Professional Documents
Culture Documents
III.
Cash Flows are inflows and outflows of cash and cash equivalents.AS-3
requires a cash flow statement to be prepared and presented in a manner
that it shows cash flows from business transactions during a period
classifying the into:
(I)Operating Activities; (ii) Investing Activities; (III) Financing Activities.
IV.
V.
VI.
OPERATING ACTIVITIES
CASH INFLOW
CASH OUTFLOW
Cash Sales
Cash received from Debtors
Cash received from commission
and Fees
Royalty.
In the case of financial companies
Cash received for Interest and
Dividends
Sale of Securities
Cash purchase
Payment to creditors
Cash operating expenses
Payment of Wages
Income Tax
In the case of financial companies
Cash paid for interest
Purchase of Securities
INVESTING ACTIVITIES
Cash Inflow
Cash Outflow
FINANCING ACTIVITIES
Cash Inflow
1. Issue of shares in Cash
2. Issue of Debentures in
Cash
3. Proceeds from Long-term
Borrowings
Cash Outflow
Payment of Loans
Redemption of preference shares
Buy-back of Equity shares
Payment of Dividend
Payment of Interest
Rs.
Particulars
Cr.
Rs.
.. By Balance b/d
.. By Profit and loss A/c
(provision made during the
year)
..
.
..
....
NOTE:
If only the provision for tax is given in the two Balance Sheets and no information
about tax paid is given, the amount in the previous years Balance sheet is
treated as tax paid during the current year. It involves an Outflow of cash.
The current years provision for tax represents the amount of tax provided for the
current year. It is added back to the current years profits to calculate net profit
before tax and extraordinary items (under the indirect method). It is merely a
book entry and does not involve outflow of cash.
The provision for Tax Account provides information about the tax paid during the
current year as well as the tax provided for the current year.
Indirect Method of calculating the Cash Flow from Operating Activities.
Under this method, net cash flow from operating activities is calculated by
employing the information contained in the Profit and Loss Account and
Balance Sheet.
The amount being net profit before tax is the starting point for calculation. It can
be calculated as:
Difference between the Closing Balance and the Opening Balance of Profit and Loss A/c
Add: The Proposed Dividend for the current year
Add: The Interim Dividend paid during the year
Add: Transfer to Reserve
Add: The Provision for tax made during the year
Less: Refund for tax credited to the Profit and Loss A/c
Less: Extraordinary items, if any, credited to the Profit and Loss A/c
Net profits before tax and extraordinary items
After having computed the Net Profit before tax and extraordinary items, it is
further adjusted to arrive at the net Cash Flow from Operating Activities. These
adjustments are classified into two categories:
1. Adjustments for Non-Cash and Non-Operating Items:
Non-Cash and non-operating items (such as depreciation, interest on long
term borrowings, discount on issue of shares or debentures written off,
goodwill/patents/copyright amortized, loss on sale on assets or
investments, premium payable on redemption of debentures or preferential
shares, etc) are added back and non-operating incomes and gains (such as
profit on sale on fixed assets and investments, interest, rent or dividend
received, etc) are deducted.
2. Adjustments for Changes in the Current Assets and Current Liabilities
Related to Operating Activities:
(e.g., debtors, bills receivable, stock, prepaid expenses, creditors, bills
payable, outstanding expenses, etc)
A decrease in current assets (excluding cash and cash equivalents) and
increase in current liabilities (excluding bank overdraft) is added and an
increase in current assets and a decrease in current liabilities is deducted
from operating profit before working capital changes to arrive at cash
generated from operation.
After that tax paid (the net of refund of tax) is deducted from cash generated
from operations to arrive at the cash flow from operating activities before
extraordinary items. After that we add or subtract the proceeds of
extraordinary item(s) to get Net cash from (used in) operating activities.
Current Liabilities
1) Creditors and Bills Payable: A decrease in creditors and bills payable
will reduce cash. Conversely, an increase in creditors/bills payable will
effectively increase the cash available to the enterprise.
