Idea Transcript
Cash Flow Statement IPCC Paper 1: Accounting/Financial Management Chapter 2 -Unit 2
1
CA. Pankaj Goel
Questions that Cash Flow Statement Answers
1 2 3
• Where did the cash come from?
• What purpose cash used for?
• And least importantly, what was the change in the cash balance?
2
Learning Objectives 1 2 3 4 5 6 7
• Meaning of Cash Flow Statement • Applicability Cash Flow Statement - AS 3 • Terms used in Cash Flow Statement • Examples of Types of Activities • Preparation of Cash Flow Statement • Format of Cash Flow Statement-Direct • Format of Cash Flow Statement-Indirect
3
Learning Objectives - 2 8
9
10
11
12
13
• Cash Flow from Operating Activities
• Cash Flow from Investing and Financing Activities
• Summary of Cash Flow Statement Process
• Adjustments relating to Cash Flow Statement for Taxation, Dividend, Interest, Foreign Currency Transaction, Non Cash Transactions, Non Current Assets-Net/Gross, Extraordinary Activities
• Examples - Comprehensive
• Summary
4
Components of Cash Flow Statement CASH& CASH EQUIVALENTS 5 FINANCING ACTIVITIES
OPERATING ACTIVITIES‐DIRECT 1
4
3 INVESTING ACTIVITIES
2 OPERATING ACTIVITIES‐INDIRECT
5
Cash for Cash Flow Statement
Cash Equivalents
Cash
Meaning of Cash 6
Cash Concept Cash is an important component for solvency of any organization Cash plays a very important role in the economic life of a business What blood is to a human body, cash is to a business enterprise. Thus, it is essential for a business to maintain an adequate balance of cash. It is important to know the movement of cash during the year and reasons for such movement. Such details are available through Cash Flow Statement, which provides information about the changes in cash and cash equivalents of an enterprise 7
•:
Cash Concept - 2
This revised Accounting Standard super seeded the Accounting Standard (AS 3) on changes in Financial Position, issued in June 1981.In 1995, SEBI amended clause 32 of listing agreement stating that every listed company, should give CFS Particulars Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Total Add: Opening cash and cash equivalent (CCE) Closing cash and cash equivalent (CCE)
Amount (Rs.) xx xx xx xx xx xx 8
Uses Of Cash Flow Statement 1
• Cash flow statement is additional information to user of financial statement
2
• This statement exhibits the flow of incoming and outgoing cash
3
• This statement assesses the ability of the enterprise to generate cash and cash equivalents
4
• It also assesses the needs of the enterprise to utilise the cash and cash equivalents generated
5
• It also assesses the liquidity and solvency of the enterprise 9
Fundamentals of Cash and Cash Flow Statement As per AS 3 Cash means- Cash and Cash Equivalents
Cash and Cash Equivalents
Cash in Hand+ Cash at Bank
Short-term investments (Till 3 months maturity)+ Marketable securities 10
Cash Flow Statement Equation
∆ Cash=∆Non Current Liability+∆ Non Current Assets+∆ in Owners Equity ∆ Cash =
• Change in Cash & Cash Equivalents
∆ Non Current Liability =
• Change in Non Current Liabilities covering change in share capital like issue of share capital etc.
∆ Non Current Assets =
• Change in Non Current Assets covering change in Assets like purchase of assets etc.
∆ in Owners Equity =
• Change in capital +Change in current liability item and change in all items of current assets other than cash and cash equivalents
11
Applicability of Cash Flow Statement 12
Applicability of AS - 3 Preparation of Cash Flow Statement as per AS-3 is mandatory for the following enterprises: • Enterprises that have a turnover of more than Rs. 50 crores during a financial year. • Enterprises that have a borrowing of more than Rs.1 crores • Companies whose shares or debts are listed or to be listed on a recognized stock exchange in India
Cash Flow Statement of listed companies shall be presented under indirect method only as prescribed in AS-3 13
Terms Used in Cash Flow Statement 14
Operating Activities
These are principal revenue producing activities of a business enterprise and include cash flows from those transactions and events that enter into the determination of net profit or loss
15
Examples of Operating Activities
Cash inflows
Cash Receipts from sale of goods/rendering of services Cash Received from royalties, fees, commission, etc. Other operating receipts
Cash outflows
Cash payments to suppliers for Goods/services Cash payments to employees Interest and taxes paid Other operating cash payments
16 9
Investing Activities
These activities include transactions and events that involve the purchase and sale of long term productive assets such as land, buildings, equipment (plant and machinery) not held for resale and other investments (which are not cash equivalents).
