FINANCIAL

MANAGEMENT
Text, Problems and Cases

8e M Y Khan | P K Jain
 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
Chapter 5

CASH FLOW STATEMENT

CASH FLOW STATEMENT

Meaning, Sources and Uses of

Cash and Its Usefulness

Preparation of Cash Flow

Statements

AS-3 – Cash Flow Statement

Solved Problem
 Cash Flow Statement
Cash flow statement indicates sources of cash inflows and
transactions of cash outflows of a firm during a period. Therefore
it is also called “Where-Got Where-Gone” statement. The
statement provides answers to many important questions related
to financial position of an enterprise.
Cash flow statement (CFS) is an important tool of financial
analysis, it clearly highlights the firm’s operating, financing and
investment activities. It enables the management to assess
whether the firm has adequate long-term funds to finance major
fixed assets expansion.
Preparation of cash flow statement is mandatory for all the listed
companies as well as for all enterprises which have turnover of
more than Rs 50 crore in a financial year.
 Cash Flow Statement of Hypothetical
Limited
Exhibit 1: Cash Flow Statement of Hypothetical Limited

Particulars Amount
(I) Sources of Cash Inflows:
(1) Business operations/operating activities
(2) Non-business/operating activities (interest/dividend received)
(3) Sale of long-term assets (plant, building and equipment)
(4) Issue of additional long-term securities (equity, preference shares and
debentures)
(5) Additional long-term borrowings (banks and financial institutions)
(6) Other sources (specify them)
(II) Sources of Cash Outflows:
(1) Purchase of long-term assets (plant and machinery, land and building,
office equipments and furniture)
(2) Redemption of preference shares and debentures
(3) Repurchase of equity shares
(4) Repayment of long-term borrowings
(5) Cash dividends paid to shareholders (preference and equity)
(6) Other items (specify)
Net Increase (Decrease) in Cash [I - II]
 Usefulness
The cash flow statement helps to provide answers to users to some of the
important questions related to the company such as the following:
How much cash has been generated from normal business operating
activities/operations of a company?
What have been the other premier financing activities of the firm through
which cash has been raised? What has happened to cash so obtained?
How much cash has been spent on investment activities, say, on
purchase of new plant and equipments?
How was the redemption of preference shares and debentures
accomplished?
Have long-term sources of cash (internally generated plus raised
externally) adequate to finance purchase of new long-term/fixed assets?
What has been the proportion of debt and equity for cash raised from
outside?
Why are dividends not larger?
Has the liquidity position of the company improved?
 Preparation of Cash Flow Statement

Cash flow statement can be prepared by

(1) Finding the difference in amounts among the various

items (say, changes in long-term liabilities, long-term
assets) between the comparative balance sheets and
then

(2) Analysing the causes of difference

The analysis, in some cases, is facilitated by the use of ‘T’;

accounts
Example 1
Given below are the balance sheets as on March 31, previous year and
current year, and a statement of income and reconciliation of earnings for
the current year of Electronics Ltd (EL).
The only item in the plant and machinery account sold during the year
was a specialised machine that originally cost Rs 15,00,000. The
accumulated depreciation on this machine at the time of sale was Rs
8,00,000.
The machine was sold for Rs 6,00,000 and full payment was received in
cash.

Electronics Ltd. purchased patents for Rs.16,00,000 during the year.

Besides cash purchases of plant and equipment, the assets of another

company were also purchased for Rs 1,00,00,000 payable in fully paid-up
shares, issued at par; the assets purchased being goodwill, Rs 30,00,000
and plant, Rs 70,00,000.
 Comparative Balance Sheets
Particulars March 31 Previous Year March 31 Current Year
(Rs lakh) (Rs lakh)

