Cash Flow Statement 6 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. Till 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 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. You will recall that cash flow analysis has also been mentioned in Chapter 4 as a technique of financial analysis. This chapter discusses this technique and explains the method of preparing a cash flow statement for an accounting period. 6.1 Nature 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 : • 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. • 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. • 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. • It also helps in fine tuning 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. 6.3 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 of 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 so also on its cash and cash equivalents. 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, 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 other activities that are not investing or financing activities. The amount of cash from operations’ indicate 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 • 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 • 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 or refunds 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 trading purposes in which case they are similar to inventory acquired specifically 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, 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 • 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 other than 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 • 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. 6.5.3 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 • Cash proceeds from issuing shares (equity or/and preference). • Cash proceeds from issuing debentures, loans, bonds and other longterm borrowings. Cash Outflows from financing activities • 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 6.5.4 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 the 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 in 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: • tax on operating profit should be classified as operating cash flows. • dividend tax, i.e. tax paid on dividend should be classified as financing activity along with dividend paid. • 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. With these three classifications, Cash Flow Statement is shown in Figure 6.1. Cash Flow Statement (Main heads only) (A) Cash flows from operating activities xxx (B) Cash flows from investing activities xxx (C) Cash flows from financing activities xxx Net increase (decrease) in cash and cash xxx equivalents (A + B + C) + Cash and cash equivalents at the beginning xxx = Cash and cash equivalents at the end xxxx Fig. 6.1 : Sharing Specimen Cash Flow Statement Test your Understanding - I Classify the following activities into operating activities, investing activities, financing activities, cash activities. 1. Purchase of machinery. 2. Proceeds from issuance of equity share capital. 3. Cash revenue from operations. 4. Proceeds from long-term borrowings. 5. Proceeds from sales of old machinery. 6. Cash receipt from trade receivables. 7. Trading commission received. 8. Purchase of non-current investment. 9. Redemption of preference shares. 10. Cash purchases. 11. Proceeds from sale of non-current investment. 12. Purchase of goodwill. 13. Cash paid to supplier. 14. Interim dividend paid on equity shares. 15. Employee benefits expenses paid. 16. Proceeds from sale of patents. 17. Interest received on debentrues held as investments. 18. Interest paid on long-term borrowings. 19. Office and administrative expenses paid. 20. Manufacturing overhead paid. 21. Dividend received on shares held as investment. 22. Rent received on property held as investment. 23. Selling and distribution expenses paid. 24. Income tax paid. 25. Dividend paid on preferences shares. 26. Under writing commission paid. 27. 29. Rent paid. Bank overdraft. 28. Brokerage paid on purchase of non-current investment. 30. Cash credit. 31. Short-term deposit. 32. Marketable securities. 33. Refund of income-tax received. 6.6 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. As per AS-3, an enterprise should report cash flows from operating activities either by using : • Direct method whereby major classes of gross cash receipts and gross cash payments are disclosed; or • 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 and Bills receivable in the beginning – Trade receivables in the end. 2. Cash payments to suppliers = Purchases + Trade Payable in the beginning – Creditors and Bills Payable in the end. 3. Purchases = Cost of Goods Sold – 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 written-off. 