Chapter 17

Cash Flow Statement

Introduction

The end product of the accounting process is “Financial Statement.” Financial Statements are nothing but the summarised statements of accounting data produced at the end of the accounting process by a business entity. It communicates accounting information to its users. The Balance Sheet and Profit and Loss Account (Income Statement) are the traditional financial statements of any business entity. A Balance Sheet shows the financial position of a business enterprise on the last day of an accounting period. It is only a Statement of Assets and Liabilities stating the financial position of an enterprise at a given date. A Profit and Loss Account (Income Statement) shows the financial performance (i.e., profit or loss) of a business entity during the specified period (i.e., accounting period). But revenues recorded in Profit and Loss Account will not reflect cash inflows. Likewise, some of the expenses shown in Profit and Loss Account will be non-cash expenses (like depreciation amortisation) and some will not be paid in full like goods purchased, on credit, outstanding expenses. As such, the periods of profit or loss will not bear any direct relationship with cash flows relating to that specified accounting period. No exact information will be obtained from these two traditional financial statements with regard to investing or financing activities of business entities. Hence, the need arises to assess the inflows and outflows of cash during the accounting period. Keeping in view of this aspect, the Institute of Chartered Accountants of India (ICAI) introduced one more essential component of financial statements – known as Cash Flow Statement. As per AS–3 (revised), the preparation of cash flow statement as the third financial statement has become statutory for any companies registered under the Companies Act 1956. The other forms of business organisations also prepare this third financial statement, viz. Cash Flow Statement. This Cash Flow Statement has to be prepared to provide information about the cash flows associated with operating, investing and financing activities of business entities during accounting period. Cash Flow Statement to put it in a nutshell reflects “sources and uses of cash.” This statement reveals “where cash comes from and where it goes.” This chapter describes in detail on this financial statement.

OBJECTIVE 1: MEANING OF CASH FLOW AND CASH FLOW STATEMENT

1. Cash flow refers to movement both, inflow and outflow, of cash and cash equivalents during a period.
2. Inflow of cash refers to all transactions that lead to increase in cash and cash equivalents.
3. Outflow of cash refers to all transactions that lead to decrease in cash and cash equivalents.
4. Cash Flow Statement is a statement that shows flow of cash and cash equivalents during a period.

OBJECTIVE 2: USES OF CASH FLOW STATEMENT

1. Short-term Planning: It gives information for a specific period. It is useful in short-term planning of an enterprise.

2. Easy Analysis of Liquidity and Solvency: Periodical cash flow statements assist in ascertaining liquidity and solvency of a concern.

3. Cash Management: This provides information about cash – surplus or deficit, thereby resulting in an efficient cash management.

4. Prediction: This predicts about the soundness of financial status of a concern.

5. Cash Budget: Cash Flow Statement is useful in preparing cash budgets of an enterprise.

6. Cash Position: This not only ascertains the cash position but also explains the reasons for such cash position (lower or higher).

7. Management Decisions: This is useful in determining the urgeness of management decisions and thereby acting as a deterrent against incorrect decisions.

8. A Tool of Planning: All future investments may be effectively planned with the help of Cash Flow Statements.

9. Dividend Policy: This statement also helps an enterprise in planning a good dividend policy.

OBJECTIVE 3: LIMITATIONS OF CASH FLOW STATEMENT

1. All non-cash transactions are not covered, since this statement is based on the limited concept of cash and cash equivalents.
2. It is not a proper substitute as this statement reveals the net cash flow only and it may not be useful as a substitute for income statement.
3. It is not an effective tool, since this is not a good indicator of the financial position of a concern as it ignores mainly the working capital part.
4. It is based on past records. No future planning can be properly made unless and otherwise it is accompanied by some other documents. It is historical in nature.

3.1 Meaning of Cash Flow, Cash and Cash Equivalents

1. Cash flows are inflows and outflows of cash and cash equivalents.
2. Cash: Cash on hand and demand deposits in banks.
3. Cash equivalents: They are usually of short term and highly liquid investments. Treasury bills, commercial papers, money market funds and investment in preference shares are some of cash equivalents.

OBJECTIVE 4: PREPARATION OF CASH FLOW STATEMENTS

As per the syllabus, cash flow statements are to be prepared as per revised standard issued by ICAI. This revised standard is better known among professional accountants as AS–3 (revised).

This AS–3 requires a Cash Flow Statement to be prepared and presented in a manner that it shows cash flow from business transactions during a period classified as follows:

1. Operating Activities
2. Investing Activities
3. Financing Activities

These classifications of business transactions as per AS–3 may be represented as follows for easy comprehension.

This is not a distinction or difference between cash inflow and cash outflow. This only facilitates easy comprehension and better remembrance of cash inflow and cash outflow for each of the activities classified.

Illustration: 1

From the following activities, classify them as (1) Operating Activities, (2) Investing Activities and (3) Financing Activities

Requirements

1. Issue of debentures
2. Sale of machinery
3. Sale of investment
4. Sale of patent
5. Bank balance
6. Investment in marketable securities (only short term)
7. Buy back of equity shares
8. Income tax paid
9. Office expenses
10. Repayment of a long-term loan

Solution

 

Financing Activities	:	Issue of debenture, buy back of shares, repayment of long-term loan (manufacturer concern)
Operating Activities	:	Sale of investment, income tax paid, office expenses
Investing Activities	:	Sale of machinery, sale of investment (financial concerns) and sale of patent
Cash equivalents	:	Bank balance, investment in marketable securities (short term)

OBJECTIVE 5: CASH FLOW STATEMENT: PREPARATION

AS–3 requires that the Cash Flow Statement should show separately the activities, viz.

1. Cash Flow from Operating Activities
2. Cash Flow from Investing Activities
3. Cash Flow from Financing Activities

Before preparation of cash flow statements, one should be familiar with the pro forma or format of Cash Flow Statement under two different methods – (i) Direct Method and (ii) Indirect Method.

These are the revised formats as issued by ICAI (revised) as per AS–3 (revised).

5.1 Direct Method Pro-forma or Format of Cash Flow Statement for the Year Ended

Particulars	Rs	Rs
Cash from Operating Activities
A. Operating Cash Receipts
(i) Cash Sales
(ii) Cash Received from Customers	–
(iii) Trading Commission Received	–
(iv) Royalties Received	–
(v) Others	–	xxxx(A)
B. Operating Cash Payments
(i) Cash Purchases	–
(ii) Cash Paid to Suppliers	–
(iii) Cash Paid to Business Expenses (office expenses, manufacturing expense, selling expense)	–
(iv) Others	–	xxxx(B)
C. Cash Generated from Operation (A−B)		xxx
D. Income Tax Paid		xxx
E. Cash Flow before Extraordinary Items		xxxx
F. Extraordinary items (Receipts/payments)		xxxx
G. Net Cash from Operating Activities	±	(–)
2. Cash flow from Investing Activities (As in Indirect Method)		xxxxx
3. Cash Flow from Financing Activities (As in Indirect Method)		xxxx
4. Net Increase/Decrease in Cash and Cash Equivalents (as in Indirect Method) (1 + 2 + 3)		xxxx
5. Add Cash and Cash Equivalents		xxxxx
In the beginning of the year (same as in Indirect Method)
6. Cash and Cash equivalent in the end of the year		xxxxx

5.2 Indirect Method Pro-forma or Format Cash Flow Statement for the Year Ended

Particulars	Rs	Rs
1. Cash Flow from Operating Activities		xxx
A. Net profit before taxation and extraordinary items
B. Add: Items to be added
• Depreciation	–
• Preliminary expenses written off	–
• Discount on issue of shares and debentures written off	–
• Goodwill written off	–
• Patents and Trade marks written off	–
• Interest on Borrowings and Debentures (Only for non-finance companies to be shown – under Financial Activities)	–
• Loss on Sale of Fixed Assets	–	xxx
C. Less: Items to be Deducted
• Interest Income (only for non-finance companies to be shown under Investment Activities)	–
• Dividend Income (for non-finance companies to be shown under investment activities)	–
• Rental Income	–
• Profit on Sale of Fixed Assets (to be shown under Investment Activities – Sale Price) Operating Profit before Working Capital Charges Operating Profi t before working capital charges	–	xxx
D. Operating Profit before Working Capital Changes (A + B – C)		–
E. Add: Decrease in Current Assets and Increase in Current Liabilities Detail:
• Decrease in Stock/inventories	–
• Decrease in Debtors/B/R	–
• Decrease in Accrued Incomes	–
• Decrease in Prepaid Expenses	–
• Increase in Creditors/B/P	–
• Increase in Outstanding Expenses	–
• Increase in Advanced Income	–
• Increase in Provision for Doubtful Debt	–	x-x
F. Less: Increase in Current Assets and Decrease in Current Liabilities
• Increase in Stock/inventories
• Increase in Debtors/B/R	–
• Increase in Accrued Incomes	–
• Increase in Prepaid Expenses	–
• Decrease in Creditors/B/P	–
• Decrease in Outstanding Expenses	–
• Decrease in Advanced Income	–
• Decrease in Provision for Doubtful Debt	–
	–	–
G. Cash Generated from Operations (D + E – F)		xxx
H. Less: Income Tax Paid		–
I. Cash flow before extraordinary items, extraordinary items (±)		* * *
J. Net Cash from (or used in) Operating Activities		xxx
2. Cash Flow from Investing Activities
• Proceeds from Sale of Fixed Assets	–
• Proceeds from Sale of Investments	–
• Proceeds from Sale of Intangible Assets	–
• Interest and Dividend Received (for non-finance companies only)	–
• Rent Income	–
• Purchase of Fixed Assets	–
• Purchase of Investments	–
• Purchase of Intangible Assets, e.g. Goodwill	–
• Extraordinary Items (± or)	–
Net Cash from (used in Investing Activities)		___
3. Cash Flow from Financing Activities		xxx
• Proceeds from Issue of Shares and Debentures	–
• Proceeds from other Long-Term Borrowings	–
• Final Dividend paid	–
• Interim Dividend paid	–
• Interest on Loans and Debentures	–
• Repayment of Loans	–
• Redemption of Debentures/pret	–
• Extraordinary Items ( + or −)	–
Net Cash from (or used in) Financing Activities	–
		–
4. Net Increase/Decrease in Cash and Cash Equivalents (1 + 2 + 3)		xxx
5. Cash and Cash Equivalents in the beginning of the year
• Cash in Hand	–
• Cash at Bank (less: O/D)	–	____
• Short-Term Deposits	–	xxx
• Marketable Securities	–	–
6. Cash and Cash Equivalents at the end of the year
• Cash in Hand
• Cash at Bank (less: O/D)
• Short-Term Deposits
• Marketable Securities

Cash Inflow from Debtors

Illustration: 2

You are required to calculate cash inflow from debtors from the following data.

Particulars	Rs
Opening Balance	5,00,000
Cash Sales	2,00,000
Opening Debtors	50,000
Closing Debtors	80,000
Sales Returns	20,000

Solution: Cash inflow from debtors has to be computed. This can be prepared by two methods.

Method 1: Cash Inflow from Debtors: First the format has to be drawn. Then transfer the items as follows:

 

Cash Inflow from Debtors

Particulars		Rs
Opening Balance	Rs	50,000
ADD Credit Sales: Total Sales	5,00,000
Less: Cash Sales	2,00,000	3,00,000
Closing Balance of Debtors		3,50,000
Cash inflow from Debtors
Less:
Sales Returns	20,000
Closing Balance of Debtors	80,000	1,00,000
Cash Inflow from Debtors		2,50,000

Note

 

Step A:	Opening Debtors has to be taken as base (given in the question)
Step B:	With this Credit Sales (Total Sale − Cash Sale) is ADDED

Step C:	Then, Sales Returns and Closing Balance of Debtors to be deducted
Step D:	The result shows Cash Infl ow from Debtors

 

Method 2

 

Total Debtors Account

Total Debtors Account (ledger) is computed, as above.