Cash 74 37
Sundry debtors 54 47
Inventories 312 277
Prepaid expenses 6 4
Land 60 60
Patents 55 65
Plant and machinery 420 550
Less: Accumulated depreciation(105) (120)
Goodwill — 30
Total Assets 876 950
Sundry creditors 86 102
Provision for income tax 89 17
Debentures 220 60
Equity capital 250 560
Retained earnings 231 211
Total Liabilities 876 950
Statement of Income and Reconciliation of Earnings for Current Year
Particulars Amount (Rs in lakh)
Net sales 1,977
Less: Cost of goods sold 1,480
Gross profit 497
Less: Operating expenses (includes
depreciation on plant and machinery and
amortisation of patents) 486
Less: Interest on debentures 14
Net loss from operations (3)
Add: Retained earnings (previous year) 231
228
Less: Dividend paid 16
Less: Loss on sale of assets 1 17
Retained earnings (March 31, current year) 211
From the foregoing information, prepare a cash-flow statement for
Electronics Ltd.
SOLUTION
Cash Flow Statement of Electronics Limited the current year
Particulars Amount in Rs
lakh
(A) Sources of cash inflows
Business operations
Cash from customers/debtors (1)* Rs 1,984
Less payment to creditors (2)* (1,429)
Less operating expenses (5)* (455)
Less interest on debentures 14
Less taxes paid (Rs 89- Rs17) 72
Sale of machine 14
Issue of equity share capital (8)* 6
210
230
(B) Cash outflows
Purchase of long-term assets 75
Plant and machinery (6)* 16
Patents 160
Redemption of debentures (7)* 16
Dividends paid to equity shareholders 267
(C) Net decrease in cash (B-A) 37
Cash at beginning of year 37
Cash at year-end 74
Note: Figures in brackets refer to working note number.
Working Notes
(A) Determination of cash from business operation requires recasting of income statement
from accrual basis to cash basis. Exclusion of non-cash items, namely, depreciation
and amortisation is obvious. The less obvious is the computation of cash inflows from
debtors/customers and cash payments to creditors for goods purchased and expenses.
The following working notes provide these required inputs.

(1) Cash Receipts from Debtors

Sundry Debtors Account
(Amount in Rs lakh)
Particulars Particulars Amount
Amount
To Balance b/f (opening balance) 54 By Cash (receipts from debtors, 1,984
To Net sales (assumed credit sales) 1,977 balancing figure)
2,031 By Balance c/d 47
2,031

Alternatively
(Amount in Rs lakh)
Net sales 1,977
Add debtors due at the beginning of current year 54
Total amount receivable from debtors 2,031
Less debtors due at the end of current year (47)
Cash receipts from debtors during current year 1,984
(2) Cash Payment to Creditors
Sundry Creditors Account
(Amount in Rs lakh)
Particulars Amount Particulars Amount
To Cash (payments to creditors, By Balance b/f (opening balance) 86
balancing figure) 1,429 By purchases* (assumed credit) 1,445
To Balance c/d 102 _____
1,531 1,531

*Cost of goods sold = Opening stock + Purchases – Closing stock

= Rs 1,480 = Rs 312 + Purchases – Rs 277
= Rs 1,480 – Rs 312 + Rs 277 = Rs 1,445 (Purchases)

Alternatively
(Amount in Rs lakh)
Credit purchases 1,445
Add sundry creditors at the beginning of year 86
Total amount due/payable to creditors 1,531
Less sundry creditors at the year-end (102)
Cash payment to creditors during the year 1,429
(3) Determination of Depreciation Charges

(a) T-Account Approach

Accumulated Depreciation Account
(Amount in Rs lakh)
Particulars Amount Particulars Amount
To Machine (accumulated By Balance b/f 105
depreciation written off By P&L A/c (depreciation amount
on machine sold) 8 charged during the year,
To Balance c/d 120 balancing figure) 23
128 128

(b) Statement Approach(Amount in Rs lakh)

Opening balance at the beginning of year 105
Less depreciation written off on plant sold during current year (8)
97
Closing balance 120
Difference represents current year depreciation 23
(4) Determination of Amortisation Charges
Patent Account
(Amount in Rs lakh)
Particulars Amount Particulars Amount
To Balance b/f 55 By Amortisation (balancing
To Cash (purchases) 16 figures) 6
___ By Balance c/d 65
71 71

