CORPORATE ACCOUNTING

CS EXECUTIVE PROF. FATEMA KAGALWALA (CS, LLB, MCOM)

CASH FLOW STATEMENT

INTRODUCTION
 When it is desired to explain to management the sources of cash and its uses during a particular
period of time, a statement known as cash flow statement is prepared.

 A statement of cash flows reports the inflows (receipts) and outflows (payments) of cash and its
equivalents of an organisation during a particular period. It provides important information that
compliments Statement of Profit & Loss and balance sheet.

 A statement of cash flow reports cash receipts and payments classified according to the entities'
major activities - operating, investing and financing during the period. This statement reports a
net cash inflow or net cash outflow for each activity and for the overall business.

 It also reports from where cash has come and how it has been spent. It explains the causes for the
changes in the cash balance. In substance, the cash flow statement summarises a myriad of
specific cash transactions into a few categories for a business entity.

 The statement of cash flows reports the cash receipts, cash payments, and net changes in cash
resulting from operating, investing and financing activities of an enterprise during a period in a
format that reconciles the beginning and ending cash balances.

 The cash flow statement should be prepared in line with the stipulations given in AS-3.

APPLICABILITY OF AS-3 CASH FLOW STATEMENTS

The applicability of Cash flow statement has been defined under the Companies Act, 2013. As per the
definition in the act, a financial statement includes the following:
i. Balance sheet
ii. Profit and loss account / Income and expenditure account
iii. Cash flow statement
iv. Statement of changes in equity
v. Explanatory notes

As per AS 3:
For Companies - As per the Companies Act, 2013, Cash Flow Statement is required to be prepared by
every company except a one person, small and dormant company.

For non-companies - AS 3 is not mandatory for entities falling in Level II and Level III

IMPORTANT TERMS
CASH: Cash Comprises of Cash in Hand & Demand Deposits with Banks.

CASH EQUIVALENTS: 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 equivalents are held for the purpose of meeting short term cash commitments rather than
for investments or other purposes. Examples of cash equivalents are treasury bills, commercial paper
etc.

CASH FLOWS: Cash Flows are Inflows & Outflows of Cash & Cash Equivalent. The difference between
cash inflow & cash outflow is known as Net Cash Flow which can be either Net Cash Inflow or Net Cash
Outflow.

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CORPORATE ACCOUNTING
CS EXECUTIVE PROF. FATEMA KAGALWALA (CS, LLB, MCOM)

UTILITY OF CASH FLOW ANALYSIS

1. Helps in efficient cash management: Cash flow analysis helps in evaluating financial policies and
cash position. Cash is the basis for all operations; hence a projected cash flow statement will enable
the management to plan and coordinate the financial operations properly. The management can know
how much cash is needed, from which source it will be derived, how much can be generated internally
and how much could be obtained from outside.

2. Helps in internal financial management: Cash flow analysis provides information about funds which
will be available from operations. This will help the management in determining policies regarding
internal financial management, e.g., possibility of repayment of long-term debts, dividend policies and
planning the replacement of plant and machinery.

3. Discloses the movements of cash: Cash flow statement discloses the complete story of cash
movement. The increase or decrease in cash, and the reasons therefore can be known. It discloses the
reasons for low cash balance in spite of heavy operating profits or for heavy cash balance in spite of
low profits. However, comparison of original forecast with the actual results highlights the trends of
movements of cash which may otherwise go undetected.

4. Discloses success or failure of cash planning: The extent of success or failure of cash planning can
be known by comparing the projected cash flow statement with the actual cash flow statement so
that necessary remedial measures can be taken.

5. Evaluate management decisions: The statement of cash flows reports the companies' investing and
financing activities and thus gives the investors and creditors about cash flow information for
evaluating managers' decisions.

6. Show the relationship of net income to changes in the business cash: Usually cash and net income
move together. High levels of income tend to lead to increase in cash and vice-versa. However, a
company's cash balance can decrease when its net income is high, and cash can increase when income
is low. The users want to know the difference between the net profit and net cash provided by
operations. The net profit shows the progress of the business during the year while cash flow relates
more to the liquidity of the business. The users can assess the reliability of net profit with the help of
cash flow statement.

