ACCOUNTANCY

PROJECT ON
CASHFLOW
STATEMENT AND
RATIO ANALYSIS
Introduction
to the Cash
Flow
Statement
• What is a Cash Flow Statement?
• A Cash Flow Statement is one of the key financial
statements that summarize the amount of cash and cash
equivalents entering and leaving a company
• Importance of Cash Flow
• Cash flow is a critical aspect of a business’s financial
stability
• Discuss how the Cash Flow Statement provides insight
into a company’s ability to generate cash from
operations, meet its financial obligations, and fund its
operations and expansions
Components of the
Cash Flow Statement
• Three Main Sections
• Operating Activities
• This section reflects the cash generated or consumed by a company's
core business operations
• Investing Activities
• Cash flows in this section represent transactions for the purchase and
sale of long-term assets and investments
• Financing Activities
• This section covers cash flows related to changes in the company’s
capital structure, such as issuing or repaying debt and equity, as well
as distributing dividends

• Objective
• The objective of segregating cash flows into these three activities is to provide
a clearer picture of where cash is coming from and how it’s being used, helping
stakeholders assess the company’s financial health
 Cash flows from operating activities are
related to the day-to-day operations of
the business, such as sales revenue and
payments to suppliers and employees

Cash Receipts: Payments received from

Definition
customers for goods and services

Cash Payments: Payments made to

suppliers for goods and services,
Examples
employee salaries, rent, and other

Cash Flows
operating expenses

from
Payment of salaries and wages: Paying
employees for their work

Operating Payment of rent or utilities: Covering the

costs of operating a business

Activities
Payment of taxes: Complying with tax
obligations
Cash Flows from
Operating Activities
• Methods of Calculation
• Direct Method
• This method lists all major operating
cash receipts and payments
• Indirect Method
• Starts with net income and adjusts for
non-cash items and changes in
working capital
Cash Flows from
Investing Activities
• Definition
• Cash flows from investing activities show the cash spent on or received from
the acquisition and sale of long-term assets, such as property, equipment, and
investments

• Examples
• Purchases: Acquisition of property, plant, and equipment , or intangible assets
like patents and trademarks
• Sales: Proceeds from selling assets like land, buildings, or securities
• Investments: Cash used to buy shares in other companies or funds, or received
from selling such investments

• Significance
• A negative cash flow in this section can indicate that the company is investing
heavily in its future, which could be a positive sign, but it might also suggest a
potential strain on current liquidity
 Cash Flows from Financing Activities

Definition Examples Implications

Cash flows from financing activities represent Issuance of Shares: Cash inflow from issuing Positive cash flow in this section could
cash transactions related to a company's new shares to raise capital indicate a company is raising capital for
capital structure Repurchase of Shares: Cash outflow for expansion, while negative cash flow might
buying back shares from shareholders indicate debt repayment or dividend
distribution, impacting the company's
Borrowing: Taking loans or issuing bonds liquidity
leads to a cash inflow
Repayment of Debt: Cash outflow when
repaying loans or bonds
Dividends Paid: Cash outflow for paying
dividends to shareholders
 CASHFLOW
STATEMENT OF
TATA STEEL
Cash Flow vs. Profit

Cash Flow vs. Profit Importance of Cash Flow

Profit is the difference between revenue and Profitability doesn’t always translate into
expenses, recorded on an accrual basis liquidity
Cash Flow measures the actual movement of Emphasize the critical role of cash flow in
cash, recording transactions only when cash is sustaining business operations, particularly in
exchanged scenarios like delayed receivables or heavy
upfront costs
 Liquidity Assessment: It provides a clear picture of a
Advantages company's ability to meet its short-term obligations

