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Cash Flow Statement - Practical Paper 3B: Financial Management Chapter 3 Unit II CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA), EPBM (IIMC), MCT

2

Learning Objectives

1

Understand the intricacies in preparation of Cash Flow Statement

2

Develop hands on skills in Cash Flow Statement preparation by solving variety of questions

3

Recap – Classification of Cash Flows

4

Recap - Cash Flow - Classification

1

• Cash flow from Operating Activities • Principal revenue generating activities

2

• Cash flow from Investing Activities • Acquisition and disposal of long term assets and other investments not included in cash equivalents

3

• Cash flows from Financing activities • Activities that has an impact of owner’s capital and borrowings

5

Cash Flow from Operating Activities Cash from Operating activities can be reported in two ways

Direct Method

Indirect Method

6

Multiple Choice Questions Cash Flow Statement

7

MCQ – 1 Principal revenue generating activities of an enterprise are called as – A. Operating Activities

B. Investing Activities

C. Financing Activities

D. None of the above

Answer: A. Operating Activities

8

MCQ – 2 Short term highly liquid investments that are readily convertible in to known amounts of cash and which are subject to insignificant risk of changes in value is known as –

A. Cash at Bank

B. Investments in Shares

C. Cash Equivalents

D. None of the above

Answer: C. Cash Equivalents

9

MCQ – 3 Cash Flows are – A. Inflows and Outflows of cash

B. Inflows and Outflows of cash equivalents

C. Inflows of Cash

D. Both A & B

Answer: D. Both A & B

10

MCQ – 4 Purchase of Machinery by means of issue of shares should be ________________ from Cash Flow Statement A. Included

B. Excluded

C. Included with value as zero

D. None of the above

Answer: B. Excluded

11

MCQ – 5 Unrealized gains and losses arising from foreign exchange rates are – A. Cash flows from operating activities

B. Cash flows from financing activities

C. Cash flows from investing activities

D. Not cash flows

Answer: D. Not cash flows

12

MCQ – 6 Equity dividend paid should be classified as cash outflow from – A. Operating activities

B. Financing activities

C. Investing activities

D. Not cash flows

Answer: B. Financing activities

13

Practical Illustrations – Question 1 IPCC – May 2011 – Paper – Accounting Using Indirect Method

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Question 1: Indirect method Balance Sheet of Lotus Ltd as on 31‐Mar‐2010 and 31‐Mar‐2011 31.03.2010 31.03.2011 Liabilities Equity Share @ Rs  10 each

Rs in 000 1000

Rs in 000 1250 10

31.03.2010 31.03.2011 Assets

Rs in 000

Rs in 000

Land &  Buildings

400

380

Machinery

750

920

Capital Reserve Profit & Loss  Account Long term loan  from Bank 

400

480

Investments

100

50

500

400

Inventories

300

280

Sundry Creditors

500

400

400

420

Provision for tax

50

60

Receivables Cash in  Hand

200

140

Cash at Bank

300

410

2450

2600

2450

2600

15

Question 1: Indirect method Additional Information 1. Depreciation written off on Building ‐ Rs 20,000 2. The Company sold some Investment at a profit of Rs 10, 000, which  is credited to Capital Reserve 3. Income tax provided during the year Rs 55,000 4. Machinery purchased during the year for Rs 2,25, 000. They paid Rs  1,25,000 in cash and issue 10,000 equity shares of Rs 10 each at par. 

You are required to prepare cash flow statement for the year ended  31st March 2011 as per AS‐3, by using indirect method

16

Question 1: Identification of Working Notes

Income Tax Paid

Sales realization Investment sales

Depreciation on Machinery

Calculation of Net Profit before tax

17

Question 1 : Indirect Method – Working Note 1 Working Note:1

(Rs. In 000)

Income Taxes Paid Provision for Tax during the year

55

Add: Opening Provision for tax (31.03.2010)

50 105

Less: Closing Provision for tax (31.03.2011)

60 45

18

Question 1 : Indirect Method – Working Note 2 Working Note:2

(Rs. In 000)

Sales realisation from Investments Opening Balance of Investment (31.03.2010)

