Cash Flow Statement

IPCC Paper 1: Accounting/Financial ManagementChapter 2 -Unit 2

CA. Pankaj Goel1

Questions that Cash Flow Statement Answers

1• Where did the cash come from?

2• What purpose cash used for?

3• And least importantly, what was

the change in the cash balance?

2

Learning Objectives

11 • Meaning of Cash Flow Statement

22 • Applicability Cash Flow Statement - AS 3

33 • Terms used in Cash Flow Statement

44 • Examples of Types of Activities

55 • Preparation of Cash Flow Statement

66 • Format of Cash Flow Statement-Direct

77 • Format of Cash Flow Statement-Indirect 3

Learning Objectives - 2

4

88• Cash Flow from Operating Activities

99• Cash Flow from Investing and Financing Activities

1010• Summary of Cash Flow Statement Process

1111• Adjustments relating to Cash Flow Statement for Taxation, Dividend,

Interest, Foreign Currency Transaction, Non Cash Transactions, Non Current Assets-Net/Gross, Extraordinary Activities

12• Examples - Comprehensive

13• Summary

OPERATING ACTIVITIES‐DIRECT

OPERATING ACTIVITIES‐INDIRECT

INVESTING ACTIVITIES

FINANCING ACTIVITIES

CASH& CASH EQUIVALENTS

1

3

4

5

2

Components of Cash Flow Statement

5

Meaning of Cash6

Cash for Cash Flow Statement

Cash Equivalents

Cash

Cash Concept

Cash is an important component for solvency of any organization

Cash plays a very important role in the economic life of a business

What blood is to a human body, cash is to a business enterprise.

Thus, it is essential for a business to maintain an adequate balance of cash.

It is important to know the movement of cash during the year and reasons for such movement.

Such details are available through Cash Flow Statement, which provides information about the changes in cash and cash equivalents of an enterprise

7

Cash Concept - 2

This revised Accounting Standard super seeded theAccounting Standard (AS 3) on changes inFinancial Position, issued in June 1981.In 1995,SEBI amended clause 32 of listing agreementstating that every listed company, should give CFS

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Particulars Amount (Rs.)

Cash flows from operating activities xxCash flows from investing activities xxCash flows from financing activities xxTotal xxAdd: Opening cash and cashequivalent (CCE)

xx

Closing cash and cash equivalent (CCE) xx

•:

Uses Of Cash Flow Statement

1• Cash flow statement is additional information to

user of financial statement

2• This statement exhibits the flow of incoming and

outgoing cash

3• This statement assesses the ability of the

enterprise to generate cash and cash equivalents

4• It also assesses the needs of the enterprise to

utilise the cash and cash equivalents generated

5• It also assesses the liquidity and solvency of the

enterprise9

Fundamentals of Cash and Cash Flow Statement

As per AS 3 Cash means- Cash and Cash Equivalents

10

Cash and Cash

EquivalentsCash in Hand+ Cash at Bank

Short-term investments

(Till 3 months maturity)+Marketable securities

Cash Flow Statement Equation

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∆ Cash=∆Non Current Liability+∆ Non Current Assets+∆ in Owners Equity

• Change in Cash & Cash Equivalents∆ Cash =

• Change in Non Current Liabilities covering change in share capital like issue of share capital etc.

∆ Non Current Liability =

• Change in Non Current Assets covering change in Assets like purchase of assets etc.∆ Non Current

Assets =

• Change in capital +Change in current liability item and change in all items of current assets other than cash and cash equivalents

∆ in Owners Equity =

Applicability of Cash Flow Statement

12

Applicability of AS - 3

Preparation of Cash Flow Statement as per AS-3 is mandatory for the following enterprises:

• Enterprises that have a turnover of more than Rs. 50 croresduring a financial year.

• Enterprises that have a borrowing of more than Rs.1 crores• Companies whose shares or debts are listed or to be listed

on a recognized stock exchange in India

Cash Flow Statement of listed companies shall be presented under indirect method only as prescribed in AS-3

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Terms Used in Cash Flow Statement

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Operating Activities

These are principal revenue producing activities of abusiness enterprise and include cash flows from thosetransactions and events that enter into the determinationof net profit or loss

15

9

Examples of Operating Activities

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Cash inflows

Cash Receipts from sale of goods/rendering of services

Cash Received from royalties, fees, commission, etc.