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– • from the accounting records of the enterprise, or • by adjusting sales cost of sales and other items in the statement of profit or loss for the following: • changes during the period in inventories and operating receivables and payables; • other non-cash items; and • other items for which cash effects are investing or financing cash flows. Figure 6.2 shows the Proforma of cash flows from operating activities using direct method. Cash Flows from Operating Activities (Direct Method) Cash flows from operating activities: Cash receipts from customers xxx (–) Cash paid to suppliers and employees xxx = Cash generated from operations xxx (–) Income tax paid xxx = Cash flow before extraordinary items xxx +/– Extraordinary items xxx = Net cash from operating activities xxxx Fig. 6.2 : Proforma of Cash Flows from Operating Activities Illustration 1 From the following information, calculate cash flow from operating activities using direct method. Profit and Loss Account for the year ended on March 31, 2011 Particulars Note Figures for Current reporting period i) Revenue from Operations ii) Other Income iii) Total Revenue (i+ii) iv) Expenses Cost of Materials Consumed Employees Benefits Expenses Depreciation Other Expenses Insurance Premium Income Tax Total Expenses v) Profit before Tax (iii-iv) 2,20,000 -2,20,000 1,20,000 30,000 20,000 8,000 10,000 1,88,000 32,000 Additional information: Particulars April 01, 2010 Rs. March 31, 2011 Rs. Trade Receivables Trade Payables Inventory Employees Benefits Expenses Prepaid Insurance Income Tax Outstanding 33,000 17,000 22,000 2,000 5,000 3,000 36,000 15,000 27,000 3,000 5,500 2,000 Solution: Cash Flows from Operating Activities (Rs.) Cash Receipts from Customers 2,17,000 Cash Paid to Suppliers (1,27,000) Cash Paid to Employees (29,000) Cash Paid for Insurance Premium (8,500) Cash generated from Operations 52,500 Income Tax Paid (11,000) Net Cash Inflow from Operations 41,500 Working Notes: 1. Cash Receipts from Customers is calculated as under : Cash Receipts from Customers = Sales+ Trade Receivables in the beginning – Trade Receivables in the end = Rs.2,20,000 + Rs.25,000 + Rs.8,000 – Rs.30,000 – Rs.6,000 = Rs. 2,17,000 2. Purchases = Cost of Goods Sold – Opening Inventory + Closing Inventory = Rs. 1,20,000 – Rs. 22,000 + Rs. 27,000 = Rs. 1,25,000 3. Cash Payments 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 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 5. Cash Paid to Employees = Rs. 30,000 + Rs.2,000 – Rs.3,000 = Rs. 29,000 6. Cash Paid for Insurance Premium = Rs. 8,000 – Rs.5,000 + Rs.5,500 = Rs. 8,500 7. Income Tax Paid = Rs. 10,000+Rs.3,000 – Rs.2,000 = Rs. 11,000 8. It is important to note here that there are no extraordinary items. 6.6.2 Indirect Method Indirect method of ascertaining cash flow from operating activities begins with the amount of net profit/loss. This is not so because statement of profit and loss incorporates the effects of all operating activities of an enterprise. However, income statement 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, 2013 Particulars Note Figures in Rs. i) Revenue from Operations ii) Other Income iii) Total Revenues (i+ii) iv) Expenses Cost of Materials Consumed Purchases of stock-in-trade Employees Benefits Expenses Finance Costs Depreciation Other Expenses v) Profit before Tax (iii-iv) 1 1,00,000 2,000 1,02,000 30,000 10,000 10,000 5,000 5,000 12,000 30,000 Notes Other income includes profit on sale of land. The above Profit and Loss Account 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.15,000 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 interest 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. 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 added to the net profit, and the decrease in current assets and increase in current liabilities are deducted from the net 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 : • Non-cash items such as depreciation, goodwill be written-off, provisions, deferred taxes, etc. which are to be added back. • All other items for which the cash effects are investing or financing cash flows. The treatment of such items depend 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, expenses which is a financing cash outflow is to be added back while fincance income such as interest received which is investing cash inflow is to be deducted from the amount of net profit. • 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. Figure 6.3 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 Profit and Loss on account of xxx Non-cash items such as Depreciation, Goodwill to be Written-off. + Deductions already made in Profit and Loss on Account of xxx Non-operating items such as Interest. – Additions (incomes) made in Profit and Loss on Account of Non-operating xxx Items such as Dividend Received, Profit on sale of Fixed Assets. Operating Profit before Working Capital changes + Increase in Current Liabilities xxx + Decrease in Current Assets xxx – Increase in Current Assets xxx – Decrease in Current Liabilities Cash Flows from Operating Activities before Tax and Extraordinary Items. – Income Tax Paid +/– Effects of Extraordinary Items xxx xxx xxx Net Cash from Operating Activities xxx Fig. 6.2: Proforma of Cash Flows from Operating Activities (Indirect Method) As stated earlier, it may be noted that 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 and that the income tax paid is deducted there from 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 (Rs.) Net Profit before Taxation and Extraordinary Items (Note 1) 42,000 Adjustments for– + Depreciation 20,000 = Operating Profit before working capital changes 62,000 – Increase in Trade Receivables (3,000) – Increase in Inventories (5,000) – Increase in Prepaid Insurance (500) – Decrease in Trade Payables (2,000) + Increase in Employees Benefits Expenses Payable +1,000 = Cash generated from Operations 52,500 – Income tax paid (11,000) = Net cash from Operating Activities 41,500 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. Notes 1: The net profit before taxation and extraordinary items has been worked out as under: (1) Net Profit = Rs. 32,000 + Income Tax provided for Profit and Loss = Rs.10,000 = Net Profit before