16

Cash Flow Statement

The end product of the accounting process is the ‘financial statements’. These are nothing but the summarized statements of accounting data produced at the end of the accounting process by a business entity. These statements communicate accounting information to the users. The balance sheet and the 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). However, revenue 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 and amortization) and some will not be paid in full (goods purchased on credit outstanding expenses). As such the periods profit or loss will not be 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 access the inflows and outflows of cash during the accounting period. Keeping in view 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 accounting standard-3 (Revised), the preparation of cash flow statement—as the thirdfinancial statement–has become statutory for any companies registered under the Companies Act 1956. The other forms of business organizations also prepare this third financial statement, namely 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 an accounting period. In a nutshell, the cash flow statement reflects ‘sources and uses of cash’. This statement reveals ‘where cash comes from and where it goes’. This chapter describes the financial statement in detail.

16.1 CASH FLOW STATEMENT

16.1.1 Meaning of Cash Flow and Cash Flow Statement

Cash flow and cash flow statement are described as follows:

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, which lead to increase in cash and cash equivalents.
3. Outflow of cash refers to all transactions, which lead to decrease in cash and cash equivalents.
4. Cash flow statement is defined as a statement which shows flow of cash and cash equivalents during a period.

16.1.1.1 Meaning of Cash, Cash Equivalents and Cash Flows

Cash: This term includes cash on hand and also demands deposits with banks. The demand deposit is a deposit, which can be repayable in cash by bank on demand by the person who made such a deposit.

Cash equivalents: This term represents the highly liquid investments, which are convertible into cash with ease and speed. They are relatively short-term investments. No risk arises in converting them into cash. Their maturity period is below 3 months; preferably investments in shares are not treated as cash equivalents. The prime object of cash equivalent is to meet short-term cash commitments. Hence, they are not meant for investments or other purposes.

Cash flows: This term refers to inflows and outflows of cash and cash equivalents. An outflow will increase the cash and cash equivalents. The difference between the cash inflows and cash outflows is termed as ‘net cash flow’. The net cash flow may be either a net cash inflow or a net cash outflow. It is pertinent to note that cash flows exclude movements between the items, which constitute cash or cash equivalents.

Cash flow statements: Cash flow statement is nothing but a statement that reflects inflows and outflows of cash and cash equivalents. Simply put, inflow means receipts and outflow means payment of a business entity.

The revised accounting standard [AS-3 (Revised)] is issued by the ICAI in March 1997.

Accordingly, cash flow statement has replaced statement of changes in financial position. The accounting standard [As-3 (Revised)] has been made mandatory with effect from accounting period on or after 1 April 2001 for enterprises, which fall in anyone or more of the specified categories.

16.1.2 Uses of Cash Flow Statement

Following are the 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, i.e. 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.

16.1.3 Limitation of Cash Flow Statement

Limitations of cash flow statements are as follows:

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

16.1.4 Preparation of Cash Flow Statements

Cash flow statements may be prepared by two methods: (a) direct method and (b) indirect method.

1. Direct method: Under this method, individual cash inflows and outflows and disclosed. First, let us take the operating activities. Cash receipts from operating revenues and cash payments for operating expenses are ascertained. The same are shown in precise form in cash flow statement. The difference between the total cash receipts and the total cash payments gives the net cash provided (or used) by operating activities.

   Following are example of cash inflows (cash receipts):

   1. Cash from customers, specifically credit customers
   2. Cash sales of goods and services
   3. Cash receipts on royalties, fees, commission and so on

   Following are example of cash outflows (cash payments):

   1. Cash payment for purchase of goods, inventories and so on
   2. Cash payments for operating expenses such as rent and power
   3. Cash payments for wages and salaries
   4. Cash payment for taxes

   The difference between total cash receipts and total payments is found out, which is called ‘the net cash’ provided by (or used in) operating activities.

2. Indirect method: Under this method, instead of individual cash flow, necessary adjustments are carried out to net profit or loss as shown by P & L A/c. The end result is the net cash flow from operating activities.

   These two methods are explained through illustrations in the forthcoming pages.

   The other two activities, i.e. cash flows from investing activities and financing activities also are illustrated.

Finally, in illustration No. 37, both the methods are explained, from which the students can understand with ease and better comprehension.

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 ‘accounting standard-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, which is classified as follows:

1. Operating activities
2. Investing activities
3. Financing activities

This classification of business transactions as per AS-3 may be represented as follows for easy comprehension:

Cash Inflow	Cash Outflow
1. Cash Sales: Cash Receipts from Sale of Goods & Other Related Services	1. Cash Purchases
2. Cash Receipts from Debtors	2. Cash Payment to Suppliers of Goods and Services
3. Cash Receipts from Royalties, Fees, Commission and Others	3. Cash Payment to Suppliers of Goods and Services
4. Cash Receipts from Insurance Company on Policy Benefits	4. Cash Payment of Wages
	5. Cash Payment to Insurance Companies as Premium and so on
	6. Cash Payment to Income Tax

(a) Cash Received on Interest and Dividends	(a) Interest Payment
(b) Sale of Securities	(b) Securities Purchased

Cash Inflow	Cash Outflow
1. Cash Receipts from Sale of Fixed Assets Including Intangible Assets	1. Cash Payment to Purchase, Shares or
2. Cash Receipts from Sale of Shares, Warrants and Other Type of Investments	2. Cash Payment Relating to Future Contract
3. Cash Receipts on Interest and Dividend	3. Cash Repayment to Purchase of Investments

Cash Inflow	Cash Outflow
1. Cash Proceeds (Receipts) from Issue of Shares (in Cash)	1. Payment of Loans
2. Cash Proceeds from Issue of Debentures	2. Redemption of Preference Shares
3. Cash Proceeds from Long-term Borrowings	3. Payment of Dividend
	4. Payment of Interest
	5. Repayment of Any Finance Liability

This is not a distinction or difference between cash inflow and outflow, but only a representation of various cash inflows and outflows for each type of activities. This only facilitates easy comprehension and better remembrance of cash inflow and outflow for each of the activities classified.

Illustration 16.1

From the following activities, classify (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 and repayment of long-term loan (manufacturer concern)

Operating activities: Sale of investment, income tax paid and office expenses

Investing activities: Sale of machinery, sale of investment (financial concerns) and sale of patent

Cash equivalents: Bank balance and investment in marketable securities (short term)

16.2 CASH FLOW STATEMENT—PREPARATION

AS-3 requires that the cash flow statement should show separately the activities, i.e.:

1. Cash flow from investing activities
2. Cash flow from financing activities

Before the preparation of cash flow statements, one should be familiar with the proforma 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)

16.2.1 Direct Method Proforma or Format Cash Flow Statement for the Year Ended

Particulars
1. 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	…	xxx (A)
B: Operating Cash Payment
(i) Cash Purchases	(…)
(ii) Cash Paid to Suppliers	(…)
(iii) Cash Paid to Business Expenses (Office Expenses, Manufacturing Expense, Selling Expense)	(…)
(iv) Others	(…)	xxx (B)
C: Cash Generated from Operation (A – B)		xxx (A – B)
D: Income Tax Paid
E: Cash Flow Before Extra Ordinary Items		xx
F: Extraordinary Items (Receipts/Payments)	+	xxx
G: Net Cash from Operating Activities	or (−)	(…)
		xxxx
2. Cash Flow from Investing Activities (As in Indirect Method)		xxx
3. Cash Flow from Financing Activities (As in Indirect Method)		xx
4. Net Increase/Decrease in Cash and Cash Equivalents		xx
(As in Indirect Method) (1 + 2 + 3)
5. Add Cash and Cash Equivalents At the Beginning of the Year (Same as in Indirect Method)		xx
6. Cash and Cash Equivalent at the End of the Year		xx