Other operating receipts

Cash outflows

Cash payments to suppliers for Goods/services

Cash payments to employees Interest and taxes paid Other operating cash payments

Investing Activities

These activities include transactions and events thatinvolve the purchase and sale of long termproductive assets such as land, buildings,equipment (plant and machinery) not held forresale and other investments (which are not cashequivalents).

17

10

Examples of Investing Activities

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Cash inflows

Sale of plant & machinery and equipment

Sale of Land & Buildings

Cash outflows

Purchase of plant & machinery and equipment

Purchase of land & buildings

Financing Activities

These activities result in changes in the size andcomposition of the owners’ capital (includingpreference share capital in the case of acompany) and borrowings of the enterprise.

19

11

Examples of Financing Activities

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Cash inflows

Borrowing cash from creditors

Issuing equity shares Issuing debt securities

Cash outflows

Repayment of amounts borrowed

Repurchase of equity shares Payment of dividends

Practice TimeExamples of Types of Activities21

Example: 1

Cash Sales• Cash paid to creditors• Cash Purchase• Cash received from Debtors• Issue of Shares• Issue of Debentures• Purchase of Investments• Purchase of Fixed Assets• Sale of Investments• Sale of Fixed Assets

Operating Activities•Operating Activities•Operating Activities•Operating Activities•Financing Activities•Financing Activities•Investing Activities•Investing Activities•Investing Activities•Investing Activities

Transactions Activities

22

Example: 1Continued

Marketable Securities•Redemption of Debentures/Preference Shares•Interest paid by Finance Company •Dividends paid by Non Finance Company •Manufacturing wages paid•Sale of Trade Marks•Income Tax paid•Income Tax Refund received•Brokerage on issue of shares

Cash Equivalents•Financing Activities

•Operating Activities

•Financing Activities

•Operating Activities•Investing Activities

•Operating Activities•Operating Activities•Financing Activities

Transactions Activities

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Sources for Preparation of Cash Flow Statement

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Basic Information -Three Sources

• It means the balance sheets in the beginning and at the end of the accounting period.

• These comparative balance sheets indicate the amount of changes that have taken place in assets, liabilities and owners’ capital accounts.

Comparative Balance Sheets

• Information in this statement enables the users to determine the amount of cash provided by or used in operations during the accounting period after making adjustments for non-cash and non-operating items, current assets and current liabilities items.

Income Statement of

Current Accounting

Period

• In addition to the comparative balance sheets and income statement of current year, selected additional transaction data are needed to extract the hidden transactions e.g., sale and purchase of fixed assets for cash.

• It means that additional information is needed to determine how cash was provided or used during the accounting period.

Selected Additional

Information

25

Steps for Preparation of Cash Flow Statement

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Step 1: Determine Change in Cash & Cash Equivalents

It involves the calculation of difference between the amount of cash and cash equivalents on the first day of the accounting period and the amount on the last day of the accounting period, with the help of comparative balance sheets.

It is never listed as a first item on the actual cash flow statement.

It is the amount by which cash and cash equivalents changed and we must explain why cash and cash equivalents changed by this amount by preparing a Cash Flow Statement

27

Example: Cash &Cash Equivalents

28

Step 2- Determine Cash Flows from Operating Activities

It is determined by the analysis of revenue and expense items of profit and loss account.

The reason is that there may be certain items in this account which increase (revenue) the profit but do not

cause any increase of cash.

Similarly some of the expense items reduce the profits but may not reduce the cash.

In addition, analysis of current assets and liabilities is also required with the help of comparative balance sheets and

additional information.

This can be computed by either Direct or Indirect Method

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Step 3- Analysis of Non Current Assets

Determine the cash provided (or used) by investing activities by the analysis of non-current assets like purchase and sale of fixed assets etc

This is done by Finding Cash Flow From Investing Activities

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Step 3- Analysis of Non Current Liabilities

Determine the cash provided (or used) by financing activities. Here again an analysis of non-current liabilities like issue of share capital, redemption of share capital etc is made.