Tax and Extraordinary Items = Rs.42,000 Illustration 3 Calculate cash flows from operating activities from the following information. Statement of Profit and Loss for the year ended March 31, 2013 Particulars Note No. Amount Rs. i) Revenue from Operations ii) Other Income iii) Total Revenue (i+ii) iv) Expenses Cost of Materials Consumed Employees Benefits Expenses Depreciation and Amortization Expenses Other Expenses v) Profit before Tax (iii-iv) 1 2 3 50,000 5,000 55,000 15,000 10,000 7,000 21,000 2,000 Notes: 1. Other Income = Profit on Sale of Machinery (Rs. 2,000 ) + Income Tax Refund (Rs. 3,000) = Rs. 5,000 2. Depreciation and Amortisation = Depreciation (Rs. 5,000) + Goodwill Expenses Amortised (Rs. 2,000) = Rs. 7,000 3. Other Expenses = Rent (Rs. 10,000) + Loss on Sale of Equipment (Rs. 3,000) + Provision for Taxation (Rs. 8,000) = Rs. 21,000 Additional Information: April 01, 2010 March 31, 2011 Rs. Rs. Provision for Taxation 10,000 13,000 Rent Payable 2,000 2,500 Trade Payables 21,000 25,000 Trade Receivables 15,000 21,000 Inventories 25,000 22,000 Solution: Cash Flows From Operating Activities Net profit before taxation, and extraordinary items 10,000 Adjustments for: + Depreciation 5,000 + Loss on sale of equipment 3,000 + Goodwill amortised 2,000 – Profit on sale of machinery (2,000) – Income tax refund (3,000) Operating Profit before Working Capital charges 15,000 – Increase in Trade Receivables (6,000) + Decrease in Inventories 3,000 + Increase in Trade Payables 4,000 + Increase in Rent PayableCash generated from Operations 16,500 Income Tax Paid (5,000) Income Tax refund 3,000 Net Cash from Operating Activities 14,500 Working Notes: 1. Net profit before taxation & extraordinary item = Rs. 2,000 + Rs.8,000 = Rs. 10,000 2. Income tax paid during the year has been ascertained by preparing provision for tax account as follows: Provision for Taxation Account Dr. Cr. Particulars J.F. Amount (Rs.) Particulars J.F. Amount (Rs.) Cash (Income tax paid duringthe year - BalancingFigure) Balance c/d 5,000 13,000 Balance b/d Profit and Loss 10,000 8,000 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 ( charges 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 payable a decrease of Rs. 2,000. Ascertain cash flow from operating activities. Solution: (Rs.) Net Profit before Taxation 1,00,000 Adjustment for Non-cash and Non-operating Items : + Depreciation 20,000 + Transfer to general reserve 30,000 + Goodwill amortized 7,000 – Gain on sale of machinery (3,000) Operating profit before working capital 1,54,000 Adjustment for working capital charges : – Increase in Trade Receivables (3,000) + Increase in Trade Payables 6,000 – Increase in Prepaid Expenses (200) – Decrease in Payable Expenses (2,000) = Net Cash from Operating Activities 1,54,800 Do it Yourself Statement of Profit and LossParticulars Note Figures in Rs. i) Revenue from Operations ii) Other Income iii) Total Revenues iv) Expenses Cost of Materials Consumed Changes in inventories of finished goods Depreciation and Amortisation expenses Other expenses Total expenses v) Profit before Tax (iii-iv) 1 2 3 4 5 6 40,00,000 21,00,000 61,00,000 20,00,000 1,00,000 3,80,000 20,40,000 45,20,000 15,80,000 Notes: Rs. 1. Cash revenue from operations 8,00,000 Credit revenue from operations 34,00,000 Less: Returns (2,00,000) Net Revenue from Operations 40,00,000 2. Trading commission 20,40,00 Discount received from suppliers 60,000 Other income 21,00,000 3. Cost of materials consumed 4,00,000 paid in cash Cost of materials consumed 17,00,000 bought on credit Less: Returns (1,00,000) Cost of materials consumed (Net) 20,00,000 4. Changes in Inventories of finished = Opening inventory – Closing inventory goods = Rs. 2,00,000 - Rs. 1,00,000 = Rs. 1,00,000 5. Depreciation and Amortisation = Depreciation + Amortisation expenses expenses = Rs. 3,80,000 + 0 = Rs. 3,80,000 6. Other expenses = (a) Administrative expenses (10,20,000) + (b) Discount allowed to customers (1,20,000) + (c) Bad debts (1,00,000) + Provision for tax (8,00,000) = 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 Accrued Trading Expenses 20,000 40,000 Advance Trading Expenses 40,000 20,000 Provision for Taxation 10,00,000 12,00,000 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 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 10,000 (other than cash and cash equivalents) Increase in Current Liabilities 1,51,000 Increase in Current Assets other than Cash and Cash Equivalents 6,00,000 Decrease in Current Liabilities 64,000 Income Tax Paid 1,18,000 Refund of Income Tax Received 3,000 (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 (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 (Rs.) Sale of Machinery 13,000 Purchase of Machinery (35,000) Net cash used in Investing Activities (22,000) Cash Flow Statement 269 Working Notes: Machinery Account Dr. Cr. Particulars J.F. Amount (Rs.) Particulars J.F. Amount (Rs.) Balance b/d Profit and Loss (profit on sale of machine Cash (balancing figure–new machinery purchased) 50,000 3,000 35,000 Cash (proceeds from sale of machine) Accumulated Depreciation Balance c/d 13,000 15,000 60,000 88,000 88,000 Accumulated Depreciation Account Dr. Cr. Particulars J.F. Amount (Rs.) Particulars J.F. Amount (Rs.) Machinery 15,000 Balance b/d 25,000 Balance c/d 15,000 Profit and Loss 5,000 (Depreciation provided during the year) 30,000 30,000 Illustration 6 From the following information, calculate cash flows from financing activities: Long-term Loans ( Rs.) 2,00,000 2 ( Rs.) ,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. Cr. Particulars