Module -4

CASH FLOW STATEMENT

Definition:

"A statement of changes in the financial position of a firm on cash basis is called a
cash flow statement."

The cash flow statement describes the inflow (sources) & outflow (uses) of cash. It
summarizes the causes of changes in cash position of a business enterprise between
two balance sheets.

Differences between Fund Flow Statement & Cash Flow Statement

Fund Flow Statement Cash Flow Statement

1) It is based on a wider concept of 1) It is based on a narrower concept of

funds i.e working capital funds i.e cash

2) It is based on accrual basis of 2) It is based on cash basis of

accounting accounting

3) Changes in current assets & current 3) No schedule of changes in working

liabilities appear separately in a capital. The changes in current assets
schedule of changes in working capital & current liabilities are summarized in
the cash flow statement.

4) It is useful in planning intermediate 4) It is useful for short term analysis &

& long term financing. cash planning of the business.

5) It reveals the sources & applications 5) It classifies all cash inflows &
of funds of an organization. outflows in terms of operating,
investing & financing activities.

Classification of Cash Flows

1) Cash flows from operating activities

2) Cash flows from investing activities

3) Cash flows from financing activities

Cash flows from Operating Activities

Operating activities are the basic revenue producing activities of the enterprise. The
amount of cash flows arising from operating activities is an indicator of a firm's
operating capability to generate sufficient funds to meet its operating needs, pay
dividends, repay loans, etc. without depending on external sources of finance.

Examples of cash flow from operating activities

1) cash receipts from sale of goods & rendering of services

2) cash receipts from royalties, fees, commissions, etc

3) cash payment to suppliers of goods & services

4) cash payment to & behalf of employees

5) cash receipts & payments of an insurance company for premiums, claims,

annuities, etc

6) cash payments or refunds of income tax relating to operating activities

Cash flows from Investing Activities

Investing activities are the acquisition & disposal of long term assets &
investments.

A separate disclosure of cash flows arising from investing activities is important

 because cash flows represent the extent to which expenditure have been made for
resources to generate future incomes.

Examples of cash flow from investing activities

1) cash payments to acquire fixed assets (including intangibles).

2) cash receipts from disposal of fixed assets (including intangibles)

3) cash receipts from disposal of shares, warrants, debt instruments, etc

4) cash advances & loans made to third parties.

5) cash receipts from the repayment of advances & loans made to third parties.

Cash flows from Financing Activities

Financing activities are activities that result in changes in the size & composition of the
owners' capital (including preference share capital in the case of a company) &
borrowings of the enterprise.

Examples of cash flows from financing activities

1) cash proceeds from issuing shares or other similar instruments

2) cash proceeds from issuing debentures, loans, bonds & other short or long
term borrowings

3) cash repayments of amounts borrowed such as redemption of debentures,

bonds, preference shares.

Uses & Significance of Cash Flow Statement

 Cash Flow Statement is of vital importance to the financial management & short term
financial planning. Its various uses are as follows:

1) Cash Flow Statement is prepared on cash basis hence it is useful in evaluating the
cash position of an enterprise.

2) A projected cash flow statement can be prepared so that it can enable the firm to
plan & co – ordinate its financial operations efficiently.

3) A comparison of historical & projected cash flow statements will reveal variations in
the performance so that the firm can take immediate effective action.

4) It indicates whether a firm's short term paying capacity is improving or deteriorating

over a period of time by preparing cash flow statements for a number of years.

5) It helps in planning the repayment of loans, replacement of fixed assets etc. It is also
significant for making capital budgeting decisions.

6) It clearly indicates the causes for poor cash position in spite of substantial profits in
a firm by throwing light on various applications of cash made by the firm.

7) Cash Flow Statement provides information of all activities classified under operating,
investing & financing activities.

Limitations of Cash Flow Statement

Despite of a number of uses, cash flow statement also suffers from the following
limitations:

1) As cash flow statement is based on cash basis of accounting, it ignores the basic
accounting concept of accrual basis.

2) Cash Flow statement is not suitable for judging the profitability of a firm as non –
cash charges are ignored while calculating cash flows from operating activities.

