Chapter 6

Cash Flow Analysis

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Chapter Outline

1. Introduction
2. Nature of Cash Flow Statement
3. Objectives of Preparing Cash Flow Statement
4. Benefits of Cash Flow Statement
5. Important Definitions as per AS-3(Revised)
6. Classification of Cash Flows
a. Cash flows from Operating Activities
b. Cash from Investing Activities
c. Cash from Financing Activities
7. Treatment of Some special Items
8. Information Required For Cash Flow Statement
9. Preparation of Cash Flow Statement
10. Format of Cash Flows Statement
a. Direct Method
b. Indirect Method
c. Cash Flow Statement as Approved by SEBI
11. Funds Flow Statement vs. Cash Flow
Statement
12. Limitations of Cash Flow Statement
13. Appendix
Questions

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1. Introduction

The funds flow analysis, discussed in the preceding chapter, deals with the flow of funds within and
outside the organization. The main focus of funds flow statement is to explain the changes which have
taken place in net working capital during the period under consideration. But a Funds flow statement
normally fails to explain the changes in cash balances. The movement of cash is of vital importance to
the management. The organization may become directionless, if the cash inflows are not sufficient to
meet the cash outflows. Many a time, a management is posed with the paradox of huge profits and
yet impossible to pay dividends, wages, telephone bills or even taxes. This is due to the ground
realities that cash is either not received or the cash received is drained out in some other ways.
Hence, it has become a necessity to have a cash flow analysis on a day to day basis. For this purpose
a statement known as ‘Cash Flow Statement’ is prepared, which shows the items resulting in inflows
and outflows of cash. In this chapter, the cash flow statement and its methods of preparation are
discussed in detail.

2. Nature of Cash Flow Statement

(a) The Cash flow statement is being prepared on the basis of extracted information of historical
records of the enterprise.
(b) It ignores basic accounting concept, i.e., accrual concept.
(c) It includes only inflows and outflows of cash and cash equivalents; it excludes transactions that
do not directly affect cash receipts and payments. These noncash transactions include
depreciation or write-offs on bad debts or credit losses to name a few.
(d) It reports on three types of financial activities: operating activities, investing activities, and
financing activities. Noncash activities are usually reported in footnotes.
(e) The statement is mainly prepared to show the impact of financial policies and procedures on the
cash position.
(f) It takes into account all the transactions that have a direct impact upon cash.
(g) It can be prepared for a year, for six months, for quarterly and even for monthly.

3. Objectives of Preparing Cash Flow Statement

(h) To identify the causes for the cash balance changes in between two different time periods, with
the help of corresponding two different balance sheets.
(i) To enlist the factors of influence on the reduction of cash balance as well as to indicate the
reasons though the profit is earned during the year and vice versa.
(j) To provide information on a firm's liquidity and solvency and its ability to change cash flows in
future circumstances
(k) To provide additional information for evaluating changes in assets, liabilities and equity
(l) To improve the comparability of different firms' operating performance by eliminating the effects
of different methods indicate the amount, timing and probability of future cash flows.
(m) Cash budget is prepared with the help of inflow and outflow of cash. If there is any variation, the
same can be corrected.

4. Benefits of Cash Flow Statement

Cash flow statement provides the following benefits:

(a) Short-Term Planning: The Cash Flow Statement gives information regarding sources and
application of cash and cash equivalents for a specific period so that it becomes easier to plan
investments, operating and financing needs of an enterprise.

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 (b) Evaluating of an enterprise: 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.
(c) Helping to understand Liquidity and Solvency: Solvency is the ability of the business to meet its
current liabilities. Quarterly or monthly Cash Flow Statements help ascertain liquidity in a better
way. Financial institutions, like banks prefer the Cash Flow Statement to analyse liquidity.
(d) Efficient Cash Management: The 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.
(e) 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 cash budgets.
(f) 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.
(g) Reasons for Cash Position: The Cash Flow Statement explains the reasons for lower and higher
cash balances with the enterprise. Sometimes, a lower cash balance is found in spite of higher
profits or a higher cash balance is found in spite of lower profits. Reasons for such situations can
be analysed with the help of the Cash Flow Statement. Sometimes in spite of high profits gone?
Answers to such questions can be found from the Cash Flow Statement.
(h) Test for the Management Decisions: It is a general rule that fixed assets are purchased from the
funds raised from long-term sources, and the best way to repay the long-term debt is out of
profits. The Cash Flow Statement shows clearly whether the cash inflows from operations have
been used for the purchase of fixed assets or whether these assets have been purchased from
cash inflows from long-term debts. Similarly, it also explains whether the debentures have been
redeemed out of profits or not. Thus, the Cash Flow Statement fan be used to test the credibility
of the management decisions.

5. Important Definitions as per Accounting Standard (As-3: Revised)

Although the AS-3 is given at the end of the chapter in appendix, some important definitions as per
this standard are explained below for the better benefit of the students.

(i) Cash comprises cash on hand and demand deposits with banks.
(ii) Cash Equivalents are short-term, highly liquid investments that are readily convertible into the
known amount of cash and which are subject to an insignificant risk of change in value. An
investment normally qualifies as cash equivalent only when it has a short maturity of, say, three
months or less from the date of acquisition Examples of cash equivalents are: (a) treasury bills,
(b) commercial paper, (c) money market funds and (d) Investments in preference shares and
redeemable within three months can also be taken as cash equivalents if there is no risk of the
failure of the company.
(iii) Cash Flows are inflows and outflows of cash and cash equivalents. AS-3 requires a Cash Flow
Statement to be prepared and presented in a manner that it shows cash flows from business
transactions during a period classifying them into : (a) Operating Activities; (b) Investing
Activities; and (c) Financing Activities.
(a) Operating Activities: Operating activities are the principal revenue-producing activities of the
enterprise and other activities that are not investing or financing activities.
(b) Investing Activities: Investing activities are the activities which involve the acquisition and
disposal of long-term assets and other investments not included in cash equivalents.

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 (c) Financing Activities: Financing activities are the activities that result in change in the size
and composition of the owners’ capital (including preference) share capital in the case of a
company) and borrowing of the enterprise.

6. Classification of Cash Flows

Various activities of an enterprise result into receipts and payments of cash, which is the subject
matter of a cash flow. 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.

Why is it important to disclose the cash flows from each

activity separately?

A student will appreciate the importance of separate disclosure under

each activity from the following:
Operating Activities
 The amount of the cash flow arising from operating activities is
a key indicator of the extent to which the operations of the
enterprise have generated cash, i.e., whether the cash
generation is adequate to maintain operating capability of the
enterprise, pay dividends, repay loans, and make new
investments.
 It is also helpful in forecasting future cash flows from operations.
Investing Activities
The amount of the cash flow arising from investing activities represents the extent to which
expenditure has been incurred to generate future income and cash flows.
Financing Activities
The amount of the cash flow arising from financing activities is useful in assessing claims on future
cash flows by the providers of funds to the enterprise.
6.1 Cash flows from Operating Activities
Operating activities are the activities that constitute the primary or main activities of an enterprise.
These are the principal revenue producing activities of the enterprise and other activities that are not
investing or financing activities. The amount of cash flows arising from operating activities is a key
indicator of the extent to which the operations of the enterprise have generated sufficient cash to
maintain its operating capability, to pay dividends, to repay loans, and to make new investments
without recourse to external sources of financing. The following are the important operating activities.

Operating Activities

Cash Inflow Cash Outflow

a) Cash Sales of goods and services (i) Cash Purchases

b) Cash received from debtors (ii) Cash Payment to Creditors
c) Cash received from Commission and Fees (iii) Cash Operating Expenses
d) Cash received from Royalty (iv) Cash payments to employees
(v) Payment of Income Tax
(vi) Payment of insurance premiums

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An enterprise may hold securities and loans for dealing or trading purposes, in which case they are
similar to inventory acquired specifically for sale. Therefore, cash flows arising from the purchase and
sale of dealing or trading activities are classified as operating activities. Similarly cash advances and
loans made by financial enterprises are usually classified as operating activities since they relate to
the main revenue producing activity of that enterprise.

Illustration 1

Assuming all the following transactions were in cash, calculate cash from operations of M/s Ambika
Ltd:
Rs.
Sales 2, 50,000
Purchases 1, 25,000
Wages 30,000
Solution
Cash from operations = Cash inflow – Cash outflow
= Sales – (Purchases + wages)
= Rs. 2, 50,000 – Rs. (1, 25,000+ 30,000)
= Rs. 2, 50,000 – Rs. 1, 55,000
= Rs. 95,000
Illustration 2
Calculate the Cash Inflow from Debtors of M/s Ambika Ltd from the following information:
Opening Debtors 10,000
Closing Debtors 25,000
Opening Bills Receivables 12,000
Closing Bills Receivables 15,000

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 Total Sales 2, 40,000
Discount Allowed 8,000
Bad Debts 10,000
Sales Returns 12,000

Solution
Cash Inflow from Debtors
= Debtors in the beginning + Bills Receivables in the beginning + Total Credit Sales- Sales Return –
Bad Debts- Discount Allowed- Debtors in the end + Bills Receivables in the end
= Rs [10,000+ 12,000+ 2, 00,000 - 12,000– 10,000- 8,000 - 25,000 - 15,000]
= Rs. 1, 52, 000

Alternatively, the cash inflow can be calculated by preparing the Total Debtors Account

Total Debtors Account

Dr. Cr.
Particulars Rs Particulars Rs

To Balance b/d 10,000 By Bill Receivable 3,000

To Credit Sales 2, 00,000 By Discount Allowed 8,000
By Bad Debts 10,000
By Sales Returns 12,000
By Cash (Inflow from Debtors) 152,000
(Balancing Figure)
By Balance c/d 25,000
2,10,000 2,10,000
Illustration 3
Calculate the Cash outflow from Creditors of M/s Ambika Ltd from the following information:
Rs
Credit Purchases 2,00,000
Opening Balance of Creditors 15,000
Closing Balance of Creditors 6,000
Discount Received 1,500
Purchase Returns 3,500
Opening Balance of Bills Payable A/c 18,000
Closing Balance of Bills Payable A/c 24,000

Solution
Cash Outflow to Creditors
Particulars Rs.
Opening Balance of Creditors 6,000
Opening Balance of Bills Payable 18,000
Add : Credit Purchases 2,00,000
2,24,000
Less : Discount Received 1,500
Purchase Returns 3,500
Closing Balance of Creditors 6,000
Closing Balance of Bills Payable 24,000 35,000
Cash Outflows to Creditors 1,89,000

Alternatively, the cash outflow can be calculated by preparing the Total Creditors Account.

