Cash Flow Statement
Key Notes
Introduction
It is a statement that shows flow (Inflow or outflow) of cash and cash equivalents
during a given period of time.
As per Accounting Standard-3 (Revised) the changes resulting in the flow of cash &
cash equivalent 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 And Cash Equivalents
Cash comprises cash in hand and demand deposits with bank.
Cash equivalents are short-term, highly liquid investment that are readily convertible
into known amount of cash and which are subject to an insignificant risk of change in
the value e.g. short-term investment.
Generally these investments have a maturity period of less than three months. Some
examples of cash equivalent: Short-term deposits, marketable securities. Treasury bills,
commercial papers, money market funds, money market funds, investment in
preference shares if redeemable within three months provided that there is no risk of the
failure of the company.
Cash flow 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.
Some types of transaction which are considered movement between cash and cash
equivalents are given below:
1. Cash deposited into bank.
2. Cash withdrawn from bank.
3. Sale of cash equivalent securities (e.g. Sale of short-term investment, sale of
commercial papers)
4. Purchases of cash equivalent securities (e.g. Purchase of short-term investment
Purchases of Treasury bills).
The above types of transaction are part of cash and equivalents, so these are included in
opening and closing cash and cash equivalent only. So these types of transaction no to
be included in cash flow from different activities like operating investing, financing
activities.
Accounting Standard 3(Revised) Issued by ICAI
Operating Activity: Operating Activities are the principal revenues producing
activities of the company and other activities that are not investing or financing
activities.
Investing Activities: Investing Activities are the acquisition and disposal of long
term assets and other investments not included in cash and cash equivalents.
Financing Activities: Financing Activities are the activities that results in the
change in the size and composition of the Owner’s Fund and Borrowed Funds of the
company.
Objectives of Cash Flow Statement
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 assess the causes of difference between actual cash & cash equivalent and
related net earnings/income.
4. To help in formulation of financial policies such as dividend policy, fixed assets
policy, capital structure related policy.
5. To help in short-term financial planning.
6. To ascertain the liquidity of enterprises.
Limitations of Cash Flow Statement
1. Non cash transaction are not taken into consideration like shares or debentures
issued to vendors, depreciating charged during the year.
2. It is a statement related with past data.
3. It is not used for judging the profitability of enterprise.
4. Accrual accounting concept is ignored in this statement e.g. credit sales, credit
purchases, outstanding expenses, accrued income are not included.
Computation of Cash flows from different activities
(INDIRECT METHOD)
A. How to calculate Cash Flow/Used From/In Operating Activities
Step1. Profit before tax and extraordinary items
Profit as per Statement of profit and loss xx
(Closing Balance - Opening Balance)
Add: Transfer to General Reserve xx
(Closing Balance - Opening Balance)
Provision for tax xx
(Made during the year i.e. Current Year Balance)
Interim Dividend xx
(Paid during the year)
Proposed Dividend xx
(Previous Year Balance)
Extra Ordinary Item (Loss), if any, Debited to
Statement of Profit & Loss xx
(Earthquake, Natural disasters etc.)
Net Deferred Tax Liabilities xx
(Opening Balance Closing Balance)
Less: Net Deferred Tax Assets xx
(Opening Balance Closing Balance)
Refund of Tax credited to Statement of P & L xx
Extraordinary-item(Insurance claim), if any, Credited to
Statement of P&L xx
Reserves transferred back to statement of Profit and Loss xx
Net Profit before Tax and Extra-ordinary item XXX
*Extraordinary items: These items are not related to normal business operations.