7. Efficiency in cash management: Cash flow analysis helps in evaluating financial policies and cash
position. It facilitates the management to plan and co-ordinate the financial operations properly. The
management can estimate how much funds are needed, from which source they will be derived, how
much can be generated internally and how much should be arranged from outside.

LIMITATIONS OF CASH FLOW ANALYSIS

1. Cash flow statement cannot be equated with the income statement. An income statement takes
into account both cash as well as non-cash items; therefore, net cash does not necessarily mean net
income of the business.

2. The cash balance as disclosed by the cash flow statement may not represent the real liquid position
of the business since it can be easily influenced by postponing purchases and other payments.

3. Cash flow statement cannot replace the income statement or the funds flow statement. Each of
them has a separate function to perform.

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CORPORATE ACCOUNTING
CS EXECUTIVE PROF. FATEMA KAGALWALA (CS, LLB, MCOM)

In spite of these limitations it can be said that cash flow statement is a useful supplementary
instrument. It discloses the volume as well as the speed at which the cash flows in the different
segments of the business. This helps the management in knowing the amount of capital tied up in a
particular segment of the business. The technique of cash flow analysis, when used in conjunction
with ratio analysis, serves as a barometer in measuring the profitability and financial position of the
business.

CLASSIFICATION OF CASH FLOW STATEMENT:

The cash flow statement during a period in classified into three main categories of cash inflows and
cash outflows i.e. operating, investing and financing activities

CASH FLOW FROM OPERATING ACTIVITIES: (Related to Income & Expenses)

Operating activities are the principal revenue-producing activities of the enterprise and other activities
that are not investing and financing activities. Operating activities include cash effects of those
transactions and events that enter into the determination of net profit or loss.

A business's normal operations result in both cash receipts and cash payments. Cash receipts result
from selling goods and providing services. The cost of goods sold and other operative expenses result
in cash disbursements. The revenues and expenses reported in the income statement, however, do
not coincide with the cash receipts and payments as we prepare the income statement on an accrual
basis. The receipts and payments of cash for these revenues and expenses may occur in either an
earlier or later period than the period we report the revenues and expenses.

There are two methods of converting net profit into net cash flows from operating activities:

1 DIRECT METHOD:
Under direct method, cash receipts from operating revenues and cash payments for operating
expenses are arranged and presented in the cash flow statement. The difference between cash
receipts and cash payments is the net cash flow from operating activities. It is in effect a cash basis
Statement of Profit & Loss.

In this case each cash transaction is analysed separately and the total cash receipts and payments for
the period is determined.

The following are some examples of usual cash receipts and cash payments resulting from operating
activities:
(i) Cash sales of goods and services;
(ii) Cash collected from debtors (customers);
(iii) Cash receipts of interest or dividends;
(iv) Cash receipts of royalties, fees, commission and other revenues;
(v) Cash payments to suppliers (creditors);
(vi) Cash payments for various operating expenses i.e. rent, rates, power etc.
(vii) Cash payments for wages and salaries to employees;
(viii) Cash payments for income tax etc.

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CORPORATE ACCOUNTING
CS EXECUTIVE PROF. FATEMA KAGALWALA (CS, LLB, MCOM)

IMPORTANT FORMULA'S:

1. Cash Collected from Debtors = Opening Balance of Debtors + Credit Sale - Closing Balance of
Debtors

2. Cash Paid to Suppliers = Opening Balance of Creditors + Credit Purchase - Closing Balance of
Creditors

3. Payment to Employees = Opening Outstanding Salary + Salary of Current Year - Closing Outstanding
Salary

4. Interest Paid = Opening Outstanding Interest + Interest of Current Year - Closing Outstanding
Interest

5. Insurance Paid = Insurance Expense of Current Year + Closing Prepaid Insurance - Opening Prepaid
Insurance

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CORPORATE ACCOUNTING
CS EXECUTIVE PROF. FATEMA KAGALWALA (CS, LLB, MCOM)

2. INDIRECT METHOD: Whereby net profit or loss is adjusted for the effect 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.

CASH FLOW FROM INVESTING ACTIVITIES: (Relating to Assets)

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:

 Cash payments to acquire fixed assets (including intangibles). These payments include those
relating to capitalized research and development costs and self-constructed fixed assets;
 Cash receipts from disposal of fixed assets (including intangibles);
 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);
 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);
 Cash advances and loans made to third parties (other than advances and loans made by a financial
enterprise);
 Cash receipts from the repayment of advances and loans made to third parties (other than
advances and loans of a financial enterprise);
 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
 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.