of Cash Financial Health Evaluation: It helps assess the overall

financial health of a business by showing its cash

Flow inflows and outflows

Statement Decision Making: It aids in making informed decisions

regarding investments, financing, and operational
activities

Risk Assessment: It helps identify potential cash

shortages or surpluses, allowing for proactive risk
management

Performance Evaluation: It allows for comparison of

cash flow performance over time and with industry
benchmarks
Limitations of Cash
Flow Statement
• Non-Cash Transactions: It doesn't account for non-cash transactions
like depreciation, which can affect profitability but not cash flow
• Historical Focus: It primarily focuses on past cash flows and may not
accurately predict future trends
• Subjectivity: Some judgments are involved in categorizing cash
flows, which can introduce subjectivity
• Limited Scope: It doesn't provide a complete picture of a company's
financial health, as it doesn't include non-cash items
• Complexity: Preparing and analyzing a cash flow statement can be
complex, especially for large or complex businesses
Introduction to
Accounting Ratio
Analysis
• Accounting ratio analysis is a powerful tool used to assess the financial
performance and position of a business
• Financial Health Assessment: Ratios help to gauge a company's
overall financial health and identify potential areas of concern
• Comparison: Ratios can be used to compare a company's
performance to industry benchmarks, competitors, or its own
historical data
• Decision Making: Investors, creditors, and management can use
ratios to make informed decisions about investments, lending, and
business operations
• Trend Analysis: By tracking changes in ratios over time, it's possible
to identify trends and anticipate future performance
Types of Liquidity Ratios: Measure a company's
ability to meet its short-term obligations

Ratios
Solvency Ratios: Assess a company's
long-term financial stability and its ability
to meet its debt obligations

Profitability Ratios: Evaluate a company's

ability to generate profits

EfficiencyActivity Ratios: Measure how

efficiently a company is using its
resources
BALANCE OF
TATA STEEL
PROFIT AND LOSS
STATEMENT OF
TATA STEEL
Liquidity Ratios

Current Ratio Quick Ratio

A high current ratio indicates a company has A higher quick ratio is generally preferred, as it
sufficient current assets to cover its short-term excludes inventory, which can be less liquid
liabilities, suggesting good financial health A low quick ratio might indicate liquidity
A low current ratio may signal financial problems, especially if the company relies
difficulties, as the company might struggle to heavily on inventory
meet its immediate obligations Formula: / Current Liabilities
Formula: Current Assets / Current Liabilities
 LIQUIDITY RATIO
1.2

0.8

0.6

0.4

0.2

0
Current Liquid

2022 2021

An ideal ratio should be 2:1, the Current Ratio of this company is 0.58:1 and 0.97:1. It means that short-term financial position of the
company is not soundful. Tata Steel won’t be able to pay current liabilities on time.

An ideal ratio should be 1:1. The company has 0.21:1 and 0.55:1. It shows that the company is not in the position to pay back current
liabilities on time.
Solvency Ratios
• Debt to Equity Ratio
• A high debt-to-equity ratio suggests a company is heavily financed
by debt, which can increase financial risk
• A low debt-to-equity ratio indicates a company is primarily funded
by equity, which is generally considered safer
• Formula: Total Liabilities / Total Equity
• Total Assets to Debt Ratio
• A high total assets to debt ratio indicates a company has a strong
financial position, as its assets significantly exceed its liabilities
• A low total assets to debt ratio suggests a company's financial
stability might be at risk
• Formula: Total Assets / Total Liabilities
Generally Debt-Equity Ratio should be 2:1 but lower In general Total Assets to Debt Ratio should be 1:1 or
is better. The company has 0.34:1 and 0.58:1. It 2:1, but higher is better. The company has 5.17:1 and
shows that long-term financial position is soundful. 3.26:1. It shows that financial position of the
company is at better circumstances.
Solvency Ratios

• Proprietary Ratio
• A high proprietary ratio is favorable, as it
indicates a company has a significant
amount of equity compared to its total
assets
• A low proprietary ratio suggests the
company's financial structure is heavily
reliant on debt
• Formula: Total Equity / Total Assets
Generally, Proprietary Ratio should not exceed 2:1. The company has 0.56:1
and 0.52:1. It shows that the company is able to manage assets well.
Efficiency Ratios
• Inventory Turnover Ratio
• A high inventory turnover ratio indicates a company is efficiently
managing its inventory, minimizing holding costs
• A low inventory turnover ratio might suggest excess inventory,
which can tie up capital and increase costs
• Formula: Cost of Goods Sold / Average Inventory
• Trade Receivable Turnover Ratio
• A high trade receivable turnover ratio indicates a company is
effectively collecting its receivables, improving cash flow
• A low trade receivable turnover ratio suggests the company might
have difficulty collecting payments from customers
• Formula: Net Credit Sales / Average Trade Receivables
 TRADE RECEIVABLE TURNOVER RATIO
42.2
42
42
41.8
41.6
41.4
41.2
41
41
40.8
40.6
40.4
2022 2021

