Cash Flow Statement

Fund Flow Statement is prepared on the basis of “working capital” concept of fund. But in Cash Flow Statement, no
classification of current and non-current items is made. Hence, even the changes in the constituents of working
capital are reflected in the cash flow statement. A separate statement of “changes in working capital” is not required
for the cash flow statement. While preparing the cash flow statement, ‘actual cash concept” is used. We have to
offset the accrued and prepaid items from the “Operational Fund Flow” to get the “Operational Cash Flow”.

1. Example: Preparation of Cash Flow statement. From the following condensed Balance Sheets and Income
Statement of M/S ABC Ltd, prepare a cash flow statement for the year 1975.

Liabilities 31/12/1974 31/12/1975 Assets 31/12/1974 31/12/1975

Current Liabilities: Current Assets:
1. Creditors for 1. Cash 2,15,000 3,00,000
Goods. 6,45,000 5,30,000 2. Book Debt 3,95,000 2,85,000
2. Outstanding S & 3. Inventories 9,80,000 11,30,000
D Expenses) 85,000 15,000

Total Current 7,30,000 5,45,000 Total Current Assets 15,90,000 17,15,000

Liabilities
Fixed Assets (at cost):
Long Term Liabilities: 1. Plant &
1. Accumulated Equipment 28,50,000 30,00,000
provision for 1,00,000 1,40,000
depreciation 2,00,000 3,00,000
2. Secured Loans
3. Equity Share 20,00,000 20,00,000
Capital
4. Reserves & 14,10,000 17,30,000
Surplus.
44,40,000 47,15,000 44,40,000 47,15,000

Condensed Income Statement for the year 1975

Sales 33,00,000
Less: Cost of Goods sold (including Rs. 40,000/- depreciation) 26,50,000
Therefore, Gross Profit 6,50,000
Less:
1. Selling & Administration. 2,40,000
2. Other Expenses. 60,000
3. Interest on Loan 30,000 3,30,000

Therefore, Profit or Loss for the year 3,20,000

Ans. For preparing the cash flow statement, the particulars of Sales and Purchase for the year 1975 etc are required.
So we have to first prepare the Sundry Debtors and Sundry Creditors Accounts.
Sundry Debtors
To Balance b/d 3,95,000 By Bank (Cash Recd.) (Balanc. fig.) 34,10,000
To Sales 33,00,000 By Balance c/d 2,85,000
36,95,000 36,95,000
Sundry Creditors
To Bank (Cash Pay.) (Balanc. fig.) 28,75,000 By Balance b/d 6,45,000
To Balance c/d 5,30,000 By Purchase* 27,60,000
34,05,000 34,05,000

* Details for Purchase in the year 1975

Cost of Sales excluding depreciation 26,10,000
Add: Closing Stock 11,30,000
37,40,000

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 Less: Opening Stock 9,80,000
Therefore, Purchase made during the year 1975 27,60,000
Outstanding Selling & Distribution expenses
To Bank (Cash Pay.) (Balanc. fig.) 3,10,000 By Balance b/d 85,000
To Balance c/d 15,000 By Bank (Expenses incurred) 2,40,000
3,25,000 3,25,000

Cash Flow statement for the year 1975

Cash Receipt Cash Payment
Balance of cash at commencement 2,15,000 Payment to Suppliers 28,75,000
Receipt from customers 34,10,000 Payment for other expenses 60,000
Secured loans received 1,00,000 Purchase of plant & Equipment 1,50,000
Selling & Distribution expenses 3,10,000
Interest on Loan 30,000
Closing balance of cash 3,00,000
37,25,000 37,25,000

2. Example: Preparation of Cash Flow statement. From the following statements of changes in Balance Sheet
items and Income Statements of M/S Horizon Ltd, prepare a cash flow statement for the year 2000-2001.

