Cash Flow Statement

IPCC Paper 1: Accounting/Financial Management

Chapter 2 -Unit 2

1 CA. Pankaj Goel

Questions that Cash Flow Statement Answers

Where did the cash come from?

1

What purpose cash used for?

2

And least importantly, what was

3 the change in the cash balance?

2
Learning Objectives
Meaning of Cash Flow Statement
1

Applicability Cash Flow Statement - AS 3

2

Terms used in Cash Flow Statement

3

Examples of Types of Activities

4

Preparation of Cash Flow Statement

5

Format of Cash Flow Statement-Direct

6

Format of Cash Flow Statement-Indirect

7 3
Learning Objectives - 2
Cash Flow from Operating Activities
8

Cash Flow from Investing and Financing Activities

9

Summary of Cash Flow Statement Process

10

Adjustments relating to Cash Flow Statement for Taxation, Dividend,

Interest, Foreign Currency Transaction, Non Cash Transactions, Non
11 Current Assets-Net/Gross, Extraordinary Activities

Examples - Comprehensive
12

Summary
13 4
Components of Cash Flow Statement
CASH&
CASHEQUIVALENTS

5 OPERATING
FINANCING ACTIVITIESDIRECT
ACTIVITIES 1
4

3 2

INVESTINGACTIVITIES OPERATING
ACTIVITIESINDIRECT

5
 Cash for
Cash Flow
Statement

Cash Equivalents

Cash

Meaning of Cash
6
Cash Concept

Cash is an important component for solvency of any organization

Cash plays a very important role in the economic life of a business

What blood is to a human body, cash is to a business enterprise.

Thus, it is essential for a business to maintain an adequate balance of cash.

It is important to know the movement of cash during the year and reasons for
such movement.

Such details are available through Cash Flow Statement, which provides
information about the changes in cash and cash equivalents of an enterprise

7
:

Cash Concept - 2

This revised Accounting Standard super seeded the

Accounting Standard (AS 3) on changes in
Financial Position, issued in June 1981.In 1995,
SEBI amended clause 32 of listing agreement
stating that every listed company, should give CFS
Particulars Amount
(Rs.)
Cash flows from operating activities xx
Cash flows from investing activities xx
Cash flows from financing activities xx
Total xx
Add: Opening cash and cash xx
equivalent (CCE)
Closing cash and cash equivalent (CCE) xx
8
Uses Of Cash Flow Statement
Cash flow statement is additional information to
1 user of financial statement

This statement exhibits the flow of incoming and

2 outgoing cash

This statement assesses the ability of the

3 enterprise to generate cash and cash equivalents

It also assesses the needs of the enterprise to

4 utilise the cash and cash equivalents generated

It also assesses the liquidity and solvency of the

5 enterprise
9
 Fundamentals of
Cash and Cash Flow Statement
As per AS 3
Cash means- Cash and Cash Equivalents

Short-term
investments
Cash and (Till 3 months
Cash in Hand+
Cash maturity)+
Cash at Bank
Equivalents
Marketable
securities

10
 Cash Flow Statement Equation

Cash=Non Current Liability+ Non Current Assets+ in Owners Equity

Change in Cash & Cash Equivalents
Cash =

Non Current Change in Non Current Liabilities covering

change in share capital like issue of share
Liability = capital etc.

Non Current Change in Non Current Assets covering change

in Assets like purchase of assets etc.
Assets =
in Owners Equity Change in capital +Change in current liability
item and change in all items of current assets
= other than cash and cash equivalents
11
 Applicability of
Cash Flow Statement
12
Applicability of AS - 3

Preparation of Cash Flow Statement as per AS-3 is

mandatory for the following enterprises:

Enterprises that have a turnover of more than Rs. 50 crores

during a financial year.
Enterprises that have a borrowing of more than Rs.1 crores
Companies whose shares or debts are listed or to be listed
on a recognized stock exchange in India

