CASH FLOW STATEMENT AS-3(revised).

(2+5 Marks)
Meaning of cash flow Statement: A statement showing the change in
financial position of a business concern during different intervals of time in terms
of cash and cash equivalent is known as cash flow statement.

Objectives of cash flow statement:

 To assess cash flow of dividend policy.
 Helps in formulation of dividend policy.
 Helps in financial planning
 Helps in preparing cash budget.
 For judging the operational efficiency.
 Statutory requirement.

Cash : Cash comprises of cash as well as cash equivalents i.e.cash in hand and
demand deposits with the bank, current investments, marketable securities,
commercial papers.

Activities in Cash flow statement

Operating Investing Financing

 Cash Flow from Operating Activities: Activities related to core or

principal revenue generating activities of an enterprise.
Cash Inflows:from Cash Sales, from Debtors, as Commission and Royalty
Cash Outflows: Cash Purchases, Payment to creditors, Payment of wages

 Cash Flow from Investing Activities: Activities related to sale and

purchase of long-term fixed assets and investments.
Cash Inflows: Proceeds from sale of Fixed Assets and Investments,
Interest and dividend received
Cash Outflows:Purchase of long term fixed assets such as Land & Building,
Plant & Machinery, Investments, etc.

 Cash Flow from Financing Activities: Activities related to change

in capital structure of a company i.e. capital or long term funds of an
enterprise.
Cash Inflows:Proceeds from Issue of Shares and Debentures for Cash
Proceeds from Long-term Borrowings such as Bonds, Loans, etc.
Cash Outflows:Repayment of Loans, Redemption of Preference Shares and
Debentures, Buy-back of Equity Shares, Payment of Dividend and Interest
Etc.
Transactions not regarded as Cash Flow: These are the transactions
that are mere movements in between the items of Cash and Cash Equivalents. This
includes cash deposited in bank, cash withdrawn from the bank and purchase or
sale of marketable securities.

Non-cash transactions: These are the transactions in which the inflow or

outflow of Cash or Cash Equivalent does not take place. Therefore, these non-cash
transactions are not considered while preparing the Cash Flow Statements. These
transactions include depreciation, amortisation, issue of bonus, etc.

Types of Businesses and Impact on Cash Flow:

Financial Enterprise: An enterprise that basically deals in lending (advancing

loans) and borrowing of funds (accepting deposits), such as Banks.
Non-Financial Enterprise: An enterprise that basically deals in areas other than
finance (purchase of raw material and sale of goods).

For an activity to be classified as ‘Operating’ or ‘not’ focus, Nature of Business is

guiding factor, i.e. Core Business Activity of the business.

Extraordinary Items:

All the incomes and expenses that arise from events or transactions that are
clearly distinct from the ordinary course of business of the enterprise are termed
as extraordinary items.All such items are not expected to recur frequently or
regularly.
It includes items such as payment to shareholders in the event of buy back of
shares, claim for damages received, etc.
FORMAT OF CASH FLOW STATEMENT ( INDIRECT METHOD)
Steps to Ascertain Net
Profit before Tax and
Extraordinary Items

Steps to Ascertain
Operating Profit
Before Working
Capital Changes—

Treatment of
Special Adjustments

 Bank Overdraft:
Treated as short-
term borrowings
shown under
Financing Activities
 Interim Dividend: The dividend declared and paid by the Board of
Directors before its Annual General Meeting during the current year.
(Always given as adjustment and is not affected by Proposed Dividend)

 Proposed dividend: As per AS-4, Contingencies and Events Occurring

after the Balance Sheet Date, Proposed dividend is shown in the Notes to
Accounts. It will be shown as contingent liability since it becomes a liability
after it is declared (approved) by the shareholders. Proposed dividend of
previous year after declaration (approved) by the shareholders will be
debited to surplus i.e., Balance in Statement of Profit and Loss. While
preparing cash flow statement, previous year's proposed dividend will be
added to Act Profit under operating activities and will be shown under
financial activity.

 Provision for tax —

 Fixed Asset Account:
a. If assets are shown at their Written Down Value i.e. after providing
depreciation:

b. If assets are shown at their Original Value( Accumulated

Depreciation balances given )
 Questions:

1. Identify activities as operating/investing/financing/cash and cash

equivalent in each of the following
a. interest received on loans granted by financial company
b. payment of dividend on equity shares
c. rent received on building
d. bank overdraft
Solution:
a. Operating activity
b. Financing activity
c. Investing activity
d. Financing activity

2. State whether following activities will result into inflow/outflow/no flow

of cash
a. purchase of goods on credit
b. sale proceed of building
c. proposed dividend paid
d. purchase of fixed assets at 10% less cost price
Solution:
 a. No flow
b. Inflows
c. Outflows
d. Outflows

3. What is meant by cash equivalents?

Solution: Cash equivalents mean short-term highly liquid investments that
are readily convertible into known amount of cash and which are
subjected to an insignificant risk of change in value.

