GASH FLOW STATEMENT Learning Objectives , studying this chapter, you shou 7 expan the meaning of cash flow statement; ( 7 understand the concept of funds in.cash flow analysis 7 identity the sources and applications of cash; ro 7 diferentiate between cash flow analysis and funds flow analysis: 7 explain the utility and limitations of cash flow analysis; : 7 understand the salient features ‘of AS: 3 cash flow statements; 7 prepare cash flow statement; and 7 bxplain the meaning of certain key terms ate id be able to: MEANING OF CASH FLOW STATEMENT ACash Flow Statement is a statement depicting change in cash position fi For example, if the cash balance cof a business is shown by its Balance Sheet on 31 December, 2016 417 0,000 while the cash balance as per its Balance Sheet on 31 December, 2017 is 30,000, there ti been an inflow of cash of € 10,000 in the year 2017 as compared to the year 2017. The cash flow h might be. It also helps sutement explains the reasons for such inflows or outflows of cash, as the cas ‘management in making plans for the immediate future. A Projected Cash Flow Statement or a Cash fue will help the management in ascertaining how much cash will be available to meet obligations Bde creditors, to pay henk loans and to pay dividend to the shareholders. A proper planning of the epee will enable the management to have cash available whenever needed and put it to some le or productive use in case there is surplus cash available. ee term Cash’” here stands for cash and bank balances. It has already been explained in the tetem parte that the term “Funds”, in a narrower sense, is also used to denote cash. In such a case, eee exclude from its purview all other current assets and currents liabilities and the Me potos of pace and “Cash Flow Statement” will have synonymous meanings. However, is, ly, we are calling this part of study Cash Flow Analysis and not Funds Flow from one period to another. PPAR X Reon OF CASH FLOW STATEMENT ‘Ow Statement can be od i prepared on the same pattern on which a Funds Fl Suse change in the cash position fr i is aera este mae ‘om one period to another is computed by taking into accounterat 3.138 Management Accounting PB opr ph. @ ctie® Sources of Cash Ni - anon Bitcali jf ys Sources of Cash can be both internal as well as external: 7 ot The e ofit Internal sources Cash from operations is the main internal source. The Net Profit shown by the Profit fol uel and Loss Account will have to be adjusted for non-cash items finding cout cash from operations. Some Afi ai fc ‘s a of these items are as follows: : Fin (i) Depreciation. Depre sult in outflow of cash and, therefore, net profit willhave 9) yer: to be increased by th tion or development rebate charged, in order to find out ame” the real cash generated from operations, Net jial (ii) Amortization of intangible assets. Goodwill, preliminary expenses, ee.» when written off against oe vin profits, reduce the net profits without affecting the cash balance. The amounts written off should, e fc tr therefore, be added back to profits to find out the cash from operations. ot a she (iii) Loss on sale of fixed ass back to profits. of: (iv) Gains from sale of fixed assets. Since sale of fixed assets is taken as a separate source of cash, it i” should be deducted from net profits. (v) Creation of reserves. If profit for the year has been arrived at after charging transfers to reserves, such transfers should be added back to profits. In case operations show a net loss, such net loss after making adjustments for non-cash items will be shown as an application of cash. = Thus, cash from operations is computed on the pattern of computation of *Funds” from operations, *=t#s*S as explained in the earlier chapter. However, to find out of real cash from operations, adjustments will fs have to be made for ‘changes’ in current assets and current liabilities arising on account of operations, as profit« viz., trade debtors, trade creditors, bills receivable, bills payable, etc. For the sake of convenience, computation of cash from operations can be studied by taking two gixies different situations: (1) when all transactions are cash transactions, and (2) when all transactions are not at cash transactions. It does not result in outflow of cash and, therefore, should be added pes When all transactions are cash transactions ‘The computation of cash from operations will be very 7 simple in this case. The net profit as shown by the Profit and Loss Account will be taken as the amount ae of cash from operations as shown in the following example: ‘obvi w Example: ‘epofit Profit and Loss Account _—— for the year ended 31 December, 2017 Yeulate Particulars z Particulars z tn To Purchases 15,000, By Sales 50,000 To Wages 10,000 To Rent ; 500 To Stationery 2,500 To Net profit 22,000 50,000 In the example given above, if all transactions