Cash Flow Statement. IPCC Paper 1: Accounting/Financial Management Chapter 2 -Unit 2. CA. Pankaj Goel

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1 Cash Flow Statement IPCC Paper 1: Accounting/Financial Management Chapter 2 -Unit 2 1 CA. Pankaj Goel

2 Questions that Cash Flow Statement Answers 1 Where did the cash come from? 2 3 What purpose cash used for? And least importantly, what was the change in the cash balance? 2

3 Learning Objectives Meaning of Cash Flow Statement Applicability Cash Flow Statement - AS 3 Terms used in Cash Flow Statement Examples of Types of Activities Preparation of Cash Flow Statement Format of Cash Flow Statement-Direct Format of Cash Flow Statement-Indirect 3

4 Learning Objectives Cash Flow from Operating Activities 9 Cash Flow from Investing and Financing Activities Summary of Cash Flow Statement Process Adjustments relating to Cash Flow Statement for Taxation, Dividend, Interest, Foreign Currency Transaction, Non Cash Transactions, Non Current Assets-Net/Gross, Extraordinary Activities 12 Examples - Comprehensive 13 Summary 4

5 Components of Cash Flow Statement CASH& CASH EQUIVALENTS FINANCING ACTIVITIES OPERATING ACTIVITIES DIRECT 3 INVESTING ACTIVITIES 2 OPERATING ACTIVITIES INDIRECT 5

6 Cash for Cash Flow Statement Cash Equivalents Cash Meaning of Cash 6

7 Cash Concept Cash is an important component for solvency of any organization Cash plays a very important role in the economic life of a business What blood is to a human body, cash is to a business enterprise. Thus, it is essential for a business to maintain an adequate balance of cash. It is important to know the movement of cash during the year and reasons for such movement. Such details are available through Cash Flow Statement, which provides information about the changes in cash and cash equivalents of an enterprise 7

8 : Cash Concept - 2 This revised Accounting Standard super seeded the Accounting Standard (AS 3) on changes in Financial Position, issued in June 1981.In 1995, SEBI amended clause 32 of listing agreement stating that every listed company, should give CFS Particulars Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Total Add: Opening cash and cash equivalent (CCE) Closing cash and cash equivalent (CCE) Amount (Rs.) xx xx xx xx xx xx 8

9 Uses Of Cash Flow Statement Cash flow statement is additional information to user of financial statement This statement exhibits the flow of incoming and outgoing cash This statement assesses the ability of the enterprise to generate cash and cash equivalents It also assesses the needs of the enterprise to utilise the cash and cash equivalents generated It also assesses the liquidity and solvency of the enterprise 9

10 Fundamentals of Cash and Cash Flow Statement As per AS 3 Cash means- Cash and Cash Equivalents Cash and Cash Equivalents Cash in Hand+ Cash at Bank Short-term investments (Till 3 months maturity)+ Marketable securities 10

11 Cash Flow Statement Equation Cash= Non Current Liability+ Non Current Assets+ in Owners Equity Cash = Change in Cash & Cash Equivalents Non Current Liability = Non Current Assets = in Owners Equity = Change in Non Current Liabilities covering change in share capital like issue of share capital etc. Change in Non Current Assets covering change in Assets like purchase of assets etc. Change in capital +Change in current liability item and change in all items of current assets other than cash and cash equivalents 11

12 12 Applicability of Cash Flow Statement

13 Applicability of AS - 3 Preparation of Cash Flow Statement as per AS-3 is mandatory for the following enterprises: Enterprises that have a turnover of more than Rs. 50 crores during a financial year. Enterprises that have a borrowing of more than Rs.1 crores Companies whose shares or debts are listed or to be listed on a recognized stock exchange in India Cash Flow Statement of listed companies shall be presented under indirect method only as prescribed in AS-3 13

14 14 Terms Used in Cash Flow Statement

15 Operating Activities These are principal revenue producing activities of a business enterprise and include cash flows from those transactions and events that enter into the determination of net profit or loss 15

