Cash Flow Statement

IPCC Paper 1/2: Accounting/Financial Management

Chapter 2-Unit 2: Cash Flow Statement

CA. Pankaj Goel

MCQ - Fill in the Blanks

2

MCQ: Fill In The Blanks - 1

While calculating cash from operating
activities .................. are added.

Decrease in current assets

Increase in debtors
Decrease in current liabilities
All the above.

Ans: a

MCQ: Fill In The Blanks - 2

Cash from operation will increase due to

..........................

a) Decrease in current assets

b) Increase in current liabilities
c) Neither of the two
d) both (a) and (b) above

Ans: d

MCQ: Fill In The Blanks - 3

Inflow of cash will take due to ........................

a) issue of shares
b) Decrease in current assets
c) Increase in the value of land
d) Payment of tax

Ans: a

MCQ: Fill In The Blanks - 4

Cash from operating activities consists of .......................

a)
b)
c)
d)

Operational net profit

Decrease in current assets
increase in current liabilities
all the above

Ans: d

MCQ True/ False Questions

7

True/ False Questions

Cash flow statement is based upon accrual basis of accounting.
False

Cash paid to employees is shown under cash flows from Operating

activities.
True

Increase in the value of fixed assets will increase cash in the

business.
False

Outflow of cash will take place if debentures are issued.

False
8

True/ False Questions

Provision for taxes may be treated as both current and non-current liabilities
True

Cash flow statement closes by the disclosing the closing balance of cash.
True

Cash flow statement forecasts outflow of cash only.

False

Depreciation is non-cash charge.

True

Illustration 1
10

Problem Statement
Harish Ltd. gives you the following information for the
year ended 31st March, 2006: Prepare CFS as
per Indirect Method
1. Sales for the year totaled Rs. 96,00,000. The
company sells goods for cash only
2. Cost of goods sold was 60% of sales.
3. Closing inventory was higher than opening
inventory by Rs. 43,000. Trade creditors on 31st
March, 2001 exceeded those on 31st March, 2000
by Rs. 23,000.
11

Contd:
4.

PBT 1380000,Tax Paid 700000,Dep on fixed assets for the

year was Rs. 3,15,000 whereas other expenses totaled Rs.
21,45,000.

5.

Outstanding expenses on 31st March, 2000 and 31st March,

2001 totaled Rs. 82,000 and Rs. 91,000 respectively.

6.

New machinery and furniture costing Rs. 10,27,500 in all

were purchased.

7.

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.

8.

Dividends and corporate dividend tax totalling Rs. 4,07,000

were paid. Cash in hand and at bank as at 31st March,
2000 totaled Rs. 2,13,800
12

Solution-1
Cash Flow Statement For the Year Ended 31 March 2006
(A) Cash Flows from Operating Activities
Net profit before tax

Rs.

Rs.

13,80,000

Adjustment for:
Depreciation

3,15,000

Operating profit before Working Capital changes 16,95,000

Increase in inventory
Increase in trade creditors
Increase in outstanding expenses
Cash generated from operations
Tax paid
Net cash from operating activities

(43,000)
23,000
9,000
16,84,000
7,00,000
9,84,000

(
13

Contd:
Cash flows from Investing Activities
Purchase of fixed assets

(10,27,500)

Net cash used in investing activities

(10,27,500)

(C) Cash Flows from Financing Activities

Issue of Equity Share Capital (Including premium)6,50,000
Dividends and Corporate Dividend Tax

(4,07,000)

Net cash generated from financing activities

2,43,000

Net increase in cash and cash equivalents (A + B + C)

1,99,500

Cash and cash equivalents on 31-3-2005

2,13,800

Cash and cash equivalents on 31-3-2006

4,13,300

14

Illustration 2
15

Problem Statement
From the following condensed comparative Balance Sheets of Jatin Ltd. And
additional information, prepare a Cash Flow for the year 2006.
Liabilities

2005
Rs.

2006 Assets
Rs.

Share Capital
Security Premium

70,000 80,000 Plant & Machinery

9,000 11,000 Accumulated

Retained earnings

23,820 30,820 Depreciation on

2005

2006

Rs.

Rs.