J.F. Amount (Rs.) Particulars J.F. Amount (Rs.) Cash (loan repaid) Balance c/d 1,00,000 2,50,000 Balance b/d Cash (new loan raised) 2,00,000 1,50,000 3,50,000 3,50,000 Do it Yourself 1. From the following particulars, calculate cash flows from investing activities: Purchased Sold (Rs.) (Rs.) Plant 4,40,000 50,000 Investments 1,80,000 1,00,000 Goodwill 2,00,000 Patents 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: 2010 2011 Machine at cost Accumulated Deprciation Equity Shares Capital Bank Loan 5,00,000 3,00,000 28,00,000 12,50,000 9,00,000 4,50,000 35,00,000 7,50,000 In year 2006, machine costing Rs.2,00,000 was sold at a profit of Rs.1,50,000, Depreciation charged on machine during the year 2006 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 Fig. 6.1. However, while preparing a cash flow statement, full details of inflows and outflows are given under thehead including the net cash flow (or use) arise there from. 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 Fig. 6.1. This figure will be the same as the total amount of cash in hand, cash at bank (or overdraft) 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 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. Look at these flow statements of Grase in Industries, Ucal Fuel Systems and Sterlite optical Technologies given at the end of the Chapter. Illustration 7 From the following information, prepare Cash Flow Statement for Pioneer Ltd. Balance Sheet of Pioneer Ltd. as on March 31, 2014 Particulars Note No. 31st March 2014 (Rs.) 31st March 2013 (Rs.) I. Equity and Liabilities 1. Shareholders’ Funds a) Share capital b) Reserve and surplus 2. Non-current Liabilities a) Long-term borrowings: Bank Loan 3. Current Liabilities a) Trade payables b) Other current liabilities: outstanding rent c) Short-term provisions 1 2 3 7,00,000 3,50,000 50,000 45,000 7,000 1,20,000 5,00,000 2,00,000 1,00,000 50,000 5,000 80,000 Total II. Assets 1. Non-current assets a) Fixed assets 12,72,000 9,35,000 (i) Tangible assets 4 5,00,000 5,00,000 (ii) Intangible assets 5 95,000 1,00,000 b) Non-current investments 2. Current assets 1,00,000 - a) Inventories 1,30,000 50,000 b) Trade receivables 1,20,000 80,000 c) Cash and cash equivalents 6 3,27,000 2,05,000 Total 12,72,000 9,35,000 Notes to Accounts: Particulars 31st March 2014 (Rs.) 31st March 2013 (Rs.) 1. Equity Share Capital 2. Reserve and Surplus Surplus: i.e. Balance in Statement of Profit and Loss 7,00,000 5,00,000 3,50,000 2,00,000 3. Short-term Provision: Proposed Dividend Provision for Taxation 70,000 50,000 50,000 30,000 4. Fixed Assets i) Tangible assets Equipments Furniture 1,20,000 80,000 2,30,000 2,70,000 2,00,000 3,00,000 5. Intangible Assets Patents 6. Cash and cash equivalents i) Cash ii) Bank balance 5,00,000 5,00,000 95,000 1,00,000 27,000 3,00,000 5,000 2,00,000 3,27,000 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 Rs. 3,000 charged on equipments and furniture. Solution: Cash Flow Statement I. Cash flows from Operating Activities : Net profit before taxation & extraordinary items Provision for : (Rs.) 2,00,000 Depreciation on Equipment Depreciation on Furniture Patents Written-off Proposed Dividend Loss on Sale of Equipment 15,000 30,000 5,000 70,000 5,000 Operating Profit before Working Capital Charges – Decrease in Creditors + Increase in Outstanding Rent – Increase in Debtors – Increase in Goods as generated from Operating Activities 3,25,000 (5,000) 2,000 (40,000) (80,000) (–) Tax Paid 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) B. Cash used in Investing Activities (1,50,000) Cash Flow Statement 273 III. Cash flows from Financing Activities: Issues of Equity share capital 2,00,000 Repayment of bank loan (50,000) Payment of Dividend (50,000) C. Cash Inflows from Financing Activities 1,00,000 Net increase in Cash & Cash Equivalents (A+B+C) 1,22,000 + Cash and Cash Equivalents in the beginning 2,05,000 Cash and Cash Equivalents in the end 3,27,000 Working Notes: (1) Equipment Account Dr. Cr. Particulars J.F. Amount (Rs.) Particulars J.F. Amount (Rs.) Balance b/d Cash 2,00,000 80,000 Depreciation (balancing figure) Bank Profit & Loss (Loss on sale) Balance c/d 15,000 30,000 5,000 2,30,000 2,80,000 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 20032004 has been paid during the year 2004-05. Hence, proposed dividend and provision for tax during the year amounts to Rs.70,000 and Rs. 50,000 respectively. (Rs.) (4) Profit and Loss at the end (–) Profit and Loss in the beginning 3,50,000 2,00,000 (5) Net Profit during the year + Provision for Tax during the year 1,50,000 50,000 Net Profit before Taxation & Extraordinary Items 2,00,000 Illustration 8 From the following Balance Sheets of Xerox Ltd., prepare, cash flow statement. Particulars Note No. 31st March 2014 (Rs.) 31st March 2013 (Rs.) 