2) Outstanding Expenses: A decrease in outstanding expenses will reduce
cash. Similarly, an increase in outstanding expenses will increase the
cash available to the enterprise.
The general rules that develop from the above discussion are:
1.
2.
3.
4.
Treatment of Depreciation
At the time of calculating profit/loss, depreciation is debited to profit
and loss account. It does not involve cash but is a book entry. Therefore,
depreciation is to be added back to net profit before tax for
calculating cash flow.
Dr.
Particulars
Particulars
Rs.
To Balance b/d
Rs.
Cr.
NOTES:
1) Generally, the purchase of fixed assets is a balancing amount on the debit
side of the account and depreciation or the sale of fixed assets on the
credit side of the account.
2) Information regarding depreciation is generally given in the question.
Students are required find out only the sale or purchase of asset.
3) If the sale and depreciation are not given, then assume it is either sale or
depreciation and give your assumptions.
In case of land, it should be assumed sale as depreciation is not charged
on land. In case of patents/goodwill/trade marks, it should be assumed
that the amount is written off.
CASE 2: When the fixed assets are shown at their original cost and
accumulated depreciation (provision for depreciation) is separately
maintained.
Under this case, (in contrast to the above case), depreciation is not directly
charged to the Asset Account. The depreciation for the period is debited to the
depreciation account (transferred to P&L A/c) and credited to Accumulated
Depreciation Account.
In the Balance Sheet, asset appears at its original cost and the accumulated
depreciation is shown either by deducting from Fixed Asset Account or on the
liability side of Balance sheet. In such cases, we prepare separate accounts for
fixed assets and accumulated depreciation. Depreciation for the year can be
ascertained from provision for depreciation account.
Dr.
Cr.
Particulars
Rs.
Particulars
Rs.
To Balance b/d
To Profit & loss A/c
.
.
.
.
To Bank A/c
..
By Balance c/d
..
..
NOTE: Normally, the purchase of fixed asset is a balancing amount on the debit
side of the account and the sale of fixed asset on the credit side of the account.
Dr.
Cr.
Particulars
Rs.
Particulars
Rs.
By Balance b/d
By Profit & loss A/c
..
When shares are issued at a premium, the cash flow statement reflects the total
cash generated by the issue (i.e., Face Value of shares + Premium).
The cash flow from financing activities is ascertained by analyzing the change in
Equity and Preference share capital, Debentures and other borrowings.
Special Items Treatment thereof in Cash Flow Statement
Enterprises
Financial Enterprises
Other Enterprises
Interest
Paid and
Received
Operating
Activities
I.
Dividends
Received
Dividends
Paid
Interest
Paid
Financing
Activities
Financing
Activities
Interest
Paid and
Dividends
Received
Investing
Activities
Dividends
Paid
Financing
Activities
Particulars
Dr.
To Balance b/d
To Share capital/debentures
Rs.
Particulars
..
Cr.
Rs.
.
.
Accounting Treatment
a) Amount of Discount Written Off: Add Back to the current years
profits for ascertaining cash from operating activities.
b) Amount of Discount Allowed During the year: Show the net proceeds
of shares/debentures as cash from Financing Activities.
INDIRECT METHOD
FORMAT OF CASH FLOW STATEMENT
For the year ended.
As per Accounting Standard-3 (Revised)
Particulars
I.
Rs.
..
........
Decrease in Stock/Inventories
Decrease in Debtors/Bills Receivables
Decrease in Accrued Incomes
Decrease in prepaid expenses
Increase in creditors/Bills payables
Increase in outstanding expenses
Increase in Advance incomes
Increase in Provision for Doubtful Debts
Notes:
1. Amounts in brackets indicate negative amounts, i.e., amounts that are to be
deducted.
2. Increase/Decrease in unpaid Interest on Debentures/Loans affects the Cash
Flow from Financing Activities and not Operating Activities.
3. Increase/Decrease in Unclaimed Dividend affects the Cash Flow from
Financing Activities and not Operating Activities.
4. Increase/Decrease in Accrued Interest on Investment affects the Cash Flow
from Investing Activities and not Operating Activities.