16.2.2 Indirect Method Proforma or Format Cash Flow Statement for the Year Ended

Particulars
1. Cash From Operating Activities
A: Net Profit Before Taxation and Extraordinary Items		xxx
B: Add: Items to Be Added:
(i) Depreciation	…
(ii) Preliminary Expenses Written off	…
(iii) Discount on Issue of Shares and Debentures Written off	…
(iv) Goodwill Written off	…
(vi) Interest on Borrowings and Debentures	…
(vi) 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:
(i) Interest Income (Only for Non-finance Companies—to be Shown Under Investment Activities)	…
(ii) Dividend Income (for Non-finance Companies—to be Shown Under Investment Activities	…
(iii) Rental Income	…
(iv) Profit on Sale of Fixed Assets	…	xxx
(To Be Shown Under Investment Activities—Sale Price)
D: Operating Profit Before Working Capital Charges (A + B − C)	…
E: Add: Decrease in Current Assets and Increase in Current Liabilities Detail:
(i) Decrease in Stock/Inventories	…
(ii) Decrease in Debtors/B/R	…
(iii) Decrease in Accrued Incomes	…
(iv) Decrease in Prepaid Expenses	…
(v) Increase in Creditors/B/P	…
(vi) Increase in Outstanding Expenses	…
(vii) Increase in Advanced Income	…
(viii) Increase in Provision for Doubtful Debt	…	xxx
F: Less: Increase in Current Assets and Decrease in Current Liabilities
(i) Increase in Stock/Inventories	…
(ii) Increase in Debtors/B/R	…
(iii) Increase in Accrued Incomes	…
(iv) Increase in Prepaid Expenses	…
(v) Decrease in Creditors/B/P	…
(vi) Decrease in Outstanding Expenses	…
(vii) Decrease in Advanced Income	…
(viii) Decrease in Provision for Doubtful Debt	…	xxx
G: Cash Generated from Operations (D + E − F)	…	xxx
H: Less Income Tax Paid		(…)
I: Cash Flow Before Extraordinary Items, Extraordinary Items (±)		xxx
J: Net Cash from (or Used in) Operating Activities		xxx
2. Cash Flow from Investing Activities	…
(i) Proceeds from Sale of Fixed Assets	…
(ii) Proceeds from Sale of Investments	…
(iii) Interest and Dividend Received (for Non-finance Companies Only)	…
(iv) Rent Income
(v) Purchase of Fixed Assets	(…)
(vi) Purchase of Investments	(…)
(vii) Purchase of Intangible Assets, e.g. Goodwill	(…)
(viii) Extraordinary Items (± or)	(…)
Net Cash from (Used in Investing Activities)		xxx
3. Cash Flow from Financing Activities
(i) Proceeds from Issue of Shares and Debentures	…
(ii) Proceeds from Other Long-term Borrowings	…
(iii) Financial Dividend Paid	…
(iv) Interim Dividend Paid	(…)
(v) Interest on Loans and Debentures	(…)
(vi) Repayment of Loans	(…)
(vii) Redemption of Debentures/Prët	(…)
(viii) Extraordinary Items ( + or−)	(…)
Net Cash from (or Used in) Financing Activities		xxx
4. Net Increase/Decrease in Cash and Cash Equivalents (1 + 2 + 3)		xxx
5. Cash and Cash Equivalents at the Beginning of the Year
(i) Cash in Hand	…
(ii) Cash at Bank (Less: O/D)	…
(iii) Short-term Deposits	…
(iv) Marketable Securities	…	xx
		xxx
6. Cash and Cash Equivalents at the End of the Year
(i) Cash in Hand	…
(ii) Cash at Bank (Less: O/D)	…
(iii) Short-term Deposits	…
(iv) Marketable Securities	…	xxx

16.3 CASH INFLOW FROM DEBTORS

Illustration 16.2

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

 

Particulars
Total Sales	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:

 

Particulars
Opening Balance		50,000
Add: Credit Sales: Total Sales	5,00,000
Less: Cash Sales	2,00,000	3,00,000
Less: Sales Returns	(20,000)	3,50,000
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 Inflow from Debtors.

 

Total debtors account (ledger) is computed as above.

Illustration 16.3

From the following calculate cash inflow from debtors.

 

Particulars
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	20% 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 the adopted)

Let Credit sales be taken as = x

Hence x: credit sales = 2,50,000

 

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

16.4 CASH INFLOW FROM TRADING COMMISSION

Illustration 16.4

Calculate the amount of trading commission received during the year 2010 from the following data.

 

	January 2010	31 December 2010
Accrued Trading Commission	10,000	15,000
Advance Trading Commission	45,000	60,000

 

Trading commission earned during the year 2010 is 1,70,000.

Solution

Trading commission received can also be computed in two different ways: (i) statement form and (ii) account form.

16.4.1 Statement Form

Particulars
Trading Commission Earning During 2010		1,70,000
Add:
1. Accrued Trading Commission as on 1 January 2010	10,000
2. Advance Trading Commission as on 31 December 2010	60,000	70,000
Less:		2,40,000
1. Accrued Trading Commission as on 31 December 2010	15,000
2. Advance Trading Commission as on 1 January 2010	45,000	60,000
		1,80,000

16.4.2 Account Form

16.5 CALCULATION OF CASH OUTFLOW ON PURCHASES—PURCHASES INCLUDE BOTH CASH AND CREDIT PURCHASES

Credit Purchases:

 

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 figure)

Illustration 16.5

Calculate cash outflow to creditors from the following.

 

Total Purchases	:	1,80,000
Cash Purchases	:	50% of Credit Purchases
Opening Creditors	:	5000
Closing Creditors	:	20,000
Purchase Returns	:	25,000
Discount (Received)	:	10,000

Solution

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

Cash purchase is given as 50% of credit purchase

So, cash purchase = x/2

Total Purchases = Cash Purchase + Credit Purchase

Particulars
Opening Balance of Creditors		5,000
Add: Credit Purchases		1,20,000
Less:		1,25,000
(i) Closing Balance of Creditors	(20,000)
(ii) Discount Received	(1 0,000)
(iii) Purchase Returns	(25,000)	(55,000)
Cash Outflow to Creditors		70,000

Illustration 16.6

Complete cash outflow to creditors from the following.

 

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 purchase will have to be calculated first.

For this, total purchase is calculated from the figures.

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

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

Then, Credit Purchases = Total Purchases – Cash Purchases

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

16.6 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 at the beginning and (ii) prepaid at the end have to be added (given in P & L A/c)
Step 2:	(i) Amount outstanding at the end and (ii) prepaid at the beginning have to be deducted from P & L A/c.
Step 3:	Net figure arrived will be the 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.

Such expenses are:

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

1. Proposed divided
2. Provision for taxation
3. Transfers to general reserves

Note 3: All items related to investing activities and financing activities are ignored because they are taken into calculation of cash flow from investing or financing activities. Examples: Profit/loss on sale of fixed assets.

Illustration 16.7

Compare cash outflow on business expenses from the following (taken from P & L A/c).

 

Expenses Occurred During the Year 2010	:	25,000
Opening Outstanding Expenses	:	3,000
Closing Outstanding Expenses	:	5,000
Opening Prepaid Expenses	:	4,000
Closing Prepaid Expenses	:	2,500

Solution

 

Particulars
Expenses Incurred During the Year		25,000
Add:    Opening Outstanding Expenses	3,000
Closing Prepaid Expenses	2,500	5,500
		30,500
Less:    Closing Outstanding Expenses	(5,000)
Opening Prepaid Expenses	(4,000)	(9,000)
Cash Outflow Expenses		21,500

16.6.1 Calculation of Cash from Operating Activities—Direct Method

Illustration 16.8

Calculate cash flow from the following data by direct method.

 

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
Received from Debtors	:	15,000
Paid to Creditors	:	5,000
and Salaries Paid	:	30,000
Expenses Paid	:	10,000
Expenses Paid	:	8,000
Claim for Tsunami Loss	:	35,000

Solution

 

Particulars
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
Cash Paid to Creditors	5,000
Cash Purchases	3,00,000
Commission Paid	15,000
Rent Paid	1 2,000
Wages and Salaries	30,000
Manufacturing Expenses	10,000
Office Expenses	8,000	(3,80,000)
		2,60,000
C: Cash from Operations Before Tax
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

16.6.2 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 indirect method.

One has to make adjustments on net profit arrived as in P & L A/c.

To put in a nut shell, the net operating profit before working capital changes has to be adjusted as:

Items to be added: Items, which 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, which lead to decrease in cash have to be deducted. They are the following:

1. Increase in current assets
2. Decrease in current liabilities

Illustration 16.9

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:

Now, we have to compute cash flow.

 

Particulars
Net Profit Before Tax		27,000
Adjustments
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 Change		25,000
IT Refund Received		3,000
Net Cash Flow from Operating Activities		28,000

Illustration 16.10

The following is the position of current assets and current liabilities of a company.

Particulars	Balance
	Opening	Closing
Provision for Bad Debts	5000
Short-term Loan	20,000	30,000
Creditors	25,000	20,000
Bills Receivable	30,000	50,000

The company incurred a loss of 70,000 during the year 2010. Calculate cash flows from operating activities by indirect method.