This is done by Finding Cash Flow From Financing Activities

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Step 5 - Preparation of Cash Flow Statement

1• Prepare a formal cash flow statement

by classifying all cash inflows and outflows in terms of operating, investing and financing activities

2• The net cash flow provided by (used

in) each of the three main activities of an entity should be highlighted

32

Step 6 - Find Net Change in Cash &Cash Equivalents

Make sure that the total net cash flow, that is, aggregate of net cash flows from operating, investing and financing activities, is equal to net increase (decrease) in cash and cash equivalents as calculated in Step 1.

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Step 7- Analysis of Non Cash Transactions

Report any significant investing and financingtransactions that did not involve cash or cashequivalents in a separate schedule to the cash flowstatement e.g., purchase of land by issue of share capital or

debentures; or redemption of debentures for sharecapital. (Para 40 of AS 3)

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Format for Preparation of Cash Flow Statement –Direct (Operating)

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Cash Flow from Operating Activities - Direct

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DIRECT METHOD- FORMAT

(a) Cash Flows from Operating Activities

Cash receipts from cash sales and customers ××××

Cash payments to creditors and others suppliers (××××)

Cash payment for overheads (××××)

××××

Less: Tax Paid ×××× Cash flows before extraordinary items ×××× Add/Less: Extraordinary items ××××

Net Cash flow from operating activities ××××

Common toBothDIRECT&INDIRECT

Computational Accounts -Direct Method

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Why We Need Computational Accounts?

Adjustments are necessary because income statement records are on accrual basis. Expenses incurred even though the cash has not been paid. Incomes earned even though the cash has not been

received. These adjustments generally relate to determination

Cash flow from Credit Purchases-creditors/Bills Payables account

Cash flow from Credit Sales.- Debtor/Bills Receivables account

Cash outflow on expenses incurred-Expenses account

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Adjustments for Changes in CA and CL

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1. Effect of Credit Sales

If out of total sales of 30,000, credit sales is Rs. 10,000, cash flow from sales = 20,000

Thus while computing cash from operations, it would be necessary that suitable adjustments for the outstanding debtors are also made

Like deducting the amt. of credit sale from the net profit as debtors outstanding at the year end.

Cash from operation = Net profit + debtors o/s at the beginning – debtors o/s at the end of the year

OR

Cash from operation = Net profit + Decrease in debtors or – (increase in debtors)

40

2. Effect of Credit Purchase

If Cash sale = 30,000, Purchase = 25,000 out of which credit purchase is 10000 , Cash from operation = 15,000

Adjustments in the Net profit would be made by adding the amt. of credit purchases to get the cash from operation.

Decrease in creditors from one period to another would mean decrease in cash from operation and vice versa. This is because more cash payments have been made to the creditors which results in outflow of cash.

Cash from operation = Net profit + creditors at the end of the year – creditors at the beginning

OR

Cash from operation = Net profit + Increase in creditors OR - (Decrease in creditors) 41

2. Effect of Credit Purchase

If Cash sale = 30,000, Purchase = 25,000 out of which credit purchase is 10000 , Cash from operation = 15,000

Adjustments in the Net profit would be made by adding the amt. of credit purchases to get the cash from operation.

Decrease in creditors from one period to another would mean decrease in cash from operation and vice versa. This is because more cash payments have been made to the creditors which results in outflow of cash.

Cash from operation = Net profit + creditors at the end of the year – creditors at the beginning

OR

Cash from operation = Net profit + Increase in creditors OR -(Decrease in creditors)42

Example 2: CA&CL Adj for Direct Method

Sales = 50,000, debtors o/s at the beginning = 8000, debtors o/s at the end = 15000, creditors at the beginning = 12000, creditors at the end = 15000, Purchases = 30000, expenses = 5000

43

Solution:Cash from operation Rs.Sales 50000

Less: Purchase 30000Expenses 5000 35000

Net Profit 15000Add: debtors at the beginning 8000

creditors at the end 15000 2300038000

Less: creditors at the beginning 12000debtors at the end 15000 27000

Cash from operation 1100044

Sample Accounts Formats-CA&CL Adjustments for Direct Method

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Accounts Format 1

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CREDITORS ACCOUNT

Particulars Rs. Particulars Rs. Bills Payables Account (Bills accepted) — Balance b/d (opening) — Discount received — Purchases Account (Credit) — Bills Receivables (endorsed) — Debtors (B/R endorsed dishonored) — Purchase Returns — Bills Payables Account — [Cash Account (Paid) outflow — (dishonored) (Balancing figure)] — Balance C/D (closing) —

Accounts Format 2

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BILLS PAYABLE ACCOUNT

Particulars Rs. Particulars Rs.