Cash Flow Statement of listed companies shall be

presented under indirect method only as prescribed
in AS-3

13
 Terms Used in
Cash Flow Statement
14
Operating Activities

These are principal revenue producing activities of a

business enterprise and include cash flows from those
transactions and events that enter into the determination
of net profit or loss

15
Examples of Operating Activities

Cash inflows Cash outflows

Cash Receipts from sale of Cash payments to suppliers for

goods/rendering of services Goods/services
Cash Received from royalties, Cash payments to employees
fees, commission, etc.
Interest and taxes paid
Other operating
receipts Other operating cash payments
16

9
Investing Activities

These activities include transactions and events that

involve the purchase and sale of long term
productive assets such as land, buildings,
equipment (plant and machinery) not held for
resale and other investments (which are not cash
equivalents).

17
 Examples of Investing Activities

Cash inflows Cash outflows

Sale of plant & machinery Purchase of plant & machinery and

and equipment equipment

Sale of Land & Buildings Purchase of land & buildings

18

10
Financing Activities

These activities result in changes in the size and

composition of the owners capital (including
preference share capital in the case of a
company) and borrowings of the enterprise.

19
Examples of Financing Activities

Cash inflows Cash outflows

Borrowing cash from

Repayment of amounts
creditors borrowed
Issuing equity shares Repurchase of equity shares
Issuing debt securities Payment of dividends
20

11
 Practice Time
21 Examples of Types of Activities
Example: 1

Transactions Activities

Cash Sales Operating Activities

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

Transactions Activities

Marketable Securities Cash Equivalents

Redemption of Financing Activities
Debentures/Preference Shares
Interest paid by Finance Operating Activities
Company
Dividends paid by Non Finance Financing Activities
Company
Manufacturing wages paid Operating Activities
Sale of Trade Marks Investing Activities
Income Tax paid Operating Activities
Income Tax Refund received Operating Activities 23
Brokerage on issue of shares Financing Activities
 Sources for Preparation of
Cash Flow Statement
24
Basic Information -Three Sources

It means the balance sheets in the beginning and at the end of the accounting
Comparative period.
Balance
Sheets These comparative balance sheets indicate the amount of changes that have taken
place in assets, liabilities and owners capital accounts.

Income Information in this statement enables the users to determine the amount of cash
Statement of
Current
provided by or used in operations during the accounting period after making
Accounting adjustments for non-cash and non-operating items, current assets and current
Period liabilities items.

In addition to the comparative balance sheets and income statement of current

Selected year, selected additional transaction data are needed to extract the hidden
Additional transactions e.g., sale and purchase of fixed assets for cash.
Information It means that additional information is needed to determine how cash was provided
or used during the accounting period.
25
 Steps for Preparation of Cash
Flow Statement
26
Step 1: Determine Change in Cash
& Cash Equivalents

It involves the calculation of difference between the amount of

cash and cash equivalents on the first day of the accounting
period and the amount on the last day of the accounting period,
with the help of comparative balance sheets.

It is never listed as a first item on the actual cash flow

statement.

It is the amount by which cash and cash equivalents changed

and we must explain why cash and cash equivalents changed
by this amount by preparing a Cash Flow Statement

27
Example: Cash &Cash Equivalents

28
Step 2- Determine Cash Flows from
Operating Activities

It is determined by the analysis of revenue and expense

items of profit and loss account.

The reason is that there may be certain items in this

account which increase (revenue) the profit but do not
cause any increase of cash.

Similarly some of the expense items reduce the profits but

may not reduce the cash.

In addition, analysis of current assets and liabilities is also

required with the help of comparative balance sheets and
additional information.

This can be computed by either Direct or Indirect Method

29
Step 3- Analysis of Non Current Assets

Determine the cash provided (or used) by investing activities

by the analysis of non-current assets like purchase and sale of
fixed assets etc

This is done by Finding Cash Flow From Investing Activities

30
Step 3- Analysis of
Non Current Liabilities

Determine the cash provided (or used) by financing

activities. Here again an analysis of non-current
liabilities like issue of share capital, redemption of
share capital etc is made.