CASH FLOWS FROM FINANCING ACTIVITIES: (Relating to Loans & Equity)

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.

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CORPORATE ACCOUNTING
CS EXECUTIVE PROF. FATEMA KAGALWALA (CS, LLB, MCOM)

TREATMENT OF SPECIAL ITEMS

In addition to the general classification of three types of cash flows, Accounting Standard-3 provides
for the treatment of the cash flows of certain special items as under:

FOREIGN CURRENCY CASH FLOWS

 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 foreign currency at the date of cash flow.

 Unrealised gains and losses arising from changes in foreign exchange rates are not cash flows.
Hence, under Indirect Method in Operating Activities, if Loss or Gain is recognized in the statement
of Profit or Loss account, has to be reversed to nullify its act as they are not cash flows.

 However, the effect of exchange rate changes on cash and cash equivalents held or due in 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
The cash flows associated with extra-ordinary items such as bad debts recovered, claims from
insurance companies, winning of a law suit or lottery etc, are disclosed separately as arising from
operating, investing or financing activities as the case may be, in the cash flow statement.

INTEREST AND DIVIDENDS

According to Accounting Standard-3 (Revised), the treatment of interest and dividends, received and
paid, depends upon the nature of the enterprise, that is, financial enterprises and other enterprises.

(i) In the case of financial enterprises: Cash flows arising from interest paid and interest and dividends
received, should be classified as cash flows from operating activities. Dividends paid should be
classified as cash flows from financing activities.

(ii) In the case of other enterprises:

 cash flows arising from interest paid should be classified as cash flows from financing activities
 cash flows arising from interest and dividends received should be classified as cash flows from
investing activities;
 Dividends paid should be classified as cash flows from financing activities.

Element Financial Enterprises Other Enterprises

Interest Paid Operating Activities Financing Activities
Dividend Paid Financing Activities Financing Activities
Interest Received Operating Activities Investing Activities
Dividend Received Operating Activities Investing Activities

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CORPORATE ACCOUNTING
CS EXECUTIVE PROF. FATEMA KAGALWALA (CS, LLB, MCOM)

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.

 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 treated as cash flows from operating activities.

 However, in case it is possible to identify the tax cash flow with an individual transaction that gives
rise to cash flows that are classified as investing or financing activities, it is appropriate to classify
the tax cash flow as an investing or financing activity.

NON-CASH TRANSACTIONS
 Investing and financing transactions that do not require the use of cash or cash equivalents should
be excluded from a cash flow statement.

 The exclusion of non-cash transactions from the cash flow statement is consistent with the
objective of a cash flow statement as these do not involve cash flows in the current period.

 Following are examples of noncash transactions:

(i) the acquisition of assets by assuming directly related liabilities.
(ii) the acquisition of an enterprise by means of issue of shares.
(iii) conversion of debt into equity.

 So, under direct method of Operating Activities or Financing or Investing Activities, we should
ignore the non-cash transactions. However, under Indirect Method of Operating Activities, if some
effect has been taken while calculating profits then we have to reverse it to nullify the effect.

FORMAT OF CASH FLOW STATEMENT

Accounting Standard-3 (Revised) has not provided any specific format for the preparation of cash flow
statements, but a general idea can be had from the illustration appearing thereof. There seems to be
flexibility in the presentation of cash flow statements. However, a widely accepted format under direct
method and indirect method is given below:

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CORPORATE ACCOUNTING
CS EXECUTIVE PROF. FATEMA KAGALWALA (CS, LLB, MCOM)

DIRECT METHOD

Cash Flow from Operating Activities:

Cash Receipts from customers
(-) Cash Paid to suppliers & employees
Cash generated from operations
(-) Income tax paid
Cash flow before extraordinary items
(+) Proceeds from earthquake disaster settlement
Net cash from Operating Activities (A)

Cash Flow from Investing Activities

(-) Purchase of Fixed Assets
(+) Proceeds from sale of equipment
(+) Interest received
(+) Dividend received
Net cash from Investing Activities (B)