3) Funds flow statement presents a more complete picture than Cash flow statement.
4) It is difficult to define the term "cash". There are no controversies over a number of
items like cheques, stamps, postal orders etc whether they are to be included in cash.

Note:

1) An increase in liability is a source of cash or cash inflow eg increase in creditors

implies purchase of goods on credit. Although no cash is received we can say that
creditors have given us loans which we have utilized to purchase goods from them.

2) A decrease in liability is an application of cash or cash outflow. E.g. sundry creditors

are paid off.

3) An increase in asset is an outflow of cash. E.g. goods sold on credit.

4) A decrease in asset is an inflow or source of cash. E.g. sale of stock, cash received
from debtors.

Actual flow of cash

It is the movement of cash that results in actual inflow or outflow of from the firm. Eg
When shares are issued for cash or when loan is repaid or when assets are sold for
cash.

Notional flow of cash

It refers to delayed receipts & payments. Increase in current liabilities like trade
creditors, bills payable, etc results in notional inflow of cash as here cash inflow is
implied.

Usually increase in long term liabilities generate actual cash & increase in current
liabilities generate notional cash.
Format of Cash Flow Statement (Indirect Method )
Particulars Amount
I.Cash from operating Activities :
(Net profit for the year ( Closing Balance – Opening balance of
P&L)
Add: Non Cash/ Non operating Expenses
Less : Non Cash /Non Operating Incomes
Operating Profit before Working Capital Changes
Add : Decrease in CA and Increase in CL
Less :Increase in CA and Decrease in CL
Cash Flow from operating Activities
Less : Income Tax
Net Cash from Operating Activities
II. Cash from Investing Activities
Add :Sale of Fixed Assets
Less : Purchase of Fixed Assets
Net Cash Generated from Investing Activities
III. Cash From Financing Activities
Add :Anything that we have received with regards to Liabilities
Less : Anything that we have pay with regards to Liabilities
Add : Increase in BOD
Less : Decrease in BOD
Add: Balance of Cash & Cash Equivalents at the beginning of the
year
Balance of Cash & Cash Equivalents at the end of the year
 Problem no 1 :
From the following balance sheet of Thin Company ltd as on 31/03/2015 and
2016
Prepare Cash Flow Statement
Liabilities 2015 2016 Assets 2015 2016
Share Capital 50,000 60,000 P&M 30,000 25,000
General Reserve 8000 12,000 L&B 20,000 40,000
P&L Account 6000 10,000 Stock 26,000 20,000
Bank Loan 10,000 2,000 Debtors 13,000 20,000
Creditors 12,000 16,000 Cash 5,000 6,000
Provision for Taxation 4,000 6,000
Outstanding 4,000 5,000
Expenses
94,000 1,11,000 94,000 1,11,000
Additional Information :
1. Income Tax paid during 2016 is Rs.4400/-
2. A Machinery costing Rs.5000 (WDV is Rs .3000 was sold at Rs .1000 /- , the
loss being written off against General Reserve )
3. Outstanding Expenses paid during the year were Rs.4500/-
Soln :
Provision for Taxation A/c
Particulars Amount Particulars Amount
To Bank a/c 4400 By Bal b/d 4000
To Bal c/d 6000 By P& L a/c (Provision 6,400
Made)(BF)
10,400 10,400

Plant and Machinery A/c

Particulars Amount Particulars Amount
To Bal b/d 30,000 By Depn a/c 2000
By Bank a/c 1000
By Gen .Reserve 2000
By Bal c/d 25,000
30,000 30,000

General Reserve a/c

Particulars Amount Particulars Amount
To P& M a/c 2000 By bal b/d 8,000
To bal c/d 12,000 By P&L a/c 6,000
14,000 14,000
 PROBLEMS:

1. From the following balance sheet prepare cash flow statement (2016)

Liabilities 2014 2015 Assets 2014 2015

Share capital 684000 900000 Goodwill 230000 180000
Preference share 300000 200000 Land and 400000 340000
General reserve 80000 140000 building 16000 400000
P and l a/c 60000 96000 Plant 154000 218000
Creditors 110000 166000 Stock 320000 400000
Bills payable 40000 32000 Debtors 40000 60000
PT 80000 100000 Bills receivable 50000 36000
Cash
1354000 1634000 1354000 1634000
Additional info:
 Dividend paid Rs 40000
  Depreciation written off during the year 2015. Land and buildings Rs
40000 and plant Rs 20000
 Provision for taxation made during the year 2015 was Rs 90000.
2. Following are the summarized balance sheets of sahana Ltd. As on 31st
December 2013 and 2014. (2015)
Balance sheet
Liabilities 2013 2014 Assets 2013 2014

Share capital 4,50,000 4,50,000 Fixed assets 4,00,000 3,20,000

General reserve 3,00,000 3,10,000 Investments
Profit & Loss 56,000 68,000 (non current ) 50,000 60,000
Account Stock 2,40,000 2,10,000
Creditors 1,68,000 1,34,000 Debtors 2,10,000 4,55,000
Provision Bank 1,49,000 1,97,000
For taxation 75,000 10,000
Mortgage loan - 2,70,000
10,49,00 12,42,00 10,49,00 12,42,00
0 0 0 0

Additional information:
a. Investments costing 8,000 were sold during the year 2014 for 8,500.
b. Provision for taxation made during the year was 90,000.
c. During the year part of the fixed assets costing 10,000 was sold for
12,000. The profit was included in profit and loss account.
d. Dividend paid during the year amounting to 40,000.
Prepare a cash flow statement.
3. From the following balance sheet of Nischal ltd prepare cash flow statement
(2013)
Liabilities 2009 2010 Assets 2009 2010

Share capita 1300000 150000 Goodwill 30000 20000

 General reserve 200000 0 Land buildings 750000 100000
P and l a/c 120000 250000 Plant and 600000 0
Bank loan 300000 180000 machinery 135000 800000
Creditors 100000 200000 Investments 330000 100000
Billa payable 80000 160000 Stock 230000 230000
Provision for tax 45000 60000 Debtors 150000 332000
Proposed 100000 60000 Cash 20000 88000
dividend 175000 Preliminary exp 15000
2245000 258500 224500 258500
0 0 0
Additional info:
 Depreciation written off during the year ending 2010 on plant and
machinery rs 120000
 Equity shares issued against the acquisition of assets of another
company, the assets considered of land and building worth Rs 15000 and
stock worth Rs 50000.no depreciation has been provided on land and
buildings during the year.
 A dividend of Rs 13500 was received during the year.
 Provision of taxation and proposed dividend shall be treated as non-
current liabilities.

4. The balance sheets of VXL limited as at December 31st of two years are given
below:
2016 2015

Assets
Cash balances 60,000 50,000
Trade debtors 1,00,000 75,000
Inventory 1,20,000 1,40,000
Land 80,000 1,00,000
 Plant and machinery 2,50,000 2,00,000

Total 6,10,000 5,65,000

Liabilities and capital

Trade creditors 40,000 30,000
Debentures 90,000 1,50,000
Provision for depreciation on plant 80,000 60,000
Equity share capital 2,40,000 2,00,000
Retained earnings 1,60,000 1,25,000

Total 6,10,000 5,65,000

Cash dividend of Rs. 25,000 has been paid during the year.
You are required to prepare a cash flow statement in indirect basis.

5. The balance sheets of X ltd as on 31st March , 2015 and 31st March , 2016 were
as follows:
31st March 31st March
2016 2015

Assets
Land and buildings 80,000 1,20,000
Plant and machinery 5,00,000 8,00,000
Stock 1,00,000 75,000
Sundry debtors 1,40,000 1,50,000
Prepaid expenses 14,000 12,000
Cash at bank 16,000 18,000

Total 8,50,000 11,75,000

 Liabilities and capital
Share capital 5,00,000 7,00,000
Profit and loss account 1,00,000 1,60,000
General reserve 50,000 70,000
Sundry creditors 1,63,000 2,00,000
Bills payable 30,000 40,000
Outstanding expenses 7,000 5,000