This is done by Finding Cash Flow From Financing

Activities

31
Step 5 - Preparation of
Cash Flow Statement

Prepare a formal cash flow statement

by classifying all cash inflows and
outflows in terms of operating,
1 investing and financing activities

The net cash flow provided by (used

in) each of the three main activities of
2 an entity should be highlighted

32
Step 6 - Find Net Change in Cash &Cash
Equivalents

Make sure that the total net cash flow, that is,
aggregate of net cash flows from operating, investing
and financing activities, is equal to net increase
(decrease) in cash and cash equivalents as
calculated in Step 1.

33
Step 7- Analysis of
Non Cash Transactions

Report any significant investing and financing

transactions that did not involve cash or cash
equivalents in a separate schedule to the cash flow
statement
e.g., purchase of land by issue of share capital or
debentures; or redemption of debentures for share
capital. (Para 40 of AS 3)

34
 Format for Preparation of
Cash Flow Statement
Direct (Operating)
35
Cash Flow from Operating Activities - Direct

DIRECT METHOD- FORMAT

(a) Cash Flows from Operating Activities
Cash receipts from cash sales and customers
Cash payments to creditors and others suppliers ()
Cash payment for overheads ()

Less: Tax Paid Common to Both
Cash flows before extraordinary items DIRECT &INDIRECT
Add/Less: Extraordinary items
Net Cash flow from operating activities

36
 Computational Accounts -
Direct Method
37
Why We Need Computational Accounts?

Adjustments are necessary because income statement

records are on accrual basis.
Expenses incurred even though the cash has not been paid.
Incomes earned even though the cash has not been
received.
These adjustments generally relate to determination
Cash flow from Credit Purchases-creditors/Bills Payables
account
Cash flow from Credit Sales.- Debtor/Bills Receivables
account
Cash outflow on expenses incurred-Expenses account

38
 Adjustments for
Changes in CA and CL
39
 1. Effect of Credit Sales

If out of total sales of 30,000, credit sales is Rs. 10,000, cash flow from sales
= 20,000

Thus while computing cash from operations, it would be necessary that

suitable adjustments for the outstanding debtors are also made

Like deducting the amt. of credit sale from the net profit as debtors
outstanding at the year end.

Cash from operation = Net profit + debtors o/s at the beginning debtors o/s
at the end of the year

OR

Cash from operation = Net profit + Decrease in debtors or (increase in

debtors)

40
2. Effect of Credit Purchase

If Cash sale = 30,000, Purchase = 25,000 out of which credit purchase is 10000 , Cash
from operation = 15,000

Adjustments in the Net profit would be made by adding the amt. of credit purchases to get
the cash from operation.

Decrease in creditors from one period to another would mean decrease in cash from
operation and vice versa. This is because more cash payments have been made to the
creditors which results in outflow of cash.

Cash from operation = Net profit + creditors at the end of the year creditors at the
beginning

OR

Cash from operation = Net profit + Increase in creditors OR - (Decrease in creditors) 41

2. Effect of Credit Purchase

If Cash sale = 30,000, Purchase = 25,000 out of which credit purchase is 10000 , Cash from
operation = 15,000

Adjustments in the Net profit would be made by adding the amt. of credit purchases to get the
cash from operation.

Decrease in creditors from one period to another would mean decrease in cash from operation
and vice versa. This is because more cash payments have been made to the creditors which
results in outflow of cash.