16 Examples of Operating Activities Cash inflows Cash outflows Cash Receipts from sale of goods/rendering of services Cash Received from royalties, fees, commission, etc. Other operating receipts Cash payments to suppliers for Goods/services Cash payments to employees Interest and taxes paid Other operating cash payments 16 9

17 Investing Activities These activities include transactions and events that involve the purchase and sale of long term productive assets such as land, buildings, equipment (plant and machinery) not held for resale and other investments (which are not cash equivalents). 17

18 Examples of Investing Activities Cash inflows Cash outflows Sale of plant & machinery and equipment Purchase of plant & machinery and equipment Sale of Land & Buildings Purchase of land & buildings 18 10

19 Financing Activities These activities result in changes in the size and composition of the owners capital (including preference share capital in the case of a company) and borrowings of the enterprise. 19

20 Examples of Financing Activities Cash inflows Cash outflows Borrowing cash from creditors Issuing equity shares Issuing debt securities Repayment of amounts borrowed Repurchase of equity shares Payment of dividends 20 11

21 Practice Time 21 Examples of Types of Activities

22 Example: 1 Transactions Activities Cash Sales Cash paid to creditors Cash Purchase Cash received from Debtors Issue of Shares Issue of Debentures Purchase of Investments Purchase of Fixed Assets Sale of Investments Sale of Fixed Assets Operating Activities Operating Activities Operating Activities Operating Activities Financing Activities Financing Activities Investing Activities Investing Activities Investing Activities Investing Activities 22

23 Example: 1Continued Transactions Activities Marketable Securities Redemption of Debentures/Preference Shares Interest paid by Finance Company Dividends paid by Non Finance Company Manufacturing wages paid Sale of Trade Marks Income Tax paid Income Tax Refund received Brokerage on issue of shares Cash Equivalents Financing Activities Operating Activities Financing Activities Operating Activities Investing Activities Operating Activities Operating Activities Financing Activities 23

24 24 Sources for Preparation of Cash Flow Statement

25 Basic Information -Three Sources Comparative Balance Sheets It means the balance sheets in the beginning and at the end of the accounting period. These comparative balance sheets indicate the amount of changes that have taken place in assets, liabilities and owners capital accounts. Income Statement of Current Accounting Period Information in this statement enables the users to determine the amount of cash provided by or used in operations during the accounting period after making adjustments for non-cash and non-operating items, current assets and current liabilities items. Selected Additional Information In addition to the comparative balance sheets and income statement of current year, selected additional transaction data are needed to extract the hidden transactions e.g., sale and purchase of fixed assets for cash. It means that additional information is needed to determine how cash was provided or used during the accounting period. 25

26 26 Steps for Preparation of Cash Flow Statement

27 Step 1: Determine Change in Cash & Cash Equivalents It involves the calculation of difference between the amount of cash and cash equivalents on the first day of the accounting period and the amount on the last day of the accounting period, with the help of comparative balance sheets. It is never listed as a first item on the actual cash flow statement. It is the amount by which cash and cash equivalents changed and we must explain why cash and cash equivalents changed by this amount by preparing a Cash Flow Statement 27

28 Example: Cash &Cash Equivalents 28

29 Step 2- Determine Cash Flows from Operating Activities It is determined by the analysis of revenue and expense items of profit and loss account. The reason is that there may be certain items in this account which increase (revenue) the profit but do not cause any increase of cash. Similarly some of the expense items reduce the profits but may not reduce the cash. In addition, analysis of current assets and liabilities is also required with the help of comparative balance sheets and additional information. This can be computed by either Direct or Indirect Method 29

30 Step 3- Analysis of Non Current Assets Determine the cash provided (or used) by investing activities by the analysis of non-current assets like purchase and sale of fixed assets etc This is done by Finding Cash Flow From Investing Activities 30

31 Step 3- Analysis of Non Current Liabilities Determine the cash provided (or used) by financing activities. Here again an analysis of non-current liabilities like issue of share capital, redemption of share capital etc is made. This is done by Finding Cash Flow From Financing Activities 31

