LEARNING OBJECTIVES
i) To understand the meaning of cash flow
statement
ii) To understand the meaning of cash, cash
funds and cash equivalents.
iii)
To calculate operating profit and cash flow from
operating activities
iv)
To understand operating and non-operating expenses and
incomes.
v) To calculate cash flow from operating,
investing and financing activities.
vi)
To prepare cash flow statement with additional
information
SALIENT POINTS :
v Classification of Activities : The cash flow from Operating, Investing and
Financing are shown separately in Cash flow
statement.
v Non
cash items : The flow of cash which affects the statement is reflected in the
preparation of Cash flow statement.
i)
What do you mean by cash flow statement?
A statement which shows inflow
and outflow of cash and cash equivalents from operating, investing and
financing activities during a specific period.
ii)
What are the various activities classified as per
AS-3(revised) related to cash flow statement?
(a) cash
flow from operating activities
(b) cash flow
from investing activities
(c) cash
flow from financing activities.
iii)
State one
objective of cash flow statement.
Helpful for short term
planning, for preparing cash budget
iv)
What do you mean by cash equivalent?
Short –term highly liquid
investments which are readily convertible into known amount of cash and which
are subject to an insignificant risk of change in the value.
v)
State the category of the following items for a
financial as well as non-financial company
(1) Dividend
received
(2) Dividend
received
(3) Interest
paid
(4) Interest
received
Answer
Financial company non-financial company
(1) Dividend
received operating
activity investing activity
(2) Dividend
paid financing
activity financing activity
(3) Interest
paid operating activity financing activity
(4) Interest
received operating
activity investing activity
(Note; for objective type
questions any one or two can be asked)
vi)
What are the objectives of preparing cash flow statement?
Ans. The objectives of cash flow statement are:
i) To
ascertain the specific sources (i.e., operating / investing financing
activities) of cash and cash equivalents generated by an enterprise.
ii) To
ascertain the specific uses (i.e., operating / investing / financing
activities) of cash and cash equivalents used by an enterprise.
iii) To
ascertain the net change in cash and cash equivalents (sources minus uses of
cash and cash equivalents) between the date of two Balance Sheets.
Problems
1) Calculate the net amount of cash flow if a
fixed asset costing Rs. 32,000(having a book value of Rs. 24,000) is sold at a
loss of Rs. 8,000.
Cash inflow from
investing activities – Rs. 16,000
(Book value
–loss=Amount received from sale Rs. 24000-Rs.8,000)
2) From
the following information calculate cash flow from operating activities:
Profit and loss
account
For
the year ended on 31-03-2007
|
Particulars
|
Amount
|
Particulars
|
Amount
|
|
To Cost of goods sold
|
6,20,000
|
By sales
|
9,60,000
|
|
To selling and distribution expenses
|
52,000
|
By Profit on sale of furniture
|
12,000
|
|
To office Expenses
|
1,20,000
|
By interest Received
|
2,400
|
|
To Loss on sale of machinery
|
57,600
|
|
|
|
To depreciation
|
24,000
|
|
|
|
To Discount on debentures
|
8,000
|
|
|
|
To payment for taxation
|
28,800
|
|
|
|
To Net Profit
|
64,000
|
|
|
|
|
9,74,400
|
|
9,74,400
|
|
|
|
|
|
Additional information
Debtors 1,12,000 1,31,200
Stock 67,200 92,000
Creditors 50,000 60,000
Outstanding expenses 2,800 1,600
SOLUTION
|
Particulars
|
Amount
|
Amount
|
|
Net Profit before Taxation and extraordinary
items
|
92,800
|
|
|
Net Profit +Taxation(64,000+28,800)
|
|
|
|
Add non-operating expenses
|
|
|
|
Depreciation
24,000
|
|
|
|
Loss on sale of machinery 57,600
|
|
|
|
Discount on debentures written off 8,000
|
89,600
|
|
|
|
1,82,400
|
|
|
less non-operating incomes
|
|
|
|
Profit on sale of furniture (12000)
|
|
|
|
Interest Received
(2,400)
|
(14,400)
|
|
|
operating profit before working capital changes
|
1,68,000
|
|
|
Adjustments related to current assets and
liabilities
|
|
|
|
Add: Increase in current Liabilities
|
|
|
|
Creditors
|
10,000
|
|
|
|
1,78,000
|
|
|
Less : Decrease in current liabilities
|
|
|
|
outstanding expenses
|
(1,200)
|
|
|
less
Increase in current assets
|
|
|
|
debtors 19,200
|
|
|
|
Stock
24,800
|
(44,000)
|
|
|
|
1,32,800
|
|
|
Less payment of taxes
|
(28,800)
|
|
|
Net cash flow from operating activities
|
|
1,04,000
|
|
3)
From the following balance sheet calculate cash flow from operating
activities.
