Cash Flow Statement - ncert

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Cash Flow Statement

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LEARNING OBJECTIVES After studying this chapter, you will be able to : • state the purpose and preparation of statement of cash flow statement; • distinguish between operating activities, investing activities and financing activities; • prepare the statement of cash flows using direct method; • prepare the cash flow statement using indirect method.

6

iill now you have learnt about the financial statements being primarily inclusive of Position Statement (showing the financial position of an enterprise as on a particular date) and Income Statement (showing the result of the operational activities of an enterprise over a particular period). There is also a third important financial statement known as Cash flow statement, which shows inflows and outflows of the cash and cash equivalents. This statement is usually prepared by companies which comes as a tool in the hands of users of financial information to know about the sources and uses of cash and cash equivalents of an enterprise over a period of time from various activities of an enterprise. It has gained substantial importance in the last decade because of its practical utility to the users of financial information. Accounting Standard-3 (AS-3), issued by The Institute of Chartered Accountants of India (ICAI) in June 1981, which dealt with a statement showing ‘Changes in Financial Position’, (Fund Flow Statement), has been revised and now deals with the preparation and presentation of Cash flow statement. The revised AS-3 has made it mandatory for all listed companies to prepare and present a cash flow statement along with other financial statements on annual basis. Hence, it may be noted, that Fund Flow statement is no more considered relevant in accounting and so not discussed here. A cash flow statement provides information about the historical changes in cash and cash

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equivalents of an enterprise by classifying cash flows into operating, investing and financing activities. It requires that an enterprise should prepare a cash flow statement and should present it for each accounting period for which financial statements are presented. This chapter discusses this technique and explains the method of preparing a cash flow statement for an accounting period. 6.1

Objectives of Cash Flow Statement

A Cash flow statement shows inflow and outflow of cash and cash equivalents from various activities of a company during a specific period. The primary objective of cash flow statement is to provide useful information about cash flows (inflows and outflows) of an enterprise during a particular period under various heads, i.e., operating activities, investing activities and financing activities. This information is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation. 6.2

Benefits of Cash Flow Statement

Cash flow statement provides the following benefits : l A cash flow statement when used along with other financial statements provides information that enables users to evaluate changes in net assets of an enterprise, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timings of cash flows in order to adapt to changing circumstances and opportunities. l Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises. l It also enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events. l It also helps in balancing its cash inflow and cash outflow, keeping in response to changing condition. It is also helpful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and impact of changing prices.

Cash Flow Statement

6.3

251

Cash and Cash Equivalents

As stated earlier, cash flow statement shows inflows and outflows of cash and cash equivalents from various activities of an enterprise during a particular period. As per AS-3, ‘Cash’ comprises cash in hand and demand deposits with banks, and ‘Cash equivalents’ means short-term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. An investment normally qualifies as cash equivalents only when it has a short maturity, of say, three months or less from the date of acquisition. Investments in shares are excluded from cash equivalents unless they are in substantial cash equivalents. For example, preference shares of a company acquired shortly before their specific redemption date, provided there is only insignificant risk of failure of the company to repay the amount at maturity. Similarly, short-term marketable securities which can be readily converted into cash are treated as cash equivalents and is liquidable immediately without considerable change in value. 6.4

Cash Flows

‘Cash Flows’ implies movement of cash in and out due to some non-cash items. Receipt of cash from a non-cash item is termed as cash inflow while cash payment in respect of such items as cash outflow. For example, purchase of machinery by paying cash is cash outflow while sale proceeds received from sale of machinery is cash inflow. Other examples of cash flows include collection of cash from trade receivables, payment to trade payables, payment to employees, receipt of dividend, interest payments, etc. Cash management includes the investment of excess cash in cash equivalents. Hence, purchase of marketable securities or short-term investment which constitutes cash equivalents is not considered while preparing cash flow statement. 6.5

Classification of Activities for the Preparation of Cash Flow Statement

You know that various activities of an enterprise result into cash flows (inflows or receipts and outflows or payments) which is the subject matter of a cash flow statement. As per AS-3, these activities are to be classified into three categories: (1) operating, (2) investing, and (3) financing activities so as to show separately the cash flows generated (or used) by (in) these activities. This helps the users of cash flow statement to assess the impact of these activities on the financial position of an enterprise and also on its cash and cash equivalents.

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6.5.1

Cash from Operating Activities

Operating activities are the activities that constitute the primary or main activities of an enterprise. For example, for a company manufacturing garments, operating activities are procurement of raw material, incurrence of manufacturing expenses, sale of garments, etc. These are the principal revenue generating activities (or the main activities) of the enterprise and these activities are not investing or financing activities. The amount of cash from operations’ indicates the internal solvency level of the company, and is regarded as the key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, paying dividends, making of new investments and repaying of loans without recourse to external source of financing. Cash flows from operating activities are primarily derived from the main activities of the enterprise. They generally result from the transactions and other events that enter into the determination of net profit or loss. Examples of cash flows from operating activities are: Cash Inflows from operating activities l l

cash receipts from sale of goods and the rendering of services. cash receipts from royalties, fees, commissions and other revenues.

Cash Outflows from operating activities l l l l

Cash payments to suppliers for goods and services. Cash payments to and on behalf of the employees. Cash payments to an insurance enterprise for premiums and claims, annuities, and other policy benefits. Cash payments of income taxes unless they can be specifically identified with financing and investing activities.

The net position is shown in case of operating cash flows. An enterprise may hold securities and loans for dealing or for trading purposes. In either case they represent Inventory specifically held for resale. Therefore, cash flows arising from the purchase and sale of dealing or trading securities are classified as operating activities. Similarly, cash advances and loans made by financial enterprises are usually classified as operating activities since they relate to main activity of that enterprise. 6.5.2

Cash from Investing Activities

As per AS-3, investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Investing activities relate to purchase and sale of long-term assets or fixed assets such as machinery,

Cash Flow Statement

253

furniture, land and building, etc. Transactions related to long-term investment are also investing activities. Separate disclosure of cash flows from investing activities is important because they represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. Examples of cash flows arising from investing activities are: Cash Outflows from investing activities l l l

Cash payments to acquire fixed assets including intangibles and capitalised research and development. Cash payments to acquire shares, warrants or debt instruments of other enterprises other than the instruments those held for trading purposes. Cash advances and loans made to third party (other than advances and loans made by a financial enterprise wherein it is operating activities).

Cash Inflows from Investing Activities l l l l l

6.5.3

Cash receipt from disposal of fixed assets including intangibles. Cash receipt from the repayment of advances or loans made to third parties (except in case of financial enterprise). Cash receipt from disposal of shares, warrants or debt instruments of other enterprises except those held for trading purposes. Interest received in cash from loans and advances. Dividend received from investments in other enterprises. Cash from Financing Activities

As the name suggests, financing activities relate to long-term funds or capital of an enterprise, e.g., cash proceeds from issue of equity shares, debentures, raising long-term bank loans, repayment of bank loan, etc. As per AS-3, financing activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in case of a company) and borrowings of the enterprise. Separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds ( both capital and borrowings ) to the enterprise. Examples of financing activities are: Cash Inflows from financing activities l l

Cash proceeds from issuing shares (equity or/and preference). Cash proceeds from issuing debentures, loans, bonds and other short/ long-term borrowings.

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Cash Outflows from financing activities l l l

Cash repayments of amounts borrowed. Interest paid on debentures and long-term loans and advances. Dividends paid on equity and preference capital.

It is important to mention here that a transaction may include cash flows that are classified differently. For example, when the instalment paid in respect of a fixed asset acquired on deferred payment basis includes both interest and loan, the interest element is classified under financing activities and the loan element is classified under investing activities. Moreover, same activity may be classified differently for different enterprises. For example, purchase of shares is an operating activity for a share brokerage firm while it is investing activity in case of other enterprises. Cash Inflows

Cash Outflows

Proceeds from sale of goods and services to customers Receipt from royalties, fees, commission and other revenues

Payment of employee benefit expenses Operating Activities

Purchase of inventory from suppliers Pay operating expenses Payment of taxes

Sale of property, plant, equipment, long-term investments

Investing Activities

Receipt from Interest and dividends Proceeds from issue of preference or equity shares

Proceeds from Issuance of Debts/Bonds

Procurement of loans

Purchase of property, plant, equipment and non-current investments

Redemption of preference shares, buy back of own equity shares Financing Activities

Redemption of debentures and payment of the long-term debts Payment of dividends and interest

Exhibit 6.1: Classification of Cash inflows and Cash Outflows Activities

Cash Flow Statement

6.5.4

255

Treatment of Some Peculiar Items

Extraordinary items Extraordinary items are not the regular phenomenon, e.g., loss due to theft or earthquake or flood. Extraordinary items are non-recurring in nature and hence cash flows associated with extraordinary items should be classified and disclosed separately as arising from operating, investing or financing activities. This is done to enable users to understand their nature and effect on the present and future cash flows of an enterprise. Interest and Dividend In case of a financial enterprise (whose main business is lending and borrowing), interest paid, interest received and dividend received are classified as operating activities while dividend paid is a financing activity. In case of a non-financial enterprise, as per AS-3, it is considered more appropriate that payment of interest and dividends are classified as financing activities whereas receipt of interest and dividends are classified as investing activities. Taxes on Income and Gains Taxes may be income tax (tax on normal profit), capital gains tax (tax on capital profits), dividend tax (tax on the amount distributed as dividend to shareholders). AS-3 requires that cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities. This clearly implies that: l tax on operating profit should be classified as operating cash flows. l dividend tax, i.e., tax paid on dividend should be classified as financing activity along with dividend paid. l Capital gains tax paid on sale of fixed assets should be classified under investing activities. Non-cash Transactions As per AS-3, investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a cash flow statement. Examples of such transactions are – acquisition of machinery by issue of equity shares or redemption of debentures by issue of equity shares. Such transactions should be disclosed elsewhere in the financial statements in a way that provide all the relevant information about these investing and financing activities. Hence, assets acquired by issue of shares are not disclosed in cash flow statement due to non-cash nature of the transaction.

