Cash Flow Statement: Notes 1

Q.1 What do you mean by cash flow statement?

Ans:- As per AS-3 it refers to the statement which is prepared to show flow of cash and
cash equivalents between two balance sheet dates under operating, investing and financing
activities.

Q.2 What do you mean by:-

1) Cash:- As per AS-3 the term cash includes cash in hand, cash at Bank(demand deposits
in bank), cheques/ draft in hand.
2) Cash equivalents:- As per AS-3 the term cash equivalents refers to short term / highly
liquid securities which are next to cash. For e.g.
Short term deposits ,
Marketable securities/ Current investments,
Commercial paper,
Treasurery Bills
3) Flow of cash:- The term flow of cash refers to inflow and outflow of cash and cash
equivalents which must bring change in the net balance of cash and cash equivalents.

Q.3 Whether there will be inflow/ outflow or no flow of cash after following transactions:-
A) Cash deposited in Bank
B) Cash withdrawal from bank
C) Marketable securities Purchased
D) Marketable securities sold at par
E) Marketable securities sold at Profit
F) Marketable securities sold at loss

Q.4 Make differences between:-

A) Cash flow statement V/s Cash book:-
Nature:- The nature of cash flow statement is statement which is prepared at the end of
Accounting period where as cash book is Journalise ledger which is prepared on daily basis
Objective:- a cash flow statement is prepared to show flow of cash under operating,
investing and financing activities where as cash book is prepared to compute closing
balance of cash and cash equivalents at the end of year.

B) Cash flow statement V/s Cash budget:- cash flow statement is historical in nature as it
is prepared on the basis of past 2 year's balance sheet where as cash budget is prepared for
future based upon estimations.

C) Cash flow statement V/s income statement:- Objective:- cash flow statement is prepared
to show the flow of cash under three different activities named operating, investing and
financing where as income statement is prepared to find out profitability.
Accounting basis:- cash flow statement is prepared on cash basis where as income
statement is prepared on accrual basis.

D) Net profit V/s Cash from operation:-

Accounting basis:- net profit is computed on approval basis where as cash from operations
is computed on cash basis.
Non cash items:- net profit is computed after considering non-cash items also where as
cash from operation is computed after considering cash items only.
Non operating items:- net profit is computed after considering non-operating items also
whereas cash from operation considers only operating items.

Q.5 List two objectives of preparing cash flow statement?

Ans:- 1. Cash flow statement is prepared to classify the flow of cash under three different
activities named operating, investing and financing activities.
2. cash flow statement is prepared to find out net increase or decrease in the balance of
cash and cash equivalent during an accounting period.

Q.6 Explain in brief limitations of cash flow statement

Ans:- 1. Window dressing:- the term window dressing refers to practice of manipulation in
the books of account. By pre ponding cash receipts and post ponding cash payments, a
better cash flow statement can be prepared that of actual.
2. Historical in nature:- Cash flow statement is prepared based on previous two year's
balance sheet so it is historical in nature and that's why it is not very helpful in short term
planning of cash as future is also affected by inflation and other factors.
3. It ignores significant non cash items:- Cash flow statement is prepared on cash basis so
it ignores significant non cash transactions like purchase of machine by issuing shares,
issue of bonus shares etc.

Q.7 Elaborate Cash from operation

Ans:- Meaning:- it includes flow of cash related to principal revenue generating activities of
a business in which it deals
Inflow:-
1. Cash Sale of goods and services
2. Cash received from debtors and bills receivable.
3. Commission/ fees/ royalty received
4. Interest received from debtors and bills receivable
5. Tax refund
6. Insurance proceeds against destruction/ abnormal loss of goods (extraordinary)
7. Bad debts recovered (extraordinary)

Outflow:-
1. Cash purchases
2. Payment made to creditors and bills payable
3. Commission or brokerage paid on goods
4. Rent paid
5. Interest paid to creditors and bills payable
6. Cash payment for other operating expenses like office, administration selling and
distribution
7. Income tax paid
8. Salary paid (always operating)
9. Amount paid to employees under VRS (extraordinary)

Q.8 Elaborate cash from investing activities.