Note

1. Cash Inflow from Debtors is the balancing figure (Rs 2,50,000).
2. Any one method may be adopted. The result will be same under both the methods, i.e. Cash Inflow from Debtors: Rs 2,50,000.

Illustration: 3

From the following calculate cash inflow from debtors

Particulars	Rs
Opening Debtors	20,000
Closing Debtors	40,000
Opening Bills Receivables	15,000
Closing Bills Receivables	25,000
Total Sales	3,00,000
Cash Sales	25% of credit sales
Discount Allowed	10,000
Bad Debts	15,000
Discount Allowed	20,000
Sales Returns	35,000

Solution: First value of credit sales is to be calculated irrespective of the method to be adopted.

 

Let Credit Sales be taken as	=	X
Cash Sales	=	25% of X
	=	X/5

Method 1: Cash Inflow from Debtors

Particulars		Rs
Opening Debtors		20,000
Opening Bills Receivable		15,000
*1Add: Credit Sales (worked out above)	Rs	2,50,000
Less: Discount Allowed	(10,000)	2,85,000
Bad Debts	(15,000)
Sales Returns	(35,000)
Closing Debtors	(40,000)
Closing Bills Receivables	(25,000)
		1,25,000
		1,60,000*2

Total Debtors Account

Bills Receivables

Method 2: Cash Inflow from Trading Commission

Illustration:4

Calculate the amount of trading commission received during the year 2006 from the following data.

 

	Jan 2006 Rs	Dec 31, 2006 Rs
Accrued Trading Commission	10,000	45,000
Advance Trading Commission	15,000	60,000
Trading Commission earned during the year 2006 is Rs 1,70,000

Solution: Trading Commission received can also be computed in two different ways (1) Statement Form and (2) Account Form.

 

1. Statement Form

Particulars	Rs	Rs
Trading Commission earning during 2006		1,70,000
Add: 1. Accrued Trading Commission as on Jan 1, 2006	10,000
2. Advance Trading Commission as on Dec 31, 2006	60,000	70,000
		2,40,000
Less: 1. Accrued Trading Commission as on Dec 31, 2006	15,000
2. Advance Trading Commission as on Jan 1, 2006	45,000	60,000
Total Commission earned during 2006		1,80,000

2. Account Form Trading Commission Account

5.3 Calculation of Cash Outflow on Purchases

Purchases include both cash and credit purchases.

5.3.1 Credit Purchases

	+ ■ Credit Purchases +
	+ ■ Opening Creditors +	Items to be added
	+ ■ Opening Bills Payable
	− ■ Closing Creditors
	− ■ Closing Bills Payable
	− ■ Discount Received	Items to be deducted
	− ■ Purchase Returns

This can also be calculated by preparing Total Creditors Account. [The balancing figure and bills payable can be inserted in the A/c by preparing Bills Payable A/c (balancing fig).]

Illustration: 5

Calculate cash outflow to creditors from the following:

 

Total Purchases	:	Rs 1,80,000
Cash Purchases	:	50% of credit purchases
Opening Creditors	:	Rs 5,000
Closing Creditors	:	Rs 20,000
Purchase Returns	:	Rs 25,000
Discount (Received)	:	Rs 10,000

Solution

First, we have to calculate credit purchase. Credit purchase is not given in the problem. So, let us assume,

Credit purchases = Rs x.

Cash purchase is given as 50% of credit purchase

So, Cash purchase = x/2

     Total purchases = Cash purchase + Credit purchase

Method 1: Calculation of Cash Outflow to Creditors

Particulars		Rs
Opening Balance of Creditors		5,000
Add: Credit Purchases		1,20,000
Less:	Rs
(i) Closing Balance of Creditors	(20,000)
(ii) Discount Received	(10,000)
(iii) Purchase Returns	(25,000)	55,000
Cash Outfl ow to Creditors		70,000

Method 2:

 

Total Creditors Account

Illustration: 6

Complete cash outflow to creditors from the following:

 

		Rs
	Cost of Goods Sold	3,00,000
	Operating Stock	5,000
	Closing Stock	15,000
	Opening Balance of Creditors	25,000
	Return Outwards	10,000
	Discount Received	15,000
	Opening Bills Payable A/c	40,000
	Closing Bills Payable A/c	50,000
	Closing Balance of Creditors	40,000
	Cash Purchases	60,000

Solution: Credit purchases will have to be calculated first. For this, from the figures, total purchases are calculated.

    Total Purchases = Cost of Sales (Cost of Goods Sold) + Closing Stock − Opening Stock

Students should note that cost of sales and cost of goods sold are one and the same

    = Rs 3,00,000 + 15,000 – 5,000 = Rs 3,10,000

Then, Credit Purchases = Total Purchases – Cash Purchases

 

	=	Rs 3,10,000 ‒ Rs 60,000
	=	Rs 2,50,000

Method 1: Cash Outflow to Creditors Account

Particulars		Rs
Opening Balance of Creditors A/c		25,000
Opening Balance of Bills Payable A/c		40,000
Add: Credit Purchases		2,50,000
Less:	Rs	3,15,000
1. Discount Received	15,000
2. Returns Outwards	10,000
3. Closing Balance of Creditors	40,000
4. Closing Balance of Bills Payable	50,000	1,15,000
Cash Outfl ow to Creditors		2,00,000

Method 2

 

5.4 Cash Outflow on Expenses Incurred

To find out cash outflow, the amount of expenses (given in P & L A/c) has to be adjusted.

 

Step 1:	For this * (i) amount outstanding in the beginning and (ii) prepaid at the end to be added with expenses (given in P & L A/c).
Step 2:	(i) Amount outstanding in the end and (ii) prepaid at the beginning have to be deducted from P & L A/c.
Step 3:	Net figure arrived will be cash paid for expenses.
Note 1:	All non-cash expenses have to be ignored because no cash payment is involved (i.e., cash flow does not take place).

Treatment of non-cash expenses: Such expenses are as follows:

1. Depreciation
2. Preliminary expenses written off
3. Discount on issue of shares and debentures written off
4. Goodwill written off
5. Patents and copyrights written off
6. Underwriting commission written off

Note 2: All appropriations: To be ignored: Outflow of cash does not occur

Appropriations:

1. Proposed dividend
2. Provision for taxation
3. Transfers to General Reserves

Note 3: All items relating to investing activities and financing activities are ignored because they are taken into calculation of cash flow from investing or financing activities. For example, profit/loss on sale of fixed assets.

Illustration: 7

Compute Cash Outflow on Business Expenses from the following (taken from P & L A/c)

 

		Rs
	Expenses occurred during the year 2006	25,000
	Opening Outstanding Expenses	3,000
	Closing Outstanding Expenses	5,000
	Opening Prepaid Expenses	4,000
	Closing Prepaid Expenses	2,500

Solution

Method I: Cash Outflow on Business Expenses

Particulars	Rs	Rs
Expenses incurred during the year		25,000
Add: Opening Outstanding Expenses Closing Prepaid Expenses	3000
Less: Closing Outstanding Expenses Opening Prepaid Expenses	2500	5,500
		30,500
Less: Closing Outstanding Expenses	5000
Opening Prepaid Expenses	4000	9,000
Cash Outflow on Expenses		21,500

Method II

 

Calculation of Cash from Operating Activities (Direct Method)

Illustration: 8

Direct Method illustrated:

Calculate cash flow from the following data by Direct Method.

 

		Rs
	Cash Sales	6,00,000
	Cash Purchases	3,00,000
	Royalties Received	25,000
	Commission Paid	15,000
	Rent Paid	12,000
	Tax Paid	33,000
	Tax Refund Received	13,000
	Cash Received from Debtors	15,000
	Cash Paid to Creditors	5,000
	Wages and Salaries Paid	30,000
	Manufacturing Expenses Paid	10,000
	Office Expenses Paid	8,000
	Insurance Claim for Tsunami Loss	35,000

Solution

 

Cash flow from Operating Activities

Particulars		Rs
A. Operating Cash Receipts
Cash Sales		6,00,000
Cash Received from Debtors		15,000
Royalties Received		25,000
		6,40,000
B. Operating Cash Payments	Rs
Cash Paid to Creditors	5,000
Cash Purchases	3,00,000
Commission Paid	15,000
Rent Paid	12,000
Wages and Salaries	30,000
Manufacturing Expenses	10,000
Office Expenses	8,000	3,80,000
C. Cash From Operations Before Tax	Rs	2,60,000
D. Income Tax Paid	33,000
Less: Refund Received	13,000	20,000
E. Cash Flow from Operations before Extraordinary Items		2,40,000
F. Extraordinary Items: Insurance Claim for Tsunami		35,000
G. Net Cash Flow From Operating Activities		2,05,000

Cash Flow from Operating Activities (Indirect Method)

So far, we have discussed the calculation of cash flow (Operating Activities) by Direct Method, stage by stage. Now we have to discuss this by the following Indirect Method.

One has to make adjustments on net profit arrived as in P & L Account.

To put in a nutshell, the net operating profit before working capital charges has to be adjusted as:

Items to be added

Items that lead to increase in cash have to be added.

They are as follows:

1. Decrease in Current Assets
2. Increase in Current Liabilities

Items to be deducted

Items that lead to decrease in cash have to be deducted.

They are as follows:

1. Increase in Current Assets
2. Decrease in Current Liabilities

Illustration: 9

Calculate Cash Flow from Operating Activities from the Following P & L A/c by Indirect Method

Solution: First, net profit before tax has to be calculated

 

	Adjustment	Net profit as per P & L A/c	Rs 15,000
	Items to be added:	1. Proposed Dividend	Rs 10,000
		2. Provision for Tax	Rs 5,000
			30,000
	Items to be deducted:	1. Refund of Tax	Rs 3,000
		2. Net Profit before Tax	Rs 27,000
			30,000

Now we have to compute cash flow.

 

Cash Flow from Operating Activities

Particulars		Rs
Net Profit Before Tax		27,000
Adjustments	Rs
Add: Depreciation	3,000
Goodwill Written off	5,000
Loss on Sale of Machinery	2,000	10,000
		37,000
Less: Profit on Sale of Building		12,000
Operating Profit before Working Capital Charges		25,000
I.T. Refund Received		3,000
Net Cash flow from Operating Activities		28,000

Illustration: 10

The following is the position of Current Assets and Current Liabilities of a Company

Particulars	1.1.2009 Rs	31.12.2009 Rs
	Rs
Provision for Bad Debts	5,000	–
Short-Term Loan	20,000	30,000
Creditors	25,000	20,000
Bills Receivable	30,000	50,000

The company incurred a loss of Rs 70,000 during the year 2009. Calculate cash flows from operating activities by Indirect Method.

Solution

Calculation of cash flow from Operating Activities: Indirect Method

Particulars		Rs
Loss During 2009		–70,000
Adjustments
(a) Increase in Current Assets	Rs
Bills Receivable	(20,000)
(b) Decrease in Current Liabilities Creditors	(5,000)
Provision for Bad Debts	(5,000)
		–30,000
Cash used in Operating Activities		(–1,00,000)

Negative Cash from Operations Illustrated:

1. Here, students should note that Net Loss is given instead of Net Profit. The result is negative one. This means (negative cash from operation) that there is net outflow of cash from Operating Activities.
2. Short-Term Loan: This is financing activity. So it has to be shown under cash flow from financing activities.
3. So, increase in short-term loan is ignored.