|
|
|||||||
|
liabilities
|
2,007
|
2008
|
Assets
|
2007
|
2,008
|
|||
|
Creditors
|
31,200
|
39,000
|
cash in hand
|
7,800
|
3,120
|
|||
|
Bills payable
|
33,600
|
7,800
|
cash in hand
|
9,800
|
3,680
|
|||
|
Income received in advance
|
40,000
|
50,000
|
Short term investments
|
15,600
|
10,800
|
|||
|
outstanding salaries
|
20,000
|
20,200
|
Investments
|
62,400
|
46,800
|
|||
|
10% Debentures
|
93,600
|
1,24,800
|
Inventory
|
46,800
|
70,200
|
|||
|
equity share capital
|
80,000
|
80,000
|
Debtors
|
39,000
|
46,800
|
|||
|
profit and loss
|
30,000
|
62,400
|
Bills receivable
|
7,800
|
15,600
|
|||
|
General Reserve
|
16,800
|
31,200
|
Fixed assets
|
1,56,000
|
2,18,400
|
|||
|
|
3,45,200
|
4,15,400
|
|
3,45,200
|
4,15,400
|
|||
|
|
|
|
|
|
|
|||
|
Solution
|
||||||||
|
Particulars
|
Amount
|
Amount
|
|
Net Profit Before Tax and Extraordinary items
|
|
|
|
(profit+Transfer to general reserve)
|
|
|
|
(Rs. 32,000+Rs. 14,400)
|
46,800
|
|
|
Adjustments
|
|
|
|
items to be added
|
|
|
|
Interest on debentures
|
9,360
|
|
|
Operating profit before working capital changes
|
|
56,160
|
|
Adjustments related to current assets and
liabilities
|
|
|
|
Add : Increase in Current liabilities
|
|
|
|
creditors
|
7,800
|
|
|
Income Received in advance
|
10,000
|
|
|
outstanding salaries
|
200
|
18,000
|
|
|
|
74,160
|
|
Less:
Increase in Current Assets
|
|
|
|
Inventory
|
(23,400)
|
|
|
Debtors
|
(7,800)
|
|
|
Bills Receivable
|
(7,800)
|
(39,000)
|
|
|
|
35,160
|
|
Less :Decrease in Current Liabilities
|
|
|
|
Bills Payable
|
(25,800)
|
|
|
Net Cash from Operating Activities
|
|
9,360
|
|
|
|
|
4) X Ltd.
made a profit of Rs.1, 00,000/- after charging depreciation of Rs.20,000/- on
assets and a transfer to General Reserve of Rs.30,000/-. The Goodwill written off was Rs.7, 000/- and
the gain on sale of machinery was Rs.3, 000/-.
The other information available to you (changes in the value of current
assets and current liabilities) is as follows:
At the end of the year Debtors
showed an increase of Rs.6, 000/-, creditors an increase of Rs.10, 000/-,
prepaid expenses an increase of Rs.200/-, Bills Receivable a decrease of Rs.3,
000/-, Bills Payable a decrease of Rs.4, 000/- and outstanding expenses a
decrease of Rs.2, 000/-. Ascertain the cash flow from the operating
activities.
Ans. Solution :
CASH FLOW FROM
OPERATING ACTIVITIES
Particulars Rs.
Net Profit 1,00,000
Add : Transfer to General Reserve 30,000
Net Profit before Tax 1,30,000
Adjustment for non-cash and non-operation expenses :
Add : Depreciation 20,000
Goodwill Written Off 7,000
27,000
Less : Gain on
Sale of Machinery 3,000 24,000
Operating Profit before working capital changes 1,54,000
Add : Decrease
in Current Assets and Increase in
Current Liabilities
Increase in Creditors 10,000
Decrease in Bills Receivable 3,000 13,000
1,67,000
Less : Increase
in Current Assets and Decrease in
Current Liabilities :
Increase in Debtors 6,000
Increase in Prepared Expenses 200
Decrease in Bill s Payable 4,000
Decrease in Outstanding Expenses 2,000 12,200
Cash Flow from Operating Activities 1,54,800
5) From the following Balance Sheets of
Ranjan Ltd. prepare Cash Flow Statement:
Liabilities 2001 2002 Assets 2001 2002
Equity Share Capital 1,50,000 2,00,000 Goodwill 36,000 20,000
12% Pre. Share Capital 75,000 50,000 Building 80,000 60,000
General Reserve 20,000 35,000 Plant 40,000 1,00,000
Profit and Loss A/c 15,000 24,000 Debtors 1,19,000 1,54,500
Creditors 37,500 49,500 Stock 10,000 15,000
Cash 12,500 9,000
2, 97,500 2, 58,500 2,
97,500 3, 58,500
Depreciation charged on plant was
Rs. 10000 and building Rs. 60000.