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 a) Long-term borrowings 3. Current Liabilities a) Trade payables b) Short-term provisions (Provision for taxation) 1 15,00,000 7,50,000 1,00,000 1,00,000 95,000 10,00,000 6,00,000 2,00,000 1,10,000 80,000 Total II. Assets 1. Non-current assets a) Fixed assets 25,45,000 19,90,000 (i) Tangible assets 2 10,10,000 12,00,000 (ii) Intangible assets Goodwill 1,80,000 2,00,000 b) Non-current investment 2. Current assets 6,00,000 - a) Inventories 1,80,000 1,00,000 b) Trade Receivables 2,00,000 1,50,000 c) Cash and cash equivalents 3 3,75,000 3,40,000 Total 25,45,000 19,90,000 Notes to Accounts: Particulars 31st March 2014 (Rs.) 31st March 2013 (Rs.) 1. Long-term borrowings: i) Debentures ii) Bank loan -1,00,000 2,00,000 - 2. Tangible Assets 1,00,000 2,00,000 i) Land and building ii) Plant and machinery 6,50,000 3,60,000 8,00,000 4,00,000 3. Cash and cash equivalents i) Cash in hand ii) Bank balance 10,10,000 12,00,000 70,000 3,05,000 50,000 2,90,000 3,75,000 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%. Solution: Cash Flow Statement I. Cash flows from Operating Activities (Rs.) Net Profit before Taxation and Extraordinary Items 2,45,000 Adjustment for – + Depreciation 40,000 + Goodwill written-off 20,000 + Proposed Dividend 1,50,000 – Profit on Sale of Land (15,000) = Operating Profit before working capital charges 4,40,000 + Increase in Creditors 10,000 – Decrease in Bills Paybles (20,000) – Increase in Debtors (50,000) – Increase in Stock (80,000) = Cash generated from Operations 3,00,000 – Income Tax Paid (1) (65,000) A. Cash Inflows from Operations 2,35,000 II. Cash flows from Investing Activities Proceeds from Sale of Land and Building 1,65,000 Purchase of Investment 6,00,000 B. Cash used in Investing Activities (4,35,000) III. Cash flows from Financing Activities Proceeds from issue of Equity Share Capital 5,00,000 Redemption of Debentures (2,00,000) Proceeds from raising Bank Loan 1,00,000 Dividend Paid (1,50,000) Dividend Tax Paid (15,000) C. Cash flows from Financing Activities 2,35,000 Net Increase in cash and cash equivalents (A+B+C) 35,000 + Cash and Cash Equivalents in the beginning 3,40,000 Cash and Cash Equivalent at the end 3,75,000 Working Notes: (1) Total income tax paid during the year Rs. 80,0000 (–) Dividend tax paid (given) Rs. (15,000) Income tax paid for operating activities 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 = Rs. 1,50,000 + Provision for tax made 276 Accountancy : Company Accounts and Analysis of Financial Statements = Rs. 1,50,000 + 95,000 (See provision for taxation account) = Rs. 2,45,000 Equity Share Capital Account Dr. Cr. Particulars J.F. Amount (Rs.) Particulars J.F. Amount (Rs.) Balance c/d 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. Amount (Rs.) Particulars J.F. Amount (Rs.) Cash (Redemption) 20,000 Balance b/d 20,000 20,000 20,000 Bank Account Dr. Cr. Particulars J.F. Amount (Rs.) Particulars J.F. Amount (Rs.) Balance c/d 1,00,000 Cash 1,00,000 1,00,000 1,00,000 Provision for Taxation Account Dr. Cr. Particulars J.F. Amount (Rs.) Particulars J.F. Amount (Rs.) Cash (Tax paid- which includes Rs. 15,000 as dividend Balance c/d 80,000 95,000 Balance b/d Profit and Loss (Provision made during the year) 80,000 95,000 1,75,000 1,75,000 Land and Building Account Dr. Cr. Particulars J.F. Amount (Rs.) Particulars J.F. Amount (Rs.) Balance b/d Profit and Loss (Profit on sale) 8,00,000 15,000 Cash Balance c/d 1,65,000 6,50,000 8,15,000 8,15,000 Cash Flow Statement 277 Proposed Dividend Account Dr. Cr. Particulars J.F. Amount (Rs.) Particulars J.F. Amount (Rs.) Cash 1,50,000 Profit and Loss 1,50,000 1,50,000 1,50,000 Plant and Machinery Account Dr. Cr. Particulars J.F. Amount (Rs.) Particulars J.F. Amount (Rs.) Balance b/d 4,00,000 Depreciation 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: (Rupees in Lakh) Particulars Note No. 31st March 2014 (Rs.) 31st March 2013 (Rs.) 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 1 1,300 4,700 200 500 1,400 4,000 600 400 Total II. Assets 1. Non-current assets 6,700 6,400 a) Fixed assets 2 2,400 2.400 b) Non-current investments 2. Current assets 300 200 a) Inventories 1,200 1,300 b) Trade receivables 800 900 c) Cash and cash equivalents 1,200 800 d) Short-term loan and advance 800 800 Total 6,700 6,400 Notes to Accounts: Particulars 31st March 2014 (Rs.) 31st March 2013 (Rs.) 1. Share capital Equity share capital 10% preference share capital 1,000 300 1,000 400 1,300 1,400 2. Fixed assets i) Tangible assets Less: Accumlated depreciation 3,600 (1,200) 3,400 (1,000) 2,400 2,400 (Rupees in Lakh) Particulars Note No. 31st March 2014 (Rs.) - I. Revenue from operation 2,800 - II. Other income (dividend income) 1,000 - III. Total Revenue 3,800 - IV. Expenses - Cost of material consumed 400 - Employees benefits expenses 200 - Finance cost (interest paid) 200 - Depreciation 200 - Loss due to earthquake 1,100 - V. Profit before tax 1,700 - VI. Tax paid 1,000 - Profit after tax 700 - Additional information: 1. No dividend paid by the company during the current financial year. 2. Out of fixed assets, lands worth Rs. 1,000 Lac having no accumulated depreciation was sold at no profit or no loss. Solution: Cash Flow Statement Cash Flows from Operating Activities Net Profit before Tax and Extraordinary Items (1) 2,800 Adjustment for : + Interest paid 200 + Depreciation 200 Operating profit before working capital charges 3,200 Adjustment for : + Decrease in Inventories + Decrease in Sundry Debtors + Increase in Sundry Creditors 100 100 100 – Decrease in Short-term Loans (400) Cash generated from Operations 3,100 (–) Income Tax Paid (1,000) (–) Loss due to earthquake (1,100) A. Net cash from Operating Activities 1,000 Cash flows from Investing Activities Sale of Land (2) 1,000 Purchase of Fixed Assets (2) (1,200) Purchase of Investments (100) B. Net cash (300) Cash flows from Financing Activities Interest Paid (200) Redemption of Capital (100) (300) C. Net Cash used in Financing Activities Net increase in Cash and Cash Equivalents 400 during the year (A+B+C) + Cash and Cash Equivalents in the 800 beginning of the year = Cash and Cash Equivalents in the end 1,200 Working Notes: (Rs. in lakh) (1) Net Profit before Tax and Extraordinary Items = Rs. 