32 Step 5 - Preparation of Cash Flow Statement 1 Prepare a formal cash flow statement by classifying all cash inflows and outflows in terms of operating, investing and financing activities 2 The net cash flow provided by (used in) each of the three main activities of an entity should be highlighted 32

33 Step 6 - Find Net Change in Cash &Cash Equivalents Make sure that the total net cash flow, that is, aggregate of net cash flows from operating, investing and financing activities, is equal to net increase (decrease) in cash and cash equivalents as calculated in Step 1. 33

34 Step 7- Analysis of Non Cash Transactions Report any significant investing and financing transactions that did not involve cash or cash equivalents in a separate schedule to the cash flow statement e.g., purchase of land by issue of share capital or debentures; or redemption of debentures for share capital. (Para 40 of AS 3) 34

35 Format for Preparation of Cash Flow Statement Direct (Operating) 35

36 Cash Flow from Operating Activities - Direct DIRECT METHOD- FORMAT (a) Cash Flows from Operating Activities Cash receipts from cash sales and customers Cash payments to creditors and others suppliers ( ) Cash payment for overheads ( ) Less: Tax Paid Cash flows before extraordinary items Add/Less: Extraordinary items Net Cash flow from operating activities Common to Both DIRECT &INDIRECT 36

37 37 Computational Accounts - Direct Method

38 Why We Need Computational Accounts? Adjustments are necessary because income statement records are on accrual basis. Expenses incurred even though the cash has not been paid. Incomes earned even though the cash has not been received. These adjustments generally relate to determination Cash flow from Credit Purchases-creditors/Bills Payables account Cash flow from Credit Sales.- Debtor/Bills Receivables account Cash outflow on expenses incurred-expenses account 38

39 39 Adjustments for Changes in CA and CL

40 1. Effect of Credit Sales If out of total sales of 30,000, credit sales is Rs. 10,000, cash flow from sales = 20,000 Thus while computing cash from operations, it would be necessary that suitable adjustments for the outstanding debtors are also made Like deducting the amt. of credit sale from the net profit as debtors outstanding at the year end. Cash from operation = Net profit + debtors o/s at the beginning debtors o/s at the end of the year OR Cash from operation = Net profit + Decrease in debtors or (increase in debtors) 40

41 2. Effect of Credit Purchase If Cash sale = 30,000, Purchase = 25,000 out of which credit purchase is 10000, Cash from operation = 15,000 Adjustments in the Net profit would be made by adding the amt. of credit purchases to get the cash from operation. Decrease in creditors from one period to another would mean decrease in cash from operation and vice versa. This is because more cash payments have been made to the creditors which results in outflow of cash. Cash from operation = Net profit + creditors at the end of the year creditors at the beginning OR Cash from operation = Net profit + Increase in creditors OR - (Decrease in creditors) 41

42 2. Effect of Credit Purchase If Cash sale = 30,000, Purchase = 25,000 out of which credit purchase is 10000, Cash from operation = 15,000 Adjustments in the Net profit would be made by adding the amt. of credit purchases to get the cash from operation. Decrease in creditors from one period to another would mean decrease in cash from operation and vice versa. This is because more cash payments have been made to the creditors which results in outflow of cash. Cash from operation = Net profit + creditors at the end of the year creditors at the beginning OR Cash from operation = Net profit + Increase in creditors OR -(Decrease in creditors) 42

43 Example 2: CA&CL Adj for Direct Method Sales = 50,000, debtors o/s at the beginning = 8000, debtors o/s at the end = 15000, creditors at the beginning = 12000, creditors at the end = 15000, Purchases = 30000, expenses =

44 Solution: Cash from operation Rs. Sales Less: Purchase Expenses Net Profit Add: debtors at the beginning 8000 creditors at the end Less: creditors at the beginning debtors at the end Cash from operation