(5) Determination of Cash Operating Expenses (Amount in Rs lakh)

Total operating expenses 486
Less depreciation (as it does not cause current cash outflow) (23)
Less amortisation (non-cash expense) (6)
Operating expenses (other than depreciation and amortization) 457
Less prepaid expenses (already paid in previous year) (6)
Add expenses paid in advance in current year 4
Operating expenses paid in cash 455
(B) Likewise, changes in long term assets, in particular, plant and
machinery require a more careful analysis to ascertain cash obtained
from their sales and cash used in their acquisition because the
straight difference of the two years values do not indicate either
purchase or sale. Such assets are subject to depreciation. Therefore,
depreciation amount should be adjusted to ascertain the amount of
such assets purchased/sold.

(6) Purchase of Plant and Machinery

(a) T-Account Approach
Plant and Machinery Account (Gross Basis)
(Amount in Rs lakh)
Particulars Amount Particulars Amount
To Balance b/f 420 By Cash (sale value) 6
To Equity share capital 70 By Loss (P&L A/c) 1
To Cash (purchases, By Accumulated depreciation (on plant sold) 8
balancing figure) 75 By Balance c/d 550
565 565
(b) Statement Approach (Amount in Rs lakh)
Opening balance of plant and machinery 420
Less original purchase price of plant sold (Rs 6 + 1 + 8) 15
Closing balance 405
Difference represents purchases 550
Less purchases against issue of share capital 145
Cash purchases of plant 70
75

(c) Equation Approach

Opening balance of plant and machinery (PM) + Purchases of PM during
the year – Initial acquisition cost of PM sold during the year = Closing
balance of PM
Rs 420 + Purchases – Rs 15 = Rs 550
Purchases = Rs 550 – Rs 420 + 15 = Rs 145
Cash purchases = Total purchases Rs 145 – Purchases through issue of
equity share capital Rs 75 = Rs 70
(a) T-Account Approach
Plant and Machinery (Net Basis)
(Amount in Rs lakh)
Particulars Amount Particulars Amount
To Balance b/f (Rs 420 – 105) 315 By Depreciation(charged during
To Equtiy share capital 70 23
current year)
To Cash (purchases, balancing 6
By Cash
75
figure By P&L A/c (loss on sale of
1
machine)
____ 430
By Balance c/d (Rs 550 – 120)
460 460
(b) Statement Approach (Amount in Rs lakh)
Opening balance of plant and machinery Rs 315
Less book value of plant sold 7
Less depreciation charged during the year 23
Closing balance 285
Difference represents purchases 430
Less purchases against issue of share capital 145
Cash purchase of plant 70
75
(c) Equation Approach
Opening balance of plant and machinery (PM) + Purchases of PM during the
year – Initial acquisition cost of PM sold during the year = Closing balance of PM
Rs 420 + Purchases – Rs 15 = Rs 550
Purchases = Rs 550 – Rs 420 + 15 = Rs 145
Cash purchases = Total purchases Rs 145 – Purchases through issue of equity share
capital Rs 75 = Rs 70

(C) Treatment of changes in long-term liabilities are the easiest to deal. They relate to (i)
fresh issue of shares and debentures or their redemption and (ii) additional long-
term borrowings or their repayment. The increase is indicative of additional issue of
securities or additional borrowings and, hence, is a source of cash.
The decrease represents repayment and, therefore, is use of cash, that is, cash outflow.
However, if the` increase in securities, say, in equity capital is caused due to issue of
bonus shares, it is not a source of cash. Likewise, if increase in shares is an outcome of
(i) payment for purchase of plant and machinery, land and building or any other
asset and
(ii) conversion of debentures into shares, such transactions do not affect cash
inflow and are excluded.
(7) Redemption of Debentures
(Amount in Rs lakh)
Opening balance (at the year beginning) 220
Closing balance (at year-end) 60
Decrease in balance represents redemption of debentures 160

