CASH FLOW STATEMENT

Definition
"A statement of changes in the financial position of a firm on cash basis is called a
cash flow statement."
The cash flow statement describes the inflow (sources) & outflow (uses) of cash. It
summarises the causes of changes in cash position of a business enterprise between
two balance sheets.
Differences between Fund Flow Statement & Cash Flow Statement
Fund Flow Statement
Cash Flow Statement
1) It is based on a wider concept of funds
1) It is based on a narrower concept of
i.e working capital
funds i.e cash
2) It is based on accrual basis of
2) It is based on cash basis of accounting
accounting
3) Changes in current assets & current
3) No schedule of changes in working
liabilities appear separately in a schedule
capital. The changes in current assets &
of changes in working capital
current liabilities are summarized in the
cash flow statement.
4) It is useful in planning intermediate &
4) It is useful for short term analysis & cash
long term financing.
planning of the business.
5) It reveals the sources & applications of
5) It classifies all cash inflows & outflows in
funds of an organization.
terms of operating, investing & financing
activities.
Classification of Cash Flows
1) Cash flows from operating activities
2) Cash flows from investing activities
3) Cash flows from financing activities
Cash flows from Operating Activities
Operating activities are the basic revenue producing activities of the enterprise. The
amount of cash flows arising from operating activities is an indicator of a firm's operating
capability to generate sufficient funds to meet its operating needs, pay dividends, repay
loans, etc. without depending on external sources of finance.
Examples of cash flow from operating activities
1)
cash receipts from sale of goods & rendering of services
2)
cash receipts from royalties, fees, commissions, etc
3)
cash payment to suppliers of goods & services
4)
cash payment to & behalf of employees
5)
cash receipts & payments of an insurance company for premiums, claims,
annuities, etc
6)
cash payments or refunds of income tax relating to operating activities
Cash flows from Investing Activities
Investing activities are the acquisition & disposal of long term assets & investments.
A separate disclosure of cash flows arising from investing activities is important

because cash flows represent the extent to which expenditure have been made for
resources to generate future incomes.
Examples of cash flow from investing activities
1) cash payments to acquire fixed assets (including intangibles).
2) cash receipts from disposal of fixed assets (including intangibles)
3) cash receipts from disposal of shares, warrants, debt instruments, etc
4) cash advances & loans made to third parties.
5) cash receipts from the repayment of advances & loans made to third parties.
Cash flows from Financing Activities
Financing activities are activities that result in changes in the size & composition of the
owners' capital (including preference share capital in the case of a company) &
borrowings of the enterprise.
Examples of cash flows from financing activities
1)
cash proceeds from issuing shares or other similar instruments
2)
cash proceeds from issuing debentures, loans, bonds & other short or long
term borrowings
3)
cash repayments of amounts borrowed such as redemption of debentures,
bonds, preference shares.
Uses & Significance of Cash Flow Statement
Cash Flow Statement is of vital importance to the financial management & short term
financial planning. Its various uses are as follows:
1) Cash Flow Statement is prepared on cash basis hence it is useful in evaluating the
cash position of an enterprise.
2) A projected cash flow statement can be prepared so that it can enable the firm to plan
& co ordinate its financial operations efficiently.
3) A comparison of historical & projected cash flow statements will reveal variations in
the performance so that the firm can take immediate effective action.
4) It indicates whether a firm's short term paying capacity is improving or deteriorating
over a period of time by preparing cash flow statements for a number of years.
5) It helps in planning the repayment of loans, replacement of fixed assets etc. It is also
significant for making capital budgeting decisions.
6) It clearly indicates the causes for poor cash position inspite of substantial profits in a
firm by throwing light on various applications of cash made by the firm.
7) Cash Flow Statement provides information of all activities classified under operating,
investing & financing activities.
Limitations of Cash Flow Statement
Despite of a number of uses, cash flow statement also suffers from the following
limitations:
1) As cash flow statement is based on cash basis of accounting, it ignores the basic
accounting concept of accrual basis.
2) Cash Flow statement is not suitable for judging the profitability of a firm as non cash
charges are ignored while calculating cash flows from operating activities.
3) Funds flow statement presents a more complete picture than Cash flow statement.
4) It is difficult to define the term "cash". There are no controversies over a number of
items like cheques, stamps, postal orders etc whether they are to be included in cash.