17
Examples of Investing Activities Cash inflows
Cash outflows
Sale of plant & machinery and equipment
Purchase of plant & machinery and equipment
Sale of Land & Buildings
Purchase of land & buildings 18 10
Financing Activities
These activities result in changes in the size and composition of the owners’ capital (including preference share capital in the case of a company) and borrowings of the enterprise.
19
Examples of Financing Activities Cash inflows
Cash outflows
Borrowing cash from creditors
Issuing equity shares
Issuing debt securities
Repayment of amounts borrowed Repurchase of equity shares Payment of dividends 20 11
Practice Time 21
Examples of Types of Activities
Example: 1 Transactions
Activities
Cash Sales
Operating Activities
•
Cash paid to creditors
•Operating Activities
•
Cash Purchase
•Operating Activities
•
Cash received from Debtors
•Operating Activities
•
Issue of Shares
•Financing Activities
•
Issue of Debentures
•Financing Activities
•
Purchase of Investments
•Investing Activities
•
Purchase of Fixed Assets
•Investing Activities
•
Sale of Investments
•Investing Activities
•
Sale of Fixed Assets
•Investing Activities
22
Example: 1Continued Transactions
Activities
Marketable Securities
Cash Equivalents
•Redemption of Debentures/Preference Shares
•Financing Activities
•Interest paid by Finance Company
•Operating Activities
•Dividends paid by Non Finance Company
•Financing Activities
•Manufacturing wages paid
•Operating Activities
•Sale of Trade Marks
•Investing Activities
•Income Tax paid
•Operating Activities
•Income Tax Refund received
•Operating Activities
•Brokerage on issue of shares
•Financing Activities
23
Sources for Preparation of Cash Flow Statement 24
Basic Information -Three Sources
Comparative Balance Sheets
• It means the balance sheets in the beginning and at the end of the accounting period. • These comparative balance sheets indicate the amount of changes that have taken place in assets, liabilities and owners’ capital accounts.
Income Statement of Current Accounting Period
• Information in this statement enables the users to determine the amount of cash provided by or used in operations during the accounting period after making adjustments for non-cash and non-operating items, current assets and current liabilities items.
Selected Additional Information
• In addition to the comparative balance sheets and income statement of current year, selected additional transaction data are needed to extract the hidden transactions e.g., sale and purchase of fixed assets for cash. • It means that additional information is needed to determine how cash was provided or used during the accounting period.
25
Steps for Preparation of Cash Flow Statement 26
Step 1: Determine Change in Cash & Cash Equivalents It involves the calculation of difference between the amount of cash and cash equivalents on the first day of the accounting period and the amount on the last day of the accounting period, with the help of comparative balance sheets.
It is never listed as a first item on the actual cash flow statement.
It is the amount by which cash and cash equivalents changed and we must explain why cash and cash equivalents changed by this amount by preparing a Cash Flow Statement 27
Example: Cash &Cash Equivalents
28
Step 2- Determine Cash Flows from Operating Activities It is determined by the analysis of revenue and expense items of profit and loss account. The reason is that there may be certain items in this account which increase (revenue) the profit but do not cause any increase of cash. Similarly some of the expense items reduce the profits but may not reduce the cash. In addition, analysis of current assets and liabilities is also required with the help of comparative balance sheets and additional information. This can be computed by either Direct or Indirect Method
29
Step 3- Analysis of Non Current Assets
Determine the cash provided (or used) by investing activities by the analysis of non-current assets like purchase and sale of fixed assets etc This is done by Finding Cash Flow From Investing Activities
30
Step 3- Analysis of Non Current Liabilities
Determine the cash provided (or used) by financing activities. Here again an analysis of non-current liabilities like issue of share capital, redemption of share capital etc is made.