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 Dr Total Creditors Account Cr
Date Particulars Rs Date Particulars Rs

To Discount Received 1,500 By Balance b/d 6,000

To Purchase Return 3,500 By Purchases 2,00,000
To Bills Payable 6,000
To Cash (bal. fig.) 1,89,000
To balance c/d 6,000
2,06,000 2,06,000

Determining the cash flow from Operating Activities

There are two stages for arriving at the cash flow from operating activities
Stage-1

Calculation of operating profit before working capital changes

It can be calculated in the following manner:

Operating Profit before working capital changes

Net profit before Tax and extra ordinary Items xxx

Add: Non-cash and non operating Items which have already been debited to profit and
Loss Account:

Depreciation xxx
Amortisation of intangible assets xxx
Loss on the sale of Fixed assets xxx
Loss on the sale of Long term Investments xxx
Provision for tax xxx
Dividend paid xxx xxx
Less: Non-cash and Non-operating Items which have already been credited to Profit and
Loss Account:
Profit on sale of fixed assets xxx
Profit on sale of Long term investment xxx xxx
Operating profit before working Capital changes xxx

Stage-II
After getting operating profit before
working capital changes as per
stage-I, increase or decrease in the
current assets and current liabilities
are adjusted. The following general
rules may be applied at the time of
adjusting current assets and
current liabilities.
A. Current assets
(i) An increase in an item of
current assets causes a
decrease in cash inflow
because cash is blocked in
current assets.

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 (ii) A decrease in an item of current assets causes an increase in cash inflow because cash is
released from the sale of current assets.
B. Current liabilities
(i) An increase in an item of current liability causes a decrease in cash outflow because cash is
saved.
(iii) A decrease in an item of current liability causes increase in cash out flow because of payment
of liability.

Thus,
Cash from Operations
= Operating profit before working capital changes
+ Net decrease in current assets
+ Net Increase in current liabilities
– Net increase in current assets
– Net decrease in current liabilities

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 Profit and Loss Account’,
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 4
The net income reported in the Income Statement of M/s Ambika Ltd. for the year 2011 was
Rs. 110, 000 and depreciation of fixed assets for the same year was Rs. 44,000. Calculate
cash from operating activities. The balances of the current assets and current liabilities at
the beginning and at the end of the year are as follows.

End of the year Beginning of the year

Particulars
Amount(Rs.) Amount(Rs.)
Cash 130,000 140,000
Debtors 200,000 180,000
Inventories 290,000 300,000
Prepaid expenses 15,000 16,000
Account payables 1,02,000 1,16,000

Solution
Cash from 0perating Activities

Particulars Details Amount (Rs.)

Net Income 1,10,000
Add: Adjustment for non cash and Non-operating
items:
Depreciation 44,000
Operating Profit before working capital changes 154,000
Add: Decrease in current assets:
Inventories 10,000
Prepaid expenses 1,000 11,000
Less: Increase in current assets:
Debtors (20,000)
Less: Decrease in current liabilities:
Account payables (14,000) (34,000)

Net Cash flow from operating Activities 1,31,000

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Illustration 5
M/s Ambika 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 gain on sale of
machinery was Rs.3, 000.
Other information available with regards to changes in the value of current assets and current
liabilities are debtors showed an increase of Rs,6,000; creditors an increase of Rs.10,000; prepaid
expenses an increase of Rs.200; bills receivables a decrease of Rs.3,000; bills payables a decrease of
Rs.4,000 and outstanding expenses a decrease of Rs. 2,000.
Determine cash flow from operating activities.

Solution
Cash from Operating Activities
Particulars (Rs.)
Net Profit before Taxation 1, 00,000
Adjustments for Non-cash and Non-operating Items:
Add: Depreciation 20,000
Transfer to general reserve 30,000
Goodwill written-off 7,000
Less: Gain on sale of machinery (3,000)
Operating profit before working capital 1, 54,000
Adjustment for working capital charges:
Add: Increase in Creditors 10,000
Decrease in Bills Receivables 3,000
Less: Increase in Debtors (6,000)
Increase in Prepaid Expenses (200)
Decrease in Bills Payables (4,000)
Decrease in Outstanding Expenses (2,000)

Net Cash from Operating Activities 1, 54,800

Illustration 6
Ambika 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.
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
Less: Gain on Sale of Machinery 27,000
3,000 24,000

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 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

Illustration 7

From the following statement, calculate the cash generated from operating activities:

Statement of Profit
For the year ended 31st March, 2011

Particulars Rs. Particulars Rs.

To Salaries 10,000 By Gross Profit 85,000
To Rent 5,000 By Profit on sale of Machinery 5,000
To Depreciation 20,000 By Dividend received 3,000
To Loss on sale of Building 5,000 By Commission Accrued 4,000
To Goodwill written off 8,000 To Proposed Dividend 10,000
To Provision for Tax 15,000
To Net Profit 24,000
97,000 97,000

Solution:

Statement Showing Cash Flow from Operating Activities

Particulars Rs. Rs.

Net Profit before Tax and Extraordinary Items 49,000
Add:
Goodwill Amortized 8,000
Loss on Sale of Building 5,000
Depreciation 20,000 33,000
82,000
Less: Profit on Sale of Machinery 5,000
Dividend Received 3,000 8,000
Operating Profit before Working Capital Changes 74,000
Less: Increase in Current Assets & Decrease in Current Liabilities:
Commission Accrued 4,000
Cash Generated from Operations 70,000
Less: Tax Paid 15,000
Cash Flow from Operating Activities 55,000
Note : Net Profit before Tax and Extraordinary items is calculated by adding Provision for Tax and
Proposed Dividend to the amount of Net Profit, i.e., Rs. 24,000 + Rs. 15,000 + Rs. 10,000.

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6.2 Cash Flow from Investing Activities
Investing Activities refer to transactions that affect the purchase and sale of fixed or long term assets
(not included in cash equivalents). These activities include transactions involving purchase and sale of
the long-term productive assets like machinery, land and buildings, etc., which are not held for resale.

Investing Activities

Cash Inflow Cash Outflow

(i)Sales of fixed Assets (i) Purchase of Fixed Assets

(ii)Sale of Investments (ii) Purchase of Investments: Shares/Debentures

(iii)Interest Received

(iv)Dividends Received

Thus, Cash inflows from investing activities are:

 Cash sale of plant and machinery, land and Building, furniture, goodwill etc.
 Cash sale of investments made in the shares and debentures of other companies
 Cash receipts from collecting the Principal amount of loans made to third parties.
Cash outflow from investing activities are:
 Purchase of fixed assets i.e. land, Building, furniture, machinery etc.
 Purchase of Intangible assets; i.e. goodwill, trade mark etc
 Purchase of shares and debentures
 Purchase of Government Bonds
 Loan made to third parties
Determining the cash flow from Investing Activities
The Cash Flow from Investing Activities is ascertained by analyzing the changes in Fixed Assets and
Long-term Investments in the beginning and at the end of the year.
Illustration 8
Ambika Ltd. has plant and machinery, whose written down value on 1 st April, 2010 was Rs.8, 60,000,
and on 31st March, 2011 was Rs. 9, 50,000. Depreciation for the year was Rs. 40,000. At the
beginning of the year, a part of plant was sold for Rs. 5,000 which had a written down value of Rs.
20,000. Calculate the Cash Flow from Investing Activities.

Solution:
Cash Flow from Investing Activities
Particulars Rs.

Cash Payment to acquire Plant and Machinery (Note) 1,50,000

Cash Receipts from Sale of Plant and Machinery 25,000 (1,25,000)

Note: Plant and Machinery A/c

Dr. Cr.
Date Particulars Rs. Date Particular Rs.
2010 2010
Apr 1 To Balance b/d 8, 60,000 Apr 1 By Bank A/c 25,000
To Profit and Loss A/c 5,000 2011 By Depreciation A/c 40,000
(Profit on Sale of Plant) Mar 31 By Balance c/d 9, 50,000
To Bank A/c (Purchases 1, 50,000
Balancing Figure)
10,15,000 10,15,000

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Illustration 9

From the following information calculate the cash flow from investing activities
Particulars Opening Closing
Machinery (at cost) 400,000 420,000
Accumulated Depreciation 100,000 110,000
Patents 280,000 160,000

Additional Information:
(a) During the year a machine costing Rs 40,000 with this accumulated depreciation Rs 24000
was sold for Rs 20,000
(b) Patents were written off to the extent of Rs 40,000 and some patents were sold at a profit of
Rs 20,000
Solution
Cash Flow from Investing Activities
Particulars Rs
Inflow from sale of machinery 20,000
Inflow from sale of patent (Note. 2) 100000
Total Inflow 120000
Outflow on purchase of machinery (Note.1) (60000)
Net cash flow from investing activities 60000

Working notes
1. Machinery A/c

2. Patent A/c

6.3 Cash from Financing Activities

Financing Activities of an enterprise are those activities

that result in change in the size and composition of
owners’ capital and borrowing of the enterprise. It
includes proceeds from issue of shares or other similar
instruments, issue of debentures, bonds, other short-
term or long-term borrowings and repayments of
amounts borrowed. Accordingly, receipts and payments
on account of the above are disclosed in the Cash Flow
Statement as the Cash Flow from Financing Activities.

