CASH FLOW

STATEMENT
 MEANING OF CASH FLOW STAEMENT

Cash flow statement is summary of cash book which shows the

movement of cash & cash equivalent from one period to another
period under following Activities:
▪ Cash flow from Operating Activities
▪ Cash flow from Investing Activities
▪ Cash flow from Financing Activities

FORMAT OF CASH FLOW STAEMENT

Particulars Rs. Rs.

A- Cash Flow From Operating Activities xxx

B- Cash Flow From Investing Activities xxx

C- Cash Flow From Financing Activities xxx

Net Increase (Decrease) in cash & Cash Equivalent xxx
(A + B + C) xxx
Add: Opening cash & cash Equivalent
Closing cash & cash Equivalent xxx

MEANING OF INVESTING ACTIVITIES

Those Activities which are related with acquisition of Fixed Assets and
Long term Investments are called Investing Activities

CASH FLOWS FROM INVESTING ACTIVITIES

In flows Out flows

▪ Sale of Fixed Assets (PPEs & I.A.)

▪ Sale of Investments
▪ Pre Acquisition dividend
▪ Income from Investments ▪ Purchase of Fixed
▪ Interest Assets
▪ Dividend ▪ Purchase of
▪ Rent Investments
▪ Loan & Advance (Including to ▪ Expenditure on
Subsidiary company) Construction of PPE
(Other than Advances to Supplier and Development of
& Employees) I.A.
▪ Interest on Loan & Advance ▪ Loan & Advances
(Other than on Advances to Given
Supplier & Employees)
▪ TDS on Interest & Dividend
Received
 MEANING OF FINANCING ACTIVITIES
Those Activities which are related with issue and repayment of
share capital and Loans & borrowing and its cost of capital are
called Financing Activities

CASH FLOWS FROM FINANCING ACTIVITIES

In flows Out flows

▪ Buy back of Equity

shares
(including premium on
▪ Proceeds from Issue of Buy back)
Equity & Preference ▪ Redemption of
shares and Debentures preference shares and
(Including premium on Debentures
Issue) (including premium paid
▪ Raising of Loan on redemption)
▪ Any Capital Grant ▪ Repayment of Loan
received ▪ Interest Paid
▪ Dividend Paid
▪ TDS paid on Interest &
Dividend

MEANING OF OPERATING ACTIVITIES

▪ Operating Activities are those activities which are neither
Investing nor Financing Activities.
▪ These are principal revenue generating activities of Business
▪ As per AS 3, Cash flow from Operating Activities can be
calculated by two method:
▪ Direct Method
▪ Indirect Method

Note:
▪ When we say cash flow statement by Direct or Indirect method,
it is only with reference to Operating Activities.
▪ Investing & Financing activities are always calculated by Direct
method. There is no Indirect method for Investing & Financing
Activities
▪ Payment of Tax and Cash flow from Extra ordinary items will be
shown separately in cash flow statement to show the impact of
these items on current year cash flow.
▪ Cash flow from Extra ordinary items Includes following:
▪ Cash received from Insurance company as Insurance
claim
▪ Payment for any Voluntary retirement
 CASH FLOWS FROM OPERATING ACTIVITIES
UNDER DIRECT METHOD

In flows Out flows

▪ Cash Purchase of Goods

▪ Cash sale of Goods
▪ Payment to Trade payables
▪ Collection from Trade
▪ Payment for All operating
Receivables
Expenses
▪ Trading commission
▪ Payment of Tax

CASH & CASH EQUIVALENT

As per AS 3, ‘Elements of Cash are:
(a) Cash in hand and Demand deposits with banks (Bank Balance)
(b) Cash equivalents

Cash equivalents include:

▪ 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
▪ Securities with short maturity period of, say, three months or
less from the date of acquisition such as:
▪ Acquisition of preference shares shortly before their
specified redemption date,
▪ Bank deposits with short maturity period, etc.