This is done by Finding Cash Flow From Financing Activities
31
Step 5 - Preparation of Cash Flow Statement
1 2
• Prepare a formal cash flow statement by classifying all cash inflows and outflows in terms of operating, investing and financing activities
• The net cash flow provided by (used in) each of the three main activities of an entity should be highlighted
32
Step 6 - Find Net Change in Cash &Cash Equivalents
Make sure that the total net cash flow, that is, aggregate of net cash flows from operating, investing and financing activities, is equal to net increase (decrease) in cash and cash equivalents as calculated in Step 1.
33
Step 7- Analysis of Non Cash Transactions
Report any significant investing and financing transactions that did not involve cash or cash equivalents in a separate schedule to the cash flow statement
e.g., purchase of land by issue of share capital or debentures; or redemption of debentures for share capital. (Para 40 of AS 3)
34
Format for Preparation of Cash Flow Statement – Direct (Operating) 35
Cash Flow from Operating Activities - Direct DIRECT METHOD- FORMAT (a) Cash Flows from Operating Activities Cash receipts from cash sales and customers
××××
Cash payments to creditors and others suppliers
(××××)
Cash payment for overheads
(××××)
×××× Less: Tax Paid
××××
Cash flows before extraordinary items Add/Less: Extraordinary items
×××× ××××
Net Cash flow from operating activities
××××
Common to Both DIRECT &INDIRECT
36
Computational Accounts Direct Method 37
Why We Need Computational Accounts?
Adjustments are necessary because income statement records are on accrual basis. Expenses incurred even though the cash has not been paid. Incomes earned even though the cash has not been received.
These adjustments generally relate to determination Cash flow from Credit Purchases-creditors/Bills Payables account Cash flow from Credit Sales.- Debtor/Bills Receivables account Cash outflow on expenses incurred-Expenses account
38
Adjustments for Changes in CA and CL 39
1. Effect of Credit Sales If out of total sales of 30,000, credit sales is Rs. 10,000, cash flow from sales = 20,000 Thus while computing cash from operations, it would be necessary that suitable adjustments for the outstanding debtors are also made Like deducting the amt. of credit sale from the net profit as debtors outstanding at the year end. Cash from operation = Net profit + debtors o/s at the beginning – debtors o/s at the end of the year OR Cash from operation = Net profit + Decrease in debtors or – (increase in debtors)
40
2. Effect of Credit Purchase If Cash sale = 30,000, Purchase = 25,000 out of which credit purchase is 10000 , Cash from operation = 15,000 Adjustments in the Net profit would be made by adding the amt. of credit purchases to get the cash from operation. Decrease in creditors from one period to another would mean decrease in cash from operation and vice versa. This is because more cash payments have been made to the creditors which results in outflow of cash. Cash from operation = Net profit + creditors at the end of the year – creditors at the beginning
OR
Cash from operation = Net profit + Increase in creditors OR - (Decrease in creditors)
41
2. Effect of Credit Purchase If Cash sale = 30,000, Purchase = 25,000 out of which credit purchase is 10000 , Cash from operation = 15,000 Adjustments in the Net profit would be made by adding the amt. of credit purchases to get the cash from operation. Decrease in creditors from one period to another would mean decrease in cash from operation and vice versa. This is because more cash payments have been made to the creditors which results in outflow of cash. Cash from operation = Net profit + creditors at the end of the year – creditors at the beginning
OR
Cash from operation = Net profit + Increase in creditors OR -(Decrease in creditors)
42
Example 2: CA&CL Adj for Direct Method
Sales = 50,000, debtors o/s at the beginning = 8000, debtors o/s at the end = 15000, creditors at the beginning = 12000, creditors at the end = 15000, Purchases = 30000, expenses = 5000
43
Solution: Cash from operation
Rs.