Ans:- Meaning:- investing activities include flow of cash related to fixed assets, non current
investment and loans and advances
Inflow:-
1. Sale of fixed assets or non current investment
2. Repayment received of loans and advances made to third party (short & long term)
3. Dividend received
4. Interest received
5. Rent received
6. Sale proceeds of short term investments other than Marketable securities
7. insurance proceeds against destruction/ abnormal loss of fixed assets (extraordinary)
8. Lottery receipt (extraordinary)
Outflow:-
1. Purchase of fixed assets and noncurrent Investments
2. Loans and advances made to third party (short and long term)
3. Purchase of goodwill (always investing)
4. Purchase of other intangible assets like patents copyright trademark
5. Payment of capital gain tax

Q.9 Elaborate cash from financing activities

Ans:- Cash from financing activities include flow of cash related to owners equity and long
term debts including bank overdraft and cash credit.
Inflow:-
1. Issue of equity and preference shares
2. Issue of debentures
3. Secured or unsecured loan raised ( bonds/ public deposit )
4. Increase in bank overdraft or cash credit
5. Interest received on calls in arrears
Outflow:-
1. Redemption of preference shares or debentures
2. Buyback of equity shares ( extra ordinary)
3. Repayment of secured or unsecured loans
4. Interest paid
5. Dividend or interim dividend paid (always financing)
6. Decrease in the balance of bank overdraft or cash credit
7. Interest paid on bank overdraft and cash credit
8. Interest paid on calls in advance
9. Preliminary expenses paid (share issue expenses, underwriting Commission, brokerage
paid on issuing shares and debentures)
10. Dividend tax paid

Q.10 Compute cash from operations from Following:-

1. Cash sales Rs. 10,00,000; credit sales Rs. 5,00,000; sales return Rs 20,000; Baddebts
Rs. 30,000; discount allowed Rs. 10,000; closing balance of debtors Rs. 1,50,000.
2. Rent received for 20 months Rs 2,00,000.
3. Commission income as per P&L a/c Rs.80,000 including accrued commission Rs.
10,000.
4. Salary paid during the year Rs 1,80,000 including prepaid salary Rs 30,000.
5. Depreciation Rs. 50,000
6. Training fees received in cash Rs 80,000 including unearned fees Rs 10,000
7. Interest paid in cash Rs. 50,000; interest outstanding Rs. 10,000
8. Baddebts recovered Rs. 50,000.
Q.11 Calculate cash from investing activities from followings
1. Machine costing Rs. 1,00,000; WDV Rs. 80,000; sold at a loss of Rs. 10,000.
2. 10% investments purchased Rs 90,000; brokerage paid Rs. 5,000.
3. Rent paid in cash Rs. 1,20,000; rent received as per income statement Rs. 1,50,000;
accrued rent Rs.15,000.
4. Machine purchased and the payment was made by issuing shares of Rs. 5,00,000 at
10% premium.
5. This machine was sold at the end of year at a loss of Rs 40,000 (Ignore depreciation)
6. Interest income as per income statement Rs 80,000; accrued interest Rs.10,000
7. Loans and advances made Rs 2,50,000.
8. Dividend paid Rs. 80,000; dividend received Rs. 40,000.

Q.12 Calculate cash from financing activities

1. Shares issued Rs. 5,00,000 including bonus shares Rs. 1,00,000
2. 10% preference shares Rs 2,00,000 were redeemed at 5% premium.
3. 10% debentures issued Rs. 4,00,000 under 5% discount including debentures worth Rs.
1,00,000 issued to the vendor of furniture of Rs. 95,000.
4. Brokerage paid on purchasing goods Rs 10,000; brokerage paid on issuing shares Rs
15000; brokerage paid on purchasing land Rs. 20,000.
5. Interest paid on bank overdraft Rs 35,000; interest on calls in Arrear Rs. 5,000; interest
on calls in advance Rs. 25,000.
6. 12% debentures of Rs. 10,00,000 were redeemed at 5% premium. 80% of them were
converted into equity shares.