Cash Flow Statement - Practical Paper 3B: Financial Management Chapter 3 Unit II

Transcription

1 Cash Flow Statement - Practical Paper 3B: Financial Management Chapter 3 Unit II CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA), EPBM (IIMC), MCT

2 2 Learning Objectives 1 Understand the intricacies in preparation of Cash Flow Statement 2 Develop hands on skills in Cash Flow Statement preparation by solving variety of questions

3 3 Recap Classification of Cash Flows

4 4 Recap - Cash Flow - Classification Cash flow from Operating Activities Principal revenue generating activities Cash flow from Investing Activities Acquisition and disposal of long term assets and other investments not included in cash equivalents Cash flows from Financing activities Activities that has an impact of owner s capital and borrowings

5 5 Cash Flow from Operating Activities Cash from Operating activities can be reported in two ways Direct Method Indirect Method

6 6 Multiple Choice Questions Cash Flow Statement

7 7 MCQ 1 Principal revenue generating activities of an enterprise are called as A. Operating Activities B. Investing Activities C. Financing Activities D. None of the above Answer: A. Operating Activities

8 8 MCQ 2 Short term highly liquid investments that are readily convertible in to known amounts of cash and which are subject to insignificant risk of changes in value is known as A. Cash at Bank B. Investments in Shares C. Cash Equivalents D. None of the above Answer: C. Cash Equivalents

9 9 MCQ 3 Cash Flows are A. Inflows and Outflows of cash B. Inflows and Outflows of cash equivalents C. Inflows of Cash D. Both A & B Answer: D. Both A & B

10 10 MCQ 4 Purchase of Machinery by means of issue of shares should be from Cash Flow Statement A. Included B. Excluded C. Included with value as zero D. None of the above Answer: B. Excluded

11 11 MCQ 5 Unrealized gains and losses arising from foreign exchange rates are A. Cash flows from operating activities B. Cash flows from financing activities C. Cash flows from investing activities D. Not cash flows Answer: D. Not cash flows

12 12 MCQ 6 Equity dividend paid should be classified as cash outflow from A. Operating activities B. Financing activities C. Investing activities D. Not cash flows Answer: B. Financing activities

13 13 Practical Illustrations Question 1 IPCC May 2011 Paper Accounting Using Indirect Method

14 Question 1: Indirect method Balance Sheet of Lotus Ltd as on 31 Mar 2010 and 31 Mar Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000 Equity Rs 10 each Land & Buildings Capital Reserve 10 Machinery Profit & Loss Account Investments Long term loan from Bank Inventories Sundry Creditors Receivables Cash in Provision for tax Hand Cash at Bank

15 Question 1: Indirect method 15 Additional Information 1. Depreciation written off on Building Rs 20, The Company sold some Investment at a profit of Rs 10, 000, which is credited to Capital Reserve 3. Income tax provided during the year Rs 55, Machinery purchased during the year for Rs 2,25, 000. They paid Rs 1,25,000 in cash and issue 10,000 equity shares of Rs 10 each at par. You are required to prepare cash flow statement for the year ended 31st March 2011 as per AS 3, by using indirect method

16 16 Question 1: Identification of Working Notes Income Tax Paid Sales realization Investment sales Depreciation on Machinery Calculation of Net Profit before tax

17 17 Question 1 : Indirect Method Working Note 1 Working Note:1 (Rs. In 000) Income Taxes Paid Provision for Tax during the year 55 Add: Opening Provision for tax ( ) Less: Closing Provision for tax ( ) 60 45

18 Question 1 : Indirect Method Working Note 2 18 Working Note:2 (Rs. In 000) Sales realisation from Investments Opening Balance of Investment ( ) 100 Add: Profit on sale of Investment (Credited to Capital Reserve) Less: Closing Balance of Investment ( ) 50 60

19 Question 1 : Indirect Method Working Note 3 19 Working Note:3 (Rs. In 000) Depreciation on Machinery Opening Balance of Machinery ( ) 750 Add: Cost of Machinery Purchased Less: Closing Balance of Machinery ( )

20 Question 1 : Indirect Method Working Note 4 20 Working Note:4 (Rs. In 000) Net Profit before tax and extraordinary items: Profit & Loss Account Less: Profit & Loss Account Profit for the Year after Tax provision 80 Add: Provision for Taxation