Sales
50000
Less: Purchase
30000
Expenses
5000 Net Profit
Add: debtors at the beginning
8000
creditors at the end
15000
35000 15000 23000 38000
Less: creditors at the beginning debtors at the end
12000 15000
Cash from operation
27000 11000 44
Sample Accounts FormatsCA&CL Adjustments for Direct Method 45
Accounts Format 1 CREDITORS ACCOUNT Particulars Bills Payables Account (Bills accepted) Discount received Bills Receivables (endorsed) Purchase Returns
Rs. — — — —
[Cash Account (Paid) outflow (Balancing figure)]
Balance C/D (closing) —
Particulars Balance b/d (opening) Purchases Account (Credit) Debtors (B/R endorsed dishonored) Bills Payables Account
Rs. — — — —
— (dishonored) —
46
Accounts Format 2 BILLS PAYABLE ACCOUNT Particulars Discount received Creditors (Bills dishonored)* [Cash Account (paid on maturity) (Balancing figure)] Balance C/D (closing)
Rs. Particulars — Balance b/d (opening) — Creditors Account (Bills accepted) — — —
Rs. — —
—
47
Accounts Format 3 DEBTORS ACCOUNT Particulars Balance b/d (Opening) Sales (Credit) Bills Receivables (dishonored)
—
Rs. Particulars — Bad Debts — Discount allowed — Sales Returns Bills Receivables (drawn) Cash Account (Inflow) (Balancing figure) Balance c/d (closing)
Rs. — — — — — —
—
48
Accounts Format 4 BILLS RECEIVABLE ACCOUNT Particulars Balance b/d (Opening) Debtors (B/R drawn)**
Rs. Particulars — Creditors (B/R endorsed) — Discount/Rebate (allowed) Debtors (B/R dishonoured) By Cash Account (received) Inflow (Balancing figure) Balance C/d (closing)
—
Rs. — — — — —
—
49
Example of CA&CLAdjustments for Direct Method 50
Example:3
Opening Stock = 5000 Purchases =
20000
Sales =
35000
Expenses =
5000
Closing Stock = 10000
51
Solution Particulars
Profit and Loss a/c Amount Particulars
Amount
Opening stock
5000
Sales
35000
Purchases
20000
Closing stock
10000
Expenses
5000
Net Profit
15000
Cash from operation: Net profit for the year-
15000
Add: Opening stock -
5000
Less: Closing stock -
(10000)
Cash from operation =
10000
52
Accounts Format 5 EXPENSES ACCOUNT Particulars Prepaid Expenses (in the beginning) Cash/Bank (cash outflow) Outstanding Expenses
Rs. Particulars × × Outstanding Expenses (In the beginning) × P & L Account (Expenses incurred) × × Prepaid Expenses
(at the end) ××
Rs. ×× ×× ××
(at the end) ××
53
3 Effect of change in Outstanding expenses, Income received in advance etc. If certain expenses are not paid (i.e., o/s) or some income is received in advance, it will result in decrease in net profit without actually decreasing the cash. This is because net profit is computed after charging to it all expenses whether paid or outstanding. Therefore cash from operation will be higher than the actual profit as per P/L account. Thus : Cash from operation = Net profit + (Expenses o/s + Income received in advance) at the end – (Expenses o/s + income received in advance) at the beginning OR Cash from operation = Net profit +Increase in (o/s expenses and income received in advance) OR – Decrease in (o/s expenses and income received in advance)
54
Example of CA&CLAdjustments for Direct Method 55
EXAMPLE: 4 Gross Profit = 30000 Expense paid = 10000 Interest received = 2000 Rs 2000 are Outstanding on account of Expenses while Rs 500 has been received as Interest for the next year
56
SOLUTION Profit and Loss account Particulars
Amount Particulars
Expenses paid
10000
Gross profit
Add: o/s exp.