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The separate disclosure of cash flows arising from financing activities is important because it is useful
in predicting claims of funds-providers (both capital and borrowing) on future cash flows of the
enterprise. Examples of cash flow arising from financing activities are:

Financing Activities

Cash Inflow Cash Outflow

(i)Issue of Shares in Cash (i) Payment of Loans
(ii)Issue of Debentures in Cash (ii)Redemption of Preference Shares
(iii)Proceeds from Long-term Borrowings (iii)Buy-back of Equity Shares
(iv) Payment of Dividend
(v) Payment of Interest
(vi) Repayment of Finance/Lease Liability

Dividends paid (in all enterprises) and interest paid (in the case of non-financing enterprises) is also
included in financing activities.
It is important to note that an increase in share capital due to bonus issue will not be shown in the
cash flow statement, since it is a capitalization of reserves. When shares are issued at a premium, the
cash flow statement reflects the total cash generated by the issue (i.e., Face Value of Shares +
Premium).
Determining the cash flow from Financing Activities
The Cash Flow from Financing Activities is ascertained by analyzing the change in Equity and
Preference Share Capital, Debentures and other borrowings.
Illustration 10

From the following information Ambika Ltd., calculate the Cash from financing activities:
31.12.2010 31.12.2011
Particulars Rs Rs
Equity share capital 400,000 500,000
10% debentures 150,000 100,000
Securities premium 40000 50000
Additional Information: Interest paid on debentures Rs10000.

Solution
Ambika Ltd.
Calculation of Cash from financing activities
Particulars Rs Rs
Cash proceeds from the issue of shares (Including premium) 110000
Less: Interest paid on 10% debentures 10000
Redemption of debenture 50000 60000
Net Cash flow from financing activities 50000

Illustration 11

From the following information of Jyoti Ltd, calculate the Cash from financing activities:

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 31.12.2010 31.12.2011
Particulars Rs Rs
Equity share capital 10,00,000 15,00,000
10% debentures 1,00,000 -
8% Debentures - 2,00,000
Additional Information:
a) Interest paid on Debentures Rs. 10,000
b) Dividend paid Rs. 50,000
c) During the year 2010-11, Jyoti Ltd. issued bonus shares in the ratio of 2:1 by
capitalising reserves.

Solution

Jyoti Ltd.
Calculation of Net Cash Flow from Financing Activities
Particulars Rs Rs
Cash Proceeds from the Issue 8% of Debentures 2,00,000
Less: Redemption of 10% Debentures 1,00,000
Interest paid 10,000
Dividend paid 50,000 1,60,000
Net Cash flow from financing activities 40,000
Note: Issue of Bonus shares is not to be shown in the Cash Flow Statement because there is no cash
flow.

7. Treatment of Some special Items

The treatment of cash flows from some unusual items as discussed below:
Extraordinary Items
Extraordinary items are non-recurring in nature, e.g. loss due to theft or fire or flood. Those are not
the usual phenomenon and hence the cash flows associated with extraordinary items should be
classified as arising from operating, investing or financing activities as appropriate and separately
disclosed in the cash flows statement to enable users to understand their nature and effect on the
present and future cash flows of the enterprise.
Interest and Dividends
The treatment of interest and dividends received and paid depends upon the nature of the enterprise.
For this purpose, the enterprises are classified as (i) Financial enterprises, and (ii) Other enterprises.
In the case of financial enterprises, cash flows arising from interest paid and interest and dividend
received should be classified as cash flows arising from operating activities as their main business is
lending and borrowing. In the case of other (non-financial) enterprises, cash flows arising from
interest paid should be classified as financing activities while interest and dividends received should be
classified as investing activities. Dividends paid should be classified as financing activities.
Payment of Interim Dividends
a) The amount of interim dividend paid during the year is shown as outflow of cash in cash flow
statement.
b) It will be added back to the profits for the purpose of calculating cash provided from operating
activities.
c) No adjustment is necessary if the cash provided from operating activities is calculated on the basis
of revised figure of net profit.
Share Capital

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The increase in share capital is regarded as inflow of cash only when there is a increase in share
capital. For example, if a company issues 10000 equity shares of Rs.10 each for cash only, Rs.
100,000 would be shown as inflow of cash from financing activities. Similarly, the redemption of
preference share is an outflow of cash. But where the share capital is issued to finance the purchase of
fixed assets or the debentures are converted into equity shares there is no cash flow. Further, the
issue of bonus shares does not cause any cash flows.
Purchase or sale of fixed Assets
The figures appearing in the comparative balance sheets at two dates in respect of fixed assets might
indicate whether a particular fixed asset has been purchased or sold during the year. This would
enable to determine the inflows or outflows of cash. For example, if the plant and machinery appears
at Rs 60,000 in the current year and Rs.50, 000 in the previous year, the only conclusion, in the
absence of any other information is that there is a purchase of fixed assets for Rs.10000 during the
year. Hence, Rs.10000 would be shown as outflow of cash.
Provision for Taxation
It is a non-operating expenses or an item of appropriation in the Income statement/Profit and Loss
Account and therefore should not be allowed to reduce the cash provided from operating activities.
Hence, if the profit is given after tax and the amount of the provision for tax made during the year is
given, the same would be added back to the current year profit figure. In the cash flow statement, the
tax paid would be recorded separately as an outflow of cash. The item of provision for taxation would
not be treated as current assets.
Sometimes, the only information available about provision for taxation is two figures appearing in the
opening balance sheet and closing balance sheet. In such a case the figure in the opening balance
sheet is treated as an outflow of cash while the figure in the closing balance sheet is treated as a non-
cash and non-operating expense and thus is added back to net Income figure to find out the cash
provided from operating activities.
Taxes on income
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
Many investing and financing activities do not have a direct impact on current cash flows. 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 non-cash transactions are:
(a) The acquisition of assets by assuming directly related activities.
(b) The acquisition of an enterprise by means of issue of shares; and
(c) The conversion of debt to equity.
Such transactions should be disclosed elsewhere in the financial statements in a way that provides all
the relevant information about these investing and financing activities. Hence, stocks acquired by
issue of shares are not disclosed in cash flow statement.
Illustration 12

The comparative balance sheets of Braja Gopi Limited at two different dates provide the
following information.
Comparative Balance sheets of Braja Gopi Limited
2010 2011

15
 Assets Amt (Rs) Amt(Rs)

Plant and machinery 13,50,000 14,40,000

It is informed that depreciation amounting to Rs. 60,000 has been provided during the year. Find the
changes that have taken place in the asset and also state their effect on cash flows .

Solution:

In order to identify the transaction affecting the asset account, the proper procedure is to prepare
the plant and machinery account as shown below:

Plant & Machinery Account

Particulars Amount Particulars Amount

To Balance b/d 13,50,000 By Depreciation (given) 60,000

To Bank A/c 1,50,000 By Balance c/d 14,40,000
(New machine purchased)
15,00,000 15,00,000
Note
 In the absence of specific information, it may be presumed that the additional machinery was
purchased for Rs.1, 50,000.
 The amount spent on the plant and machinery represents a reduction in the cash and its equivalent.
It is, therefore, an example of outflow of cash.

Illustration 13
In the comparative balance sheet of Ruturaj Ltd., the position of Building Account is given as under.

Comparative Balance sheets of Ruturaj Ltd

2010 2011
Particulars Amt (Rs) Amt (Rs)
Building Account 3840000 3910000
Accumulated depreciation on Building 700000 790000
Additional Information: A part of the building of Rs.74, 000 was sold for Rs.60, 000.
The accumulated depreciation on building sold was Rs.20, 000 Analyse the transaction.

Solution
The different transactions affecting the building account are to be identified by preparing the following
accounts:

Building Account

Particulars Amount Particulars Amount

To Balance b/d 38,40,000 By Cash (Inflow) 60,000

To Profit and loss Account 6,000 By Accumulated Dep A/c 20,000
(New machine purchased)
To Bank A/c [Purchase (outflow)] 1,44,000 By Balance c/d 39,10,000
39,90,000 39,90,000

Accumulated Depreciation Account

Particulars Amount Particulars Amount

16
 To Building A/c 20,000 By Balance b/d 7,00,000
To Balance c/d 7,90,000 By Profit and Loss A/c 1, 10,000
8,10,000 8,10,000
Note
(a) The gain on sale of building (i.e. Rs 6000) would be deducted from the reported Income (or
profit)
(b) Purchase of building for Rs.144, 000 is identified from the balancing figure in the Building
account as an outflow of cash.
(c) Rs.1,10,000 a charge to Profit and Loss Account is non-cash expenses and would be added
back to the reported net income (profit)

Illustration 14
The following comparative balance sheets of Rutuparna Ltd contain the relevant information
about provision for taxation.

Comparative Balance sheets of Rutuparna Limited

2010 2011
Liabilities Amt (Rs) Amt(Rs)

Provision for Taxation 20000 30000

It is informed that Rs. 50,000 was charged to Profit and Loss Account for the year
2007. Ascertain how much cash was used.

Solution

Provision for Taxation Account

Particulars Amount Particulars Amount
To Bank (Balancing figure) 40000 By Balance b/d 20000
To Balance c/d 30000 By Profit and Loss A/c 50000
70,000 70,000
Note:
(a) Rs. 40,000 would be shown as an outflow of cash
(b) Rs. 50,000 would be treated as non-cash expense and added back to net Income figure to
compute cash provided from operations.

8. Information Required For Cash Flow Statement

The following basic information is needed for the preparation of a cash flow statement:
(a) Comparative Balance Sheets: Balance
Sheets at the beginning and at the end
of the accounting period indicate the
amount of changes that have taken
place in assets, liabilities and capital.
(b) Profit and Loss Account/Income
Statement: The profit and loss account
of the current period enables to
determine the amount of cash provided

17
 by or used in operations during the accounting period after making adjustments for non-cash,
current assets and currents liabilities.
(c) Additional Data: In addition to the above statements, additional data are collected to determine
how cash has been provided or used e.g. sale or purchase of assets for cash .

9. Preparation of Cash Flow Statement

Having discussed how the Cash Flow Statement is prepared for each activity, let us now discuss the
Cash Flow Statement as a complete statement as follows:
(i) Compute the Cash Flows from Operating Activities.
(ii) Compute the Cash Flows from Investing Activities.
(iii) Compute the Cash Flows from Financing Activities.
(iv) The Cash Flows under each activity
(Operating/Investing/Financing) are shown in the Cash
Flow Statement. Aggregate of these three activities will be
either an increase or a decrease in cash equivalents.
(v) Cash and Cash Equivalent balance at the beginning will be
added to the net increase or decrease in Cash Equivalents
(Step v). Resulting figure will be Cash and Cash
Equivalents at the end.