5.5 Adjustments

For sale and purchase of (non-current) fixed assets (as per revised standard)

1. Cash received from sale of an item of (non-current) fixed assets is not to be considered as cash flows from investing activities.
2. Profit/Loss on sale of (non-current) fixed assets is taken into account in calculating cash flow from operating activities.
3. While preparing (non-current) fixed assets account much care should be taken into accounts.

There are two methods for this:

Treatment of (non-current) fixed assets – on original basis and – on W.D.V. basis.

5.5.1 On Original cost basis

1. Look at the Balance Sheet
2. If there is “Provision for Depreciation” or “Accumulated Depreciation” for both years, it shows that fixed assets are shown at their original cost.
3. In such cases, both “Fixed Assets Account” and “Provision for Depreciation Account” will have to be prepared to arrive at purchase and sale of fixed assets and the actual amount of depreciation.

5.5.2 On Written Down Value basis

1. If there is no such item, depreciation appears in the Balance Sheet, it means that fixed assets are shown at written down value (i.e., after depreciation).
2. Only fixed asset account has to be prepared and current year’s depreciation has to be credited to Fixed Assets Account (i.e., no need to prepare Provision for Depreciation Account).

Illustration: 11

Compute Cash Flow from Operating Activities by Indirect Method

Particulars	Opening Balance Rs	Closing Balance Rs
P & L Account	45,000	55,000
General Reserve	25,000	30,000
Provision for Depreciation on Plant	40,000	45,000
Outstanding Expenses	5,000	2,000
Goodwill	25,000	15,000
Sundry Debtors	60,000	50,000

An item of plant costing Rs 50,000 having book value of Rs 40,000 was sold for Rs 45,000 during the year.

Solution

Step 1: First, net profit before tax is to be calculated

 

Net profit for the year
Difference between opening and closing balances in the problem (i.e. Rs 55,000 − Rs 45,000)	Rs 10,000
Adjustment
Add General Reserve (Difference Rs 30,000 − 25,000)	Rs 5,000
Net Profit before Tax	Rs 15,000

Step 2: Next,

Treatment of Plant A/c

1. Plant A/c has to be prepared
2. This has to be prepaid to arrive at depreciation, as cost, book value and sale of plant were given
3. Balancing figure in the plant account is the figure arrived at for depreciation
4. Profit on Sale = Sale Price – Book Price

   = Rs 45,000 – 40,000 = Rs 5,000

Plant Account

Step 3

1. Next, provision for Depreciation of Plant A/c has to be prepared
2. Balancing figure in this account is the amount provided for depreciation during the year
3. Depreciation arrived at as in Plant Account has to be transferred here under “Plant A/c.”

Treatment of Provision for Depreciation

 

Provision for Depreciation on Plant Account

Step 4

Finally, now computation of cash flow from operating activities has to be worked out as follows:

 

Calculation of Cash Flows from Operating Activities

Particulars	Rs
Net Profit Before Tax	15,000
Adjustments
Add: Non-cash expenses

Particulars		Rs
	Rs
Depreciation	15,000
Goodwill written off	10,000	25,000
		40,000
Less: Non-cash incomes
Profit on Sale of Plant		(5,000)
Operating Profit before Working Capital Charges		35,000
Add: Decrease in Current Assets: Sundry Debtors Debtors		10,000
		45,000
Less: Decrease in Current Liabilities: Outstanding Expenses		(3,000)
Cash Flows from Operating Activities		42,000

Illustration: 12

Calculate cash flows from Operating Activities from the following information

Particulars	2008 (Rs)	2009 (Rs)
Debtors	42,000	46,000
Prepaid Expenses	2,000	2,700
Accrued Income	1,500	1,200
Income Revised in Advance	800	1,000
Creditors	26,000	29,000
Bills Payable	13,000	11,000
Outstanding Expenses	8,000	6,000

Profit made during 2009 amounted to Rs 1,00,000 after taking into account the following adjustments

1. Profit on Sale of Investment : Rs 2,000
2. Loss on Sale of Machine      : Rs 900
3. Goodwill Amortised             : Rs 3000
4. Depreciation Charged           : Rs 2900

Answer: Cash flow for Operating Activities

Particulars		Rs
Profit for the Year		1,00,000
Items to be added back to profit	Rs
Add: Depreciation	2,900
Goodwill Amortised	3,000
Loss on Sale of Machine	900	6,800
		1,06,800
Less. Profit on Sale of Investment	(2,000)	(2,000)
Cash Generated from Operation before		1,04,800
Working Capital Charges (operation profit)
Add: Decrease in Current Assets and Increase
in Current Liabilities	300
Accrued Income	200
Income Received in Advance

Particulars	Rs	Rs
Creditors	2,000	2,500
		1,07,300
Less: Increase in Current Assets and Decrease in Current Liabilities:
Debtors	(4,000)
Prepaid Expenses	(200)
Bills Payable	(2,000)
Outstanding Expenses	(2,000)	(8,700)
Net Cash Flow from Operating Activities		98,600

Illustration: 13

The net profit of a company before tax is Rs 12,50,000 as on Mar 31, 2009 after considering the following:

 

	Rs
Depreciation on Fixed Assets	25,000
Goodwill Written off	15,000
Loss on Sale of Machine	12,000

The current assets and current liabilities on the beginning and at the end of the year were as follows:

Particulars	Mar 31, 2008 (Rs)	Mar 31, 2009 (Rs)
Bills Receivables	25,000	15,000
Bills Payable	10,000	12,500
Debtors	30,000	38,800
Stock in Hand	18,000	14,000
Outstanding Expenses	8,000	7,000

Calculate cash flow from Operating Activities.

Answer: Students should once again remember the steps in preparing cash flow from Operating Activities:

 

Step 1:	Net profit before tax is taken as the base.
Step 2:	Items to be added back to the net profit have to be written one by one and add with net profit.
Step 3:	This added value is “operating profit before working capital charges.”
Step 4:	With this the following items to be added:
	Decrease in the value of Current Assets
	Increase in the value of Current Liabilities
Step 5:	Then, the following items have to be deducted:
	Increase in the value of Current Assets
	Decrease in the value of Current Liabilities
Step 6:	Net result is “net cash flow from operating activities”

 

Calculation of Cash Flow from Operating Activities

Particulars		Rs
A. Net Profi t before Tax		12,50,000
B. Add: (Items to be added back to Net Profit)	Rs
Depreciation on Fixed Assets	25,000
Goodwill Written off	15,000
Loss on Sale of Machine	12,000	52,000
(A + B) C. Operating Profi t before Working Capital Charges (A + B)		13,02,000
D. Add: (Decrease in Current Assets and Increase in Current Liabilities
Decrease in Bills Receivables	9,500
Decrease in Stock	4,000
Increase in Bills Payable	2,500	16,000
E. (Deduct) Less: (Increase in Current Assets and Decrease in Current Liabilities		13,18,000
Increase in Debtors	8,000
Decrease in Outstanding Expenses	1,000	(9,000)
(C + D − E) F. Net Cash Flow from Operating Activities (C + D − E)		13,08,200

5.6 Cash Flow from Investing Activities

1. The investing activities of a concern relate to the acquisition and disposal of long-term assets and other reinvestments not included in cash equivalents.
2. The cash flow from investing activities is ascertained by analysing the changes in fixed assets and long-term investments in the beginning and at the end of the year.
3. The cash inflow and cash outflow (i.e. cash flow) of items included in this category of investing activities are as follows:

Payments (Cash Outflow)

1. Cash payments to acquire fixed assets.
2. Cash payments to acquire shares, warrants or debt instruments of other enterprises and interests in joint ventures.
3. Cash advances and loans to third parties.

   Receipts (Cash Inflow)

4. Cash receipts from disposal of fixed assets.
5. Cash receipts from disposal of shares, warrants or debt instruments of other enterprises and interests in joint ventures.
6. Cash receipts from the repayment of loans and advances made to third parties.

5.6.1 Accounting Treatment

5.6.1.1 Fixed Assets: There are two categories: (i) Fixed assets are shown at Written Down Value (W.D.V.). No additional information will be shown.

1. To compute the missing figures, fixed asset account is opened and all items are recorded.
2. To ascertain purchase of fixed assets → balancing figure on the debit side of the A/c.
3. To ascertain sale of fixed assets → balancing figure on the credit side of the A/c.
4. To ascertain depreciation → balancing figure on the credit side of the account.
5. In cases, if both sale and depreciation are not given, it may be assumed to be either sale or depreciation and such assumption should be expressly recorded.
6. In case of land → no depreciation recorded.
7. In case of patents, trade marks, goodwill, etc. → the amount has to be written off.

Illustration:14

A public limited company has plant and machinery whose written down value on Apr 1, 2009 was Rs 7,50,000 and on Mar 31, 2010 was Rs 9,00,000. Depreciation for the year was Rs 30,000. At the beginning of the year a part of the plant was sold for Rs 20,000 which had written down value of Rs 17,500. Calculate the net cash flow from investing activities.

Solution

Note: Fixed assets are shown at written down value

Stage 1: Purchasing amount has to be calculated. So Plant and Machinery A/c has to be opened

 

Plant and Machinery Account

Stage 2: Cash flow from Investing Activities

Particulars	Rs	Rs
Cash Payments to Acquire Plant and Machinery	(1,97,500)
Cash Receipts from Sale of Plant and Machinery (given in question)	20,000	(1,77,500)
Cash Flow from Investing Activities		__________ (1,77,500)

Second Category

5.6.1.2 Fixed Assets are shown:   At cost and accumulated depreciation (separately maintained) or provision for depreciation

1. In this case, depreciation is not directly charged to the Fixed Assets Account.
2. Depreciation for the year is ascertained from Provision for Depreciation Account (Accumulated Depreciation A/c).

This can be explained with the help of the following illustration.

Illustration: 15

From the following information, calculate the cash flow from Investing Activities.

Particulars	Mar 31, 2008 (Rs)	Mar 31, 2009 (Rs)
Machinery (at cost)	5,00,000	5,50,000
Accumulated Depreciation	1,00,000	1,20,000
Patents	3,00,000	1,90,000

Additional Information

1. During 2008–2009, a machine costing Rs 50,000 with accumulated depreciation Rs 30,000 was sold for Rs 25,000.
2. Patents were written off to the extent of Rs 55,000 and some patents were sold at a profit of Rs 25,000.

Solution

• Fixed Assets value is shown at cost
• Accumulated depreciation is also shown
• Further information particulars are also in the problem
• In this question details on patents are also shown
• So, we have to open separate accounts for
  1. Machinery
  2. Accumulate Depreciation Account
  3. Patents Account

to ascertain all the missing figures.

Step 1

 

	Profit on sale of machinery is to be calculated.
	Profit on Sale of Machinery = Sale Price − Book Value
	= Rs 25,000 − (Cost − Accumulated Depreciation)
	= Rs 25,000 − (Rs 50,000 − Rs 30,000)
	= Rs 25,000 − (Rs 20,000)
	= Rs 5,000

This amount has to be debited to Machinery A/c as P & L A/c.

Step 2

 

Step 3

 

Step 4

 

Step 5

 

Cash Flow from Investing Activities

Particulars	Rs
Inflow from Sale of Machinery	25,000
*1 Outflow on Purchase of Machinery	(1,00,000)
*3 Inflow from Sale of Patents	80,000
Net Cash Flow from Investing Activities	5,000

Illustration: 16

From the following particulars, calculate the cash flows from investing activities.