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With these three classifications, Cash Flow Statement is shown in Exhibit 6.2. Cash Flow Statement (Main heads only) (A) Cash flows from operating activities (B) Cash flows from investing activities (C) Cash flows from financing activities Net increase (decrease) in cash and cash equivalents (A + B + C) + Cash and cash equivalents at the beginning = Cash and cash equivalents at the end

xxx xxx xxx xxx xxx xxxx

Exhibit 6.2 : Sharing Specimen Cash Flow Statement Test your Understanding - I Classify the following activities into operating activities, investing activities, financing activities, cash equivalents. 1. Purchase of machinery. 3. Cash revenue from operations. 5. Proceeds from sale of old machinery. 7. Trading commission received. 9. Redemption of preference shares. 11. Proceeds from sale of non-current investment. 13. Cash paid to supplier. 15. Employee benefits expenses paid. 17. Interest received on debentures held as investments. 19. Office and administrative expenses paid. 21. Dividend received on shares held as investment. 23. Selling and distribution expenses paid. 25. Dividend paid on preferences shares. 27. Rent paid. 29. Bank overdraft. 30. Cash credit. 32. Marketable securities.

6.6

2. Proceeds from issuance of equity share capital. 4. Proceeds from long-term borrowings. 6. Cash receipt from trade receivables. 8. Purchase of non-current investment. 10. Cash purchases. 12. Purchase of goodwill. 14. Interim dividend paid on equity shares. 16. Proceeds from sale of patents. 18. Interest paid on long-term borrowings. 20. Manufacturing overheads paid. 22. Rent received on property held as investment. 24. Income tax paid. 26. Under-writing commission paid. 28. Brokerage paid on purchase of noncurrent investment. 31. Short-term deposit. 33. Refund of income-tax received.

Ascertaining Cash Flow from Operating Activities

Operating activities are the main source of revenue and expenditure in an enterprise. Therefore, the ascertainment of cash flows from operating activities need special attention.

Cash Flow Statement

257

As per AS-3, an enterprise should report cash flows from operating activities either by using : l Direct method whereby major classes of gross cash receipts and gross cash payments are disclosed; or l Indirect method whereby net profit or loss is duly adjusted for the effects of (1) transactions of a non-cash nature, (2) any deferrals or accruals of past/future operating cash receipts, and (3) items of income or expenses associated with investing or financing cash flows. It is important to mention here that under indirect method, the starting point is net profit/ loss before taxation and extra ordinary items as per Statement of Profit and Loss of the enterprise. Then this amount is for non-cash items, etc., adjusted for ascertaining cash flows from operating activities. Accordingly, cash flow from operating activities can be determined using either the Direct method or the Indirect method. These methods are discussed in detail as follows. 6.6.1

Direct Method

As the name suggests, under direct method, major heads of cash inflows and outflows (such as cash received from trade receivables, employee benefits expenses paid, etc.) are considered. It is important to note here that items are recorded on accrual basis in statement of profit and loss. Hence, certain adjustments are made to convert them into cash basis such as the following : 1. Cash receipts from customers = Revenue from operations + Trade receivables in the beginning – Trade receivables in the end. 2. Cash payments to suppliers = Purchases + Trade Payables in the beginning – Trade Payables in the end. 3. Purchases = Cost of Revenue from Operations – Opening Inventory + Closing Inventory. 4. Cash expenses = Expenses on accrual basis + Prepaid expenses in the beginning and Outstanding expenses in the end – Prepaid expenses in the end and Outstanding expenses in the beginning. However, the following items are not to be considered: 1. Non-cash items such as depreciation , discount on shares, etc., be writtenoff. 2. Items which are classified as investing or financing activities such as interest received, dividend paid, etc. As per AS-3, under the direct method, information about major classes of gross cash receipts and cash payments may be obtained either–

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Accountancy : Company Accounts and Analysis of Financial Statements

from the accounting records of the enterprise, or by adjusting revenue from operation, cost of revenue from operations and other items in the statement of profit or loss for the following: l changes during the period in inventories and trade receivables and payables; l other non-cash items; and l other items for which cash effects are investing or financing cash flows. Exhibit 6.3 shows the proforma of cash flows from operating activities using direct method. l l

Cash Flows from Operating Activities (Direct Method) Cash flows from operating activities: Cash receipts from customers (–) Cash paid to suppliers and employees =

xxx

Cash generated from operations

(–) Income tax paid =

(xxx) xxx

Cash flow before extraordinary items

+/– Extraordinary items =

xxx (xxx)

xxx xxxx

Net cash from operating activities

Exhibit 6.3 : Proforma of Cash Flows from Operating Activities

Illustration 1 From the following information, calculate cash flow from operating activities using direct method. Statement of Profit and Loss for the year ended on March 31, 2015 Particulars i) ii) iii) iv)

Revenue from operations Other Income Total revenue (i+ii) Expenses Cost of materials consumed Employees benefits expenses Depreciation Other expenses Insurance Premium Total expenses v) Profit before tax (iii-iv) Less Income tax vi) Profit after tax

Note

Figures for Current reporting period 2,20,000 2,20,000 1,20,000 30,000 20,000 8,000 1,78,000 42,000 (10,000) 32,000

Cash Flow Statement

259

Additional information: Particulars Trade receivables Trade payables Inventory Outstanding employees benefits expenses Prepaid insurance Income tax outstanding

April 01, 2014 Rs 33,000 17,000 22,000 2,000

March 31, 2015 Rs 36,000 15,000 27,000 3,000

5,000 3,000

5,500 2,000

Solution: Cash Flows from Operating Activities Particulars Cash receipts from customers Cash Paid to suppliers Cash Paid to employees Cash Paid for Insurance premium Cash generated from operations Income Tax paid Net Cash Inflow from Operations

(Rs) 2,17,000 (1,27,000) (29,000) (8,500) 52,500 (11,000) 41,500

Working Notes: 1.

2.

3.

4.

5. 6. 7. 8.

Cash Receipts from Customers is calculated as under : Cash Receipts from Customers = Revenue from Operations + Trade Receivables in the beginning – Trade Receivables in the end = Rs 2,20,000 + Rs 33,000 – Rs 36,000 = Rs 2,17,000 Purchases = Cost of Revenue from Operations – Opening Inventory + Closing Inventory = Rs 1,20,000 – Rs 22,000 + Rs 27,000 = Rs 1,25,000 Cash payment to suppliers = Purchases + Trade Payables in the beginning – Trade Payables in the end = Rs 1,25,000 + Rs 17,000 – Rs 15,000 = Rs 1,27,000 Cash Expenses = Expenses on Accrual basis – Prepaid Expenses in the beginning and Outstanding Expenses in the end + Prepaid Expenses in the end and Outstanding Expenses in the beginning Cash Paid to Employees = Rs 30,000 + Rs 2,000 – Rs 3,000 = Rs 29,000 Cash Paid for Insurance Premium = Rs 8,000 – Rs 5,000 + Rs 5,500 = Rs 8,500 Income Tax Paid = Rs 10,000+Rs 3,000 – Rs 2,000 = Rs 11,000 It is important to note here that there are no extraordinary items.

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6.6.2 Indirect Method Indirect method of ascertaining cash flow from operating activities begins with the amount of net profit/loss. This is so because statement of profit and loss incorporates the effects of all operating activities of an enterprise. However, Statement of Profit and Loss is prepared on accrual basis (and not on cash basis). Moreover, it also includes certain non-operating items such as interest paid, profit/loss on sale of fixed assets, etc.) and non-cash items (such as depreciation, goodwill to be written-off, etc.. Therefore, it becomes necessary to adjust the amount of net profit/loss as shown by Statement of Profit and Loss for arriving at cash flows from operating activities. Let us look at the example : Statement of Profit and Loss Account for the year ended March 31, 2015 Particulars i) ii) iii) iv)

v)

Revenue from Operations Other Income Total Revenues (i+ii) Expenses Cost of Materials Consumed Purchases of stock-in-trade Employees Benefits Expenses Finance Costs Depreciation Other Expenses Profit before Tax (iii-iv)

Note

1

Figures in Rs 1,00,000 2,000 1,02,000 30,000 10,000 10,000 5,000 5,000 12,000 72,000 30,000

Note: Other income includes profit on sale of land.

The above Statement of Profit and Loss shows the amount of net profit of Rs 30,000. This has to be adjusted for arriving cash flows from operating activities. Let us take various items one by one. 1. Depreciation is a non-cash item and hence, Rs 5,000 charged as depreciation does not result in any cash flow. Therefore, this amount must be added back to the net profit. 2. Finance costs of Rs 5,000 is a cash outflow on account of financing activity. Therefore, this amount must also be added back to net profit while calculating cash flows from operating activities. This amount of finance cost will be shown as an outflow under the head of financing activities. 3. Other income includes profit on sale of land: It is cash inflow from investing activity. Hence, this amount must be deducted from the amount of net profit while calculating cash flows from operating activities.