10. Format of Cash Flows Statement

AS-3 (Revised) has not provided any specific format for preparing a cash flows statement. However,
an idea of the suggested format can be inferred from the illustrations appearing in the appendices to
the accounting standard. The cash flow statement should report cash flows during the period classified
by operating, investing and financing activities; a widely used format of cash flow statement is given
below:

10.1 Direct Method

DIRECT METHOD
FORMAT FOR CASH FLOW STATEMENT
for the year ended ….
[As per Accounting Standard-3 (Revised)]
Particulars Rs Rs
Rs
I. Cash Flow from Operating Activities
A. Operating Cash Receipts, e.g.,
– Cash Sales ….
– Cash received from Customers ….
– Trading Commissions received ….
– Royalties received …. ****
(B) Operating Cash Payments, e.g.,
– Cash Purchases (…) ….
– Cash Paid to the Suppliers (…) ….
– Cash Paid for Business Expenses like Office Expenses, *
….
Manufacturing Expenses, Selling and Distribution Exp. Etc. ****
(C) Cash generated from Operations (A – B)
…
(D) Income Tax Paid (Net of Tax Refund received)
(…)

18
 (E) Cash Flow before Extraordinary Item
….
(F) Extraordinary Items (Receipt/Payment)
(+/-)….
(G) Net Cash from (or used in) Operating Activities
….
II. Cash Flow from Investing Activities
(Same as under Indirect Method)
III. Cash Flow from Financing Activities
…
(Same as under Indirect Method)
IV. Net Increase/Decrease in Cash and Cash Equivalents
…
(Same as under Indirect Method - I + II + III)
…
V. Add Cash and Cash Equivalents in the beginning of the year
VI. Cash and Cash Equivalents in the end of the year
…

10.2 Indirect Method

INDIRECT METHOD
FORMAT FOR CASH FLOW STATEMENT
for the year ended ….
[ As per Accounting Standard-3 (Revised)]

Particulars Rs Rs
Rs
I. Cash Flow from Operating Activities
Net Profit and Loss A/c or Difference between Closing Balance and
Opening Balance of Profit and Loss A/c …
…
(A) Add: Appropriation of funds. …
– Transfer to reserve – …
– Proposed dividend for current year – …
…
– Interim dividend paid during the year – …
…
– Provision for tax made during the current year – …
…
– Extraordinary item, if any, debited to the Profit and Loss A/c – …
…
Less: Extraordinary item, if any, credited to the Profit and Loss A/c
(…)
– Refund of tax credited to Profit and Loss A/c – (….)
(…)
– Net Profit before Taxation and Extraordinary Items – (….)
….
(B) Add: Non operating Expenses:
– Depreciation …
– Preliminary Expenses/Discount on Issue of Shares and …
Debentures written off
– Goodwill, Patents and Trade Marks Amortized …
– Interest on Borrowings and Debentures …
– Loss on Sale of Fixed Assets … …
(C) Less: Non Operating Incomes:
– Interest Income …

– Dividend Income …
– Rental Income …

19
 – 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
– Decrease in Stock/ Inventories …
– Decrease in Debtors/ Bills Receivables …
– Decrease in Accrued Incomes …
– Decrease in Prepaid Expenses …
– Increase in Creditors /Bills 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
– Decrease in Stock/ Inventories …
– Decrease in Debtors/ Bills Receivables …
– Decrease in Accrued Incomes …
– Decrease in Prepaid Expenses …
– Increase in Creditors /Bills Payables …
– Increase in Outstanding Expenses …
– Increase in Advance Incomes …
– Increase in Provision for Doubtful Debts. …
(G) Cash Generated from Operations (D+E–F) …
…
(H) Less : Income Tax Paid (Net of Tax Refund received) …
…
(I) Less : Income Tax Paid (Net of Tax Refund received) …
…
(J) (+/-) Extraordinary Items …
(K) 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 Intangible Assets like Goodwill (….) –

Net Cash from (or used in) Financing Activities

…
III. Cash from Financing Activities
– Proceeds from Issue of Shares and Debentures … –
– Proceeds from Other Long-term Borrowings … –
– Final Dividend Paid (….) –
– Interest and Debentures and Loans Paid (….) –
– Repayment of Loans (….) –
– Redemption of Debentures / Preference Shares (….) –
Net Cash from (or used in) Financing 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 in the end of the year
– Cash in Hand … –
– Cash at Bank (Less : Bank Overdraft) … –
– Short-term Deposits … –

20
 – Marketable Securities … –
…
–
Note: Amounts in brackets indicate negative amounts, i.e., amounts that are to be deducted.

Illustration 15
From the following Profit and Loss Account, you are required to compute cash from operations.
Profit and Loss A/c
for the year ending 31st Dec, 2010
Rs Rs
To Salaries 10,000 By Gross profit 50,000
To Rent 2,000 By profit on sale of land 10,000
To Depreciation 4,000 By income tax refund 6,000
To loss on sale of plant 2,000
To Good will written off 8,000
To proposed dividend 10,000
To provision for taxation 10,000
To Net profit 20,000
66,000 66,000

Solution

Cash from Operations

Net profit made during the year 20,000
Add: Non cash expenses
Depreciation 4,000
Loss on sale of plant 2,000
Goodwill return off 8,000
Add: Non operating expenses
Proposed dividend 10,000
Provision for taxation 10,000 34,000
Less: Non cash income
Profit on sale of land 10,000
Less: Non operating income
Income tax refund 6,000 16,000
Cash from Operations 38,000

Illustration 16

From the following balances calculate cash from operations:

December 31
Particulars
2010 2011
Profit and Loss A/c Balance 75,000 1,55,000
Debtors 45,000 42,000
Creditors 20,000 26,000
Bills Receivable 12,000 15,000
Cash in hand 2,500 3,000
Prepaid expenses 1,600 1,400
Bills Payable 18,000 16,000
Cash at Bank 8,000 10,000
Outstanding expenses 1,200 1,600
Income received in advance 250 300
Outstanding Income 800 900

21
 Additional information:
(i) Depreciation written off during the year Rs.10, 000
(ii) Transfer to General Reserve Rs.10, 000

Solution

Calculation of Funds from Operations

Particulars Rs. Rs.
Profit & Loss A/c as on 31st December 2011 1,55,000

Add: Depreciation 10,000

Transfer to General Reserve 10,000 20,000
1,75,000
Less: P & L a/c as on 1st January 2011 75,000
Operating Profit before working capital changes 1,00,00
Add: Decrease in Current Assets
Decrease in Debtors 3,000
Decrease in Prepaid Expenses 200
Add: Increase in Current Liabilities
Increase in Creditors 6,000
Increase in Outstanding Expenses 400
Increase in Income Received in Advance 50 9,650
Less: Increase in Current Assets 1,09,650
Increase in Bills Receivables 3,000
Increase in Outstanding Income 100
Less: Decrease in Current Liabilities
Decrease in Bills Payable 2,000 5,100
Cash from Operations 1.04,550
Note: Decrease in current assets means current assets are converted into cash and increase in current liabilities
results in further generation of cash. Hence they are added. Increase in current assets and decrease in current
liabilities result in outflow of cash. Hence they are deducted.

Illustration 17
From the following Information, you are required to prepare the cash flow statement of Odyssey Ltd.
for the year ended 31st March (both methods).

Odyssey Ltd
Balance Sheets
as on 31st March
2010 2011 2010 2011
Liabilities Assets
Rs. Rs. Rs. Rs.
Share Capital 70,000 70,000 Fixed Assets 50,000 91,000
Secured Loans - 40,000 Inventory 15000 40,000
Creditors 14,000 39,000 Debtors 5,000 20,000
Tax payable 1,000 3,000 Cash 20,000 7,000
Profit & Loss A/c 7,000 10,000 Prepaid expenses 2,000 4,000
92,000 162,000 92,000 162,000

Odyssey Ltd
Profit and Loss Account
for the year ended 31st March 2011
Dr. Cr
Particulars Amount(Rs.) Particulars Amount (Rs)

22
 Opening Stock 15,000 Sales 100,000
Purchases 98,000 Closing Inventory
Gross profit c/d 27000
1,40,000 1,40,000
General Expenses 11,000 Gross profit c/d 27000
Depreciation 8,000
Provision for tax 4,000
Net Profit c/d 4,000
27,000 27,000
Dividend (interim) 1,000 Net Profit c/d 7,000
balance c/d 10000 Net profit b/d 4,000
11,000 11,000

Solution

A. Direct Method

Odyssey Ltd
Cash Flow Statement
for the year ended, March 31, 2011
Amount Amount
Particulars
Rs Rs
(A) Cash flow from operating Activities
Cash receipts from Debtors (Working Note-1) 85,000
Cash payment for :
Cash paid to suppliers (Working Note-2) (73,000)
General expenses (13,000) (86,000)
Cash from operating activities (1,000)
Taxes paid (2000)
Net Cash from operating activities (3,000)
(B) Cash flow from Investing Activities
Purchase of fixed Assets (Working Note-3) (49,000)
Net cash used in investing Activities (49,000)
(C) Cash flow from financing Activities
Proceeds from Raising secured loans 40,000
Dividend paid (1,000)
Net cash from Financing Activities 39,000
[A + B + C] Net Decrease in cash(– 3000 – 49000 + (13,000)
39000)

Working Notes:

1. Debtors A/c
Dr Cr
Balance b/d 5,000 Cash A/c (Received): Bal Fig. 85,000
Sales A/c (Credit) 1,00,000 Balance c/d 20,000
1,05,000 1,05,000

2. Creditors A/c
Dr Cr
Cash A/c (Paid): Bal Fig. 73,000 Balance b/d 14,000
Balance c/d 39,000 Purchase A/c 98,000
1,12,000 1,12,000

3. Fixed Assets A/c

Dr Cr

23
 Balance b/d 50,000 Depreciation (given) 8,000
Cash (Purchase) Bal. Fig 49,000 Balance c/d 91,000
99,000 99,000

B. Indirect Method

Odyssey Ltd
Cash Flow Statement
for the year ended, March 31, 2011
Amount Amount
Particulars
Rs Rs
(A) Cash flow from operating Activities
Net profit as per Profit and Loss A/c 4,000
Add : Provision for Tax (Working Note-2) 4,000
Net profit before Tax 8,000
Add : Depreciation 8,000
Operating profit before working changes 16,000
Add: Decrease in Current Assets/ Increase in Current liabilities
Increase in Creditors 25,000
Less : Increase in current assets/ Decrease in Current liabilities
Increase in Debtors (15000)
Increase in Inventory (25000)
Increase in prepaid expenses (2,000) (17,000)
Cash from Operating Activities (1,000)
Taxes paid (2000)
Net cash from Operating Activities (3,000)
(B) Cash flow from Investing Activities
Purchase of fixed Assets (Working Note-1) (49,000)
Net cash used in investing Activities (49,000)
(C) Cash flow from financing Activities
Proceeds from Raising secured loans 40,000
Dividend paid (1,000)
Net cash from Financing Activities 39,000
[A + B + C] Net Decrease in cash(– 3000 – 49000 + 39000) (13,000)