100

Add: Profit on sale of Investment (Credited to  Capital Reserve)

10 110

Less: Closing Balance of Investment (31.03.2011)

50 60

19

Question 1 : Indirect Method – Working Note 3 Working Note:3

(Rs. In 000)

Depreciation on Machinery  Opening Balance of Machinery (31.03.2010)

750

Add: Cost of Machinery Purchased

225 975

Less: Closing Balance of Machinery (31.03.2011)

920 55

20

Question 1 : Indirect Method – Working Note 4 Working Note:4

(Rs. In 000)

Net Profit before tax and extraordinary items: Profit & Loss Account ‐ 31‐.03.2011

480

Less: Profit & Loss Account ‐ 31‐.03.2010

400

Profit for the Year after Tax provision

80

Add: Provision for Taxation

55 135

21

Question 1 : Cash Flow Statement (Indirect Method) CASH FLOW STATEMENT (Rs. In 000) Cash flows from Operating activities: Net Profit Before tax and extraordinary items:

135

Adjustments for: Depreciation Building Depreciation Machinery Operating profit before working capital changes

20 55 210

Adjustments for Working Capital Changes: Add: Decrease in Inventories Less: Increase in Receivables Less: Decrease in Sundry Creditors Cash Generation from Operations Less: Income Tax Paid Net Cash from Operating activities

20 (20) (100) (100) 110 45 65

22

Question 1 : Cash Flow Statement - Continued (Rs. In 000) Cash flows from Investing activities: Purchase of Machinery Cash received on Sales of Investment Net Cash from Investing activities Cash flows from Financing activities: Issue of Shares Repayment of Long Term Loan Net Cash from Financing activities

(125) 60 (65) 150 (100) 50

Net increase in Cash and Cash equivalents

50

Cash and Cash equivalents at the beginning  Cash in Hand Cash at Bank

200 300

500

Cash and Cash equivalents at the end Cash in Hand Cash at Bank

140 410

550

23

Practical Illustrations – Question 2 IPCC – May 2007 – Paper – Cost Accounting Using Indirect Method

24

Question 2: Indirect method Balance Sheet of JK Ltd as on 31‐Mar‐2005 and 31‐Mar‐2006 Liabilities Share Capital

31.03.05

31.03.06

Rs in 000

Rs in 000

1440

Capital Reserve

1920 48

31.03.05 31.03.06 Assets

Rs in 000 Rs in 000

Fixed Assets

3840

4560

Less: Depreciation

1104

1392

2736

3168

General Reserve

816

960

Profit & Loss Account

288

360

Investments

480

384

9% Debenture

960

672

210

312

Current Liabilities

576

624

Cash Other Current assets  (including stock)

1134

1272

Proposed Dividend

144

174

Preliminary Expenses

96

48

Provision for Tax

432

408 4656

5184

Unpaid Dividend

18 4656

5184

25

Question 2: Indirect method - Continued Additional Information 1. During the year 2005 ‐ 2006, Fixed Assets with a book value of Rs 2,40,000  (accumulated depreciation Rs 84,000) was sold for Rs 1,20,000 2. Provided Rs 4,20,000 as depreciation 3. Some investments are sold at a profit of Rs 48,000 and the Profit was  credited to Capital Reserve 4. It was decided that stocks be valued at cost, whereas previously the practice  was to value stock at cost less 10 percent. The stock was Rs 2,59,200 as on  31.03.2005. The stock as at 31.03.06 was correctly valued at Rs 3,60,000 5. It was decided to write off Fixed Assets costing Rs 60,000 on which  depreciation amounting to Rs 48,000 has been provided. 6. Debentures are redeemed at Rs 105 Required: Prepare Cash Flow Statement

26

Question 2: Identification of Working Notes

Purchase of Fixed Assets, Sales of Fixed Assets, Fixed Assets Written Off, Depreciation Account (Optional)

Sales Realizati on from Investme nt

Opening Stock Revaluatio n and Opening Profit and Loss (Adjustmen t for stock revaluation )