Cash from operation = Net profit + creditors at the end of the year creditors at the
beginning

OR

Cash from operation = Net profit + Increase in creditors OR -(Decrease in creditors)

42
Example 2: CA&CL Adj for Direct Method

Sales = 50,000, debtors o/s at the beginning =

8000, debtors o/s at the end = 15000, creditors at
the beginning = 12000, creditors at the end =
15000, Purchases = 30000, expenses = 5000

43
Solution:
Cash from operation Rs.
Sales 50000
Less: Purchase 30000
Expenses 5000 35000
Net Profit 15000
Add: debtors at the beginning 8000
creditors at the end 15000 23000
38000
Less: creditors at the beginning 12000
debtors at the end 15000 27000
Cash from operation 11000
44
 Sample Accounts Formats-
CA&CL Adjustments for
Direct Method
45
Accounts Format 1

CREDITORS ACCOUNT

Particulars Rs. Particulars Rs.

Bills Payables Account (Bills accepted) Balance b/d (opening)
Discount received Purchases Account (Credit)
Bills Receivables (endorsed) Debtors (B/R endorsed dishonored)
Purchase Returns Bills Payables Account
[Cash Account (Paid) outflow (dishonored)
(Balancing figure)]
Balance C/D (closing)

46
Accounts Format 2

BILLS PAYABLE ACCOUNT

Particulars Rs. Particulars Rs.

Discount received Balance b/d (opening)

Creditors (Bills dishonored)* Creditors Account (Bills accepted)
[Cash Account (paid on maturity)
(Balancing figure)]
Balance C/D (closing)

47
Accounts Format 3

DEBTORS ACCOUNT

Particulars Rs. Particulars Rs.

Balance b/d (Opening) Bad Debts
Sales (Credit) Discount allowed
Bills Receivables (dishonored) Sales Returns
Bills Receivables (drawn)
Cash Account (Inflow)
(Balancing figure)
Balance c/d (closing)

48
Accounts Format 4

BILLS RECEIVABLE ACCOUNT

Particulars Rs. Particulars Rs.

Balance b/d (Opening) Creditors (B/R endorsed)
Debtors (B/R drawn)** Discount/Rebate (allowed)
Debtors (B/R dishonoured)
By Cash Account (received) Inflow
(Balancing figure)
Balance C/d (closing)

49
 Example of CA&CL-
Adjustments for Direct
Method
50
Example:3

Opening Stock = 5000

Purchases = 20000

Sales = 35000

Expenses = 5000

Closing Stock = 10000

51
Solution
Profit and Loss a/c
Particulars Amount Particulars Amount
Opening stock 5000 Sales 35000
Purchases 20000 Closing stock 10000
Expenses 5000
Net Profit 15000

Cash from operation:

Net profit for the year- 15000
Add: Opening stock - 5000

Less: Closing stock - (10000)

Cash from operation = 10000 52
Accounts Format 5

EXPENSES ACCOUNT

Particulars Rs. Particulars Rs.

Prepaid Expenses (in the beginning) Outstanding Expenses
(In the beginning)
Cash/Bank (cash outflow) P & L Account (Expenses incurred)
Outstanding Expenses Prepaid Expenses
(at the end) (at the end)

53
 3 Effect of change in Outstanding expenses,
Income received in advance etc.

If certain expenses are not paid (i.e., o/s) or some income is received in advance, it will
result in decrease in net profit without actually decreasing the cash.

This is because net profit is computed after charging to it all expenses whether paid or
outstanding.

Therefore cash from operation will be higher than the actual profit as per P/L account.
Thus :

Cash from operation = Net profit + (Expenses o/s + Income received in advance) at
the end (Expenses o/s + income received in advance) at the beginning

OR

Cash from operation = Net profit +Increase in (o/s expenses and income received
in advance) OR Decrease in (o/s expenses and income received in advance)

54
 Example of CA&CL-
Adjustments for Direct
Method
55
EXAMPLE: 4

Gross Profit = 30000

Expense paid = 10000

Interest received = 2000

Rs 2000 are Outstanding on account of Expenses while

Rs 500 has been received as Interest for the next year

56
 SOLUTION
Profit and Loss account
Particulars Amount Particulars Amount
Expenses paid 10000 Gross profit 30000
Add: o/s exp. 2000 Interest received 2000
Net Profit (Balancing) 19500 Less: interest rece-
-ived in advance ( 500 )
Cash from operation:
Net profit for the year 19500
Add: Outstanding expenses 2000
Income received in advance 500
Cash from operation 22000

57
4. Effect of Prepaid expenses and
Outstanding Income

It is similar to the effect of debtors.