Followings are not flow of cash, so not to be considered while

preparing Cash Flow statement:
▪ Cash deposited into Bank or withdrawn from Bank
▪ Purchase / sale of Marketable securities which are having
insignificant risk of changes in value (Cash Equivalent)
▪ Issue of Bonus shares or shares issued on conversion of
Pref Shares or Debentures
▪ Purchase of Assets and consideration paid in shares or
debentures of the company
 Classify following into Operating, Investing and
Financial Activities
Items Activities
Loans and Advances given to the following
and interest earned on them:
(1) to suppliers

(2) to employees

(3) to its subsidiaries companies

Investment made in subsidiary Smart Ltd.
and dividend received
Dividend paid for the year
TDS on interest income earned on
investments made
TDS on interest earned on advance given to
suppliers
Insurance claim received against loss of
fixed asset by fire
Brokerage paid on purchase of investments
Underwriting commission paid
Trading commission received
Proceeds from sale of investment
Purchase of goodwill
Redemption of preference shares
Rent received from property held as
investment
Interest paid on long-term borrowings
Marketable securities (having risk of change
in value)
Refund of income tax received
The following summary cash account has been extracted
from the company’s accounting records, Prepare Cash Flow
Statements:
Summary Cash Account
(‘000)
Balance at 1-1-08 35
Receipts from customers 2,783
Issue of shares 300
Sale of fixed assets 128
Income from Investments 500
3,746
Payments to suppliers 2,047
Payments for fixed assets 230
Payments for overheads 115
Wages and salaries 69
Taxation 243
Dividends 80
Repayments of bank loan 250

3,034
Balance at 31-12-08 (3,746 – 3034) 712

Cash flow Statement by Direct Method

Particulars Rs. Rs.

A- Cash flow from Operating Activities
Receipts from customers 2,783
Payment to Suppliers (2047)
Payment for Overhead (115)
Payment for wages & salaries (69)
Cash from operation before Tax 552
Less: Tax Paid (243)
A - Cash flow from Operating Activities 309
B - Cash flow from Investing Activities
Income from Investments received 500
Sale of Fixed Assets 128
Purchase of Fixed Assets (230) 398
C - Cash flow from Investing Activities
Issue of shares 300
Payment for Dividend (80)
Repayment of Bank loan (250) (30)
Net Increase (Decrease) In cash & CE 677
Add: opening Cash & CE 35
Closing Cash & CE 712
 CALCULATION OF OPERATING ACTIVITIES UNDER
INDIRECT METHOD

▪ Under Indirect method, we convert net profit of entity into cash

operating profit and such cash operating profit will be cash
flow from operating Activities.

Statement Showing Cash flow from operating activities under

Indirect Method
Particulars Rs. Rs.
Change in Profit as per Balance sheet xxx
Add: Transfer to Reserve xxx
Add: Dividend Declared xxx
Add: Provision for Tax xxx
Profit Before Tax xxx
Add: Non-Cash expenses
▪ Depreciation of PPEs xxx
▪ Amortization of Goodwill and other
Intangibles xxx
▪ Preliminary Expenses written off xxx
Add (Less): Non operating expenses /
Losses/ Incomes
▪ Interest Expenses xxx
▪ Loss on sale of Fixed Asset /
Investments xxx
▪ Premium on redemption of debenture
/ pref. shares which has been written
off xxx
▪ Discount on issue of debentures w/o
▪ Income from Investments(Interest, xxx
dividend, rent) (xxx)
▪ Profit on sale of Fixed Asset /
Investments (xxx)
Cash from operation before change in
working capital xxx
Add/Less: Changes in working capital
▪ Increase in current liabilities xxx
▪ Decrease in current assets xxx
▪ Increase in current assets (xxx)
▪ Decrease in current liabilities (xxx)
Cash from operation before Tax xxx
Less: Tax Paid (xxx)
Cash flow from Operating Activities xxx
 CALCULATION OF OPERATING ACTIVITIES UNDER
INDIRECT METHOD

Example 1
From following Details, prepare Cash Flow Statement
Rs.
▪ Net profit after considering below mentioned items 10,00,000
▪ Provision for tax is 2,00,000
(Tax Paid is Rs. 1,80,000)
▪ Depreciation on F.A. 50,000
▪ Amortization of Goodwill 1,00,000
▪ Interest Expense 56,000
(Interest Actually Paid Rs. 50,000)
▪ Income on Investment earned 60,000
(Income Actually received Rs. 62,000)

Other Details for Investing and Financing

▪ Purchase of Fixed Assets 3,00,000

▪ Sale of Fixed Assets 1,80,000
▪ Sale of Investments 1,56,000
▪ Purchase if Investments 1,00,000
▪ Pre Acquisition dividend Received 30,000
▪ Issues of 10,000 shares of Rs. 10 at 20% Premium
▪ Redemption of 1500 debentures of Rs. 100 at 125 per
debentures

Details of Current Assets and current Liabilities

Opening Closing
Stock 1,50,000 2,10,000
Debtors 1,10,000 95,000
Creditors 1,20,000 1,35,000
B/P 10,000 18,000
B/R 6,000 8,000
Cash & Cash Equivalent 60,000 11,45,000
 Cash flow Statement by Indirect Method

Particulars Rs. Rs.