Payment towards Redempti on of 9% Debenture

Calculation of Net Profit before tax and Extraordinar y Items

27

Question 2 : Indirect Method – Working Note 1

Working Note:1

(Rs. In 000) Fixed Assets Account

Particulars To Balance b/d To Purchases (Balancing  amount)

Rs

Particulars

3840.00

By Sale of Assets

1020.00

By Fixed Assets Written Off  A/c By Balance c/d

4860.00

Rs 240.00

60.00 4560.00 4860.00

28

Question 2 : Indirect Method – Working Note 2 Working Note:2

(Rs. In 000) Depreciation Account

Particulars

Rs

Particulars

To Sales of Assets 

84.00

By Balance b/d

48.00

By Profit & Loss a/c  (Depreciation Provision)

To Fixed Assets Written off  A/c To Balance c/d

Rs 1104.00

420.00

1392.00 1524.00

1524.00

29

Question 2 : Indirect Method – Working Note 3 (Rs. In  000)

Working Note:3 Sale of Fixed Assets Account Particulars To Fixed Assets a/c

Rs 240.00

Particulars

Rs

By Depreciation a/c

84.00

By Cash  By Profit and Loss A/c ‐ Loss on Sales (Balancing  Amount) 240.00

120.00

36.00 240.00

30

Question 2 : Indirect Method – Working Note 4 Working Note:4

(Rs. In 000) Fixed Assets Written Off Account

Particulars

Rs

Particulars

Rs

To Fixed Assets a/c

60.00

By Depreciation a/c

48.00

By Profit and Loss A/c   (Balancing Amount)

12.00

60.00

60.00

31

Question 2 : Indirect Method – Working Note 5

Working Note:5

(Rs. In 000) Investment Account

Particulars To Balance b/d

To Capital Reserve A/c  (Profit on sale)

Rs 480.00

48.00 528.00

Particulars By Cash (Balancing  Amount)

Rs 144.00

By Balance c/d

384.00 528.00

32

Question 2 : Indirect Method – Working Note 6

Working Note:6

(Rs. In 000) Opening Stock Revaluation Account

Particulars

Rs

To Balance b/d

259.20 

To Profit & Loss A/c  (31.03.2005)

28.80  288.00 

Particulars

By Balance c/d

Rs

288.00  288.00 

33

Question 2 : Indirect Method – Working Note 7 Working Note:7

(Rs. In 000) 9% Debentures a/c

Particulars To Cash (Balancing  Amount)

Rs

Particulars

Rs

302.40 

To Balance c/d

672.00 

By Balance b/d 960.00  By Profit and Loss A/c ‐ Premium on  Redemption (Rs  288000*5%) 14.40 

974.40 

974.40 

34

Question 2 : Indirect Method – Working Note 8 Working Note:8 Particulars To Proposed Dividend To Transfer to General Reserve To Provision for Tax To 9% Debentures (Premium on  Redemption) To Loss on Sales of Assets To Preliminary Expenses  (Written off) To Fixed Assets Written Off A/c To Balance c/d

(Rs. In 000) Profit and Loss A/c Rs Particulars 174.00  By Balance b/d 144.00 

By Opening Stock Revaluation  a/c

408.00 

By Profit Before Tax and  Extraordinary Items

Rs 288.00  28.80  879.60 

14.40  36.00  48.00  12.00  360.00  1,196.40 

1,196.40 

35

Question 2 : Cash Flow Statement (Indirect Method) CASH FLOW STATEMENT (Rs. In 000) Cash flows from Operating activities: Net Profit Before tax and extradinary items:

879.60

Adjustments for: Depreciation Operating profit before working capital changes Adjustments for Working Capital Changes: Less: Increase in Other Current Assets Add: Increase Current Liabilities

420.00 1299.60

(109.20) 48.00

Cash Generation from Operations

(61.20) 1238.40

Less: Tax Paid Net Cash from Operating activities

432.00 806.40

36

Question 2 : Cash Flow Statement - Continued (Rs. In 000) Cash flows from Investing activities: Purchase of Fixed Assets Cash received on Sales of Fixed Assets Cash received on Sale of Investment Net Cash from Investing activities