Discount received — Balance b/d (opening) — Creditors (Bills dishonored)* — Creditors Account (Bills accepted) — [Cash Account (paid on maturity) — (Balancing figure)] Balance C/D (closing) — — —

Accounts Format 3

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DEBTORS ACCOUNT

Particulars Rs. Particulars Rs. Balance b/d (Opening) — Bad Debts — Sales (Credit) — Discount allowed — Bills Receivables (dishonored) — Sales Returns — Bills Receivables (drawn) — Cash Account (Inflow) — (Balancing figure) Balance c/d (closing) —

— —

Accounts Format 4

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BILLS RECEIVABLE ACCOUNT

Particulars Rs. Particulars Rs. Balance b/d (Opening) — Creditors (B/R endorsed) — Debtors (B/R drawn)** — Discount/Rebate (allowed) — Debtors (B/R dishonoured) — By Cash Account (received) Inflow (Balancing figure) — Balance C/d (closing) —

— —

Example of CA&CL-Adjustments for Direct Method

50

Example:3

Opening Stock = 5000

Purchases = 20000

Sales = 35000

Expenses = 5000

Closing Stock = 10000

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SolutionProfit and Loss a/c

Particulars Amount Particulars AmountOpening stock 5000 Sales 35000Purchases 20000 Closing stock 10000Expenses 5000 Net Profit 15000

Cash from operation:Net profit for the year- 15000Add: Opening stock - 5000

Less: Closing stock - (10000)Cash from operation = 10000 52

Accounts Format 5

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EXPENSES ACCOUNT

Particulars Rs. Particulars Rs. Prepaid Expenses (in the beginning) × × Outstanding Expenses × × (In the beginning) Cash/Bank (cash outflow) × P & L Account (Expenses incurred) × × Outstanding Expenses × × Prepaid Expenses × × (at the end) (at the end)

× × × ×

3 Effect of change in Outstanding expenses, Income received in advance etc.

If certain expenses are not paid (i.e., o/s) or some income is received in advance, it will result in decrease in net profit without actually decreasing the cash.

This is because net profit is computed after charging to it all expenses whether paid or outstanding.

Therefore cash from operation will be higher than the actual profit as per P/L account. Thus :

Cash from operation = Net profit + (Expenses o/s + Income received in advance) at the end – (Expenses o/s + income received in advance) at the beginning

OR

Cash from operation = Net profit +Increase in (o/s expenses and income received in advance) OR – Decrease in (o/s expenses and income received in advance)

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Example of CA&CL-Adjustments for Direct Method

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EXAMPLE: 4

Gross Profit = 30000 Expense paid = 10000 Interest received = 2000 Rs 2000 are Outstanding on account of Expenses while

Rs 500 has been received as Interest for the next year

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SOLUTIONProfit and Loss account

Particulars Amount Particulars Amount Expenses paid 10000 Gross profit 30000Add: o/s exp. 2000 Interest received 2000Net Profit (Balancing) 19500 Less: interest rece-

-ived in advance ( 500 )Cash from operation:Net profit for the year 19500Add: Outstanding expenses 2000

Income received in advance 500Cash from operation 22000

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4. Effect of Prepaid expenses and Outstanding Income

It is similar to the effect of debtors.

While computing net profit from operations, the expenses only for accounting period are charged to P/L a/c.

This means pre-paid expenses (since not charged) do not decrease net profit for the year but actually reduces the cash from operation.

