CASH FLOW STATEMENT

    LEARNING OBJECTIVES
i)          To understand the meaning of cash flow statement
ii)         To understand the meaning of cash, cash funds and cash equivalents.
iii)            To calculate operating profit and cash flow from operating activities
iv)             To understand operating and non-operating expenses and incomes.
v)         To calculate cash flow from operating, investing and financing activities.
vi)             To prepare cash flow statement with additional information
SALIENT POINTS :
v Classification  of Activities :  The cash flow from Operating, Investing and Financing  are shown separately in Cash flow statement.
v Non cash items : The flow of cash which affects the statement is reflected in the preparation of Cash flow statement.
i)                What do you mean by cash flow statement?
A statement which shows inflow and outflow of cash and cash equivalents from operating, investing and financing activities during a specific period.
ii)              What are the various activities classified as per AS-3(revised) related to cash flow statement?
(a)   cash flow from operating activities
(b)  cash flow from investing activities
(c)   cash flow from financing activities.
iii)             State one objective of cash flow statement.
Helpful for short term planning, for preparing cash budget
iv)             What do you mean by cash equivalent?
Short –term highly liquid investments which are readily convertible into known amount of cash and which are subject to an insignificant risk of change in the value.
v)               State the category of the following items for a financial as well as non-financial company
(1)  Dividend received
(2)  Dividend received
(3)  Interest paid
(4)  Interest received

Answer                                  
                                           Financial company            non-financial company   
(1)  Dividend received                operating activity           investing activity
(2)  Dividend paid                      financing activity           financing activity
(3)  Interest paid                         operating activity           financing activity
(4)  Interest received                  operating activity            investing activity
(Note; for objective type questions any one or two can be asked)  
vi)        What are the objectives of preparing cash flow statement?
Ans.        The objectives of cash flow statement are:
               i)     To ascertain the specific sources (i.e., operating / investing financing activities) of cash and cash equivalents generated by an enterprise.
               ii)    To ascertain the specific uses (i.e., operating / investing / financing activities) of cash and cash equivalents used by an enterprise.
               iii)  To ascertain the net change in cash and cash equivalents (sources minus uses of cash and cash equivalents) between the date of two Balance Sheets.
Problems
1)      Calculate the net amount of cash flow if a fixed asset costing Rs. 32,000(having a book value of Rs. 24,000) is sold at a loss of Rs. 8,000.
Cash inflow from investing activities – Rs. 16,000
(Book value –loss=Amount received from sale Rs. 24000-Rs.8,000)
2)     From the following information calculate cash flow from operating activities:
Profit and loss account
For the year ended on 31-03-2007
Particulars
Amount
Particulars
Amount
To Cost of goods sold
6,20,000
By sales
9,60,000
To selling and distribution expenses
52,000
By Profit on sale of furniture
12,000
To office Expenses
1,20,000
By interest Received
2,400
To Loss on sale of machinery
57,600


To depreciation
24,000


To Discount on debentures
8,000


To payment for taxation
28,800


To Net Profit
64,000



9,74,400

9,74,400




Additional information
Debtors                             1,12,000               1,31,200
Stock                                   67,200                  92,000
Creditors                             50,000                 60,000
Outstanding expenses             2,800                  1,600

SOLUTION
Particulars
Amount
Amount
Net Profit before Taxation and extraordinary items
92,800

Net Profit +Taxation(64,000+28,800)


Add non-operating expenses


Depreciation                                             24,000


Loss on sale of machinery                         57,600


Discount on debentures written off               8,000
89,600


    1,82,400

less non-operating incomes


Profit on sale of furniture                         (12000)


Interest Received                                         (2,400) 
(14,400)

operating profit before working capital changes
1,68,000

Adjustments related to current assets and liabilities


Add: Increase in current Liabilities


Creditors
10,000


1,78,000

Less : Decrease in current liabilities


outstanding expenses
(1,200)

less  Increase in current assets


debtors                                             19,200


Stock                                                   24,800
(44,000)