Generally, Inventory Turnover Ratio should be Higher the Trade Receivable Turnover Ratio better it
between 5 and 10. The company has 2.28 is. The company has 41 times and 42 times. This
times and 2 times, which is pretty decent; the shows that the company is able to collect trade
receivables quickly.
company is able to sell its inventory.
Efficiency Ratios

• Trade Payable Turnover Ratio

• A high trade payable turnover ratio indicates
a company is paying its suppliers promptly,
which can improve relationships and
potentially negotiate better terms
• A low trade payable turnover ratio might
suggest the company is taking advantage of
extended payment terms
• Formula: Credit Purchases / Average Trade
Payables
 TRADE PAYABLE TURNOVER RATIO
0.25
0.23

0.2

0.15 0.14

0.1

0.05

0
2022 2021

Higher the Trade Payable Turnover Ratio the better it is. The ratio
of the company has increased from 0.14 times to 0.23 times. This
shows the speed with which the amount is paid to trade payable.
This concludes the creditworthiness isn’t good.
Profitability Ratios
• Gross Profit Ratio
• A high gross profit ratio indicates a company is effectively
managing its cost of goods sold, resulting in higher margins
• A low gross profit ratio suggests the company might be facing
pricing pressures or inefficiencies in its production process
• Formula: Gross Profit / Net Sales
• Operating Ratio
• A low operating ratio indicates a company is efficiently managing
its operating expenses, which can improve profitability
• A high operating ratio suggests the company might have excessive
operating costs
• Formula: Operating Expenses / Net Sales
Profitability Ratios
• Operating Profit Ratio
• A high operating profit ratio indicates a company's core operations
are generating significant profits
• A low operating profit ratio suggests the company might need to
improve its operational efficiency or pricing strategy
• Formula: Operating Profit / Net Sales
• Net Profit Ratio
• A high net profit ratio indicates a company is generating substantial
overall profits
• A low net profit ratio suggests the company might have high
expenses or other factors affecting its profitability
• Formula: Net Profit / Net Sales
 NET PROFIT RATIO
35
31.44
30

25

20

15

10 9.04

0
2022 2021

Higher Gross Profit ratio is considered better. The Higher the Net Profit Ratio the better it is. The
Gross Profit of the company has increased from company’s Net Profit increased from 9.04% to
17.57% to 38.93%. It shows that the financial 31.44%. This shows that financial position of the
position of the company is better and also able ti company is sound, and it is efficient in overall
meet its operating expenses. business operations.
Return on
Investment Ratios
• Return on Assets
• A high ROA indicates a company is effectively using its assets to
generate profits
• A low ROA might suggest the company needs to improve its asset
utilization or profitability
• Formula: Net Profit / Total Assets
• Return on Equity
• A high ROE indicates a company is generating significant returns
for its shareholders
• A low ROE might suggest the company needs to improve its
profitability or reduce its equity base
• Formula: Net Profit / Total Equity
 Early Warning Signs: Ratios can identify potential
Advantages financial problems before they become serious

of Ratio Comparison: Ratios allow for comparison between

Analysis
different companies, industries, and time periods

Decision Making: Ratios provide valuable information

for making informed business decisions

Efficiency Assessment: Ratios help assess a company's

efficiency in using its resources

Performance Evaluation: Ratios measure a company's

performance against industry benchmarks
 Historical Data: Ratios are based on historical data and
Limitations may not accurately predict future performance

of Ratio Accounting Practices: Different accounting methods can

Analysis
affect the comparability of ratios

Non-Financial Factors: Ratios do not consider non-

financial factors that may impact a company's
performance

Time-Consuming: Calculating and analyzing ratios can

be time-consuming

Misinterpretation: Ratios must be interpreted carefully

to avoid misinterpretation