Solution

 

Particulars
Loss During 2010		− (70,000)
Adjustments:
(a) Increase in Current Liabilities Bills Receivable	(20,000)
(b) Decrease in Current Liabilities Creditors	(5000)
Provision for Bad Debts	(5000)	− (30,000)
Cash Used in Operating Activities		− (1,00,000)

Here, students should note that net loss is given, instead of net profit. The result is negative. This means (negative cash from operation) that there is net outflow of cash from operating activities.

Short-term Loan: This is a financing activity. Therefore, it has to be shown under cash flow from financing activities.

Increase in short-term loan is ignored.

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

• Cash received from sale of an item of (non-current) fixed assets is not to be considered as cash flows from investing activities.
• The profit/loss on sale of (non-current) fixed assets is taken into account in calculating cash flow from operating activities.
• While preparing (non-current) fixed assets account much care should be taken.

There are two methods for this:

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 accounts 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.
2. On written down value basis
   1. If there is no such items (depreciation) appear 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 (that means no need to prepare ‘provision for depreciation account’).

Illustration 16.11

 

Particulars	Opening Balance	Closing Balance
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 50,000 having book value of 40,000 was sold for 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. 55,000 − 45,000)	10,000
Adjustment:
Add General Reserve (Difference 30,000 − 25,000)	5,000
Net Profit Before Tax:	15,000

Step 2:

1. Plant account 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

                       = 45,000 – 40,000

                       = 5,000

Step 3:

1. 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’.

 

Step 4: Finally, Computation of Cash Flow From Operating Activities Has to be Worked out as Follows:

 

Particulars
Net Profit Before Tax		15,000
Adjustments:
Add: Non-cash Expenses:
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 Changes		35,000
Add: Decrease in Current Assets Sundry Debtors		10,000
		45,000
Less: Decrease in Current Liabilities: Outstanding Expenses		(3,000)
Cash Flows from Operating Activities		42,000

Illustration 16.12

Calculate cash flows from operating activities from the following information.

Particulars	2008 ()	2009 ()
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 1,00,000 after taking into account the following adjustments:

1. Profit on Sale of Investment  2,000
2. Loss on Sale of Machine          900
3. Goodwill Amortized              3,000
4. Depreciation Charged            2,900

Solution

Cash flow for operating activities

Particulars
Profit for the Year		1,00,000
Items to Be Added Back to Profit
Add: Depreciation	2,900
Goodwill Amortized	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 Working Capital Changes (Operation Profit)		1,04,800
Add : Decrease in Current Assets and Increase in Current Liabilities Accrued Income	300
Income Received in Advance	200
Creditors	2,000	2,500
		1,07,300
Less: Increase in Current Assets and Decrease in Current Liabilities Debtors	(4,000)
Prepaid Expense	(200)
Bills Payable	(2,000)
Outstanding Expenses	(2,000)	(8,700)
Net Cash Flows from Operating Activities		98,600

Illustration 16.13

The net profit of a company before tax is 12,50,000 as on 31 March 2011 after considering the following.

 

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

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

Particulars	31 March 2010 ()	31 March 2011 ()
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

Solution

Calculate cash flow from operating activities:

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 Changes.
Step 4:	With this, the Following Items to be Added: (a) Decrease in the value of current assets (b) 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.

 

Particulars
A: Net Profit Before Tax		12,50,000
B: Add: (Items to Be Added Back to Net Profit)
Depreciation on Fixed Assets	25,000
Goodwill Written off	15,000
Loss on Sale of Machine	12,000	52,000
C: Operating Profit Before Working Capital Changes (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)		13,18,200
Increase in Debtors	8,000
Decrease in Outstanding Expenses	1,000	(9,000)
F: Net Cash Flow from Operating Activities (C + D − E)		13,09,200

16.7 CASH FLOW 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 at the beginning and end of the year.
3. The cash inflow and outflow (i.e. cash flow) of items included in this category of investing activities are as follows:
   1. 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
   2. Receipts (cash inflow)
      1. Cash receipts from disposal of fixed assets
      2. Cash receipts from disposal of shares, warrants or debt instruments of other enterprises and interests in joint ventures
      3. Cash receipts from the repayments of loans and advances made to third parties

16.7.1 Accounting Treatment

16.7.1.1 Fixed Assets

There are two categories as follows:

First category: Fixed assets are shown at written down value (WDV). No additional information will be shown:

1. To compute the missing figures, fixed asset account is opened. 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 case, 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 is recorded.
7. In case of patents, trade marks, goodwill and so on, the amount has to be written off.

Illustration 16.14

A public limited company has plant and machinery whose written down value on 1 April 2010 was 7,50,000 and on 31 March 2011 was 9,00,000. Depreciation for the year was 30,000. At the beginning of the year a part of the plant was sold for 20,000, which had written down value of 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.

 

 

Stage 2:

 

Particulars
Cash Payments to Acquire Plant and Machinery	(1,97,5000)
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: Fixed assets are shown at cost and accumulated depreciation (separately maintained) or provision for depreciation

1. In the 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 following illustration.

Illustration 16.15

From the following information, calculate the cash flow from investing activities.

Particulars	31.03.2010	31.3.2011
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 2010–11, a machine costing 50,000 with accumulated depreciation of 30,000 was sold for 25,000.
2. Patents were written off to the extent of 55,000 and some patents were sold at a profit of 25,000.

Solution

1. Fixed assets value is shown at cost.
2. Accumulated depreciation is also shown.
3. Further information are also in the problem.
4. In this question details on patents are also shown.
5. So, we have to open the following accounts separately to ascertain all the missing figures:
   1. Machinery
   2. Accumulated depreciation account
   3. Patents account

Step 1: Profit on Sale of Machinery is to be Calculated.

Step 2:

 

Step 3:

 

Step 4:

 

Step 5:

 

Particulars
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 16.16

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

 

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

Solution

This is a different problem.

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

 

Particulars
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)

Illustration 16.17

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

Solution

 

Step 1:	First, Cost of Sales is to be Calculated: 50% of the Investments Held at the Beginning = 50/100 × 40,000 = 20,000
	With this, Profit has to be Added to arrive at cash inflow from sale of investment. So sale of investment = 20,000 + 10,000 = 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:

 

Particulars
Inflow from Sale of Investment
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 16.18

Calculate cash flow from investing activities.

Particulars	Opening ()	Closing ()
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 60,000 with accumulated depreciation of 35,000 was sold for 30,000.

Solution

 

Step 1:
	Profit on Sale of Machinery has to be Calculated.
	Profit on Sale of Machinery	= Sale Price – Book Value
	Sale Price is Given	= 30,000
Step 2:	Book Value is to be Found Out.
	Book Value	= (Cost – Accumulated Depreciation)
		= ( 60,000 – 35,000)
		= 25,000
Step 3:	Profit on Sale of Machinery	= 30,000 – 25,000
		= 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.

 

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

16.8 CASH FLOW FINANCING ACTIVITIES

16.8.1 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 preference 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 is the cash flow statement.
2. But in case, when shares are issued at premium, that 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 16.19

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

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

Interest paid on debentures = 18,000

Solution

Note:

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

Particulars
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 16.20

A public limited company extends the following information. Calculate the net cash flow from financing activities.

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

Additional information:

1. Dividend paid is 75,000.
2. Interest paid on debentures is 12,000.
3. During the year 2010–11, the company issued bonus shares in the ratio of 2:1 by capitalizing the reserve.

Solution

Note:

1. Nine per cent debentures shown for the year 2011: proceeds from new issue of debentures—included
2. Twelve per cent debentures redeemed in full—included
3. Interests and dividends paid—included
4. Capital increase due to issue to bonus share not to be included (capitalization of reserve)

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

 

Particulars
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

16.9 ACCOUNTING TREATMENT OF SPECIAL ITEMS

16.9.1 Interest and Dividend

This depends on the following:

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 a financing activity (financial or non-financial)
   2. Dividends received: for financial operating activity.
      1. For non-financial concerns

                     ↓

      2. Investing activity
   3. Interest: both paid and received:
      1. For financial enterprises:

                     ↓

      2. Operating activity
      3. For non-financial enterprises:

         ↓

      • Interest paid → financing activity
      • Interest received → investing activity

These can be represented by a tabular column as follows:

16.9.2 Proposed Dividend

1. Proposed dividend for current year:

   To be added back to current years profit to ascertain cash flow from operating activity.

2. Proposed dividend for previous year:

   To be treated as financing activity.