45 45 Sample Accounts Formats- CA&CL Adjustments for Direct Method

46 Accounts Format 1 CREDITORS ACCOUNT Particulars Rs. Particulars Rs. Bills Payables Account (Bills accepted) Balance b/d (opening) Discount received Purchases Account (Credit) Bills Receivables (endorsed) Debtors (B/R endorsed dishonored) Purchase Returns Bills Payables Account [Cash Account (Paid) outflow (dishonored) (Balancing figure)] Balance C/D (closing) 46

47 Accounts Format 2 BILLS PAYABLE ACCOUNT Particulars Rs. Particulars Rs. Discount received Balance b/d (opening) Creditors (Bills dishonored)* Creditors Account (Bills accepted) [Cash Account (paid on maturity) (Balancing figure)] Balance C/D (closing) 47

48 Accounts Format 3 DEBTORS ACCOUNT Particulars Rs. Particulars Rs. Balance b/d (Opening) Bad Debts Sales (Credit) Discount allowed Bills Receivables (dishonored) Sales Returns Bills Receivables (drawn) Cash Account (Inflow) (Balancing figure) Balance c/d (closing) 48

49 Accounts Format 4 BILLS RECEIVABLE ACCOUNT Particulars Rs. Particulars Rs. Balance b/d (Opening) Creditors (B/R endorsed) Debtors (B/R drawn)** Discount/Rebate (allowed) Debtors (B/R dishonoured) By Cash Account (received) Inflow (Balancing figure) Balance C/d (closing) 49

50 50 Example of CA&CL- Adjustments for Direct Method

51 Example:3 Opening Stock = 5000 Purchases = Sales = Expenses = 5000 Closing Stock =

52 Solution Profit and Loss a/c Particulars Amount Particulars Amount Opening stock 5000 Sales Purchases Closing stock Expenses 5000 Net Profit Cash from operation: Net profit for the year Add: Opening stock Less: Closing stock - (10000) Cash from operation =

53 Accounts Format 5 EXPENSES ACCOUNT Particulars Rs. Particulars Rs. Prepaid Expenses (in the beginning) Outstanding Expenses (In the beginning) Cash/Bank (cash outflow) P & L Account (Expenses incurred) Outstanding Expenses Prepaid Expenses (at the end) (at the end) 53

54 3 Effect of change in Outstanding expenses, Income received in advance etc. If certain expenses are not paid (i.e., o/s) or some income is received in advance, it will result in decrease in net profit without actually decreasing the cash. This is because net profit is computed after charging to it all expenses whether paid or outstanding. Therefore cash from operation will be higher than the actual profit as per P/L account. Thus : Cash from operation = Net profit + (Expenses o/s + Income received in advance) at the end (Expenses o/s + income received in advance) at the beginning OR Cash from operation = Net profit +Increase in (o/s expenses and income received in advance) OR Decrease in (o/s expenses and income received in advance) 54

55 55 Example of CA&CL- Adjustments for Direct Method

56 EXAMPLE: 4 Gross Profit = Expense paid = Interest received = 2000 Rs 2000 are Outstanding on account of Expenses while Rs 500 has been received as Interest for the next year 56

57 SOLUTION Profit and Loss account Particulars Amount Particulars Amount Expenses paid Gross profit Add: o/s exp Interest received 2000 Net Profit (Balancing) Less: interest rece- -ived in advance ( 500 ) Cash from operation: Net profit for the year Add: Outstanding expenses 2000 Income received in advance 500 Cash from operation

58 4. Effect of Prepaid expenses and Outstanding Income It is similar to the effect of debtors. While computing net profit from operations, the expenses only for accounting period are charged to P/L a/c. This means pre-paid expenses (since not charged) do not decrease net profit for the year but actually reduces the cash from operation. Similarly income earned during the year is credited to P/L a/c, whether received or not. Thus o/s income increases the profit but not the cash from operation. Thus: Cash from operation = Net profit + (Prepaid expenses + o/s income) at the beginning of the year - (Prepaid expenses + o/s income) at the end of the year Or Cash from operation = Net profit + Decrease in (Prepaid expenses + o/s income) OR Increase in (Prepaid expenses + o/s income) 58