Profit & Loss Accounts of M/S Horizon Ltd for the years ending 31/3/2000 and
31/3/2001respectively
Ending Ending
31/03/2001 31/03/2000
Net Sales 701 623
Less: Cost of Goods sold:
Stocks 421
Wages 68
Other manufacturing expenses 63
552 475
Therefore, Gross Profit 149 148
Less: Operating expenses:
Depreciation 30
General administration 12
Selling 18
60 49
Therefore, Operating Profit 89 99
Non-operating Surplus (+) / Deficit (-) - 6
Profit before interest and tax 89 105
Less: Interest 21 22
Profit before tax 68 83
Less: Tax 34 41
Profit after tax (Net Profit) 34 42
Less: Dividend 28 27
Retained Earning 6 15

Changes in Balance Sheet items of M/S Horizon Ltd as on 31/3/2000 and 31/3/2001respectively
As on As on Increase Decrease
31/03/2001 31/03/2000
Equity Share Capital 150 100 - -
Preference Share Capital - - - -
Reserves and Surplus 112 106 6 -
Secured Loans:
Term Loans 70 58 12 -
Cash Credit 73 73 - -
Unsecured Loans:
Bank Credit 25 25 - -

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 Inter Corporate Deposit 44 - 44 -
Current Liabilities & Provisions:
Trade Creditors 75 60 15 -
Advance taken 20 13 7 -
Provisions 10 8 2 -
Total Liabilities 579 493 - -
Fixed Assets (net) 330 322 8 -
Investments 15 15 - -
Secured Loans:
Cash & Bank 10 6 4 -
Debtors 114 68 46 -
Inventories 105 72 33 -
Advances given 5 10 - 5
Miscellaneous Expenditures and Losses 0 0 - -
Total Assets 579 493 - -

Ans. According to the accounting principles of the board of Institute of Chartered Accountants of India, cash flow is
to be classified into three classes:
1. Cash flow from operating activities.
2. Cash flow from investing activities.
3. Cash flow from financing activities.

A Cash Flow from Operating activities

Net profit before tax and extra ordinary items 68
Adjustments for:
Interest paid 21
Depreciation written off 30
51
Operating profit before working capital changes 119
Adjustments for:
Debtors (46)
Inventories (33)
Advances given 5
Trade Creditors 15
Advances taken 7
Provisions 2
(50)
Cash Generated from operations 69
Adjustments for:
Interest paid (21)
Income tax paid (34)
(55)
Cash Flow before extra ordinary items 14
Extra ordinary items:
Less: profit from sale of plants -
Add: Goodwill written off -
Net Cash Flow from Operating activities 14
B Cash Flow from Investing activities
Purchase of Fixed Assets (38)
Net cash Flow from Investing Activities (38)
C Cash Flow from Financing activities
Proceeds from term loans 12
Proceeds from inter corporate deposits 44
Dividend paid (28)
28
Net cash Flow from Financing Activities 28
D Hence, net increase in cash and cash equivalents 4
Add: Beginning cash and cash equivalents as on 01/04/2000 6

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 Therefore, Ending cash and cash equivalents as on 31/03/2001 10

3. Example: Preparation of Cash Flow statement. Acme Manufacturing Co. has provided the following financial
statements. Prepare a statement of cash flow.

Income statement of Acme Manufacturing Co for the year ending 31/12/1975

Revenue 1,200,000
Add: Gain on sale of equipment 50,000
1,250,000
Less: Cost of Goods sold 640,000
Less: Depreciation 125,000
Less: Interest expenses 35,000
(800,000)
Net Income 450,000
Other information:-
a. Equipment with a book value of Rs.1,25,000/- was sold for Rs.1,75,000/- (original cost was Rs.2,25,000/-).
b. Dividend of Rs.2,25,000/-were declared and paid.
Comparative Balance Sheets of Acme Manufacturing Co as on 31/12/1974 and 31/12/1975
As on 31/12/1974 As on 31/12/1975
Assets
Cash 112,500 350,000
Accounts Receivable 350,000 281,250
Inventories 125,000 150,000
Plant & Equipment 1,000,000 1,025,000
Accumulated depreciation (500,000) (525,000)
Land 500,000 718,750
Total Assets 1,587,000 2,000,000
Liabilities and Equity
Accounts Payable 300,000 237,500
Mortgage Payable - 250,000
Common Stock 75,000 75,000
Contributed capital in excess of par 300,000 300,000
Retained earning 912,000 1,137,500
Total Liabilities and Equity 1,587,000 2,000,000