Step 2: Treatment of Non Cash and Non Operating Items
Add : Depreciation charged on Fixed Assets
during the current year xx
Preliminary expenses, Discount on issue of debentures,
share issue expenses etc. written off (unamortized Expenses) xx
Goodwill, Patents and Trademark amortized/written off xx
Interest on Long term borrowing, Debentures and loans xx
Loss on Sales of Fixed Assets/Investments xx
Premium payable on redemption of Debentures or
Preference Shares xx
Less : Gain on sale of Fixed Assets/Investment (xx)
Rental income (xx)
Interest income (xx)
Dividend Income (xx)
Operating Profit before Working Capital changes XXX
Step 3: Treatment of Current Assets and Current Liabilities
Add: Increase in Current Liabilities
Trade Payables(Creditors and Bills Payable) xx
Outstanding expenses xx
Un Accrued Incomes xx
Provision for doubtful debts xx
Decrease in Current Assets
(other than cash and cash equivalent)
Trade Receivables(Debtors and Bills Receivables) xx
Inventories xx
Accrued Income xx
Prepaid Expenses xx
Less : Increases in Current Assets
(other than cash and cash equivalent) and
Trade Receivables(Debtors and Bills Receivables) (xx)
Inventories (xx)
Accrued Income (xx)
Prepaid Expenses (xx)
Decrease in Current Liabilities
Trade Payables(Creditors and Bills Payable) (xx)
Outstanding expenses (xx)
Un Accrued Incomes (xx)
Provision for doubtful debts (xx)
Cash generated from Operations XXX
Less: Income tax paid during the year (xx)
Cash flow before Extraordinary Items XXX
Add: Extraordinary Credit Items xx
Less: Extraordinary Debit Items (xx)
Cash Flow/Used from/in Operating Activities XXX
B. How to calculate Cash Flow/Used From/In Investing Activities
Add: Proceeds from sales of Fixed Tangible Assets. xx
(Building, Furniture, Machinery etc.)
Proceeds from sales of Investment. xx
(Short term or Long term)
Proceeds from sales of Fixed Intangible Assets xx
(Patents, Trade Marks, Copyright etc.)
Proceeds from Loans and advances xx
( repayment by the outsiders to the firm)
Interest Received on loans and advances xx
Interest Received on debentures held as investments xx
Dividend Received xx
Rent Received xx
Less:Purchase of Fixed Tangible Assets. (xx)
(Building, Furniture, Machinery etc.)
Purchase of Investment. (xx)
(Shares, Debentures, Bonds, etc.)
Purchase of Fixed Intangible Assets (xx)
(Patents, Trade Marks, Copyright etc.)
Amount advanced as Loans to outsiders (xx)
Insurance claim received against the (xx)
loss of fixed assets
Cash Flow/Used From/In Investing Activities XXX
C. How to calculate Cash Flow/Used From/In Financing Activities
Add: Proceeds from Issue of equity Share capital. xx
(including premium but excluding discount
and share expenses, if any)
Proceeds from Issue of preference shares capital. xx
(including premium but excluding discount
and share expenses, if any)
Proceeds from taking long-term loan and issue of debentures. xx
(including premium but excluding discount
and debenture expenses, if any)
Proceeds from Bank Overdraft and Cash Credit. xx
Less: Amount paid for repayment of long term loan. (xx)
Redemption of Preference share capital in cash. (xx)
(including premium on redemption, if any)
Redemption of Debenture in cash (xx)
(including premium on redemption, if any)
Buy bank of Equity shares (Extra Ordinary Item) (xx)
Repayment of Bank Overdraft and Cash Credits (xx)
Interest paid on long-term loan and debentures (xx)
Dividend paid. (xx)
Interim dividend paid. (xx)
Dividend paid on Preference Shares (xx)
Cash Flow/Used From/In Financing Activities XXX
How to Calculate Cash and Cash Equivalents?
Add: Cash Flow/Used From/In Operating Activities XXX
Cash Flow/Used From/In Investing Activities XXX
Cash Flow/Used From/In Financing Activities XXX
= Net Increase/Decrease in Cash and Cash Equivalent XXX
Add:Opening Balance of Cash and Cash Equivalent XXX
= Closing Balance of Cash and Cash Equivalent XXX
Important Working Notes:
1. Proposed Dividend Account
Particulars Rs. Particulars Rs.
To Bank (Dividend XX By Balance b/d XX
Paid during the (Opening Bal.)
year)
To Balance c/d XX By Balance in XX
(Closing Bal.) Statement of P&L
A/c (Proposed
dividend during
the current year)
XXX XXX
2. Provision for Tax Account
Particulars Rs. Particulars Rs.
To Bank (tax Paid XX By Balance b/d XX
during the year) (Opening Bal.)
To Balance c/d
(Closing Bal.) XX By Balance in XX
Statement of P&L
A/c (made during
the current year)
XXX XXX
3. Fixed Asset Account
(At WDV Method)
Particulars Rs. Particulars Rs.