(8) Issue of Equity Share Capital for Cash

(Amount in Rs lakh)
Closing balance at current year-end 560
Less opening balance 250
Increase in balance represents additional issue 310
Less payment for goodwill (Rs 30) and for plant (Rs 70) by equity
capital 100
Difference indicates additional cash raised through equity capital 210
 Rules for changes in current assets and current
liabilities to the statement of profit and loss in
computation of cash from operations
1) All the increases in current assets (excluding cash) and decreases in
current liabilities which increase working capital decrease cash.
The decrease in current liabilities takes place when they are paid in cash.
For instance, decrease in creditors, bank overdrafts, bills payable and
dividends payable will occur due to their payment
Negative impact of increase in current assets on cash. For instance, an
increase in sundry debtors takes place when credit sales are greater than
cash collections from them.
2) From the first follows the second rule—all decreases in current assets
other than cash and increases in current liabilities which cause a
decrease in working capital increase cash.
Debtors would decrease when cash collections are more than current
credit sales. Inventories would decrease because cost of goods sold is
more than cost of goods purchased; Decrease in prepaid expenses
reflects that the firm has paid less for services than are currently used.
 Exhibit 2: Cash From Business Operations
(Direct Method)
(A) Sales revenues
(B) Less: Expenses using working capital
Cost of raw materials used (or cost of goods sold)
Wages and salary expenses
Others manufacturing expenses (excluding depreciation)
Office expenses
Selling and distribution expenses
Interest
Income tax
(C) Working capital from business operations
(D) Adjustment to convert to cash basis
(i) Add: Decrease in WC (–CA or +CL)
Decrease in current assets other than cash (item-wise)
Increase in current liabilities (item-wise)
(ii) Less:Increase in WC (+CA or ­–CL)
Increase in current assets other than cash (item-wise)
Decrease in current liabilities (item-wise)
(E) Cash flow from business operations
Exhibit 3: Cash From Business Operation [Based on Exhibit 2]
(Amount in Rs lakh)
Net sales 1,977
Less cost of goods sold 1,480
Less operating expenses (other than depreciation and
amortization) 457
Less interest on debentures 14 1,951
Working capital from business operations 26
Add (Decrease in WC i.e. - CA or + CL):
Debtors 7
Inventories 35
Prepaid expenses 2
Creditors 16 60
Less (increase in WC i.e. - CA or – CL)
Provision for income-taxes (72)
Cash from business operation 14
 Exhibit 4: Cash From Business Operations
(Indirect Method)
(A) Net income (or loss) as shown by statement of profit and loss
(B) Add: Depreciation expenses;
Amortisation of goodwill, patents and other intangible assets;
Amortisation of discount on debentures or share issue expenses;
Amortisation of extraordinary losses occurred in previous years;
Loss on sale of non-current assets;
(C) Less:Amortisation of premium received on debentures;
Profit on sale of equipment (already included under sources)
Profit on revaluation of non-current assets (does not contribute to
working capital)
Dividends and interest received on investments (reported separately).
(A + B – C) = Working capital from business operations.
(D) Adjustment to convert to cash basis:
(i) Add: Decrease in WC (–CA or +CL)
Decrease in current assets other than cash (item wise)
Increase in current liabilities (item-wise)
(ii) Less: Increase in WC (+CA or ­–CL)
Increase in current assets other than cash (item-wise)
Decrease in current liabilities (item-wise)
(E) Cash flow from business operations
Exhibit 5: Cash From Business Operations [Based on Exhibit 4]
(Amount in Rs lakh)
Net loss as per income statement (3)
Add depreciation on plant and machinery 23
Add amortisation on patents 6
Working capital from business operations 26
Add (Decrease in WC i.e. – CA or + CL)
Debtors 7
Inventories 35
Prepaid expenses 2
Creditors 16 60
Less (increase in WC i.e. – CA or – CL)
Provision for income-taxes (72)
Cash from business operations 14
 AS-3: Cash Flow Statement
The Institute of Chartered Accountants of India (ICAI) issued the
Accounting Standard (AS-3) relating to the preparation of cash
flow statement (CFS) for accounting periods commencing on or
after April 1, 2001 for enterprises.
1) Which have either turnover of more than Rs 50 crore in a
financial year or
2) The shares of which are listed in stock exchange (i.e. the listed
companies) in India or outside India or
3) Enterprises which are in the process of listing their equity or
debt securities as evidenced by the Board of Directors’
resolution in this regard.
The CFS of listed companies should be presented as per the
indirect method prescribed in AS-3.
Statement of Cashflows provides a summary of operating,
investment and financial Cashflows and reconciles them with
change in its cash and cash-equivalents (marketable securities)
during the period.

