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 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 Recap Classification of Cash Flows
4 Recap - Cash Flow - Classification 1 2 3 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 Cash Flow from Operating Activities Cash from Operating activities can be reported in two ways Direct Method Indirect Method
6 Multiple Choice Questions Cash Flow Statement
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 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 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 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 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 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 Practical Illustrations Question 1 IPCC May 2011 Paper Accounting Using Indirect Method
Question 1: Indirect method Balance Sheet of Lotus Ltd as on 31 Mar 2010 and 31 Mar 2011 14 31.03.2010 31.03.2011 31.03.2010 31.03.2011 Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000 Equity Share @ Rs 10 each 1000 1250 Land & Buildings 400 380 Capital Reserve 10 Machinery 750 920 Profit & Loss Account 400 480 Investments 100 50 Long term loan from Bank 500 400 Inventories 300 280 Sundry Creditors 500 400 Receivables 400 420 Cash in Provision for tax 50 60 Hand 200 140 Cash at Bank 300 410 2450 2600 2450 2600
Question 1: Indirect method 15 Additional Information 1. Depreciation written off on Building Rs 20,000 2. 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 55,000 4. 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 Question 1: Identification of Working Notes Income Tax Paid Sales realization Investment sales Depreciation on Machinery Calculation of Net Profit before tax
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 (31.03.2010) 50 105 Less: Closing Provision for tax (31.03.2011) 60 45
Question 1 : Indirect Method Working Note 2 18 Working Note:2 (Rs. In 000) Sales realisation from Investments Opening Balance of Investment (31.03.2010) 100 Add: Profit on sale of Investment (Credited to Capital Reserve) 10 110 Less: Closing Balance of Investment (31.03.2011) 50 60
Question 1 : Indirect Method Working Note 3 19 Working Note:3 (Rs. In 000) Depreciation on Machinery Opening Balance of Machinery (31.03.2010) 750 Add: Cost of Machinery Purchased 225 975 Less: Closing Balance of Machinery (31.03.2011) 920 55
Question 1 : Indirect Method Working Note 4 20 Working Note:4 (Rs. In 000) Net Profit before tax and extraordinary items: Profit & Loss Account 31.03.2011 480 Less: Profit & Loss Account 31.03.2010 400 Profit for the Year after Tax provision 80 Add: Provision for Taxation 55 135
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
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 300 500 Cash and Cash equivalents at the end Cash in Hand 140 Cash at Bank 410 550 22
23 Practical Illustrations Question 2 IPCC May 2007 Paper Cost Accounting Using Indirect Method
Question 2: Indirect method 24 Balance Sheet of JK Ltd as on 31 Mar 2005 and 31 Mar 2006 31.03.05 31.03.06 31.03.05 31.03.06 Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000 Share Capital 1440 1920 Fixed Assets 3840 4560 Capital Reserve 48 Less: Depreciation 1104 1392 General Reserve 816 960 2736 3168 Profit & Loss Account 288 360 Investments 480 384 9% Debenture 960 672 Cash 210 312 Other Current assets Current Liabilities 576 624 (including stock) 1134 1272 Proposed Dividend 144 174 Preliminary Expenses 96 48 Provision for Tax 432 408 Unpaid Dividend 18 4656 5184 4656 5184
Question 2: Indirect method - Continued Additional Information 1. During the year 2005 2006, Fixed Assets with a book value of Rs 2,40,000 (accumulated depreciation Rs 84,000) was sold for Rs 1,20,000 2. 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 31.03.2005. The stock as at 31.03.06 was correctly valued at Rs 3,60,000 5. 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 105 25 Required: Prepare Cash Flow Statement
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
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 3840.00 By Sale of Assets 240.00 To Purchases (Balancing amount) 1020.00 By Fixed Assets Written Off A/c 60.00 By Balance c/d 4560.00 4860.00 4860.00
Question 2 : Indirect Method Working Note 2 28 Working Note:2 (Rs. In 000) Depreciation Account Particulars Rs Particulars Rs To Sales of Assets 84.00 By Balance b/d 1104.00 To Fixed Assets Written off A/c 48.00 By Profit & Loss a/c (Depreciation Provision) 420.00 To Balance c/d 1392.00 1524.00 1524.00
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 240.00 By Depreciation a/c 84.00 By Cash 120.00 By Profit and Loss A/c Loss on Sales (Balancing Amount) 36.00 240.00 240.00
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 60.00 By Depreciation a/c 48.00 By Profit and Loss A/c (Balancing Amount) 12.00 60.00 60.00
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 480.00 Amount) 144.00 To Capital Reserve A/c (Profit on sale) 48.00 By Balance c/d 384.00 528.00 528.00
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 259.20 To Profit & Loss A/c (31.03.2005) 28.80 By Balance c/d 288.00 288.00 288.00
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) 302.40 By Balance b/d 960.00 To Balance c/d 672.00 By Profit and Loss A/c Premium on Redemption (Rs 288000*5%) 14.40 974.40 974.40 33
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 174.00 By Balance b/d 288.00 To Transfer to General Reserve 144.00 To Provision for Tax 408.00 To 9% Debentures (Premium on Redemption) 14.40 To Loss on Sales of Assets 36.00 By Opening Stock Revaluation a/c 28.80 By Profit Before Tax and Extraordinary Items 879.60 To Preliminary Expenses (Written off) 48.00 To Fixed Assets Written Off A/c 12.00 To Balance c/d 360.00 1,196.40 1,196.40