59 59 Example of CA&CL- Adjustments for Direct Method

60 Example: 5 Facts Net Profit = Prepaid Expenses as on 1/1/07 = 2000 Prepaid Expenses as on 31/12/07 = 3000 O/S (Accrued) Income on 1/1/07 = 1000 O/S (Accrued) Income on 31/12/07 = 2000 Required Calculate cash from operation 60

61 Solution Cash from operation: Net profit Less: Prepaid expenses as on 31/12/07 (3000) o/s income as on 31/12/07 (2000) Add: Prepaid expenses as on 1/1/ o/s income as on 1/1/ Cash from operation

62 SUMMARY OF FINDINGS Increase in Current assets and Decrease in current liability Decrease in cash Decrease in Current assets and Increase in current liabilities Increase in cash 62

63 63 Miscellaneous Examples - Direct Method

64 Example: 6 From the following information of Hemakshi Power Ltd, find out Cash paid to Creditors and Bills Payables Opening balance of Creditors 45,000 Closing balance of creditors 40,000 Opening balance of Bills Payables 20,000 Closing balance of Bills Payables 6,000 Bills Payables accepted during year 10,000 Total Purchases during the year 3,00,000 (half of them are on credit) Discount received from Creditors 2,000 Goods returned to Suppliers 4,000 64

65 Solution (A) CREDITORS ACCOUNT Particulars Rs. Particulars Rs. Discount received 2,000 Balance b/d 45,000 Purchases Returns 4,000 Purchases (Credit) 1,50,000 Bills Payables accepted 10,000* Cash (paid) (balancing figure) 1,29,000 Balance c/d 50,000 1,95,000 1,95,000 BILLS PAYABLES ACCOUNT Particulars Rs. Particulars Rs. Cash (paid) (Balancing figure) 24,000 Balance b/d 20,000 Balance c/d 6,000 Creditor s Account (Bills accepted) 10,000* 30,000 30,000 Cash paid to creditors = Rs. 1,29,000 Cash paid on account of bills payable = Rs. 24,000 65

66 Example: 7 Calculate the Cash Outflow on account of expenses from the following information: Expenses incurred during the year ,50,000 Outstanding expenses on 31 Dec ,000 Outstanding expenses on 31 Dec ,5000 Prepaid expenses on 31 Dec ,000 Prepaid expenses on 31 Dec ,000 66

67 Solution Cash Outflow on Expenses Particulars Rs. Expenses incurred during the year 1,50,000 Add: Outstanding expenses (2007) 20,000 Prepaid expenses (2008) 10,000 30,000 1,80,000 Less: Outstanding expenses (2008) 35,000 Prepaid expenses (2007) 15,000 50,000 Cash Outflow on Expenses 13,000 In Account Form Expenses Account Particulars Rs. Particulars Rs. Prepaid Expenses Account (2007) 15,000 Outstanding Expenses Account (2007)20,000 Bank Account (Outflow) 1,30,000 Profit and Loss A/c 1,50,000 (Balancing Figure) Prepaid Expenses Account (2008) 10,000 Outstanding Expenses (2008) 35,000 1,80,000 1,80,000 67

68 Solution Cash Flow from Operating Activities Particulars Rs. (i) Operating Cash Receipts Cash Sales 96,00,000 96,00,000 (ii) Operating Cash Payments Cash Paid to Creditors Expenses Cash Generated from Operations before Tax ( i - ii) 1684,000 Less: Income Tax Paid (Net of Refund) 700,000 Cash Flows from Operations before Extraordinary items Less: Extraordinary items: Insurance Claim for Earthquake Loss XXX Net Cash Flow from Operating Activities

69 69 Format for Preparation of Cash Flow Statement- Indirect(Operating)

70 Cash Flow From Operating Activities- Indirect INDIRECT METHOD-FORMAT It is to be noted that difference in two methods is only in Operating Activity and not in other activities. This is shown below: Net Profit (Before Tax and Extraordinary items) Adjustments: a. Non Cash items b. Items treated separately Operating profit before working capital changes Add: Decrease in current assets/increase in current liability Cash generated from operations Less: Income Taxes Paid Cash flows before extraordinary items Add/Less: Extraordinary items Net cash from operating activities Common to Both DIRECT &INDIRECT 70