Operating Activities
Operating cashflows are directly related to production and sales of
the firm’s products/services.
Investment Activities
Investment flows are cashflows associated with purchase/sale of
both fixed assets and business interests.
Financial Activities
Financing flows are cashflows that result from debt/equity financing
transactions and include incurrence and repayment of debt
cashflows from the sale of shares and cash outflows to purchase
shares or pay dividend.
Exhibit 6: Direct Method Cash Flow Statement
Cashflow From Operating Activities
Cash receipts from customers
Cash paid to suppliers and employees
Cash generated from operations
Income tax
Cash flow before extraordinary items
Proceeds from earthquake disaster settlement
Net cash from operating activities
Cashflow From Investing Activities
Purchase of fixed assets
Proceeds from sale of equipments
Interest received
Dividends received
Net cash from investing activities
Cashflow From Financing Activities
Proceeds from issuance of share capital
Proceeds from long-term borrowings
Repayments of long-term borrowings
Interest paid
Dividends paid
Net cash used in financing activities
Net Increase in Cash and Cash-equivalents*
Cash and cash-equivalents at the beginning of a period
Cash and cash-equivalents at the end of a period
*Consists of cash on hand and balance with banks, investment in money market (short-term) investments
and effect of exchange rate changes.
Exhibit 7: Cash Flow Statement of Electronics Limited for the Current Year
(Direct Method) (Amount in Rs lakh)
Particulars Amount
Cash Flows From Operating Activities
Cash receipts from customers 1,9841
Cash paid to suppliers and employees 1,8842
Cash generated from operations 100
Income taxes paid (72)
Net cash from operating activities 28*
Cash Flows From Investing Activities
Purchase of plant and machinery (75)
Purchase of patents (16)
Proceeds from sale of plant 6
Net cash used in investing activities (85)
Cash Flows From Financing Activities
Proceeds from issuance of equity share capital 210
Repayment of debentures (Rs 220 – 60) (160)
Interest paid to debenture-holders (14)
Dividends paid (16) 20
(Contd.)
Net decrease in cash balance (Rs 85 – 48) (37)
Less :
Cash and cash equivalents at beginning of the year 74
Cash and cash equivalents at end of the year 37
* It may be recalled that cash from operating activities (shown in Section II)
was Rs 14; the difference of Rs 14 (Rs 28 as per AS – 3 and Rs 14 as per
CFS) is due to exclusion of interest payment on debentures (Rs 14); this
interest payment is shown under financing activities.
Working Notes
(Amount in Rs lakh)
(1) Cash receipts from debtors and customers:
Debtors at the beginning of the year 54
Add: Net sales during the year 1,977
Total sum receivable 2,031
Less: Debtors at the end of the year 47
Total 1,984
(2) Cash paid to suppliers and employees:
Cost of goods sold 1,480
Add: Operating expenses excluding depreciation and 457
amortisation (Rs 486 – 23 – 6) 4
Add: Curent year prepaid expenses (6)
Less Previous year prepaid expenses 455

Add: Creditors at the beginning of the year 86

Add: Inventories at the end of the year 277
Less: Creditors at the end of the year (102)
Less: Inventories at the beginning of the year (312)
Total 1,884
Exhibit 8: Indirect Method Cashflow Statement