62,000 66,000

7% Mortgage loan
20,000 plant and machinery(37,000)(26,200)
Creditors
6,900 6,000 Building
95,000 1,16,000
Outstanding salaries 2,000 1,400 Accumulated
Provision for taxation 1,000

1,400 depreciation on building( 43,000) (45,000)

Land
10,000 12,000
Stock
10,220 9,620
Debtors
8,600 7,600
Prepaid expenses
720
800
Cash
6,180 9,800
1,12,720 1,50,620
1,12,720 1,50,620

16

Contd:

1.

2.

3.
4.

Additional information :
Plant costing Rs. 16,000 (accumulated
depreciation Rs. 14,800) was sold during the year
for Rs. 1,200.
Building was acquired during the year at a cost of
Rs. 21,000. In addition to cash payment of Rs.
1,000, a 7% mortgage loan was raised for the
balance.
Dividend of Rs. 8,000 was paid during the year.
A sum of Rs. 13,900 was transferred to provision
for taxation account in 2006.(ICAI)
17

Solution-2
Cash Flow Statement
For The Year Ending 31 December 2006
Rs.
Rs.
(A) Cash Flows from Operating Activities
Net profit before tax
28,900
Adjusted for :
Depreciation on :
Building
2,000
Plant
4,000
6,000
Operating profit before working capital changes
34,900
Decrease in stock
600
Decrease in debtors
1,000
Decrease in creditors
(900)
Decrease in outstanding salaries
(600)
Increase in prepaid expenses
(80)
Cash generated from opertations
34,920
Income tax paid
(13,500)
Net cash generated from operations
21,420

18

Contd:
(B) Cash Flows from Investing Activities
Purchase of Building
Purchase of Plant and Machinery
Purchase of Land
Sale of plant
Net cash used in Investing Activities
(C) Cash Flows from Financing Activities
Issue of Shares Capital
Security Premium
Dividends paid
Net cash from financing activities
Net increase in cash (A + B + C)
Cash in the beginning
Cash at the end

(1,000)
(20,000)
(2,000)
1,200
(21,800)
10,000
2,000
(8,000)
4,000
3,620
6,180
9,800

Significant Non-cash Transaction : Purchase of building by issuing 7% of Mortgage Loan.

Note : It is presumed that 7% Mortgage Loan consists of issue of debentures or bonds.

19

Working Notes
Retained Earnings Account
Dividend paid
Balance c/d

Rs.
Rs.
8,000 Balance b/d
23,820
30,820 Profit during the year (Balancing Figure)15,000
38,820
38,820
Plant and Machinery Account

Rs.
Rs.
Balance b/d
62,000 Sale of plant
1,200
Bank-Purchase (Balancing Figure)20,000Depreciation on plant sold14,800
Balance c/d
66,000
82,000
82,000
Accumulated Depreciation on Plant & Machinery Account
Plant (Depreciation)
Balance c/d

Rs.
Rs.
14,800 Balance b/d
37,000
26,200 Profit and Loss Account(Depreciation) 4,000
41,000
41,000

20

Contd:
Building Account
Rs.
Balance b/d
95,000
Cash (Purchase)
1,000
Mortgage Loan (Purchase)
20,000
1,16,000

Balance c/d

Rs.
1,16,000

1,16,000

Accumulated Depreciation on Building Account

Balance c/d

Rs.
45,000

Rs.
Balance b/d
43,000
Profit and Loss Account(Depreciation) 2,000

45,000
45,000
Provision for Taxation Account
Rs.
Income tax paid (Balancing Figure)13,500 Balance b/d
Balance c/d
1,400 Profit and Loss Account

14,900

Rs.
1,000
13,900

(provision during the year)

14,900

21

Illustration 3
22

Problem Statement
The balance sheets of a Sandeep limited company
as at 31 March 2008 and 31 March 2009
Note No 1:
07-08
08-09
Reserves
48,000
50,000

Land & Buildings 1,48,000

1,44,250
Profit & Loss Account
39,690
41,220
Plant & Machinery
1,12,950
1,16,200

23

Contd:

24

Contd:
The following additional information is available from
the books:
1. During the year ended 31-3-2009 an interim
dividend of Rs. 26,000 and final dividend of Rs.
54,000 were paid.
2. The assets of another company were purchased
for Rs.60,000 payable in fully paid shares of the
company. These assets consisted of stock Rs.
22,000 and machinery Rs. 29,000. In addition
sundry purchases of plant were made totalling Rs.
6,000.
3. Income-tax paid during 2009 was Rs. 25,000.