700 + Rs.1,100 + Rs.1,000 = Rs. 2,800 (2) Fixed Assets Account Dr. Cr. Particulars J.F. Amount (Rs.) Particulars J.F. Amount (Rs.) Balance b/d Cash (Purchase of fixed assets) 3,400 1,200 Cash (Sale of land) Balance c/d 1,000 3,600 4,600 4,600 280 Accountancy : Company Accounts and Analysis of Financial Statements Accumulated Depreciation Account Dr. Cr. Particulars J.F. Amount (Rs.) Particulars J.F. Amount (Rs.) Balance c/d 1,200 Balance b/d Profit and Loss 1,000 200 1,200 1,200 Illustration 10 From the following information of Banjara. Prepare a cash flow statement: (Rupees in ‘000) Particulars Note No. 31st March 2014 (Rs.) 31st March 2013 (Rs.) I. Equity and Liabilities 1. Shareholders’ Funds a) Share capital b) Reserve and surplus (Surplus) 2. Non-current Liabilities a) Long-term borrowings (Long-term loan) 3. Current Liabilities a) Trade payables b) Other current liabilities Total II. Assets 1. Non-current assets 1 1,500 3,410 1,110 150 630 1,250 1,380 1,040 1,890 1,100 6,800 6,660 a) Fixed assets 2 730 850 b) Non-current investments 2. Current assets 2,500 2,500 a) Current investments (Marketable) 670 135 b) Inventories 900 1,950 c) Trade Receivables 1,700 1,200 d) Cash and cash equivalents 200 25 e) Other current assets (Interest receivables) Total 100 - 6,800 6,660 Notes to Accounts: Particulars 31st March 2014 (Rs.) 31st March 2013 (Rs.) 1. Other Current Liabilities i) Interest payable ii) Income tax payable 230 400 100 1,000 630 1,100 2. Fixed Assets: i) Tangible Less: Accumlated depreciation 2,180 (1,450) 1,910 (1,060) 730 850 Statement of Profit and Loss for the year ended 31st March, 2014 (Rupees in ‘000) Particulars Note No. 31st March 2014 (Rs.) I. Revenue from operation II. Other income 1 30,650 640 III. Total Revenue IV. Expenses Cost of material consumed Finance cost (interest expenses) Depreciation Other expenses (Admn. and selling expenses) 31,290 26,000 400 450 910 Total expenses Profit before tax Less: Tax 27,760 3,530 (300) Profit after tax 3,230 Note:- Long term Borrowings made during the year 2013-14 were of Rs 2,50,000 Solution: Cash Flow Statement (Direct Method) Cash Flows from Operating Activities Cash Receipts from Customers Cash Paid to Suppliers and Employees 30,150 (27,600) (Rs.‘000) 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 (350) 20 200 1,830 Dividends Received 160 Net cash from Investing Activities 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 (1,200) Net cash used in Financing Activities (1,150) (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 (Indirect Method) (Rs.‘000) Cash Flows from Operating Activities Net Profit before Taxation and Extraordinary Item 3,390 Adjustments for: + Depreciation 450 – Interest Income (300) – Dividend Income (200) + Interest Expense 400 Operating Profit before working capital charges 3,740 Increase in Sundry Debtors (500) Decrease in Inventories 1,050 Decrease in Sundry Creditors (1,740) Cash generated from Operations 2,550 Income Tax paid (860) Cash flow before Extraordinary Items 1,690 Proceeds from earthquake disaster settlement 140 Net cash from Operating Activities 1,830 Cash Flows from Investing Activities Purchase of Fixed Assets (350) Proceeds from Sale of Equipment 20 Interest Received 200 Dividends Received (net of TDS) 160 Net cash from Investing Activities 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 (1,200) Net Cash used in Financing Activities (1,150) Net Increase in Cash and Cash Equivalents 710 Cash and Cash Equivalents at the beginning of the period 160 Cash and Cash Equivalents at the end of the period 870 Working Notes: (1) Cash and Cash Equivalents Cash and Cash Equivalents consist of cash on hand and balances with banks, and investments in money-market instruments. Cash and Cash Equivalents included in the Cash Flow Statement comprise the following balance sheet amounts. Cash in Hand and balances with Bank Short-term Investments Cash and Cash Equivalents (2) Cash Receipts from Customers Sales Add: Sundry Debtors at the beginning of the year Less : Sundry Debtors at the end of the year (3) Cash paid to Suppliers and Employees Cost of Sales Administrative and Selling Expenses Add: Sundry Creditors at the beginning of the year Inventories at the end of the year Less : Sundry Creditors at the end of the year Inventories at the beginning of the year (Rs.‘000) 2006 2005 (Rs.) (Rs.) 200 25 670 135 870 160 30,650 1,200 31,850 1,700 30,150 26,000 910 26,910 1,890 900 2,790 29,700 150 1,950 2,100 27,600 (4) Income Tax paid (including TDS from dividends received) 300 Income Tax expense for the year (including tax deducted at source from dividends received) Add : Income Tax liability at the beginning of the year 1,000 1,300 Less : Income Tax liability at the end of the year 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. (5) Repayment of Long-term Borrowings Long-term Debts at the beginning of the year 1,040 Add : Long-term Borrowings made during the year 250 1,290 Less : Long-term Borrowings at the end of the year 1,110 180 (6) Interest paid Interest expense for the year 400 Add: Interest Payable at the beginning of the year 100 500 Less: Interest Payable at the end of the year 230 270 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. Accounting Standard 3 11. Extraordinary Items Summary Cash Flow Statement: The Cash Flow Statement helps in ascertain in the liquidity of an enterprise. Cash Flow Statement is to be prepared and reported by Indian companies enterprises 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. Question for Practice Short Answer Questions 1. What is a Cash flow statement? 