4. State with reason whether the issue of 9% debentures to the vendors for
the purchase of machinery of Rs 50,000 will result into inflow, outflow or
no flow of cash.
Solution: There is no flow of cash by the issue of 9% debentures to the
vendors for the purchase of machinery of Rs 50,000 because this
transaction will not change the balance of cash and cash equivalents.

5. Under which type of activity will you classify ‘refund of income tax
received’ while preparing the cash flow statement?
Solution: Operating activity.

6. Give an example of the activity which remains financing activity for every
enterprise.
Solution: Dividend paid.

7. Following is the balance sheet of GIC Ltd as on 31 March 2021. Prepare

cash flow statement

Particulars Note no. 31.3.2020 31.3.2019

 I.EQUITY AND LIABILITIES: ₹ ₹
1. Shareholder’s Funds
(a) Share Capital 70,000 60,000
(b)Reserves and Surplus 1 44,000 8,000
2. Non-Current Liabilities
(a) Long-term Borrowings 2 50,000 50,000
3. Current Liabilities
(a) Trade Payables 25,000 9,000
TOTAL 1,89,000 1,27,000

II. ASSETS:
Non-Current Assets
Fixed Assets
98,000 84,000
Tangible Assets
Non-current Investments 16,000 6,000
2. Current Assets 18,000 20,000
(a) Current investments 49,000 12,000
(b) Inventories 8,000 5,000
(c)Cash and Cash Equivalents 1,89,000 1,27,000
TOTAL

Notes to Accounts
1. Reserve & Surplus: 31.3.2020 31.3.2019
General Reserve 30,000 20,000
Surplus i.e. Balance in Statement of Profit &Loss. 14,000 (12,000)
44,000 8,000
2. Long Term Borrowings:
Debentures 50,000. 50,000
Additional Information:
Depreciation provided on tangible assets (Machinery) during the year ₹8,000.
Interest paid on debentures ₹5,000.
Solution:

CASH FLOW STATEMENT

For the year ended 31st march,2020
Particulars Details Amount
Cash flows from operating Activities:
Net profit before tax 36,000
Adj.non-cash/non-op.
Add: Depreciation 8,000
Interest on debentures 5,000 13000
…………….
Operating profit before w.c.changes 49000
Add: increase in current liabilities
Trade payables 16,000
Less: increase in current assets
Inventories (37,000) (21000)
………………
Net cash flow from operating activities 28,000
Cash flow from Investing Activities: (22,000)
Purchase of fixed Tangible assets (10,000)
Purchase of Non-current investments (32,000)
Cash used in investing activities
Cash flows from financing activities: 10,000
Proceeds from issue of equity share capital
Interest paid on debentures (5,000) 5,000
Net cash flow from financing activities ……………………..
1,000
Net increase in cash & cash equivalents
(A+B+C) 25,000
Add: cash and cash equivalents in the
beginning 26,000
Cash and cash equivalents at the end of the
year

Working notes-
1. NET PROFIT BEFORE TAX:
Net profit for the current year(14,000+12,000) = 26,000
Add: transfer to general reserve = 10,000
36,000
2. FIXED TANGIBLE ASSETS
To balance b/d 84,000 By Depreciation. 8,000
To bank (purchase) 22,000 By balance c/d. 98,000
(bal. fig.)
1,06,000 1,06,000

8. Welprint Ltd. has given you the following information:

Rs.
Machinery as on April 01, 2020 50,000
Machinery as on March 31, 2021 60,000
Accumulated Depreciation on April 01, 2020 25,000
Accumulated Depreciation on March 31, 2021 15,000
 During the year, a Machine costing Rs. 25,000 with Accumulated
Depreciation Rs. 15,000 was sold for Rs. 13,000.
Calculate cash flow from Investing Activities on the basis of the above
information.
Solution:
Cash flows from investing activities Rs.

Sale of Machinery 13,000

Purchase of Machinery (35,000)
Net cash used in Investing Activities (22,000)

Working Notes:
Machinery Account
Dr. Cr.
Particulars J.F. Amount Particulars J.F. Amount
(Rs.) (Rs.)
Balance b/d 50,000 Cash (proceeds 13,000
Statement of Profit and from sale of machine)
Loss (profit on sale of 3,000 Accumulated
machine) Depreciation 15,000
Cash (balancing 35,000 Balance c/d
figure:new machinery 60,000
purchased)
88,000 88,000

Accumulated depreciation Account

Dr. Cr.
Particulars J.F. Amount Particulars J.F. Amount
(Rs.) (Rs.)
Machinery 15,000 Balance b/d 25,000
Balance c/d 15,000 Statement of Profit and Loss 5,000
(Depreciation provided
during the year)
30,000 30,000
 9. From the following Balance Sheets of Xerox Ltd., prepare cash flow
statement.