Cash Flow Statement

261

The above example gives you an idea as to how various adjustments are made in the amount of net profit/loss. Other important adjustments relate to changes in working capital which are necessary (i.e., items of current assets and current liabilities) to convert net profit/loss which is based on accrual basis into cash flows from operating activities. Therefore, the increase in current assets and decrease in current liabilities are deducted from the operating profit, and the decrease in current assets and increase in current liabilities are added to the operating profit so as to arrive at the exact amount of net cash flow from operating activities. As per AS-3, under indirect method, net cash flow from operating activities is determined by adjusting net profit or loss for the effect of : l Non-cash items such as depreciation, goodwill written-off, provisions, deferred taxes, etc., which are to be added back. l All other items for which the cash effects are investing or financing cash flows. The treatment of such items depends upon their nature. All investing and financing incomes are to be deducted from the amount of net profits while all such expenses are to be added back. For example, finance cost which is a financing cash outflow is to be added back while other income such as interest received which is investing cash inflow is to be deducted from the amount of net profit. l Changes in current assets and liabilities during the period. Increase in current assets and decrease in current liabilities are to be deducted while increase in current liabilities and decrease in current assets are to be added up. Exhibit 6.4 shows the proforma of calculating cash flows from operating activities as per indirect method. The direct method provides information which is useful in estimating future cash flows. But such information is not available under the indirect method. However, in practice, indirect method is mostly used by the companies for arriving at the net cash flow from operating activities. Cash Flows from Operating Activities (Indirect Method) Net Profit/Loss before Tax and Extraordinary Items Deductions already made in Statement of Profit and Loss on account of Non-cash items such as Depreciation, Goodwill to be Written-off. + Deductions already made in Statement of Profit and Loss on Account of Non-operating items such as Interest. – Additions (incomes) made in Statement of Profit and Loss on Account of Non-operating items such as Dividend received, Profit on sale of Fixed Assets. Operating Profit before Working Capital changes + Increase in Current liabilities + Decrease in Current assets – Increase in Current assets +

xxx xxx xxx

xxx xxx xxx xxx

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– Decrease in Current Liabilities Cash Flows from Operating Activities before Tax and Extraordinary Items – Income Tax Paid +/– Effects of Extraordinary Items

xxx xxx xxx xxx

Net Cash from Operating Activities

xxx

Exhibit 6.4: Proforma of Cash Flows from Operating Activities (Indirect Method)

As stated earlier, while working out the cash flow from operating activities, the starting point is the ‘Net profit before tax and extraordinary items’ and not the ‘Net profit as per Statement of Profit and Loss’. Income tax paid is deducted as the last item to arrive at the net cash flow from operating activities. Illustration 2 Using the data given in Illustration 1, calculate cash flows from operating activities using indirect method. Solution: Cash Flows from Operating Activities Particulars

(Rs)

(Net Profit before Taxation and Extraordinary Items (Note 1) Adjustments for– + Depreciation

42,000

= – – – – +

Operating Profit before working capital changes Increase in Trade Receivables Increase in Inventories Increase in Prepaid Insurance Decrease in Trade Payables Increase in Outstanding Employees Benefits Expenses

62,000 (3,000) (5,000) (500) (2,000) +1,000

= –

Cash generated from Operations Income tax paid

52,500 (11,000)

=

Net cash from Operating Activities

41,500

20,000

You will notice that the amount of cash flows from operating activities are the same whether we use direct method or indirect method for its calculation. Working Notes : The net profit before taxation and extraordinary items has been worked out as under: Net Profit = Rs 32,000 + Income Tax = Rs 10,000 = Net Profit before Tax and Extraordinary Items

=

Rs 42,000

Cash Flow Statement

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Illustration 3 Calculate cash flows from operating activities from the following information. Statement of Profit and Loss for the year ended March 31, 2015 Particulars i) ii) iii) iv)

v)

Note No.

Revenue from Operations Other Income Total Revenue (i+ii) Expenses Cost of Materials Consumed Employees Benefits Expenses Depreciation and Amortisation Expenses Other Expenses

1

2 3

Profit before Tax (iii-iv)

Working Notes: 1. Other Income

=

2. Depreciation and Amortisation Expenses

= = = =

3. Other Expenses

=

Amount Rs 50,000 5,000 55,000 15,000 10,000 7,000 21,000 53,000 2,000

Profit on Sale of Machinery (Rs 2,000 ) + Income Tax Refund (Rs 3,000) Rs 5,000 Depreciation (Rs 5,000) + Goodwill Amortised (Rs 2,000) Rs 7,000 Rent (Rs 10,000) + Loss on Sale of Equipment (Rs 3,000) + Provision for Taxation (Rs 8,000) Rs 21,000

Additional Information:

Provision for Taxation Rent Payable Trade Payables Trade Receivables Inventories

April 01, 2014 Rs

March 31, 2015 Rs

10,000 2,000 21,000 15,000 25,000

13,000 2,500 25,000 21,000 22,000

Solution: Cash Flows from Operating Activities Particulars

(Rs)

Net profit before taxation, and extraordinary items

7,000

Adjustments for: + +

Depreciation Loss on sale of equipment

5,000 3,000

+

Goodwill amortised

2,000

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Accountancy : Company Accounts and Analysis of Financial Statements –

Profit on sale of machinery

(2,000)

Operating Profit before Working capital changes

15,000



Increase in Trade receivables

(6,000)

+

Decrease in Inventories

3,000

+

Increase in Trade payables

4,000

+

Increase in Rent payable

500

Cash generated from operations

16,500

Income Tax paid

(5,000)

Income Tax refund

3,000 14,500

Net Cash from Operating activities Working Notes: 1. 2.

Net profit before taxation & extraordinary item = Rs 2,000 + Rs 8,000 – Rs 3,000 = Rs 7,000 Income tax paid during the year has been ascertained by preparing provision for taxation account as follows: Provision for taxation Account

Dr. Particulars Cash (Income tax paid during the year :Balancing Figure) Balance c/d

J.F.

Amount (Rs) 5,000

Particulars Balance b/d Profit and Loss

J.F.

Cr. Amount (Rs) 10,000 8,000

13,000 18,000

18,000

Illustration 4 Charles 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 amortised was Rs 7,000 and gain on sale of machinery was Rs 3,000. Other information available to you ( changes in the value of current assets and current liabilities) are trade receivables showed an increase of Rs 3,000; trade payables an increase of Rs 6,000; prepaid expenses an increase of Rs 200; and outstanding expenses a decrease of Rs 2,000. Ascertain cash flow from operating activities.

Cash Flow Statement

265

Solution: Cash Flows from Operating Activities Particulars

(Rs)

Net Profit before Taxation Adjustment for Non-cash and Non-operating Items : + Depreciation + Goodwill amortised – Gain on sale of machinery

1,30,000 20,000 7,000 (3,000) 1,54,000

Operating profit before working capital Adjustment for working capital charges : – Increase in Trade receivables + Increase in Trade payables – Increase in Prepaid expenses – Decrease in Outstanding expenses =

(3,000) 6,000 (200) (2,000) 1,54,800

Net Cash from Operating Activities

Working Notes : Calculation of Net Profit before Taxation and Extraordinary items: (1) Net Profit = Rs 1,00,000 + Transfer to General reserve = Rs 30,000 = Rs 1,30,000

Do it Yourself Statement of Profit and Loss for the year ending 31 March, 2015 Particulars i) ii) iii) iv)

v)

Revenue from Operations Other Income Total Revenues (i+ii) Expenses Cost of Materials Consumed Changes in inventories of finished goods Depreciation and Amortisation expenses Other expenses Total expenses Profit before Tax (iii-iv)

Note 1 2

Figures in Rs 40,00,000 21,00,000 61,00,000

3 4

20,00,000 1,00,000

5

3,80,000

6

20,40,000 45,20,000 15,80,000

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Accountancy : Company Accounts and Analysis of Financial Statements Working Notes: 1.

Rs 8,00,000 34,00,000 (2,00,000) 40,00,000

Cash revenue from operations Credit revenue from operations Less: Returns Net Revenue from Operations

2.

Trading commission Discount received from suppliers Other income 3. Cost of materials consumed paid in cash Cost of materials consumed bought on credit Less: Returns Cost of materials consumed (Net)

20,40,000 60,000 21,00,000 4,00,000 17,00,000 (1,00,000) 20,00,000

4.

Changes in Inventories of finished goods

= = =

Opening inventory – Closing inventory Rs 2,00,000 – Rs 1,00,000 Rs 1,00,000

5.

Depreciation and Amortisation expenses

= = =

Depreciation + Amortisation expenses Rs 3,80,000 + 0 Rs 3,80,000

6.