2. How the various activities are 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 the terms: (i) Cash Equivalents, (ii) Cash flows. 6. Prepare a format of cash flow from operating activities under and indirect method. 7. State clearly what would constitute the operating activities for each of the follow in the following of enterprises: (i) Hotel (ii) Film production house (iii) Financial enterprise (iv) Media enterprise (v) Steel manufacturing unit (vi) Software development business unit. 8. “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. Describe the procedure to prepare Cash Flow Statement. 2. Describe “Indirect” method of ascertaining Cash Flow from operating activities. 3. Explain the major Cash Inflows and outflows from investing activities. 4. 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, 2007. Depreciation for the year was Rs. 2,00,000. There was again of Rs. 50,000 on assets sold which was credited to profit and loss account. Bills Receivables increased during the year Rs. 40,000 and Bills Payables also increased by Rs. 60,000. Compute the cash flow operating activities by the indirect approach. 2. From the information given below you are required to prepare the cash paid for the inventory: (Rs.) Inventory in the beginning 40,000 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% drawn 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.:Ans.: Rs. 50,000 investing flow (outflow); Rs. 2,00,000 investing flow (outflow); Rs. 60,000 investing flow (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, 2013 Particulars Note No. Amount(Rs.) i) Revenue from Operations ii) Expenses Cost of Materials Consumed Purchases of Stock-in-trade Other Expenses 1 2 10,00,000 50,000 5,00,000 3,00,000 Total Expenses 8,50,000 iii) Profit before tax (i-ii) 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 decrease 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. Compute net cash provided by operations for the year ended March 31, 2014 by the indirect method. [Ans.:Ans.: Cash provided from operations Rs. 2,18,000]. 5. Compute cash from operations from the following figures: (i) Profit for the year 2013-14 is a sum of Rs. 10,000 after providing for depreciation of Rs. 2,000. (ii) The current assets of the business for the year ended March 31, 2013 and 2014 are as follows: March March 31, 2013 31, 2014 (Rs.) (Rs.) Trade Receivables 14,000 15,000 Provision for Doubtful Debts 1,000 1,200 Trade Payables 13,000 15,000 Inventories 5,000 8,000 Short-term Investments 10,000 12,000 Expenses payable 1,000 1,500 Prepaid Expenses 2,000 1,000 Accrued Income 3,000 4,000 Income received in advance 2,000 1,000 [Ans.: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 Note No. Figures as the end of 2011 (Rs.) Figures as at the end of reporting 2010 (Rs.) II) Assets 1. Non-current Assets a) Fixed assets i) Tangible assets ii) Intangible assets b) Non-current investments 1 2 3 12,40,000 4,60,000 3,60,000 10,20,000 3,80,000 2,60,000 Notes 1 Tangible assets = Machinery 2 Intangible assets = Patents Notes Figures of Figures of current year previous year 1. Tangible Assets Machinery 12,40,000 10,20,000 2. Intangible Assets Goodwill 3,00,000 1,00,000 Patents 1,60,000 2,80,000 4,60,000 3,80,000 3. Non-current Investments 10% long term investments 1,60,000 60,000 Investment in land 1,00,000 1,00,000 Shares of Amartex Ltd. 1,00,000 1,00,000 3,60,000 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, 2007, 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, 2011. (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 ............................... 2013 Particulars Note No. 2011 (Rs.) 2010 (Rs.) I) Equity and Liabilities 1. Shareholders’ Funds a) Equity share capital b) Reserves and surplus 2. 3. Non-current liabilities a) Long-term borrowings 4. Current liabilities Trade payables Short-term provisions 1 2 3,00,000 2,00,000 80,000 1,20,000 70,000 2,00,000 1,60,000 1,00,000 1,40,000 60,000 Total II) Assets 1. Non-current assets 7,70,000 6,60,000 a) Fixed assets 2. Current assets 3 5,00,000 3,20,000 a) Inventories 1,50,000 1,30,000 b) Trade receivables 4 90,000 1,20,000 c) Cash and cash equivalents 5 30,000 90,000 Total 7,70,000 6,60,000 Notes 2011 2010 1. Long-term borrowings Bank Loan 80,000 1,00,000 2. Short-term provision Proposed dividend 70,000 60,000 3. Fixed assets 6,00,000 4,00,000 Less: Accumulated Depreciation 1,00,000 80,000 (Net) Fixed Assets 5,00,000 3,20,000 4. Trade receivables Debtors 60,000 1,00,000 Bills receivables 30,000 20,000 90,000 1,20,000 5. Cash and cash equivalents Bank 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 Invisiting 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. Particulars Note No. 2011 (Rs.) 2010 (Rs.) 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 1 2 3 4 5 1,30,000 22,800 21,200 2,400 38,400 1,20,000 15,200 14,000 3,200 22,400 II) Assets 1. Non-Current Assets a) Fixed assets 2,14,800 1,74,800 i) Tangible assets 6 96,400 76,000 ii) Intangible assets 18,800 24,000 b) Non-current investments 2. Current Assets 14,000 4,000 a) Inventories 31,200 34,000 b) Trade receivables 43,200 30,000 c) Cash and cash equivalents 11,200 6,800 2,14,800 1,74,800 Notes 2011 2010 1. Share Capital Equity share capital 1,20,000 80,000 10% Preference share capital 20,000 40,000 1,40,000 1,20,000 2. Reserves and surplus General reserve 12,000 8,000 Balance in statement of 10,800 7,200 profit and loss 22,800 15,200 3. Trade payables Bills payable 21,200 14,000 4. Other current liabilities Outstanding expenses 2,400 3,200 5. Short-term provisions Provision for taxation 12,800 11,200 Proposed dividend 15,600 11,200 38,400 22,400 6. Tangible assets Land and building 20,000 40,000 Plant 76,400 36,000 96,400 76,000 Additional Information: Depreciation Charge on Land & Building Rs. 20,000, and Plant Rs. 10,000 during the year. [Ans.:Rs. 34,800Ans.: Cash flow from Operating Activities Cash flow from Invisiting Activities Rs. (50,400) Cash flow from Financing Activities Rs. 20,000]. 