Note:
1) An increase in liability is a source of cash or cash inflow eg increase in creditors
implies purchase of goods on credit. Although no cash is received we can say that
creditors have given us loans which we have utilized to purchase goods from them.
2) A decrease in liability is an application of cash or cash outflow. Eg sundry creditors are
paid off.
3) An increase in asset is an outflow of cash. Eg goods sold on credit.
4) A decrease in asset is an inflow or source of cash. Eg sale of stock, cash received
from debtors.
Actual flow of cash
It is the movement of cash that results in actual inflow or outflow of from the firm. Eg
When shares are issued for cash or when loan is repaid or when assets are sold for
cash.
Notional flow of cash
It refers to delayed receipts & payments. Increase in current liabilities like trade
creditors, bills payable, etc results in notional inflow of cash as here cash inflow is
implied.
Usually increase in long term liabilities generate actual cash & increase in current
liabilities generate notional cash.

Problems
Cash flow statement of sole proprietors
1. Balance Sheet of Mr. A on 01.01.2005 & 31.12.2005 were as follows.
LIABILITIES
1.1.2005 31.12.2005
ASSETS
1.1.2005
Capital
Mrs B's Loan
Loan from SBI
Sundry
Creditors

1,50,000
30,000
60,000

1,90,000
-------80,000

50,000

56,000

Cash
Debtors.
Stock
Furniture
Machinery
Land
Buildings

20,000
54,000
48,000
2,000
90,000
36,000
40,000

31.12.2005
26,000
76,000
42,000
2,000
65,000
45,000
70,000

2,90,000 3,26,000
2,90,000
3,26,000
During the year.
1. A Machine costing is 12,000/- (accumulated depreciation of Rs 4000/-) was
sold for Rs.5, 500/2. The provision for depreciation against machinery as on 1.1.2005 was
Rs.24,000/- and on 31.12.2005 was Rs.37,000/3. Net profit for the year 2005 amounted to Rs.60, 000/You are required to prepare cash flow statement.
2. Prepare a cash flow statement of Mr. Kumar.
LIABILITIES

1.1.2006

Current liabilities

35,000

31.12.2006
40,000

ASSETS
Cash

1.1.2006
5000

31.12.2006
4,000

Loan from Mrs.X

Bank Loan
Capital

-------40,000
1,50,000

25,000
30,000
1,54,000

Debtors.
Stock
Land
Buildings
Machinery

40,000
45,000
30,000
25,000
30,000
40,000
50,000
55,000
70,000
80,000
2,25,000
2,49,000
2,25,000
2,49,000
During the year Kumar brought in additional capital of Rs.10,000 and his drawings
during the year was Rs.31,000.
Provision for depreciation on machinery opening balance Rs.30, 000 and closing
balance Rs 40,000. No depreciation needs to be provided for other assets.
Cash flow statements of companies

3. The following details are available from a company

LIABILITIES
Share capital
Debentures
Reserve for doubtful debts
Trade creditors
Profit and Loss A/c

31-12-98
Rs.
70,000
12,000
700
10,360
10,040
1,03,100

31-12-99
Rs.
74,000
6,000
800
11,840
10,560
1,03,200

ASSETS

31-12-98
Rs.
9,000
14,900
49,200
20,000
10,000
1,03,100

Cash
Debtors
Stock
Land
Goodwill

31-12-99
Rs.
7,800
17,700
42,700
30,000
5,000
1,03,200

In addition, you are given:

1. Dividend paid total Rs.3,500
2. Land purchased for Rs.10,000
3. Amount provided for amortisation of goodwill Rs.5,000
4. Debentures paid off Rs.6,000
Prepare Cash flow statement

4. The following are the comparative balance sheets of XYZ as on 31st December
2005 and 2006
LIABILITIES
Share capital
(shares of Rs.10 each)
Profit and loss a/c
9% Debentures
Creditors

2005
2006
3,50,000 3,70,000

2005
2006
1,00,000 1,50,000
2,46,000 2,13,500
50,400
52,800
50,000
25,000
60,000
30,000
42,000
35,000
51,600
59,200
3,000
4,000
71,000
84,500
5,12,000 5,12,000
5,12,000 5,12,000
Other particulars provided to you are : (a) Dividends declared and paid during the
year Rs.17,500 (b) Land was revalued during the year at Rs.1,50,000 and the profit
on revaluation transferred to profit and loss a/c. you are required to prepare a cash
flow statement for the year ended 31-12-2006.
5. From following information calculate C.F.S
LIABILITIES
2006
2007
Equity capital
1,40,000
1,40,000
Reserves
74,000
1,05,000
Sundry creditor.
32,000
35,000
O/s wages paid
3,000
4,000

ASSETS
Land
Stock
Goodwill
Cash & Bank
Temporary investments
Debtors

ASSETS
Fixed Assets (net)
Cash
Sundry Debtors.
Inventories.