16.9.3 Interim Dividend

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

16.9.4 Discount on Issue of Shares or Debentures

1. Discounts are to be written off through profit and loss account.
2. Discount written off: To be added back to current year’s profits to ascertain cash from operating activities.
3. Discount allowed during the year: To be treated as financing activity.

16.9.5 Non-cash Transactions

1. As no cash flow takes place, they are not included in the preparation of cash flow statement.
2. But AS-3 (Revised) stipulates that such items have to be disclosed as foot note in the statement.
3. Example
   1. Issue of shares for consideration other than cash
   2. Conversion of debentures into shares

16.9.6 Taxes on Income

1. In general, it is treated as an operating activity
2. But at times, if it is associated with any specific activity, then it may be treated as investing or financing activity, depending upon the nature of transactions.

16.9.7 Extra–ordinary Items

1. Extra-ordinary items have to be classified under appropriate activity. It may be one of the three following activities:
2. Insurance claims
3. Buy-back of shares
4. Compensation—land acquisition

Illustration 16.21

From the following information, calculate the cash flow from (i) investing activities and (ii) financing activities.

Particulars	1 April 2010	31 March 2011
	()	()
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 2010–11, furniture costing 7,000 was sold at a profit of 2,500.

Depreciation on furniture charged during the year amounted to 6,000.

Solution

1. In this question, items related to investing activities and financing activities are shown. So cash flow has to be computed for each separately.
2. Changes in capital and loan are related to financing activities and the remaining items are related to investing activities.

Step 1: First, cash flow from financing activities is to be computed as follows:

 

Particulars
Cash Inflow by Issue of Fresh Capital {i.e. Increase in Capital = 2,75,000 – 2,00,000}	75,000
Cash Outflow on Repayment of Loan {i.e. Loan Decreased: 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

 

Step 2:

 

Step 3:

 

Step 4: Finally, Cash Flow From Investing Activities has to be Ascertained.

 

Particulars
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 the net cash used in investing activities.

Illustration 16.22

An extract from the balance sheets of ABC Ltd.

You are required to prepare the cash flow statement for the year ended on 31 March 2011.

Solution

Computation of cash flow statement of ABC Ltd. for the year ended on 31 March 2011

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)

Illustration 16.23

An extract from the balance sheets of XY Ltd. is as follows.

Additional information:

The final dividend on preference shares and an interim dividend of 60,000 on equity shares were paid on 31 March 2011.

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.
2. First, cash flow from operating activities is calculated.

A: Cash Flow from Operating Activities
Closing Balance as per Profit and Loss A/c		5,50,000
Less: Opening Balance as per Profit and Loss A/c		3,00,000
Net Profit		2,50,000
Add: Proposed Dividend During the year 2010–11	2,50,000
Dividend Paid on Pref. Shares.	60,000
Interim Dividend Paid	60,000	3,70,000
Net Cash from Operating Activities		6,20,000
B: Cash Flow from Financing Activities:
Final Dividend Paid on Equity Shares ( 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 16.24

An extract from the balance sheet of Renu Ltd. is as follows.

Solution

1. In this problem also items related to both operating and financing activities appear.
2. First, discount on issue of shares account and then discount on issue debenture account have to be prepared.
3. 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 on 31 March 2011.

 

1. Cash Flow Operating Activities
Closing Balance as per Profit and Loss A/c	2,50,000
Less: Discount Balance as per Profit and Loss A/c	(2,00,000)
Add: Discount on Issue of Shares (from *1)	1,00,000
Interest on Debentures ( 1,50,000 × 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

Illustration 16.25

An extract from the balance sheet of Verma Ltd. is as follows.

Additional information:

Discount on the issue of debentures written off during the year 2010–11 was 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 in 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 31 March 2011.

 

1. Closing Balance as per Profit and Loss A/c	2,25,000
Less: Opening Balance as per Profit and Loss 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 16.26

From the following information, prepare a cash flow statement for the year ending on 31 March 2011.

Depreciation provided during the year 2010–11 = 10,000

 

[B.Com. (Madras)—Modified]

Solution

Stage I: Cash flow from operating activities has to be calculated first.

Step 1: For this profit as per balance sheet has to be taken as base figure ( 60,000 – 50,000)

Step 2: General Reserve ( 10,000 – 4,000) has to be added

Step 3: Here, Depreciation and Goodwill,

Step 4: With this

1. Increase in current liabilities (here, bills payable only):
   
2. Increase in current assets, here debtors: ( 20,000 – 15,000) and decrease in current liabilities (here, creditors (2010–11) have to be deducted.

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 occur on purchase of machine and 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

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 flow or share capital

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

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 in the following format:

 

B: Cash Flow from Investing Activities
Purchase of Machine (Transferred from Machinery A/c) (Step 1)	(59,000)
Purchase of Building (90,000 . 40,000) (Step 2)	(50,000)	(1,09,000)
Net Cash Used in Investing Activities
C: Cash Flow from Financing Activities
Issue of Share Capital (Stage III, 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

 

16.10 IMPORTANT STEPS (STAGES) IN THE PREPARATION OF CASH FLOW STATEMENT

Stage I: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 to 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 changes.

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 the next stage.

Stage II: Cash flow from investing activities

Purchases of plant, machinery, land and buildings have to be recorded here.

Important note: If depreciation amount is given in additional information, separate account (plants A/c – building A/c) has to be prepared to ascertain the value of its purchase, which is cash flow from investing activities.

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

Figure arrived is termed as ‘net cash from financing activities’.

Stage III: Cash flow from financing activities.

Step 1: Issue of share capital to be recorded.

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’.

Stage IV: Net increase and decrease in cash and cash equivalents

 

Stage V: Cash and cash equivalents at the beginning of the year to be added.

Stage VI: Cash and cash equivalents at the end of the year to be recorded.

Note: This is a simplified form. Only one or two items are shown. Students should practice with this first and then proceed to all the other items mentioned in the standardized format as prescribed by [(AS-3)].

Illustration 16.27

The following is the financial position as on 31 March.

During the year 60,000 was paid as dividend. You are required to prepare cash flow statement as per revised accounting standard [(AS)-3 (Revised)].

Solution

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

 

Profit as on 31 March 2011	: 1,60,000
Profit as on 31 March 2010	: 1,40,000
(Difference) Profit for the Year	: 20,000
Add: Dividend Paid During the Year	: 60,000
*1Net Profit Before Tax and Extraordinary Items	: 80,000*1

 

Particulars
A: Cash Flow from Operating Activities
*1 Net Profit Before Tax and Extraordinary Items (as Calculated Above)	*180,000
Add: Depreciation	1 0,000
Operating Profit Before Working Capital Changes	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

16.11 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:

 

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 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.

1. This shows that the taxes were paid during the year.
2. 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.

1. This amount is to be added to profits.
2. Net profit before tax is to be shown under ‘cash flow from operating activities’.
3. This treatment (adjustment) is done, if tax paid during the year is not given in the problem.
4. 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).

Hint 5: Dividend paid during the year:

Interim dividend for the year is calculated as follows:

1. Net profit for the year is first calculated.
2. This amount is added with opening balance of P & L A/c.
3. 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 adjustment are to be made:

 

Profit at the End of the Period (Closing):
Less: Profit at the Beginning (Opening):	—
Profit of the year:	—
	xx
Appropriations:
Add: 1. Interim Dividend Paid:	—
2. Provision for Tax:	—
Profit Before Tax:	xx

Illustration 16.28

From the following information, prepare a cash flow statement as on 31 March 2009.

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

Solution

Illustration 16.29

From the following balance sheet of Raja Ltd., prepare a cash flow statement as on 31 December 2011.

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

 

Net Profit Before Taxation
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

A: Net Profit Before Tax and Extraordinary Items
Adjustment for
Depreciation on Plant	10,000
Depreciation on Building	60,000
Goodwill Written off	1 6,000	86,000
Operation Profit Before Working Capital Changes		1,10,000
Adjustments for :
Add: Increase in Creditors	12,000
Less: Increase in Debtors	(35,500)
Increase in Stock	(5,000)	(28,500)
Net Cash from Operating Activities		81,500—A
B: Cash Flows from Investing Activities
Purchase of Plant	70,000
Purchase of Building	40,000
Net Cash in Investing Activities		(1,10,000)—B
C: Cash Flow from Financing Activities
Issue of Share Capital	50,000
Redemption of 12% Pref. Share Capital	(25,000)
Net Cash from Financing Activities		25,000—C
Net Decrease in Cash and Cash Equivalents (A + B + C)		(3,500)
Cash and Cash Equivalents at the Beginning of the Year		(12,500)
Cash and Cash Equivalents at the End of the Year		9,000

Illustration 16.30

From the following balance sheet of Vivek Ltd., prepare a cash flow statement.