Profit after Tax 10,00,000
Add: Provision for Tax 2,00,000
Profit Before Tax 12,00,000
▪ Depreciation of F.A. 50,000
▪ Amortization of Goodwill 1,00,000
▪ Interest Expenses 56,000
▪ Income on Investments (60,000)
▪ Premium on Redemption of Deb 37,500
Cash from operation before change in
working capital 13,83,500
Add/Less: Changes in working capital
▪ Increase in Stock (60,000)
▪ Decrease in Debtors 15,000
▪ Increase in Creditors 15,000
▪ Increase in B/P 3,000
▪ Increase in B/R (2,000)
Cash from operation before Tax 13,54,500
Less: Tax Paid 1,80,000
A- Cash flow from Operating Activities 11,74,500

B - Cash flow from Investing Activities

Income from Investments received
Purchase of Fixed Assets 62,000
Sale of Fixed Assets (3,00,000)
Sale of Investments 1,80,000
Purchase of Investments 1,56,000
Pre-Dividend Received (1,00,000)
30,000 28,000
C - Cash flow from Investing Activities
Interest paid (50,000)
Issue of shares 1,20,000
Redemption of Debentures (1,87,500) (1,17,500)
Net Increase (Decrease) In cash & CE 10,85,000
Add: opening Cash & CE 60,000
Closing Cash & CE 11,45,000
 PREPARATION OF FIXED ASSETS A/C

F.A. A/C IS PREPARED F.A. A/C IS

AT WDV PREPARED AT COST

WHEN F.A. A/C IS PREPARED AT WDV

▪ In this case, Depreciation charged in current year is credited in

Assets a/c.
▪ When Asset is sold, then its WDV on the date of sale is credited
in Asset a/c
▪ Opening and Closing Balance of Assets are also shown at WDV.

Fixed Assets a/c (AT WDV)

Particulars Rs. Particulars Rs.
To Balance b/d xxx By Bank xxx
To Profit on sale xxx (Sale Proceeds)
To Bank (b/f) (Purchase) xxx By Loss on sale xxx
By Depreciation of C.Y. xxx
By Balance c/d xxx
xxx xxx

WHEN F.A. A/C IS PREPARED AT COST

▪ In this case, Opening & Closing Balance of Asset, Purchase and sale
all will be shown at cost in Asset a/c
▪ Depreciation charged in current year is credited in a separate a/c
known as Provision/ Accumulated Depreciation a/c
▪ When Asset is sold, then its cost is credited in Asset a/c and
Accumulated Dep on such Asset is debited to Accumulated
Depreciation a/c

Fixed Assets a/c (AT COST)

Particulars Rs. Particulars Rs.
To Balance b/d xxx By Bank (Sale Proceeds) xxx
To Profit on sale (If any) xxx By Accumulated Dep on xxx
To Bank (b/f) (Purchase) xxx Asset sold xxx
By Loss on sale (If any) xxx
By Balance c/d xxx
xxx xxx

Accumulated Depreciation a/c

Particulars Rs. Particulars Rs.
To Accumulated Dep on xxx By Balance b/d xxx
Asset sold By Depreciation of C.Y. xxx
To Balance c/d xxx
xxx xxx
Example 2
31-03-23 31-03-24
Machinery 1,50,000 2,50,000
In current year, Machine costing Rs. 2,00,000, Accumulated
Depreciation Rs. 50,000 sold for Rs. 1,20,000. Depreciation of
current year was Rs. 80,000. Prepare Machinery a/c and calculate
Machine purchased.

Example 3
31-03-23 31-03-24
Machinery 10,00,000 16,00,000

In current year, Machine costing Rs. 5,00,000, Accumulated

Depreciation Rs. 3,50,000 sold for Rs. 1,80,000. Depreciation rate
was 20% p.a. Assets are purchased and sold at beginning of the
year. Prepare Machinery a/c and calculate Machine purchased.