Other expenses

=

10,20,000 (Administrative expenses) +1,20,000(Discount allowed to customers) + 1,00,000 (Bad debts) + 8,00,000 (Provision for tax) Rs 20,40,000

= Additional Information:

(Rs)

(Rs)

Trade Receivables

20,00,000

40,00,000

Trade Payables

20,00,000

10,00,000

Other Expenses payable (administrative)

10,000

20,000

Prepaid Administrative Expenses

20,000

10,000

Outstanding Trading Expenses

20,000

40,000

Advance Trading Expenses

40,000

20,000

10,00,000

12,00,000

Provision for Taxation

Ascertain Cash from Operations. Show your workings clearly. 2. From the following information calculate net cash from operations: Particulars

(Rs)

Operating Profit after Provision for Tax of Rs 1,53,000

6,28,000

Insurance proceeds from the famine settlement

1,00,000

Proposed Dividend for the current year

72,000



Cash Flow Statement

267

Depreciation

1,40,000

Loss on Sale of Machinery

30,000

Profit on Sale of Investment

20,000

Dividend Received on Investments

6,000

Decrease in Current Assets (other than cash and cash equivalents)

10,000

Increase in Current Liabilities

1,51,000

Increase in Current Assets other than Cash and Cash Equivalents

6,00,000

Decrease in Current Liabilities Income Tax Paid

64,000 1,18,000

Refund of Income Tax Received

3,000

Test your Understanding – II 1. (a)

(b)

(c) (d) (e)

(f)

2.

Choose one of the two alternatives given below and fill in the blanks in the following statements: If the net profits earned during the year is Rs 50,000 and the amount of debtors in the beginning and the end of the year is Rs 10,000 and Rs 20,000 respectively, then the cash from operating activities will be equal to Rs __________________ (Rs 40,000/Rs 60,000) If the net profits made during the year are Rs 50,000 and the bills receivables have decreased by Rs 10,000 during the year then the cash flow from operating activities will be equal to Rs ________________ (40,000/Rs 60,000) Expenses paid in advance at the end of the year are ________________ the profit made during the year (added to/deducted from). An increase in accrued income during the particular year is ________________ the net profit (added to/deducted from). Goodwill amortised is ________________ the profit made during the year for calculating the cash flow from operating activities (added to/ deducted from). For calculating cash flow from operating activities, provision for doubtful debts is ________________ the profit made during the year (added to/ deducted from). While computing cash from operating activities, indicate whether the following items will be added or subtracted from the net profit- if not to be considered, write NC

Items:

Treatment

(a)

Increase in the value of creditors

(b)

Increase in the value of patents

(c)

Decrease in prepaid expenses

(d)

Decrease in income received in advance

(e)

Decrease in value of inventory

268

Accountancy : Company Accounts and Analysis of Financial Statements (f)

Increase in share capital

(g)

Increase in the value of trade receivables

(h)

Increase in the amount of outstanding expenses

(i)

Conversion of debentures into shares

(j)

Decrease in the value of trade payables

(k)

Increase in the value of trade receivables

(l)

Decrease in the amount of accrued income.

Sometimes, neither the amount of net profit is specified nor the Statement of profit and loss is given. In such a situation, the amount of net profit can be worked out by comparing the balances of Statement of Profit and Loss given in the comparative balance sheets for two years. The difference is treated as the net profit for the year; and, then, by adjusting it with the amount of provision for tax made during the year (as worked out by comparing the provision for tax balances of two years given in balance sheets), the amount of ‘Net Profit before tax’ can be ascertained (see Illustration 7 and 8). 6.7 Ascertainment of Cash Flow from Investing and Financing Activities The details of item leading inflows and outflows from investing and financing activities have already been outlined. While preparing the cash flow statement, all major items of gross cash receipts, gross cash payments, and net cash flows from investing and financing activities must be shown separately under the headings ‘Cash Flow from Investing Activities’ and ‘Cash Flow from Financing Activities’ respectively.’ The ascertainment of net cash flows from investing and financing activities have been briefly dealt with in Illustrations 5 and 6. Illustration 5 Welprint Ltd. has given you the following information:

(Rs) Machinery as on April 01, 2012 50,000 Machinery as on March 31, 2013 60,000 Accumulated Depreciation on April 01, 2012 25,000 Accumulated Depreciation on March 31, 2013 15,000 During the year, a Machine costing Rs 25,000 with Accumulated Depreciation of 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 Sale of Machinery Purchase of Machinery Net cash used in Investing Activities

(Rs) 13,000 (35,000) (22,000)

Cash Flow Statement

269

Working Notes: Machinery Account

Dr.

Cr.

Particulars

J.F.

Balance b/d Statement of Profit and Loss (profit on sale of machine) Cash (balancing figure:new machinery purchased)

Amount Particulars (Rs) 50,000 Cash (proceeds from sale of machine) 3,000 Accumulated Depreciation 35,000 Balance c/d

J.F.

Amount (Rs) 13,000 15,000 60,000

88,000

88,000

Accumulated Depreciation Account

Dr.

Cr.

Particulars

J.F.

Machinery Balance c/d

Amount Particulars (Rs) 15,000 Balance b/d 15,000 Statement of Profit and Loss (Depreciation provided during the year)

J.F.

30,000

Amount (Rs) 25,000 5,000

30,000

Illustration 6 From the following information, calculate cash flows from financing activities: April 1, March 31, 2014 2015 (Rs) (Rs) Long-term Loans 2,00,000 2,50,000 During the year, the company repaid a loan of Rs 1,00,000. Solution: Cash flows from Financing Activities Proceeds from long-term borrowings

1,50,000

Repayment of long-term borrowings

(1,00,000)

Net cash inflow from Financing Activities

50,000

Working Notes: Long-term Loan Account Dr. Particulars Cash (loan repaid) Balance c/d

J.F.

Amount Particulars (Rs) 1,00,000 Balance b/d 2,50,000 Cash (new loan raised) 3,50,000

J.F.

Cr. Amount (Rs) 2,00,000 1,50,000 3,50,000

270

Accountancy : Company Accounts and Analysis of Financial Statements Do it Yourself 1. From the following particulars, calculate cash flows from investing activities: Purchased (Rs)

Sold (Rs)

Plant

4,40,000

50,000

Investments

1,80,000

1,00,000

Goodwill Patents

2,00,000 1,00,000

Interest received on debentures held as investment Rs 60,000 Dividend received on shares held as investment Rs 10,000 A plot of land had been purchased for investment purposes and was let out for commercial use and rent received Rs 30,000. 2.

From the following Information, calculate cash flows from investing and financing activities:

Particulars Machine at cost Accumulated Depreciation

2014 5,00,000

2015 9,00,000

3,00,000

4,50,000

Equity Shares Capital

28,00,000

35,00,000

Bank Loan

12,50,000

7,50,000

In year 2015, machine costing Rs 2,00,000 was sold at a profit of Rs 1,50,000, Depreciation charged on machine during the year 2015 amounted to Rs 2,50,000.

6.8

Preparation of Cash Flow Statement

As stated earlier cash flow statement provides information about change in the position of Cash and Cash Equivalents of an enterprise, over an accounting period. The activities contributing to this change are classified into operating, investing and financing. The methology of working out the net cash flow (or use) from all the three activities for an accounting period has been explained in details and a brief format of Cash Flow Statement has also been given in Exhibit 6.2. However, while preparing a cash flow statement, full details of inflows and outflows are given under these heads including the net cash flow (or use). The aggregate of the net ‘cash flows (or use) is worked out and is shown as ‘Net Increase/Decrease in cash and Cash Equivalents’ to which the amount of ‘cash and cash equivalent at the beginning’ is added and thus the amount of ‘cash and cash equivalents at the end’ is arrived at as shown in Exhibit 6.2. This figure will be the same as the total amount of cash in hand, cash at bank and cash equivalants (if any) given in the balance sheet (see Illustrations 7 to 10). Another point that needs to be noted is that when cash flows from operating

Cash Flow Statement

271

activities are worked out by an indirect method and shown as such in the cash flow statement, the statement itself is termed as ‘Indirect method cash flow statement’. Thus, the Cash flow statements prepared in Illustrations 7, 8 and 9 fall under this category as the cash flows from operating activities have been worked out by indirect method. Similarly, if the cash flows from operating activities are worked by direct method while preparing the cash flow statement, it will be termed as ‘direct method Cash Flow Statement’. Illustration 10 shows both types of Cash Flow Statement. However, unless it is specified clearly as to which method is to be used, the cash flow statement may preferably be prepared by an indirect method as is done by most companies in practice. Illustration 7 From the following information, prepare Cash Flow Statement for Pioneer Ltd. Balance Sheet of Pioneer Ltd., as on March 31, 2015 Particulars I. Equity and Liabilities 1. Shareholders’ Funds a) Share capital b) Reserve and surplus 2. Non-current Liabilities Long-term borrowings: Bank Loan 3. Current Liabilities a) Trade payables b) Other current liabilities: outstanding rent c) Short-term provisions Total II. Assets 1. Non-current assets a) Fixed assets (i) Tangible assets (ii) Intangible assets b) Non-current investments 2. Current assets a) Inventories b) Trade receivables c) Cash and cash equivalents Total

Note No.

1 2

3

4 5

6

31st March 31st March 2015 (Rs) 2014 (Rs)

7,00,000 3,50,000

5,00,000 2,00,000

50,000

1,00,000

45,000 7,000 1,20,000 12,72,000

50,000 5,000 80,000 9,35,000

5,00,000 95,000 1,00,000

5,00,000 1,00,000 -

1,30,000 1,20,000 3,27,000 12,72,000

50,000 80,000 2,05,000 9,35,000

Notes to Accounts: Particulars 1. Equity Share Capital 2. Reserve and Surplus Surplus: i.e., Balance in Statement of Profit and Loss

31st March 31st March 2015 (Rs) 2014 (Rs) 7,00,000

5,00,000

3,50,000

2,00,000

272

Accountancy : Company Accounts and Analysis of Financial Statements

3. Short-term Provision: Proposed Dividend Provision for Taxation 4. Fixed Assets – Tangible assets – Equipments – Furniture 5. Intangible Assets Patents 6. Cash and cash equivalents i) Cash ii) Bank balance

70,000 50,000 1,20,000

50,000 30,000 80,000

2,30,000 2,70,000 5,00,000

2,00,000 3,00,000 5,00,000

95,000

1,00,000

27,000 3,00,000 3,27,000

5,000 2,00,000 2,05,000

During the year, equipment costing Rs 80,000 was purchased. Loss on Sale of equipment amounted to Rs 5,000. Depreciation of Rs 15,000 and 3,000 charged on equipments and furniture.