Particulars Note 31st March 31st March

No. 2021 (Rs.) 2020 (Rs.)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital 15,00,000 10,00,000
7,50,000 6,00,000
b) Reserve and surplus (Balance in
Statement of Profit and Loss)
2. Non-current Liabilities Long- 1 1,00,000 2,00,000
term borrowings
1,00,000 1,10,000
3. Current Liabilities 95,000 80,000
a) Trade payables
b) Short-term provisions 25,45,000 19,90,000
(Provision for taxation)
Total
II. Assets
1. Non-current assets
2 10,10,000 12,00,000
1,80,000 2,00,000
a) Fixed assets
6,00,000 -
(i) Tangible assets
(ii) Intangible assets (Goodwill) b) 1,80,000 1,00,000
Non-current investment 2,00,000 1,50,000
2. Current assets 3 3,75,000 3,40,000
25,45,000 19,90,000
a) Inventories
b) Trade Receivables
c) Cash and cash equivalents
Total

Notes to accounts
Particulars 31st March 31st March
2021(Rs.) 2020 (Rs.)
1. Long-term borrowings:
i) 9% Debentures 2,00,000
ii) 5% Bank loan 1,00,000
1,00,000 2,00,000
2. Tangible Assets
i) Land and building 6,50,000 8,00,000
ii) Plant and machinery 3,60,000 4,00,000
10,10,000 12,00,000
3. Cash and cash equivalents
i) Cash in hand 70,000 50,000
ii) Bank balance 3,05,000 2,90,000
3,75,000 3,40,000
 Notes to Accounts:
Additional information:
1. Proposed dividend 2020-21 is Rs. 2,25,000 and for 2019-20 is Rs. 1,50,000.
2. Income tax paid during the year includes Rs. 15,000 on account of
dividend tax.
3. Land and building book value Rs. 1,50,000 was sold at a profit of 10%.
4. The rate of depreciation on plant and machinery is 10%.
5. 9% debentures redeemed on April 2021, 5% bank loan was opted
on March 31, 2021.
Solution:
Cash Flow Statement

Particulars (Rs.)
I. Cash flows from Operating Activities
Net Profit before Taxation and Extraordinary Items 3,95,000
Adjustment for –
+ Depreciation 40,000
+ Goodwill written-off 20,000
– Profit on Sale of Land (15,000)
= Operating Profit before working capital changes 4,40,000
– Decrease in Trade Payables (10,000)
– Increase in Trade Receivables (50,000)
– Increase in Inventories (80,000)
= Cash generated from Operations 3,00,000
– Income Tax Paid (1) (65,000)
A. Cash Inflows from Operations 2,35,000
II. Cash flows from Investing Activities
Proceeds from Sale of Land and Building 1,65,000
Purchase of Investment (6,00,000)
B. Cash used in Investing Activities 4,35,000

III. Cash flows from Financing Activities

Proceeds from issue of Equity Share Capital 5,00,000
Redemption of Debentures 2,00,000
Proceeds from raising Bank Loan 1,00,000
Dividend Paid 1,50,000
Dividend Distribution Tax Paid 15,000
C. Cash flows from Financing Activities 2,35,000
Net Increase in cash and cash equivalents 35,000
(A+B+C)
+ Cash and Cash Equivalents in the beginning 3,40,000
Cash and Cash Equivalent at the end 3,75,000
Working Notes:
(1) OTotal tax paid during the year Rs. 80,0000

(2) (–) Dividend Distribution tax paid (given) Rs. (15,000)

Income tax paid for operating activities Rs. 65,000
(3) Net profit earned during the year after tax and dividend
= Rs. 7,50,000 – 6,00,000 = Rs. 1,50,000
(4) Net profit before tax
= Net profit earned during the year after tax and dividend +
Provision for tax made + Declared Dividend
= Rs. 1,50,000 + Rs. 95,000 (See provision for taxation)+ Rs. 1,50,000
= Rs. 3,95,000
Bank Account
Particulars J.F. Amount Particulars J.F. Amount
(Rs.) (Rs.)
Balance c/d 1,00,000 Cash 1,00,000
1,00,000 1,00,000
Provision for Taxation Account
Dr. Cr.
Particulars J.F. Amount Particulars J.F. Amount
(Rs.) (Rs.)
Cash (Tax paid:which 80,000 Balance b/d 80,000
includes Rs. 15,000 as Statement of Profit and Loss 95,000
dividend (Provision
95,000 the year) made during
Balance c/d
1,75,000 1,75,000

Land and Building Account

Dr. Cr.
Particulars J.F. Amount Particulars J.F. Amoun
(Rs.) t
(Rs.)
Balance b/d 8,00,000 Cash 1,65,000
Statement of Profit and 15,000 Balance c/d 6,50,000
Loss
(Profit on sale)
8,15,000 8,15,000

Plant and Machinery Account

Dr. Cr.
Particulars J.F. Amount Particulars J.F. Amount
(Rs.) (Rs.)
Balance b/d 4,00,000 Depreciation Balance 40,000
c/d 3,60,000
4,00,000 4,00,000