Example 5
31-03-23 31-03-24
Machinery 5,00,000 8,00,000
Accumulated Depreciation 1,80,000 2,70,000

In current year, Machine costing Rs. 1,20,000, Accumulated

Depreciation Rs. 50,000 sold for Rs. 60,000. Calculated Asset
purchased and Depreciation of current year

Example 6
31-03-23 31-03-24
Machinery 15,00,000 18,00,000
Accumulated Depreciation 6,00,000 8,70,000

In current year, Machine costing Rs. 5,00,000 Accumulated

Depreciation Rs. 3,00,000 sold for Rs. 2,50,000. Calculated Asset
purchased and Depreciation of current year
 TAX ADJUSTMENT

PROVISION FOR TAX IS

PROVISION FOR TAX IS
GIVEN WITHOUT
GIVEN WITH BALANCE OF
BALANCE OF ADVANCE
ADVANCE TAX
TAX

PROVISION FOR TAX IS GIVEN WITHOUT BALANCE OF ADVANCE TAX

▪ In this case, provision for tax a/c is prepared in we will
calculate either tax paid in current year or Tax provision made
(Tax Provided) in current year

Provision for Tax a/c

Particulars Rs. Particulars Rs.
To Bank (b/f) xxx By Balance b/d (Given) xxx
To Balance c/d (Given) xxx By P&L xxx
xxx xxx

Example 7
31-03-23 31-03-24
Provision for Tax 5,00,000 8,00,000

Example 8
31-03-23 31-03-24
Provision for Tax 3,00,000 6,50,000

Tax paid in 2023-24 is Rs. 3,30,000

Example 9
31-03-23 31-03-24
Provision for Tax 4,00,000 6,00,000

Tax Provision made in 2023-24 is Rs. 4,50,000

 DIVIDEND ADJUSTMENT
DIVIDEND PROPOSED / DECLARED

If Given with in Balance If Given out side the

Sheet Balance Sheet

▪ Current year Dividend

▪ Current year Dividend
will be added to Net
will be ignored
Profit
▪ Previous year dividend
▪ Previous year dividend
will be added to Net
will be treated as
profit and also shown
payment in current year
as out flow of financing
and shown as out flow
activities
of financing activities

TREATMENT INTERIM DIVIDEND

▪ Add in Net Profit

▪ Show as out flow in financing activities
CONSOLIDATED
FINANCIAL
STATEMENTS
 MEANING OF HOLDING COMPANY AND
SUBSIDIARY COMPANY
▪ Holding company means a company which control another company.
▪ Subsidiary company means a company which is controlled by another
company (Holding company)

HOW CONTROL ACQUIRED

Control is acquired when a company:

▪ Acquired more than 50% voting power of another company OR
▪ Have power to compose Board of directors of another company
Note:
▪ Voting power is acquired when equity shares are purchased. There is
no voting power in case of preference shares.

▪ Right to compose Board of director means any director can be

appointed or removed or his position can be changed.

CONSOLIDATED FINANCIAL STATEMENT (CFS)

CFS Includes Following

Consolidated Consolidated Consolidated Consolidated

Balance Profit & Loss Cash Flow Notes to
Sheet Statement Statement Accounts

CONSOLIDATION WITH SUBSIDIARIES AS PER AS

▪ Consolidation with subsidiaries will be as per AS 21

▪ AS 21 does not mandate to prepare Consolidated Financial

Statement (CFS), It only specify the process and procedure for
preparation of CFS.

▪ It means, AS 21 will be applied only when a company is preparing

CFS with its subsidiaries.

▪ AS 21 specify to prepare CFS on the basis of full consolidation

method
CONSOLIDATION PROCESS OF BALANCE SHEET AS PER
AS 21

▪ Every Holding company will consolidate the financial statement of

all its subsidiaries with its own financial statement as per the
process and procedure specified in AS 21 which are as under:
▪ All Assets and All Liabilities of Subsidiary company will be added
with Assets and Liabilities of Holding company on line by line
basis.

