CBSE Quick Revision Notes and Chapter Summary

Class-12 Accountancy
Part – B – Cash Flow Statement

Introduction

Cash flow statement was previously known as the flow of Cash statement. Cash Flow Statement is
prepared according to Accounting Standard – 3 (Revised). Cash flow statement provides
information on a firm's liquidity and solvency. It is concerned with the inflow and outflow of cash
in the business. The cash flow statement is partitioned into three segments, namely:

(1) Cash flow resulting from operating activities;

(2) Cash flow resulting from investing activities; and
(3) Cash flow resulting from financing activities.

The cash coming into the business is known as cash inflow, and cash going out from the business
is known as cash outflow.

Meaning and Definition of Cash Flow Statement

It is a statement that shows flow (inflow or outflow) of cash and cash equivalents during a
given period of time. As per Accounting Standard­3 (Revised) the changes resulting in the flow
of cash & cash equivalents arises on account of three types of activities i.e.
(1) Cash flow from Operating Activities.
(2) Cash flow from Investing Activities.
(3) Cash flow from Financing Activities

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. ­­­­­­­­ Accounting Standard – 3 (Revised) issued by ICAI

Operating activities: - Operating activities are the principal revenue­producing activities of the
enterprise and other activities that are not investing or financing activities.

Investing activities: - Investing activities are the acquisition and disposal of long­term assets
and other investments not included in cash equivalents.

Financing activities: ­ 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.
OBJECTIVES OF CASH FLOW STATMEMENT

1. To ascertain how much cash or cash equivalents have been generated or used in different

activities i.e. operating/investing/financing activity.

2. To ascertain the net changes in cash and cash equivalents.

3. To assesss the causes of difference between actual cash & cash equivalent and related net
earning/income.

4. To help in formulation of financial policies such as dividend policy, fixed assests policy,
capitalstructure related policy.

5. To help in short­term financial planing.

6. To ascertain the liquidity of enterprises

LIMITATIONS OF CASH FLOW STATEMENT

1. Non cash transaction are not taken into consideration like sahres or debentures issued to
vendores, deprecaition charged during the year.

2. It is a statement related with past data.

3. It is not used for judging the profitability of enterprises.

4. Accrual accounting concept is ignored in this statement e.g. credi sales, credit purchases,
outstanding expesnes, accrued income are not included.

Calculation of Inflows and outflows from various activities

How to Calculate Cash From Operating Activities

Step 1. Profit before tax and extraordinary items

Profit as per statement of Profit & Loss (closing balance – opening balance) xxxx
Add : Transfer to Reserve (closing balance – opening balance) xxxx
Add : Proposed dividend for the current year xxxx
Add : Interim dividend paid during the year xxxx
Add : Provision for tax made during the year xxxx
Add : Net Deferred Tax Liabilities (opening balance – closing balance) xxxx
Less : Net Deferred Tax Asset (opening balance – closing balance) (xxxx)
Less : Refund of tax credited to the Statement of Profit & Loss (xxxx)
Add : Extraordinary item (loss), if any, debited to Statement of Profit & Loss (earthquake, disaster etc.) xxxx
Less : Extraordinary item (insurance claim), if any, credited to Statement of Profit & Loss (xxxx)

xxxx
Net Profit before Taxation and Extraordinary Items
Step 2. Treatment of Non-cash and Non-operating items xxxx
Add : xxxx
Depreciation on fixed tangible assets xxxx
Amortised Goodwill/Patents/Trademarks/ Copyright and other intangible fixed assets xxxx
Unamortised expenses and losses (fictitious assets) written off xxxx
Interest on loans or interest on borrowings xxxx
Interest on debentures xxxx
Premium payable on redemption of debentures or preference shares xxxx
Loss on sale of fixed assets
Loss on sale of investments (whether short term or long term)
Less :
Rental Income (xxxx)
Interest on investment (xxxx)
Dividend income (xxxx)
Profit on sale of fixed assets (xxxx)
Profit on sale of investment (xxxx)

Operating Profit before Working Capital Changes xxxx

Step 4. Treatment of Current Assets and Current Liabilities

Add :
Decrease in Current Assets (excluding cash and cash equivalents)
• Decrease in Inventories (stock) xxxx
• Decrease in Trade Receivables (Debtors and B/R) xxxx
• Decrease in Prepaid Expenses and accrued incomes etc. (if any) xxxx

Increase in Current Liabilities

• Increase in Trade Payables (creditors and Bills Payable) xxxx
• Increase in outstanding expenses or advance incomes (if any) xxxx
• Increase in provision for doubtful debts xxxx xxxx
Less :
Increase in Current Assets (excluding cash and cash equivalents)
• Increase in Inventories (stock) xxxx
• Increase in Trade Receivables (Debtors and B/R) xxxx
• Increase in Prepaid Expenses and accrued incomes etc. (if any) xxxx

Decrease in Current Liabilities

• Decrease in Trade Payables (creditors and Bills Payable) xxxx
• Decrease in outstanding expenses or advance incomes (if any) xxxx
• Decrease in provision for doubtful debts xxxx (xxxx)
xxxx
Cash Generated from Operation
(xxxx)
Less : Income Tax Paid (excluding Tax Refund)
Cash Flow before Extraordinary Items xxxx

Add : Extraordinary Credit items xxxx

(xxxx)
Less : Extraordinary Debit items

Net Cash Flow from (used in) Operating Activities xxxx

 How to calculate the Cash Flow from Investing Activities

Add Items :
xxxx
Proceeds from sale of Fixed Tangible Assets (Land, Building, Machinery, Furniture etc.)
xxxx
Proceeds from sale of Fixed Intangible Assets (Patents, Trademark and Copyright etc.)
xxxx
Proceeds from sale of Investments (short-term or long-term)
xxxx
Proceeds from loans and advances (repayment by the outsiders to the firm)
xxxx
Interest received on investments (short-term or long-term)
xxxx
Interest received on loans and advances
xxxx
Interest received on debentures held as investments
xxxx
Dividend received
xxxx
Rent received
Less Items :
Purchase of Fixed Tangible Assets (xxxx)
Purchase of Fixed Intangible Assets (xxxx)
Purchase of Investments (shares, debentures, bonds etc.) (xxxx)
Amount advanced to outsiders as loan (xxxx)
Insurance claim received against the loss of fixed assets (xxxx)

Cash flow from (used in) Investing Activities xxxx

How to calculate Cash Flow from Financing Activities

xxxx
Proceeds from issue of Equity Share Capital xxxx
xxxx
(with premium but exclude discount and share issue expenses, if any)
xxxx
Proceeds from issue of Pref. Share Capital (with premium but exclude discount, if any) xxxx
(with premium but exclude discount and share issue expenses, if any) Add xxxx
Proceeds from issue of Debentures xxxx
(with premium but exclude discount and debenture issue expenses, if any) xxxx
Proceeds from other Long-term Borrowings (loans etc.) xxxx

Redemption of Pref. Shares (with premium paid on redemption) (xxxx)

(xxxx)
Redemption of Debentures (with premium paid on redemption) (xxxx)
Dividend paid Less (xxxx)
Interest paid (on debentures or loans) (xxxx)
Repayment of loans

Cash flow from (used in) Financing Activities xxxx

 How to calculate Cash and Cash Equivalents?
Cash Flow from (used in) Operating Activities xxxx
ADD Cash Flow from (used in) Investing Activities xxxx
Cash Flow from (used in) Financing Activities xxxx

Net Increase or Decrease in Cash and Cash Equivalents xxxx

Add : Cash and Cash Equivalents in the beginning xxxx

Cash and Cash Equivalents at the end xxxx