 

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

Solution

 

B: Cash Flows from Investing Activities

Plant Purchased		(60,000)
Building Purchased		(30,000)
Net Cash in Investing Activities		90,000)—B
C: Cash Flow from Financing Activities
Proceeds from Issue of Equity Shares		50,000
Redemption of Pref. Shares		(10,000)
Net Cash from Financing Activities		40,000—C
D: Net Increase in Cash and Cash Equivalents (A + B + C)		3,000
( 52,000 + ( −90,000) + 40,000)
E: Cash and Cash Equivalents at the Beginning of the Year: Cash-in-Hand		15,000
Cash and Cash Equivalents at the End of the Year		17,000

Illustration 16.31

What is meant by investing activities? From the following particulars prepare cash flows from investing activities.

 

	Purchased	Sold
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	20,000

Investment Purposes and Was Let out for Commercial Use and Rent Received

Solution

The acquisition and disposal of long-term assets (not included in cash equivalents) is called investing activities.

 

Particulars
Purchase of Machinery	(4,00,000)
Proceeds from Sale of Machinery	2,00,000
Purchase on Investments	(2,00,000)
Proceeds from Sale of Investments	3,00,000
Purchase of Goodwill	(1,00,000)
Proceeds from Sales 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)

This has to be deducted from ( 2,00,000 + 3,00,000 + 1,50,000 + 10,000 + 5,000 + 20,000 = 6,85,000. Again (– 7,00,000 + 6,85,000) = net result (– 15,000). So cash is used. Cash flows out on investing activities.

Illustration 16.32

Calculate cash flows from operating activities from the following information.

Particulars	2010	2011
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
Profit and Loss A/c	80,000	90,000

Solution

Calculation of Net Cash Flows from Operating Activities

Particulars
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 16.33

From the following information prepare a cash flow statement.

 

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

Solution

Cash Flow Statement for the Year Ended

Particulars
A: Cash Flows from Operating Activities
Net Profit for the Year	20,000
Add: Decrease in Debtors	5,000
Increase in Creditors	7,000
Net Cash Flows from Operating Activities		32,000—A
B: Cash Flows from Investing Activities
Sale of Fixed Assets	20,000
Net Cash from Investing Activities		20,000—B
C: Cash Flows from Financing Activities
Redemption of Debtors	(50,000)
Net Cash from Financing Activities		(50,000)—C
D: Net Increase in Cash and Cash Equivalents (A + B + C)		2,000
(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 16.34

Prepare a cash flow statement on the basis of the information given in the balance sheet of P.S. Ltd.

Solution

 

Particulars
A: Cash Flows 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:
Amortization of Goodwill	8,000
Investment on Long-term Loan (Debtors = 1,00,000 × 12/100 × 1)	12,000	20,000
Operating Profit Before Working Capital Charges		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 a Stock	(20,000)	(45,000)
Net Cash from Operating Activities		95,000—A
B: Cash Flows from Investing Activities
Purchase of Land and Building	(80,000)
Purchase of Machinery	(30,000)	(1,10,000)
Net Cash Used in Financing Activities		(1,10,000)—B
C: Cash Flows 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—C
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 16.35

Prepare a cash flow statement of Bulbul Ltd. on the basis of the information given in the balance sheets.

Solution

 

Particulars
A: Cash Flows from Operating Activities:
Closing Balance of General Reserve	1,80,000
Less : Operating Balance of General Reserve	(1,00,000)
Net Profit Before Tax		80,000
Add: Items to Be Added:
Amortization of Goodwill	20,000
Invest on Debenture	24,000	44,000
Operating Profit Before Working Capital Charges		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
		2,74,000
Less: Increase in Current Assets and Decrease in Current Liabilities:
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 Flows 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 (A − B + C)		25,000
( 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 16.36

The following balances appeared in plant A/c and accumulated depreciation A/c in the books of Bhart Ltd.

 

	As on 31 March 2010	As on 31 March 2011
Plant	7,50,000	9,70,000
Accumulated Depreciation	1,80,000	2,40,000

 

Additional information:

 

Plant costing 1,45,000 accumulated depreciation thereon 70,000 was sold for 35,000. You are required to do the following:

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.

Solution

Note:

1. Students have to prepare
   1. Plant account
   2. 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.

1. Sale of plant: Given in additional information: 35,000: Inflow of cash: ‘investing activities’
2. Purchase of plant: Balancing figure in the plant account: 3,65,000: Outflow of cash: ‘investing activities’
3. Loss on sale of plant: (From plant account) 1,45,000 – 70.000 – 35,000 = 40,000 will be added back to net profit of the year while preparing cash flow statement.
4. Depreciation charged: 1,30,000 (balancing figure in accumulated depreciation account) will also have to be added to net profit.

(Model: Both direct and indirect methods—preparation of cash flow statement)

Illustration 16.37

Comparative balance sheets for 2009 and 2010 and income statement of for 2010 of PQR Ltd. are presented as follows.

 

	2010	2009
Assets:
Cash	27,000	36,000
Short-term Investments	6,000	3,000
Debtors	2,85,000	2,37,000
Provision for Doubtful Debts	(9,000)	(6,000)
Inventory	3,09,000	2,76,000
Prepaid Expenses	18,000	15,000
Land	2,07,000	1,98,000
Machinery and Equipment	5,16,000	4,68,000
Provision for Depreciation	(3,39,000)	(3,06,000)
	10,20,000	9,21,000
Liabilities:
Creditors	1,98,000	2,34,000
Dividends Payable	6,000	—
Income Tax Payable	9,000	15,000
Long-term debt	2,25,000	1,26,000
Equity Share Capital	78,000	78,000
P & L Appropriation Account	5,04,000	4,68,000
	10,20,000	9,21,000

Particulars
Net Sales Revenue	18,00,000
Cost of Good Sold	(15,00,000)
Gross Margin	3,00,000O
Operating Expenses	(1,98,000)
Operating Income	1,02,000
Indirect Expenses	(12,000)
Income Before Tax	90,000
Lawsuit Compensation	15,000
	1,05,000
Income Tax	(51,000)
Net Income	54,000

The following additional information is available:

1. Dividends declared during 2010 is 18,000
2. (ii) Market price per share on 31 December 2010 is 14.50
3. Equipment worth 48,000 was acquired by the issuance of long-term note 30,000 and by paying cash of 18,000
4. Land was acquired for 9,000
5. There were no accruals and prepaid amounts of interest.

Instructions:

1. Prepare a cash flow statement [As per AS-3 (Revised)]
2. Short-term investments are assumed to be a part of cash and cash equivalents

Solution

I—Indirect Method

 

Particulars
A: Cash Flows from Operating Activities:
Net Income Before Tax and Extraordinary Items Adjustments for:	90,000
Depreciation	33,000
Interest Expense	12,000
Provision for Doubtful Debts	3,000
Operating Profit Before Working Capital Changes	1,38,000
Increase in Debtors	(48,000)
Increase in Inventories	(33,000)
Increase in Prepaid Expenses	(3,000)
Decrease in Creditors	(36,000)
Cash Generated from Operations	18,000
Taxes Paid	(57,000)
Cash Flow from Extraordinary Item	(39,000)
Law Suit Compensation	15,000
Net Cash Used in Operating Activities		(24,000)
B: Cash Flows from Investing Activities:
Purchase of Land	(9,000)
Purchase of Equipment	(18,000)
Net Cash Used in Investing Activities		(27,000)
C: Cash Flows from Financing Activities:
Proceeds from Long-term Borrowings	69,000
Dividends Paid	(1 2,000)
Interest Paid	(1 2,000)
Net Cash from Financing Activities		45,000
Net Decrease in Cash and Cash Equivalents: (A + B + C)		(6,000)
Cash and Cash Equivalents at the Beginning		39,000
Cash and Cash Equivalents at the End		33,000
Significant Non-cash Transaction
Purchase of Equipment for Long-term Note: 30,000

II—Direct Method

 

Particulars
A: Cash Flows from Operating Activities
Cash Receipts from Customers	1752,000
Cash Paid to Suppliers and Employees	17,34,000
Cash Inflows from Operations	18,000
Income Tax Paid	(57,000)
Cash Flow from Extraordinary Item	(39,000)
Law Suit Compensation	15,000
Net Cash Used in Operating Activities		(24,000)
B: Cash Flows from Investing Activities:
Purchase of Land	(9,000)
Purchase of Equipment	(18,000)
Net Cash Used in Investing Activities		(27,000)
C: Cash Flows from Financing Activities:
Proceeds from Long-term Borrowings	69,000
Dividends Paid	(12,000)
Interest Paid	(12,000)
Net Cash from Financing Activities.		45,000
Net Decrease in Cash and Cash Equivalents (A + B + C)		(6,000)
Cash and Cash Equivalents at the Beginning		29,000
Cash and Cash Equivalents at the End		33,000