71 71 Format for Preparation of Cash Flow Statement - Investing

72 Cash Flow From Investing Activities CASH FLOW FROM INVESTING ACTIVITIES Proceeds from sale of Fixed Assets Proceeds from sale of Long term investments Proceeds from sale of Patents/Copyrights/Trademarks Rent/Dividend/Interest Received Purchase of Fixed Assets(Less) Purchase of Long term Investments(Less) Purchase of Patents/Trademarks/Copyrights/Goodwill(Less) Net Cash from (or used in) Investing Activities XXX 72

73 73 Format for Preparation of Cash Flow Statement- Financing

74 Cash Flow From Financing Activities CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issue of equity shares/preference shares Proceeds from issue of debentures Proceeds from long term loans from Bank or Financial Institutions Proceeds from increase in Securities Premium Redemption of Debentures/Preference Shares (including premium) (Less) Buy-back of Equity Shares(Less) Repayment of Long term loans(less) Interest paid(less) Interim Dividend paid(less) Final Dividend Paid(Less) Utilization of Securities Premium(Less) Net Cash from (or used in) Financing Activities XXX 74

75 75 Summary of Format of Cash Flow Statement

76 Cash Inflows and Outflows 76

77 77 Adjustments - Cash Flow Statement

78 Adjustment 1: Treatment of Tax Cash flow for tax payments / refund should be classified as cash flow from operating activities. If cash flow can be specifically identified as cash flow from investment / financing activities, appropriate classification should be made. Capital Gain Tax should be classified as cash outflow from investing Activity Corporate Dividend Tax should be classified as cash outflow from Financing Activity 78

79 Adjustment 2:Hidden Dividend Reconciliation of Profit as per Balance Sheet with PBT (Profit Before tax) The net profit before taxation figure in the account is the starting point for calculation. It can be calculated as follows Difference between the Closing Balance and the Opening Balance of Profit and Loss Account... Add: Proposed Dividend for the current year... Add: Interim Dividend Paid during the year... Add: Transfer to general Reserve... Less: Provision for tax made during the year... Less: Refund of tax credited to the profit and loss account... Less: Extraordinary items, if any, credited to the Profit and Loss Account (...) Net Profit before tax, and extra ordinary items If any Balancing Figure is Present, then it is Interim Dividend 79

80 Adjustment 3-Interim Dividend The interim dividend is declared by the board of directors in between the financial year. Declaration of the interim dividend does not require the approval at the general meeting. Interim dividend becomes due and is paid during the same year. The amount of interim dividend is added back to current years profits to find out cash flow from operating activities(indirect Method) The payments made in respect of dividends would be shown an outflow at cash under Financing Activities. 80

81 Adjustment 4: Proposed Dividends The proposed dividend for the current year becomes due and is paid in the next year. It is an outflow of cash and cash equivalents in the next year. It is added back to current years profits to find out cash flow from operating activities.(indirect) The proposed dividend of the previous year becomes due and is also paid in the current year under Financing Activity. 81

82 Adjustment 5: Interest Interest Received Received from investment it is in investment activities Received from short term investment classified, as cash equivalents should be considered as cash inflows from operating activities. Received on trade advances and operating receivables should be in operating activities Interest Paid On loans / debts are in financing activities On working capital loan and any other loan taken to finance operating activities are in operating activities Interest Charged Added to find out cash flow from operating activities(indirect Method) 82

83 Adjustment 6: Foreign Currency Transaction The effect of change in exchange rate in cash and cash equivalents held in foreign currency should be reported as separate part of the reconciliation of cash and cash equivalents. Unrealized gain and losses arising from changes in foreign exchanges rates are not cash flows. Unrealised foreign exchange gain is reduced from the net profit befor tax in the cash flow statement while computing cash flow from operating activities as it does not involve a cash inflow. Likewise, unrealised foreign exchange loss is added to the net profit before tax in the cash flow statement while computing the cash flow from operating activities. 83