▪ Investments in Subsidiary companies will be replaced with net

assets of subsidiary company and we calculate cost of control
(Goodwill) or capital reserve by preparing following statement which
is known as cost of control statement:
Cost of Investments xxx
Less: Holding share in Share Capital of Subsidiary (xxx)
Less: Holding share in Pre Acquisition profit (xxx)
Goodwill (Capital Reserve) xxx

▪ Goodwill or Capital Reserve is calculated on the date when

controlling interest is acquired by Holding company (Date of
Acquisition of shares)

▪ Those Net Assets of Subsidiary companies which are not owned by

Holding company but Controlled by Holding company is called
“Minority Interest”

▪ Minority Interest is calculated as under:

Minority Share in Share Capital of Subsidiary xxx
Minority share in Pre Acquisition profit xxx
Minority share in post Acquisition profit xxx
Total Minority Interest xxx

▪ Minority Interest is calculated on each consolidated balance sheet

date.
▪ In consolidated Balance sheet, Minority Interest will be shown in
Separate heading under “Equity and Liabilities” below shareholders
fund but above Non current Liabilities.
▪ Minority Interest is calculated on each consolidated balance sheet
date.
▪ Shareholders fund in Consolidated Balance sheet will consist
following:
▪ Share capital of Holding Company only
▪ Consolidated Balance of Reserve & Surplus

▪ Balance of Consolidated Reserve & Surplus will be calculated as

under
Reserve & Surplus of Holding company xxx
Holding share in in post Acquisition Reserve / profit xxx
Capital Reserve arise under cost of control (If any) xxx
Consolidated Reserve & Surplus xxx
 PROFITS OF SUBSIDIARY COMPANY

PRE - ACQUISSITION POST ACQUISSITION

PROFITS & RESERVES PROFITS & RESERVES

Profit & Reserves earned Profit & Reserves earned

by subsidiary company by subsidiary company
up to the date of after the acquisition of
acquisition of control by control by Holding
Holding company company

Share of
Share of Holding in
Holding in Share of
Share of post
pre profit & Minority
Minority is Reserve &
Reserve is is taken
taken in profit is
Deducted in
Minority Added in
from cost Minority
of Interest respective
Interest
Investment reserve &
profits

HOW TO CALCULATE PREP AND POST PROFITS

Example 1
H Ltd acquire 80% shares in S Ltd for Rs. 15,00,000 on 01-04-2023.
Following details of S Ltd is provided to you on 31-03-2024:
Share capital Rs. 10,00,000
General Reserve Rs. 3,00,000(Rs. 1,20,000 on 01-04-2023)
Profit & Loss Rs. 4,00,000 (Rs. 1,00,000 on 01-04-2023)

Calculate Cost of control, Minority Interest and consolidated R&S

assuming GR and P&L of H Ltd was Rs. 4,00,000 and Rs. 5,00,000

Example 2
H Ltd acquire 70% shares in S Ltd for Rs. 16,00,000 on 01-10-2023.
Following details of S Ltd is provided to you on 31-03-2024:
Share capital Rs. 12,00,000
General Reserve Rs. 4,00,000(Rs. 1,60,000 on 01-04-2023)
Profit & Loss Rs. 6,00,000 (Rs. 2,40,000 on 01-04-2023)

Calculate Cost of control, Minority Interest and consolidated R&S

assuming GR and P&L of H Ltd was Rs. 5,00,000 and Rs. 8,00,000
Example 3
H Ltd acquire 60% shares in S Ltd for Rs. 10,00,000 on 01-08-2023.
Following details of S Ltd is provided to you on 31-03-2024:
Share capital Rs. 11,00,000
General Reserve Rs. 3,00,000(Rs. 1,20,000 on 01-04-2023)
Profit & Loss Rs. 5,00,000 (Rs. 1,40,000 on 01-04-2023)

Calculate Cost of control, Minority Interest and consolidated R&S

assuming GR and P&L of H Ltd was Rs. 5,00,000 and Rs. 8,00,000

IMPORTANT ADJUSTMENTS
1. ABNORMAL LOSS/GAIN

When in current year, there is any abnormal loss or gain in subsidiary

company, then following treatment is required in AOP:
▪ If Abnormal Loss, Add in Closing Balance of Profit
▪ If Abnormal Gain, deduct from Closing Balance of Profit
▪ Apply time adjustment
▪ After that:
▪ Deduct abnormal loss from pre or post profit depending in
which period loss occurred.
▪ Add Abnormal gain in Pre or post profit as the case may
be depending in which period profit arise.