	Purchases Rs	Sales Rs
Investments	3,00,000	2,00,000
Goodwill	1,50,000	–
Machinery	6,50,000	2,10,000
Patents	–	1,00,000

Dividend received on shares held as investment Rs 30,000. Interest received on debentures held as investment Rs 40,000. A building purchased for investment purposes (out of surplus funds) was let out and rent proceeds received thereby Rs 1,20,000.

Solution

This is a different problem.

• All purchases and sales are given straight.
• No need to prepare separate account for any item.
• So, cash flow from investing activities can straight away be calculated as follows:

Cash Flow from Investing Activities

Particulars	Rs
Investments Purchased	(3,00,000)
Proceeds from Sale of Investments	2,00,000
Goodwill Purchased	(1,50,000)
Machinery Purchased	(6,50,000)
Proceeds from Sale of Machinery	2,10,000
Proceeds from Sale of Patents	1,00,000
Interest Received on Debentures	40,000
Dividend Received on Shares	30,000
Rent Received	1,20,000
Net Cash Flow from Investing Activities	(4,00,000)

5.7 Cash Flow from Investing Activities

Illustration:17

A company has investments at the beginning of the year Rs 40,000 and at the end of the year Rs 30,000. During the year the company had sold 50% of its investments held in the beginning of the year at a profit of Rs 10,000. Compute cash flow from Investing Activities.

Solution

Step 1: First, cost of sales is to be calculated at 50% of the investment held in the beginning.

With this, profit has to be added to arrive at cash inflow from sale of investment.

So Sale of Investment = Rs 20,000 + Rs 10,000 = Rs 30,000

Step 2: Next, investment account is to be prepared to compute outflow on purchase of investment (i.e., the balancing figure in this account)

 

Step 3

 

Calculation of Cash Flow from Investing Activities

Particulars		Rs
Inflow from Sale of Investment	Rs
Cost of Investment Sold	20,000
Add: Profit on Sale	10,000	30,000
Less: Outflow on Purchase of Investment		(10,000)
Net Cash Flow from Investing Activities		20,000

Illustration: 18

 

Calculate Cash Flow from Investing Activities

Particulars		Rs
	Rs
Machinery (at Cost)	6,00,000	6,25,000
Accumulated Depreciation	1,10,000	1,25,000

During the year, one of the machines costing Rs 60,000 with accumulated depreciation for this machine Rs 35,000 was sold for Rs 30,000.

Solution

 

Step 1:	Computation of profit on sale of fixed assets and book value of assets. Profit on sale of machinery has to be calculated. Profit on Sale of Machinery = Sale Price – Book Value Sale price is given = Rs 30,000
Step 2:	Book value is to be found out Book Value = (Cost – Accumulated Depreciation)             = (Rs 60,000 – 35,000)             = Rs 25,000
Step 3:	Profit on sale of machinery = Rs 30,000 – 25,000 = Rs 5,000
Step 4:	Then machinery account is to be prepared

 

Step 5: Accumulated Depreciation Account is to be prepared

 

Step 6: Cash flow from investing activities is prepared

 

Cash Flow from Investing Activities

Particulars	Rs
Inflow from Sale of Machinery	30,000
Outflow from Purchase of Machinery	(85,000)
(Balancing Figure in Machinery A/c)
Net Cash Flow from Investing Activities	(55,000)

5.8 Cash Flow from Financing Activities

5.8.1 Meaning

Activities that result in change in the size and composition of owners’ capital and borrowing of the enterprises are termed as financing activities.

Items included in financing activities are as follows:

1. Proceeds from issue of shares
2. Proceeds from issue of debentures
3. Proceeds from long-term borrowings
4. Receipts by way of loan
5. Proceeds from issue of bonds
6. Redemption of preferences shares/debentures
7. Repayment of long-term borrowings, loans, etc.
8. Interest paid (non-financial concerns only)
9. Dividend paid (in all concerns)

Note

1. Issue of Bonus Shares – (by which the increase in share capital) is not to be shown as a financing activity in the cash flow statement.
2. But in case, when shares are issued at premium will be shown in cash flow statements.
3. The cash flow from financing activities is ascertained by analysing the changes in equity share capital, preference share capital, debentures and other borrowings.

Illustration: 19

Calculate the cash flow from financing activities of a concern from the following information

Particulars	Mar 31, 2008 (Rs)	Mar 31, 2009 (Rs)
Equity Share Capital	5,00,000	6,75,000
9% Debentures	2,00,000	1,50,000
Securities Premium	50,000	70,000

Additional Information: Interest paid on debentures = Rs 18,000

Solution

Note

Treatment of change in share capital and changes in debentures and redemption.

1. Change in share capital (Rs 6,75,000 – 5,00,000) reveals issue of shares.
2. Premium increase, also included.
3. Change in debentures (Rs 2,00,000 – 1,50,000) reflects redemption, included.
4. Interest paid on debentures, also included.

Calculation of Net Cash Flow from Financing Activities

Particulars	Rs	Rs
Cash Receipts from Issue of Shares	1,75,000
Add: Proceeds from Premium	20,000	1,95,000
Redemption of Debentures	(50,000)
Interest Paid on Debentures	(18,000)	(68,000)
Net Cash Flow from Financing Activities		1,27,000

Illustration: 20

A public limited company extends the following information. Calculate the net cash flow from Financing Activities.

Particulars	Rs	Rs
Equity Shares Capital	20,00,000	30,00,000
12% Debentures	1,00,000	–
9% Debentures	–	3,00,000

Additional Information

1. Dividend paid Rs 75,000
2. Interest paid on debentures Rs 12,000
3. During the year 2008–2009, the company issued bonus shares in the ratio of 2:1 by capitalizing reserve

Solution

Note

Treatment of new issue of debentures – Interest and Dividend Bonus share

• 9% debentures – shown for the year 2009 – proceeds from new issue of debentures – included
• 12% debentures – redeemed in full – included
• Interest paid and dividends paid – included
• Capital increase due to issue of bonus share not to be included (capitalisation of reserve)

So, care should be taken before ascertaining the cash flow from financing activities, whether that items form part of financing activities and whether it should be included or not.

 

Calculation of Net Cash Flow from Financing Activities

Particulars	Rs
Cash Proceeds from the Issue of 9% Debentures	3,00,000
Payments on Redemption of 12% Debentures	(1,00,000)
Interest Paid on Debentures	(12,000)
Payment of Dividend	(75,000)
Net Cash Flow from Financing Activities	1,13,000

5.9 Accounting Treatment of Special Items

5.9.1 Interest and Dividend

This depends on

1. The nature of business entities (i.e. financial or non-financial)
2. The nature of transactions (i.e. received or paid)
   1. Dividends paid is always treated as financing activity (financial or non-financial)
   2. Dividends received: for financial enterprises operating activity

      For non-financial concerns

               ↓

      Investing activity

               ↓

   3. Interest: both paid and received:

      –For financial enterprises;

               ↓

      –Operating activity

      –For non-financial enterprises:

               ↓

      Interest paid → financing activity

      Interest received → investing activity

      These can be represented by the tabular column as follows:

5.9.2 Proposed Dividend

• Proposed dividend for current year:

  To be added back to current year's profit to ascertain cash flow from Operating Activities.

• Proposed dividend for previous year:

  To be treated as Financing Activity.

5.9.3 Interim Dividend

• To be added back to current year's profits to ascertain cash flow from operating activities.
• Further, it has to be treated as cash used in a financing activity.

5.9.4 Discount on Issue of Shares or Debentures

• Discounts are to be written off through Profit and Loss Account.
• Discount written off: To be added back to current year's profits to ascertain cash from Operating Activities.
• Treatment of special items.
• Discount allowed during the year: To be treated as Financing Activity.

5.9.5 Non-cash Transactions

• As no cash flow takes place, they are not included in preparation of Cash Flow Statement.
• But AS–3 (revised) stipulates that such items have to be disclosed as footnote in the statement.
• For example
  1. Issue of shares for consideration other than cash
  2. Conversion of debentures into shares

5.9.6 Taxes on Income

• In general, it is treated as an Operating Activity.
• But at times, if it is associated with any specific activity, then it may be treated as investing or financing activity depending on the nature of transactions.

5.9.7 Extraordinary Items

• Extraordinary items have to be classified under appropriate activity. It may be either one of the three activities. For example
  1. Insurance claims
  2. Buy-back of shares
  3. Compensation – land acquisition

Illustration: 21

From the following information, calculate the cash flow from Investing Activities and Financing Activities.

Particulars	Apr 1, 2008 (Rs)	Mar 31, 2009 (Rs)
Furniture (at cost)	25,000	35,000
Accumulated Depreciation on Furniture	5,000	8,000
Capital	2,00,000	2,75,000
Loan	50,000	30,000

During the year 2008–2009, furniture costing Rs 7,000 was sold at a profit of Rs 2,500. Depreciation on furniture charged during the year amounted to Rs 6,000.

Solution

• In this question, items relating to Investing Activities and Financing Activities are shown. So cash flows have to be computed for each separately.
• Changes in capital and loan relate to Financing Activities and the remaining items relate to Investing Activities.

Step 1: First, cash flow from Financing Activities is to be computed as follows:

 

Cash Flow from Financing Activities

Particulars	Rs
Cash Inflow by Issue of Fresh Capital {i.e. Increase in Capital = Rs 2,75,000 – 2,00,000}	75,000
Cash Outflow on Repayment of Loan {i.e. Loan Decreased: Rs 50,000 – 30,000}	(20,000)
Net Cash from Financing Activities
	55,000

Next, Furniture Account and Accumulated Depreciation Accounts have to be computed.

 

Sale Price	=	Cost – Accumulated Depreciation + Profit on Sale
	=	Rs 7,000 − 3,000*2 + 2,500 = Rs 6,500*

Step 2

 

Step 3

 

Step 4: Finally, cash flow from Investing Activities has to be ascertained.

 

Cash Flow from Investing Activities

Particulars	Rs
Cash Inflow by Sale of Furniture *1	6,500
Cash Outflow on Purchase of Furniture *3	(17,000)
Net Cash Flow from Investing Activities	(10,500)

Note: Here, negative net cash flow indicates net cash used in Investing Activities.

Illustration: 22

 

You are required to prepare the cash flow statement for the year ended Mar 31, 2008.

Solution: Computation of Cash Flow Statement of ABC Ltd. for the year ended Mar 31, 2008.

	Rs	Rs
A. Cash Flow from Operating Activities
Closing Balance as per P & L A/c	10,00,000
Less: Opening Balance as per P & L A/c	7,00,000
Net Profit	3,00,000
Add: Proposed Dividend during the Year	5,00,000
Net Cash from Operating Activities		8,00,000
B. Cash Flow from Financing Activities
Final Dividend paid,	4,00,000
i.e. Proposed Dividend (previous year) Payable	(70,000)	3,30,000
Net Cash used in Financing Activities		3,30,000

Proposed Dividend Account

Illustration: 23

 

Additional Information

The final dividend on preference shares and an interim dividend of Rs 60,000 on equity shares were paid on Mar 31, 2009. How these items will be recorded in the Cash Flow Statement?