25

Soluion-3
CashFlowStatementforVictorsComputersLtd.
FortheyearEnding31March2009
CashFlowfromOperatingActivities

Differenceinprofitbetween31March2008and31March2009

Rs.

Rs.

1,530

Adjustmentsfor:
Depreciation

35,500

Provisionfortax

34,000

Reserves

2,000

Dividends(26,000+54,000)

80,000

Operatingprofitbeforetaxandworkingcapitalchanges

1,53,030

DecreaseinSundryDebtors

12,550

DecreaseinStock(1,09,040+22,00097,370)

33,670

IncreaseinSundryCreditors

2,125

DecreaseinBillsPayable

(22,255)

Cashgeneratedfromoperations

1,79,120

Incometaxpaid

(25,000)

Netcashfromoperatingactivities

1,54,120

26

Contd:
CashfromInvestingActivities
PurchaseofPlant

(6,000)

PurchaseofGoodwill

(10,000)

Decreaseinadvances[Para15(e)AS3(Revised)]

1,580

NetCashusedininvestingactivities

RepaymentofBankOverdraft

(60,000)

DividendsPaid

(80,000)

(14,420)

CashFlowsfromFinancingActivities

Netcashusedinfinancingactivities

(1,40,000)

Netdecreaseincashandcashequivalents(A+B+C)

(300)

Cashandcashequivalentsatthebeginning

3,000

Cashandcashequivalentsattheend

2,700

27

Illustration 4
28

Problem Statement

The following figures have been extracted from the Books of Nikhil Limited
for the year ended on 31.3.2004. You are required to prepare a cash flow
statement

Net profit before taking into account income tax and income from law
suits but after taking into account the following items was Rs. 20 lakhs:

(a) Depreciation on Fixed Assets Rs. 5 lakhs.

(b) Discount on issue of Debentures written off Rs. 30,000.
(c) Interest on Debentures paid Rs. 3,50,000.
(d) Book value of investments Rs. 3 lakhs (Sale of Investments for Rs. 3,20,000).
(e) Interest received on investments Rs. 60,000.
( f) Compensation received Rs. 90,000 by the company in a suit filed.
(ii) Income tax paid during the year Rs. 10,50,000.
(iii)15,000, 10% preference shares of Rs. 100 each were redeemed on
31.3.2004 at a premium of 5%. Further the company issued 50,000 equity
shares of Rs. 10 each at a premium of 20% on 2.4.2003. Dividend on
preference shares were paid at the time of redemption
29

Contd:
Dividends paid for the year 2002-2003 Rs. 5 lakhs
and interim dividend paid Rs. 3 lakhs for the year
2003-2004.
(v) Land was purchased on 2.4.2003 for Rs.
2,40,000 for which the company issued 20,000
equity shares of Rs. 10 each at a premium of 20%
to the land owner as consideration
(vi) Current assets and current liabilities in the
beginning and at the end of the years were as
detailed below:

30

Contd:

Stock
Sundry Debtors
Cash in hand
Bills receivable
Bills payable
Sundry Creditors
Outstanding expenses

As on
31.3.2003
Rs.
12,00,000
2,08,000
1,96,300
50,000
45,000
1,66,000
75,000

As on 31.3.2004
Rs.
13,18,000
2,13,100
35,300
40,000
40,000
1,71,300
81,800

31

Solution
Cash Flow Statement
for the year ended 31st March, 2004
Rs.
Rs.
Cash flow from Operating Activities
Net profit before income tax and extraordinary items:
20,00,000
Adjustments for:
Depreciation on fixed assets
5,00,000
Discount on issue of debentures
30,000
Interest on debentures paid
3,50,000
Interest on investments received
(60,000)
Profit on sale of investments
(20,000) 8,00,000
Operating profit before working capital changes
28,00,000

32

Contd:
Adjustments for:
Increase in stock
Increase in sundry debtors
Decrease in bills receivable
Decrease in bills payable
Increase in sundry creditors
Increase in outstanding expenses

