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CASH FLOW STATEMENT

What is a cash flow statementAccording to accounting standard 3 Cash flow statement is statement that show flow of cash and cash equivalents during a given period. This statement shows the net increase or net decrease of cash and cash equivalents under each activity separately (operating/investing/financing) and collectively.

Objective of cash flow statementTo ascertain the sources from activities (i.e., Operating/Investing/Financing Activities from which Cash and Cash Equivalents were generated by an enterprise.To ascertain the uses by activities (i.e., Operating/ Investing/Financing Activities from which Cash and Cash Equivalents were generated by an enterprise.To ascertain the net change in Cash and Cash Equivalents indicating the difference between sources and uses from or by the three activities between the dates of two Balance Sheets.

Uses of cash flow statementShort-term Planning: Cash Flow Statement provides information about sources and application of cash and cash equivalents for a specific period. It helps to plan investments and assess the financial requirements of an enterprise.Cash Flow helps in understanding Liquidity and Solvency: Solvency is the ability of the business to meet its current liabilities. Quarterly or monthly Cash Flow Statement helps to ascertain liquidity in a better way. Financial institutions, like banks prefer the Cash Flow Statement to analyse liquidity.Efficient Cash Management: Cash Flow Statement provides information relating to surplus or deficit of cash. An enterprise, therefore, can decide about the Short-term Investments of the surplus and can arrange the Short-term Credit in case of deficit.Comparative Study: A comparison of the cash flows for the previous year with the budgeted figures of the same year will indicate as to what extent the cash resources of the business were generated and applied according to the plan. It is, therefore, useful for the management to prepare the cash budgets.

Limitations of cash flow statementNon-cash Transactions are Ignored: The Cash Flow Statement shows only inflows and outflows of cash. It does not show non-cash transactions like the purchase of building by the issue of shares or debentures to the vendors or issue of bonus shares.Not a Substitute for an Income Statement: An Income Statement shows both cash and non-cash items. The Income Statement shows the net income of the firm whereas the Cash Flow Statement shows only the net cash inflows or outflows which do not represent the net profits or losses of the enterprise.Historical in Nature: It rearranges the existing information available in the Income Statement and the Balance Sheet. It will become more useful if it is accompanied by the projected Cash Flow Statement.Fundamental Accounting Concept Ignored: It ignores basic accounting concept, i.e., accrual concept.

Format of cash flow

Analysis of financial statement of companies

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FORMAT OF CASH FLOW STATEMENTfor the year ended ..[As per Accounting Standard-3 (Revised)]

Particulars`

I. Cash Flow from Operating Activities

Net Profit as per Statement of Profit and Loss or Difference between Closing Balance and Opening Balance of Statement of Profit and Loss

Add:Transfer to reserve..

Proposed dividend for current year..

Interim dividend paid during the current year..

Provision for tax made during the current year..

Extraordinary item, if any, debited to the Statement of Profit and Loss..

Less:Extraordinary item if any, credited to the Statement of Profit and Loss(.)

Refund of tax credited to Statement of Profit and Loss(.)

(A)Net Profit before Taxation and Extraordinary Items..

Adjustment for Non-cash and Non-operating Items

(B)Add: Items to be Added

- Depreciation..

- Preliminary Expenses/Discount on Issue of Shares and Debentures written off..

- Goodwill, Patents and Trademarks Amortised..

- Interest on Borrowing and Debentures..

- Loss on Sale of Fixed Assets....

(C)Less: Items to be Deducted

- Interest Income..

- Dividend Income..

- Rental Home..

- Profit on Sale of Fixed Assets..(..)

(D)Operating Profit before Working Capital Changes (A + B C)..

(E)Add: Decrease in Current Assets and

Increase in Current Liabilities

Detail:

- Decrease in Stock/Inventories

- Decrease in Debtors/Bills Receivables (Trade Receivables)..

- Decrease Accrued Incomes..

- Decrease in Prepaid Expenses..

- Increase in Creditors/Bills Payables (Trade Payables)..

- Increase in Outstanding Expenses..

- Increase in Advance Incomes..

- Increase in Provision for Doubtful Debts....

(F)Less: Increase in Current Assets and

Decrease in Current Liabilities

Detail:

- Increases in Stock/Inventories..

- Increases in Debtors/Bills Receivables (Trade Receivables)..

- Increase in Accrued Incomes..

- Increase in Prepaid Incomes..