21 Question 1 : Cash Flow Statement (Indirect Method) CASH FLOW STATEMENT (Rs. In 000) Cash flows from Operating activities: Net Profit Before tax and extraordinary items: 135 Adjustments for: Depreciation Building 20 Depreciation Machinery 55 Operating profit before working capital changes 210 Adjustments for Working Capital Changes: Add: Decrease in Inventories 20 Less: Increase in Receivables (20) Less: Decrease in Sundry Creditors (100) (100) Cash Generation from Operations 110 Less: Income Tax Paid 45 Net Cash from Operating activities 65 21

22 Question 1 : Cash Flow Statement - Continued (Rs. In 000) Cash flows from Investing activities: Purchase of Machinery (125) Cash received on Sales of Investment 60 Net Cash from Investing activities (65) Cash flows from Financing activities: Issue of Shares 150 Repayment of Long Term Loan (100) Net Cash from Financing activities 50 Net increase in Cash and Cash equivalents 50 Cash and Cash equivalents at the beginning Cash in Hand 200 Cash at Bank Cash and Cash equivalents at the end Cash in Hand 140 Cash at Bank

23 23 Practical Illustrations Question 2 IPCC May 2007 Paper Cost Accounting Using Indirect Method

24 Question 2: Indirect method 24 Balance Sheet of JK Ltd as on 31 Mar 2005 and 31 Mar Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000 Share Capital Fixed Assets Capital Reserve 48 Less: Depreciation General Reserve Profit & Loss Account Investments % Debenture Cash Other Current assets Current Liabilities (including stock) Proposed Dividend Preliminary Expenses Provision for Tax Unpaid Dividend

25 Question 2: Indirect method - Continued Additional Information 1. During the year , Fixed Assets with a book value of Rs 2,40,000 (accumulated depreciation Rs 84,000) was sold for Rs 1,20, Provided Rs 4,20,000 as depreciation 3. Some investments are sold at a profit of Rs 48,000 and the Profit was credited to Capital Reserve 4. It was decided that stocks be valued at cost, whereas previously the practice was to value stock at cost less 10 percent. The stock was Rs 2,59,200 as on The stock as at was correctly valued at Rs 3,60, It was decided to write off Fixed Assets costing Rs 60,000 on which depreciation amounting to Rs 48,000 has been provided. 6. Debentures are redeemed at Rs Required: Prepare Cash Flow Statement

26 26 Question 2: Identification of Working Notes Purchase of Fixed Assets, Sales of Fixed Assets, Fixed Assets Written Off, Depreciation Account (Optional) Sales Realizati on from Investme nt Opening Stock Revaluatio n and Opening Profit and Loss (Adjustmen t for stock revaluation ) Payment towards Redempti on of 9% Debenture Calculation of Net Profit before tax and Extraordinar y Items

27 Question 2 : Indirect Method Working Note 1 27 Working Note:1 (Rs. In 000) Fixed Assets Account Particulars Rs Particulars Rs To Balance b/d By Sale of Assets To Purchases (Balancing amount) By Fixed Assets Written Off A/c By Balance c/d

28 Question 2 : Indirect Method Working Note 2 28 Working Note:2 (Rs. In 000) Depreciation Account Particulars Rs Particulars Rs To Sales of Assets By Balance b/d To Fixed Assets Written off A/c By Profit & Loss a/c (Depreciation Provision) To Balance c/d

29 Question 2 : Indirect Method Working Note 3 29 Working Note:3 (Rs. In 000) Sale of Fixed Assets Account Particulars Rs Particulars Rs To Fixed Assets a/c By Depreciation a/c By Cash By Profit and Loss A/c Loss on Sales (Balancing Amount)

30 Question 2 : Indirect Method Working Note 4 30 Working Note:4 (Rs. In 000) Fixed Assets Written Off Account Particulars Rs Particulars Rs To Fixed Assets a/c By Depreciation a/c By Profit and Loss A/c (Balancing Amount)

31 Question 2 : Indirect Method Working Note 5 31 Working Note:5 (Rs. In 000) Investment Account Particulars Rs Particulars Rs By Cash (Balancing To Balance b/d Amount) To Capital Reserve A/c (Profit on sale) By Balance c/d