1,32,800

Less payment of taxes
(28,800)

Net cash flow from operating activities

1,04,000






3)         From the following balance sheet calculate cash flow from operating activities.



liabilities
2,007
2008
Assets
2007
2,008
Creditors
31,200
39,000
cash in hand
7,800
3,120
Bills payable
33,600
7,800
cash in hand
9,800
3,680
Income received in advance
40,000
50,000
Short term investments
15,600
10,800
outstanding salaries
20,000
20,200
Investments
62,400
46,800
10% Debentures
93,600
1,24,800
Inventory
46,800
70,200
equity share capital
80,000
80,000
Debtors
39,000
46,800
profit and loss
30,000
62,400
Bills receivable
7,800
15,600
General Reserve
16,800
31,200
Fixed assets
   1,56,000
2,18,400

3,45,200
4,15,400

3,45,200
4,15,400






Solution


Particulars
Amount
Amount
Net Profit Before Tax and Extraordinary items


(profit+Transfer to general reserve)


(Rs. 32,000+Rs. 14,400)
46,800

Adjustments


items to be added


Interest on debentures
9,360

Operating profit before working capital changes

56,160
Adjustments related to current assets and liabilities


Add : Increase in Current liabilities


creditors
7,800

Income Received in advance
10,000

outstanding salaries
200
18,000


74,160
Less:  Increase in Current Assets


Inventory
(23,400)

Debtors
(7,800)

Bills Receivable
(7,800)
(39,000)


35,160
Less :Decrease in Current Liabilities


Bills Payable
(25,800)

Net Cash from Operating Activities

9,360



4)          X 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 written off was Rs.7, 000/- and the gain on sale of machinery was Rs.3, 000/-.  The other information available to you (changes in the value of current assets and current liabilities) is as follows:
             At the end of the year Debtors showed an increase of Rs.6, 000/-, creditors an increase of Rs.10, 000/-, prepaid expenses an increase of Rs.200/-, Bills Receivable a decrease of Rs.3, 000/-, Bills Payable a decrease of Rs.4, 000/- and outstanding expenses a decrease of        Rs.2, 000/-.  Ascertain the cash flow from the operating activities.
Ans.        Solution :      
               CASH FLOW FROM OPERATING ACTIVITIES
               Particulars                                                                                                                Rs.
               Net Profit                                                                                                         1,00,000
               Add : Transfer to General Reserve                                                                    30,000
                            Net Profit before Tax                                                                         1,30,000
               Adjustment for non-cash and non-operation expenses :

               Add :    Depreciation                                                                  20,000
                            Goodwill Written Off                                                      7,000
                                                                                                                   27,000
               Less :    Gain on Sale of Machinery                                              3,000             24,000
               Operating Profit before working capital changes                                            1,54,000
               Add :    Decrease in Current Assets and Increase in                                                    
                            Current Liabilities                                                                                           
                            Increase in Creditors                                                     10,000
                            Decrease in Bills Receivable                                          3,000             13,000
                                                                                                                                       1,67,000
               Less :    Increase in Current Assets and Decrease in
                            Current Liabilities :
                            Increase in Debtors                                                         6,000
                            Increase in Prepared Expenses                                           200
                            Decrease in Bill s Payable                                              4,000
                            Decrease in Outstanding Expenses                                  2,000             12,200
                            Cash Flow from Operating Activities                                                1,54,800




5)          From the following Balance Sheets of Ranjan Ltd. prepare Cash Flow Statement:
             Liabilities                             2001           2002         Assets                  2001           2002
             Equity Share Capital      1,50,000     2,00,000         Goodwill          36,000        20,000
             12% Pre. Share Capital     75,000        50,000         Building            80,000        60,000
             General Reserve               20,000        35,000         Plant                  40,000     1,00,000
             Profit and Loss A/c           15,000        24,000         Debtors          1,19,000     1,54,500
             Creditors                           37,500        49,500         Stock                 10,000        15,000
                                                                             Cash         12,500                 9,000
                                                   2, 97,500    2, 58,500                              2, 97,500    3, 58,500
            
             Depreciation charged on plant was Rs. 10000 and building Rs. 60000.