Working Notes:

1. Fixed Assets A/c

Dr Cr
Balance b/d 50,000 Depreciation (given) 8,000
Cash (Purchase) Bal. Fig 49,000 Balance c/d 91,000
99,000 99,000

2. Provision for Tax A/c

Dr Cr
Cash A/c (Paid): Bal Fig. 2,000 Balance b/d (Given) 1,000
Balance c/d (Given) 3,000 Purchase Profit & loss A/c 4,000
(Provision made during
the year
5,000 5,000

10.3 Cash Flow Statement as Approved by SEBI

Format of Cash Flow Statement approved by SEBI is given below:

24
Cash Flow Statement
(for the year ended.....)

25
11. Funds Flow Statement vs. Cash Flow Statement

Basis of Difference Funds Flow Statement Cash Flow Statement

Basis of Analysis Funds flow statement is based on Cash flow statement is based on
broader concept i.e. working capital. narrow concept i.e. cash, which is
only one of the elements of working
capital.

Source Funds flow statement tells about the Cash flow statement stars with the
various sources from where the funds opening balance of cash and reaches
generated with various uses to which to the closing balance of cash by
they are put. proceeding through sources and uses.

Usefulness Funds flow statement is more useful Cash flow statement is useful in
in assessing the long-range financial understanding the short-term
strategy. phenomena affecting the liquidity of
the business.

Schedule of Changes in In funds flow statement changes in In cash flow statement changes in
Working Capital current assets and current liabilities current assets and current liabilities
are shown through the schedule of are shown in the cash flow statement
changes in working capital. itself.

Causes Funds flow statement shows the Cash flow statement shows the
causes of changes in net working causes the changes in cash.
capital.

Principal of Accounting Funds flow statement is consonant In cash flow statement data obtained
with the accrual basis of accounting. on accrual basis are converted into
cash basis.

26
12. Limitations of Cash Flow Statement

Though the Cash Flow Statement is a very useful tool of financial analysis, it has its limitations which
must be kept in mind at the time of its use. These limitations are:
(a) Non-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 buildings by the issue of
shares or debentures to the vendors or issue of bonus shares.
(b) 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. Thus it cannot be a substitute for an Income Statement.
(c) 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.
(d) Ignorance: It ignores basic accounting concept, i.e., accrual concept.
(e) May not represent the real position: A Cash Flow Statement only reveals the inflow and outflow
of cash. The cash balance disclosed by the Cash Flow Statement may not represent the real
liquid position of the concern.
(f) Not suitable for judging the profitability: Cash Flow Statement is not suitable for judging the
profitability of a firm as non-cash changes are ignored while calculating cash flows from
operating activities.
(g) Conceptual Ambiguity: It is difficult to precisely define the term cash. There are controversies
among accountants over a number of near cash items like cheques, stamps, postal orders etc.,
to be included in cash.
(h) Influenced by changes in management policies: The cash balance as disclosed by the cash flow
statement may to represent the real liquidity position of the business, but the cash can be
easily influenced by purchases and sales policies, by making certain advance payments or by
postponing certain payments.
(i) Misleading inter-firm comparison- The terms of purchases and sales differ from firm to firm;
Moreover, cash inflow does not always mean profit. Therefore, inter-firm comparison of cash
flows may also be misleading.
(j) Misleading inter-industry comparison - Cash flow statement does not measure the economic
efficiency of one company in relation to another. Usually a company with heavy capital
investment will have more cash inflow. Therefore, inter-industry comparison of cash flow
statement may be misleading.
Above all, a Cash Flow Statement does not give a complete picture of financial position of the concern.

Illustration 18
From the following profit or loss accounts, find out the flow of cash from operating activities of
Mohan Ltd.

Dr. Profit and Loss Account Cr.

Particulars Amount Particulars Amount

27
 (Rs) (Rs)
To Rent Paid 14,000 By Gross Profit 1,82,000
Less: Prepaid 12,000 By Profit on Sale of Machine 12,000
2,000 25,000 By Tax Refund 3,800
To Salaries 15,000 By Rent received 4,000
To Depreciation 10,000 Add: Rent accrued 5,000
To Loss on sale of Furniture 8,000 1,000
To Goodwill written Off 3,000
To Bad Debts 18,000
To Office Expenses 7,000
To Discount allowed 30,000
To Proposed Dividend 22,000
To Provision for Tax 52,800
To Net Profit
2,02,800 2,02,800
Note: There was increase in closing stock by Rs. 25,000.
[Ans: Cash from Operating Activities Rs.1, 03,800]

Illustration 19
Prepare Cash flow Statement from the following information of Box Ltd. For the year ended March 31,
2004.

Balance sheets of Lion ltd.

as on March 31,2004
Liabilities 2003 2004 Assets 2003 2004
(Rs) (Rs) (Rs) (Rs)

Share capital 3,00,000 4,00,000 Goodwill 70,000 30,000

Profit & Loss Account 1,20,000 2,60,000 Machinery 3,00,000 3,20,000
General Reserve 60,000 95,000 12% Investments 1,50,000 3,00,000
Tax Provision 70,000 80,000 Stock 35,000 1,85,000
Creditors 50,000 90,000 Debtors 50,000 70,000
Bill Payables 30,000 10,000 Cash at Bank 30,000 40,000
Depreciation Provision 25,000 40,000 Short term Investment 20,000 30,000

6,55,000 9,75,000 6,55,000 9,75,000

Additional Information:
(a) Investment costing Rs.50, 000 were sold for Rs. 48,000 during the year.
(b) Tax paid during the year Rs.70, 000.
(c) Interest received on Investment Rs. 12,000.

[Ans: 16.(i) Cash Inflow from Operating Activities Rs.80, 000

(ii)Cash Outflow on Investing Activities Rs.1, 60,000
(iii)Cash Inflow from Financing Activities Rs. 1, 00,000]
Illustration 20
From the following Balance Sheets of Ranjan Ltd. prepare Cash Flow Statement:

Liabilities 2010 2011 Assets 2010 2011

Equity Share Capital 1,50,000 2,00,000 Goodwill 36,000 20,000
12% Pref. 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 2, 58,500

28
 Depreciation charged on plant was Rs. 10000 and building Rs. 60000.

Ans.
Ranjan Ltd.
Cash Flow Statement
for the year ended 31st December, 2011
Particulars Rs. Rs.
A. Cash Flow from Operating Activities
Net Profit before tax:
Closing Balanced 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: 10,000
Add: Depreciation on Plant
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:

Dr. 1. Building Account Cr.

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

Dr. 2. Plant Account Cr.

Date Particulars Rs. Date Particulars Rs.
To Balance 40,000 By Depreciation A/c 10,000
b/d
To Bank A/c 70,000 By Balance C/d 1,00,000
1,10,000 1,10,000

29
13. Appendix

AS: 3- Cash Flow Statements

The following is the text of the revised Accounting Standard (AS) 3, 'Cash Flow Statements', issued by the Council
of the Institute of Chartered Accountants of India. This Standard supersedes Accounting Standard (AS) 3, 'Changes
in Financial Position', issued in June, 1981.
In the initial years, this accounting standard will be recommendatory in character. During this period, this standard
is recommended for use by companies listed on a recognised stock exchange and other commercial, industrial and
business enterprises in the public and private sectors.
Objective
Information about the cash flows of an enterprise 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.
The Statement deals with the provision of information about the historical changes in cash and cash equivalents of
an enterprise by means of a cash flow statement which classifies cash flows during the period from operating,
investing and financing activities.
1. Scope
2. Users of an enterprise's financial statements are interested in how the enterprise generates and uses cash and
cash equivalents. This is the case regardless of the nature of the enterprise's activities and irrespective of whether
cash can be viewed as the product of the enterprise, as may be the case with a financial enterprise. Enterprises
need cash for essentially the same reasons, however different their principal revenue-producing activities might be.
They need cash to conduct their operations, to pay their obligations, and to provide returns to their investors.
Benefits of Cash Flow Information
3. A cash flow statement, when used in conjunction with the other financial statements, provides information that
enables users to evaluate the changes in net assets of an enterprise, its financial structure (including its liquidity
and solvency) and its ability to affect the amounts and timing 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.
4. Historical cash flow information is often used as an indicator of the amount, timing and certainty of future cash
flows. It is also useful in checking the accuracy of past assessments of future cash flows and in examining the
relationship between profitability and net cash flow and the impact of changing prices.
Definitions
5. The following terms are used in this Statement with the meanings specified:
Cash comprises cash on hand and demand deposits with banks.
Cash equivalents are 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.
Cash flows are inflows and outflows of cash and cash equivalents.
Operating activities are the principal revenue-producing activities of the enterprise and other activities
that are not investing or financing activities.
Investing activities are the acquisition and disposal of long-term assets and other investments not
included in cash equivalents.
Financing activities are activities that result in changes in the size and composition of the owners'
capital (including preference share capital in the case of a company) and borrowings of the enterprise.
Cash and Cash Equivalents
6. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment
or other purposes. For an investment to qualify as a cash equivalent, it must be readily convertible to a known