Cash Flow from Financing Activities

(+) Proceeds from Issue of Share Capital
(+) Proceeds from Long term Borrowings
(-) Repayments of Long term Borrowings
(-) Interest Paid
(-) Dividend paid
Net cash from Financing Activities (C)

Net Increase (Decrease) in Cash and Cash Equivalents (A+B+C)

(+) Cash and Cash Equivalents at Beginning of Period
(=) Cash and Cash Equivalents at End of Period

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CORPORATE ACCOUNTING
CS EXECUTIVE PROF. FATEMA KAGALWALA (CS, LLB, MCOM)

INDIRECT METHOD

Cash Flow from Operating Activities:

Net profits before tax & extraordinary items

Adjustments for:
Non Cash Nature:
(+) Depreciation
(+) Amortization of Intangible Assets, Preliminary Expenses, etc
(+)/(-) Foreign Exchange

Relating to Investing or Financing:

(+)/(-) Profit or loss on sale of Investments
(+)/(-) Gain or loss on sale of Fixed Assets
(+)/(-) Interest or Dividend

Operating Profit before working capital changes

Adjustments for:
Working Capital Changes
(-) Increases in Current Assets
(+) Decreases in Current Assets
(+) Increases in Current Liabilities
(-) Decreases in Current Liabilities

Cash generation from operations

(-) Tax Paid
(-) Extraordinary Items

Net cash from Operating Activities (A)

Cash Flow from Investing Activities

(-) Purchase of Fixed Assets
(+) Proceeds from sale of equipment
(+) Interest received
(+) Dividend received
Net cash from Investing Activities (B)

Cash Flow from Financing Activities

(+) Proceeds from Issue of Share Capital
(+) Proceeds from Long term Borrowings
(-) Repayments of Long Term Borrowings
(-) Interest Paid
(-) Dividend paid
Net cash from Financing Activities (C)

Net Increase (Decrease) in Cash and Cash Equivalents (A+B+C)

(+) Cash and Cash Equivalents at Beginning of Period
(=) Cash and Cash Equivalents at End of Period

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CORPORATE ACCOUNTING
CS EXECUTIVE PROF. FATEMA KAGALWALA (CS, LLB, MCOM)

Illustrations

1. The following information is available from the books of Exclusive Ltd. for the year ended 31st
March, 2005:
(i) Cash sales for the year were Rs. 10,00,000 and sales on account Rs. 12,00,000.
(ii) Payments on accounts payable for inventory totalled Rs. 7,80,000.
(iii) Collection against accounts receivable were Rs. 7,60,000.
(iv) Rent paid in cash Rs. 2,20,000, outstanding rent being Rs. 20,000.
(v) 4,00,000 Equity shares of Rs.10 par value were issued for Rs. 48,00,000.
(vi) Equipment was purchased for cash Rs. 16,80,000.
(vii) Dividend amounting to Rs. 10,00,000 was declared, but yet to be paid.
(viii) Rs. 4,00,000 of dividends declared in the previous year were paid.
(ix) An equipment having a book value of Rs. 1,60,000 was sold for Rs. 2,40,000.
(x) The cash account was increased by Rs. 37,20,000.
Prepare a cash flow statement using direct method.

2. Madhuri Ltd. gives you the following information for the year ended 31st March, 2006:
(i) Sales for the year totalled Rs.96,00,000. The company sells goods for cash only.
(ii) Cost of goods sold was 60% of sales.
(iii) Closing inventory was higher than opening inventory by Rs.43,000.
(iv) Trade creditors on 31st March, 2006 exceeded those on 31st March, 2005 by Rs.23,000.
(v) Tax paid amounted to Rs.7,00,000.
(vi) Depreciation on fixed assets for the year was Rs.3,15,000 whereas other expenses totalled
Rs.21,45,000.
Outstanding expenses on 31st March, 2005 and 31st March, 2006 totalled Rs.82,000 and Rs.91,000
respectively.
(vii) New machinery and furniture costing Rs.10,27,500 in all were purchased.
(viii) A rights issue was made of 50,000 equity shares of Rs.10 each at a premium of Rs.3 per share.
The entire money was received with applications.
(ix) Dividends totalling Rs.4,00,000 were distributed among shareholders.
(x) Cash in hand and at bank as at 31st March, 2005 totalled Rs.2,13,800. You are required to
prepare a cash flow statement using direct method. (10 marks)