Solution

1. Items shown in the Balance Sheet extract relate to Operating Activities and Financing Activities. Computation of both cash flow from Operating Activities and Financing Activities
2. First cash flow from Operating Activities is calculated

	Rs	Rs
Cash Flow from Operating Activities
Closing Balance as per P &L A/c		5,50,00
Less: Opening Balance as per P & L A/c		3,00,000
Net Profit		2,50,000
Add: Proposed Dividend during the year 2008–2009	2,50,000
Dividend Paid on Preference Shares	60,000
Interim Dividend Paid	60,000	3,70,000
Net Cash from Operating Activities		6,20,000
Cash Flow from Financing Activities
Final Dividend paid on Equity Shares (Rs 1,75,000 – 55,000)		(1,20,000)
Final Dividend paid on Preference Shares		(60,000)
Interim Dividend paid on Equity Shares		(60,000)
Net Cash used in Financing Activities		(2,40,000)

Illustration: 24

 

Solution

1. In this problem also items relating to both Operating Activities and Financing Activities appear.
2. First, Discount on Issue of Shares Account and then Discount on Issue of Debenture Account have to be prepared.
3. A separate account for 10% Debenture A/c has also to be prepared.
4. After ascertaining the missing figures, we can compute the cash flows.

Step 1

 

Step 2

 

Step 3

 

Step 4

 

An Extract of Cash Flow Statement for the year ended Mar 31, 2009

	Rs
1. Cash Flow Operating Activities
Closing Balance as per P & L A/c	2,50,000
Less: Discount Balance as per P & L A/c	(2,00,000)
Add: Discount on Issue of Shares (from – *1)	1,00,000
Interest on Debentures (Rs 15,00,000 × 10/100)	1,50,000
Net Cash from Operating Activities	3,00,000
2. Cash Flow from Financing Activities
Proceeds from Issue of Debentures (from – *3)	4,25,000
Interest paid on Debentures (Rs 1,50,000 – 25,0000)	(1,25,000)
(as calculated) (unpaid)
Net Cash from Financing Activities	3,00,000

Illustration: 25

 

Additional Information

Discount on the issue of debentures written off during the year 2008–2009 was Rs 25,000.

You are required to depict the related items in the Cash Flow Statement.

Solution

1. Steps will be the same as explained in the previous illustration.
2. Only additional adjustment to be made is for written off amount on debentures.

Step 1

 

Step 2

 

Step 3

 

Step 4

 

An extract of cash flow statement for the year ended on Mar 31, 2009

	Rs
1. Closing Balance as per P & L A/c	2,25,000
Less: Opening Balance as per P & L A/c	(1,50,000)
Add: Discount on Issue of Shares *1	70,000
Discount on Issue of Debentures *2	75,000
Interest on Debentures	1,50,000
Net Cash from Operating Activities	3.70,000
2. Cash Flow from Operating Activities
Proceeds from Issue of Debentures	4,25,000
Interest paid on Debentures	(1,30,000)
Net Cash from Financing Activities	2,95,000

Illustration: 26

From the following information, prepare a Cash Flow Statement for the year ending on Mar 31, 2008.

Depreciation provided during the year 2007–2008 = Rs 10,000

 

[B. Com (Madras) – Modified]

Solution

Stage I: (A) Cash flow from Operating Activities has to be calculated first.

Step 1: For this profi t as per Balance Sheet has to be taken as base fi gure (Rs 60,000 − 50,000)

Step 3: Here, depreciation and goodwill

Important Step: SUM of (i), (ii) and (iii) = Operating profi t before working capital charges

Step 4: With this

1. Increase in Current Liabilities (here – Bills Payable only): Rs 25,000 – 15,000 (given) have to be added. And

   ↓	↓
   (given)	(given)

2.  
   1. Increase in Current Assets (here – Debtors: Rs 20,000 − 15,000) and Decrease in Current Liabilities (here – creditors: Rs 5,000 – 3,000) have to be deducted.

      ↓	↓
      (2007)	(2008)

Step 5: Result – Net Cash from Operating Activities

Stage II: (B) Cash flow from Investing Activities has to be calculated:

Here in this question, cash outflows occurs on (i) purchase of machine and (ii) building

Step 1: *Accrual cash flow – amount spent on purchase of machineries – is ascertained by separately preparing Machinery Account and the balancing figure from that account has to be transferred here.

Step 2: Purchase of Building

     Rs 90,000 − 40,000

 

↓	↓
(2007)	(2008)

[These two items are recorded one by one]

Note: The values are written without brackets which means outflow of cash:

Stage III: (C) Cash flow from Financing Activities has to be computed

Step 1: Here, in the problem, cash fl ow or share capital (Rs 1,60,000 − 80,000) is recorded.

 

↓	↓
(2008)	(2007)

Stage IV: Net increase in cash and cash equivalents is to be computed as

 

Add	=	A (Stage 1)
Less	=	B (Stage 2)
Add	=	C (Stage 3)

[(i.e.) A − B + C] shows as

      ↓

Net increase in cash and cash equivalents

 

Stage V:	With this
	Add: Cash and cash equivalents at the beginning
Stage VI:	Finally, we arrive at
	Cash and cash equivalents at the end.
	These are represented into the format as shown below

Cash Flow Statement

Calculation of cash flow statement as per AS–3.

 

A. Cash Flow Statement from Operating Activities

	Rs	Rs
Net Profit before Taxation
Profit as per Balance Sheets	10,000
(Rs.60,000 – 50,000) (Ref: Stage 1. Step 1)
Add: General Reserve	6,000	16,000
(Rs 10,000 – 4,000) (Ref: Stage 1. Step 2)
Add: Adjustments
Depreciation (from information) (from step iii)	10,000
Goodwill (Rs 30,000 – 20,000) (step iii)	10,000	20,000
Operating Profit before Working Capital Charges		36,000
Add: Increased in Current Liabilities
Bills Payable (Rs 25,000 – 15,000) (step 4a)		10,000
Less: Increase in Current Assets		46,000
Debtors (step 4b)	5,000
Decrease in Current Liabilities (Creditors) (step 4b)	2,000	(7,000)
Net Cash from Investing Activities		39,000

B. Cash Flow from Investing Activities

		Rs
Purchase of Machine (transferred from Machinery A/c) (Step 1)	(59,000)
Purchase of Building (Rs 90,000 – 40,000) (Step 2)	(50,000)
Net Cash used in Investing Activities		(1,09,000)

C. Cash Flow from Financing Activities

	Rs
Issue of Share Capital (Stage 3 – Step 1)	80,000
A − B + C Net Increase in Cash and Cash Equivalents (Stage IV)	10,000
Cash and Cash Equivalents at the Beginning (Stage V) (given 2007)	20,000
Cash and Cash Equivalents at the End (Stage VI)	30,000

OBJECTIVE 6: IMPORTANT STEPS (STAGES) IN THE PREPARATION OF CASH FLOW STATEMENT

6.1 Stage I: A. Cash Flow from Operating Activities

Step 1: Net profit before tax is taken as base. Instead of showing separately the closing balances and opening balances of P & L A/c straight away, net profit (closing balance – opening balance) amount can be recorded and with this transfer the General Reserve is added

Step 2: Add:

1. Transfer to General Reserve
2. Other adjustments (items added back to profit, i.e. depreciation; goodwill loss on sale, etc.)

Step 3: Figure arrived at this stage is termed as operating profit before working capital charges

Step 4: With this, the following items have to be added

Add:

1. Decrease in the value of Current Assets
2. Increase in the value of Current Liabilities

Step 5: Less: following items have to be deducted

1. Increase in the value of Current Assets
2. Decrease in the value of Current Liabilities

Step 6: Figure arrived at this stage is termed as Net Cash Flow from Operating Activities. Now we have to go to next stage.

6.2 Stage II: B. Cash Flow from Investing Activities

Purchase of plant, machinery, land and buildings, etc. has to be recorded here.

 

Important Note:

If depreciation amount is given in additional information, separate accounts (Plants A/c – Building A/c) have to be prepared to ascertain the value of their purchase which are cash flows from Investing Activities.

(In this stage, such items as described above are to be recorded and the sum of all items to be shown within brackets, which means that due to investing activities cash outflow actually takes place).

Figure arrived is termed as Net Cash from Financing Activities.

6.3 Stage III: C. Cash Flow from Financing Activities

Step 1: Issue of share capital to be recorded, etc.

Step 2: Less: If any redemption, such amount has to be recorded and deducted from Step 1.

Step 3: Figure arrived at this stage is termed as “Net Cash from Financing Activities”.

6.4 Stage IV: Net Increase/Decrease in Cash and Cash Equivalents

6.5 Stage V: Cash and Cash Equivalents at the Beginning of the Year to be Added

6.6 Stage VI: Cash and Cash Equivalents at the End of the Year to be Recorded

Note:

This is a simplified form. One or two items only are shown. Students should practice with this first and then proceed to all the other items mentioned in the standardised format as prescribed by AS–3.

Illustration: 27

The following is the financial position as on Mar 31

During the year Rs 60,000 was paid as dividend, you are required to prepare Cash Flow Statement as per AS–3 (revised)

 

Solution:

First, net profit has to be calculated because all adjustments have to be carried on units net profit as base.

 

	Rs
Profit as on Mar 31, 2009	1,60,000
Profit as on Mar 31, 2008	1,40,000
(Difference) Profit for the year	20,000
Add: Dividend paid during the year	60,000
and Net profit before Tax and Extraordinary Items	80,000*1

 

Cash Flow Statement for the Year Mar 31, 2009

Particulars	Rs	Rs
A. Cash Flow from Operating Activities
*1Net Profit before Tax and Extraordinary Items	*1 80,000
(as calculated above)
Add: Depreciation	10,000
Operating Profit before Working Capital Charges	90,000
Add: Decrease in Stock	14,000
Increase in Current Liabilities	20,000
Increase in Debtors	(5,000)
Net Cash from Operating Activities		1,19,000
B. Cash Flow from Investing Activities
Purchase of Building	(20,000)
Purchase of Land	(20,000)
Purchase of Machinery	(30,000)
Net Cash used in Investing Activities		(70,000)
C. Cash Flow from Financing Activities
Proceeds of Loan from Ram Ltd.	40,000
Repayment of Bank loan	(30,000)
Payment of Dividend	(60,000)	(50,000)
Net Decrease in Cash and Cash Equivalents		(1,000)
Cash and Cash Equivalents at the Beginning		12,000
Cash and Cash Equivalents at the End		11,000

Notes:

1. Figures mentioned within brackets mean negative items (minus items – to be deducted)
2. If there is negative cash from activities, then it is understood that there is net outflow of cash from such activities.

OBJECTIVE 7: SOME IMPORTANT HINTS

Hint 1: Instead of profit/loss, capital alone may be given in the problem. In such cases, profit is arrived at as follows:

Treatment of Capital and Drawings

		Rs
	Capital at the end of the period.:…	xx
	Less: Capital at the beginning of the period	xx
	Profit for the year	xx

Hint 2: In case, if capital at the beginning and at the end of the period is given, students have to prepare Capital Account, and the balancing figure is taken as “Drawings.”

 

	Calculation of Drawings :
	Opening Capital :	………
	Add: Net Profit :	………
	Less: Closing Profit :	………
	Drawings	__________

This amount has to be included in cash flow from financing activities under “Drawings.”

Hint 3: Loss on sale of fixed assets is calculated as follows:

Loss on Sale of Fixed Assets: Cost – Selling Price

And if in case of any depreciation: Cost – Accumulated Depreciation – Selling Price

Hint 4: Provision for Taxation

Case 1: Item, “Provision for Taxation” appears on the liabilities side of previous year’s Balance Sheet.

• This shows that the taxes were paid during the year.
• So, while calculating net cash from operating activities, this has to be deducted.

Case 2: This item “Provision for Taxation” appears on the liabilities side of the currents year’s balance sheet.