- Decrease in Creditors/Bills Payables (Trade Payables)..

- Decrease in Outstanding Expenses..

- Decrease in Advance Incomes..

- Decrease in Provision for Doubtful Debts..(..)

(G)Cash Generated from Operations (D + E F)..

(H)Less: Income Tax Paid (Net of Tax Refund received)(..)

(I)Cash Flow before Extraordinary Items Extraordinary Items (+/-)..

(J)Net Cash from (or used in) Operating Activities

II.Cash Flow from Investing Activities

- Proceeds from Sale of Fixed Assets..

- Proceeds from sale of Investments..

- Proceeds from sale of Intangible Assets..

- Interest and Dividend received (For Non-financial Companies only)..

- Rent Income(..)

- Purchase of Fixed Assets(..)

- Purchase of Investments(..)

- Purchase of Intangible Assets like Goodwill Extraordinary Items (+/-)(..)

Net Cash from (or used in) Investing Activities..

III.Cash Flow from Financing Activities

- Proceeds from Issue of Share and Debentures..

- Proceeds from Other Long-term Borrowings..

- Final Dividend Paid(..)

- Interim Dividend Paid(..)

- Interest on Debentures and Loans Paid(..)

- Repayment of Loans(..)

- Redemption of Debentures/Preference Shares Extraordinary Items (+/-)(..)

Net Cash from (or used in) Investing Activities(..)

IV.Net Increase/Decrease in Cash and Cash Equivalents (I + II + III)..

V.Add: Cash and Cash Equivalents in the beginning of the year...

- Cash in Hand..

- Cash at Bank (Less: Bank Overdraft)..

- Short-term Deposits..

- Marketable Securities..

VI.Cash and Cash Equivalents at the end of the year..

- Cash in Hand..

- Cash at Bank (Less: Bank Overdraft)..

- Short-term Deposits..

- Marketable Securities....

..

(F)Less: Increase in Current Assets and

Decrease in Current Liabilities

Detail:

- Increases in Stock/Inventories..

- Increases in Debtors/Bills Receivables (Trade Receivables)..

- Increase in Accrued Incomes..

- Increase in Prepaid Incomes..

- Decrease in Creditors/Bills Payables (Trade Payables)..

- Decrease in Outstanding Expenses..

- Decrease in Advance Incomes..

- Decrease in Provision for Doubtful Debts..(..)

(G)Cash Generated from Operations (D + E F)..

(H)Less: Income Tax Paid (Net of Tax Refund received)(..)

(I)Cash Flow before Extraordinary Items Extraordinary Items (+/-)..

(J)Net Cash from (or used in) Operating Activities

II.Cash Flow from Investing Activities

- Proceeds from Sale of Fixed Assets..

- Proceeds from sale of Investments..

- Proceeds from sale of Intangible Assets..

- Interest and Dividend received (For Non-financial Companies only)..

- Rent Income(..)

- Purchase of Fixed Assets(..)

- Purchase of Investments(..)

- Purchase of Intangible Assets like Goodwill Extraordinary Items (+/-)(..)

Net Cash from (or used in) Investing Activities..

III.Cash Flow from Financing Activities

- Proceeds from Issue of Share and Debentures..

- Proceeds from Other Long-term Borrowings..

- Final Dividend Paid(..)

- Interim Dividend Paid(..)

- Interest on Debentures and Loans Paid(..)

- Repayment of Loans(..)

- Redemption of Debentures/Preference Shares Extraordinary Items (+/-)(..)

Net Cash from (or used in) Investing Activities(..)

IV.Net Increase/Decrease in Cash and Cash Equivalents (I + II + III)..

V.Add: Cash and Cash Equivalents in the beginning of the year...

- Cash in Hand..

- Cash at Bank (Less: Bank Overdraft)..

- Short-term Deposits..

- Marketable Securities..

VI.Cash and Cash Equivalents at the end of the year..

- Cash in Hand..

- Cash at Bank (Less: Bank Overdraft)..

- Short-term Deposits..

- Marketable Securities....

..