Significant Non-cash Transaction

Purchase of Equipment for Long-term Note 30,000

Calculations
1. Calculation of Cash Receipts from Customers:
Sales Revenue	18,00,000
Add: Sundry Debtors at the Beginning	2,37,000
	20,37,000
Less: Sundry Debtors at the End	2,85,000
	17,52,000
2. Calculation of Cash Paid to Suppliers and Employees:
Cost of Goods Sold	15,00,000
Operating Expenses	1,62,000
[ 1,98,000 − 33,000 (Depreciation) − 3,000 (Provision for Doubtful Debts)
	16,62,000
Add: Creditors at the Beginning
Payments at the End	2,34,000
Inventories at the End	18,000
	22,23,000
Less: Creditors at the End	(1,98,000)
Payments at the Beginning	(15,000)
Inventories at the Beginning	(2,76,000)
	17,34,000
3. Calculation of IT Paid:
Income Tax Expense	51,000
Add: IT Liabilities at the Beginning	15,000
	66,000
Less: IT Liabilities at the End	(9,000)
	57,000
4. Calculation of Dividend Paid:
Amount Appropriated	18,000
Less: Liability at the End	6,000
	12,000

Cash flow statement 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, which has turnover of more than 50 crores in a financial year.

Main ‘sources’ of cash inflows are the following:

1. Proceeds from sale of long-term assets
2. Long-term borrowings
3. Cash receipts from raising additional share capital
4. Business operations
5. Cash receipts from non-business operations (e.g. investment, dividends, etc.)

Main ‘uses of cash’ (or) cash outflows are as follows:

1. Payment of dividend interest
2. Purchase of assets
3. Redemption of debentures
4. Repayment of borrowings

The cash flow statement shows cash flows (inflow and outflow) in terms of three components as per accounting standard-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, etc.) and cash outflow (cash purchases, cash paid to suppliers and employees and cash operating expenses, income tax, etc.)

Major investing activities are cash inflows: sale of fixed assets, investments, interest and dividends, received and cash outflows: purchase of fixed assets and investments.

Major financing activities are 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 assets 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 assess claims on future cash flows.

Important steps to prepare cash flow statement:

 

Step 1:	Cash flow from operating activities is computed either by direct or indirect method.
Step 2:	Net cash flow from investing activities is calculated.
Step 3:	Net cash flow from financing activities is determined.
Step 4:	Net flow, i.e. net increase or decrease in cash or cash equivalents is determined from Steps 1–3.
Step 5:	Cash and cash equivalent balance at the beginning of the period is added to the net cash flows determined in Step 4.
Step 6:	The amount arrived in Step 4 must be equal to cash and cash equivalents balance at the end of the year.

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

Cash Flow Statements: A statement that shows the flow of cash and equivalents during a period.

Cash Flow: Inflow and outflow of cash and equivalents.

Cash: Cash constitutes cash on banks.

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.

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

Financing Activities: Activities that result in change in size and composition of the owners’ capital and borrowing of the enterprises.

Indirect Method: The method that adjusts net income to reveal only.

Investing Activities: Activities that result in change in size and composition of fixed assets and long-term investments.

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

QUESTION BANK

 

I: State whether the following statements are true or false

1. Inflow of cash refers to all transactions, which lead to increase in cash and cash equivalents.
2. Outflow of cash refers to all transactions, which lead to decrease in cash and cash equivalents.
3. Non-cash transactions are covered in cash flow statements.
4. Cash sales is cash outflow.
5. Cash receipts from debtors is a financing activity.
6. Cash payment relating to a future contract is an investing activity.
7. Cash receipts from debtors is treated as cash inflow for operating activities.
8. Cash receipts on interest and dividend is treated as cash inflow for financing activities.
9. Cash proceeds from issuing share is treated as cash inflow from financing activities.
10. Cash receipts from sale of fixed assets is 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 an operating activity.
15. Repayment of any finance liability is a financing activity.
16. Cash proceeds from long-term borrowings is an investing activity.
17. Cash receipts from royalties is an 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 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

II: Fill in the blanks with apt word(s)

1. Cash flow refers to the movement both inflow and outflow of_____ and_____ during a period.
2. Cash flow statement is a_____ which 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 that change is_____and______.
6. Cash flow statement (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 in 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 are 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 activities
10. increases
11. financing activities
12. decreases
13. financing activities
14. operating
15. investing

III: Multiple choice questions—Choose the correct 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)

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
    1. operating,
    2. investing,
    3. financing and
    4. 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. Explain cash flow statement. Elucidate the main objectives of cash flow statement.
2. ‘The analysis of cash flow statement in any organization 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:
   1. cash equivalents
   2. cash flow (including movement between the items of cash or cash equivalents)
   3. operating activities
   4. investing activities
   5. 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.
   1. cash inflow from debtors (sales)
   2. cash inflow from operating income
   3. cash outflow to creditors (purchases)
   4. cash outflow on expenses (both outstanding and paid in advance)
   5. 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:
   1. net profit before tax
   2. non-cash and non-operating items
   3. changes in current assets and current liabilities
   4. fixed assets
8. Explain the accounting treatment for the following while preparing cash flow from investing activities.
   1. fixed assets (shown at written down value)
   2. fixed assets (shown at cost and accumulated depreciation is separately maintained)
9. Explain the accounting treatment for the following items while preparing cash flow from financing activities.
   1. dividend (proposed dividend and interim dividend)
   2. taxes on income
   3. discount on issue of shares/debentures (amount of discount written 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.

 

Particular	2010	2011
Stock	60,000	50,000
Debtors	25,000	23,000
Creditors	32,000	28,000
Expenses	3,500	4,500
Outstanding
Bills Payable	35,000	22,000
Accrued Income	8,000	9,000
Profit and Loss A/c	80,000	90,000

[Ans.: Net cash flow from operating activities: 5,000]

2. X Ltd. made a profit of 1,00,000 after charging depreciation of 20,000 on assets and a transfer to general reserve of 30,000. The goodwill written off was 7,000 and the gain on sale of machineries was 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 6,000; creditors an increase of 10,000. Prepaid expenses and increase of 200; bills receivable a decrease of 3,000; bills payable at decrease of 4,000; and outstanding expenses a decrease of 2,000. Ascertain cash flow from operating activities.

[Ans.: Net cash flow from operating activities: 1,54,800]

3. X Ltd. made a profit of 1,20,000 after charging depreciation of ? 20,000 on assets and a transfer to general reserve of 30,000. The goodwill written off was 7,000 and the gain on sale of the machineries was 3,000. Changes in the value of current assets and liabilities at the end of the year:

Debtors showed an increase of 6,000; creditors an increase of 10,000; prepaid expenses an increase of 200; bills receivable a decrease of 3,000; bills payable a decrease of 4,000 and outstanding expenses a decrease of 2,000.

Ascertain cash flow from operating activities.

[Ans.: Net cash from operating activities: 1,74,800]

4. On 31 March 2011 Y Ltd. made a profit of 1,25,000 after considering the following.

 

Depreciation on Billings	25,000
Depreciation on Plant and	45,000
Machinery
Amortization or Goodwill	20,000
Gain on Sale of Machinery	10,000

The Current Assets and Current Liabilities:

	1.4.2010	31.3.2011
Accounts Receivable	35,000	45,000
Stock on Hand	75,000	69,000
Cash on 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

[Ans.: Net cash flow from operating activities: 1,98,000]

5. Calculate net cash flows from operating activities from the following details.

 

Profits Earned During the Year 2011	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	2010	2011
Accounts Receivable	35,000	45,000
Debtors	10,000	15,000
Bills Receivable	7,000	5,000
Stock	15,000	18,000
Prepaid Expenses	2,000	3,000
Bills Expenses	15,000	25,000
Creditors	20,000	18,000
Outstanding Expenses	3,000	4,000

[Ans.: Net cash from operating activities: 87,000

6. Y Ltd. made a net profit of 15,000 for the year ending on 31 March 2011 after taking the following into consideration.