30
amount of cash and be subject to an insignificant risk of changes in value. Therefore, an investment normally
qualifies as a cash equivalent 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 substance, cash
equivalents; for example, preference shares of a company acquired shortly before their specified redemption date
(provided there is only an insignificant risk of failure of the company to repay the amount at maturity).
7. Cash flows exclude movements between items that constitute cash or cash equivalents because these
components are part of the cash management of an enterprise rather than part of its operating, investing and
financing activities. Cash management includes the investment of excess cash in cash equivalents.
Presentation of a Cash Flow Statement
8. The cash flow statement should report cash flows during the period classified by operating,
investing and financing activities.
9. An enterprise presents its cash flows from operating, investing and financing activities in a manner which is
most appropriate to its business. Classification by activity provides information that allows users to assess the
impact of those activities on the financial position of the enterprise and the amount of its cash and cash
equivalents. This information may also be used to evaluate the relationships among those activities.
10. A single transaction may include cash flows that are classified differently. For example, when the installment
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.
Operating Activities
11. The amount of cash flows arising from operating activities is a 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, pay dividends, repay loans and make new investments without recourse to external sources of
financing. Information about the specific components of historical operating cash flows is useful, in conjunction with
other information, in forecasting future operating cash flows.
12. Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the
enterprise. Therefore, 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:
(a) cash receipts from the sale of goods and the rendering of services;
(b) cash receipts from royalties, fees, commissions and other revenue;
(c) cash payments to suppliers for goods and services;
(d) cash payments to and on behalf of employees;
(e) cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other
policy benefits;
(f) cash payments or refunds of income taxes unless they can be specifically identified with financing and
investing activities; and
(g) cash receipts and payments relating to futures contracts, forward contracts, option contracts and swap
contracts when the contracts are held for dealing or trading purposes.
13. Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which is included in the
determination of net profit or loss. However, the cash flows relating to such transactions are cash flows from
investing activities.
14. 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 the main revenue-producing activity of
that enterprise.
Investing Activities
15. The separate disclosure of cash flows arising from investing activities is important because the cash flows
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:
(a) Cash payments to acquire fixed assets (including intangibles). These payments include those relating to
capitalised research and development costs and self-constructed fixed assets;
(b) Cash receipts from disposal of fixed assets (including intangibles);

31
 (c) cash payments to acquire shares, warrants or debt instruments of other enterprises and interests in joint
ventures (other than payments for those instruments considered to be cash equivalents and those held for
dealing or trading purposes);
(d) cash receipts from disposal of shares, warrants or debt instruments of other enterprises and interests in joint
ventures (other than receipts from those instruments considered to be cash equivalents and those held for
dealing or trading purposes);
(e) Cash advances and loans made to third parties (other than advances and loans made by a financial
enterprise);
(f) Cash receipts from the repayment of advances and loans made to third parties (other than advances and
loans of a financial enterprise);
(g) cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the
contracts are held for dealing or trading purposes, or the payments are classified as financing activities; and
(h) Cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when
the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities.
16. When a contract is accounted for as a hedge of an identifiable position, the cash flows of the contract are
classified in the same manner as the cash flows of the position being hedged.
Financing Activities
17. The 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 cash flows arising from financing activities are:
(a) Cash proceeds from issuing shares or other similar instruments;
(b) Cash proceeds from issuing debentures, loans, notes, bonds, and other short or long-term borrowings; and
(c) Cash repayments of amounts borrowed.
Reporting Cash Flows from Operating Activities
18. An enterprise should report cash flows from operating activities using either:
(a) the direct method, whereby major classes of gross cash receipts and gross cash payments are
disclosed; or
(b) the indirect method, whereby net profit or loss is adjusted for the effects of transactions of a
non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments,
and items of income or expense associated with investing or financing cash flows.
19. The direct method provides information which may be useful in estimating future cash flows and which is not
available under the indirect method and is, therefore, considered more appropriate than the indirect method. Under
the direct method, information about major classes of gross cash receipts and gross cash payments may be
obtained either:
(a) from the accounting records of the enterprise; or
(b) by adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a
financial enterprise) and other items in the statement of profit and loss for:
i) changes during the period in inventories and operating receivables and payables;
ii) other non-cash items; and
iii) other items for which the cash effects are investing or financing cash flows.
20. Under the indirect method, the net cash flow from operating activities is determined by adjusting net profit or
loss for the effects of:
(a) changes during the period in inventories and operating receivables and payables;
(b) non-cash items such as depreciation, provisions, deferred taxes, and unrealised foreign exchange gains and
losses; and
(c) all other items for which the cash effects are investing or financing cash flows.
Alternatively, the net cash flow from operating activities may be presented under the indirect method by showing
the operating revenues and expenses excluding non-cash items disclosed in the statement of profit and loss and
the changes during the period in inventories and operating receivables and payables.

32
Reporting Cash Flows from Investing and Financing Activities
21. An enterprise should report separately major classes of gross cash receipts and gross cash
payments arising from investing and financing activities, except to the extent that cash flows described
in paragraphs 22 and 24 are reported on a net basis.
Reporting Cash Flows on a Net Basis
22. Cash flows arising from the following operating, investing or financing activities may be reported
on a net basis:
(a) cash receipts and payments on behalf of customers when the cash flows reflect the activities of
the customer rather than those of the enterprise; and
(b) cash receipts and payments for items in which the turnover is quick, the amounts are large, and
the maturities are short.
23. Examples of cash receipts and payments referred to in paragraph 22(a) are:
(a) the acceptance and repayment of demand deposits by a bank;
(b) funds held for customers by an investment enterprise; and
(c) rents collected on behalf of, and paid over to, the owners of properties.
Examples of cash receipts and payments referred to in paragraph 22(b) are advances made for, and the
repayments of:
(a) principal amounts relating to credit card customers;
(b) the purchase and sale of investments; and
(c) other short-term borrowings, for example, those which have a maturity period of three months or less.
24. Cash flows arising from each of the following activities of a financial enterprise may be reported on
a net basis:
(a) cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity
date;
(b) the placement of deposits with and withdrawal of deposits from other financial enterprises; and
(c) cash advances and loans made to customers and the repayment of those advances and loans.
Foreign Currency Cash Flows
25. Cash flows arising from transactions in a foreign currency should be recorded in an enterprise's
reporting currency by applying to the foreign currency amount the exchange rate between the
reporting currency and the foreign currency at the date of the cash flow. A rate that approximates the
actual rate may be used if the result is substantially the same as would arise if the rates at the dates of
the cash flows were used. The effect of changes in exchange rates on cash and cash equivalents held in
a foreign currency should be reported as a separate part of the reconciliation of the changes in cash
and cash equivalents during the period.
26. Cash flows denominated in foreign currency are reported in a manner consistent with Accounting Standard
(AS) 11, Accounting for the Effects of Changes in Foreign Exchange Rates. This permits the use of an exchange
rate that approximates the actual rate. For example, a weighted average exchange rate for a period may be used
for recording foreign currency transactions.
27. Unrealised gains and losses arising from changes in foreign exchange rates are not cash flows. However, the
effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the
cash flow statement in order to reconcile cash and cash equivalents at the beginning and the end of the period.
This amount is presented separately from cash flows from operating, investing and financing activities and includes
the differences, if any, had those cash flows been reported at the end-of-period exchange rates.
Extraordinary Items
28. The cash flows associated with extraordinary items should be classified as arising from operating,
investing or financing activities as appropriate and separately disclosed.
29. The cash flows associated with extraordinary items are disclosed separately as arising from operating, investing
or financing activities in the cash flow statement, to enable users to understand their nature and effect on the
present and future cash flows of the enterprise. These disclosures are in addition to the separate disclosures of the
nature and amount of extraordinary items required by Accounting Standard (AS) 5, Net Profit or Loss for the
Period, Prior Period Items and Changes in Accounting Policies.

33
Interest and Dividends
30. Cash flows from interest and dividends received and paid should each be disclosed separately. Cash
flows arising from interest paid and interest and dividends received in the case of a financial enterprise
should be classified as cash flows arising from operating activities. In the case of other enterprises,
cash flows arising from interest paid should be classified as cash flows from financing activities while
interest and dividends received should be classified as cash flows from investing activities. Dividends
paid should be classified as cash flows from financing activities.
31. The total amount of interest paid during the period is disclosed in the cash flow statement whether it has been
recognised as an expense in the statement of profit and loss or capitalised in accordance with Accounting Standard
(AS) 10, Accounting for Fixed Assets.
32. Interest paid and interest and dividends received are usually classified as operating cash flows for a financial
enterprise. However, there is no consensus on the classification of these cash flows for other enterprises. Some
argue that interest paid and interest and dividends received may be classified as operating cash flows because they
enter into the determination of net profit or loss. However, it is more appropriate that interest paid and interest
and dividends received are classified as financing cash flows and investing cash flows respectively, because they
are cost of obtaining financial resources or returns on investments.
33. Some argue that dividends paid may be classified as a component of cash flows from operating activities in
order to assist users to determine the ability of an enterprise to pay dividends out of operating cash flows.
However, it is considered more appropriate that dividends paid should be classified as cash flows from financing
activities because they are cost of obtaining financial resources.
Taxes on Income
34. 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.
35. Taxes on income arise on transactions that give rise to cash flows that are classified as operating, investing or
financing activities in a cash flow statement. While tax expense may be readily identifiable with investing or
financing activities, the related tax cash flows are often impracticable to identify and may arise in a different period
from the cash flows of the underlying transactions. Therefore, taxes paid are usually classified as cash flows from
operating activities. However, when it is practicable to identify the tax cash flow with an individual transaction that
gives rise to cash flows that are classified as investing or financing activities, the tax cash flow is classified as an
investing or financing activity as appropriate. When tax cash flow are allocated over more than one class of
activity, the total amount of taxes paid is disclosed.
Investments in Subsidiaries, Associates and Joint Ventures
36. When accounting for an investment in an associate or a subsidiary or a joint venture, an investor
restricts its reporting in the cash flow statement to the cash flows between itself and the
investee/joint venture, for example, cash flows relating to dividends and advances.
Acquisitions and Disposals of Subsidiaries and Other Business Units
37. The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other
business units should be presented separately and classified as investing activities.
38. An enterprise should disclose, in aggregate, in respect of both acquisition and disposal of
subsidiaries or other business units during the period each of the following:
(a) the total purchase or disposal consideration; and
(b) the portion of the purchase or disposal consideration discharged by means of cash and cash
equivalents.
39. The separate presentation of the cash flow effects of acquisitions and disposals of subsidiaries and other
business units as single line items helps to distinguish those cash flows from other cash flows. The cash flow effects
of disposals are not deducted from those of acquisitions.
Non-cash Transactions
40. Investing and financing transactions that do not require the use of cash or cash equivalents should
be excluded from a cash flow statement. Such transactions should be disclosed elsewhere in the
financial statements in a way that provides all the relevant information about these investing and
financing activities.
41. Many investing and financing activities do not have a direct impact on current cash flows although they do
affect the capital and asset structure of an enterprise. The exclusion of non-cash transactions from the cash flow