Cashflow From Operating Activities

Net profit before taxation, and extraordinary items
Adjustment for
 Depreciation
 Foreign exchange loss
 Interest income
 Dividend income
 Interest expense
Operating profit before working capital changes
Decrease/(increase) in sundry debtors
Decrease/(increase) in inventories
Increase/(decrease) in sundry creditors
Cash generated from operations
Income tax paid
Cash flow before extraordinary items
Proceeds from earthquake disaster settlement
Net cash from operating activities
(Contd.)
Cashflow From Investing Activities
Purchase of fixed assets
Proceeds from sale of equipment
Interest received
Dividends received
Net cash from investing activities
Cashflow From Financing Activities
Proceeds from issuance of share capital
Proceeds from long-term borrowings
Repayment of long-term borrowings
Interest paid
Dividends paid
Net cash used in financing activities
Net Increases in Cash and Cash-equivalents
Cash and cash-equivalents at the beginning of a period
Cash and cash-equivalents at the end of a period
Exhibit 9: Cash Flow Statement of Electronics Limited for the current
year (Indirect Method)
(Amount in Rs lakh)
Particulars Amount
Cash flows From Operating Activities
Net loss before taxation and extra-ordinary items (4)
Adjustments for:
Depreciation 23
Amortisation of patent 6
Interest expenses 14
Loss on sale of assets 1
Operating profit before working capital changes 40
Add: Decrease in debtors 7
Add: Decrease in inventories 35
Add: Prepaid expenses 2
Add: Increase in creditors 16
Cash generated from operations 100
Less: Income-tax paid 72
(Contd.)
Particulars Amount
Net cash from operating activities 28
Cash flows From Investing Activities
Purchase of plant and machinery (75)
Purchase of patents (16)
Proceeds from sale of plant 6
Net cash used in investing activities (85)
Cash flows From Financing Activities
Proceeds from issuance of equity share capital 210
Repayment of debentures (220 – 60) (160)
Interest paid to debentureholders (14)
Dividends paid (16) 20
Net decrease in cash balance (78 – 41) (37)
Cash and cash equivalents at beginning of the year 74
Cash and cash equivalents at end of the year 37
Exhibit 10: Cashflow Statement of a Financial Enterprise

Cashflows From Operating Activities

Interest and commission receipts
Interest payment
Recoveries on loans previously written off
Cash payments to employees and suppliers
Operating profit before changes in operating assets
Decrease (or increase) in operating assets:
 Short-term funds
 Deposit held for regulatory or monetary control purposes
 Funds advanced to customers
 Net increase in credit card receivables
 Other short-term securities
Decrease (or increase) in operating liabilities
 Deposits from customers
 Certificates of deposit
 Net cash from operating activities before income tax
 Income taxes paid
Net cash from operating activities
(Contd.)
Cashflows From Investing Activities
Dividends received
Interest received
Proceeds from sale of permanent investments
Purchase of permanenet investments
Purchase of fixed assets
Net cash from investing activities
Cashflows From Financing Activities
Issue of shares
Repayment of long-term borrowings
Net decrease in other borrowings
Dividends paid
Net cash used in financing activities
 Extraordinary Items
Extraordinary items are unusual in nature, not frequent in occurrence and
are material in amount. The cash flows associated with extraordinary items
are disclosed separately as arising from operating, investing or financing
activities in the CFS.

Interest
In general, cash flows arising from interest paid should be classified as
cash flows from financing activities, say interest on loans/debts; interest
paid on working capital loan and any other loan taken to finance operating
activities are to be shown as a part of operating activities.
Dividends
While dividends paid are classified as financing activities as they are cost
of obtaining financial resources, dividends received on investments
constitute a part of investment activities.
Deferred taxes
Deferred taxes are to be treated just like other expenses on accrual basis.
Taxes on Income
Taxes paid on income as well as tax refunds are usually
classified as cash flows from operating activities. In the event
of their specific identification with investment or financing
activities, the tax cash flow is classified as an investing or
financing activity as appropriate.