(1020.00) 120.00 144.00

Cash flows from Financing activities: Issue of Shares Redemption of 9% Debentures Dividend Paid Net Cash from Financing activities

480.00 (302.40) (126.00)

(756.00)

51.60

Net increase / (Decrease)  in Cash and Cash equivalents

102.00

Cash and Cash equivalents at the beginning 

210.00

Cash and Cash equivalents at the end

312.00

37

Practical Illustrations – Question 3 IPCC – May 2008 – Paper – Cost Accounting and Financial Management Projected Cash flow Statement and Estimated Bank Balance

38

Question 3 X Ltd has the following balances as on 01 April 2007 Rs in 000 Fixed Assets Less: Depreciation

1140 399 741

Stocks and Debtors

475

Bank Balance

66.5

Creditors

114

Bills Payable Capital (Shares of Rs 100 each)

76 570

39

Question 3 – Continued The Company made the following estimates for the financial year 2007 ‐ 08 1. The company will pay a free of tax dividend of 10% and the rate of tax being 25% 2. The company will acquire fixed assets costing Rs 1,90,000 after selling one  machine for Rs 38,000 costing Rs 95,000 and on which depreciation provided  amounted to Rs 66,500 3. Stocks and Debtors, Creditors and Bills payables at the end of financial year are  expected to be Rs. 5,60,500, Rs 1,48,200 and Rs 98,800 respectively 4. Profit would be Rs 1,04,500 after depreciation of Rs 1,14,000 Prepare the projected cash from operations  and ascertain the bank balances of X  Ltd at the end of the Financial year 2007 ‐ 08

40

Question 3: Identification of Working Notes

Profit on sale of Machine

Dividend payment and Dividend Tax

41

Question 3 : Working Note 1

Working Note:1

(Rs. In 000)

Profit on Sale of Fixed Assets: Cost of sold Equipment

95.0

Accumulated Depreciation on Equipments sold Written Down Value of Equipment  sold

66.5

Less: Sale value 

38.0

28.5

9.5

42

Question 3 : Working Note 2

Working Note:2

(Rs. In 000)

Dividend and Dividend Tax: Net Dividend : 10% on Rs 570,000 Gross Dividend Dividend Tax

57.0 (57 / 75%) x 100%

76.0 19.0

43

Question 3 : Cash Flow Statement CASH FLOW STATEMENT (Rs. In 000) Cash flows from Operating activities: Net Profit Before tax and extradinary items: Profit for the year Less: Profit on sale of assets Adjustments for: Depreciation Operating profit before working capital changes Adjustments for Working Capital Changes: Less: Increase in Stocks and Debtors Add: Increase Creditors Add: Increase Bills payable Net Cash from Operating activities

104.5 9.5

95.0 114.0 209.0

(85.5) 34.2 22.8 (28.5) 180.5

44

Question 3 : Cash Flow Statement (Continued) (Rs. In 000) Cash flows from Investing activities: Purchase of Fixed Assets Cash received on Sales of Fixed Assets Net Cash from Investing activities

(190.0) 38.0

Cash flows from Financing activities: Dividend Paid Dividend Tax Paid Net Cash from Financing activities

(57.00) (19.00)

(152.0)

Net increase / (decrease)in Cash and Cash equivalents

(76.0) (47.5)

Bank Balance at the beginning 

66.5

Bank Balance on 31.03.2008

19.0

45

Practical Illustrations – Question 4 IPCC – May 2011 – Paper – Cost Accounting and Financial Management Under Indirect Method

46

Question 4 : Cash Flow Statement Summarised Balance Sheet of XYZ Ltd as on 31‐Mar‐2010 and 31‐Mar‐2011 31.03.10 31.03.11 31.03.10 31.03.11 Liabilities Preference Share Capital Equity Share Capital Share Premium  Capital redemption reserve General Reserve P & L A/c Current Liabilities Proposed Dividend Provision for Tax