34
statement is consistent with the objective of a cash flow statement as these items do not involve cash flows in the
current period. Examples of non-cash transactions are:
(a) the acquisition of assets by assuming directly related liabilities;
(b) the acquisition of an enterprise by means of issue of shares; and
(c) the conversion of debt to equity.
Components of Cash and Cash Equivalents
42. An enterprise should disclose the components of cash and cash equivalents and should present a
reconciliation of the amounts in its cash flow statement with the equivalent items reported in the
balance sheet.
43. In view of the variety of cash management practices, an enterprise discloses the policy which it adopts in
determining the composition of cash and cash equivalents.
44. The effect of any change in the policy for determining components of cash and cash equivalents is reported in
accordance with Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies.
Other Disclosures
45. An enterprise should disclose, together with a commentary by management, the amount of
significant cash and cash equivalent balances held by the enterprise that are not available for use by it.
46. There are various circumstances in which cash and cash equivalent balances held by an enterprise are not
available for use by it. Examples include cash and cash equivalent balances held by a branch of the enterprise that
operates in a country where exchange controls or other legal restrictions apply as a result of which the balances
are not available for use by the enterprise.
47. Additional information may be relevant to users in understanding the financial position and liquidity of an
enterprise. Disclosure of this information, together with a commentary by management, is encouraged and may
include:
(a) the amount of undrawn borrowing facilities that may be available for future operating activities and to settle
capital commitments, indicating any restrictions on the use of these facilities; and
(b) the aggregate amount of cash flows that represent increases in operating capacity separately from those
cash flows that are required to maintain operating capacity.
48. The separate disclosure of cash flows that represent increases in operating capacity and cash flows that are
required to maintain operating capacity is useful in enabling the user to determine whether the enterprise is
investing adequately in the maintenance of its operating capacity. An enterprise that does not invest adequately in
the maintenance of its operating capacity may be prejudicing future profitability for the sake of current liquidity
and distributions to owners.

****

Questions

1. What do you mean by Cash Flow Statement? State main objectives of cash flow statement.
2. State the uses of cash flow statement? What are the objectives of preparing cash flow
statement?
3. What is Cash Flow Statement? Give three items of sources (inflow) of cash.
4. How the various activities are classified (as per AS-3 revised) while preparing cash flow
statement?
5. Explain the major Cash Inflows and outflows from financing activities.
6. Describe “Direct” and “Indirect” method of ascertaining Cash Flow from operating activities.
7. Enumerate the various steps involved in the preparation of ‘Cash Flow Statement’.
8. Prepare a format of cash flow from operating activities under direct method and indirect method.
9. What are the differences between a cash flow statement and funds flow statement? What is a
Cash flow statement?

35
10. What is meant by Cash Flow Statement? Explain briefly how the statement is prepared as per
AS-3 (revised).
11. From the following information relating Lippi Bharati Ltd, calculate cash flow from operating
activities:

Particulars 2010 2011

Rs (Rs.)
Profit and Loss Appropriation A/c 20,000 30,000
Bills Receivables 14,000 18,000
Provisions for Depreciation 30,000 32,000
Rent Outstanding 1,600 4,000
Prepaid Insurance 1,400 1,200
Goodwill 20,000 16,000
Stock 14,000 18,000
Ans. (Rs. 10,600)
12. The following is the Profit and Loss Account of Ganaga a Limited:
Ganagaa Limited
Profit and Loss Account for the Year ended March 31, 2011
(Rs.) (Rs.)
Sales 10, 00,000
Cost of Goods Sold:
Opening Stock 2, 50,000
Purchases 5,00,000
7,50,000
Less Closing Stock 2,00,000 5,50,000
Gross Profit 4,50,000
Operating Expenses 3,00,000
Net Profit 1,50,000
Additional information:
(i) Trade debtors decrease by Rs. 30,000 during the year.
(ii) Prepaid expenses increase by Rs. 5,000 during the year.
(iii) Trade creditors decrease by Rs. 15,000 during the year.
(iv) Outstanding expenses increased by Rs. 3,000 during the year.
(v) Operating expenses included depreciation of Rs. 25,000.
Compute net cash provided by operations for the year ended March 31, 2011.
[Ans.: Cash provided from operations Rs. 2, 18,000].

13. The following information is available regarding the ending and beginning balances in
Accounts Payable, Inventory, and Accounts Receivable:
Accounts Accounts
Payable Inventory Receivable

Ending 80,000  40,000  80,000 

Beginning 100,000   50,000  85,000 
Change  (20,000) (10,000)  (5,000)
Net income for the period was Rs.4, 80, 000, which included depreciation expense of Rs.1, 00,
000. You are required to determine net cash from operations for the period.
14. From the following Profit and Loss A/c of Roy & Sons Ltd, calculate cash flow from operating
activities for the year ended on 31.3.2011:

Particulars Rs. Particulars Rs.

To Salaries 22,300 By Gross Profit 54,500
To Depreciation on fixed assets 8,200 By Rent Received 3,200
To Preliminary Exp. w/off. 1,500 By Profit on Sale of fixed assets 11,300
To Discount on issue of deb. 1,000
To General Reserve 12,000

36
 To Discount on Sales 4,180
To Goodwill 3,220
To Net Profit 16,600

69,000 69,000
Ans. (Rs. 31,220)
15. Compute cash flow from operating activities from the following data :

31.3.10 31.3.11
Particulars
Rs (Rs.)
Profit and Loss A/c 15,950 24,400
General Reserve 1,200 1,800
Goodwill 5,000 3,000
Depreciation 4,500 6,300
Discount on Issue of Debenture 500 350
Sundry Debtors 4,100 2,800
Sundry Creditors 1,500 2,100
Bills Payable 5,300 2,900
3,300 2,100
Ans. (Rs 26,100)
16. The following is the position of current assets and current liabilities of Tupur Publishers Ltd. :
2010 (Rs) 2011(Rs)
Provision for Bad debts 1,000
Short term loans 10,000 19,000
Creditors 15,000 10,000
Bills Receivable 20,000 40,000
The company incurred a loss of Rs. 45,000 during the year. Calculate cash from operating
activities.
Ans. (Rs. 62,000)
17. The following is the position of current assets and current liabilities of Gajalakshami Ltd.
Calculate cash flow from operating activities during 2010-11:

2010 2011
Particulars
Rs (Rs.)
Profit & Loss Appropriation A/c 2,000 3,000
Bills Receivable 1,400 1,800
Provision for Depreciation 3,000 3,200
Outstanding Rent Payable 160 480
Prepaid Insurance 140 120
Goodwill 2,000 1,600
Stock 1,400 1,800
Ans. (Rs. 1060)
18. Calculate cash flow from operating acidities during 2010-11 from the following :

Liabilities 2010 2011 Assets 2010 2011

Capital 50 70 Cash & Bank 30 40
Debentures 60 40 Trade Debtors 40 60
Accumulated Profits 30 50 Stock 50 60
Trade Creditors 60 90 Goodwill 30 20
Machinery 50 70
200 250 200 250
Ans. (Rs. 40,000)

19. Calculate cash from operating activities from the following Profit and Loss account for the year
ending on 31.3.11.

37
.
Profit and Loss Account
(for the year ending on 31.3.11)
Dr. Cr.
Particulars Rs. Particulars Rs.
To Salaries 1,800 By Gross Profit 6,500
To Rent 1,000 By Profit on Sale of Plant 700
To Provision for Bad debts 200 By Income Tax Refund 600
To Depreciation 400
To Loss on Sale of land 300
To Goodwill written off 500
To Proposed dividend 700
To Provision for tax 400
To Net Profit 2,500
7,800 7,800
Ans. (Rs. 3700)
20. From the following information prepare a Cash Flow Statement
(Rs)
Operating Cash Balance 15,000
Closing Cash Balance 19,000
Increase in Creditors 13,000
Decrease in Debtors 17,000
Fixed assets purchase 30,000
Redemption of 12% debentures 14,000
Profit for the year 18,000
Ans. Cash flow from operating investing and financing activities = Rs. 48000, Rs. 30,000 Rs.
14,000).
21. From the following information prepare a Cash Flow Statement.
(Rs)
Operating Cash Balance 1, 00,000
Closing Cash Balance 1, 20,000
Increase in Creditors 50,000
Decrease in Debtors 70,000
Fixed assets purchase 2, 00,000
Redemption of 12% debentures 5, 00,000
Profit for the year 2, 00,000

Ans. Cash flow from operating, investing and financing activities = Rs.
320,000 Rs. 2, 00,000 & Rs. 5, 00,000).
22. From the following Balance Sheets of M/s Rahman & Bros. Ltd. prepare a Cash Flow Statement
as per (AS-3 (Revised) :

Liabilities 2010 2011 Assets 2010 2011

(Rs.) (Rs.) (Rs.) (Rs.)
Equity Share Capital 1,50,000 2,00,000 Goodwill 36,000 20,000
15% Preference Share Buildings 80,000 60,000
Capital 75,000 50,000 Plant 40,000 1,00,000
General Reserve 20,000 35,000 Debtors 1,19,000 1,54,500
Profit & Loss A/c 20,000 24,000 Stock 10,000 15,000
Creditors 32,500 49,500 Cash 12,500 9,000

2,97,500 3,58,500 2,97,500 3,58,500

Depreciation charged on Plant was Rs. 10,000 and on building was Rs. 20,000.
Ans. (Rs. 41,500 Rs. 70,000 & Rs. 25,000)

38
23. The McGill Company has made the following balance sheet information available for use
in this problem:
Ending Balance Beginning Balance
Rs. Rs.
Accounts receivable 12,000 19,000
Inventory 4,000 11,000
Supplies 1,000 2,500
Prepaid rent 3,500 3,000
Accounts payable 15,000 14,000
Unearned rent revenue 6,000 1,500
Salaries payable 1,000 2,000

During the year, the company recorded the following activities:

a) the purchase of investment securities; Rs.12,000
b) the payment of cash dividends; Rs.3,000
c) the sale of land costing Rs.40,000 for proceeds of Rs.54,000
d) the annual depreciation of plant and equipment; Rs.9,000
e) the issue of common stock for cash; Rs.5,000
f) annual accrual net income; Rs.156,000
Prepare McGill's annual statement of cash flows using the indirect method of disclosing cash flows
from operations.
24. Prepare Cash Flow Statement as per AS.3 (Revised) from the following Balance Sheets of 2010
and 2011.