While computing net profit from operations, the expenses only for accounting period
are charged to P/L a/c.

This means pre-paid expenses (since not charged) do not decrease net profit for the
year but actually reduces the cash from operation.

Similarly income earned during the year is credited to P/L a/c, whether received or not.
Thus o/s income increases the profit but not the cash from operation. Thus:

Cash from operation = Net profit + (Prepaid expenses + o/s income) at the
beginning of the year - (Prepaid expenses + o/s income) at the end of the year

Or

Cash from operation = Net profit + Decrease in (Prepaid expenses + o/s income)
OR Increase in (Prepaid expenses + o/s income)
58
 Example of CA&CL-
Adjustments for Direct
Method
59
Example: 5

Net Profit = 20000

Prepaid Expenses as on 1/1/07 = 2000
Facts

Prepaid Expenses as on 31/12/07 = 3000
O/S (Accrued) Income on 1/1/07 = 1000
O/S (Accrued) Income on 31/12/07 = 2000

Calculate cash from operation

Required

60
Solution

Cash from operation:

Net profit 20000
Less: Prepaid expenses as on 31/12/07 (3000)
o/s income as on 31/12/07 (2000)

Add: Prepaid expenses as on 1/1/07 2000

o/s income as on 1/1/07 1000
Cash from operation 18000

61
SUMMARY OF FINDINGS

Increase in Current assets and

Decrease in current liability

Decrease in cash

Decrease in Current assets and

Increase in current liabilities

Increase in cash

62
 Miscellaneous Examples -
Direct Method
63
Example: 6

From the following information of Hemakshi

Power Ltd, find out Cash paid to Creditors
and Bills Payables
Opening balance of Creditors 45,000
Closing balance of creditors 40,000
Opening balance of Bills Payables 20,000
Closing balance of Bills Payables 6,000
Bills Payables accepted during year 10,000
Total Purchases during the year 3,00,000
(half of them are on credit)
Discount received from Creditors 2,000
Goods returned to Suppliers 4,000
64
Solution
(A) CR ED IT OR S ACCO UNT

Particulars Rs. Particulars Rs.

Discount received 2,000 Balance b/d 45,000
Purchases Returns 4,000 Purchases (Credit) 1,50,000
Bills Payables accepted 10,000*
Cash (paid) (balancing figure) 1,29,000
Balance c/d 50,000
1,95,000 1,95,000

BILLS PAYABLES ACCOUNT

Particulars Rs. Particulars Rs.

Cash (paid) (Balancing figure) 24,000 Balance b/d 20,000
Balance c/d 6,000 Creditors Account (Bills accepted) 10,000*
30,000 30,000
Cash paid to creditors = Rs. 1,29,000
Cash paid on account of bills payable = Rs. 24,000

65
Example: 7

Calculate the Cash Outflow on account of

expenses from the following information:
Expenses incurred during the year 2008 1,50,000
Outstanding expenses on 31 Dec. 2007 20,000
Outstanding expenses on 31 Dec. 2008 3,5000
Prepaid expenses on 31 Dec. 2007 15,000
Prepaid expenses on 31 Dec. 2008 10,000

66
Solution
Cash Outflow on Expenses
Particulars Rs.
Expenses incurred during the year 1,50,000
Add: Outstanding expenses (2007) 20,000
Prepaid expenses (2008) 10,000 30,000
1,80,000
Less: Outstanding expenses (2008) 35,000
Prepaid expenses (2007) 15,000 50,000
Cash Outflow on Expenses 13,000
In Account Form
Expenses Account
Particulars Rs. Particulars Rs.
Prepaid Expenses Account (2007) 15,000 Outstanding Expenses Account (2007)20,000
Bank Account (Outflow) 1,30,000 Profit and Loss A/c 1,50,000
(Balancing Figure) Prepaid Expenses Account (2008) 10,000
Outstanding Expenses (2008) 35,000
1,80,000 1,80,000

67
Solution
Cash Flow from Operating Activities

Particulars Rs.