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: 879.60 Adjustments for: Depreciation 420.00 Operating profit before working capital changes 1299.60 Adjustments for Working Capital Changes: Less: Increase in Other Current Assets (109.20) Add: Increase Current Liabilities 48.00 (61.20) Cash Generation from Operations 1238.40 Less: Tax Paid 432.00 Net Cash from Operating activities 806.40 35
Question 2 : Cash Flow Statement - Continued (Rs. In 000) Cash flows from Investing activities: Purchase of Fixed Assets (1020.00) Cash received on Sales of Fixed Assets 120.00 Cash received on Sale of Investment 144.00 Net Cash from Investing activities (756.00) Cash flows from Financing activities: Issue of Shares 480.00 Redemption of 9% Debentures (302.40) Dividend Paid (126.00) Net Cash from Financing activities 51.60 Net increase / (Decrease) in Cash and Cash equivalents 102.00 Cash and Cash equivalents at the beginning 210.00 Cash and Cash equivalents at the end 312.00 36
37 Practical Illustrations Question 3 IPCC May 2008 Paper Cost Accounting and Financial Management Projected Cash flow Statement and Estimated Bank Balance
38 Question 3 X Ltd has the following balances as on 01 April 2007 Rs in 000 Fixed Assets 1140 Less: Depreciation 399 741 Stocks and Debtors 475 Bank Balance 66.5 Creditors 114 Bills Payable 76 Capital (Shares of Rs 100 each) 570
Question 3 Continued 39 The Company made the following estimates for the financial year 2007 08 1. 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 66,500 3. 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 2007 08
40 Question 3: Identification of Working Notes Profit on sale of Machine Dividend payment and Dividend Tax
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 38.0 9.5
Question 3 : Working Note 2 42 Working Note:2 (Rs. In 000) Dividend and Dividend Tax: Net Dividend : 10% on Rs 570,000 57.0 Gross Dividend (57 / 75%) x 100% 76.0 Dividend Tax 19.0
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 104.5 Less: Profit on sale of assets 9.5 95.0 Adjustments for: Depreciation 114.0 Operating profit before working capital changes 209.0 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 180.5 43
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 31.03.2008 19.0 44
45 Practical Illustrations Question 4 IPCC May 2011 Paper Cost Accounting and Financial Management Under Indirect Method
46 Question 4 : Cash Flow Statement Summarised Balance Sheet of XYZ Ltd as on 31 Mar 2010 and 31 Mar 2011 31.03.10 31.03.11 31.03.10 31.03.11 Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000 Preference Share Capital 400 200 Plant & Machinery 700 820 Equity Share Capital 400 660 Long Term investment 320 400 Share Premium 40 30 Goodwill 30 Capital redemption reserve 100 Current Assets 910 1141 General Reserve 200 120 Short term investment (Less than 2 months) 50 84 P & L A/c 130 175 Cash and Bank 100 80 Current Liabilities 640 900 Preliminary Exps 40 20 Proposed Dividend 160 210 Provision for Tax 150 180 2120 2575 2120 2575
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 10000 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 95000. It also acquired another company stock Rs 25000 and plant and machinery Rs 105000 and paid Rs 160000 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 140000 Required: Prepare Cash Flow Statement
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
Question 4 : Working Note 1 49 Working Note:1 (Rs. In 000) Plant and Machinery Account Particulars Rs Particulars Rs To Balance b/d 700.00 By Depreciation 80.00 To Bank 95.00 To Acquired from other company 105.00 By Balance c/d 820.00 900.00 900.00
Question 4 : Working Note 2 50 Working Note:2 (Rs. In 000) Provision for Tax Account Particulars Rs Particulars Rs To Bank 140.00 By Balance b/d 150.00 To Balance c/d 180.00 By Profit & Loss a/c (Tax Provision) 170.00 320.00 320.00
Question 4 : Working Note 3 51 Working Note:3 (Rs. In 000) General Reserve Account Particulars Rs Particulars Rs To Capital redemption reserve 100.00 By Balance b/d 200.00 To Balance c/d 120.00 By Profit & Loss a/c 20.00 220.00 220.00
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 170.00 By Balance b/d 130.00 To Transfer to General Reserve 20.00 By Profit Before Tax and Extraordinary Items 445.00 To Proposed Dividend 210.00 To Balance c/d 175.00 575.00 575.00
Question 4 : Working Note 5 53 Working Note:5 (Rs. In 000) Net increase in Current Assets Current Assets as on 31.03.2011 1141.00 Less: Stock acquired by issue of shares 25.00 1116.00 Less: Current Assets as on 31.03.2010 910.00 206.00
Question 4 : Cash Flow Statement CASH FLOW STATEMENT (Rs. In 000) Cash flows from Operating activities: Net Profit Before tax and extradinary items: 445.00 Adjustments for: Depreciation on Plant and Machinery 80.00 Foreign Exchange Loss 1.60 Preliminary expenses written off 20.00 101.60 Operating profit before working capital changes 546.60 Adjustments for Working Capital Changes: Less: Increase in Current Assets (206.00) Add: Increase Current Liabilities 260.00 54.00 Cash Generation from Operations 600.60 Less: Tax Paid 140.00 Net Cash from Operating activities 460.60 54
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 Shares @ 10% premium for cash 110.00 Redemption of Preference Share Capital (220.00) Dividend Paid (160.00) Net Cash from Financing activities 270.00 Net increase in Cash and Cash equivalents 15.60 Cash and Cash equivalents as on 31 Mar 2010 150.00 Cash and Cash equivalents as on 31 Mar 2011 165.60 55
Thank You 56