 

Depreciation on Plant and Machinery	15,000
Depreciation on Buildings	45,000
Amortization 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	1.4.2010	31.3.2011
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

[Ans.: Cash flow from operating activities: 97,000]

7. The following balances appeared in machinery account and accumulated depreciation account in the books of XYZ Ltd.

 

	31 March 2011	31.3.2011
Machinery Account A/c	17,78,985	26,55,450
Accumulated	3,40,795	4,75,690
Depreciation A/c

Additional Information:

A machinery costing 2,60,000 on which accumulated depreciation 1,00,000 was sold for 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?

[Ans.:

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

8. Calculate the cash flow from operating activities form the following information.

 

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 Exp. Written off	10,000

 

Particulars	31 March 2008	31 March 2009
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

[Ans.: Net cash flow from operating activities: 97,000]

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

[Ans : (i) Net profit before tax and extraordinary items:30,000

(ii) Net cash flow operating activities:3,600]

10. From the following summarized balance sheets of a company calculate cash flow from operating activities.

[Ans.: Cash flow from operating activities: 13,600]

11. From the following statement compute cash generated from operating activities. Statement of profit for the year ending on 31 March 2011.

[Ans.: Cash generated from operating activities: 55,000]

12. From the following summarized balance sheets calculate flow from operating activities.

[Ans.: Cash flow from operating activities: 10,000]

13. A company had the following balances; investment at the beginning of the period is 46,000. Investment at the end of the period is 30,000. During the year, the company sold 60% of its investment held at the beginning of the period at a profit of 10,000. Calculate the cash flow from investing activities.

[Ans.: Cash flow from investing activities: 26,000]

[Hint: Investment A/c (Bal. Fig.): 11,600]

14. From the following information calculate cash flow from investing activities.

Investment at the beginning of the period:               25,000

Investment at the end of the period:                       24,000

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

[Ans.: Cash flow from investing activities: 20,000]

[Hint: Purchase value { 9,000}]

15. From the following particulars calculate cash flow from investing activities.

 

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

[Ans.: Net cash used in investing activities: 3,92,000]

16. From the following information calculate cash flow from investing activities.

 

	31 March 2010	31 March 2011
Machinery	5,00,000	1,00,000
Accumulated	1,00,000	1,20,000
Depreciation
Patent Rights	3,00,000	1,80,000

Additional Information:

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

[Ans.: Net cash flow from investing activities: 40,000]

[Hint: Balancing figures: machinery A/c is 1,00,000, accumulated depreciation A/c is 50,000 and patents account is 1,15,000]

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

[Ans.: Net cash flow from investing activities: 1,76,000]

[Hint: Plant & machinery A/c Bal. Fig.: 1,96,000]

18. Calculate cash flow from financial activities from the following information.

 

	31 March 2010	31 March 2010
Equity Share Capital	6,00,000	8,00,000
9% Debentures	2,00,000	1,00,000
Securities Premium	50,000	75,000

Additional Information:

Interest paid on debentures is 18,000.

[Ans.: Net cash from financing activities: 1,07,000]

19. A public limited company provides the following figures. Calculate the net cash flow from financing activities.

 

	31 March 2010	31 March 2010
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: 15,000
2. Dividend paid: 40,000
3. During the year 2010–11, the company issued bonus shares in the ratio of 2:1 by capitalizing the reserve.

[Ans.: Net cash flow financing activities: 95,000]

20. Calculate cash flow from (i) investing activities and (ii) financing activities from the following information.

 

	31 March 2010	31 March 2010
Furniture (at Cost)	30,000	40,000
Accumulated	7,000	10,000
Depreciations
Furniture
Capital	1,50,000	2,25,000
Loan from Bank	40,000	25,000

During the year 2010–11, furniture costing 5,000 was sold at a profit of 3,000. Depreciation charged during the year was 6,000.

[Ans.

1. Net cash from financing activities: 60,000
2. Net cash flow from investing activities: 10,000]

[Hint: Sale price: 5,000; Furniture purchased: 15,000; Accumulated depreciation: 3,000]

21. From the following summary cash account of XYZ Ltd. you are required to prepare a cash flow statement for the year ended on 31 March 2011 in accordance with AS-3.

Summary Cash Account for the Year Ended on 31 March 2011

[Ans.:

1. Net cash from operating activities: 2,50,000
2. Net cash used in investing activities: ( 1,00,000)
3. Net cash used in financing activities: ( 50,000)]

22. The balance sheet of J.K. Ltd. as on 31 March 2010 and 31 March 2011 are as follows:

Additional Information:

An old machine was sold for 20,000, which had a written down value of 10,000; dividend paid during the year was 16,000 and depreciation charged to profit and loss account for the year amounted to 10,000. Prepare the cash flow statement.

[Ans.:

1. Cash flow from operating activities: 36,000
2. Cash used in investing activities: 32,000
3. Cash flow from financing activities: 4,000]

 

 

23. X Ltd. gives you the following information for the year ended on 31 March 2011:

1. Sales for the year totalled is 48,00,000. The Company sells goods for cash only.
2. Cost of goods sold was 60% of the sales. Closing inventory was higher than the opening inventory by 21,500. Trade creditors on 31 March 2011 exceeded those on 31 March 2010 by 11,500.
3. Net profit before tax was 6,90,000. Tax paid amounted to 3,50,000. Depreciation on fixed assets for the year was 1,57,000, whereas other expenses totalled 10,72,500. Outstanding expenses on 31 March 2010 and 31 March 2011 totalled 41,000 and 45,000, respectively.
4. New machinery and furniture costing 5,13,750 in all were purchased.
5. A right issue was made of 1,000 equity shares of 250 each at a premium of 75 per share. The entire money was received along the applications.
6. Dividends and corporate dividend tax totalling 2,03,500 were paid.
7. Cash in hand and at bank as on 31 March 2010 totalled 1,06,900.

You are required to prepare cash flow statement using indirect method.

 

[B.Com (Hons)—Delhi 2007, Modified]

[Ans.: Net cash from operating activities: 4,92,000

Net cash used in investing activities: (5,13,750)

Net cash from financing activities: 1,21,500]

24. The following data were provided by the accounting records of X Ltd. as the year ended on 31 March 2011:

 

Sales	40,00,000
Cost of Goods Sold	(24,00,000)
Gross Profit	16,00,000
Operating Expenses	(2,00,000)
(Including Depreciation)
Indirect Expenses Paid	(1,20,000)
Interest Income Received	40,000
Gain on Sale of Investments	60,000
Loss on Sale of Plant	(20,000)
Net Profit Before Tax	7,60,000
Provision for Income Tax	(2,80,000)
Net Profit After Tax	4,80,000

 

Assets	As on 31 March 2011	As on 31 March 2010
Plant	28,00,000	20,00,000
Less: Accumulated Depreciation	(4,00,000)	(3,20,000)
	24,00,000	16,80,000
Investment (Long-term)	4,00,000	6,40,000
Inventory	6,00,000	4,40,000
Accounts Receivable	1,80,000	2,20,000
Cash at Bank	2,00,000	1,80,000
	37,80,000	31,60,000
Liabilities
Equity Share Capital	16,00,000	8,00,000
Securities Premium	80,000	-
General Reserve	6,00,000	5,20,000
P & L A/c	1,40,000	32,000
Debentures	10,00,000	14,00,000
Accounts Payable	2,40,000	2,08,000
Provision for Tax	1,20,000	2,00,000
	37,80,000	31,60,000

Additional Information:

1. Sol investment for 3,00,000.
2. Issued equity shares of 10 each at 10% premium.
3. Sold plant that cost 48,000 with accumulated depreciation of 8,000 for 20,000.
4. Paid dividend.

You are required to prepare cash flow statement as per AS-3 (Revised)

 

[B.Com (Hons)—Delhi 2008, Modified]

[Ans : Net cash from operating activities:

 

4,40,000

Net cash used in investing activities: (4,88,000)

Net cash from financing activities: 68,000 Net increase in cash and cash equivalents: 20,000]

25. The data given ahead were provided by the accounting records of Shuchi diamonds Ltd.:

 

(for the Year Ended on 31 March 2010)

 

Sales		3,49,000
Cost of Goods Sold		(2,60,000)
Gross Margin		89,000
Operating Expenses		(73,500)
(Including Depreciation Expenses of 18,500)		15,500
Other Income (Expenses):
Interest Expenses Paid	(11,500)
Interest Income Received	3,000
Gain on Sale of Investments	6,000
Loss on Sale of Plant	(1,500)	(4,000)
Provision Before Tax		11,500
Provision for tax		(3,500)
Provision After Tax		8,000

 

Comparative Balance Sheets (as on 31 March)

Analysis of selected transactions and accounts during 2010–11:

1. Sold investments costing 45,000 for 51,000. Some investments were purchased for cash.
2. Sold plant assets that cost 5,000 with accumulated depreciation of 1,000 for 2,500.
3. Issued 50,000 of bonds at face value in exchange for plant assets on 31 March 2011. Some plant assets were purchased for cash also.
4. Repaid 25,000 of bonds as face value as majority.
5. Issued 7,500 shares of 10 each for cash at par.
6. Paid cash dividends 4,000—ignore corporate dividend tax.