(i) Operating Cash Receipts

Cash Sales 96,00,000

96,00,000

(ii) Operating Cash Payments

Cash Paid to Creditors 5780000

Expenses 2136000

7916000

Cash Generated from Operations before Tax ( i - ii) 1684,000

Less: Income Tax Paid (Net of Refund) 700,000

Cash Flows from Operations before Extraordinary items 984000

Less: Extraordinary items: Insurance Claim for Earthquake Loss XXX

Net Cash Flow from Operating Activities 984000

68
 Format for Preparation of
Cash Flow Statement-
Indirect(Operating)
69
Cash Flow From Operating Activities-
Indirect
INDIRECT METHOD-FORMAT
It is to be noted that difference in two methods is only in Operating Activity and not in other
activities. This is shown below:

Net Profit (Before Tax and Extraordinary items)

Adjustments:
a. Non Cash items
b. Items treated separately
Operating profit before working capital changes
Add: Decrease in current assets/Increase in current liability
Cash generated from operations
Less: Income Taxes Paid Common to Both
Cash flows before extraordinary items DIRECT &INDIRECT
Add/Less: Extraordinary items
Net cash from operating activities

70
 Format for Preparation of
Cash Flow Statement -
Investing
71
Cash Flow From Investing Activities
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of Fixed Assets
Proceeds from sale of Long term investments
Proceeds from sale of Patents/Copyrights/Trademarks
Rent/Dividend/Interest Received
Purchase of Fixed Assets(Less)
Purchase of Long term Investments(Less)
Purchase of Patents/Trademarks/Copyrights/Goodwill(Less)
Net Cash from (or used in) Investing Activities XXX

72
 Format for Preparation of
Cash Flow Statement-
Financing
73
Cash Flow From Financing Activities

CASH FLOW FROM FINANCING ACTIVITIES:

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

74
 Summary of Format of Cash
Flow Statement
75
Cash Inflows and Outflows

76
 Adjustments -
Cash Flow Statement
77
Adjustment 1: Treatment of Tax

Cash flow for tax payments / refund should be classified as cash flow
from operating activities.

If cash flow can be specifically identified as cash flow from investment /

financing activities, appropriate classification should be made.

Capital Gain Tax should be classified as cash outflow from investing

Activity

Corporate Dividend Tax should be classified as cash outflow from

Financing Activity

78
Adjustment 2:Hidden Dividend
Reconciliation of Profit as per Balance Sheet
with PBT (Profit Before tax)
The net profit before taxation figure in the account
is the starting point for calculation. It can be
calculated as follows
Difference between the Closing Balance and the Opening Balance of Profit and Loss Account
...
Add: Proposed Dividend for the current year ...
Add: Interim Dividend Paid during the year ...
Add: Transfer to general Reserve ...
Less: Provision for tax made during the year ...
Less: Refund of tax credited to the profit and loss account ...
Less: Extraordinary items, if any, credited to the Profit and Loss Account (...)
Net Profit before tax, and extra ordinary items
79
If any Balancing Figure is Present, then it is Interim Dividend
Adjustment 3-Interim Dividend

The interim dividend is declared by the board of directors in between

the financial year.

Declaration of the interim dividend does not require the approval at the
general meeting.

Interim dividend becomes due and is paid during the same year.

The amount of interim dividend is added back to current years profits to

find out cash flow from operating activities(Indirect Method)

The payments made in respect of dividends would be shown an outflow

at cash under Financing Activities.