Example 4
H Ltd acquire 80% shares in S Ltd for Rs. 15,00,000 on 01-09-2023.
Following details of S Ltd is provided to you on 31-03-2024:
Share capital Rs. 10,00,000
General Reserve Rs. 3,00,000(Rs. 1,20,000 on 01-04-2023)
Profit & Loss Rs. 4,00,000 (Rs. 1,00,000 on 01-04-2023)

In August 2023, Loss by fire Rs. 1,50,000, Insurance claim Rs. 90,000.
Calculate Cost of control, Minority Interest and consolidated R&S
assuming GR and P&L of H Ltd was Rs. 4,00,000 and Rs. 5,00,000

Example 5
H Ltd acquire 70% shares in S Ltd for Rs. 20,00,000 on 01-08-2023.
Following details of S Ltd is provided to you on 31-03-2024:
Share capital Rs. 20,00,000
General Reserve Rs. 5,00,000 (Rs. 1,40,000 on 01-04-2023)
Profit & Loss Rs. 3,00,000 (Rs. 1,20,000 on 01-04-2023)

Loss by fire:
▪ In July 2023 - Rs. 1,50,000,
▪ In Dec 2023 - Rs. 90,000

Calculate Cost of control and Minority Interest and Consolidated R&S

assuming GR and P&L of H Ltd was Rs. 8,00,000 and Rs. 7,00,000
2. BONUS ISSUE OF SHARES BY SUBSIDIARY COMPANY

▪ When in current year, there is Bonus issue of shares by subsidiary

company, then it increases Share capital of subsidiary company and
decrease Reserve & Surplus (General Reserve or Profit & Loss) of
subsidiary company.
▪ Treatment of Bonus issue is depend on the fact that whether:
▪ Entry for Bonus has not been passed by Subsidiary company
before consolidation
▪ Entry for Bonus has been passed by Subsidiary company
before consolidation

TREATMENT WHEN ENTRY FOR BONUS ISSUE HAS NOT PASSED

BY SUBSIDIARY COMPANY BEFORE CONSOLIDATION

▪ Calculate Bonus Amount

▪ Add Bonus amount in share capital of subsidiary company and
▪ Deduct Bonus amount from Pre or Post Profit of subsidiary company
in AOP depending from which profit, Bonus is distributed.
▪ If nothing specified, always assume Bonus from pre profits

Notes:
▪ There is no change in holding ratio due to issue of bonus shares
▪ Share of holding company and Minority interest in share capital and
Profit will be calculated after the above adjustment of Bonus

Example 6
H Ltd acquire 80,000 shares in S Ltd for Rs. 15,00,000 on 01-09-2023.
Following details of S Ltd is provided to you on 31-03-2024:
Share capital (Rs. 10) Rs. 10,00,000
General Reserve Rs. 3,00,000 (Rs. 1,20,000 on 01-04-2023)
Profit & Loss Rs. 4,00,000 (Rs. 1,00,000 on 01-04-2023)

On 31-03-24, S Ltd issued Bonus shares in the ratio of 1:4 for which no
entry has yet been passed. Calculate Cost of control, Minority Interest
and consolidated R&S assuming GR and P&L of H Ltd was Rs. 4,00,000
and Rs. 5,00,000
TREATMENT WHEN ENTRY FOR BONUS ISSUE HAS PASSED BY
SUBSIDIARY COMPANY BEFORE CONSOLIDATION

When Entry for Bonus has already been passed, then following
procedure will be followed at the time of consolidation:
▪ Calculate Bonus Amount
▪ Add Bonus amount in Closing Balance of General Reserve / Profit
& Loss of subsidiary company in AOP
▪ Calculate increase in General Reserve / Profit & Loss in current
year
▪ Apply time Adjustment
▪ Deduct Bonus Amount from pre or post profit from where bonus
was declared
(If Nothing specified, Bonus is assumed to be deducted from pre
profit)

Example 7
H Ltd acquire 80,000 shares in S Ltd for Rs. 15,00,000 on 01-08-2023.
Following details of S Ltd is provided to you on 31-03-2024:
Share capital (Rs. 10) Rs. 14,00,000
General Reserve Rs. 6,00,000 (Rs. 1,20,000 on 01-04-2023)
Profit & Loss Rs. 7,00,000 (Rs. 1,00,000 on 01-04-2023)

On 01-01-24, S Ltd issued Bonus shares in the ratio of 2:5 for which
entry has already been passed. Calculate Cost of control, Minority
Interest and consolidated R&S assuming GR and P&L of H Ltd was Rs.
8,00,000 and Rs. 15,00,000

3. DIVIDEND DECLARED BY SUBSIDIARY COMPANY

▪ When in current year, there is Dividend declared by subsidiary

company after the purchase of shares by Holding company, then
Holding company will also received dividend from subsidiary
company as major shareholder.