are cash transactions, i.e., all purchases and expenses have been paid for in cash and all sales have been realised in cash, the cash from operations will be z 22,000 i.e,, the net profit as shown by the Profit and Loss Account. Thus, in case of all transactions being cash transactions, the equation for computing cash from operations can be put as follows: 4 Cash from operations = Net Profitn all transactions q wn from operations on 4 nal practice. The busi Seas outstanding ang = profit made by a tions in such a sity, Computation of chapter; and (i) Adjustments in the funds so calculate, current liabilities, Weare giving below an it Cash Flow stat Te Not cash Hansactions jn th oe the basis that alt transactioy a NSS sells go some of firm cannot ation can funds (i.¢, SSeS (excluding cash) and stration for/computiag ace : Puting *Funds’ from o erations. How. se credit transactions, henee ah Amount of “Funds from Overatin n nes OME nether spesions as shown in the illustrates” Iustration 4.1 ‘WPuchases | ‘To Wages fit c/d To Gross profit c) a To Salaries By Gross Profit b/d 5,000 ToRent By Profit on sale of building ToDepreciation on plant Book value 710,000 ToLoss on sale of furniture Sold for 15,000 5,000 To Goodwill Written off ToNet profit ™ 10,000 Calculate the cash from operations. Solution Cash from Operations 75,500 Net profit as per P. & L. Ale ‘ é Non-cash items (i.e., items which do not result in outflow of cash): cnr Depreciation in Loss on sale of furniture seca nt Iwill written off eA n {285 Non-cash items (items which do not result in inflow of cash): a Profit on sale of building es © 15,000 will be taken as a separate source ofc 3,000 ~Cash from operations3.140 Management Accounting Adjustments for Changes in Current Assets and Current Liabilities In the illustration given above, the cash from operations has been computed on the same pattem on which funds from operations are computed. As @ matter of fact, the funds from operations is equivalent to cash from operations in this case. This is because of the presumption that all are cash transactions ang all goods have been sold, However, there may be credit purchases, credit sales, outstanding and prepaig expenses, etc. In such a case, adjustments will have to be made for each of these items in order to find out cash from operations, This has been explained in the following pages: (i) Effects of Credit Sales. In business, there are both cash sales and credit sales. In case, the total sales are % 30,000 out of which the credit sales are & 10,000, it means sales have contributed only to the extent of € 20,000 in providing cash from operations. Thus, while computing cash from operations, it Will be necessary that suitable adjustments for outstanding debtors are also made. Consider the following example: Example 1 Net profit for the year 20,000 Total sales 40,000 Debtors outstanding at the end of the accounting year 10,000 The above figures show that out of total sales of € 40,000 which must have been considered from computing net profit, % 10,000 has still to be realised in cash from debtors. Therefore, cash from operations should be computed as follows: Net Profit for the year % 20,000 Less: Debtors outstanding at the end of the accounting year 10,000 Cash from operations 10,000 In case, there were outstanding debtors in the beginning of the accounting year amounting to % 15,000, it can safely be presumed that they must have been realised during the course of the year. The amount of cash from operations will therefore be computed as follows: Net Profit for the year 20,000 Less: Debtors outstanding at the end of the accounting year 10,000 10,000 Add: Debtors outstanding in the beginning of the accounting year 15,000 Cash from operations 25,000 Thus, cash from operations can be calculated on the basis of the following equation if there are debtors outstanding at the end as well as in the beginning of the accounting year: Es Debtors outstanding at the beginning of the accounting year. Cash from Operations = Net profit a Debtors outstanding at the end of the accounting yeat or s + Decrease in Debtors. Cash from operations = Net profit Or = Increase in Debtors For example, in the above case, cash from operations can be computed as follows: i % 20,000 + & 5,000 = 25,000, (ii) Effect of Credit Purchases. Whatever has been stated regarding credit sales is also applicable !