From the following information, prepare the Cash Flow Statement

BALANCE SHEETS as at 31st March

Particulars2011 (`)2012 (`)

I. EQUITY AND LIABILITIES

1.Shareholders Funds

Share Capital5,00,0008,00,000

Reserves and Surplus:

Balance of Statement of Profit and Loss2,00,0003,50,000

2.Non-Current Liabilities

Long-term Borrowings:

6% Debentures1,00,000

3.Current Liabilities

Bank Loan50,000

Trade Payable:2011 (`)2012 (`)

Creditors50,00055,000

Bills Payable50,00020,000

1,00,00075,0001,00,00075,000

Short-term Provisions: Provision for Taxation50,00065,000

Total9,50,00013,40,000

II.ASSETS

1.Non-Current Assets

(a) Fixed Assets:

(i)Tangible Assets:

Building4,00,0002,50,000

Plant and Machinery3,00,0002,70,000

Non-Current Investments2,70,000

(ii)Intangible Assets:

Goodwill1,00,00050,000

2.Current Assets

Trade Receivables (Debtors)40,00080,000

Inventories (Stock)60,00050,000

Cash40,00090,000

Bank10,0002,80,000

Total9,50,00013,40,000

Interim Dividend paid ` 50,000.

CASH FLOW STATEMENTfor the year ended 31st March, 2012

Particulars`

(A)Cash Flow from Operating Activities

Net Profit before Tax (WN-1)2,65,000

Items to be added

Goodwill Written off (` 1,00,000 ` 50,000)50,000

Depreciation on Plant and Machinery (` 3,00,000 ` 2,70,000)30,000

3,45,000

Operating Profit before Working Capital Changes

Add:Decrease in Current Assets and Increase in Current Liabilities

Trade Payables (Increase in Creditors)5,000

Inventories (Decrease in Stock)10,000

Less:Increase in Current Assets and Decrease in Current Liabilities

Increase in Debtors (Trade Receivable)(40,000)

Decrease in Bills Payable (Trade Payable)(30,000)

2,90,000

Cash Generated by Operating Activities50,0002,40,000

Less:Tax Paid

Net Cash from Operating Activities

(B)Cash Flow from Investing Activities

Proceeds from Sale of Building (WN-2)1,50,000

Purchase of Investments(2,70,000)

Net Cash used in Investing Activities(1,20,000)

(C)Cash Flow from Financing Activities

Proceeds from issue of Shares3,00,000

Payment of Interim Dividend(50,000)

Redemption of Debentures(1,00,000)

Proceeds from raising of Bank Loan50,000

Net Cash Flow from Financing Activities 2,00,000

(D)Net Increase in Cash and Cash Equivalent ( A + B + C)3,20,000

Add:Opening Balance of Cash and Bank50,000

(E)Closing Balance of Cash and Bank3,70,000

CASH FLOW STATEMENTfor the year ended 31st March, 2012

Particulars`

(A)Cash Flow from Operating Activities

Net Profit before Tax (WN-1)2,65,000

Items to be added

Goodwill Written off (` 1,00,000 ` 50,000)50,000

Depreciation on Plant and Machinery (` 3,00,000 ` 2,70,000)30,000

3,45,000

Operating Profit before Working Capital Changes

Add:Decrease in Current Assets and Increase in Current Liabilities

Trade Payables (Increase in Creditors)5,000

Inventories (Decrease in Stock)10,000

Less:Increase in Current Assets and Decrease in Current Liabilities

Increase in Debtors (Trade Receivable)(40,000)

Decrease in Bills Payable (Trade Payable)(30,000)

2,90,000

Cash Generated by Operating Activities50,0002,40,000

Less:Tax Paid

Net Cash from Operating Activities

(B)Cash Flow from Investing Activities

Proceeds from Sale of Building (WN-2)1,50,000

Purchase of Investments(2,70,000)

Net Cash used in Investing Activities(1,20,000)

(C)Cash Flow from Financing Activities

Proceeds from issue of Shares3,00,000

Payment of Interim Dividend(50,000)

Redemption of Debentures(1,00,000)

Proceeds from raising of Bank Loan50,000

Net Cash Flow from Financing Activities 2,00,000

(D)Net Increase in Cash and Cash Equivalent ( A + B + C)3,20,000

Add:Opening Balance of Cash and Bank50,000

(E)Closing Balance of Cash and Bank3,70,000

From the following Balance Sheets of A Ltd., prepare the Cash Flow Statement as per AS-3 (Revised) as at 31st March, 2012:

BALANCE SHEETS

Particulars2011 (`)2012 (`)

I. EQUITY AND LIABILITIES

1.Shareholders Funds

Equity Share Capital2,00,0002,00,000

Reserves and Surplus:

Balance of Statement of Profit and Loss50,00090,000

2.Current Liabilities

Short-term Borrowings:

Bank Loan10,000

Trade Payables (Creditors)15,00020,000

3.Other Current Liabilities

Outstanding Expenses5,0001,000

Unclaimed Dividend4,000

Short-term Provisions:

Provision of Taxation20,00025,000

Total3,00,0003,40,000

II.ASSETS

1.Non-Current Assets

Fixed Assets2,35,0002,75,000

2.Current Assets

Inventories (Stock)25,00015,000

Trade Receivables (Debtors)10,00020,000

Cash and Cash Equivalents:

Cash8,00010,000

Bank22,00020,000

Total3,00,0003,40,000

The net profit for the year after providing ` 20,000 for depreciation were ` 60,000. During the year, the company declared equity dividend @ 10% and paid ` 15,000 as Tax.

CASH FLOW STATEMENTfor the year ended 31st March, 2012

Particulars`

(A)Cash Flow from Operating Activities

Net Profit before Tax (WN-1)80,000

Add:Depreciation20,000

Operating Profit before Working Capital Changes1,00,000

Add:Trade Payables (Increase in Creditors)5,000

Inventories (Decrease in Stock)10,000

Less:Increase in Debtors (Trade Receivable)(10,000)

Decrease in Bills Payable (Trade Payable)(4,000)

Cash Generated by Operating Activities1,01,000

Less:Tax Paid(15,000)

Net Cash from Operating Activities 86,000

(B)Cash Flow from Investing Activities

Outflow on Purchase of Fixed Assets (WN-3)(60,000)

Net Cash used in Investing Activities(60,000)

(C)Cash Flow from Financing Activities

Payment of Bank Loan(10,000)

Payment of Dividend [` 20,000 ` 4,000 (Unclaimed)] (16,000)

Net Cash used in Financing Activities26,000

(D)Net Increase in Cash and Cash Equivalent ( A - B - C)Nil

Add:Opening Balance of Cash and Bank30,000

(E)Closing Balance of Cash and Bank30,000

Dr.PROVISION FOR TAX ACCOUNTCr.

Particulars `Particulars`

To Cash A/c (Tax paid)15,000By Balance b/d20,000

To Balance c/d25,000By Statement of Profit and Loss (Provision made)20,000*

(Bal. Fig.)

40,00040,000

Dr.FIXED ASSETS ACCOUNTCr.

Particulars `Particulars`

To Balance b/d2,35,000By Depreciation20,000

To Cash A/c (Bal. Fig.)60,000By Balance c/d2,75,000

(Fixed Asset Purchased)

2,95,0002,95,000

CASH FLOW STATEMENTfor the year ended 31st March, 2012

Particulars`

(A)Cash Flow from Operating Activities

Net Profit before Tax (WN-1)80,000

Add:Depreciation20,000

Operating Profit before Working Capital Changes1,00,000

Add:Trade Payables (Increase in Creditors)5,000

Inventories (Decrease in Stock)10,000

Less:Increase in Debtors (Trade Receivable)(10,000)

Decrease in Bills Payable (Trade Payable)(4,000)

Cash Generated by Operating Activities1,01,000

Less:Tax Paid(15,000)

Net Cash from Operating Activities 86,000

(B)Cash Flow from Investing Activities

Outflow on Purchase of Fixed Assets (WN-3)(60,000)

Net Cash used in Investing Activities(60,000)

(C)Cash Flow from Financing Activities

Payment of Bank Loan(10,000)

Payment of Dividend [` 20,000 ` 4,000 (Unclaimed)] (16,000)

Net Cash used in Financing Activities26,000

(D)Net Increase in Cash and Cash Equivalent ( A - B - C)Nil

Add:Opening Balance of Cash and Bank30,000

(E)Closing Balance of Cash and Bank30,000

Dr.PROVISION FOR TAX ACCOUNTCr.

Particulars `Particulars`

To Cash A/c (Tax paid)15,000By Balance b/d20,000

To Balance c/d25,000By Statement of Profit and Loss (Provision made)20,000*

(Bal. Fig.)

40,00040,000

Dr.FIXED ASSETS ACCOUNTCr.

Particulars `Particulars`

To Balance b/d2,35,000By Depreciation20,000

To Cash A/c (Bal. Fig.)60,000By Balance c/d2,75,000

(Fixed Asset Purchased)

2,95,0002,95,000