Total 8,50,000 11,75,000

Additional information:
i) Rs 50,000 depreciation has been charged to plant and machinery during
the year, 2016.
ii) A piece of machinery was sold for Rs. 8,000 during 2016. It had cost Rs.
12,000, depreciation of Rs. 7,000 has been provided on it.
Prepare cash flow statement from the above detail.
6. Given below are the balance sheets of IVRL & Sons (2006)
Liabilities 1 Jan. 31 Dec. Assets 1 Jan. 31 Dec.
2015 2015 2015 2015

Creditors 40,000 44,000 Cash 10,000 7,000

Mrs. A,s loan 25,000 - Debtors 30,000 50,000
Loans from bank 40,000 50,000 Stock 35,000 25,000
capital 1,25,000 1,53,000 Machinery 80,000 55,000
Land 40,000 50,000
Building 35,000 60,000
2,30,000 2,47,000 2,30,000 2,47,00
0

During the year a machine costing 10,000 (accumulated depreciation 3,000)

sold for 5,000. The provisions for depreciation against machinery as
 st
on 1 January, 2005 was 25,000 and on 31 December 2015 40,000. Net
profit for the year amount to 45,000.
You are required to prepare Cash flow statement.

7. Following is the balance sheet of AB Co ltd. As at 1st January, 2015 and 31st
December 2015.
1-1-2015 31-12-2015

Liabilities and capital

Equity share capital 3,00,000 3,50,000
Share premium - 30,000
General premium 45,000 65,000
Profit and loss 30,000 80,800
6% debenture - 70,000
Sundry creditors 85,000 90,700
Provision for taxation 22,500 40,500
Proposed dividend 30,000 35,000

Total 5,12,500 7,62,000

Assets
Land and building 2,30,000 3,90,000
Plant and machinery 85,400 1,40,000
Furniture 5,500 6,500
Stock 82,400 95,700
Sundry debtors 75,000 85,500
Bank balance 34,200 44,300

Total 5,12,500 7,62,000

Additional information:
 Depreciation written off during the year:

Land and building 60,000

Plant and machinery 50,000
Furniture 1,200

You are required to prepare a cash flow statement.

8. The following balance sheets are given:
Liabilities 2015 2016 Assets 2015 2016

Equity share capital 3,00,000 4,00,00 Goodwill 1,15,000 90,000

Redeemable pref. 1,50,000 0 Land and 2,00,000 1,70,000
capital 40,000 1,00,00 building
General reserve 30,000 0 Plant 80,000 2,00,000
Profit and loss 42,000 70,000 Debtors 1,60,000 2,00,000
amount 55,000 48,000 Stock 77,000 1,09,000
Proposed dividend 20,000 50,000 Bills receiva 20,000 30,000
Creditors 40,000 83,000 Cash in hand 15,000 10,000
Bills payable 16,000 Cash at bank 10,000 8,000
Provision for taxation 50,000
6,77,000 8,17,00 6,77,000 8,17,000
0

It is given that:
a) Depreciation of Rs 20,000 on land and building and Rs. 10,000 on plant has
been charged in 2016.
b) Interim dividend of Rs 20,000 has been paid in 2016.
c) Income tax Rs 35,000 has been paid during 2016.

9. From the following balance sheet of PK ltd for the year ending 31-12-2015 and 31
-12-2016.
 Liabilities 2015 2016 Assets 2015 2016

Equity share capital 2,15,000 2,75,00 Goodwill - 20,000

Reserves 40,000 0 Plant and 1,12,950 1,16,20
Profit and loss A/c 39,690 40,000 mach 0
Provision for tax 40,000 41,220 Land and 1,48,500
Bank loan 59,510 50,000 building 1,44,25
Current liabilities 73,280 - Current 1,98,530 0
52,660 assets 7,500
cash 1,70,73
0
7,700

The following information is also provided:

1. A dividend of 26,000 was paid during the year 2016
2. Profit before tax for the year was 62,530.
3. During the year 2016, the company paid tax of 25,000.
4. During the year, the company purchased another company and paid 60,000
in share capital. It acquires stock 21,640 and plant 18,360.
5. It purchased machinery costing 5,650 during the year.