Rs

Solution: Cash Flow Statement I.

Particulars Cash flows from Operating Activities : Net profit before taxation & extraordinary items Provision for : Depreciation on equipment Depreciation on furniture Patents written-off Loss on sale of equipment

(Rs) 2,70,000 15,000 30,000 5,000 5,000

Operating Profit before Working capital Changes – Decrease in Trade payables + Increase in Outstanding rent – Increase in Trade receivables – Increase in inventories Cash generated from Operating activities (–) Tax paid

3,25,000 (5,000) 2,000 (40,000) (80,000) 2,02,000 (30,000)

A.

Cash Inflows from Operating Activities

1,72,000

II.

Cash flows from Investing Activities: Proceeds from sale of equipments Purchase of new equipment Purchase of Investments

30,000 (80,000) (1,00,000)

Cash used in Investing Activities

(1,50,000)

B.

Cash Flow Statement III.

C.

273

Cash flows from Financing Activities: Issues of equity share capital Repayment of bank loan Payment of dividend

2,00,000 (50,000) (50,000)

Cash Inflows from Financing Activities

1,00,000

Net increase in Cash & Cash Equivalents (A+B+C) + Cash and Cash Equivalents in the beginning Cash and Cash Equivalents in the end

1,22,000 2,05,000 3,27,000

Working Notes: (1) Equipment Account Dr. Particulars Balance b/d Cash

J.F.

Amount Particulars (Rs) 2,00,000 Depreciation 80,000 (balancing figure) Bank Statement of Profit & Loss (Loss on sale) Balance c/d 2,80,000

J.F.

Cr. Amount (Rs) 15,000 30,000 5,000 2,30,000 2,80,000

(2)

Patents of Rs 5,000 (i.e., Rs 1,00,000 – Rs 95,000) were written-off during the year, and depreciation on furniture Rs 30,000. (Rs 3,00,000 – Rs 2,70,000)

(3)

It is assumed that dividend of Rs 50,000 and tax of Rs 30,000 provided in 20132014 has been paid during the year 2014-15. Hence, proposed dividend and provision for tax during the year amounts to Rs 70,000 and Rs 50,000 respectively.

(4)

Profit and Loss at the end (–) Profit and Loss in the beginning

(Rs) 3,50,000 2,00,000

(5)

Net Profit during the year + Provision for tax during the year + Proposed dividend

1,50,000 50,000 70,000

Net Profit before taxation & extraordinary Items

2,70,000

274

Accountancy : Company Accounts and Analysis of Financial Statements

Illustration 8 From the following Balance Sheets of Xerox Ltd., prepare cash flow statement. Particulars I. Equity and Liabilities 1. Shareholders’ Funds a) Share capital b) Reserve and surplus (Balance in Statement of Profit and Loss) 2. Non-current Liabilities Long-term borrowings 3. Current Liabilities a) Trade payables b) Short-term provisions (Provision for taxation) Total II. Assets 1. Non-current assets a) Fixed assets (i) Tangible assets (ii) Intangible assets (Goodwill) b) Non-current investment 2. Current assets a) Inventories b) Trade Receivables c) Cash and cash equivalents Total Notes to Accounts: Particulars 1. Long-term borrowings: i) Debentures ii) Bank loan 2. Tangible Assets i) Land and building ii) Plant and machinery 3. Cash and cash equivalents i) Cash in hand ii) Bank balance

Note No.

1

31st March 2015 (Rs)

31st March 2014 (Rs)

15,00,000 7,50,000

10,00,000 6,00,000

1,00,000

2,00,000

1,00,000 95,000

1,10,000 80,000

25,45,000 19,90,000

2

3

10,10,000 1,80,000 6,00,000

12,00,000 2,00,000 -

1,80,000 1,00,000 2,00,000 1,50,000 3,75,000 3,40,000 25,45,000 19,90,000

31st March 31st March 2015 (Rs) 2014 (Rs) 2,00,000 1,00,000 1,00,000

2,00,000

6,50,000 8,00,000 3,60,000 4,00,000 10,10,000 12,00,000 70,000 3,05,000 3,75,000

50,000 2,90,000 3,40,000

Additional information: 1. Dividend proposed and paid during the year 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%.

Cash Flow Statement

275

Solution: Cash Flow Statement Particulars I.

II.

Cash flows from Operating Activities Net Profit before Taxation and Extraordinary Items Adjustment for – + Depreciation + Goodwill written-off – Profit on Sale of Land

3,95,000 40,000 20,000 (15,000)

= Operating Profit before working capital changes – Decrease in Trade Payables – Increase in Trade Receivables – Increase in Inventories

4,40,000 (10,000) (50,000) (80,000)

= Cash generated from Operations – Income Tax Paid (1)

3,00,000 (65,000)

A. Cash Inflows from Operations

2,35,000

Cash flows from Investing Activities Proceeds from Sale of Land and Building Purchase of Investment

1,65,000 (6,00,000)

B. Cash used in Investing Activities III.

(Rs)

(4,35,000)

Cash flows from Financing Activities Proceeds from issue of Equity Share Capital Redemption of Debentures Proceeds from raising Bank Loan Dividend Paid Dividend Tax Paid

5,00,000 (2,00,000) 1,00,000 (1,50,000) (15,000)

C. Cash flows from Financing Activities Net Increase in cash and cash equivalents (A+B+C) + Cash and Cash Equivalents in the beginning

2,35,000 35,000 3,40,000

Cash and Cash Equivalent at the end

3,75,000

Working Notes: (1) Total tax paid during the year (–) Dividend tax paid (given) Income tax paid for operating activities

Rs 80,0000 Rs (15,000) Rs 65,000

(2) Net profit earned during the year after tax and dividend = Rs 7,50,000 – 6,00,000 = Rs 1,50,000 (3) Net profit before tax = Net profit earned during the year after tax and dividend + Provision for tax made + Proposed Dividend = Rs 1,50,000 + Rs 95,000 (See provision for taxation account)+ Rs 1,50,000 = Rs 3,95,000

276

Accountancy : Company Accounts and Analysis of Financial Statements

Equity Share Capital Account Dr.

Cr.

Particulars

J.F.

Balance c/d

Amount Particulars (Rs)

J.F.

Amount (Rs)

15,00,000 Balance b/d Cash (New capital raised)

10,00,000 5,00,000

15,00,000

15,00,000

Debenture Account Dr.

Cr.

Particulars

J.F.

Cash (Redemption)

Amount Particulars (Rs) 20,000 Balance b/d

J.F.

20,000

Amount (Rs) 20,000 20,000

Bank Account Dr.

Cr.

Particulars

J.F.

Balance c/d

Amount Particulars (Rs) 1,00,000 Cash

J.F.

1,00,000

Amount (Rs) 1,00,000 1,00,000

Provision for Taxation Account Dr. Particulars

Cr. J.F.

Cash (Tax paid:which includes Rs 15,000 as dividend Balance c/d

Amount Particulars J.F. Amount (Rs) (Rs) 80,000 Balance b/d 80,000 Statement of Profit and Loss 95,000 (Provision made during 95,000 the year) 1,75,000 1,75,000

Land and Building Account Dr. Particulars Balance b/d Statement of Profit and Loss (Profit on sale)

Cr. J.F.

Amount Particulars (Rs) 8,00,000 Cash 15,000 Balance c/d 8,15,000

J.F.

Amount (Rs) 1,65,000 6,50,000 8,15,000

Cash Flow Statement

277

Proposed Dividend Account Dr. Particulars

Cr. J.F.

Cash

Amount Particulars (Rs)

J.F.

1,50,000 Surplus

Amount (Rs) 1,50,000

1,50,000

1,50,000

Plant and Machinery Account Dr. Particulars Balance b/d

Cr. J.F.

Amount Particulars (Rs)

J.F.

4,00,000 Depreciation Balance c/d

Amount (Rs) 40,000 3,60,000

4,00,000

4,00,000

Illustration 9 From the following information of Oswal Mills Ltd., prepare cash flow statement: Balance Sheet of Oswal Mills as on 31st March, 2014 and 2015 Particulars I. Equity and Liabilities 1. Shareholders’ Funds a) Share capital b) Reserve and surplus (Surplus) 2. Current Liabilities a) Short-term loan b) Trade payables Total II. Assets 1. Non-current assets a) Fixed assets b) Non-current investments 2. Current assets a) Inventories b) Trade receivables c) Cash and cash equivalents d) Short-term loans and advances Total

Note No.

1

2

(Rupees in Lakhs) 31st March 31st March 2015 (Rs) 2014 (Rs)

1,300 4,700

1,400 4,000

200 500 6,700

600 400 6,400

2,400 300

2.400 200

1,200 800 1,200 800 6,700

1,300 900 800 800 6,400

278

Accountancy : Company Accounts and Analysis of Financial Statements

Notes to Accounts: Particulars

(Rs in Lakhs) 31st March 31st March 2014 (Rs) 2015 (Rs)

1. Share capital Equity share capital 10% preference share capital 2. Fixed assets Tangible assets Less: Accumlated depreciation

1,000 300 1,300

1,000 400 1,400

3,600 (1,200) 2,400

3,400 (1,000) 2,400

Statement of Profit and Loss for the year ended 31st March, 2015 Particulars I. II. III. IV.