• This amount is to be added to profits.
• “Net profit before tax” is to be shown.

Under cash flow from Operating Activities

• This treatment (adjustment) is done, if tax paid during the year is not given in the problem.
• If “Tax paid” is given in question, then the “Provision for Tax Account” is prepared and the amount of tax paid is found out (balancing figure) (provision for taxation).

Format Provision for Tax Account

Hint 5: Dividend paid during the year

• Interim dividend for the year is calculated as
• Net profit for the year is first calculated.
• This amount is added with opening balance of P & L A/c.
• Then it is deduced by closing balance of P & L A/c.

Dividend Paid: Opening Balance of P & L + Net Profit – Closing Balance of P &L A/c.

Hint 6: If appropriate adjustments have to be made for both provision for tax and interim dividend to arrive at net profit before tax, then the following adjustments are to be made as

 

		Rs
	Profit at the end of the period (Closing)	–
	Less: Profit at the beginning (Opening)	− —
	Profit of the Year	− —
	Appropriations
	Add: 1. Interim Dividend paid	–
	2. Provision for Tax	− —
	Profit Before Tax	xx

Illustration: 28

From the following information, prepare a Cash Flow Statement as on Mar 31, 2009.

Depreciation provided during the year on machine was Rs.10,000.

Solution

 

Illustration: 29

Comprehensive illustrations from 28 to 37

From the following Balance Sheet of Raja Ltd, prepare a Cash Flow Statement.

Depreciation charged on plant was Rs 10,000 and on building was Rs 60,000.

Solution: As depreciation is given in additional information, Plant A/c and Building A/c have to be prepared separately to ascertain the value of their purchase which are cash flow from Investing Activities.

 

 

 

Cash Flow Statement for the year ended Dec 31, 2009

Net Profit before Taxation	Rs	Rs
Closing Balance of P & L A/c	24,000
Add: Transfer of General Reserve	15,000
	39,000
Less: Opening Balance of P & L A/c	15,000	24,000

Note: Instead of showing separately closing and opening balance adjustments, straight away net profit can be found as (Closing Balance – Opening Balance) as Rs 9,000 and with this transfer to General Reserve is added.

	Rs	Rs
A. Net Profit before Tax and Extraordinary Items
Adjustments for	10,000
Depreciation on Plant	60,000
Depreciation on Building	16,000
Goodwill written off		86,000
Operation Profit before Working Capital Charges		1,10,000
Adjustments for:
Add: Increase in Creditors	12,000
Less: Increase in Debtors	(35,000)
Increase in Stock	(5,000)	(28,500)
Net Cash from Operating Activities		81,500
B. Cash Flow from Investing Activities
Purchase of Plant	70,000
Purchase of Building	40,000
Net Cash in Investing Activities		(1,10,000)
C. Cash Flow from Financing Activities
Issue of Share Capital	50,000
Redemption of 12% Preference Share Capital	(25,000)
Net Cash from Financing Activities		25,000
		(3,500)
Cash and Cash Equivalents at the Beginning of the Year		(12,5,00)
Cash and Cash Equivalents at the End of the Year		9,000

Illustration: 30

From the following Balance Sheet of Vivek Ltd., prepare Cash Flow Statement.

Depreciation charged on plant was Rs 30,000 and on building was Rs 50,000.

Solution

 

Illustration: 31

What is meant by Investing Activities? From the following particulars prepare cash flow from Investing Activities.

	Purchased Rs	Sold Rs
1. Machinery	4,00,000	2,00,000
2. Investments	2,00,000	3,00,000
3. Goodwill	1,00,000
4. Patents	–	1,50,000
5. Interest received or debentures held as investments	10,000
6. Dividend received on shares held as investments	5,000
7. A plot of land was purchased out of surplus funds for investment purposes and was let out for commercial use and rent received	20,000

Answer: The acquisition and disposal of long-term assets (not included in cash equivalents) is called Investing Activities.

 

Cash Flow from Investing Activities

Particulars	Rs
Purchase of Machinery	(4,00,000)
Proceeds from Sale of Machinery	2,00,000
Purchase of Investments	(2,00,000)
Proceeds from Sale of Investments	3,00,000
Purchase of Goodwill	(1,00,000)
Proceeds from Sale of Patents	1,50,000
Interest Received	10,000
Dividend Received	5,000
Rent Received	20,000
Net Cash used in Investing Activities	(15,000)

Note: Figures within brackets mean items, i.e. to be deducted. This comes to be Rs 4,00,000, Rs 2,00,000, Rs 1,00,000 = Rs 7,00,000.

This has to be deducted from (Rs 2,00,000 + Rs 3,00,000 + Rs 1,50,000 + Rs 10,000 + Rs 5,000 + Rs 20,000 = Rs 6,85,000. Again (Rs – 7,00,000 + Rs 6,85,000) = Net Result (– Rs 15,000). So cash is used. Cash flows out on Investing Activities.

Illustration: 32

Calculate cash flows from Operating Activities from the following information.

Calculate cash flows from Operating Activities from the following information.

Particulars	2008 Rs	2009 Rs
Stock	60,000	50,000
Debtors	25,000	23,000
Creditors	32,000	28,000
Expenses Outstanding	3,500	4,500
Bills Payable	35,000	22,000
Accrued Income	8,000	9,000
P & L A/c	80,000	90,000

 

Calculation of Net Cash Flows from Operating Activities

Particulars	Rs	Rs
Profit for the Year (Closing – Opening)		10,000
Decrease in Stock	10,000
Decrease in Debtors	2,000
Decrease in Creditors	(4,000)
Increase in Expenses Outstanding	1,000
Increase in Accrued Income	(1,000)
Decrease in Bills Payable	(13,000)	(5,000)
Net Cash Flow from Operating Activities		5,000

Illustration: 33

From the following information prepare a Cash Flow Statement.

	Rs
Opening Cash Balance	10,000
Closing Cash balance	12,000
Decrease in Debtors	5,000
Increase in Creditors	7,000
Sale of Fixed Assets	20,000
Redemption of Debtors	50,000
Net Profit for the Year	20,000

 

Cash Flow Statement for the Year Ended

Particulars	Rs	Rs
A. Cash Flow from Operating Activities
Net Profit for the Year	20,000
Add: Decrease in Debtors	5,000
Increase in Creditors	7,000
Net Cash from Operating Activities		_______ 32,000
B. Cash Flow from Investing Activities
Sale of Fixed Assets	20,000
Net Cash from Investing Activities		_______ 20,000
C. Cash Flow from Financing Activities
Redemption of Debtors	(50,000)
Net Cash from Financing Activities		(50,000)
D. Net Increase in Cash and Cash Equivalents		2,000
(A + B + C) (32,000 + 20,000 – 50,000)
E. Cash and Cash Equivalents at the Beginning		10,000
F. Cash and Cash Equivalents at the End of the Period		12,000

Illustration: 34

Prepare a Cash Flow Statement on the basis of the information given in the Balance Sheet of P.S. Ltd.

Solution

 

Cash Flow Statement for the year ended 2009

Particulars	Rs	Rs
A. Cash Flow from Operating Activities
Closing Balance of General Reserve	70,000
Less: Operating Balance of General Reserve	(50,000)
Net Profit (before Tax and Extraordinary Items)		20,000
(Note: Net profit is not disclosed in the balance sheet. Only General Reserve appears here)
Add: Items to be added i
Amortisation of Goodwill	8,000
Investment on Long-term Loan (Debtors = 1,00,000 × 12/100 × 1)	12,000	12,000
Operating Profi t before Working Capital Changes		40,000
Add: Decrease in Current Assets and Increase in Current Liabilities:
Increase in Creditors	20,000
Increase in Bills Payable	80,000	1,00,000
Less: Increase in Current Assets and Decrease in Current Liabilities:
Decrease in Outstanding Expenses	(5,000)
Increase in Debtors	(20,000)
Increase in Stock	(20,000)	(45,000)
Net Cash from Operating Activities		95,000
B. Cash Flow from Investing Activities
Purchase of Land and Building	(80,000)
Purchase of Machinery	(30,000)	(1,10,000)
Net Cash used in Investing Activities		(1,10,000)
C. Cash Flow from Financing Activities
Proceeds from Equity Shares	50,000
Payment of Long Term (Debenture Redeemed)	(20,000)
Payment of Interest on Debtors	(12,000)	18,000
Net Cash from Financing Activities		18,000
D. Net Increase in Cash and Cash Equivalents (A + B + C)		3,000
(95,000 − 1,10,000 + 18,000)
E. Cash and Cash Equivalents at the Beginning Cash in Hand		15,000
F. Cash and Cash Equivalents at the End of the Period		18,000

Illustration: 35

Prepare a cash flow statement of Bulbul Ltd. on the basis of the information given in the Balance Sheets.

Solution

 

Cash Flow Statement for the year ended Dec 31, 2009

Particulars	Rs	Rs
A. Net Profit before Tax and Extraordinary Items
Closing Balance of General Reserve	1,80,000
Less: Opening Balance of General Reserve	(1,00,000)
Net Profit before Tax		80,000
Add: Items to be added
Amortisation of Goodwill	20,000
Invest on Debenture	24,000	44,000
Operating Profit before Working Capital Changes		1,24,000
Add: Decrease in Current Assets and Increase in Current Liabilities:
Decrease in Stock	1,20,000
Increase in Creditors	20,000
Increase in Outstanding Expenses	10,000	1,50,000
Less: Increase in Current Assets and Decrease in Current Liabilities		2,74,000
Increase in Debtors	(10,000)
Decrease in Bills Payable	(5,000)	(15,000)
Cash generated from Operation:		2,59,000
Less Income Tax paid		– ——
Cash from Operating Activities		2,59,000
B. Cash Flow from Investing Activities
Purchase of Land	(3,00,000)
Purchase of Machinery	(10,000)	(3,10,000)
Net Cash used in Investing Activities		(3,10,000)
C. Cash flows from Financing Activities
Proceeds from Issue of Equity Shares	1,00,000
Payment for Debentures (Redemption)	(50,000)
Payment of Interest on Debentures	(24,000)	26,000
Net Cash from Financing Activities		26,000
D. Net Increase/Decrease in Cash and Cash Equivalents		25,000
(A − B + C) (Rs 2,59,000 − 3,10,000 + 26,000)
E. Cash and Cash Equivalents at the Beginning (Cash)		10,000
F. Cash and Cash Equivalents at the End		35,000

Illustration: 36

The following balances appeared in Plant A/c and Accumulated Depreciation A/c in the books of Bhart Ltd.

	As on Mar 31, 2008 Rs	As on Mar 31, 2009 Rs
Plant	7,50,000	9,70,000
Accumulated Depreciation	1,80,000	2,40,000

Additional Information: Plant costing Rs 1,45,000 accumulated depreciation thereon Rs 70,000 was sold for Rs 35,000. You are required to

1. Compute the amount of plant purchased, depreciation charged for the year and loss on sale of plant.
2. Show how each of the items related to the plant will be shown in the Cash Flow Statement.

Answer: Note:

1. Students have to prepare Plant Account and Accumulated Depreciation Account
2. From the balancing figures obtained in each account, inflow or outflow of cash has to be found out. Accordingly it has to be treated in Cash Flow Statement.

 

• Sale of plant: Given in additional information: Rs 35,000: Inflow of cash “Investing Activities”
• Purchase of plant: balancing figure in the Plant Account: Rs 3,65,000: Outflow of cash: Investing Activities
• Loss on sale of plant: (from Plant Account) Rs 1,45,000 – 70,000 – 35,000 = Rs 40,000 will be added back to net profit of the year while preparing Cash Flow Statement.
• Depreciation charged: Rs 1,30,000 (balancing figure in Accumulated Depreciation Account) will also have to be added to net profit.

