Cash Flow Statement

Cash: Cash comprises cash in hand and cash at bank.

Cash Equivalents: Cash equivalents are short-term, highly liquid investments that are readily
convertible into known amounts of money and which are subjected to an insignificant risk of
changes in value.

Cash Flows: Cash flows means cash inflow and cash outflow of cash and cash equivalents.

Classification of Cash Flows in Cash Flow Statement

Cash flows be classified in by Operating, Investing and Financing Activities.

Operating Activities: Operating Activities are the principal revenue-producing of an enterprise

and other activities that are not investing or financing activities.

Investing Activities: Investing Activities are concerned with the acquisition and disposal of
long-term assets and other investments not included in cash equivalents.

Financing Activities: Financing activities result in changes in the size and composition of the
equity capital and borrowings of the enterprise.

Separate Disclosure Requirements: The following items are to be closed separately;

 Extra Ordinary Items

 Interest Paid and Received
 Dividends Paid and Received
 Investments and sale of shares in subsidiaries, associated and joint ventures.
 Components of cash and cash equivalents.

Non-cash transactions should not be reflected in the cash flow statement. However, such
transactions should be disclosed in the form of appropriate narratives. Examples of non-cash
transactions include:
 Acquisition of Assets by means of Finance Lease
 Acquisition of entity through the issuance of shares
 Conversion of loan into capital
 Disposal of assets for consideration other than cash
 Issuance of Bonus shares

Methods of Preparation of Cash Flow Statement.

1. Direct Method
2. Indirect Method

1
 Benefits of Cash Flow Statement

 A tool to evaluate liquidity, solvency and financial stability of the entity.

 Presentation of a detailed summary of cash inflows and cash outflows.

 An indicator of the amount, timing, and extent of future cash flows.

 It emphasizes the qualitative aspect of the Profit i.e. what portion of Profit represents cash
inflows.

 Measures the ability of an entity to pay cash dividends to owners, salaries to employees,
and settlements to creditors’ invoices.

 Evaluates the ability of the entity to generate its cash requirements from normal trading
operations.

 Helps in the evaluation of working capital requirement

Cash Inflows

 Decrease in assets
 Increase in liabilities
 Increase in shareholders’ equity

Cash Outflows

 Increase in assets
 Decrease in liabilities
 Decrease in shareholders’ equity

2
Question 4

From the following particulars, Prepare a Cash Flow Statement of Madina Textile Ltd. for the
period ended December 31, 2022.

December 31 December 31
Balance Sheet 2022 2021
Rs. Rs.
Cash 7,900 9,700
Accounts Receivables 8,300 12,700
Provision for Doubtful Debts (1,350) (1,200)
Inventories 36,000 40,000
Furniture 80,000 60,000
Accumulated Depreciation (24,050) (16,000)
106,800 105,200

Accounts Payable 16,000 20,800

Debentures - 20,000
Share Capital 80,000 56,000
Retained Earnings 10,800 8,400
106,800 105,200

Income Statement
Year Ended December 31, 2022
Rs.
Net Sales 95,000
Cost of Goods Sold (44,000)
Gross Profit 51,000
Selling & Admin. Expenses (including Depreciation) (28,600)
Earning before Interest & Tax 22,400
Unappropriated Profit b/f 8,400
Profit Available for Appropriation 30,800
Dividend Paid (20,000)
Retained Earnings c/f 10,800

Additional Information:

During the year, Furniture Costing Rs.10,000, on which Depreciation of Rs.8,000 was provided, sold for
was sold for Rs.1,500.

3
Question 2
K plc’s profit and loss account for the year ended September 30 2023 and its balance sheets at
September 30 2022 and 2023 are as follows
Profit and loss account
Rs. 000
Turnover 25,000
Operating Cost (14,000)
Profit Before Interest & tax 11,000
Interest Expense (1,600)
Taxation (400)
Profit after Tax 9,000

Balance Sheets 2023 2022

Rs. 000 Rs. 000
Fixed Assets 174,000 142,000

Current assets
Inventories 1,200 2,100
Trade Debts 800 2,000
Bank 900 -
2,900 4,100

Current Liabilities
Creditors (1,200) (800)
Unclaimed Dividend (700) (600)
Provision for Taxation (1,400) (1,100)
Accrued Expenses - (400)
(3,300) (2,900)
Interest Payable (5,000) (4,700)
168,600 138,500

Share capital 40,000 40,000

Revaluation reserve 48,100 25,000
General Reserves 80,500 73,500
168,600 138,500

Costs incurred during the year include depreciation of Rs. 3,500,000. No assets were sold during
the year.
Requirement: Prepare K plc’s cash flow statement for the year ended 30 September 2023.

4
Question 3

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 30TH SEP. 2023
Rs.000
Sales 8,000
Cost of sales (4,500)
Gross Profit 3,500
Operating Expenses (1,000)
Operating Profit 2,500
Interest (14)
Profit Before Tax 2,486
Taxation (800)
Dividends (700)
Retained Profit for the Year 986
Balance brought forward 4,400
Retained Profit carried forward 5,386

Balance Sheet at 30th September 2023 2022

Rs.000 Rs.000 Rs.000 Rs.000
Fixed Assets 8,100 6,800
Current Assets
Stock 800 600
Debtors 670 620
Recoverable ACT 100 90
Bank 80 300
Total Assets 9750 8,410
OE + Liabilities
Share Capital 1,100 1,000
Share premium 509 225
Profit & Loss 5,386 4,400
Long Term Loan 1,200 1,400
Current Liabilities
Creditors 420 340
Proposed Dividend 400 360
Taxation 735 685
Total 9750 8,410

During the year the Company purchased fixed assets costing Rs.1,900,000.
Fixed Assets with a book value of Rs.310,000 were sold for Rs.80,000.
Required:
Prepare a cash flow statement for Z Ltd. for the year ended 30th Sep. 2023.