Note No.

Revenue from operation Other income (dividend income) Total Revenue Expenses Cost of material consumed Employees benefit expenses Finance cost (interest paid) Depreciation Loss due to earthquake

V. Profit before tax VI. Tax paid Profit after tax

(Rupees in Lakhs) 31st March 2015 (Rs) 2,800 1,000 3,800 400 200 200 200 1,100 2,100 1,700 1,000 700 -

Additional information: 1. No dividend paid by the company during the current financial year. 2. Out of fixed assets, land worth Rs 1,000 Lakhs having no accumulated depreciation was sold at no profit or no loss.

Solution: Cash Flow Statement Particulars Cash Flows from Operating Activities Net Profit before Tax and Extraordinary Items (1) Adjustment for : + Interest paid + Depreciation Operating profit before working capital changes Adjustment for : + Decrease in Inventories + Decrease in Trade Receivables

(Rupees in Lakhs) Rs 2,800 200 200 3,200 100 100

Cash Flow Statement +

279

Increase in Trade Payables

100

Cash generated from operations (–) Income Tax paid Cash Flow before Extraordinary items (–) Loss due to earthquake

3,500 (1,000) 2,500 (1,100)

A. Net cash from Operating Activities Cash flows from Investing Activities Sale of Land Purchase of fixed assets (2) Purchase of Investments B. Net cash from Investing Activities Cash flows from Financing Activities Payment of short-term loans Interest Paid Redemption of 10% preference share capital C. Net Cash used in Financing Activities Net increase in Cash and Cash Equivalents during the year (A+B+C) + Cash and Cash Equivalents in the beginning of the year =

Cash and Cash Equivalents in the end

1,400 1,000 (1,200) (100) (300) (400) (200) (100) (700) 400 800

1,200

Working Notes: (1)

(Rs in Lakhs) Net Profit before Tax and Extraordinary Items = Rs 700 + Rs 1,100 + Rs 1,000 = Rs 2,800 Fixed Assets Account

(2)

Dr. Particulars Balance b/d Cash (Purchase of fixed assets)

Cr. J.F.

Amount Particulars (Rs) 3,400 Cash (Sale of land) 1,200 Balance c/d 4,600

J.F.

Amount (Rs) 1,000 3,600 4,600

280

Accountancy : Company Accounts and Analysis of Financial Statements

Accumulated Depreciation Account Dr. Particulars

J.F.

Balance c/d

Amount Particulars (Rs)

J.F.

Cr. Amount (Rs)

1,200 Balance b/d Statement of Profit and Loss 1,200

1,000 200 1,200

Illustration 10 From the following information of Banjara Ltd., prepare a cash flow statement: Particulars I. Equity and Liabilities 1. Shareholders’ Funds a) Share capital b) Reserve and surplus (surplus) 2. Non-current Liabilities Long-term borrowings (Long-term loan) 3. Current Liabilities a) Trade payables b) Other current liabilities Total II. Assets 1. Non-current assets a) Fixed assets b) Non-current investments 2. Current assets a) Current investments (Marketable) b) Inventories c) Trade Receivables d) Cash and cash equivalents e) Other current assets (Interest receivables) Total Notes to Accounts: Particulars 1. Other Current Liabilities i) Interest payable ii) Income tax payable

Note No.

1

2

(Rupees in Lakhs) 31st March 31st March 2015 (Rs) 2014 (Rs)

1,500 3,410

1,250 1,380

1,110

1,040

150 630 6,800

1,890 1,100 6,660

730 2,500

850 2,500

670 900 1,700 200 100

135 1,950 1,200 25

6,800

6,660

31st March 31st March 2015 (Rs) 2014 (Rs) 230 400 630

100 1,000 1,100

Cash Flow Statement 2. Fixed Assets: Tangible Less: Accumlated depreciation

281

2,180 (1,450) 730

1,910 (1,060) 850

Statement of Profit and Loss for the year ended 31st March, 2015 Particulars I. II. III. IV.

Revenue from operation Other income Total Revenue Expenses Cost of material consumed Finance cost (interest expenses) Depreciation Other expenses (Admn. and selling expenses) Total expenses Profit before tax Less: Tax Profit after tax

(Rupees in Lakhs) Note 31st March No. 2014 (Rs) 30,650 1 640 31,290 26,000 400 450 910 27,760 3,530 (300) 3,230

Notes to Accounts: Particulars 1. Other Income during the year 2014-15 i) Interest Income ii) Dividend Income iii) Insurance Proceeds from earthquake disaster Settlement

Rs 300 200 140 640

Additional Information: (Rs ’000) (i)

An amount of Rs 250 was raised from the issue of share capital and a further Rs 250 was raised from long-term borrowings.

(ii)

Interest expense was Rs 400 of which Rs 170 was paid during the period. Rs 100 relating to interest expense of the prior period was also paid during the period.

(iii)

Dividends paid were Rs 1,200.

(iv)

Tax deducted at source on dividends received (included in the tax expense of Rs 300 for the year) amounted to Rs 40.

282

Accountancy : Company Accounts and Analysis of Financial Statements

(v)

During the period, the enterprise acquired Fixed Assets for Rs 350. The payment was made in cash.

(vi)

Plant with original cost of Rs 80 and accumulated depreciation of Rs 60 was sold for Rs 20.

(vii)

Trade Receivables and Trade Payables include amounts relating to credit sales and credit purchases only.

Cash Flow Statement (Direct Method) (Rs ‘000) Particulars Cash Flows from Operating Activities Cash Receipts from Customers Cash Paid to Suppliers and Employees

Rs,

30,150 (27,600)

Cash generated from Operations Income Tax paid

2,550 (860)

Cash Flow before Extraordinary Item Proceeds from earthquake disaster settlement

1,690 140

Net Cash from Operating Activities Cash Flows from Investing Activities Purchase of Fixed Assets Proceeds from Sale of Equipment Interest Received Dividends Received Net cash from Investing Activities

Rs

1,830 (350) 20 200 160 30

Cash Flows from Financing Activities Proceeds from issuance of Share Capital

250

Proceeds from Long-term Borrowings

250

Repayment of Long-term Borrowings

(180)

Interest paid

(270)

Dividends paid Net cash used in Financing Activities

(1,200) (1,150)

Net increase in Cash and Cash Equivalents

710

Cash and cash equivalents at beginning of period

160

Cash and cash equivalents at end of period

870

Cash Flow Statement

283

Cash Flow Statement (Indirect Method) (Rs ‘000) Particulars

Rs

Cash Flows from Operating Activities Net Profit before Taxation and Extraordinary Item

3,390

Adjustments for: +

Depreciation

– –

Interest Income Dividend Income

(300) (200)

450

+

Interest Expense

400

Operating Profit before working capital changes Increase in Trade Receivables

3,740 (500)

Decrease in Inventories

1,050

Decrease in Trade Payables

(1,740)

Cash generated from Operations Income Tax paid

2,550 (860)

Cash flow before Extraordinary Items

1,690

Proceeds from earthquake disaster settlement Net cash from Operating Activities Cash Flows from Investing Activities Purchase of Fixed Assets

140 1,830 (350)

Proceeds from Sale of Equipment Interest Received

20 200

Dividends Received (net of TDS)

160

Net cash from Investing Activities

30

Cash flows from Financing Activities Proceeds from issuance of Share Capital Proceeds from Long-term Borrowings Repayment of Long-term Borrowings Interest Paid Dividends Paid Net Cash used in Financing Activities

250 250 (180) (270) (1,200) (1,150)

Net Increase in Cash and Cash Equivalents

710

Cash and Cash Equivalents at the beginning of the period Cash and Cash Equivalents at the end of the period

160 870

284

Accountancy : Company Accounts and Analysis of Financial Statements

Working Notes: (1) Cash and Cash Equivalents Cash and Cash Equivalents consist of cash in hand and balances with banks, and investments in money-market instruments. Cash and Cash Equivalents included in the Cash Flow Statement comprise of the following balance sheet amounts. (Rs ‘000)

Cash in Hand and balances with Bank Short-term Investments

2015 (Rs) 200 670

2014 (Rs) 25 135

870

160

Cash and Cash Equivalents (2) Cash Receipts from Customers Sales Add: Trade Receivables at the beginning of the year

30,650 1,200

Less : Trade Receivables at the end of the year

31,850 (1,700) 30,150

(3) Cash paid to Suppliers and Employees Cost of Revenue from operations Administrative and Selling Expenses

26,000 910 26,910

Add: Trade Payables at the beginning of the year Inventories at the end of the year

1,890 900

Less : Trade Payables at the end of the year Inventories at the beginning of the year

150 1,950

2,790 29,700 (2,100) 27,600

(4) Income Tax paid (including TDS from dividends received) Income Tax expense for the year (including tax deducted at source from dividends received) Add : Income Tax liability at the beginning of the year

Less : Income tax payable at the end of the year

300 1,000 1,300 (400) 900

Out of Rs 900, tax deducted at source on dividends received (amounting to Rs 40) is included in cash flows from investing activities and the balance of Rs 860 is included in cash flows from operating activities.