2000
Interest received
Net Profit (Balancing)
19500
Less: interest rece-ived in advance
Amount 30000 2000 ( 500 )
Cash from operation: Net profit for the year
19500
Add: Outstanding expenses
2000
Income received in advance Cash from operation
500 22000
57
4. Effect of Prepaid expenses and Outstanding Income It is similar to the effect of debtors. While computing net profit from operations, the expenses only for accounting period are charged to P/L a/c. This means pre-paid expenses (since not charged) do not decrease net profit for the year but actually reduces the cash from operation. Similarly income earned during the year is credited to P/L a/c, whether received or not. Thus o/s income increases the profit but not the cash from operation. Thus: Cash from operation = Net profit + (Prepaid expenses + o/s income) at the beginning of the year - (Prepaid expenses + o/s income) at the end of the year Or Cash from operation = Net profit + Decrease in (Prepaid expenses + o/s income) OR – Increase in (Prepaid expenses + o/s income) 58
Example of CA&CLAdjustments for Direct Method 59
Example: 5
Facts
• • • • •
Net Profit = 20000 Prepaid Expenses as on 1/1/07 = 2000 Prepaid Expenses as on 31/12/07 = 3000 O/S (Accrued) Income on 1/1/07 = 1000 O/S (Accrued) Income on 31/12/07 = 2000
• Calculate cash from operation
Required
60
Solution Cash from operation: Net profit Less: Prepaid expenses as on 31/12/07 o/s income as on 31/12/07
Add: Prepaid expenses as on 1/1/07 o/s income as on 1/1/07 Cash from operation
20000
(3000) (2000) 2000 1000 18000
61
SUMMARY OF FINDINGS
Increase in Current assets and Decrease in current liability Decrease in cash
Decrease in Current assets and Increase in current liabilities Increase in cash
62
Miscellaneous Examples Direct Method 63
Example: 6 From the following information of Hemakshi Power Ltd, find out Cash paid to Creditors and Bills Payables • • • • • •
Opening balance of Creditors 45,000 Closing balance of creditors 40,000 Opening balance of Bills Payables 20,000 Closing balance of Bills Payables 6,000 Bills Payables accepted during year 10,000 Total Purchases during the year 3,00,000 (half of them are on credit) • Discount received from Creditors 2,000 • Goods returned to Suppliers 4,000
64
Solution (A) Particulars Discount received Purchases Returns Bills Payables accepted Cash (paid) (balancing figure) Balance c/d
CR ED IT OR S ACCO UNT Rs. 2,000 4,000 10,000* 1,29,000 50,000 1,95,000
Particulars Balance b/d Purchases (Credit)
Rs. 45,000 1,50,000
1,95,000
BILLS PAYABLES ACCOUNT Particulars Cash (paid) (Balancing figure) Balance c/d
Rs. Particulars Rs. 24,000 Balance b/d 20,000 6,000 Creditor’s Account (Bills accepted) 10,000* 30,000 30,000 Cash paid to creditors = Rs. 1,29,000 Cash paid on account of bills payable = Rs. 24,000
65
Example: 7 Calculate the Cash Outflow on account of expenses from the following information: • • • • •
Expenses incurred during the year 2008 Outstanding expenses on 31 Dec. 2007 Outstanding expenses on 31 Dec. 2008 Prepaid expenses on 31 Dec. 2007 Prepaid expenses on 31 Dec. 2008
1,50,000 20,000 3,5000 15,000 10,000
66
Solution Cash Outflow on Expenses Particulars Expenses incurred during the year Add: Outstanding expenses (2007) Prepaid expenses (2008)
Rs. 1,50,000 20,000 10,000
Less: Outstanding expenses (2008) Prepaid expenses (2007) Cash Outflow on Expenses In Account Form Particulars Prepaid Expenses Account (2007) Bank Account (Outflow) (Balancing Figure) Outstanding Expenses (2008) 1,80,000
35,000 15,000
30,000 1,80,000 50,000 13,000
Expenses Account Rs. Particulars Rs. 15,000 Outstanding Expenses Account (2007)20,000 1,30,000 Profit and Loss A/c 1,50,000 Prepaid Expenses Account (2008) 10,000 35,000 1,80,000
67
Solution Cash Flow from Operating Activities Particulars (i)
Rs.