Ans. Solution:
Rajan Ltd.
CASH FLOW
STATEMENT for the year ended 31st December, 2002
Particular’s Rs. Rs.
A. Cash
Flow from Operating Activities
B. Net
Profit before tax :
Closing Balanced of Profit and Loss A/c
Closing Balance of Profit and Loss A/c 24,000
Add: Transfer to General Reserve 15,000
39,000
Less:
Opening Balance of Profit and Loss A/c 15,000
Net
Profit before tax and extraordinary items 24,000
Adjustments
for:
Add:
Depreciation on Plant 10,000
Depreciation
on Building 60,000
Goodwill
written off 16,000 86,000
Operating
profit before working capital changes 1,10,000
Adjustments
for:
Increase
in Creditors 12,000
Increase
in Debtors (35,500)
Increase
in Stock (5,000) (28,500)
Net
Cash from operating activities
(A) 81,500
B. Cash Flow
from Investing Activities
Purchase of Plant (Note 2) (70,000)
Purchase of Building (Note 1) (40,000)
Net cash used in investing activities (B) (1,10,000)
C. Cash Flow
from financing Activities
Issue of Equity Shares 50,000
Redemption of 12% Preference Shares (25,000)
Net Cash from financing activities (C) 25,000
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 close of the
year 9,000
Working Notes:
1. Dr. BUILDING
ACCOUNT Cr.
Date Particulars Rs. Date Particulars Rs.
To Balance b/d 80,000 By
Depreciation A/c 60,000
To Bank A/c 70,000 By
Balance c/d 60,000
1,
20,000 1,
20,000
2. Dr. PLANT ACCOUNT Cr.
Date Particulars Rs. Date Particulars Rs.
To Balance b/d 40,000 By
Depreciation A/c 10,000
To Bank A/c 70,000 By
Balance c/d 1, 00,000
1,10,000 1,10,000
6) From the
following Balance Sheet of India Ltd. and the additional information given made
out the Cash Flow Statement:
Liabilities 2007 2008 Assets 2007 2008
Share Capital 3,
00,000 4, 00,000 Goodwill 1,
15,000 90,000
Mortgage Loan 1,
50,000 1, 00,000 Land & Building 2,
00,000 1, 70,000
General Reserve 40,000 70,000 Plant 80,000 2, 00,000
P & L A/c 30,000 48,000 Debtors 1, 60,000 2, 00,000
Proposed Div. 42,000 50,000 Stock 77,000 1, 09,000
Creditors 55,000 83,000 Bills
Receivable 20,000 30,000
Bills Payable 20,000 16,000 Cash
in hand 15,000 10,000
Provisions for Taxation 40,000 50,000 Cash
at Bank 10,000 8,000
6, 77,000 8, 17,000 6,
77,000 8, 17,000
Additional information:
(1)Depreciation of Rs.1,000/- and
Rs.20,000/- has been charged on Plant and Land & Building respectively in
2006-07.
(2)The interim dividend of Rs.20,
000/- has been paid in 2007-08.
(3)Income Tax of Rs.35, 000/- was paid during the year
2007-08.
Ans. Cash Flow from operating activities Rs. 1, 25,000, cash used
in investing activities Rs. 120000 cash used in Financing Activities Rs.
12,000, Net decrease in cash and Bank Balance Rs. 7000.
7) From
the following prepare cash flow statement as per AS-3 |
Liabilities
|
2010
|
2011
|
Assets
|
2010
|
2011
|
|
Share Capital
|
2,88,000
|
3,20,000
|
Fixed Assets
|
2,40,000
|
4,00,000
|
|
Reserves And Surpluses
|
64,000
|
80,000
|
Less Accumulated Dep.
|
64,000
|
1,20,000
|
|
Bank Loan
|
80,000
|
60,000
|
|
1,76,000
|
2,80,000
|
|
creditors
|
2,48,000
|
2,40,000
|
Goodwill
|
64,000
|
56,000
|
|
bills payable
|
|
4,000
|
Investments
|
72,000
|
88,000
|
|
Proposed Dividend
|
36,000
|
48,000
|
Stock
|
1,60,000
|
1,80,000
|
|
Income Tax Payable
|
20,000
|
24,000
|
Debtors
|
1,60,000
|
1,52,000
|
|
|
|
|
Bank
|
1,04,000
|
20,000
|
|
|
7,36,000
|
7,76,000
|
|
7,36,000
|
7,76,000
|
|
Additional information:
|
|
|
|
|
|
||||
|
(i) During the year a part
of the machinery costing Rs. 40,000 was sold for Rs. 20,000.