(1,18,000)
(5,100)
10,000
(5,000)
5,300
6,800
(1,06,000)

Cash generated from operations

26,94,000
Income tax paid
Cash flow from extraordinary items:
Compensation received in a suit filed
Net cash flow from operating activities

(10,50,000)
16,44,000

90,000
17,34,000

33

Contd:
Cash flow from Investing Activities
Sale proceeds of investments
Interest received on investments
Net cash flow from investing activities
Cash flow from Financing Activities
Proceeds by issue of equity shares at 20% premium
Redemption of preference shares at 5% premium
Preference dividend paid
Interest on debentures paid
Dividend paid (5,00,000 + 3,00,000)
Net cash used in financing activities
Net decrease in cash and cash equivalents during
the year
Add: Cash and cash equivalents as on 31.3.2003
Cash and cash equivalents as on 31.3.2004

3,20,000
60,000
3,80,000
6,00,000
(15,75,000)
(1,50,000)
(3,50,000)
(8,00,000)
(22,75,00
0)
(1,61,000)
1,96,300
35,300

34

Illustration 5
35

Problem Statement
1. Presented below is the comparative balance sheets for Ashna Ltd. at 31 March :
2006

2005

Rs.

Rs.

Cash

40,000

57,000

Accounts Receivable

77,000

64,000

Inventory
Prepaid expenses

1,32,000 1,40,000
12,140

16,540

Land

1,25,000 1,50,000

Equipment

2,00,000 1,75,000

Accumulated Depreciation-Equipment

(60,000)

Building

2,50,000 2,50,000

Accumulated Depreciation-Building

(75,000)

(42,000)

(50,000)

7,01,140 7,60,540
Accounts Payable

33,000

45,000

Bonds Payable

2,35,000 2,65,000

Equity Share Capital (Rs. 10 shares)

2,80,000 2,50,000

Retained Earnings

1,53,140 2,00,540

36

Contd:
Additional information :
1.

Operating expenses include depreciation expense of Rs.

70,000 and amortization of prepaid expenses of Rs. 4,400.

2.

Land was sold for cash at book value.

3.

Cash dividends of Rs. 74,290 were paid.

4.

Net income for 2006 was Rs. 26,890.

5.

Equipment was purchased for Rs. 65,000 cash. In addition

equipment costing Rs. 40,000 with a book value of Rs.
13,000 was sold for Rs. 15,000 cash.

6.

Bonds were redeemed at face value by issuing 3,000 equity

shares of Rs. 10 at par.

Prepare a statement of cash flows for 2006 using the indirect

method [AS-3 (Revised)]

37

Solution
AshnaLtd.

Cash Flows Statement For the Year Ended 31 December 2006

[AS-3 (Revised)] (Indirect Method)
(A)Cash Flows from Operating Activities
Net Income
26,890
Adjustments for :
Depreciation
70,000
Amortization of prepaid expenses
4,400
Gain on sale of equipment
(2,000)
Operating profit before working capital changes
99,290
Increase in Accounts Receivable
(13,000)
Decrease in Inventories
8,000
Decrease in Accounts Payable
(12,000)
Net cash from operating activities
82,290
38

Contd:
(B) Cash

Flows from Investing Activities

Sale of Land
Sale of Equipment
Purchase of Equipment
Net cash used in investing activities

25,000
15,000
(65,000)
(25,000)

39

Contd:

(C) Cash

Flows from Financing Activities

Dividends Paid

(74,290)

Net cash used in financing activities

(74,290)

Net decrease in cash and cash equivalents (A + B + C)

(17,000)

Cash and cash equivalents at the beginning of the period

57,000

Cash and cash equivalents at the end of the period

40,000
Note: Significant Non-cash Transaction-Redemption of Bonds in exchange
for Equity Share Capital Rs. 30,000

40

Working Notes
Equity Share Capital Account
Rs.
Rs.
Balance c/d2,80,000 Balance b/d
2,50,000
Bonds Payable Account 30,000
2,80,000
2,80,000

Bonds Payable Accounts

Rs.
Rs.
Balance c/d2,65,000 Balance b/d
Equity Share Capital Account
2,65,000

2,35,000
30,000
2,65,000

41

Illustration 6
42

Problem Statement(PCC-Nov 2007)