Operating Cash Receipts Cash Sales
96,00,000
96,00,000 (ii) Operating Cash Payments Cash Paid to Creditors Expenses
5780000 2136000 7916000
Cash Generated from Operations before Tax ( i - ii) Less: Income Tax Paid (Net of Refund) Cash Flows from Operations before Extraordinary items Less: Extraordinary items: Insurance Claim for Earthquake Loss Net Cash Flow from Operating Activities
1684,000 700,000 984000 XXX 984000
68
Format for Preparation of Cash Flow StatementIndirect(Operating) 69
Cash Flow From Operating ActivitiesIndirect INDIRECT METHOD-FORMAT It is to be noted that difference in two methods is only in Operating Activity and not in other activities. This is shown below: Net Profit (Before Tax and Extraordinary items) Adjustments: a. Non Cash items b. Items treated separately Operating profit before working capital changes Add: Decrease in current assets/Increase in current liability Cash generated from operations Less: Income Taxes Paid Cash flows before extraordinary items Add/Less: Extraordinary items Net cash from operating activities
××××
×××× ×××× ×××× ×××× ×××× ×××× ××××
Common to Both DIRECT &INDIRECT
70
Format for Preparation of Cash Flow Statement Investing 71
Cash Flow From Investing Activities CASH FLOW FROM INVESTING ACTIVITIES Proceeds from sale of Fixed Assets Proceeds from sale of Long term investments Proceeds from sale of Patents/Copyrights/Trademarks Rent/Dividend/Interest Received Purchase of Fixed Assets(Less) Purchase of Long term Investments(Less) Purchase of Patents/Trademarks/Copyrights/Goodwill(Less) Net Cash from (or used in) Investing Activities
XXX
72
Format for Preparation of Cash Flow StatementFinancing 73
Cash Flow From Financing Activities CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issue of equity shares/preference shares Proceeds from issue of debentures Proceeds from long term loans from Bank or Financial Institutions Proceeds from increase in Securities Premium Redemption of Debentures/Preference Shares (including premium) (Less) Buy-back of Equity Shares(Less) Repayment of Long term loans(Less) Interest paid(Less) Interim Dividend paid(Less) Final Dividend Paid(Less) Utilization of Securities Premium(Less) Net Cash from (or used in) Financing Activities
XXX
74
Summary of Format of Cash Flow Statement 75
Cash Inflows and Outflows
76
Adjustments Cash Flow Statement 77
Adjustment 1: Treatment of Tax
Cash flow for tax payments / refund should be classified as cash flow from operating activities. If cash flow can be specifically identified as cash flow from investment / financing activities, appropriate classification should be made. Capital Gain Tax should be classified as cash outflow from investing Activity Corporate Dividend Tax should be classified as cash outflow from Financing Activity
78
Adjustment 2:Hidden Dividend Reconciliation of Profit as per Balance Sheet with PBT (Profit Before tax) The net profit before taxation figure in the account is the starting point for calculation. It can be calculated as follows
Difference between the Closing Balance and the Opening Balance of Profit and Loss Account ... Add: Proposed Dividend for the current year ... Add: Interim Dividend Paid during the year ... Add: Transfer to general Reserve ... Less: Provision for tax made during the year ... Less: Refund of tax credited to the profit and loss account ... Less: Extraordinary items, if any, credited to the Profit and Loss Account (...)
Net Profit before tax, and extra ordinary items
If any Balancing Figure is Present, then it is Interim Dividend
79
Adjustment 3-Interim Dividend The interim dividend is declared by the board of directors in between the financial year. Declaration of the interim dividend does not require the approval at the general meeting. Interim dividend becomes due and is paid during the same year. The amount of interim dividend is added back to current years’ profits to find out cash flow from operating activities(Indirect Method) The payments made in respect of dividends would be shown an outflow at cash under Financing Activities.
80
Adjustment 4: Proposed Dividends
The proposed dividend for the current year becomes due and is paid in the next year. It is an outflow of cash and cash equivalents in the next year. It is added back to current years’ profits to find out cash flow from operating activities.(Indirect) The proposed dividend of the previous year becomes due and is also paid in the current year under Financing Activity.
81
Adjustment 5: Interest
Interest Received
• Received from investment – it is in investment activities • Received from short term investment classified, as cash equivalents should be considered as cash inflows from operating activities. • Received on trade advances and operating receivables should be in operating activities
Interest Paid
• On loans / debts are in financing activities • On working capital loan and any other loan taken to finance operating activities are in operating activities
Interest Charged
• Added to find out cash flow from operating activities(Indirect Method)
82
Adjustment 6: Foreign Currency Transaction The effect of change in exchange rate in cash and cash equivalents held in foreign currency should be reported as separate part of the reconciliation of cash and cash equivalents. Unrealized gain and losses arising from changes in foreign exchanges rates are not cash flows. Unrealised foreign exchange gain is reduced from the net profit befor tax in the cash flow statement while computing cash flow from operating activities as it does not involve a cash inflow. Likewise, unrealised foreign exchange loss is added to the net profit before tax in the cash flow statement while computing the cash flow from operating activities. 83
Adjustment 7-Non Cash Transaction
AS per Para 40 of AS 3, non cash transaction shall be separately disclosed as foot note to Cash Flow Statement like land purchased against issue of debentures etc.