Cash Flow Statement

285

(5) Repayment of Long-term Borrowings Long-term Debts at the beginning of the year Add : Long-term Borrowings made during the year

1,040 250

Less : Long-term Borrowings at the end of the year

1,290 (1,110) 180

(6) Interest paid Interest expense for the year Add: Interest Payable at the beginning of the year

400 100 500 (230)

Less: Interest Payable at the end of the year

270

Terms Introduced in the Chapter 1.

Cash

2.

Cash Equivalents

3.

Cash Inflows

4.

Cash Outflows

5.

Non-cash item

6.

Cash Flow Statement

7.

Operating Activities

8.

Investing Activities

9.

Financing Activities

10.

11.

Extraordinary Items

Accounting Standard-3

Summary Cash Flow Statement: The Cash Flow Statement helps in ascertaining the liquidity of an enterprise. Cash Flow Statement is to be prepared and reported by Indian companies according to AS-3 issued by The Institute of Chartered Accountants of India. The cash flows are categorised into flows from operating, investing and financing activities. This statement helps the users to ascertain the amount and certainty of cash flows to be generated by company.

286

Accountancy : Company Accounts and Analysis of Financial Statements

Questions for Practice Short Answer Questions 1.

What is a Cash flow statement?

2.

How are the various activities classified (as per AS-3 revised) while preparing cash flow statement?

3.

State the uses of cash flow statement.

4.

What are the objectives of preparing cash flow statement?

5.

State the meaning of the terms: (i) Cash Equivalents, (ii) Cash flows.

6.

Prepare a format of cash flow from operating activities under indirect method.

7.

State clearly what would constitute the operating activities for each of the following enterprises: (i) (ii)

Film production house

(iii)

Financial enterprise

(iv)

Media enterprise

(v) (vi) 8.

Hotel

Steel manufacturing unit Software development business unit.

“The nature/type of enterprise can change altogether the category into which a particular activity may be classified.” Do you agree? Illustrate your answer.

Long Answer Questions 1. 2. 3. 4.

Describe the procedure to prepare Cash Flow Statement. Describe “Indirect” method of ascertaining Cash Flow from operating activities. Explain the major Cash Inflows and outflows from investing activities. Explain the major Cash Inflows and outflows from financing activities.

Numerical Questions 1.

Anand Ltd., arrived at a net income of Rs 5,00,000 for the year ended March 31, 2014. Depreciation for the year was Rs 2,00,000. There was a profit of Rs 50,000 on assets sold which was transferred to Statement of Profit and Loss account. Trade Receivables increased during the year Rs 40,000 and Trade Payables also increased by Rs 60,000. Compute the cash flow from operating activities by the indirect approach. [Ans.: Rs 6,70,000]

Cash Flow Statement

2.

287

From the information given below you are required to calculate the cash paid for the inventory: Particulars

(Rs)

Inventory in the beginning

40,000

Credit Purchases

1,60,000

Inventory in the end

38,000

Trade payables in the beginning

14,000

Trade payables in the end

14,500

[Ans.: Rs 1,59,500] 3.

For each of the following transactions, calculate the resulting cash flow and state the nature of cash flow, viz., operating, investing and financing. (a)

Acquired machinery for Rs 2,50,000 paying 20% by cheque and executing a bond for the balance payable.

(b)

Paid Rs 2,50,000 to acquire shares in Informa Tech. and received a dividend of Rs 50,000 after acquisition.

(c)

Sold machinery of original cost Rs 2,00,000 with an accumulated depreciation of Rs 1,60,000 for Rs 60,000.

[Ans.: (a) Rs (50,000) investing activity (outflow); (b) Rs (2,00,000) investing activity (outflow); (c) Rs 60,000 investing activity (inflow). 4.

The following is the Profit and Loss Account of Yamuna Limited: Statement of Profit and Loss of Yamuna Ltd., for the Year ended March 31, 2015 Particulars

Note No.

i) Revenue from Operations ii)

Amount (Rs) 10,00,000

Expenses Cost of Materials Consumed

1

Purchases of Stock-in-trade Other Expenses Total Expenses iii) Profit before tax (i-ii)

50,000 5,00,000

2

3,00,000 8,50,000 1,50,000

Additional information: (i) Trade receivables decrease by Rs 30,000 during the year. (ii) Prepaid expenses increase by Rs 5,000 during the year. (iii) Trade payables increase by Rs 15,000 during the year. (iv) Outstanding Expenses payable increased by Rs 3,000 during the year. (v) Other expenses included depreciation of Rs 25,000.

288

Accountancy : Company Accounts and Analysis of Financial Statements

Compute net cash from operations for the year ended March 31, 2014 by the indirect method. [Ans.: Cash from operations Rs 2,18,000]. 5. (i) (ii)

Compute cash from operations from the following figures: Profit for the year 2014-15 is a sum of Rs 10,000 after providing for depreciation of Rs 2,000. The current assets of the business for the year ended March 31, 2014 and 2015 are as follows:

Particulars

March 31, 2014 (Rs) 14,000 1,000 13,000 5,000 10,000 1,000 2,000 3,000 2,000

Trade Receivables Provision for Doubtful Debts Trade Payables Inventories Other Current Assets Expenses payable Prepaid Expenses Accrued Income Income received in advance

March 31, 2015 (Rs) 15,000 1,200 15,000 8,000 12,000 1,500 1,000 4,000 1,000

[Ans.: Cash from operations: Rs 7,700]. 6.

From the following particulars of Bharat Gas Limited, calculate Cash Flows from Investing Activities. Also show the workings clearly preparing the ledger accounts: Balance Sheet of Bharat Gas Ltd., as on ____________________

Particulars

II) Assets 1. Non-current Assets a) Fixed assets i) Tangible assets ii) Intangible assets b) Non-current investments

Note No.

Figures as the end of 2015 (Rs)

Figures as at the end of reporting 2014 (Rs)

1 2 3

12,40,000 4,60,000 3,60,000

10,20,000 3,80,000 2,60,000

Figures of current year

Figures of previous year

12,40,000

10,20,000

3,00,000 1,60,000 4,60,000

1,00,000 2,80,000 3,80,000

Notes: 1 Tangible assets = Machinery 2 Intangible assets = Patents Notes to accounts:

1. Tangible Assets Machinery 2. Intangible Assets Goodwill Patents

Cash Flow Statement

289

3. Non-current Investments 10% long term investments Investment in land Shares of Amartex Ltd.

1,60,000 1,00,000 1,00,000 3,60,000

60,000 1,00,000 1,00,000 2,60,000

Additional Information: (a) Patents were written-off to the extent of Rs 40,000 and some Patents were sold at a profit of Rs 20,000. (b) A Machine costing Rs 1,40,000 (Depreciation provided thereon Rs 60,000) was sold for Rs 50,000. Depreciation charged during the year was Rs 1,40,000. (c) On March 31, 2014, 10% Investments were purchased for Rs 1,80,000 and some Investments were sold at a profit of Rs 20,000. Interest on Investment was received on March 31, 2015. (d) Amartax Ltd., paid Dividend @ 10% on its shares. (e) A plot of Land had been purchased for investment purposes and let out for commercial use and rent received Rs 30,000. [Ans.: Rs 5,24,200]. 7.

From the following Balance Sheet of Mohan Ltd., prepare cash flow Statement: Balance Sheet of Mohan Ltd., as at 31st March 2014 and 31st March 2015

Particulars I)

Note No.

March 31, 2015 (Rs)

March 31, 2014 (Rs)

3,00,000 2,00,000

2,00,000 1,60,000

1

80,000

1,00,000

2

1,20,000 70,000 7,70,000

1,40,000 60,000 6,60,000

3

5,00,000

3,20,000

4 5

1,50,000 90,000 30,000 7,70,000

1,30,000 1,20,000 90,000 6,60,000

Equity and Liabilities 1. Shareholders’ Funds a) Equity share capital b) Reserves and surplus

2. Non-current liabilities a) Long-term borrowings 3. Current liabilities Trade payables Short-term provisions Total II) Assets 1. Non-current assets Fixed assets 2. Current assets a) Inventories b) Trade receivables c) Cash and cash equivalents Total

290

Accountancy : Company Accounts and Analysis of Financial Statements

Notes to accounts: 1. Long-term borrowings Bank Loan 2. Short-term provision Proposed dividend 3. Fixed assets Less: Accumulated Depreciation (Net) Fixed Assets 4. Trade receivables Debtors Bills receivables 5. Cash and cash equivalents Bank

2015

2014

80,000

1,00,000

70,000 6,00,000 1,00,000 5,00,000

60,000 4,00,000 80,000 3,20,000

60,000 30,000 90,000

1,00,000 20,000 1,20,000

30,000

90,000

Additional Information: Machine Costing Rs 80,000 on which accumulated depreciation was Rs, 50,000 was sold for Rs 20,000. Rs [Ans.: Cash flow from Operating Activities 1,80,000 Cash flow from Investing Activities (2,60,000) Cash flow from Financing Activities 20,000. 8.

From the following Balance Sheets of Tiger Super Steel Ltd., prepare Cash Flow Statement: Balance Sheet of Tiger Super Steel Ltd. as at 31st March 2014 and 31st March 2015

Particulars I)

Equity and Liabilities 1. Shareholders’ Funds a) Share capital b) Reserves and surplus 2. Current Liabilities a) Trade payables b) Other current liabilities c) Short-term provisions

II) Assets 1. Non-Current Assets a) Fixed assets i) Tangible assets ii) Intangible assets b) Non-current investments 2. Current Assets a) Inventories b) Trade receivables c) Cash and Cash Equivalents

Note No.