2006
90,000
75,000
43,000
49,000

2007
87,000
97,000
40,000
58,000

Miscellaneous
expenses o/s

Prepaid Rent
3,000
5,000
11,000
3,000
2,60,000
2,87,000
2,60,000
2,87,000
1. Accumulated depreciation was Rs.16,000 at the end of 2006 and Rs. 19,000 at the
end of 2007.
2. Other information:
Wages Rs.23,000
Sales 3,00,000
Miscellaneous operating Expenses Rs.47,000
Depreciation Rs.3000
Cost of Goods sold Rs.1,90,000
6. From following information, prepare a cash flow statement of C.P. Ltd. For the year
ended 31st December, 2007
BALANCE SHEET
LIABILITIES
2006
2007
ASSETS
2006
2007
Rs.
Rs.
Rs.
Rs.
Share capital
70,000 70,000
Plant and Machinery
50,000
91,000
Secured
Inventory
15,000
40,000
loans(repayable in
Debtors
5,000
20,000
2015)
----40,000
Cash
20,000
7,000
Creditors
14,000 39,000
Prepaid Expenses
2,000
4,000
Tax payable
1,000
3,000
Profit and Loss A/c
7,000 10,000
92,000 1,62,000
92,000
1,62,000
PROFIT AND LOSS ACCOUNT
(for the year ended 31st December 2007)
Rs.
To opening inventory
15,000 By Closing stock
To purchase
98,000 By Sales
To gross profit C/d
27,000
1,40,000
To general expenses
11,000 By Gross profit b/d
To depreciation
8,000
To taxes
4,000
To net profit C/d
4,000
27,000
To dividend
1,000 By balance b/f
To balance C/f
10,000 By net profit b/d
11,000

7.

Rs.
40,000
1,00,000
_______
1,40,000
27,000
_______
27,000
7,000
4,000
11,000

ABC Ltd. has submitted the following condensed balance sheet as on 31 st

December 2006 and 31st December 2007 and the statement of income and
reconciliation of retained earnings for the year ended 31st December, 2007.
LIABILITIES

Share capital
General Reserve

BALANCE SHEETS
2006
2007
ASSETS
Rs.
Rs.
3,00,000 4,00,000
Fixed Assets
80,000 1,00,000
Less: accumulated

2006
2007
Rs.
Rs.
7,00,000 8,00,000

Retained Earnings
6% Debentures
Loans o mortgage
Sundry Creditors
Wages Outstanding
Provision for income
tax

60,000
90,000
2,00,000 1,25,000
-------40,000
1,85,000 1,05,000
3,000
5,000
75,000
1,40,000
9,03,000 10,05,000

depreciation
Stock
Sundry Debtors
Cash in hand/bank
Prepaid Expenses
Preliminary expenses

2,25,000
4,75,000
1,25,000
1,80,000
95,000
3,000
25,000
9,03,000

2,60,000
5,40,000
2,00,000
1,50,000
89,000
6,000
20,000
10,05,000

STATEMENT OF INCOME AND RECONCILIATION OF RETAINED EARNINGS

(For the year ended 31st December 2007)
Sales
15,00,000
st
Less: Cost of goods sold: stock of 1 Jan,2007
1,25,000
Add: Purchases
10,00,000
11,25,000
2,00,000
9,25,000
Less: Stock on31st Dec, 2007
5,75,000
40,000
Less: Wages
5,35,000
Gross Income
2,05,000
Less: sundry expenses
5,000
Preliminary expenses written off
35,000
2,45,000
Depreciation
2,90,000
1,40,000
Less: provision for income tax
1,50,000
20,000
General reserve
1,00,000
1,20,000
Dividend paid
30,000
Net income for the year (Retained)
60,000
Add: retained earnings on 31-12-2006
90,000
Additional Information
During 2007, the company purchased a building for Rs.1,00,000 you are required to
prepare cash flow statement for the year ended 31st December 2007
8 From the following balance sheet of X Co prepare cash flow statement
LIABILITIES
2006
2007
ASSETS
2006
2007
Share Capital
4,50,000
6,00,000
Plant & Machinery
6,00,000
7,25,000
Share premium
----15,000
Less: depreciation
1,20,000
1,45,000
P/L appropriation
60,000
60,000
4,80,000
5,80,000
Profit for the year
---50,000
Land
1,83,000
1,98,000
8% Debentures
2,50,000
2,00,000
Loan to subsidiary
25,000
---Profit on redemption
Co.
Of debentures
---1,000
Shares in
Sundry creditors.
2,20,000
1,90,000
subsidiary
30,000
40,000
Provision for Tax
40,000
50,000
Stock
1,60,000
1,48,000
Proposed Dividend
45,000
60,000
Debtors
1,20,000
1,62,000
Bank
67,000
98,000
10,65,000 12,26,000
10,65,000
12,26,000
Additional Information
1) During the year plant costing Rs.40,000 was sold for Rs.15,000. Accumulated

Depreciation on plant was Rs.20,000.