84 Adjustment 7-Non Cash Transaction AS per Para 40 of AS 3, non cash transaction shall be separately disclosed as foot note to Cash Flow Statement like land purchased against issue of debentures etc. 84

85 Contd: Example:8 M/s. X. Ltd. bought the assets of M/s. Y. Ltd. for Rs. 1,00,000 payable in fully paid shares of M/s. X. Ltd. These assets consisted of stock of goods Rs. 30,000, machinery Rs. 50,000 and goodwill Rs. 20,000. How this transaction would be dealt with in the preparation of cash flow statement. An analysis of the transaction shows that the following journal entry must have been made: Stock Account Dr. 30,000 Machinery Account Dr. 50,000 Goodwill Account Dr. 20,000 To Equity Share Capital Account 1,00,000 85

86 Adjustment 8-Non Current asset-net Basis The comparative balance sheets of M/s. V. Ltd. at two different dates provide the following information: Plant and Machinery-1,350000(PY) 1,440000(CY) It is informed that depreciation amounting to Rs. 6,00,000 has been provided during the year. Find out the changes that have taken place in the asset and also state their effect on cash flows. 86

87 Solution: Plant and Machinery Account (Amount in 000) Particular Rs. Particular Rs. Balance b/d 1,350 Depreciation (given) 600 Cash-Purchase outflow Balance c/d 1,440 (Balancing figure) 690 2,040 2,040 87

88 Adjustment 9-Non Current asset-gross Basis In the comparative balance sheets of M/s. P. Ltd. the position of buildings account is given as under : Additional information : (Amount in 000) Liabilities Assets Rs. Rs. Rs. Rs. Accumulated Buildings 3,840 3,910 depreciation Buildings A part of the buildings Rs. 74,000 was sold for Rs. 60,000. The accumulated depreciation on buildings sold was Rs. 20,000. Analyse the transactions. 88

89 Solution: Buildings Account Rs. Rs. Balance b/d Cash (Inflow) 60 Profit and Loss Account 3,840 Accumulated depreciation 20 (Gain on sale) (i) 6 3,910 Cash-purchase (Outflow) (Balancing figure) (ii) 144 3,990 3,990 ACCUMULATED DEPRECIATION ACCOUNT (BUILDINGS) Rs. Rs. Buildings (Accumulated Depreciation) Balance b/d Balance c/d 20 Profit and Loss Account (iii) (Depreciation charged)

90 Adjustment 10-Extraordinary items The cash flows associated with extraordinary items should be classified as arising from: Operating Investing or Financing activities as appropriate and separately disclosed. Example-Proceeds from Earthquake settlements etc 90

91 91 Examples

92 Example- 9 Prepare Cash Flow Statement of sona Ltd. from the following information for the year ended March 31, 2007: Particulars (Rs) (Rs) Investments 1,80,000 2,40,000 Fixed Assets (at cost) 2,10,000 4,00,000 Equity Share Capital 12,00,000 16,00,000 Long term Loan 8,00,000 4,50,000 Cash 1,64,000 1,44,000 Additional Information: 1. Cash flow from operating activities after tax and extra ordinary items Rs. 3,60, Depreciation on fixed assets Rs. 85, Interest received Rs. 45, Dividend paid during the year Rs. 1,40,000 92

93 Solution SONA LTD. CASH FLOW STATEMENT FOR THE YEAR ENDED ON 31 MARCH, 2007 Particulars Amount (Rs.) Amount (Rs) (A) Cash Flow from Operating Activities (A) 3,60,000 (B) Cash Flow from Investing Activities: Purchase of Investment (60,000) Purchase of Fixed Asset (4,00, ,000 2,10,000) (2,75,000) Interest Received 45,000 Net Cash used in Investing Activities (B) (2,90,000) (C) Cash Flow from Financing Activities: Issue of Equity Share Capital 4,00,000 Repayment of long term loans (3,50,000) Dividend paid during the year (1,60,000) Net Cash used in financing Activities (C) (1,90,000) Net Decrease in Cash & Cash Equivalents (A+B+C) (20,000) Add: Cash & Cash equivalents in the beginning 64,000 Cash & Cash equivalents at the end 44,000 93