▪ Treatment of Dividend by Holding company will depend whether

dividend is received out of Pre profit or Post profit

TREATMENT OF DIVIDEND BY HOLDING COMPANY

DIVIDEND RECEIVED FROM DIVIDEND RECEIVED FROM POST

PRE - ACQUISITION PROFITS - ACQUISITION PROFITS

It will be treated as recovery It will be treated as Income

of cost and credited to and credited to Profit &
Investment a/c Loss a/c
Notes:
▪ Sometime Dividend Received from subsidiary company out of pre
profit but it is credited to P&L.
▪ In this case, a Rectification Entry will be passed by Holding
company as under:
P&L a/c Dr.
To Investment a/c

▪ Effect of above entry will be:

▪ Dividend received by Holding company will be deducted
▪ From Consolidated P&L in consolidated R&S
▪ From Cost of Investment in cost of control

TREATMENT OF DIVIDEND DECLARED BY SUBSIDIARY

COMPANY IN AOP
▪ Calculate Dividend Amount
▪ Add Dividend amount in Closing Balance of Profit & Loss of
subsidiary company in AOP
▪ Calculate increase in Profit & Loss in current year
▪ Apply time Adjustment
▪ Deduct Dividend Amount from pre or post profit from where
Dividend was declared

Notes:
If dividend of previous year is declared in current year and shares are
purchased by holding company in current year, then Dividend will be
assumed to be declared out of pre acquisition profit (Out of Profit of
Previous year)

Example 8
H Ltd acquire 70% shares in S Ltd for Rs. 15,00,000 on 01-8-2023. Following
details of S Ltd is provided to you on 31-03-2024:
Share capital (Rs. 10) Rs. 10,00,000
General Reserve Rs. 3,00,000 (Rs. 1,50,000 on 01-04-2023)
Profit & Loss Rs. 5,00,000 (Rs. 1,40,000 on 01-04-2023)

On 25-10-23, S Ltd declared and paid dividend for the year ended 31-03-23 @
12%. H Ltd credited such dividend in its Profit & Loss a/c.
Calculate Cost of control, Minority Interest and consolidated R&S assuming
GR and P&L of H Ltd was Rs. 3,00,000 and Rs. 8,00,000
 4. TREATMENT OF CONTRA ITEMS
▪ Contra items are those items which are included in Debtors,
Creditors, B/R, B/P and Loan and which are Receivable / Payable to
each other

▪ All contra items which are receivable / payable to each other will be
eliminated while preparing consolidated Financial statement

Creditors/B/P/ Loan Payable a/c Dr.

To Debtors/ B/R/ Loan Receivable a/c
(Being Contra Items are eliminated)

5. STOCK RESERVE
▪ When Holding company or subsidiary company sold goods to each
other before consolidation at Normal selling price and on the date of
consolidation, such goods or part of such goods is still in the stock
of the company which purchase goods, then we have to calculate
Profit earned by selling company which is included in such stock.

▪ Such profit is treated as unrealized profit on the date of

consolidation and it is also known as “Stock Reserve”.

TREATMENT OF STOCK RESERVE

WHEN TRANSACTION IS DWON STREAM WHEN TRANSACTION IS UP STREAM

(GOODS SOLD BY HOLDING TO (GOODS SOLD BY SUBSIDIARY TO

SUBSIDIARY) HOLDING)

TREATMENT: TREATMENT:
▪ STOCK RESERVE IS DEDUCTED ▪ STOCK RESERVE IS DEDUCTED
FROM STOCK IN CBS FROM STOCK IN CBS

▪ IT IS ALSO DEDUCTED FROM PROFIT ▪ IT IS ALSO DEDUCTED FROM

OF HOLDING COMPANY IN POST PROFIT OF SUBSIDIARY
CONSOLIDATED R&S COMPANY IN AOP
Example 9
H Ltd has a Subsidiary, S Ltd. H Ltd sold Goods to S Ltd for Rs. 5,00,000
at cost + 25%. Entire goods has been in stock of S Ltd. Calculate Stock
Reserve and its treatment.