80
Adjustment 4: Proposed Dividends

The proposed dividend for the current year becomes due and
is paid in the next year.

It is an outflow of cash and cash equivalents in the next year.

It is added back to current years profits to find out cash flow

from operating activities.(Indirect)

The proposed dividend of the previous year becomes due and

is also paid in the current year under Financing Activity.

81
Adjustment 5: Interest

Received from investment it is in investment activities

Received from short term investment classified, as cash
Interest equivalents should be considered as cash inflows from
Received operating activities.
Received on trade advances and operating receivables
should be in operating activities

On loans / debts are in financing activities

Interest On working capital loan and any other loan taken to finance
Paid operating activities are in operating activities

Interest Added to find out cash flow from operating activities(Indirect

Charged Method)
82
Adjustment 6:
Foreign Currency Transaction

The effect of change in exchange rate in cash and cash equivalents

held in foreign currency should be reported as separate part of the
reconciliation of cash and cash equivalents.

Unrealized gain and losses arising from changes in foreign exchanges

rates are not cash flows.

Unrealised foreign exchange gain is reduced from the net profit befor
tax in the cash flow statement while computing cash flow from
operating activities as it does not involve a cash inflow.

Likewise, unrealised foreign exchange loss is added to the net profit

before tax in the cash flow statement while computing the cash flow
from operating activities.

83
Adjustment 7-Non Cash Transaction

AS per Para 40 of AS 3, non cash transaction shall be

separately disclosed as foot note to Cash Flow
Statement like land purchased against issue of
debentures etc.

84
Contd: Example:8
M/s. X. Ltd. bought the assets of M/s. Y. Ltd. for Rs.
1,00,000 payable in fully paid shares of M/s. X. Ltd.
These assets consisted of stock of goods Rs. 30,000,
machinery Rs. 50,000 and goodwill Rs. 20,000. How
this transaction would be dealt with in the preparation
of cash flow statement.
An analysis of the transaction shows that the following
journal entry must have been made:
Stock Account Dr. 30,000
Machinery Account Dr. 50,000
Goodwill Account Dr. 20,000
To Equity Share Capital Account 1,00,000 85
Adjustment 8-Non Current asset-Net
Basis
The comparative balance sheets of M/s. V. Ltd. at two
different dates provide the following information:
Plant and Machinery-1,350000(PY) 1,440000(CY)
It is informed that depreciation amounting to Rs.
6,00,000 has been provided during the year.
Find out the changes that have taken place in the
asset and also state their effect on cash flows.

86
Solution:

Plant and Machinery Account

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

87
Adjustment 9-Non Current asset-Gross
Basis
In the comparative balance sheets of M/s. P. Ltd. the
position of buildings account is given as under :
(Amount in 000)

Liabilities 201 202 Assets 201 202

Rs. Rs. Rs. Rs.
Accumulated Buildings 3,840 3,910
depreciationBuildings 700 790

Additional information :
A part of the buildings Rs. 74,000 was sold for Rs. 60,000.
The accumulated depreciation on buildings sold was Rs. 20,000.
Analyse the transactions.

88
Solution:
Buildings Account
Rs. Rs.
Balance b/d Cash (Inflow) 60
Profit and Loss Account 3,840 Accumulated depreciation 20
(Gain on sale) (i) 6 3,910
Cash-purchase (Outflow)
(Balancing figure) (ii) 144
3,990 3,990

ACCUMULAT ED DEPRECIATION ACCOUNT

(BUILDINGS)

Rs. Rs.
Buildings (Accumulated Depreciation) Balance b/d
Balance c/d 20 Profit and Loss Account (iii) 700
790 (Depreciation charged) 110
810 810

89
Adjustment 10-Extraordinary items

The cash flows associated with extraordinary items

should be classified as arising from:
Operating
Investing or
Financing activities

as appropriate and separately disclosed.