March 31, 2015 (Rs)

March 31, 2014 (Rs)

1 2

1,40,000 22,800

1,20,000 15,200

3 4 5

21,200 2,400 28,400 2,14,800

14,000 3,200 22,400 1,74,800

6

96,400 18,800 14,000

76,000 24,000 4,000

31,200 43,200 11,200 2,14,800

34,000 30,000 6,800 1,74,800

Cash Flow Statement

291

Notes to accounts: 1. Share Capital Equity share capital 10% Preference share capital 2. Reserves and surplus General reserve Balance in statement of profit and loss 3. Trade payables Bills payable 4. Other current liabilities Outstanding expenses 5. Short-term provisions Provision for taxation Proposed dividend 6. Tangible assets Land and building Plant

2015

2014

1,20,000 20,000 1,40,000

80,000 40,000 1,20,000

12,000 10,800

8,000 7,200

22,800

15,200

21,200

14,000

2,400

3,200

12,800 15,600 28,400

11,200 11,200 22,400

20,000 76,400 96,400

40,000 36,000 76,000

Additional Information: Depreciation Charge on Land & Building Rs 20,000, and Plant Rs 10,000 during the year. [Ans.: Cash flow from Operating Activities Cash flow from Investing Activities Cash flow from Financing Activities 9.

Rs 34,800 Rs (50,400) Rs 20,000].

From the following information, prepare cash flow statement:

Particulars I. Equity and Liabilities 1. Shareholders’ Funds a) Share capital b) Reserve and surplus 2. Non-current Liabilities (8% Debentures) 3. Current Liabilities Trade payables Total

Note No.

31st March 2015 (Rs)

31st March 2014 (Rs)

7,00,000 4,70,000

5,00,000 2,50,000

4,00,000

6,00,000

9,00,000 24,70,000

6,00,000 19,50,000



292

Accountancy : Company Accounts and Analysis of Financial Statements

II. Assets 1. Non-current assets Fixed assets i) Tangible ii) Intangible–Goodwill 2. Current assets a) Inventories b) Trade Receivables c) Cash and cash equivalents Total

7,00,000 1,70,000

5,00,000 2,50,000

6,00,000 6,00,000 4,00,000 24,70,000

5,00,000 4,00,000 3,00,000 19,50,000

Additional Information: Depreciation Charge on Plant amount to Rs 80,000. Rs [Ans.: Cash inflow from Operating Activities Cash inflow from Investing Activities Cash inflow from Financing Activities

3,80,000 (2,80,000) NIL.

10. From the following Balance Sheet of Yogeta Ltd., prepare cash flow statement: Particulars I. Equity and Liabilities 1. Shareholders’ Funds a) Share capital b) Reserve and surplus (Surplus) 2. Non-current Liabilities Long-term borrowings 3. Current Liabilities a) Short-term borrowings (Bank overdraft) b) Trade payables c) Short-term provision (Provision for taxation) Total II. Assets 1. Non-current assets Fixed assets Tangible 2. Current assets a) Inventories b) Trade Receivables c) Cash and cash equivalents Total

Note No.

31st March 2015 (Rs)

31st March 2014 (Rs)

1

4,00,000 2,00,000

2,00,000 1,00,000

2

1,50,000

2,20,000

1,00,000 70,000 50,000

50,000 30,000

9,70,000

6,00,000

7,00,000

4,00,000

1,70,000 1,00,000

1,00,000 50,000 50,000 6,00,000

9,70,000

Cash Flow Statement Notes to Accounts: Particulars 1. Share capital a) Equity share capital b) Preference share capital 2. Long-term borrowings Long-term loan Loan from Rahul

293

31st March 2014 (Rs)

31st March 2013 (Rs)

3,00,000 1,00,000 4,00,000

2,00,000 2,00,000

1,50,000 1,50,000

2,00,000 20,000 2,20,000

Additional Information: Net Profit for the year after charging Rs 50,000 as Depreciation was Rs 1,50,000. Dividend paid on Share was Rs 50,000, Tax Provision created during the year amounted to Rs 60,000. Rs [Ans.: Cash from Operating Activities

2,20,000

Cash from Investing Activities

(3,50,000)

Cash from Financing Activities

(80,000)].

11. Following is the Financial Statement of Garima Ltd., prepare cash flow statement. Particulars I. Equity and Liabilities 1. Shareholders’ Funds a) Share capital b) Reserve and surplus (Surplus) 2. Current Liabilities a) Trade payables b) Short-term provisions (Provision for taxation) Total II. Assets 1. Non-current assets Fixed assets Tangible 2. Current assets a) Inventories b) Trade receivables c) Cash and cash equivalents d) Other current assets Total

Note No.

1 2

31st March 2015 (Rs)

31st March 2014 (Rs)

4,40,000 40,000

2,80,000 28,000

1,56,000 12,000

56,000 4,000

6,48,000

3,68,000

3,64,000

2,00,000

1,60,000 80,000 28,000 16,000 6,48,000

60,000 20,000 80,000 8,000 3.68,000

294

Accountancy : Company Accounts and Analysis of Financial Statements Notes to Accounts: Particulars

31st March 2015 (Rs)

31st March 2014 (Rs)

3,00,000 1,40,000 4,40,000

2,00,000 80,000 2,80,000

1. Share capital a) Equity share capital b) Preference share capital 2. Reserve and surplus Surplus in statement of profit and loss at the beginning of the year Add: Profit of the year Less: Dividend Profit at the end of the year

28,000 16,000 4,000 40,000

Additional Information: 1. 2. 3.

Interest paid on Debenture Rs 600 Dividend paid during the year Rs 4,000 Depreciation charged during the year Rs 32,000 Rs

[Ans.: Cash flow from Operating Activities

(12,000)

Cash flow from Investing Activities

(1,96,000)

Cash flow from Financing Activities

1,56,000.

12. From the following Balance Sheet of Computer India Ltd., prepare cash flow statement. (Rs in ‘000) Particulars I. Equity and Liabilities 1. Shareholders’ Funds a) Share capital b) Reserve and surplus–Surplus 2. Non-Current Liabilities 10% Debentures 3. Current liabilities a) Short-term borrowings b) Trade payables c) Short-term provisions Total II. Assets 1. Non-current assets a) Fixed assets 2. Current assets a) Inventories b) Trade receivables c) Cash and cash equivalents–cash d) Other current assets–prepaid exp. Total

Note No.

1

2 3

4

31st March 2015 (Rs)

31st March 2014 (Rs)

50,000 3,700

40,000 3,000

6,500

6,000

6,800 11,000 10,000 88,000

12,500 12,000 8,000 81,500

25,000

30,000

35,000 24,000 3,500 500 88,000

30,000 20,000 1,200 300 81,500



Cash Flow Statement

295

Notes to Accounts: Particulars

31st March 2015 (Rs)

31st March 2014 (Rs)

1,200 2,500 3,700

1,000 2,000 3,000

6,800

12,500

4,200 5,800 10,000

3,000 5,000 8,000

40,000 (15,000) 25,000

41,000 (11,000) 30,000

1. Reserve and surplus i) Balance in statement of profit and loss ii) General reserve 2. Short-term borrowings Bank overdraft 3. Short-term provisions i) Provision for taxation ii) Proposed dividend 4. Fixed Assets: Fixed Assets Less Accumulated Depreciation

Additional Information: Interest paid on Debenture Rs 600 [Ans.: Net Cash from Operating Activities

Rs 2,100

Net Cash from Investing Activities

Rs 1,000

Net Cash from Financing Activities

Rs 4,900

Project Work 1.

Read and analyse the cash flow statements as given in the Annual Report of any three listed companies and ascertain: (i) which method (direct or indirect) is used for the purpose of calculating cash flows from operating activities; (ii) the treatment of special items such as dividend tax, profit/loss on sale of fixed assets, depreciation extraordinary items, etc. (iii) Whether all companies follow the same proforma of cash flow statement or different ones. (iv) As to whether you think that companies properly highlight cash flow statement in their Annual Reports.

2.

“Why companies must necessarily prepare and present a statement of cash flows”. Discuss it in the classroom. Comment.

3.

You analyse the cash flow statement for the past 3 years for a company chosen by you and find out(i) (ii)

Whether the net increase in cash and cash equivalents over the years is noticed. If net cash flow from operating activities have been negative throughout, what may be the possible reasons for the situation. What would be the possible reasons for your perception about the functioning of the company?

296

Accountancy : Company Accounts and Analysis of Financial Statements

Answers to Test your Understanding Test your Understanding – I Answer :

a) Operating activities - 3, 6, 7, 10, 13, 15, 19, 20, 23, 24, 27; b) Investing activities - 1, 5, 8, 11, 12, 16, 17, 21, 22 c) Financing activities - 2, 4, 9, 14, 18, 25, 26, 28, 29; d) Cash equivalents - 30, 31, 32, 33.

Test your Understanding – II Answers:

(a) 40,000, (b) 60,000, (c) deducted from, (d) deducted from, (e) added to, (f) added to

Answers:

1. +, 2. NC, 3. +, 4. –, 5. +, 6. NC, 7. –, 8 +, 9. NC, 10 –, 11 –, 12 +

Cash Flow Statement

297

NOTE

298

Accountancy : Company Accounts and Analysis of Financial Statements

NOTE

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