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Cash Flow StatementCash Flow Statement• Profit ≠ Cash
• As P & L a/c is prepared on Accrual basis• The term cash mean & include –
1. Cash in Hand2. Demand deposit with banksp3. Cash Equivalents
Cash Flow Statement
• AS-3 & IAS-7• CFS reflects the movement of cash from three
types of Activities of the firm –types of Activities of the firm 1. Operating Activities2 Investing Activities2. Investing Activities3. Financing Activities
ExerciseExerciseIdentify the following transactions with the three activities:
1 Borrowed from a bank and purchased land 4,00,000
2 Sold investment securities 7,00,000
3 Paid dividends 3,00,000
4 Issued 500 equity shares 3 50 0004 Issued 500 equity shares 3,50,000
5 Purchased machinery and equipment 1,75,000
6 Bank loan paid 6,50,000
7 Received accounts receivable outstanding 1,00,000
8 Accounts payable increased 1,90,[email protected]
Preparation of CFSPreparation of CFS• Direct Method
• Comparatively more useful• Disclose gross receipts & gross paymentsDisclose gross receipts & gross payments
I di t M th d• Indirect Method• Profit & Loss a/c is reconciled for the effects of
transaction of non cash nat retransaction of non – cash [email protected]
Format: Direct MethodStatement of Cash Flows (Direct Method ) …..Company Name
For the year ended….
Cash flows from operating activitiesCash received from customersCash received from customers Interest receivedCash paid for merchandiseCash paid for Income taxesNet cash flow from operating activities XXX (A)
Cash flows from investing activitiesPurchase of marketable securitiesProceeds from sale of marketable securities Cash paid for purchase of plant assetsLoan made to borrowersCollection on loansCash received from sale of plant assetsNet cash from investing activities
XXX (B)
Cash flows from financing activitiesProceeds from borrowingsCash paid to settle short-term debtsCash paid to retire long term debtCash received from issuing stockCash paid for dividendsNet cash provided by financing activities
XXX (C)
Net increase (decrease) in cashCash and cash equivalent at the beginning of the yearCash and cash equivalents at the end of the year
A + B + C [email protected]
Format: Indirect MethodNet profit before tax and extraordinary items(+) Depreciation(+) Amortization of intangible assets(+) Preliminary expenses written off(-) Gain on sale of fixed assets / investments(+) Loss on sale of fixed assets / investmentsOperating profit before working capital changes(+) Decrease in current assets( -) Increase in current assets (+) Increase in current liability(-) Decrease in current liability (-) Income tax paid(±) Extraordinary items
NET CASH FLOW PROVIDED BY (or USED IN ) OPERATING ACTIVITIESA
Cash flows from investing activitiesCash flows from investing activities(+) Sale of assets / investments(-) Purchase of assets / investmentsNET CASH FLOW PROVIDED BY (or USED IN ) INVESTING ACTIVITIES B
Cash flows from financing activities(+) P d f l t b i(+) Proceeds from long term borrowings(+) Proceeds from issue of share capital(-) Dividends paid(-) Interest paidNET CASH FLOW FROM FINANCING ACTIVITIES C
Net increase / decrease in cash and cash equivalents(+) Cash and cash equivalents in the beginningCash and cash equivalents at the end
A + B + CXXX
CFS: Indirect PerformaCFS: Indirect Performa
• Classify the extraordinary items based on theClassify the extraordinary items based on the Activities
• Tax flow also to be classified based on the• Tax flow also to be classified based on the ActivitiesD i l d h h i• Do not include the non – cash transactions• Generally put as note to the statement
Non-Cash items• Purchase of long – term assets by issuing
equity share capital.q y p• Retirement of bonds by issuing equity share
capital.p• Issue of debt to purchase fixed assets.• Exchange of non cash assets for other nonExchange of non cash assets for other non
cash assets.• Conversion of preferred share to equity shareConversion of preferred share to equity share
Steps to Prepare CFS• Information needed for its preparation –
1. Comparative Balance Sheet2. Income Statement3. Additional information
• Steps to prepare CFS• Analyse the Non – Current AccountsAnalyse the Non Current Accounts• Analyse the profit & loss figure• Chart the cash flow statementChart the cash flow statement
Cash flow statementFor the year ending ….