84
Contd: Example:8 M/s. X. Ltd. bought the assets of M/s. Y. Ltd. for Rs. 1,00,000 payable in fully paid shares of M/s. X. Ltd. These assets consisted of stock of goods Rs. 30,000, machinery Rs. 50,000 and goodwill Rs. 20,000. How this transaction would be dealt with in the preparation of cash flow statement. An analysis of the transaction shows that the following journal entry must have been made: Stock Account Dr. 30,000 Machinery Account Dr. 50,000 Goodwill Account Dr. 20,000 To Equity Share Capital Account 1,00,000
85
Adjustment 8-Non Current asset-Net Basis The comparative balance sheets of M/s. V. Ltd. at two different dates provide the following information: Plant and Machinery-1,350000(PY) 1,440000(CY) It is informed that depreciation amounting to Rs. 6,00,000 has been provided during the year. Find out the changes that have taken place in the asset and also state their effect on cash flows.
86
Solution: Plant and Machinery Account Particular Balance b/d Cash-Purchase outflow (Balancing figure)
Rs. Particular 1,350 Depreciation (given) Balance c/d 690 2,040
(Amount in ’000) Rs. 600 1,440 2,040
87
Adjustment 9-Non Current asset-Gross Basis
In the comparative balance sheets of M/s. P. Ltd. the position of buildings account is given as under : (Amount in ‘000)
Liabilities Accumulated depreciation—Buildings
20×1 Rs. 700
20×2 Assets Rs. Buildings 790
20×1 Rs. 3,840
20×2 Rs. 3,910
Additional information : A part of the buildings Rs. 74,000 was sold for Rs. 60,000. The accumulated depreciation on buildings sold was Rs. 20,000. Analyse the transactions.
88
Solution: Balance b/d Profit and Loss Account (Gain on sale) (i) Cash-purchase (Outflow) (Balancing figure) (ii)
Buildings Account Rs. Cash (Inflow) 3,840 Accumulated depreciation 6
Rs. 60 20 3,910
144 3,990
3,990
ACCUMULAT ED DEPRECIATION ACCOUNT (BUILDINGS)
Buildings (Accumulated Depreciation) Balance c/d
Rs.
Rs.
Balance b/d 20 Profit and Loss Account (iii) 790 (Depreciation charged) 810
700 110 810
89
Adjustment 10-Extraordinary items
The cash flows associated with extraordinary items should be classified as arising from: Operating Investing or Financing activities
as appropriate and separately disclosed. Example-Proceeds from Earthquake settlements etc
90
Examples 91
Example- 9 Prepare Cash Flow Statement of sona Ltd. from the following information for the year ended March 31, 2007:
Particulars Investments Fixed Assets (at cost) Equity Share Capital Long term Loan Cash
31.3.2006 (Rs) 31.3.2007 (Rs) 1,80,000 2,40,000 2,10,000 4,00,000 12,00,000 16,00,000 8,00,000 4,50,000 1,64,000
1,44,000
Additional Information: 1.
Cash flow from operating activities after tax and extra ordinary
items – Rs. 3,60,000 2.
Depreciation on fixed assets – Rs. 85,000
3.
Interest received – Rs. 45,000
4.