Liabilities 2010 2011 Assets 2010 2011

(Rs.) (Rs.) (Rs.) (Rs.)
Equity Share Capital 30,000 40,000 Fixed Assets 40,000 65,000
Reserve & Surplus 8,500 11,000 Less: Accumulated
Bank Loan 10,000 7,500 Depreciation 8,000 13,500
Creditors 31,000 39,000 32,000 51,500
Bank Overdraft — 500 Investments 8,000 11,000
Proposed Dividend 4,500 6,000 Stock 20,000 22,500
Debtors 21,000 19,000
Bank 3,000 —
84,000 1,04,000 84,000 1,04,000
Ans. (Rs. 14,500, Rs. 2,500, Rs. 7,500)
25. Following are the comparative Balance Sheets of Washi & Bros. Ltd. for the year 2010 and 2011.
You are required to prepare a Cash Flow Statement as per AS-3 (Revised)

Liabilities 2010 2011 Assets 2010 2011

(Rs.) (Rs.) (Rs.) (Rs.)
Share Capital 70,000 74,000 Cash 9,000 7,800
15% Debentures 12,000 6,000 Trade Debtors (good) 14,900 17,700
Trade Creditors 10,360 11,840 Stock in trade 49,200 42,700
Provision for d/ Land 20,000 30,000
debts 700 800 Goodwill 10,000 5,000
Profit & Loss A/c 10,040 10,560
1,03,100 1,03,200 1,03,100 1,03,200
Additional Information:
(i) Dividends were paid totaling Rs. 3,500
(ii) Land was purchased for Rs. 10,000
(iii) Amount provided for amortization of goodwill Rs 5,000
(iv) Debenture loan was repaid Rs 6,000
Ans. (Rs. 10,800, Rs 10,000 & Rs. 2000)

39
26. The Balance Sheets of Maharaja Sons Ltd. as on 31.3.10 and 31.3.11 were as follows:

Liabilities 2010 2011 Assets 2010 2011

(Rs.) (Rs.) (Rs.) (Rs.)
Equity Share Capital 90,000 1,30,000 Fixed Assets 93,400 1,66,000
General Reserve 10,000 15,000 Stock 22,000 26,000
Profit & Loss A/c 20,000 30,000 Debtors 36,000 39,000
15% Debentures — 20,000 Bank 4,000 5,000
Creditors 37,400 42,000 Preliminary Expenses 2,000 1,000

1,57,400 2,37,000 1,57,400 2,37,000

Additional Information:
(i) Depreciation written off on Fixed Assets Rs. 23,400
(ii) Dividend paid on Equity Share Capital Rs. 20,000
Prepare Cash Flow Statement as per AS-3 (Revised)
Ans. (Rs. 57000, Rs. 96,000 & Rs. 40,000)
27. Prepare Cash Flow Statement as per AS-3 (Revised) from the following Balance Sheets of Ali &
Bros. Ltd.

Liabilities 2010 2011 Assets 2010 2011

(Rs.) (Rs.) (Rs.) (Rs.)
Equity Share 4,80,000 7,20,000 Investments 42,200 —
Capital 2,60,000 1,20,000 Discount on
15% Redeemable Issue of Shares 1,20,000 96,000
Preference Share Factory Buildings 2,00,000 1,20,000
Capital 48,000 72,000 Machinery 2,16,000 4,58,400
General Reserve — 64,800 Fixed Deposits 24,000 84,000
Profit & Loss A/c Preliminary 24,000 16,800
Current Liabilities: Expenses
Proposed Dividend Current Assets
Sundry Creditors 67,200 93,600 Sundry Debtors 1,80,000 2,59,200
Bills Payable 70,000 1,00,000 Stock 2,04,000 1,87,200
Outstanding Salary 17,200 27,200 Bank 30,600 50,000
Provision for Tax 39,200 14,400 Cash 7,000 17,200
67,200 76,800

10,48,800 12,88,800 10,48,000 12,88,800

Ans. (Rs. 1, 76,000, Rs. 1, 79,200 & Rs. 32,800)
28. Following are the Balance Sheets of Shafi & Bros. Ltd. as at 31 st March, 2011, prepare Cash
Flow Statement as per AS-3 (revised)

Liabilities 2010 2011 Assets 2010 2011

(Rs.) (Rs.) (Rs.) (Rs.)
Share Capital 1,00,000 1,10,000 Goodwill 5,000 4,000
15% Debentures 50,000 30,000 Land 42,000 66,000
General Reserve 20,000 20,000 Machinery 60,000 80,000
Profit & Loss A/c 11,000 19,000 Stock 25,000 21,000
Prov. for Income Tax 4,000 11,000 Debtors 30,000 24,000
Creditors 5,000 4,000 Preliminary Exp 3,000 2,000
Bills Payable 2,000 3,000 Cash 30,000 2,400
Prov. for doubtful 3,000 2,400
debts
1,95,000 1,99,400 1,95,000 1,99,400
Additional Information:

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 (i) During the year 2011, a part of Machine costing Rs. 7,500 (Accumulated depreciation thereon
being Rs. 2,500) was sold for Rs. 3,000.
(ii) Income tax was paid Rs, 4,000 during 2011.
(iii) Depreciation on Machinery for 2011 was provided at Rs. 5,000.
Ans. (Rs. 35,900, Rs. 53,500 & Rs. 10,000)
29. From the following Balance Sheets of M/s Neyamat & Bros. Ltd. for two years 2010 and 2011,
prepare cash Flow Statement

Liabilities 2010 2011 Assets 2010 2011

(Rs.) (Rs.) (Rs.) (Rs.)
Share Capital 36,000 30,000 Goodwill 5,000 6,000
P & L A/c 20,000 14,000 Machinery 20,000 25,000
15% Debentures — 5,000 Stock 18,000 12,000
Creditors 9,000 11,000 Debtors 19,000 15,000
Cash 3,000 2,000
65,000 60,000 65,000 60,000
Additional Information:
(i) A Machine of the book value of Rs 6,000 was sold for Rs.6, 500 during 2011.
(ii) Debentures were redeemed for Rs. 4,900.
(iii) Cash dividend of Rs. 2,500 was paid during 2011.
(iv) Depreciation on Machinery was provided Rs. 1,000
Ans. (Rs. 2100, 4500 & Rs. 4900)
30. From the following Balance Sheets of Shahid & Bros. Ltd, prepare a Cash Flow Statement as
per AS-3 (Revised) treating Provision for tax as a non-current liability

Shahid & Bros. Ltd

Balance Sheet
Liabilities 2010 2011 Assets 2010 2011
(Rs.) (Rs.) (Rs.) (Rs.)
Share Capital 3,00,000 4,00,000 Goodwill 1,15,000 90,000
15% Debentures 1,50,000 1,00,000 Buildings 2,00,000 1,70,000
General Reserve 40,000 70,000 Debtors 1,60,000 2,00,000
P & L A/c 72,000 98,000 Cash 25,000 18,000
Creditors 55,000 83,000 Bills Receivable 20,000 30,000
Bills Payable 20,000 16,000 Stock 1,57,000 3,09,000
Prov. for tax 40,000 50,000

6,77,000 8,17,000 6,77,000 8,17,000

Additional Information:
(i) Depreciation on Building is 15%.
(ii) Income Tax paid is Rs. 40,000.
Ans. (Rs. 57,000, Rs NIL & Rs. 50,000)

31. Following are the comparative Balance Sheets of ABC Co. Ltd. for the year 2010 and 2011 .
2010 2011 2010 2011
Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
Equity Share Capital 45,000 65,000 Fixed Assets 46,700 83,000
15% Debentures 10,000 20,000 Stock 11,000 13,000
Trade Creditors 8,700 11,000 Debtors 18,000 19,500
General Reserve 5,000 7,500 Cash 2,000 2,500
Profit & Loss A/c 10,000 15,000 Preliminary Exp. 1,000 500

78,700 1,18,500 78,700 1,18,500

Prepare Cash Flow Statement. As per AS-3 (revised)
Ans. (Rs. 6,800 Rs. 36,500 & Rs. 30,000)

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32. From the following Balance Sheets of Zia-ul-Haque & Co, Prepare Cash Flow Statement as per
AS-3 (revised)

Liabilities 2010 2011 Assets 2010 2011

(Rs.) (Rs.) (Rs.) (Rs.)
Share Capital 80,000 1,00,000 Machinery (at cost) 1,20,000 1,44,000
Depreciation Reserve 40,000 43,000 Debtors 40,000 35,000
Profit and Loss A/c 30,000 50,000 Stock 30,000 32,000
15% Debentures 40,000 20,000 Preliminary Expenses 4,000 3,000
Creditors 20,000 17,000 Bank Balance 16,000 16,000

2,10,000 2,30,000 2,10,000 2,30,000

Ans. (Rs. 24,000, Rs. 24,000, Rs. NIL)
33. Prepare Cash Flow Statement from the following Information:

Liabilities 2010 2011 Assets 2010 2011

(Rs.) (Rs.) (Rs.) (Rs.)
Share Capital 5,00,000 7,00,000 Cash and Bank 3,00,000 4,00,000
8% Debentures 6,00,000 4,00,000 Debtors 4,00,000 6,00,000
Profit and Loss A/c 3,00,000 5,00,000 Stock 5,00,000 6,00,000
Creditors 6,00,000 9,00,000 Goodwill 2,50,000 1,70,000
Dis. on debenture 50,000 30,000
Machinery 5,00,000 7,00,000

20,00,000 25,00,000 20,00,000 25,00,000

Additional Information: Depreciation Charge on Plant amount to Rs. 80,000.

[Ans.: Cash inflow from Operating Activities Rs. 3, 80,000, Cash inflow from
Investing Activities Rs. (2, 80,000), Cash inflow from financing Activities Rs.NIL].

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