Rs in 000 Rs in 000 400 200 400 40

200 130 640 160 150 2120

660 30 100 120 175 900 210 180 2575

Assets Plant & Machinery

Rs in 000 Rs in 000 700 820

Long Term investment Goodwill Current Assets Short term investment  (Less than 2 months) Cash and Bank Preliminary Exps

320 910

400 30 1141

50 100 40

84 80 20

2120

2575

47

Question 4 : Cash Flow Statement Additional Information 1. Preference Share Capital was redeemed at a premium of 10%  partly out of proceeds from issue of 10000 equity shares of Rs 10  each issued at 10% premium and partly out of profits otherwise  available for dividend 2. The company purchased plant and machinery for Rs 95000. It also  acquired another company stock Rs 25000 and plant and machinery  Rs 105000 and paid Rs 160000 in equity share capital for the  acquisition 3. Foreign Exchange loss of Rs 1600 represents loss in value of short  term investment 4. The company paid tax of Rs 140000 Required: Prepare Cash Flow Statement

48

Question 4: Identification of Working Notes

Depreciati on on Plant and Machinery

Provision for Taxation

Transfer to General reserve

Calculati on of Net Profit before tax

Net increas e in Current Assets

49

Question 4 : Working Note 1 Working Note:1

(Rs. In 000) Plant and Machinery Account

Particulars To Balance b/d

Rs 700.00

To Bank 95.00 To Acquired from other  company 105.00 900.00

Particulars

Rs

By Depreciation

80.00

By Balance c/d

820.00 900.00

50

Question 4 : Working Note 2 Working Note:2

(Rs. In 000) Provision for Tax Account

Particulars To Bank

To Balance c/d

Rs 140.00

Particulars

Rs

By Balance b/d

150.00

By Profit & Loss a/c  (Tax Provision)

170.00

180.00 320.00

320.00

51

Question 4 : Working Note 3 Working Note:3

(Rs. In 000) General Reserve Account

Particulars To Capital redemption  reserve

Rs 100.00

Particulars By Balance b/d By Profit & Loss a/c 

To Balance c/d

Rs 200.00 20.00

120.00 220.00

220.00

52

Question 4 : Working Note 4 Working Note:4

(Rs. In 000) Profit and Loss A/c

Particulars To Provision for Tax

Rs 170.00 

To Transfer to General  Reserve 20.00  To Proposed Dividend

210.00 

To Balance c/d

175.00  575.00 

Particulars By Balance b/d By Profit Before Tax  and Extraordinary  Items

Rs 130.00 

445.00 

575.00 

53

Question 4 : Working Note 5 Working Note:5

(Rs. In 000) Net increase in Current Assets

Current Assets as on 31.03.2011 Less: Stock acquired by issue of shares

1141.00 25.00 1116.00

Less: Current Assets as on 31.03.2010

910.00 206.00

54

Question 4 : Cash Flow Statement CASH FLOW STATEMENT (Rs. In 000) Cash flows from Operating activities: Net Profit Before tax and extradinary items: Adjustments for: Depreciation on Plant and Machinery Foreign Exchange Loss Preliminary expenses written off Operating profit before working capital changes Adjustments for Working Capital Changes: Less: Increase in Current Assets Add: Increase Current Liabilities Cash Generation from Operations Less: Tax Paid Net Cash from Operating activities

445.00 80.00 1.60 20.00

(206.00) 260.00

101.60 546.60

54.00 600.60 140.00 460.60

55

Question 4 : Cash Flow Statement..Continued (Rs. In 000) Cash flows from Investing activities: Purchase of Machinery Purchase of Investment Net Cash from Investing activities Cash flows from Financing activities: Issue of Shares @ 10% premium for cash Redemption of Preference Share Capital Dividend Paid Net Cash from Financing activities Net increase in Cash and Cash equivalents Cash and Cash equivalents as on 31‐Mar‐2010 Cash and Cash equivalents as on 31‐Mar‐2011

(95.00) (80.00) (175.00)

110.00 (220.00) (160.00) ‐270.00 15.60 150.00 165.60

56

Thank You

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Cash Flow Statement - Practical - promrek.ru

Cash Flow Statement - Practical Paper 3B: Financial Management Chapter 3 Unit II CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA),...

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