i) Cash flow from operating activitiesa. Net profit before taxation and extraordinary items
Adjustment forNon cash itemsNon – operating items
b. Operating profit before working capital changesIncrease/Decrease in Current AssetsIncrease/Decrease in Current Liabilities
c. Cash generated from operationsIncome tax paid
d. Cash flow before extraordinary iteme. After tax cash flow from extraordinary items
Net cash from Operating Activities
ii) Cash flows from investing activitiesa. Cash payments to acquire Fixed Assetsb. Cash receipts from disposing Fixed Assetsc. Cash payments to acquire Financial Assets (e.g. subsidiary investment)d. Cash receipts from disposal of Financial Assetse. Interest / Dividend received
Net cash from Investing Activities
iii) Cash flow from financing activitiesa. Issue of equity/preferred sharesb. Buyback/redemption of sharesc. Issue/redemption of debenturesd. Raising / repaying long term loanse. Interest / Dividend paid
Net cash from Financing Activities
Net increase/decrease in cashCash at the beginning of the periodCash at the end of the period
Q1. Use the following information about X Ltd. to prepare the cash flow statement for the company: Comparative balance sheet of X Ltd.
As on 31st March of... Liabilities 2009 2008 Assets 2009 2008
Equity Share Capital 60,000 50,000 Land 10,000 10,000 Profit & Loss A/c 5,000 4,000 Furniture 17,000 11,000 Creditors 4,000 2,500 Vehicles 12,500 8,000 Provision for Taxation 1,500 1,000 Short-term Investments 2,000 1,000 Proposed Dividend 2,000 1,000 Stock 17,000 14,000 Debtors 8,000 6,000 Bank & Cash 6,000 8,500 72,500 58,500 72,500 58,500
The company also has the Profit and Loss Account as:
Profit and Loss Account For the year ending 31st March 2009
Profit before tax 4,500 Less: Tax (1,500)
Profit after tax 3,000 Less: Proposed dividend (2,000)
Profit retained 1,000 The following additional information is also provided:
Furniture Vehicles Depreciation for the year 1,000 2,500 Disposals
Proceeds from disposal 1,700 Written Down Value (1,000)
Profit on disposal 700 Q2. The following is the Balance sheet of MN Ltd.
Comparative balance sheet of MN Ltd. As on 31st March of... (‘000)
Liabilities 2008 2009 Assets 2008 2009 Equity capital 60,00 60,00 Land & Buildings 14,20 17,50 General Reserve 30,90 34,10 Plant & Machinery 31,00 37,50 Profit & Loss Account 1,50 1,80 Furniture & Fixtures 8,40 9,80 9% Debentures – 15,00 Investment 50 60 Sundry Creditors 1,30 3,70 Stock 3,40 4,20 Proposed Dividends 1,80 Debtors 30,00 36,00 Cash and Bank 8,00 9,00 95,50 1,14,60 95,50 1,14,60
Additional information for the year ended 31 March 2009:
1. Dividend of Rs. 1,80,000 for the year ended 31 March 2008 was paid during 2009. 2. Investment costing Rs. 10,000 was sold for Rs. 12,000. 3. Depreciation on assets for the year ended 31 March 2009 was charged to Profit & Loss account
as follow:
Land and Buildings Rs. 42,000 Plant and Machinery Rs. 4,74,000 Furniture and Fixtures Rs. 184,000
4. Sales of fixed assets: Machinery Sale value Rs. 1,00,000 (WDV Rs. 2,20,000) Furniture Sale value Rs. 30,000 (WDV Rs. 20,000) Prepare the cash flow statement of MN Ltd. for the year ended 31 March 2009.
Q3. Use the following information about KM Ltd.’s Balance sheet as on 31st December 2007 and 31st
December 2008 to prepare a statement of cash flows for the year ended 31st December 2008. Comparative balance sheet of KM Ltd.