• Cash Flow Statement is a statement that depicts sources of cash inflows and transactions of cash outflows during a period. It is a statement indicating flow of cash and cash equivalents during a period.
• Now, preparation of Cash Flow Statement is mandatory for all the companies. It is also mandatory for all business entities that has turnover of more than Rs 50 crores in a financial year.
• Main sources of cash inflows are as follows: (i) Proceeds from sale of long-term assets, (ii) Long-term borrowings, (iii) Cash receipts from raising additional share capital, (iv) Business operations, (v) Cash receipts from non-business operations (e.g. investment, dividend, etc).
• Main “uses of cash” (or) cash outflows are as follows: (i) Payment of dividend interest, (ii) Purchase of assets, (iii) Redemption of debentures, (iv) Repayment of borrowings.
• The Cash Flow Statement shows cash flows (inflow and outflow) in terms of three components as per AS–3: (i) Operating, (ii) Investing and (iii) Financing Activities.
• The Cash Flow Statement shows the net increase/ decrease of cash and cash equivalents under each activity individually and collectively.
• Cash flows from operating activities result from the major revenues producing activities of a business concern. The major operating items are cash inflow (cash sales, cash received from debtors, cash proceeds from extraordinary items, royalty, commission, and so on) and cash outflow (cash purchases, cash paid to suppliers and employees and cash operating expenses, income tax, and so on).
• Major investing activities of cash inflow: sale of fixed assets, investments, interest and dividends, received and cash outflows: purchase of fixed assets and investments.
• Major financing activities of cash inflows: issue of shares in cash, issue of debentures, proceeds from long-term borrowings and cash outflows: redemption of preference shares/debentures, repayment of loans buy-back of equity shares, payment of interest and dividend, etc.
• Importance of (activities) Cash Flow Statement – operating activities – net cash flow is an indicator to assess cash generation and to forecast future cash flows.
• Investing activities: To study the net result of the amount spent on investment, usefulness of such expenditure and thereby the future income from such investments.
• Financing activities: To asses claims on future cash flows.
• Important steps to prepare cash flow statement:
  1. Cash flow from operating activities is computed either by direct method or indirect method.
  2. Net cash flow from investing activities is calculated.
  3. Net cash flow from financing activities is determined.
  4. Net flow, i.e. net increase or decrease in cash or cash equivalents is determined from steps (i), (ii) and (iii)
  5. Cash and cash equivalents balance at the beginning of the period is added to the net cash flows determined in Step (iv).
  6. The amount arrived in Step (iv) must be equal to cash and cash equivalents balance at the end of the year.

Cash: Cash constitutes cash on banks.

Cash Equivalents: Short term, highly liquid investments that are readily convertible into known amount of cash.

Cash Flow: Inflow and outflow of cash equivalents.

Cash flow statement: A statement that shows the flow of cash and cash equivalent during a period.

Accounting Standard: Issued by ICAI.

Operating Activities: Principle revenue producing activities of business enterprises that are not investing and financing activities.

Investing Activities: Activities that result in change in size and composition of the owners' capital.

Financing Activities: Activities that result in change in size and composition of the owners' capital.

Debenture: A debt security with a general claim against all assets.

Debtor: A person who owes money to another or a business enterprise that owes money to another.

Depreciation: The systematic allocation of cost of fixed assets.

Direct method: The method that calculates net cash provided by operating activities.

Indirect method: The method that adjusts accrual net income to reveal only cash receipts and outflows.

General Reserve: An estimate of unforeseen liability undistributed profit.

 

Toster G., Financial Statement Analysis, Prentice Hall, Englewood Cliffs, 1986.

Horngreen Sundem Elioot, Introduction to Financial Accounting, Pearson Education, New Delhi, 2005.

Helfert, E.H., Techniques of Financial Analysis, Inrwin, Homewood, 1997.

———, Compendium of Statements and Standards of Accounting, The Institute of Chartered Accountants of India, New Delhi.

 

I Choose the best answer

1. The Cash Flow Statement is based on
   1. cash basis of accounting
   2. accounting equation
   3. accrual basis of accounting
   4. none of the above
2. Dividend paid is always classified as
   1. operating activity
   2. investing Activity
   3. financing activity
   4. none of the above
3. Proposed dividend is classified as
   1. investing activity
   2. financing activity
   3. operating activity
   4. cash equivalent
4. Interest received by (other than) financial concerns is classified as
   1. investing activity
   2. financing activity
   3. operating activity
   4. cash equivalent
5. Profit on sale of machinery comes under
   1. investing activity
   2. financing activity
   3. operating activity
   4. none of the above
6. Sale of patents is classified under
   1. investing activity
   2. financing activity
   3. operating activity
   4. cash equivalent
7. Rent received by a company (whose main business is real estate) is classified as
   1. investing activity
   2. financing activity
   3. operating activity
   4. cash equivalent
8. Rent received by a company (whose main business is manufacturing) falls under
   1. investing activity
   2. financing activity
   3. operating activity
   4. cash equivalent
9. Sale of investments by a finance company is classified as
   1. investing activity
   2. financing activity
   3. operating activity
   4. cash equivalent
10. Sale of investments by a non-finance company comes under
    1. investing activity
    2. financing activity
    3. operating activity
    4. none of the above

Answers

1. (a)
2. (b)
3. (c)
4. (a)
5. (c)
6. (a)
7. (a)
8. (b)
9. (c)
10. (a)

II State whether the following statements are True or False

1. Inflow of cash refers to all transactions that lead to increase in cash and cash equivalents.
2. Outflow of cash refers to all transactions that lead to decrease in cash and cash equivalents.
3. Non-cash transactions are covered in cash flow statements.
4. Cash sales – cash outflow.
5. Cash receipts from debtors are financing activity.
6. Cash payment relating to a future contract is an investing activity.
7. Cash receipts from debtors are treated as cash inflow for operating activities.
8. Cash receipts on interest and dividend are treated as cash inflow for financing activities.
9. Cash proceeds from issuing share are treated as cash inflow from financing activities.
10. Cash receipts from sale of fixed assets are shown as cash inflow from financing activities.
11. Cash payment to creditors is treated as cash outflow for investing activities.
12. The cash flow statement is based upon accrual basis of accounting.
13. Redemption of preference shares is an investing activity.
14. Cash payment to income tax is operating activity.
15. Repayment of any finance liability is financing activity.
16. Cash proceeds from long-term borrowings are an investing activity.
17. Cash receipts from royalties are operating activity.
18. Cash flow statement is concerned with change in working capital position between the two different dates of balance sheet.
19. Cash payment to creditors is a financing activity.
20. Accounting standard (AS)–3 sets standards to the preparation of cash flow statement.
21. Bank balance is cash equivalent in the preparation of cash flow statement.
22. Decrease in current assets will result in increase in cash.
23. Increase in current liabilities will result in decrease in cash.
24. If there is net loss (negative cash from operation) then there is net outflow of cash from operating activities.
25. Acquisition and disposal of long-term asset is termed as “Investing Activities” of a concern.
26. A change in owners' capital and borrowing capital is revealed in cash flow from financing activities of a concern.
27. If there is negative cash from activities, then there will be net inflow of cash.
28. Revaluation of building affects cash flows.
29. Sources of cash and uses of cash are to be equal.
30. Sources of cash should always be more than uses of cash.

Answers

 

1. True	2. True	3. False	4. False	5. False
6. True	7. True	8. False	9. True	10. False
11. False	12. False	13. False	14. True	15. True
16. False	17. True	18. False	19. False	20. True
21. True	22. True	23. False	24. True	25. True
26. True	27. False	28. False	29. False	30. False

 

III Fill in the blanks with appropriate words

1. Cash flow refers to the movement both, inflow and outflow of ________ during a period.
2. Cash flow statement is a ____________ that shows flow of cash and cash equivalents during a period.
3. Cash flow statement is based on past records. So it is ________ in nature.
4. Cash equivalents are usually of short term but highly ________ investments.
5. Cash equivalents reveal change in ________.
6. Cash flow statements (based on AS–3) should be prepared and presented under __________ method.
7. Taxes paid on income should be shown separately as the cash flows from ________ activities.
8. Decrease in creditors ________ cash.
9. The activities that result in changes is the size and composition of the owner’s capital and borrowing of the enterpriser are ____________activities.
10. Decrease in inventory ________ cash.
11. Buy back of shares is shown under ________.
12. Increase in pre-paid expenses ____________cash.
13. Dividends paid are classified under ________.
14. Cash payments to suppliers of goods and services are shown under ________.
15. Long-term assets acquired classified under_______ activities.

Answers

1. cash and cash equivalents
2. statement
3. historic
4. liquid
5. cash and cash equivalents
6. indirect
7. operating
8. decreases
9. financing
10. increases
11. financing
12. decreases
13. financing
14. operating
15. investing

1. Explain cash flow.
2. Define Cash Flow Statement.
3. What do you mean by cash equivalent? Give two examples.
4. Name the classification of cash flows from business transactions while preparing cash flow statements as per AS–3.
5. What do you mean by operating activities?
6. What is meant by investing activities?
7. What are financing activities?
8. Mention the two methods of cash flow from operating activities.
9. Give four examples for operating activities.
10. Give four examples for investing activities.
11. Give four examples for financing activities.
12. Identify the transactions as belonging to (a) operating, (b) investing, (c) financing and (d) cash equivalent activities.
    1. short-term deposit in banks
    2. cash credit
    3. issue of share capital
    4. repayment of long-term loan
    5. cash received from debtors
    6. sale of patents
    7. commission received
    8. income tax paid
13. When does the flow of cash arise?
14. What are non-cash expenses? Give any four examples.
15. Explain current assets. Give four examples.
16. How an increase/decrease in current assets will affect cash flows?
17. Explain current liabilities. Give four examples.
18. How an increase/decrease will affect cash flows?
19. How the cash flow from investing activities is ascertained?
20. How the cash flow from financing activities is ascertained?

1. Cash Flow Statement: Explain elucidate the main objectives of Cash Flow Statement.
2. “The analysis of Cash Flow Statement in any organisation can be very useful to the management” – Discuss.
3. What are the limitations of Cash Flow Statement?
4. Explain the following terms by citing two examples each: (i) cash equivalents, (ii) cash flow (including movement between the items of cash or cash equivalents), (iii) operating activities, (iv) investing activities and (v) financing activities.
5. Explain the classification of businesses activities as per AS–3, showing the inflow and outflow of cash.
6. Explain the accounting treatment for the following while calculating cash flow from Operating Activities under Direct Method. (i) cash inflow from debtors (sales), (ii) cash inflow from operating income, (iii) cash outflow to creditors (purchases), (iv) cash outflow on expenses (both outstanding and paid in advance), (v) non-cash expenses and appropriations.
7. Explain the accounting treatment in the preparation of cash flow from Operating Activities under Indirect Method for the following items: (i) net profit before tax, (ii) non-cash and non-operating items, (iii) changes in current assets and current liabilities (iv) fixed assets.
8. Explain the accounting treatment for the following while preparing cash flow from investing activities. (i) fixed assets (shown at written down value), (ii) fixed assets (shown at cost and accumulated depreciation is separately maintained)
9. Explain the accounting treatment for the following items while preparing Cash Flow Statement from Financing Activities. (i) dividend (proposed dividend and interim dividend), (ii) taxes on income, (iii) discount on issue of shares/debentures (amount of discount retained off and amount of discount allowed during the year).
10. Draw the format for Cash Flow Statement (Operating Activities) by Direct Method as per AS–3 (revised).
11. Draw the format for Cash Flow Statement (Operating Activities) by Indirect Method as per AS–3 (revised).
12. Differentiate between “funds flow” statement and “Cash Flow” Statement.