JLtd.presentsyouthefollowinginformationfortheyearended31stMarch,2007:
(Rs.inlacs)
(i)

Net profit before tax provision

36,000

(ii)

Dividend paid

10,202

(iii)

Income-tax paid

(iv)

Book value of assets sold

Loss on sale of asset

(v)

Depreciation debited in P & L account

(vi)

Capital grant received - amortized in P & L A/c

(vii)

Book value of investment sold

Profit on sale of investment

5,100
222
48
24,000
10
33,318
120

43

Contd:
(viii)

Interest income from investment credited in P & L A/c

3,000

(ix)

Interest expenditure debited in P & L A/c

12,000

(x)

Interest actually paid (Financing activity)

13,042

(xi)

Increase in working capital

67,290

[Excluding cash and bank balance]

(xii)

Purchase of fixed assets

22,092

(xiii)

Expenditure on construction work

41,688

(xiv)

Grant received for capital projects

(xv)

Long term borrowings from banks

(xvi)

Provision for Income-tax debited in P & L A/c

Cash and bank balance on 1.4.2006
Cash and bank balance on 31.3.2007

YouarerequiredtoprepareacashflowstatementasperAS3(Revised).

18
55,866

6,000
6,000
8,000
44

Solution
Cash Flow Statement
For the Year Ending 31 March 2006
(A) Cash Flows from Operating Activities
Net profit before tax
Adjustments for:
Depreciation
Loss on sale of asset
Amortization of Government Grant
Profit on sale of investment
Interest received
Interest paid
Operating profit before working capital changes
Increase in working capital
Cash from operations
Tax Paid
Net cash used in operating activities

Rs. (in Lakhs)

36,000

Rs.(in Lakhs)

24,000
48
(10)
(120)
(3,000)
12,000
68,918
(67,290)
1,628
(5,100)
(3,472)

45

Contd:
(B) Cash Flows from Investing Activities
Purchase of fixed assets
Interest income
Sale of investment (33,318 + 120)
Sale of asset (222 48)
Expenditure on Capital Project
Net cash used in investing activity
(C) Cash Flows form Financing Activity
Dividend Paid
Grant Received
Interest Paid
Long term Borrowing
Net Cash provided from financing activity
Net increase in cash and cash equivalents (A + B + C)
Cash and cash equivalents at the beginning
Cash and cash equivalents at the end

(22,092)
3,000
33,438
174
(41,688)
(27,168)
(10,202)
18
(13,042)
55,866
32,640
2,000
6,000
8,000

46

Illustration 7
47

Problem Statement (PCC-June 2009)

FromthefollowingsummarisedCashaccountofSLtd.,preparecashflow
statementfortheyearended31stMarch,2009inaccordancewithAS3(revised)
usingdirectmethod.
SummarisedCashAccount
Opening balance
Issue of share capital
Received from customers
Sale of fixed assets

(Rs.000)
50
300
2,800
100

3,250

Payment to suppliers
Purchase of fixed assets
Overhead expenses
Wages and salaries
Tax paid
Dividend paid
Bank loan
Closing balance

(Rs.000)
2,000
200
200
100
250
50
300
150
3,250

48

Solution 7

CashFlowStatementfortheyearended31.3.2009
CashflowfromOperatingActivities
Rs.in000

Cashreceivedfromcustomers
Less:Cashpaidtosuppliers
Cashpaidforoverheadexpenses
Cashpaidforwagesandsalaries
Less:Incometaxpaid
NetcashgeneratedfromOperatingActivities

2,800
2,000
200
100 2,300
500
250
250

49

Contd:
CashflowfromInvestingActivities
Saleoffixedassets

100

Less:Purchaseoffixedassets

(200)

NetcashusedinInvestingActivities

(100)

CashflowfromFinancingActivities
Receivedfromissueofsharecapital

300

Less:Paymentofbankloan

(300)

Paymentofdividend

50

350

NetcashusedinFinancingActivities

(50)

Netincreaseincashandequivalents

100

Add:Cashandequivalentsatthebeginningoftheyear

50

Cashandequivalentsattheendoftheyear

150

50

THANK YOU