94 Example:10 Point out giving reasons whether following statements are True or False: (i) Cash flow statement is based upon accrual basis of accounting. False (ii) Cash paid to employees is shown under cash flows from Operating activities. True Increase in the value of fixed assets will increase cash in the business. False 94

95 Examples Point out giving reasons whether following statements are True or False: (i) Outflow of cash will take place if debentures are issued False Provision for taxes may be treated as both current and non-current liabilities. True Cash flow statement forecasts outflow of cash only. False 95

96 Comprehensive Example:11 The following financial statement have been prepared by the Chief Accountant of XYZ Liabilities Assets Rs. Rs. Rs. Rs. Share Capital 4,00,000 5,00,000 Fixed Assets 10,00,000 11,20,000 Reserves & Surplus 2,50,000 2,80,000 Less: Dep. Written Off 3,70,000 4,60,000 Profit and Loss A/c 1,40,000 1,65,000 6,30,000 6,60,000 Debentures 3,00,000 2,80,000 Stock-in-Trade 2,40,000 3,70,000 Creditors 70,000 60,000 Debtors 2,50,000 2,30,000 Provision for Tax 60,000 80,000 Cash in Hand and at Bank 80,000 90,000 Discount on issue of Share 20,000 15,000 12,20,000 13,65,000 12,20,000 13,65,000 96

97 Problem Statement - 2 Profit and Loss Appropriation Account for the year ended 31st March, Particulars Rs. Particulars Rs. Transfer to Reserves 30,000 Balance b/d 1,40,000 Interim Dividend paid 80,000 Net Profit for current year 1,35,00 Balance b/d 1,65,000 2,75,000 2,75,000 Prepare a Cash Flow Statement as per AS-3. 97

98 Solution: XYZ Cash Flow Statement for the year ended 31st March, 2008 Particulars Rs. Rs. (A) Cash Flows from Operating Activities Closing Balance as per Profit and Loss Account 1,65,000 Less: Opening Balance as per Profit and Loss Account 1,40,000 25,000 Adjustments for: Interim Dividend 80,000 Transfer to Reserve 30,000 Provision for Taxation 80,000 Net Profit before Tax 2,15,000 Add:Discount on Issue of shares 5,000 Depreciation 90,000 Operating Profit before Working Capital Changes 3,10,000 Less:Increase in Stock (1,30,000) Add:Decrease in Debtors 20,000 Less:Decrease in Creditors (10,000) Cash generated from operating activities 1,90,000 Less:Income tax paid 60,000 Net Cash from Operating Activities 1,30,000 98

99 Contd: (B) Cash Flow from Investing Activities Fixed Assets Purchased (1,20,000)(1,20,000) Net Cash used in investing Activities (C) Cash Flow from Financing Activities Issue of Shares 1,00,000 Redemption of Debentures (20,000) Dividend Paid (80,000) Net Cash from Financing Activities NIL Net increase in Cash and Cash Equivalents (A + B + C) 10,000 Opening balance of Cash 80,000 Closing balance of Cash and Cash Equivalents 90,000 99

100 Learning Summary Cash Flow Statement is prepared as per standard format prescribed by AS-3 issued by ICAI Cash flow statements are prepared to explain the cash movements between two points of time The connection between two successive balance sheets and the statement of cash flows can be shown as follows: Cash= Non Current Liability+ Non Current Assets+ in Owners Equity The statement of cash flows shows three main categories of cash inflows (cash receipts) and cash outflows (cash payments). These are in order as follows: Cash Flows From Operating Activities Cash Flows From Investing Activities Cash Flows From Financing Activities Cash Flow from Operating activity can be computed using Direct and Indirect method 100

101 101 Thank You

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