Similarly income earned during the year is credited to P/L a/c, whether received or not. Thus o/s income increases the profit but not the cash from operation. Thus:

Cash from operation = Net profit + (Prepaid expenses + o/s income) at the beginning of the year - (Prepaid expenses + o/s income) at the end of the year

Or

Cash from operation = Net profit + Decrease in (Prepaid expenses + o/s income) OR – Increase in (Prepaid expenses + o/s income)

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Example of CA&CL-Adjustments for Direct Method

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Example: 5

• Net Profit = 20000• Prepaid Expenses as on 1/1/07 = 2000• Prepaid Expenses as on 31/12/07 = 3000• O/S (Accrued) Income on 1/1/07 = 1000• O/S (Accrued) Income on 31/12/07 = 2000

Facts

• Calculate cash from operation

Required

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Solution

Cash from operation:Net profit 20000

Less: Prepaid expenses as on 31/12/07 (3000)o/s income as on 31/12/07 (2000)

Add: Prepaid expenses as on 1/1/07 2000o/s income as on 1/1/07 1000

Cash from operation 18000

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SUMMARY OF FINDINGS

Increase in Current assets andDecrease in current liability

Decrease in cash

Decrease in Current assets andIncrease in current liabilities

Increase in cash

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Miscellaneous Examples -Direct Method

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Example: 6

From the following information of HemakshiPower Ltd, find out Cash paid to Creditors and Bills Payables• Opening balance of Creditors 45,000• Closing balance of creditors 40,000• Opening balance of Bills Payables 20,000• Closing balance of Bills Payables 6,000• Bills Payables accepted during year 10,000• Total Purchases during the year 3,00,000

(half of them are on credit)• Discount received from Creditors 2,000• Goods returned to Suppliers 4,000

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Solution

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(A) CREDITORS ACCOUNT

Particulars Rs. Particulars Rs. Discount received 2,000 Balance b/d 45,000 Purchases Returns 4,000 Purchases (Credit) 1,50,000 Bills Payables accepted 10,000* Cash (paid) (balancing figure) 1,29,000 Balance c/d 50,000 1,95,000 1,95,000

BILLS PAYABLES ACCOUNT

Particulars Rs. Particulars Rs. Cash (paid) (Balancing figure) 24,000 Balance b/d 20,000 Balance c/d 6,000 Creditor’s Account (Bills accepted) 10,000* 30,000 30,000 � Cash paid to creditors = Rs. 1,29,000 � Cash paid on account of bills payable = Rs. 24,000

Example: 7

Calculate the Cash Outflow on account of expenses from the following information:• Expenses incurred during the year 2008 1,50,000• Outstanding expenses on 31 Dec. 2007 20,000• Outstanding expenses on 31 Dec. 2008 3,5000• Prepaid expenses on 31 Dec. 2007 15,000• Prepaid expenses on 31 Dec. 2008 10,000

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Solution

67

Cash Outflow on Expenses Particulars Rs. Expenses incurred during the year 1,50,000 Add: Outstanding expenses (2007) 20,000 Prepaid expenses (2008) 10,000 30,000 1,80,000 Less: Outstanding expenses (2008) 35,000 Prepaid expenses (2007) 15,000 50,000 Cash Outflow on Expenses 13,000 In Account Form

Expenses Account Particulars Rs. Particulars Rs. Prepaid Expenses Account (2007) 15,000 Outstanding Expenses Account (2007)20,000 Bank Account (Outflow) 1,30,000 Profit and Loss A/c 1,50,000 (Balancing Figure) Prepaid Expenses Account (2008) 10,000 Outstanding Expenses (2008) 35,000

1,80,000 1,80,000

Solution

68

Cash Flow from Operating Activities

Particulars Rs.

(i) Operating Cash Receipts

Cash Sales 96,00,000

96,00,000

(ii) Operating Cash Payments

Cash Paid to Creditors 5780000

Expenses 2136000

7916000

Cash Generated from Operations before Tax ( i - ii) 1684,000

Less: Income Tax Paid (Net of Refund) 700,000

Cash Flows from Operations before Extraordinary items 984000

Less: Extraordinary items: Insurance Claim for Earthquake Loss XXX

Net Cash Flow from Operating Activities 984000

Format for Preparation of Cash Flow Statement-Indirect(Operating)

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Cash Flow From Operating Activities-Indirect