|
|||||||||
|
(ii) Depreciation
provided during the year Rs. 80,000.
|
|
||||||||
|
(iii) Interim Dividend
paid during the year Rs. 20,000.
|
|
|
|||||||
|
Solution
|
|||||||||
|
Cash Flow Statement for
the year ended 2011
|
|||||||||
|
A Cash flow from operating activities:
|
|
|
|||||||
|
Profit before Tax and
Extraordinary items
|
1,08,000
|
|
|||||||
|
Adjustments for :
|
|
|
|||||||
|
Add: Depreciation
|
80,000
|
|
|||||||
|
Goodwill Written off
|
8,000
|
|
|||||||
|
Less: Profit on sale of
Machinery
|
(4,000)
|
|
|||||||
|
operating profit before
working capital changes
|
1,92,000
|
|
|||||||
|
Add : Decrease in
current assets:
|
|
|
|||||||
|
Debtors
8,000
|
|
|
|||||||
|
Add: increase in
current liability:
|
|
|
|||||||
|
Bills payable
4,000
|
12,000
|
|
|||||||
|
|
2,04,000
|
|
|||||||
|
Less : increase in
current assets
|
|
|
|||||||
|
Stock
20,000
|
|
|
|||||||
|
less : Decrease in Current Activities
|
|
|
|||||||
|
Creditors
8,000
|
(28,000)
|
|
|||||||
|
cash from operating
activities
|
1,76,000
|
|
|||||||
|
Less Tax paid
|
(20,000)
|
|
|||||||
|
Net cash flow from
operating activities
|
|
1,56,000
|
|||||||
|
|
|
|
|||||||
|
B Cash flow from investing activities
|
|
|
|||||||
|
sale of machinery
|
20,000
|
|
|||||||
|
purchase of fixed
assets
|
(2,00,000)
|
|
|||||||
|
purchase of investment
|
(16,000)
|
|
|||||||
|
Cash flow in investing
activities
|
|
1,96,000
|
|||||||
|
|
|
|
|||||||
|
C: Cash flows from operating activities:
|
|
|
|||||||
|
Issue of Share capital
|
32,000
|
|
|||||||
|
Repayment of bank loan
|
(20,000)
|
|
|||||||
|
payment of dividend
|
|
|
|||||||
|
regular 36,000
|
|
|
|||||||
|
interim
20,000
|
(56,000)
|
|
|||||||
|
Cash used in financing
activities
|
|
(44,000)
|
|||||||
|
A+B+C=
|
|
(84,000)
|
|||||||
|
Add cash and cash
equivalents at the beginning
|
|
1,04,000
|
|||||||
|
cash and cash
equivalents at the end
|
|
20,000
|
|||||||
|
|
|
|
|||||||
|
Working Notes
|
|
|
|||||||
|
(i) Calculation of
Profit before tax and extra ordinary items:
|
|
|
|||||||
|
Net profit during the
year --------
|
|
|
|||||||
|
Add: Transfer to reserves 16,000
|
|
|
|||||||
|
Proposed
dividend
48,000
|
|
|
|||||||
|
Income tax
provision
24,000
|
|
|
|||||||
|
Interim Dividend 20,000
|
|
|
|||||||
|
|
1,08,000
|
|
|||||||
|
Fixed assets account
|
|||||||||
|
Dr.
|
Cr.
|
||||||||
|
Particulars
|
Rs.
|
Particulars
|
Rs.
|
||||||
|
To balance b/d
|
2,40,000
|
By Bank (sale)
|
40,000
|
||||||
|
To Cash a/c
(B.F)(purchase)
|
2,00,000
|
By Balance c/d
|
4,00,000
|
||||||
|
|
4,40,000
|
|
4,40,000
|
||||||
|
|
|||||||||
|
Machinery Disposal Account
|
Cr.
|
||||||||
|
To Fixed Assets a/c
|
40,000
|
By cash a/c
|
20,000
|
||||||
|
TO Profit and loss a/c
(B.F)
|
4,000
|
By accumulated dep.
|
24,000
|
||||||
|
|
44,000
|
|
44,000
|
||||||
|
|
|
|
|
||||||
|
Accumulated
Depreciation Account
|
Cr.
|
||||||||
|
To assets disposal a/c
|
24,000
|
by balance b/d
|
64,000
|
||||||
|
To bal c/d
|
1,20,000
|
By P &L a/c
|
24,000
|
||||||
|
|
1,44,000
|
|
1,44,000
|
||||||
|
Income Tax Payable a/c
|
|||||||||
|
To cash a/c
|
20,000
|
By Balance b/d
|
20,000
|
||||||
|
To Balance c/d
|
24,000
|
By P&L a/c
|
24,000
|
||||||
|
|
44,000
|
|
44,000
|
||||||