Investments in Subsidiaries, Associates and Joint Ventures

Enterprises having investments in susbsidiaries, associates
and joint ventures are required to report in the CFS the cash
flows between themselves and the investee/joint venture, for
example, cash flows relating to dividends and advances.
Acquisitions and Disposals of Subsidiaries and Other Business Units

The aggregate cash flows arising from acquisitions and from

disposals of subsidiaries or other business units should be
presented separately and classified as investing activities.

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. Such transactions should be disclosed elsewhere in the
financial statements in a way that provides all the relevant
information about these investing and financing activities. Examples
of non-cash transactions are: (i) the acquisition of assets/an
enterprise by means of issue of shares and/or debentures, (ii)
conversion of debt into equity and (iii) issue of bonus shares.
SOLVED PROBLEM
Prepare a statement from the following financial information of ABC company,
to explain the causes of increase in cash despite the firm incurring losses.
(Amount in Rs lakh)
Income statement
Sales Rs 600.0
Dividends from investment in another 3.6
company 603.6

Expenses Rs 400
Cost of goods sold 50
Depreciation 175
Other operating expenditure 1.6
Interest 3.0 629.6
Loss on sale of plant (sale value, Rs 7.2) (26)
Net loss
(Amount in Rs lakh)
Retained earnings
Beginning balance Rs 50
Net loss (26)
Dividends (16)
Ending balance 8
 (Amount in Rs lakh)
Position statement
Previous year Current year
Cash Rs 19.2 Rs 43.2
Sundry debtors 28.6 16.8
Inventory 33.0 22.0
Prepayments 2.2 1.8
Investments 18.0 18.0
Land 15.0 15.0
Plant and machinery 119.8 110.4
Accumulated depreciation (75.2) (78.4)
Total assets 160.6 148.8
Accounts payable 18.2 10.2
Accrued liabilities 1.2 2.4
Dividends payable 1.2 2.2
Debentures 12.0 16.0
Equity capital 50.0 60.0
Preference share capital 28.0 50.0
Retained earnings 50.0 8.0
Total liabilities 160.6 148.8
Solution
Cash Flow Statement of ABC Company (Indirect Method)
Particulars Amount (in Rs lakh)
Casflow from operating activities:
Net loss before extraordinary items (Rs 26)
Adjustment for
Depreciation 50
Interest expenses 1.6
Loss on sale of plant 3.0
Dividend income (3.6)
Operating profit before working capital changes 25.0
Decrease in sundry debtors 11.8
Decrease in inventories 11.0
Decrease in prepayments 0.4
Decrease in accounts payable (8.0)
Increase in accrued liabilities 1.2 41.4
Net cash from operating activities
Cash flow from investing activities:
Purchase of plant and machinery (47.6)
Sale of plant 7.2
Dividends received 3.6 (36.8)
 CONTD.

Net cash used in investing activities

Cash from financing activities:
Proceeds from issuance of equity share capital 10
Proceeds from issuance of preference share capital 22
Proceeds from debentures 4
Dividends paid to shareholders (15)
Interest paid on debentures (1.6)
Net cash from financing activities 19.4
Increase in cash 24.0
Cash at the beginning of current year 19.2
Cash at the end of current year 43.2
Working Notes
(i) Accumulated depreciation account
To Plant (accumulated deprecation Rs 46.8 By Balance b/d Rs 75.2
on plant sold) (balancing figure)
To Balance c/d 78.4 By P&L A/c (depreciation of 50.0
_____ the current year) _____
125.2 125.2
(ii) Gross value of plant sold
Cash A/c Dr Rs 7.2
P&L A/c (Loss) Dr 3.0
Accumulated depreciation A/c Dr 46.8
To plant Rs 57.0
(iii) Purchase of plant Plant account
To Balance b/f Rs 119.8 By Cash Rs 7.2
To Plant purchased (balancing 47.6 By P&L A/c 3.0
figure) By Accumulated depreciation 46.8
____ A/c 110.4
167.4 By Balance c/d 167.4
(iv) Dividends paid = Rs 1.2 payable of previous year + Rs 16 of current year – Rs 2.2
dividends payable at current year-end = Rs 15