As on 31st December of .. (‘000) Liabilities 2007 2008 Assets 2007 2008
Share capital 8,00 10,00 Plant & Machinery 5,00 7,00 Reserve 1,50 2,00 Land & Building 4,00 6,00 Profit & loss account 60 1,00 Investments – 1,00 Debentures – 2,00 Sundry debtors 7,00 5,00 Provision for taxation 70 1,00 Stock 2,00 4,00 Proposed dividend 1,00 2,00 Cash on hand/bank 2,00 2,00 Sundry creditors 8,20 7,00 20,00 25,00 20,00 25,00
The additional information relating to 2008 activities is as follows: 1. Depreciation @ 25% was charged on the opening value of Plant & Machinery. 2. During the year one old machine costing Rs. 50,000 (WDV 20,000) was sold for Rs. 35,000. 3. Rs. 50,000 was paid towards Income tax during the year. 4. Building under construction was not subject to any depreciation.
Solution indications: Cash inflow from operating activities Rs. 3,10,000 Cash outflow from investing activities Rs. 6,10,000 Cash inflow from financing activities Rs. 3,00,000 Q4. The following is the Balance sheet of PQ Ltd.
Comparative balance sheet As on 31st March of …
Liabilities 2008 2009 Assets 2008 2009 Share Capital 315,000 465,000 Plant 505,000 715,000 Reserves & Surplus 132,000 140,000 Less: Accumulated Dep. 68,000 103,000 Bonds 245,000 295,000 437,000 612,000 Current Liabilities Long Term Investments 127,000 115,000
Account Payable 43,000 50,000 Current Assets Accrued Liabilities 9,000 12,000 Inventory 110,000 144,000 Income Tax Payable 5,000 3,000 Account Receivable 55,000 47,000 Cash 15,000 46,000 Prepaid Expenses 5,000 1,000
749,000 965,000 749,000 965,000
The profit and loss account of the company is as follows:
Profit & Loss Account for the year ending on 31st March 2009
Cost of goods sold 520,000 Sales 698,000 Gross Profit 178,000
698,000
698,000
Depreciation 37,000 Gross Profit 178,000 Administration expenses 110,000 Interest received 6,000 Interest paid 23,000 Gain on sale of Investment 12,000 Loss on sale of Plant 3,000
Income tax 7,000 Net Profit 16,000
196,000
196,000
With the help of further information given below, prepare the cash flow statement of this company:
1. Investment purchased for Rs. 78,000. 2. Investments costing Rs. 90,000 sold for Rs. 102,000. 3. Plant purchased for Rs. 120,000. 4. Plant costing Rs. 10,000, with accumulated depreciation of Rs. 2,000, was sold for Rs.
5,000. 5. Bonds with face value of Rs. 100,000 was issued in exchange of Plant bought on 31st
Mar. 09 6. Repaid Rs. 50,000 of bonds at face value at maturity. 7. Issued 15,000 shares of Rs. 10 each. 8. Paid cash dividends Rs. 8,000.
Solution to Q4
Cash Flow Statement of PQ Ltd.
for the year ending 31-03-2009
cash flow from operations Net profit before taxation 23,000
Adjustments for: Depreciation 37,000
Profit on sale of Investments 12,000 Loss on sale of Plant 3,000 Interest paid 23,000 Interest received 6,000 operating profit before WC changes 68,000
Decrease in account receivables 8,000 Increase in Inventories 34,000 Decrease in prepaid expenses 4,000 Increase in account payable 7,000 Increase in accrued liabilities 3,000 cash generated from operations 56,000
Income tax paid 9,000 Net cash inflow from operations
47,000
Cash flow from investing activities Sale of Plant 5,000
Purchase of Plant 120,000 Purchase of Investments 78,000 Sale of Investments 102,000 Interest received 6,000 Net cash outflow from investing activities
85,000
Cash flow from financing activities Issue of share capital 150,000
Repayment of bond 50,000 Interest paid 23,000 Dividend paid 8,000 Net cash inflow from financing activities
69,000
Net increase in cash & cash eq.
31,000 Cash & cash eq. at the beginning
15,000
Cash & cash eq. at the end
46,000