Example-Proceeds from Earthquake settlements
etc

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 Examples
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 Example- 9
Prepare Cash Flow Statement of sona Ltd. from the following information for the year ended March 31, 2007:

Particulars 31.3.2006 (Rs) 31.3.2007 (Rs)

Investments 1,80,000 2,40,000
Fixed Assets (at cost) 2,10,000 4,00,000
Equity Share Capital 12,00,000 16,00,000
Long term Loan 8,00,000 4,50,000
Cash 1,64,000 1,44,000
Additional Information:
1. Cash flow from operating activities after tax and extra ordinary
items Rs. 3,60,000
2. Depreciation on fixed assets Rs. 85,000
3. Interest received Rs. 45,000
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4. Dividend paid during the year Rs. 1,40,000
Solution

SONA LTD.

CA S H F LOW ST AT EM ENT
F O R T H E YE A R E N D E D O N 3 1 M AR C H , 2 0 0 7

Particulars Amount (Rs.) Amount (Rs)

(A) Cash Flow from Operating Activities (A) 3,60,000
(B) Cash Flow from Investing Activities:
Purchase of Investment (60,000)
Purchase of Fixed Asset (4,00,000 + 85,000 2,10,000) (2,75,000)
Interest Received 45,000
Net Cash used in Investing Activities (B) (2,90,000)
(C) Cash Flow from Financing Activities:
Issue of Equity Share Capital 4,00,000
Repayment of long term loans (3,50,000)
Dividend paid during the year (1,60,000)
Net Cash used in financing Activities (C) (1,90,000)
Net Decrease in Cash & Cash Equivalents (A+B+C) (20,000)
Add: Cash & Cash equivalents in the beginning 64,000
Cash & Cash equivalents at the end 44,000

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Example:10

Point out giving reasons whether following

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

Point out giving reasons whether following

statements are True or False:
(i) Outflow of cash will take place if debentures are
issued
False
Provision for taxes may be treated as both current
and non-current liabilities.
True
Cash flow statement forecasts outflow of cash
only.
False 95
Comprehensive Example:11

The following financial statement have been prepared by the Chief Accountant of XYZ
Liabilities 2007 2008 Assets 2007 2008
Rs. Rs. Rs. Rs.
Share Capital 4,00,000 5,00,000 Fixed Assets 10,00,000 11,20,000
Reserves & Surplus 2,50,000 2,80,000 Less: Dep. Written Off 3,70,000 4,60,000
Profit and Loss A/c 1,40,000 1,65,000 6,30,000 6,60,000
Debentures 3,00,000 2,80,000 Stock-in-Trade 2,40,000 3,70,000
Creditors 70,000 60,000 Debtors 2,50,000 2,30,000
Provision for Tax 60,000 80,000 Cash in Hand and at Bank 80,000 90,000
Discount on issue of Share 20,000 15,000
12,20,000 13,65,000 12,20,000 13,65,000

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Problem Statement - 2
Profit and Loss Appropriation Account for the year ended 31st March, 2008.
Particulars Rs. Particulars Rs.
Transfer to Reserves 30,000 Balance b/d 1,40,000
Interim Dividend paid 80,000 Net Profit for current year 1,35,00
Balance b/d 1,65,000
2,75,000 2,75,000
Prepare a Cash Flow Statement as per AS-3.

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

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Contd:

(B) Cash Flow from Investing Activities

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

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Learning Summary
Cash Flow Statement is prepared as per standard format prescribed by AS-3
issued by ICAI

Cash flow statements are prepared to explain the cash movements between two
points of time

The connection between two successive balance sheets and the statement of
cash flows can be shown as follows:

Cash=Non Current Liability+ Non Current Assets+ in Owners Equity

The statement of cash flows shows three main categories of cash inflows (cash
receipts) and cash outflows (cash payments). These are in order as follows:
Cash Flows From Operating Activities
Cash Flows From Investing Activities
Cash Flows From Financing Activities

Cash Flow from Operating activity can be computed using Direct and Indirect
method
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 Thank You
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