Dividend paid during the year – Rs. 1,40,000
92
Solution SONA LTD. CA S H F LOW ST AT EM ENT F O R T H E YE A R E N D E D O N 3 1 M AR C H , 2 0 0 7 Particulars Amount (Rs.) (A) Cash Flow from Operating Activities (A) (B) Cash Flow from Investing Activities: Purchase of Investment (60,000) Purchase of Fixed Asset (4,00,000 + 85,000 – 2,10,000) (2,75,000) Interest Received 45,000 Net Cash used in Investing Activities (B) (C) Cash Flow from Financing Activities: Issue of Equity Share Capital 4,00,000 Repayment of long term loans (3,50,000) Dividend paid during the year (1,60,000) Net Cash used in financing Activities (C) Net Decrease in Cash & Cash Equivalents (A+B+C) Add: Cash & Cash equivalents in the beginning
Cash & Cash equivalents at the end
Amount (Rs) 3,60,000
(2,90,000)
(1,90,000) (20,000) 64,000
44,000
93
Example:10 Point out giving reasons whether following statements are True or False: (i) Cash flow statement is based upon accrual basis of accounting. False (ii) 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
94
Examples Point out giving reasons whether following statements are True or False: (i) Outflow of cash will take place if debentures are issued False Provision for taxes may be treated as both current and non-current liabilities. True Cash flow statement forecasts outflow of cash only. False
95
Comprehensive Example:11 The following financial statement have been prepared by the Chief Accountant of XYZ Liabilities 2007 2008 Assets 2007 2008 Rs. Rs. Rs. Rs. Share Capital 4,00,000 5,00,000 Fixed Assets 10,00,000 11,20,000 Reserves & Surplus 2,50,000 2,80,000 Less: Dep. Written Off 3,70,000 4,60,000 Profit and Loss A/c 1,40,000 1,65,000 6,30,000 6,60,000 Debentures 3,00,000 2,80,000 Stock-in-Trade 2,40,000 3,70,000 Creditors 70,000 60,000 Debtors 2,50,000 2,30,000 Provision for Tax 60,000 80,000 Cash in Hand and at Bank 80,000 90,000 Discount on issue of Share 20,000 15,000 12,20,000
13,65,000
12,20,000
13,65,000
96
Problem Statement - 2 Profit and Loss Appropriation Account for the year ended 31st March, 2008. Particulars Rs. Particulars Rs. Transfer to Reserves 30,000 Balance b/d 1,40,000 Interim Dividend paid 80,000 Net Profit for current year 1,35,00 Balance b/d 1,65,000 2,75,000 2,75,000 Prepare a Cash Flow Statement as per AS-3.
97
Solution: XYZ Cash Flow Statement for the year ended 31st March, 2008 Particulars (A) Cash Flows from Operating Activities Closing Balance as per Profit and Loss Account Less: Opening Balance as per Profit and Loss Account Adjustments for: Interim Dividend Transfer to Reserve Provision for Taxation Net Profit before Tax Add:Discount on Issue of shares Depreciation Operating Profit before Working Capital Changes Less:Increase in Stock Add:Decrease in Debtors Less:Decrease in Creditors Cash generated from operating activities Less:Income tax paid
Net Cash from Operating Activities
Rs.
Rs.
1,65,000 1,40,000 25,000 80,000 30,000 80,000 2,15,000 5,000 90,000 3,10,000 (1,30,000) 20,000 (10,000) 1,90,000 60,000
1,30,000
98
Contd: (B) Cash Flow from Investing Activities Fixed Assets Purchased Net Cash used in investing Activities (C) Cash Flow from Financing Activities Issue of Shares Redemption of Debentures Dividend Paid Net Cash from Financing Activities Net increase in Cash and Cash Equivalents (A + B + C) Opening balance of Cash Closing balance of Cash and Cash Equivalents
(1,20,000)(1,20,000)
1,00,000 (20,000) (80,000) NIL 10,000 80,000 90,000
99
Learning Summary Cash Flow Statement is prepared as per standard format prescribed by AS-3 issued by ICAI Cash flow statements are prepared to explain the cash movements between two points of time The connection between two successive balance sheets and the statement of cash flows can be shown as follows: ∆ Cash=∆Non Current Liability+∆ Non Current Assets+∆ in Owners Equity The statement of cash flows shows three main categories of cash inflows (cash receipts) and cash outflows (cash payments). These are in order as follows: • Cash Flows From Operating Activities • Cash Flows From Investing Activities • Cash Flows From Financing Activities
Cash Flow from Operating activity can be computed using Direct and Indirect method 100
Thank You 101