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INDIRECT METHOD-FORMAT

It is to be noted that difference in two methods is only in Operating Activity and not in other activities. This is shown below: Net Profit (Before Tax and Extraordinary items) ×××× Adjustments: a. Non Cash items b. Items treated separately Operating profit before working capital changes ×××× Add: Decrease in current assets/Increase in current liability ×××× Cash generated from operations ×××× Less: Income Taxes Paid ×××× Cash flows before extraordinary items ×××× Add/Less: Extraordinary items ××××

Net cash from operating activities ××××

Common toBothDIRECT&INDIRECT

Format for Preparation of Cash Flow Statement -Investing

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Cash Flow From Investing Activities

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CASH FLOW FROM INVESTING ACTIVITIES Proceeds from sale of Fixed Assets Proceeds from sale of Long term investments Proceeds from sale of Patents/Copyrights/Trademarks Rent/Dividend/Interest Received Purchase of Fixed Assets(Less) Purchase of Long term Investments(Less) Purchase of Patents/Trademarks/Copyrights/Goodwill(Less)

Net Cash from (or used in) Investing Activities XXX

Format for Preparation of Cash Flow Statement-Financing

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Cash Flow From Financing Activities

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CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issue of equity shares/preference shares Proceeds from issue of debentures Proceeds from long term loans from Bank or Financial Institutions Proceeds from increase in Securities Premium Redemption of Debentures/Preference Shares (including premium) (Less) Buy-back of Equity Shares(Less) Repayment of Long term loans(Less) Interest paid(Less) Interim Dividend paid(Less) Final Dividend Paid(Less) Utilization of Securities Premium(Less)

Net Cash from (or used in) Financing Activities XXX

Summary of Format of Cash Flow Statement

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Cash Inflows and Outflows

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Adjustments -Cash Flow Statement

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Adjustment 1: Treatment of Tax

Cash flow for tax payments / refund should be classified as cash flow from operating activities.

If cash flow can be specifically identified as cash flow from investment / financing activities, appropriate classification should be made.

Capital Gain Tax should be classified as cash outflow from investing Activity

Corporate Dividend Tax should be classified as cash outflow from Financing Activity

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Adjustment 2:Hidden Dividend

Reconciliation of Profit as per Balance Sheet with PBT (Profit Before tax)

The net profit before taxation figure in the account is the starting point for calculation. It can be calculated as follows

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Difference between the Closing Balance and the Opening Balance of Profit and Loss Account ... Add: Proposed Dividend for the current year ... Add: Interim Dividend Paid during the year ... Add: Transfer to general Reserve ... Less: Provision for tax made during the year ... Less: Refund of tax credited to the profit and loss account ... Less: Extraordinary items, if any, credited to the Profit and Loss Account (...) Net Profit before tax, and extra ordinary items

If any Balancing Figure is Present, then it is Interim Dividend

Adjustment 3-Interim Dividend

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The interim dividend is declared by the board of directors in between the financial year.

Declaration of the interim dividend does not require the approval at the general meeting.

Interim dividend becomes due and is paid during the same year.

The amount of interim dividend is added back to current years’ profits to find out cash flow from operating activities(Indirect Method)

The payments made in respect of dividends would be shown an outflow at cash under Financing Activities.

Adjustment 4: Proposed Dividends

The proposed dividend for the current year becomes due and is paid in the next year.

It is an outflow of cash and cash equivalents in the next year.

It is added back to current years’ profits to find out cash flow from operating activities.(Indirect)

The proposed dividend of the previous year becomes due and is also paid in the current year under Financing Activity.

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Adjustment 5: Interest

• Received from investment – it is in investment activities• Received from short term investment classified, as cash

equivalents should be considered as cash inflows from operating activities.

• Received on trade advances and operating receivables should be in operating activities

Interest Received

• On loans / debts are in financing activities• On working capital loan and any other loan taken to finance

operating activities are in operating activities

Interest Paid

• Added to find out cash flow from operating activities(Indirect Method)

Interest Charged

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Adjustment 6:Foreign Currency Transaction

The effect of change in exchange rate in cash and cash equivalents held in foreign currency should be reported as separate part of the reconciliation of cash and cash equivalents.

Unrealized gain and losses arising from changes in foreign exchanges rates are not cash flows.

