible that due to the wrong method the accurate
cash the company cannot make proper cash planning.

Preparation methods:
The direct method of preparing a cash flow statement results in a more
easily understood report. The indirect method is almost universally used,
because FAS 95 requires a supplementary report similar to the indirect method
if a company chooses to use the direct method.

Direct method
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The direct method for creating a cash flow statement reports major classes of
gross cash receipts and payments. Under IAS 7, dividends received may be
reported under operating activities or under investing activities. If taxes paid are
directly linked to operating activities, they are reported under operating
activities; if the taxes are directly linked to investing activities or financing
activities, they are reported under investing or financing activities.

Indirect method

The indirect method uses net-income as a starting point, makes adjustments for
all transactions for non-cash items, then adjusts from all cash-based
transactions. An increase in an asset account is subtracted from net income, and
an increase in a liability account is added back to net income. This method
converts accrual-basis net income (or loss) into cash flow by using a series of
additions and deductions.

Cash flow activities

The cash flow statement is partitioned into three segments, namely:

1) Cash flow resulting from operating activities;
2) Cash flow resulting from investing activities; and
3) Cash flow resulting from financing activities.
The money coming into the business is called cash inflow, and money going out
from the business is called cash outflow.

Operating activities

Operating activities include the production, sales and delivery of the company's
product as well as collecting payment from its customers. This could include
purchasing raw materials, building inventory, advertising, and shipping the
product.
Under IAS 7, operating cash flows include
Receipts from the sale of goods or services
Receipts for the sale of loans, debt or equity instruments in a trading portfolio
Interest received on loans
Dividends received on equity securities
29
Payments to suppliers for goods and services
Payments to employees or on behalf of employees
Interest payments (alternatively, this can be reported under financing activities
in IAS 7, and US GAAP)
Items which are added back to [or subtracted from, as appropriate] the net
income figure (which is found on the Income Statement) to arrive at cash flows
from operations generally include:
 Depreciation (loss of tangible asset value over time)
 Deferred tax
 Amortization (loss of intangible asset value over time)
Any gains or losses associated with the sale of a non-current asset, because
associated cash flows do not belong in the operating section. (Unrealized
gains/losses are also added back from the income statement)

Investing activities

Examples of investing activities are

 Purchase or Sale of an asset (assets can be land, building, equipment,
marketable securities, etc.)
 Loans made to suppliers or received from customers
 Payments related to mergers and acquisitions

Financing activities

Financing activities include the inflow of cash from investors such as banks and
shareholders, as well as the outflow of cash to shareholders as dividends as the
company generates income. Other activities which impact the long-term
liabilities and equity of the company are also listed in the financing activities
section of the cash flow statement.
Under IAS 7,
 Proceeds from issuing short-term or long-term debt
 Payments of dividends

30
 Payments for repurchase of company shares
 Repayment of debt principal, including capital leases
For non-profit organizations, receipts of donor-restricted cash that is limited to
long-term purposes
 Items under the financing activities section include:
 Dividend paid
 Sale or repurchase of the company's stock
 Net borrowings
 Payment of dividend tax

Disclosure of non-cash activities

Under IAS 7, non-cash investing and financing activities are disclosed in

footnotes to the financial statements. Under US General Accepted Accounting
Principles (GAAP), non-cash activities may be disclosed in a footnote or within
the cash flow statement itself. Non-cash financing activities may include
 Leasing to purchase an asset
 Converting debt to equity
 Exchanging non-cash assets or liabilities for other non-cash assets or
liabilities
BALANCE SHEET ACCOUNTS AND CASH FLOW
Every balance sheet account reflects specific activity. There are only a few
distinctive transactions that affect each account. Following are examples of
some of the common changes in balance sheet accounts that register as cash
flow.

Accounts receivable increases when the company sells merchandise or does a

service on credit, and decreases when the customer pays its bill. Accounts
receivable is associated with sales or revenue on an income statement. The
change in accounts receivable or the cash collected from customers is classified
as an operating activity.

Inventory increases when the company buys merchandise for resale or use in its
manufacturing process, and decreases when the merchandise is sold. Inventory
is associated with the income statement account cost of goods sold (COGS).
The change in inventory or the cash paid for inventory purchases is classified as
an operating activity.