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CORPORATE ACCOUNTING
CS EXECUTIVE PROF. FATEMA KAGALWALA (CS, LLB, MCOM)

Q.3 From the following balance sheets of A Ltd make out the statement of cash flow
Liabilities 1999 2000 Assets 1999 2000
Eq share capital 300,000 400,000 Goodwill 115,000 90,000
8% redeem. Pref 150,000 100,000 Land and building 200,000 170,000
shares
GR 40,000 70,000 Plant 80,000 200,000
P/L 30,000 48,000 Debtors 160,000 200,000
Prop. Divid 42,000 50,000 Stock 77,000 109,000
Creditors 55,000 83,000 Bills receivable 20,000 30,000
Bills payable 20,000 16,000 Short term 15,000 10,000
investments
Prov for taxation 40,000 50,000 Cash in hand 10,000 8,000
677,000 817,000 677,000 817,000

Additional information
 Depreciation of Rs 10,000 and Rs 20,000 have charged on plant account and land and building
account respectively in2000.
 An interim dividend of rs 20,000 has been paid in 2000
 Income tax Rs 35,000 was paid during the year in 2000
 Short term investments are sold at a profit of Rs 3000

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CORPORATE ACCOUNTING
CS EXECUTIVE PROF. FATEMA KAGALWALA (CS, LLB, MCOM)

PAST EXAM QUESTIONS

The Capital structure of Sangam Ltd. is given below:

Particulars ₹ (Crore)
Share Capital (divided in shares of 10/- each) 5,000

Secured Loans 4,000

Unsecured Loans 2,500

In the next year the company is undertaking an expansion project of ₹ 1,500/- crore.

The project is to be financed in the ratio of 40% infusion of fresh owner capital and 60% secured debt
capital. No old debt is repaid during the year.

The equity capital will be raised at ₹ 15/- per share. The average interest rate of the debt (old + new)
will be 13%.

The income tax rate is 25%.

Prepare a statement showing forecast cash flow from financing activities.

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CORPORATE ACCOUNTING
CS EXECUTIVE PROF. FATEMA KAGALWALA (CS, LLB, MCOM)

The summarized information of CBA Limited is given below :

Balance Sheet of CBA Ltd. on 1st April 2022 to 31st March 2023

Amount (in ₹)

Particulars 1st April 2022 31st March, 2023

I. Equities and Liabilities
Equity Share Capital 9,00,000 10,50,000
Share Premium — 90,000
General Reserve 1,35,000 1,95,000
Profit and Loss Account 90,000 2,42,400
10% debentures — 2,10,000
Sundry Creditors 2,55,000 2,72,100
Provision for Taxation 67,500 1,21,500
Proposed Dividend 90,000 1,05,000
Total 15,37,500 22,86,000

II. Assets
Land and Building 6,90,000 11,70,000
Plant and Machinery 2,56,200 4,20,000
Furniture 16,500 19,500
Stock 2,47,200 2,87,100
Sundry Debtors 2,25,000 2,56,500
Bank 1,02,600 1,32,900
15,37,500 22,86,000

Depreciation during the year : Amount (in ₹ )

Land and Building 1,80,000

Plant and Machinery 1,50,000

Furniture 3,600

Debentures were issued on 1st October, 2022.

Prepare Cash Flow Statement of CBA Limited for the financial year ended 31st March, 2023.

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CORPORATE ACCOUNTING
CS EXECUTIVE PROF. FATEMA KAGALWALA (CS, LLB, MCOM)

(a) From the following summary of bank account of X. Ltd., prepare Cash Flow Statementfor the year
ended 31st March, 2023 :
Summary of Bank Account for the year ended 31.3.2023
Particulars Amount in Particulars Amount in
₹ in lakh ₹ in lakh
To Balance b/d 50 By Payments to Suppliers 2,000
To Issue of Equity Shares 300 By Purchase of Fixed Assets 200
To Receipts from By Overhead Expenses 200
Customers 2,800 By Wages and Salaries 100
To Sales of Fixed Assets 100 By Income Tax 250
By Dividend 50
By Repayment of Bank Loan 300
By Balance c/d 150
Total 3,250 Total 3,250

Assume that the company does not have any cash and cash equivalents and there were NIL cash
transaction.

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