9. From the following information, prepare cash flow statement: Particulars Note No. 31st March 2014 (Rs.) 31st March 2013 (Rs.) I. Equity and Liabilities 1. Shareholders’ Funds a) Share capital b) Reserve and surplus 2. Non-current Liabilities (8% Debentures) 3. Current Liabilities a) Trade payables 7,00,000 4,70,000 4,00,000 9,00,000 5,00,000 2,50,000 6,00,000 6,00,000 Total II. Assets 1. Non-current assets a) Fixed assets 24,70,000 19,50,000 i) Tangible 7,00,000 5,00,000 ii) Intangible–Goodwill 2. Current assets 1,70,000 2,50,000 a) Inventories 6,00,000 5,00,000 b) Trade Receivables 6,00,000 4,00,000 c) Cash and cash equivalents 4,00,000 3,00,000 Total 24,70,000 19,50,000 Additional Information: Depreciation Charge on Plant amount to Rs. 80,000. Rs. [Ans.:Ans.: Cash inflow from Operating Activities 3,80,000 Cash inflow from Invisiting Activities (2,80,000) Cash inflow from Financing Activities NIL. – Accountancy : Company Accounts and Analysis of Financial Statements 10. From the following Balance Sheet of Yogeta Ltd., prepare cash flow statement: Particulars Note 31st March 31st March No. 2014 (Rs.) 2013 (Rs.) I. Equity and Liabilities 1. Shareholders’ Funds a) Share capital 1 4,00,000 2,00,000 b) Reserve and surplus–Surplus 2,00,000 1,00,000 2. Non-current Liabilities a) Long-term borrowings 2 1,50,000 2,20,000 3. Current Liabilities a) Short-term borrowings 1,00,000 -(Bank overdraft) b) Trade payables 70,000 50,000 c) Short-term provision 50,000 30,000 (Provision for taxation) Total 9,70,000 6,00,000 II. Assets 1. Non-current assets a) Fixed assets i) Tangible 7,00,000 4,00,000 2. Current assets a) Inventories 1,70,000 1,00,000 b) Trade Receivables 1,00,000 50,000 c) Cash and cash equivalents -50,000 Total 9,70,000 6,00,000 Notes to Accounts Particulars 31st March 2014 (Rs.) 31st March 2013 (Rs.) 1. Share capital a) Equity share capital b) Preference share capital 3,00,000 1,00,000 2,00,000 - 2. Long term borrowings Long-term loan Long-term Rahul 4,00,000 2,00,000 -1,50,000 2,00,000 20,000 1,50,000 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 Invisiting Activities (3,50,000) Cash from Financing Activities (80,000)]. 11. Following is the Financial Statement of Garima Ltd., prepare cash flow statement. Particulars Note No. 31st March 2014 (Rs.) 31st March 2013 (Rs.) 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) 1 2 4,40,000 40,000 1,56,000 12,000 2,80,000 28,000 56,000 4,000 Total II. Assets 1. Non-current assets a) Fixed assets 6,48,000 3,68,000 i) Tangible 2. Current assets 3,64,000 2,00,000 a) Inventories 1,60,000 60,000 b) Trade receivables 80,000 20,000 c) Cash and cash equivalents 28,000 80,000 d) Other current assets 16,000 8,000 Total 6,48,000 3.68,000 Notes to Accounts Particulars 31st March 2014 (Rs.) 31st March 2013 (Rs.) 1. Share capital a) Equity share capital b) Preference share capital 3,00,000 1,40,000 2,00,000 80,000 2. Reserve and surplus Surplus in statement of profit and loss at the beginning of the year Add: Profit of the year Less: Dividend 4,40,000 2,80,000 28,000 16,000 4,000 Profit at the end of the year 40,000 Interest paid on Debenture Rs. 600 Rs. [Ans.:Ans.: Cash Outflow (use) 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 Note No. 31st March 2014 (Rs.) 31st March 2013 (Rs.) I. Equity and Liabilities 1. Shareholders’ Funds a) Share capital b) Reserve and surplus–Surplus 2. Non-Current Liabilities 10% Debentures Current liabilities a) Short-term borrowings b) Trade payables c) Short-term provisions 1 2 3 50,000 3,700 6,500 6,800 11,000 10,000 40,000 3,000 6,000 12,500 12,000 8,000 Total II. Assets 1. Non-current assets 88,000 81,500 a) Fixed assets 2. Current assets 4 25,000 30,000 a) Inventories 35,000 30,000 b) Trade receivables 24,000 20,000 c) Cash and cash equivalents–cash 3,500 1,200 d) Other current assets–prepaid exp. 500 300 Total 88,000 81,500 Notes to Accounts Particulars 31st March 2014 (Rs.) 31st March 2013 (Rs.) 1. Reserve and surplus i) Balance in statement of profit and loss ii) General reserve 1,200 2,500 1,000 2,000 2. Short-term borrowings i) Bank overdraft ii) Short-term provisions iii) Provision for taxation iv) Proposed dividend 3,700 3,000 6,800 4,200 5,800 12,500 3,000 5,000 16,800 20,500 Additional Information: Interest paid on Debenture Rs. 600 Rs. [Ans.:Ans.: Net Cash from Operating Activities 2,100 Net Cash from Invisiting 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 etc. 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 of 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. Long Answer Question 3. You analyse the cash flow statement for the past 3 years for a company chosen by you and find out(i) Whether has there been net increase in cash and cash equivalents over the years. 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 your perception about the functioning of the company. 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, 29; c) Financing activities - 2, 4, 9, 14, 18, 25, 26, 28; 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 +

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