2) Tax paid during the year Rs.55,000
9.Balance Sheet of Smith John Ltd.,
LIABILITIES
2005
2006
Equity Share Capital
3,00,000 4,00,000
8% redeemable
Preference share
1,50,000 1,00,000
Capital reserve
--20,000
General reserve
40,000
50,000
P/L/ a/c
30,000
48,000
Proposed dividend
42,000
50,000
Sundry creditors
25,000
47,000
Bills Payable.
20,000
16,000
Liability for outstanding
expenses
30,000
36,000
Provision for Tax
40,000
50,000
1.
2.
3.
4.

Share Capital
General Res.
P&L a/c
Bank Loan
(long term)
Sundry creditors
Provision for Tax

2004
1,00,000
2,00,000
20,000
80,000
1,40,000
77,000
20,000
15,000
10,000

2005
80,000
1,70,000
30,000
2,00,000
1,70,000
1,09,000
30,000
10,000
8,000

15,000

10,000

6,77,000 8,17,000
6,77,000
8,17,000
A portion of the building was sold in 2006 and the profit has been transferred to
capital reserve.
The written down value of a machine was Rs.12,000. It was sold for Rs.10,000.
Depreciation of Rs.10,000 is charged in 2006.
Investments are trade Investments Rs.3000 by way of dividend is received
including Rs.1000 from pre-acquisition profits which has been credited to the
Investments a/c.
An Interim dividend of Rs.20,000 has been paid in 2006.
Prepare Cash Flow statement.

10.Given is the balance sheet below:

LIABILITIES
2004

ASSETS
Goodwill
Buildings
Investments
Plants
Sundry debtors
Stock
Bills Receivables
Cash
Bank
Preliminary
Expenses

2005

2,00,000
50,000
30,500
70,000

2,50,000
60,000
30,600
-----

1,50,000
30,000

1,35,200
35,000

ASSETS
Land & Buildings
Machinery
Sundry debtors
Cash
Bank
Goodwill
Stock

2004
2,00,000
1,50,000
80,000
500
---Nil
1,00,000

2005
1,90,000
1,69,000
64,200
600
8,000
5,000
74,000

5,30,500
5,10,800
5,30,500
5,10,800
Additional Information
During the year ended 31-12-2005
Dividend of Rs.23,000 was paid
Assets of another Co. was purchased for a consideration of Rs.50,000 payable
in shares.
The following assets were purchased: stock Rs.20,000, machinery Rs.25,000
Machinery was further purchased: Rs.8,000
Depreciation written off on machinery Rs 12,000

Income tax provision made during the year Rs.33,000

Loss on sale of machinery Rs.200 was written off to the general reserve

11. Following schedule shows the balance sheet in condensed form of Sanjeev ltd.
At the end of the year 2005
Assets
Cash and bank balances
Sundry Debtors
Temporary investments
Prepaid expenses
Stock in trade
Land and buildings
Machinery
Liabilities and Capital
Sundry creditors
Outstanding expenses
8% Debentures
Depreciation fund
Reserve for contingencies
Profit and Loss account
Capital

2004

2005

45,000
33,500
55,000
500
41,000
75,000
26,000
2,76,000

45,000
21,500
37,000
1,000
53,000
75,000
35,000
2,76,000

51,500
6,500
45,000
20,000
30,000
8,000
1,15,000
2,76,000

48,000
6,000
35,000
22,000
30,000
11,500
1,15,000
2,76,000

The following information is also available.

10% dividend was paid in cash

New machinery for Rs.15,000 was purchased but old machinery costing
Rs.6,000 was sold for Rs.2,000 accumulated depreciation was Rs.3,000

Rs.10,000 8% debentures were redeemed by purchase from open market

@ Rs.96 for a debenture of Rs.100

Rs. 18,000 investment were sold at book value

You are required to prepare cash flow statement.