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Prepaid insurance increases when the company pays insurance premiums
covering future periods and decreases when the time period of coverage expires.
The change in prepaid or the amount paid for insurance is classified as an
operating activity.

Land, building, and equipment accounts increase when the company purchases

additional assets and decrease when the assets are sold. The only time the
income statement is affected is when the asset is sold at a price higher or lower
than book value, at which time a gain or loss on sale of assets appears on the
income statement. The amount of cash used or received from the purchase or
sale of such assets is classified as an investing activity. The gain or loss is
reported as operating cash flow.

Accumulated depreciation increases as the building and equipment depreciates

and decreases when building and equipment is sold. Depreciation expense does
not appear on a cash flow statement presented using the direct method.
Depreciation expense is added back to net income on a cash flow statement
presented using the indirect method, since the depreciation caused net income to
decrease during the period but did not affect cash.

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CASH FLOW
ANALYSIS

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What is Cash Flow Analysis?
Cash flow analysis is the examination of cash inflows and outflows of an entity.
A company’s cash flow statement provides a bond between the income
statement and the balance sheet. It allows an analyst to determine where the
company’s cash was produced (inflows) and dispersed (outflows) during a
specific period of time (usually a year).

Why is Cash Flow Analysis Important?

Cash flow calculations provide information on profitability, quality of earnings,
liquidity, risks, capital requirements, future growth, dividends, etc. They are
some of the most important tools for value investment analysis of investment
opportunities.
Investors looking at investment opportunities should ask: Is the entity
generating enough cash to sustain its’ business, grow its’ business, and provide
returns to stakeholders? Cash flow metrics can be invaluable for comparison
research and ratio analysis with enterprise value, or various other
measurements.

Different Types of Cash Flow-

Cash Flow from Operations-
Cash Flow from Operations measures the cash generated from the core business
or operations of the business.
Cash Flow From Operations (CFO) = Net Income + Depreciation &
Amortization +/- 1 Time Adjustments +/- Changes in Working Capital
Cash Flow from Operations is a line item in the Cash Flow Statement.

Cash Flow from Investing Activities-

Cash Flow from Investing measures the purchases and sales of long term
investments including items such as capital expenditures, acquisitions, or
investments in other securities such as stock and bonds.
Cash Flow from Investing = Net Capital Expenditures of Property, Plant, and
Equipment (PPE) +/- Long Term Investments
Cash flow from investing activities will usually be negative. For most
companies this represents investment in itself. Cash flows would only be
positive when investments are disposed of.
Cash Flow from Investing Activities is a line item in the Cash Flow Statement.
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Cash Flow from Financing Activities-
Cash flow from Financing measures the activities that fund the company and
stakeholders (debt and equity holders). These activities include issuing or
buying back stock, issuing or repurchasing debt, and paying dividends to
shareholders.
Cash Flow from Financing = Cash Received From Issuance of Equity or Debt –
Dividends to Shareholders – Purchase of Outstanding Equity or Debt
Cash Flow from Financing Activities is a line item in the Cash Flow Statement.
Note: The above cash flows are segregated and detailed in the Statement of
Cash Flow. The sum of the three makes up the Total Cash Flow for the entity.
Total Cash Flow-
Total Cash Flow = Cash Flow from Operations +/- Investing Cash Flow +/-
Financing Cash Flow
Total Cash Flow of the entity is the sum of the Cash Flow from all activities
including operating, investing, and financing activities. It is the total you find at
the bottom of the Cash Flow Statement labelled “Change in Cash and Cash
Equivalents”. The Total Cash Flow of a period of time will equal the difference
between the entity’s cash balance at the beginning and ending of the time
period.

Cash Earnings-
Cash Earnings = Net Income + Non-Cash Expenses (i.e. Depreciation &
Amortization)
Cash Earnings of Net Cash Flow or Net Income plus Depreciation (NIPD) is the
profits (or loss) of the entity plus non-cash expenses (i.e. depreciation and
amortization).
This metric includes the financing and investing activities that are included on
the income statement, but excludes financing and investing activities affecting
the balance sheet.
Personally, cash earnings are one of my favourite metrics because it isolates the
operations income. This is the cash earnings power of company operations.
Management can do one of three things with cash earnings: 1) reinvest it in the
business 2) pay down debt or 3) return it to shareholders through dividends or
buybacks.