Unrealised foreign exchange gain is reduced from the net profit befortax in the cash flow statement while computing cash flow from operating activities as it does not involve a cash inflow.

Likewise, unrealised foreign exchange loss is added to the net profit before tax in the cash flow statement while computing the cash flow from operating activities.

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Adjustment 7-Non Cash Transaction

AS per Para 40 of AS 3, non cash transaction shall be separately disclosed as foot note to Cash Flow Statement like land purchased against issue of debentures etc.

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Contd: Example:8 M/s. X. Ltd. bought the assets of M/s. Y. Ltd. for Rs.

1,00,000 payable in fully paid shares of M/s. X. Ltd. These assets consisted of stock of goods Rs. 30,000, machinery Rs. 50,000 and goodwill Rs. 20,000. How this transaction would be dealt with in the preparation of cash flow statement.

An analysis of the transaction shows that the following journal entry must have been made:

Stock Account Dr. 30,000Machinery Account Dr. 50,000Goodwill Account Dr. 20,000

To Equity Share Capital Account 1,00,000 85

Adjustment 8-Non Current asset-Net Basis

The comparative balance sheets of M/s. V. Ltd. at two different dates provide the following information:

Plant and Machinery-1,350000(PY) 1,440000(CY) It is informed that depreciation amounting to Rs.

6,00,000 has been provided during the year. Find out the changes that have taken place in the

asset and also state their effect on cash flows.

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Solution:

87

Plant and Machinery Account (Amount in ’000)

Particular Rs. Particular Rs. Balance b/d 1,350 Depreciation (given) 600 Cash-Purchase outflow Balance c/d 1,440 (Balancing figure) 690 2,040 2,040

Adjustment 9-Non Current asset-Gross Basis

In the comparative balance sheets of M/s. P. Ltd. the position of buildings account is given as under :

(Amount in ‘000)

88

Liabilities 20 × 1 20 × 2 Assets 20 × 1 20 × 2 Rs. Rs. Rs. Rs. Accumulated Buildings 3,840 3,910 depreciation—Buildings 700 790

Additional information :

A part of the buildings Rs. 74,000 was sold for Rs. 60,000.

The accumulated depreciation on buildings sold was Rs. 20,000.

Analyse the transactions.

Solution:

89

Buildings Account Rs. Rs. Balance b/d Cash (Inflow) 60 Profit and Loss Account 3,840 Accumulated depreciation 20 (Gain on sale) (i) 6 3,910 Cash-purchase (Outflow) (Balancing figure) (ii) 144 3,990 3,990

ACCUMULATED DEPRECIATION ACCOUNT (BUILDINGS)

Rs. Rs. Buildings (Accumulated Depreciation) Balance b/d Balance c/d 20 Profit and Loss Account (iii) 700 790 (Depreciation charged) 110 810 810

Adjustment 10-Extraordinary items

The cash flows associated with extraordinary items should be classified as arising from: Operating Investing or Financing activities

as appropriate and separately disclosed. Example-Proceeds from Earthquake settlements

etc

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Examples91

Example- 9

92

Prepare Cash Flow Statement of sona Ltd. from the following information for the year ended March 31, 2007:

Particulars 31.3.2006 (Rs) 31.3.2007 (Rs) Investments 1,80,000 2,40,000 Fixed Assets (at cost) 2,10,000 4,00,000 Equity Share Capital 12,00,000 16,00,000 Long term Loan 8,00,000 4,50,000

Cash 1,64,000 1,44,000 Additional Information:

1. Cash flow from operating activities after tax and extra ordinary

items – Rs. 3,60,000

2. Depreciation on fixed assets – Rs. 85,000

3. Interest received – Rs. 45,000

4. Dividend paid during the year – Rs. 1,40,000

Solution

93

SONA LTD.