To Balance b/d XX By Bank A/c XX
(opening bal.) (sale of
investment)
To Bank A/c XX By Depreciation XX
(Additional A/c (Dep. On
Purchase) fixed assets sold)
To P&L a/c* XX By P&L a/c* XX
( Profit on sale of (Loss on Sale of
fixed assets A/c) fixed assets A/c)
By depreciation XX
A/c (Current year
dep. On
remaining fixed
assets)
By Balance c/d XX
(Closing Bal.)
XXX XXX
*Either of the one will appear at a time.
4. Fixed Asset Account
(At Original Cost Method)
Particulars Rs. Particulars Rs.
To Balance b/d XX By Bank A/c XX
(opening bal.) (sale of
investment)
To Bank A/c XX By Provision for XX
(Additional Depreciation A/c
Purchase) (Prov. For Dep.
On fixed assets
To P&L a/c* XX sold)
( Profit on sale of
fixed assets A/c) By P&L a/c* XX
(Loss on Sale
of fixed assets
A/c)
XX
By Balance c/d
(Closing Bal.)
XXX XXX
*Either of the one will appear at a time.
Provision For Depreciation Account
Particulars Rs. Particulars Rs.
To Fixed Asset A/c XX By Balance b/d XX
(Prov. For Dep. On (opening bal.)
fixed assets sold)
To Balance c/d XX By Depreciation XX
(Closing Bal.) A/c (Dep. On
fixed assets sold
or the current
year)
XXX XXX
By :Sourabh Soni
(M):9893833573
Case 3: When provision for tax made during the year is given.
2019=28000
2020=32000
Prov. Made during the year= Rs. 20000
Particulars Amt Particulars Amt
To Bank (OA -) 16000 By Bal b/d 28000
To Bal c/d 32000 By P/L (OA +) 20000
48000 48000
Q24
Particulars Amt Particulars Amt
To Bal b/d 500000 By Bank A/c 275000 IA +
To P/L 25000 OA -
To Bank( Add 750000 IA - By Bal c/d 1000000
Pur.)
1275000 1275000
To Bal b/d 900000 By Dep 50000 OA +
To Bank A/c 650000IA -
By Bal c/d 1500000
1550000 1550000
Cash Flow from Investing Activities:
Sale of Investments 275000
Interest on Inv. 75000
Pur of Inv. (750000)
Pur of L/B (650000)
Cash used in Investing Act. (1050000)
Q45.
In the books of Mevanca Ltd.
Cash Flow Statement
As per AS-3(revised)
For the year ending 2016-17
Particulars Detail Amt. Net Amt.
A. Cash Flow from Operating Act.
Net Loss as per St. of P/L (95000)
Add: Prov. For Tax 51000
Less:
Net profit before Tax & Ext. Item (44000)
Add: IOL 7500
Dep. On Machinery 25000
Less:
Operating Profit Before WCC (11500)
Add: T/R 14000
OCA 4000
Less: T/P (14000)
Inventories (7000)
Cash Generated from Operations (14500)
Less: Tax paid during the year (53000)
Cash Used in Operating Activity (67500)
B. Cash Flow from Invt. Act.
Add:
Less: Purchase of Machinery (169000)
Cash Used In Invest. Act. (169000)
C. Cash Flow from Finan. Act.
Add: Proceeds from Issue of Shares 200000
10% LTL 20000
Less: IOL (7500)
Cash Flow from Finan. Act. 212500
Net Decrease in Cash & Cash Equv. (24000)
(A+B+C)
Add: Opening Bal. of CCE 49000
= Closing Bal. of CCE 25000
CASH & CASH EQUVIVALENT:
CASH IN HAND = 750000 640000
CASH AT BANK =
CURRENT INVESTMENT = 300000 480000
MARKETABLE SECURITIES =
Total = 1050000 1120000
1. WN.
Machinery A/c
Part. Amt. Part. Amt.
To Bal b/d 2000000 By Bank 12000
By P/L 4000
To Bank A/c 588000 By AD 32000
By Bal c/d 2540000
2588000 2588000
Acc. Dep A/c
Part. Amt. Part. Amt.
To Mach. A/c 32000 By Bal b/d 300000
To Bal c/d 400000 By Dep. A/c 132000
432000 432000
Cost 48000
-AD 32000
BV 16000
-SP 12000
P/L 4000