 

1. Calculate cash flow from Operating Activities from the following information.

Particulars	2007 Rs	2008 Rs
Stock	60,000	50,000
Debtors	25,000	23,000
Creditors	32,000	28,000
Expenses Outstanding	3,500	4,500
Bills Payable	35,000	22,000
Accrued Income	8,000	9,000
P and L A/c	80,000	90,000

Answer: Net cash flow from Operating Activities Rs 5,000

2. X Ltd made a profit of Rs 1,00,000 after charging depreciation of Rs 20,000 on assets and a transfer for General Reserve of Rs 30,000. The Goodwill retain off was Rs 7,000 and the gain on sale of machineries was Rs 3,000. The other information available: (charges in the value of current assets and current liabilities). At the end of the year, debtors show an increase of Rs 6,000; creditors an increase of Rs 10,000; prepaid expenses an increase of Rs 200; bills receivable a decrease of Rs 3,000; bills payable a decrease of Rs 4,000 and outstanding expenses a decrease of Rs 2,000. Ascertain cash flow from operating activities.

Answer: Net Cash Flow from Operating Activities: Rs 1,54,800

3. X Ltd made a profit of Rs 1,20,000 after charging of depreciation of Rs 20,000 on assets and a transfer to General Reserve of Rs 30,000. The goodwill written off Rs 7,000 and the gain on sale of the machineries was Rs 3,000. Changes in the value of current assets and current liabilities at the end of the year: Debtors showed an increase of Rs 6,000; creditors an increase of Rs 10,000; prepaid expenses an increase of Rs 200; bills receivable a decrease of Rs 3,000; bills payable a decrease of Rs 4,000 and outstanding expenses a decrease of Rs 2,000.

Ascertain cash flow from operating activities.

Answer: Net Cash from Operating Activities: Rs 1,74,800.

4. On Mar 31, 2008, Y Ltd. made a profit of Rs 1,25,000 after considering the following.

	Rs
Depreciation on Billings	25,000
Depreciation on Plant and Machinery	45,000
Amortisation or Goodwill	20,000
Gain on Sale of Machinery	10,000
Current Assets and Current Liabilities

	Apr 1, 2007 Rs	Mar 31, 2008 Rs
Accounts Receivable	35,000	45,000
Stock in Hand	75,000	69,000
Cash in Hand	18,000	30,000
Accounts Payable	30,000	32,000
Expenses Payable	10,000	5,000
Bank Overdraft	60,000	35,000

Ascertain cash flow from Operating Activities.

Answer: Net Cash Flow from Operating Activities: Rs 1,98,000

 

5. Calculate net cash flows from Operating Activities from the following details.

	Rs
Profits earned during the year 2008	50,000
Transfer to General Reserve	10,000
Depreciation provided	20,000
Profit on Sale of Furniture	5,000
Loss on Sale of Machineries	10,000
Preliminary Expenses retain off	10,000

Particulars	2007 Rs	2009 Rs
Debtors	10,000	15,000
Bills Receivable	7,000	5,000
Stock	15,000	18,000
Prepaid Expenses	2,000	3,000
Bills Payable	15,000	25,000
Creditors	20,000	18,000
Outstanding Expenses	3,000	4,000

Answer: Net cash from Operating Activities: Rs 87,000

 

6. Y Ltd. made a net profit of Rs 15,000 for the year ending on Mar 31, 2009 after taking the following into consideration.

	Rs
Depreciation on Plant and Machinery	15,000
Depreciation on Buildings	45,000
Amortisation of Goodwill	20,000
Loss on Sale of Machinery	5,000

Current Assets and Current Liabilities at the beginning and at the end of the year.

Particulars	Apr 1, 2008 Rs	Mar 31, 2009 Rs
Accounts Receivables	35,000	40,000
Stock in Hand	55,000	42,000
Cash in Hand	12,000	2,000
Expense Due	6,000	8,000
Accounts Payable	60,000	53,000

Calculate cash flow from Operating Activities.

Answer: Cash flow from Operating Activities: Rs 97,000

7. The following balances appeared in Machinery Account and Accumulated Deprecation Account in the books of XYZ Ltd.

	Mar 31, 2008 Rs	Mar 31, 2009 Rs
Machinery A/c	17,78,985	26,55,450
Accumulated Depreciation A/c	3,40,795	4,75,690

Additional Information

Machinery costing Rs 2,60,000 on which accumulated depreciation Rs 1,00,000 was sold for Rs 75,000. You are required to

1. Compute the amount of machinery purchased, depreciation charged for the year and loss on sale of machinery.
2. How shall each of the items related to machinery be shown in Cash Flow Statement?

Answer	1. Amount spent on purchase of machinery	Rs 11,41,465
	2. Depreciation charged for the year	Rs 2,34,895
	3. Loss on sale of machinery	Rs 90,000

 

8. Calculate cash flow from Operating Activities from the following information.

	Rs
Profit for the Year	50,000
Transfer to General Reserve	10,000
Depreciation provided	20,000
Profit on Sale of Furniture	5,000
Loss on Sale of Furniture	10,000
Preliminary Expenses Written off	10,000

Particulars	Mar 31, 2008 Rs	Mar 31, 2008 Rs
Debtors	10,000	15,000
Bills Receivable	7,000	5,000
Stock	15,000	18,000
Prepaid Expenses	2,000	3,000
Creditors	20,000	18,000
Bills Payable	15,000	25,000
Outstanding Expenses	3,000	4,000

Answer: Net Cash Flow from Operating Activities: Rs 97,000

9. From the following summarised balance sheets of a company, compute cash flow from operating activities.

Answer:	(i) Net profit before tax and extraordinary items Rs 30,000
	(ii) Net cash flow from operating activities Rs 3,600

 

10. From the flowing summarised Balance Sheets of a company calculate cash flow from Operating Activities.

Answer: Cash flow from Operating Activities: Rs 13,600

11. From the flowing statement compute cash generated from Operating Activities.

 

Answer: Cash generated from Operating Activities Rs 55,000

12. From the following summarised Balance Sheets, calculate cash flow from Operating Activities.

Answer: Cash flow from Operating Activities Rs 10,000

13. A company had the following balances: investment at the beginning of the period Rs 46,000 and investment at the end of the period Rs 30,000. During the year the company sold 60% of its investments held in the beginning of the period at a profit of Rs 10,000. Calculate the cash flow from Investing Activities.

Answer: Cash flow from investing activities Rs 26,000

Hint: Investment A/c (balancing figure) Rs 11,600

14. From the following information calculate cash flow from Investing Activities.

Investment at the beginning of the period	Rs 25,000
Investment at the end of the period	Rs 24,000

During the year the company sold 40% of its investments held in the beginning of the period at a profit of Rs 9,000.

Answer: Cash Flow from Investing Activities: Rs 20,000

Hint: Purchase value {Rs 9,000}

15. From the following particulars calculate cash flow from Investing Activities.

	Purchase Rs	Sold Rs
Investment	2,30,000	1,40,000
Goodwill	1,75,000	–
Machinery	5,30,000	2,10,000
Patents	–	75,000

Interest received on debentures held as an investment Rs 18,000. Dividend received on shares held as investments Rs 25,000. A part of building was purchased out of surplus funds for investment purposes, which earned Rs 75,000 by way of rent.

Answer: Net cash used in Investing Activities: Rs 3,92,000

16. From the following information calculate cash flow from Investing Activities.

	Mar 31, 2008 Rs	Mar 31, 2009 Rs
Machinery	5,00,000	5,50,000
Accumulated Depreciation	1,00,000	1,20,000
Patent Rights	3,00,000	1,80,000

Additional Information

1. During the year, a machine costing Rs 50,000 with accumulated depreciation Rs 30,000 was sold for Rs 25,000.
2. Patents were written of to the extent of Rs 30,000, and some patents were sold at a profit of Rs 25,000.

  Answer: Net cash flow from Investing Activities Rs 40,000

Hint: Balancing Figures: Machinery A/c Rs 1,00,000, Accumulated Depreciation A/c Rs 50,000 and Patents Account Rs 1,15,000

17. 1f. Ajay & Co. has plant and machinery, whose written down value on Apr 1, 2008 was Rs 7,50,000 and on Mar 31, 2009 was Rs 9,00,000. Depreciation for the year was Rs 30,000. At the beginning of the year a part of plant was sold for Rs 20,000 which had a written down value of Rs 16,000.

Answer: Net cash flow from Investing Activities Rs 1,76,000

Hint: Plant and Machinery A/c (Balancing Figure) Rs 1,96,000

18. Calculate cash flow from Financial Activities from the following information.

	Mar 31, 2008 Rs	Mar 31, 2009 Rs
Equity Share capital	6,00,000	8,00,000
9% Debentures	2,00,000	1,00,000
Securities Premium	50,000	75,000

Information: Interest paid on debentures Rs 18,000

Answer: Net cash from Financing Activities: Rs 1,07,000

19. A public limited company provides the following figures. Calculate the net cash flow from Financing Activities.

	Mar 31, 2008 Rs	Mar 31, 2009 Rs
Equity Share Capital	8,00,000	12,00,000
10% Debentures	1,50,000	–
6% Debentures	–	3,00,000

Additional Information

1. Interest paid on Debentures Rs 15,000
2. Dividend paid Rs 40,000
3. During the year 2008–2009, the company issued bonus shares in the ratio of 2:1 by capitalizing the reserve.

Answer: Net cash flow from Financing Activities: Rs 95,000

20. Calculate cash flow from (i) Investing Activities and (ii) Financing Activities from the following information.

	Mar 31, 2008 Rs	Mar 31, 2009 Rs
Furniture (at cost)	30,000	40,000
Accumulated Depreciations Furniture	7,000	10,000
Capital	1,50,000	2,25,000
Loan from Bank	40,000	25,000

During the year 2008–2009, furniture costing Rs 5,000 was sold at a profit of Rs 3,000. Depreciation charged during the year was Rs 6,000.

 

Answer:	1. Net cash from Financing Activities: Rs 60,000
	2. Net cash fl ow from Investing Activities: Rs 10,000

 

Hint:	Sale Price Rs 5,000
	Furniture purchased: Rs 15,000
	Accumulated Depreciation: Rs 3,000

21. From the following Summary Cash Account of XYZ Ltd., you are required to prepare Cash Flow Statement for the year ended Mar 31, 2009 in accordance with AS–3.

Summary Cash Account for the year ended Mar 31, 2009

Answer:	1. Net cash from Operating Activities: Rs 2,50,000
	2. Net cash used in Investing Activities: Rs 1,00,000
	3. Net cash used in Financing Activities: Rs 50,000

22. The Balance Sheet of J. K. Ltd. as on Mar 31, 2008 and Mar 31, 2009 are as follows:

Additional Information

An old machine was sold for Rs 20,000 which had a written down Rs 10,000; dividend paid during the year Rs 16,000 and depreciation charged to Profit and Loss Account for the year amounted to Rs 10,000. Prepare the Cash Flow Statement.

		Rs
Answer:	1. Cash flow from Operating Activities	36,000
	2. Cash used in Investing Activities	32,000
	3. Cash flow from Financing Activities	4,000
	Cash – Cash constitutes cash on banks.