Ans.        Solution:
Rajan Ltd.
CASH FLOW STATEMENT for the year ended 31st December, 2002
               Particular’s                                                                                       Rs.                   Rs.
A.     Cash Flow from Operating Activities                                                                                                                                                                                                    
B.      Net Profit before tax :
                      Closing Balanced of Profit and Loss A/c
                      Closing Balance of Profit and Loss A/c                               24,000
                      Add: Transfer to General Reserve                                       15,000
                                                                                                                   39,000
                      Less: Opening Balance of Profit and Loss A/c                    15,000
                      Net Profit before tax and extraordinary items                                              24,000
                      Adjustments for:
                      Add: Depreciation on Plant                                                 10,000
                      Depreciation on Building                                                     60,000
                      Goodwill written off                                                            16,000             86,000
                      Operating profit before working capital changes                                      1,10,000
                      Adjustments for:                                                                             
                      Increase in Creditors                                                            12,000
                      Increase in Debtors                                                           (35,500)
                      Increase in Stock                                                                 (5,000)          (28,500)
                      Net Cash from operating activities                (A)                                         81,500




               B.   Cash Flow from Investing Activities
                      Purchase of Plant (Note 2)                                                (70,000)                       
                      Purchase of Building (Note 1)                                           (40,000)                       
                      Net cash used in investing activities             (B)                                    (1,10,000)
               C.   Cash Flow from financing Activities
                      Issue of Equity Shares                                                          50,000
                      Redemption of 12% Preference Shares                             (25,000)
                      Net Cash from financing activities                (C)                                         25,000
                      Net decrease in cash and cash                                                                               
                      Equivalents                                           (A+B+C)                                       (3,500)
                      Cash and cash equivalents at the beginning of the year                                12,500
                      Cash and cash equivalents at the close of the year                                         9,000
               Working Notes:

               1. Dr.                                   BUILDING ACCOUNT                                               Cr.
               Date    Particulars                            Rs.      Date     Particulars                                Rs.
                           To Balance b/d               80,000                  By Depreciation A/c          60,000
                           To Bank A/c                   70,000                  By Balance c/d                   60,000
                                                              1, 20,000                                                         1, 20,000


               2. Dr.                                   PLANT ACCOUNT                                                     Cr.
               Date    Particulars                            Rs.      Date     Particulars                                Rs.
                           To Balance b/d               40,000                  By Depreciation A/c          10,000
                           To Bank A/c                   70,000                  By Balance c/d               1, 00,000
                                                                1,10,000                                                             1,10,000        
6)          From the following Balance Sheet of India Ltd. and the additional information given made out the Cash Flow Statement:
             Liabilities                             2007           2008         Assets                        2007     2008
             Share Capital                3, 00,000    4, 00,000         Goodwill            1, 15,000  90,000
             Mortgage Loan              1, 50,000    1, 00,000         Land & Building 2, 00,000          1, 70,000
             General Reserve               40,000        70,000         Plant                       80,000          2, 00,000
             P & L A/c                          30,000        48,000         Debtors               1, 60,000          2, 00,000
             Proposed Div.                   42,000        50,000         Stock                       77,000          1, 09,000
             Creditors                           55,000        83,000         Bills Receivable     20,000  30,000
             Bills Payable                     20,000        16,000         Cash in hand           15,000  10,000
             Provisions for Taxation     40,000        50,000         Cash at Bank           10,000    8,000
                                                   6, 77,000    8, 17,000                                    6, 77,000          8, 17,000
             Additional information:
             (1)Depreciation of Rs.1,000/- and Rs.20,000/- has been charged on Plant and Land & Building respectively in 2006-07.
             (2)The interim dividend of Rs.20, 000/- has been paid in 2007-08.
               (3)Income Tax of Rs.35, 000/- was paid during the year 2007-08.
Ans.        Cash Flow from operating activities Rs. 1, 25,000, cash used in investing activities Rs. 120000 cash used in Financing Activities Rs. 12,000, Net decrease in cash and Bank Balance Rs. 7000.
7)    From the following prepare cash flow statement as per AS-3
Liabilities
2010
2011
Assets
2010
2011
Share Capital
2,88,000
3,20,000
Fixed Assets
2,40,000
4,00,000
Reserves And Surpluses
64,000
80,000
Less Accumulated Dep.
64,000
1,20,000
Bank Loan
80,000
60,000