Example 10
H Ltd has a Subsidiary, S Ltd. S Ltd sold Goods to H Ltd for Rs. 8,00,000
at cost + 20%. Goods of the value of Rs. 3,00,000 is still in stock of H Ltd.
Calculate Stock Reserve and its treatment

6. REVALUATION OF ASSETS OF SUBSIDIARY ON THE DATE OF

ACQUSITION OF SHARES BY HOLDING

▪ When Holding company acquired shares, then it may be possible

that some of Assets of Subsidiary company are Revalued on the
date of acquisition of shares the effect of which has not yet given.
▪ Profit or Loss on Revaluation will be treated as Pre Profit or loss for
Holding company and it is considered for calculation of Goodwill or
Capital reserve in Cost of control.
▪ Revised Value of Assets of subsidiary company will be added with
Assets of Holding company in CBS after adjustment of Additional
Depreciation or saving in Depreciation.
▪ Additional Depreciation is calculated as under:
Depreciation on New Value of Assets for post period xxx
Less: Depreciation on old Value of Assets for post period xxx
Additional Depreciation / Saving in Depreciation xxx

▪ Additional Dep is deducted and saving in Dep is added in Post profit

in AOP.
▪ Value of Assets to be shown in CBS is calculated as under:
Value of Assets of Holding Company xxx
Add: Revised Value of Assets of Subsidiary company xxx
Less: Depreciation on Revised value for post period (xxx)
Assets to be shown in CBS xxx

Example 11
The Balance sheet of H Ltd and S Ltd as at 31-03-24 is given below:
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share Capital 4,00,000 3,00,000 Machinery 5,00,000 2,70,000
(Rs. 10) Furniture 2,00,000 1,20,000
General Reserve 1,00,000 10,000 Investments in
Profit & Loss 4,80,000 40,000 Shares in S Ltd 4,80,000 --
Current Liabilities 5,00,000 90,000 Current Assets 3,00,000 50,000
14,80,000 4,40,000 14,80,000 4,40,000

H Ltd Acquired 80% shares in S Ltd on 01- 04 -23 when the General Reserve
and Profit & Loss of S Ltd was Rs. 4,000 and 10,000.
The Book value of Machine & Furniture of S Ltd on 01-04-23 was Rs.
3,00,000 and Rs. 1,50,000 which was Revalued at Rs. 4,00,000 and Rs.
1,30,000 respectively but no effect of which has been given in above
Balance sheet.
Prepare CBS
Ans. Goodwill Rs. 1,68,000, MI Rs. 84,800
Example 12
The Balance sheet of H Ltd and S Ltd as at 31-03-24 is given below:
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share Capital 16,00,000 12,00,000 Machinery 17,00,000 10,80,000
(Rs. 10) Furniture 8,00,000 4,80,000
General Reserve 3,20,000 50,000 Investments in
Profit & Loss 20,00,000 1,50,000 Shares in S Ltd 19,20,000 --
Current Liabilities 8,00,000 2,50,000 Current Assets 3,00,000 90,000
47,20,000 16,50,000 47,20,000 16,50,000

H Ltd Acquired 70% shares in S Ltd on 01- 10 -23 when the General
Reserve and Profit & Loss of S Ltd was Rs. 20,000 and 50,000.
The Book value of Machine & Furniture of S Ltd on 01-04-23 was Rs.
12,00,000 and Rs. 6,00,000 which was Revalued at Rs. 16,00,000 and
Rs. 5,20,000 respectively on 01-10-2023 but no effect of which has
been given in above Balance sheet.
Prepare CBS
Ans. Goodwill Rs. 6,84,500, MI Rs. 5,48,400

7. PREFERENCE SHARES IN SUBSIDIARY COMPANY

▪ If there is Preference share capital in subsidiary company, then

following treatment will be required:
▪ If preference shares are not held by Holding company, then
entire preference share capital of subsidiary company will be
shown in Minority Interest.

▪ But if some preference shares of subsidiary company are

acquired / hold by holding company, then following treatment will
be made:
▪ Investment in Preference shares is taken in cost of control
along with Investment in equity shares
▪ Percentage of Preference share capital held by Holding
company is deducted from cost of investment in cost of
control and Preference Share capital not held by holding
company will be taken in Minority Interest.

9. CONSOLIDATE PROFIT & LOSS STATEMENT

▪ Consolidated P&L is prepared in the same format in which company
prepare its separate P&L statement as per schedule III

▪ In Consolidated P&L, all items of income and expenses of Subsidiary

company are added with Income and Expenses of Holding company
on Line by Line basis.

▪ If there is contra items, then they should be eliminated while

preparing Consolidated P&L

▪ Contra items includes following:

▪ Goods sold to each other
▪ Services rendered to each other
▪ Unrealized profit included in inventories