CASH FLOW STATEMENT FOR THE YEAR ENDED ON 31 MARCH, 2007

Particulars Amount (Rs.) Amount (Rs) (A) Cash Flow from Operating Activities (A) 3,60,000 (B) Cash Flow from Investing Activities: Purchase of Investment (60,000) Purchase of Fixed Asset (4,00,000 + 85,000 – 2,10,000) (2,75,000) Interest Received 45,000 Net Cash used in Investing Activities (B) (2,90,000) (C) Cash Flow from Financing Activities: Issue of Equity Share Capital 4,00,000 Repayment of long term loans (3,50,000) Dividend paid during the year (1,60,000) Net Cash used in financing Activities (C) (1,90,000) Net Decrease in Cash & Cash Equivalents (A+B+C) (20,000) Add: Cash & Cash equivalents in the beginning 64,000 Cash & Cash equivalents at the end 44,000

Example:10

Point out giving reasons whether following statements are True or False:

(i) Cash flow statement is based upon accrual basis of accounting.

False(ii) Cash paid to employees is shown under cash

flows from Operating activities.True

Increase in the value of fixed assets will increase cash in the business.

False 94

Examples

Point out giving reasons whether following statements are True or False:

(i) Outflow of cash will take place if debentures are issued

False Provision for taxes may be treated as both current

and non-current liabilities.True

Cash flow statement forecasts outflow of cash only.

False 95

Comprehensive Example:11

96

The following financial statement have been prepared by the Chief Accountant of XYZ Liabilities 2007 2008 Assets 2007 2008 Rs. Rs. Rs. Rs. Share Capital 4,00,000 5,00,000 Fixed Assets 10,00,000 11,20,000 Reserves & Surplus 2,50,000 2,80,000 Less: Dep. Written Off 3,70,000 4,60,000 Profit and Loss A/c 1,40,000 1,65,000 6,30,000 6,60,000 Debentures 3,00,000 2,80,000 Stock-in-Trade 2,40,000 3,70,000 Creditors 70,000 60,000 Debtors 2,50,000 2,30,000 Provision for Tax 60,000 80,000 Cash in Hand and at Bank 80,000 90,000 Discount on issue of Share 20,000 15,000

12,20,000 13,65,000 12,20,000 13,65,000

Problem Statement - 2

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Profit and Loss Appropriation Account for the year ended 31st March, 2008. Particulars Rs. Particulars Rs. Transfer to Reserves 30,000 Balance b/d 1,40,000 Interim Dividend paid 80,000 Net Profit for current year 1,35,00 Balance b/d 1,65,000 2,75,000 2,75,000

Prepare a Cash Flow Statement as per AS-3.

Solution:

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XYZ Cash Flow Statement

for the year ended 31st March, 2008 Particulars Rs. Rs. (A) Cash Flows from Operating Activities Closing Balance as per Profit and Loss Account 1,65,000 Less: Opening Balance as per Profit and Loss Account 1,40,000 25,000 Adjustments for: Interim Dividend 80,000 Transfer to Reserve 30,000 Provision for Taxation 80,000 Net Profit before Tax 2,15,000 Add:Discount on Issue of shares 5,000 Depreciation 90,000 Operating Profit before Working Capital Changes 3,10,000 Less:Increase in Stock (1,30,000) Add:Decrease in Debtors 20,000 Less:Decrease in Creditors (10,000) Cash generated from operating activities 1,90,000 Less:Income tax paid 60,000 Net Cash from Operating Activities 1,30,000

Contd:

99

(B) Cash Flow from Investing Activities Fixed Assets Purchased (1,20,000)(1,20,000) Net Cash used in investing Activities (C) Cash Flow from Financing Activities Issue of Shares 1,00,000 Redemption of Debentures (20,000) Dividend Paid (80,000) Net Cash from Financing Activities NIL Net increase in Cash and Cash Equivalents (A + B + C) 10,000 Opening balance of Cash 80,000 Closing balance of Cash and Cash Equivalents 90,000

Learning Summary

Cash Flow Statement is prepared as per standard format prescribed by AS-3 issued by ICAI

Cash flow statements are prepared to explain the cash movements between two points of time

The connection between two successive balance sheets and the statement of cash flows can be shown as follows:

∆ Cash=∆Non Current Liability+∆ Non Current Assets+∆ in Owners Equity

The statement of cash flows shows three main categories of cash inflows (cash receipts) and cash outflows (cash payments). These are in order as follows:

• Cash Flows From Operating Activities • Cash Flows From Investing Activities • Cash Flows From Financing Activities

Cash Flow from Operating activity can be computed using Direct and Indirect method

100

Thank You101