1,76,000
2,80,000
creditors
2,48,000
2,40,000
Goodwill
64,000
56,000
bills payable

4,000
Investments
72,000
88,000
Proposed Dividend
36,000
48,000
Stock
1,60,000
1,80,000
Income Tax Payable
20,000
24,000
Debtors
1,60,000
1,52,000



Bank
1,04,000
20,000

7,36,000
7,76,000

7,36,000
7,76,000



Additional information:





(i) During the year a part of the machinery costing Rs. 40,000 was sold for Rs. 20,000.
(ii) Depreciation provided during the year Rs. 80,000.

(iii) Interim Dividend paid during the year Rs. 20,000.


Solution
Cash Flow Statement for the year ended 2011
A  Cash flow from operating activities:


Profit before Tax and Extraordinary items
1,08,000

Adjustments for :


Add: Depreciation
80,000

Goodwill Written off
8,000

Less: Profit on sale of Machinery
(4,000)

operating profit before working capital changes
1,92,000

Add : Decrease in current assets:


 Debtors                                                         8,000


Add: increase in current liability:


 Bills payable                                              4,000
12,000


2,04,000

Less : increase in current assets


Stock                                                            20,000


less :  Decrease in Current Activities


Creditors                                                        8,000
(28,000)

cash from operating activities
1,76,000

Less Tax paid
(20,000)

Net cash flow from operating activities

1,56,000



B      Cash flow from investing activities


sale of machinery
20,000

purchase of fixed assets
(2,00,000)

purchase of investment
(16,000)

Cash flow in investing activities

1,96,000



C:  Cash flows from operating activities:


Issue of Share capital
32,000

Repayment of bank loan
(20,000)

payment of dividend


         regular                                                            36,000


          interim                                                          20,000
(56,000)

Cash used in financing activities

(44,000)
A+B+C=

(84,000)
Add cash and cash equivalents at the beginning

1,04,000
cash and cash equivalents at the end

20,000



Working Notes


(i) Calculation of Profit before tax and extra ordinary items:


Net profit during the year                  --------


Add:  Transfer to reserves                  16,000


 Proposed  dividend                              48,000


Income tax provision                            24,000


Interim Dividend                                    20,000



1,08,000

Fixed assets account

Dr.
Cr.

Particulars
Rs.
Particulars
Rs.

To balance b/d
2,40,000
By Bank (sale)
40,000

To Cash a/c (B.F)(purchase)
2,00,000
By Balance c/d
4,00,000


4,40,000

4,40,000





Machinery  Disposal Account
Cr.

To Fixed Assets a/c
40,000
By cash a/c
20,000

TO Profit and loss a/c (B.F)
4,000
By accumulated dep.
24,000


44,000

44,000






                                          Accumulated                  Depreciation Account
Cr.

To assets disposal a/c
24,000
by balance b/d
64,000

To bal c/d
1,20,000
By P &L a/c
24,000


1,44,000

1,44,000


Income Tax Payable a/c

To cash a/c
20,000
By Balance b/d
20,000

To Balance c/d
24,000
By P&L a/c
24,000


44,000

44,000