32 Question 2 : Indirect Method Working Note 6 32 Working Note:6 (Rs. In 000) Opening Stock Revaluation Account Particulars Rs Particulars Rs To Balance b/d To Profit & Loss A/c ( ) By Balance c/d

33 Question 2 : Indirect Method Working Note 7 Working Note:7 (Rs. In 000) 9% Debentures a/c Particulars Rs Particulars Rs To Cash (Balancing Amount) By Balance b/d To Balance c/d By Profit and Loss A/c Premium on Redemption (Rs *5%)

34 Question 2 : Indirect Method Working Note 8 34 Working Note:8 (Rs. In 000) Profit and Loss A/c Particulars Rs Particulars Rs To Proposed Dividend By Balance b/d To Transfer to General Reserve To Provision for Tax To 9% Debentures (Premium on Redemption) To Loss on Sales of Assets By Opening Stock Revaluation a/c By Profit Before Tax and Extraordinary Items To Preliminary Expenses (Written off) To Fixed Assets Written Off A/c To Balance c/d , ,196.40

35 Question 2 : Cash Flow Statement (Indirect Method) CASH FLOW STATEMENT (Rs. In 000) Cash flows from Operating activities: Net Profit Before tax and extradinary items: Adjustments for: Depreciation Operating profit before working capital changes Adjustments for Working Capital Changes: Less: Increase in Other Current Assets (109.20) Add: Increase Current Liabilities (61.20) Cash Generation from Operations Less: Tax Paid Net Cash from Operating activities

36 Question 2 : Cash Flow Statement - Continued (Rs. In 000) Cash flows from Investing activities: Purchase of Fixed Assets ( ) Cash received on Sales of Fixed Assets Cash received on Sale of Investment Net Cash from Investing activities (756.00) Cash flows from Financing activities: Issue of Shares Redemption of 9% Debentures (302.40) Dividend Paid (126.00) Net Cash from Financing activities Net increase / (Decrease) in Cash and Cash equivalents Cash and Cash equivalents at the beginning Cash and Cash equivalents at the end

37 37 Practical Illustrations Question 3 IPCC May 2008 Paper Cost Accounting and Financial Management Projected Cash flow Statement and Estimated Bank Balance

38 38 Question 3 X Ltd has the following balances as on 01 April 2007 Rs in 000 Fixed Assets 1140 Less: Depreciation Stocks and Debtors 475 Bank Balance 66.5 Creditors 114 Bills Payable 76 Capital (Shares of Rs 100 each) 570

39 Question 3 Continued 39 The Company made the following estimates for the financial year The company will pay a free of tax dividend of 10% and the rate of tax being 25% 2. The company will acquire fixed assets costing Rs 1,90,000 after selling one machine for Rs 38,000 costing Rs 95,000 and on which depreciation provided amounted to Rs 66, Stocks and Debtors, Creditors and Bills payables at the end of financial year are expected to be Rs. 5,60,500, Rs 1,48,200 and Rs 98,800 respectively 4. Profit would be Rs 1,04,500 after depreciation of Rs 1,14,000 Prepare the projected cash from operations and ascertain the bank balances of X Ltd at the end of the Financial year

40 40 Question 3: Identification of Working Notes Profit on sale of Machine Dividend payment and Dividend Tax

41 Question 3 : Working Note 1 41 Working Note:1 (Rs. In 000) Profit on Sale of Fixed Assets: Cost of sold Equipment 95.0 Accumulated Depreciation on Equipments sold 66.5 Written Down Value of Equipment sold 28.5 Less: Sale value

42 Question 3 : Working Note 2 42 Working Note:2 (Rs. In 000) Dividend and Dividend Tax: Net Dividend : 10% on Rs 570, Gross Dividend (57 / 75%) x 100% 76.0 Dividend Tax 19.0

43 Question 3 : Cash Flow Statement CASH FLOW STATEMENT (Rs. In 000) Cash flows from Operating activities: Net Profit Before tax and extradinary items: Profit for the year Less: Profit on sale of assets Adjustments for: Depreciation Operating profit before working capital changes Adjustments for Working Capital Changes: Less: Increase in Stocks and Debtors (85.5) Add: Increase Creditors 34.2 Add: Increase Bills payable 22.8 (28.5) Net Cash from Operating activities