Prepare cash flow statement for the year ended on 31 March 2011 as per AS-(3) (Revised) using indirect method.

 

[B.Com (Hons)—Delhi 2009, Modified]

[Ans: Net cash from operating activities: 23,500

Net cash used in investing activities: (42,500)

Net cash from financing activities: 34,500]

26. From the information given below relating to Pooja Ltd., you are required to prepare a cash flow statement:

Assets	31 March 2011	31 March 2010
Freehold Land and Building	50,000	—
at Cost
Less: Depreciation	(10,000)	—
Leasehold Land and Building	—	25,000
Less: Depreciation	—	(500)
Plant and Equipment at Cost	1,50,000	6,00,000
Less: Depreciation	(1,25,000)	(1,60,000)
Investment at Cost	30,000	—
Stock in Hand	1,50,000	1,00,000
Debtors	50,000	50,000
Bank	5,000	—
Discount on Issue of	—	1,250
Debentures
	3,00,000	6,15,750
Liabilities and Capital
Preference Shares of 10	—	25,000
Ordinary Shares of 10	1,00,000	1,60,000
Capital Redemption Reserve	20,000	—
Account
Securities Premium Account	10,000	20,000
Surplus on Sale of:
Freehold Land and Building	—	60,000
Investment	—	10,000
Govt. Grants	15,000	25,000
Retained Profits	1,05,000	1,25,000
Debentures	—	50,000
Loan from UTI for 5 years	—	25,000
Creditors for Goods	20,000	35,000
Bank Overdraft	—	47,000
Taxation	30,000	30,000
Acceptance Credit	—	3,750
	3,00,000	6,15,750

Additional information:

1. No plan and equipment was sold or scrapped during the year.
2. On 1 January 2011, The freehold land and building were sold and leased back from the purchaser.
3. A bonus issue of ordinary shares on the basis of one new share for every five held has been made. The capital redemption reserve was used for this purpose.
4. The preference shares were issued for cash at par.
5. An issue of 10 ordinary shares was made at a price of 12.50 per share.
6. Debentures were issued at a discount of 10%.
7. No dividends were paid or proposed for the year.
8. Explain briefly why the cash at bank has become nil although the retained earnings have registered an increase over the last year.

[B.com (Hons)—Delhi 2009, Modified]

[Ans: Net cash from operating activities: 1,28,000

Net cash used in investing activities: (3,35,000)

Net cash from financing activities: 2,02,000)]

27. The following are the balance sheets of Subhikishu Ltd. as on 31 March 2010 and 31 March 2011, respectively.

Additional Information:

1. Debentures were redeemed at a premium of 10% on 1 October 2010.
2. Investments were sold at a profit of 50% on cost.
3. During the year a machine costing 2,50,000 (accumulated depreciation of 1,00,000) was sold at a profit of 20% on book value.
4. During the year building costing 5,25,000 was purchased by issue of 10,000 equity shares of 10 each at a premium of 1 per share and balance by cash.
5. A building costing 2,50,000 (with accumulated depreciation of 1,75,000) was sold for 85,000.

Prepare cash flow statement as per AS-3 (Revised). Show all working clearly.

 

[B.Com (Hons)—Delhi 2010, Modified]

[Ans : Cash from operating activities: 6,85,000

Cash used in investing activities: (2,66,250)

Cash used in financing activities: (3,31,250)]

28. From the following details relating to the account of Grow More Ltd. prepare cash flow statement:

	31 March 2011	31 March 2010
Assets:
Plant and Machinery	14,00,000	10,00,000
Land and Building	12,00,000	8,00,000
Investments	2,00,000	—
Sundry Debtors	10,00,000	14,00,000
Stock	8,00,000	4,00,000
Cash on Hand/Bank	4,00,000	4,00,000
	50,00,000	40,00,000
Liabilities:
Share Capital	20,00,000	16,00,000
Reserve	4,00,000	3,00,000
P & L A/c	2,00,000	1,20,000
Debentures	4,00,000	—
Provision for Taxation	2,00,000	1,40,000
Proposed Dividend	4,00,000	2,00,000
Sundry Creditors	14,00,000	16,40,000
	50,00,000	40,00,000

1. Depreciation at 25% was charged on the opening value of plant and machinery.
2. During the year one old machine costing 1,00,000 (WDV 40,000) was sold for 70,000.
3. 1,00,000 was paid towards income tax during the year.
4. Building under construction was not subject to any depreciation.

Prepare cash flow statement.

[C.A. (Final)—November 2005, Modified]

[Ans: Net cash from operating activities: 6,20,000

Net cash used in investing activities: (12,20,000)

Net cash from financing activities: 6,00,000]

29. From the summary cash account of X Ltd. prepare a cash flow statement for the year ended on 31 March 2011 in accordance with AS-3 (Revised) using direct and indirect methods. The company does not have any equivalents:

 

[C.A. (Final)—Modified]

[Ans: Net cash from operating activities: 15,00,000

Net cash used in investing activities (6,00,000)

Net cash from financing activities: (3,00,000)

[NOTE: Answers will be the same under both the methods.]

30 The balance sheet of New Light Ltd. for the years ended on 31 March 2010 and 2011 are as follows:

Additional Information:

1. The company sold one fixed asset for 2,00,000. The cost of which was 4,00,000 and the depreciation provided on it was 1,60,000.
2. The company also decided to write off another fixed asset costing 1,12,000 on which depreciation amounting to 80,000 has been provided.
3. Depreciation on fixed assets provided 7,20,000.
4. Company sold some investments at a profit of 80,000, which were credited to capital reserve.
5. Debentures and preference share capital redeemed at 5% premium.
6. Company decided to value stock as cost, whereas previously the practice was to value stock at cost less than 10%. The stock according to books on 31 March 2010 was 4,32,000. The stock on 31 March 2011 was correctly valued at 6,00,000.

Prepare cash flow statement as per revised accounting standard-3 by indirect method.

 

[C.A. (Final) 2003—Modified]

[Ans: Net cash from operating activities: 11,84,000

Net cash used in investing activities:

(12,72,000)

Net cash from financing activities: (88,000)]

31. XYZ Ltd. gives you the following information. You are required to prepare a cash flow statement by using indirect methods as per AS-3 for the year ended on 31 March 2011:

 

Additional Information:

1. Net profit for the year ended on 31 March 2011, after charging depreciation of 90,000 is 11,20,000.
2. Debtors of 1,15,000 were determined to be worthless and were written off against the provisions for doubtful debts account during the year.
3. XYZ Ltd. declared divided of 6,00,000 for the year 2010–11.

[C.A. (Final)—2004, Modified]

[Ans: Net cash from operating activities: 9,80,000

Net cash used in investing activities: (6,70,000)

Net cash used in financing activities: (nil)]

32. Nee Ltd. had the following figures as on 1 April 2010:

 

Fixed Assets—Cost	18,00,000
Less: Depreciation	6,30,000
	11,70,000
Bank Balance	1,05,000
Current Assets,	7,50,000
other than Bank Balance
Current Liabilities	3,00,000
Capital (Shares of 10 Each)	12,00,000

The company made the following estimates:

1. The profit would be 1,74,000 after depreciation of 1,80,000.
2. The company will acquire fixed assets costing 3,00,000 after selling one machine for 60,000 costing 1,50,000 and on which depreciation provided will amount to 1,05,000.
3. Current assets and current liabilities, other than bank balance, at the end of March 2011 are expected to be 8,85,000 and 3,90,000, respectively.
4. The company will pay dividend of 10% and corporate dividend tax thereon of 11%.

At the end of the accounting year, the company sends all the cash in hand to the bank.

Prepare a cash flow statement for the year ended on 31 March 2011 and estimate the bank balance or overdraft as on that date.

[Ans: Net cash from operating activities: 2,94,000

Net cash used in investing activities: (2,40,000)

Net cash from financing activities: 1,33,200

Bank balance as on 31 March 2011: 25,800