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Owner Earnings-
Warren Buffett has promoted the concept of “Owner Earnings”. Owner
Earnings takes it one step beyond Cash Earnings by subtracting the approximate
amount of capital expenditures it takes to keep the company a going concern.
This is calculated:
Owner Earnings = Net Income + Non-Cash Expenses (i.e. Depreciation &
Amortization) – Average Annual Maintenance Capital Expenditures
(Note: An estimate is made of Maintenance Capital Expenditures. This is the
CAPEX required to maintain the company and does not include CAPEX
required for growth.)
What is left is theoretically for the company stakeholders (debt & equity
shareholders). Options would include reinvesting for growth, debt reduction,
dividends, and stock buybacks.

Owners’ Cash Profits-

Owners’ Cash Profits is a slight variation of Owners’ Earnings. Here, Cash
Flow from Operations is used instead of Net Income; therefore changes in
working capital are included in the equation.
Owners’ Cash Profits (OCP) = Cash Flow from Operations (CFO)  [Net Income
+ Depreciation & Amortization +/-  one-time adjustments +/- Changes in
Working Capital] – Estimate of Maintenance Capital Expenditures.

Free Cash Flow-

Free Cash Flow = Cash Flow from Operations – Capital Expenditures
Free Cash Flow is Cash Flow from Operations less capital expenditures. It is the
cash available to debt and equity holders after the expenses and taxes are paid
and capital expenditures have been deducted.
The difference between Owner’s Cash Profits and Free Cash Flow is Free Cash
Flow would deduct all capital expenditure, including any extraordinary
expenditures used to grow the company. Owners’ Earnings and Owners’ Cash
Profits only subtract the average capital expenditures or those needed to sustain
the company.
A positive free cash flow means the company has enough cash inflows to
maintain operations and meet its capital expenditure plans. A negative free cash
flow means the company needs to use cash reserves, or raise cash through the
sale of assets, stock or debt. In the long run, a company cannot have negative
free cash flow and remain a going concern.

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Net Free Cash Flow Calculation-
Net Free Cash Flow is Free Cash Flow less the current portion (1 year) of long
term debt, and the current dividends the company currently intends to pay (1
year).

Net Free Cash Flow (NFCF) = Free Cash Flow (FCF) – current portion of long
term debt – current portion of future dividends.
This is a more conservative version of Free Cash Flow. A positive net free cash
flow means the company has enough cash inflows to meet ALL the plans
(operations, investments, and financing) of the company during the following
year. A negative net free cash flow means the company needs to use cash
reserves, raise cash from outside sources, or cut planned cash outflows.

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 RECOMMENDATION

• OMFED should follow an organizational structure emphasizing on quality

issues insisting its suppliers to have a consistent focus on quality.
• There is a greater need to build awareness of quality among its suppliers.
• There is a need for imparting the importance of ethical business practices to
the entities involved.
• Steps should be taken overcome the problems such as lack of infrastructural
facilities by approaching the Government for allowing grants.
• There is a need for cost optimization and enhancing the infrastructure facilities
of warehouse with cold storage.
• For dairy products, quantity and quality are just analogous to muscles and
bones. So, the distributors must be properly educated to effectively forecast the
demand and thereby reduce the chances of volume or quantity loss.
• The buffalo-based system should be promoted to improve dairying.

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CHAPTER – 5
CONCLUSION

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 CONCLUSION

Cash Flow is one of the most important investment concepts to understand. For
the value investor it is more important than accounting profits because it paints
an untainted or truer picture of the company and its finances.
Each one of the different cash flow metrics gives pertinent insight into the
health of an entity. By using the different types of cash flow for investment
analysis you will be greatly improving your ability to analyse and compare
investment opportunities.
At the end I would like to thank each and every person who helped me in the
completion of the project.

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