44 Question 3 : Cash Flow Statement (Continued) (Rs. In 000) Cash flows from Investing activities: Purchase of Fixed Assets (190.0) Cash received on Sales of Fixed Assets 38.0 Net Cash from Investing activities (152.0) Cash flows from Financing activities: Dividend Paid (57.00) Dividend Tax Paid (19.00) Net Cash from Financing activities (76.0) Net increase / (decrease)in Cash and Cash equivalents (47.5) Bank Balance at the beginning 66.5 Bank Balance on

45 45 Practical Illustrations Question 4 IPCC May 2011 Paper Cost Accounting and Financial Management Under Indirect Method

46 46 Question 4 : Cash Flow Statement Summarised Balance Sheet of XYZ Ltd as on 31 Mar 2010 and 31 Mar Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000 Preference Share Capital Plant & Machinery Equity Share Capital Long Term investment Share Premium Goodwill 30 Capital redemption reserve 100 Current Assets General Reserve Short term investment (Less than 2 months) P & L A/c Cash and Bank Current Liabilities Preliminary Exps Proposed Dividend Provision for Tax

47 Question 4 : Cash Flow Statement 47 Additional Information 1. Preference Share Capital was redeemed at a premium of 10% partly out of proceeds from issue of equity shares of Rs 10 each issued at 10% premium and partly out of profits otherwise available for dividend 2. The company purchased plant and machinery for Rs It also acquired another company stock Rs and plant and machinery Rs and paid Rs in equity share capital for the acquisition 3. Foreign Exchange loss of Rs 1600 represents loss in value of short term investment 4. The company paid tax of Rs Required: Prepare Cash Flow Statement

48 Question 4: Identification of Working Notes 48 Depreciati on on Plant and Machinery Provision for Taxation Transfer to General reserve Calculati on of Net Profit before tax Net increas e in Current Assets

49 Question 4 : Working Note 1 49 Working Note:1 (Rs. In 000) Plant and Machinery Account Particulars Rs Particulars Rs To Balance b/d By Depreciation To Bank To Acquired from other company By Balance c/d

50 Question 4 : Working Note 2 50 Working Note:2 (Rs. In 000) Provision for Tax Account Particulars Rs Particulars Rs To Bank By Balance b/d To Balance c/d By Profit & Loss a/c (Tax Provision)

51 Question 4 : Working Note 3 51 Working Note:3 (Rs. In 000) General Reserve Account Particulars Rs Particulars Rs To Capital redemption reserve By Balance b/d To Balance c/d By Profit & Loss a/c

52 Question 4 : Working Note 4 52 Working Note:4 (Rs. In 000) Profit and Loss A/c Particulars Rs Particulars Rs To Provision for Tax By Balance b/d To Transfer to General Reserve By Profit Before Tax and Extraordinary Items To Proposed Dividend To Balance c/d

53 Question 4 : Working Note 5 53 Working Note:5 (Rs. In 000) Net increase in Current Assets Current Assets as on Less: Stock acquired by issue of shares Less: Current Assets as on

54 Question 4 : Cash Flow Statement CASH FLOW STATEMENT (Rs. In 000) Cash flows from Operating activities: Net Profit Before tax and extradinary items: Adjustments for: Depreciation on Plant and Machinery Foreign Exchange Loss 1.60 Preliminary expenses written off Operating profit before working capital changes Adjustments for Working Capital Changes: Less: Increase in Current Assets (206.00) Add: Increase Current Liabilities Cash Generation from Operations Less: Tax Paid Net Cash from Operating activities

55 Question 4 : Cash Flow Statement..Continued (Rs. In 000) Cash flows from Investing activities: Purchase of Machinery (95.00) Purchase of Investment (80.00) Net Cash from Investing activities (175.00) Cash flows from Financing activities: Issue of 10% premium for cash Redemption of Preference Share Capital (220.00) Dividend Paid (160.00) Net Cash from Financing activities Net increase in Cash and Cash equivalents Cash and Cash equivalents as on 31 Mar Cash and Cash equivalents as on 31 Mar

56 Thank You 56