Ans.
Acme Manufacturing Co – statement of cash flow for the year ending 31/12/1975
A Cash Flow from Operating activities
Net Income 450,000
Add (deduct adjustment entries):
Gain on sale of equipment (50,000)
Decrease in Accounts Receivable 68,750
Increase in Inventory (25,000)
Depreciation expenses 125,000
Decrease in Accounts Payable (62,500) 56,250
Net Cash Flow from Operating activities 506,250
B Cash Flow from Investing activities
Sale of equipment 175,000
Purchase of equipment # (250,000)#
Purchase of land (218,750) (293,750)
Net cash Flow from Investing Activities (293,750)
C Cash Flow from Financing activities
Mortgage received (received as loan) 250,000
Dividend Paid (225,000)
D Net cash Flow from Financing Activities 25,000
Hence, net increase in cash and cash equivalents = [A + B + C] 237,500
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 Beginning equipment = 1,000,000
# Purchase (Balancing fig.) = 250,000

Less: Sales = (225,000)

Therefore, ending equipment = 1,025,000

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 Example of Cash Flow Analysis

Q. Given below the Balance Sheets as on 31st Dec in millions of U.S. Composite Corporation:

Assets Liabilities and Shareholders’ Equity

20X2 20X1 20X2 20X1
Current Assets: Current Liabilities:
Cash and Equivalents 140 107 Accounts Payable 213 197
Accounts Receivables 294 270 Notes Payable 50 53
Inventories 269 280 Accrued Expenses 223 205
Others 58 50
Total Current Assets 761 707 Total Current Liabilities 486 455

Fixed Assets: Long-term Liabilities:

Property, Plant & Equipment 1,423 1,274 Deferred Taxes 117 104
Less: Depreciation (550) (460) Long-term debt1 471 458
Net property, Plant & Equipment 873 814 Total long-term Liabilities 588 562

Intangible Assets and Others 245 221 Stockholders’ Equity:

Preferred Stock 39 39
Total Fixed Assets 1,118 1,035 Common Stock ($ 1 par value)3 55 32
Capital Surplus 347 327
Accumulate Retained earning 390 347
Less: Treasury Stock2 (26) (20)
Total Equity 805 725

Total Liabilities & Shareholders’

Total Assets 1,879 1,742 1,879 1,742
Equity

Note:
1. Long-term debt rose by [471 – 458] = 13 million. This is the difference between 86 million new debt and
73 million in retirement of old debt.
2. Treasury stock rose by 6 million. This reflects the repurchase of 6 million of the U.S. Composite’s
company stock.
3. U.S. Composite reports 43 million in new equity. The company issued 23 million shares at a price of 1.87.
The par value of common stock increased by 23 million, and capital surplus by increased by 20 million.

The income statement for the U.S. Composite Corporation for the year ending 20X2 is also given as;

Total Operating Revenue 2,262

Cost of Goods Sold (1,655)
Selling, general and administrative expenses (327)
Depreciation (90)
Operating Income 190
Other income 29
EBIT 219
Interest Expense (49)
Pre-tax income 170
Taxes:
Current (71)
Deferred (13)
Net Income 86
Retained earning 43
Dividends 43
There are 29 millions shares outstanding.
Earning per Share = [86 / 29] 2.97
Dividend per Share = [43 / 29] 1.48

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You are required to show the “Statement of Cash Flows” for the year 20X2 for the U.S. Composite Corporation.

Ans.
“Statement of Cash Flows” for the year 20X2 for the U.S. Composite Corporation (in Millions).

Operations:
Net Income 86
Depreciation 90
Deferred Taxes* 13
Changes in Assets and liabilities:
Accounts Receivables (24)
Inventories 11
Accounts Payable 16
Accrued Expenses 18
Notes payable (3)
Other (8)
Total Cash Flow from Operation 199

Investing Activities:
Acquisition of Fixed Assets (198)
Sale of Fixed Assets 25
Total Cash Flow from Investing activities (173)

Financing activities:
Retirement of debts (including notes) (73)
Proceeds of Long-term Debt 86
Dividends (43)
Repurchase of Stock (6)
Proceeds from New Stock issues 43
Total Cash Flow from Financing activities 7

Changes in Cash (on the Balance Sheet) 33

* Deferred taxes result from differences between accounting income and true taxable income. The current tax
portion is actually sent to the tax authority. The deferred tax portion is not and hence this is a non-cash item.