© credit purchases. The only difference will be that decrease in creditors from one period to will result im decrease of cash from operations because it means more cash payments havete tothe creditors Which wil wx from one period £0 another wil jus been made to the ereditors f ihe disposal of the business ? pore Sales for the year Expenses peanount oF net protit comes to Sales Jess: Purchases Expenses Not Profit hough the net p ait prchases). THis is Because tho feet Profit, the actual cash whieh perations stands incre’ sample 3 Sales Purchases Expenses Creditors outstand danding, at the Creditors ou Tpeeash from operations will be Sales Less: P Expenses Net Profit ass; Creditors outstanding Cash from operat Alematively, cash fro Net profit for the yea ‘Add: Increas ar h Cash from operations us, the effect of eredit pu Sish from operation: urchases » Net profit Cash from operations © “os! | se and Loss Accoun Silay, the amount of closing 0% tases the amount of net cy help of the following examP!* nurchaxe of the year (including e afit is © 5,000, the cash from opx ugh Purchases of & 30,000 have been considered for ealeu % 20,000, Thus, cash from ng, in the beginning of the accounting y ‘Add: Creditors outstanding 2 m operations ean n creditors (& 1 Effect of Opening and C 4, 1 thus edu k is put ol profit withow Cash Plow Statement 3.441 ronult | nor for eM edit pu Pairchayen af © 10,000), © 40,000 5,000 tions will be & has been paid for purchases is only ased by & 10,000, the amount of creditors outstanding, at the cend of the accounting year computed as follows © 30,000 5,000 a the beginning, ofthe accounting Year n be computed as follows 5,000 ~€ 10,000) n be shown with the hi Increase in creditors Or Decrease in © amount of openiN sto ig the net profit without re nt the eredit side of the Profit the eash from operation’: editors. ack is cl 1 increasing we of cosh f goods ay Hom operations because upped which wil sul in inerease of eas balance a relp of the following eau «ducing the cash ind Loss Account, Tt thus Nt An outta WW of cinsh, On the other hand, inerewse in eredilors lows payment €40,000 40,000 5,000 40,000 45,000 5,000 15,000 (® 5,000 + © 10,000 for ng, ind of the year. 40,000 30,000 5,000 10,000 15,000 40,000 35,000 5,000 15,000 20,000 10,000 10,000 5,000 5,000 10,000 tion in computing arged to the debit side of from operations. ‘This will be clear with3.142 Management Accounting fl eo caries % 5,000 Cet Opening stock a "ow cnet ‘ : Purchars pe Hao ican 10,000 ® The amount of net profit can be computed as follows: r, Kee Profit and Loss Account j= Particulars || Particulars u Opening stock 5,000 _{/Sales 35,000 Purchases 20,000 || Closing stock 10,000 Expenses 5,000 Net profit 15,000 ple 45,000 45,000 The net profit for the year is € 15,000. The cash from operations will be computed as follows: Net Profit for the year 2 15,000 Add: Opening stock 5,000 20,000 Less: Closing stock 10,000 Te cash Cash from operations 10,000 Alternatively, the amount of cash from operations can be computed as follows: Net Profit for the year 2 15,000 Less: Outflow of cash on account of increase in stock 5,000 Cash from operations The effect of change in stock on cash from operations can now be put up as follows: + Decrease in stock. Cash from operations = Net profit Ont Ahern = Increase in stock Effect of Outstanding Expenses, Incomes received in Advance, etc. The effect of these items on cash from operations is similar to the effect of creditors. This means any increase in these items will result in increase in cash from operations while any decrease means decrease in cash from operations. This is because net profit from operations is computed after charging to it all expenses whether paid Th or outstanding. In case certain expenses have not been paid, this will result in decrease of net profit mh. without a corresponding decrease in cash from operations. Similarly, income received in advance is not ~~ taken into account while calculating profit from operations, since it relates to the next year. It, therefore, | means cash from operations will be higher than the actual net profit as shown by the Profit and Loss Account. Consider the following example: Example 5 Gross Profit 30,000 Expenses paid 10,000 Interest received 2,000 % 2,000 are outstanding on account of expenses while & 500 has been received as interest for the year. The net profit will be computed as follows: ;ash Flow Statement 3.143 P oe rofit and Loss Account penpenses om 10,000 u Particulars lore stand Eee pp sven SACO ey | 30,000 spnet ro By Interest received 2,000 Less: Interest received 3 in advance 00 | __1,500__ Fhe cash from operations will now be [ se computed as follows: Net Profit for the year z Add: Expenses outstandi 'standing at the end of th oe Interest received in advance 2m Cash from operations 500 Example 6 22,000 Net profit for the year 2013 Expenses outstanding as on T January, 2013.” bs yt Expenses outstanding as on 31 December, 2013 aad Interest received in advance 1 January, 2013 Pond Interest received in advance 31 December, 2013 2000 the cash from operations will be computed as follows ; Net Profit for the year Add: Expenses outstandi sai jing on 31 December, 2013 3,000 Income received in advance on 31 December, 2013 2,000 15,000 Less: Expenses outstanding on 1 January, 2013 2,000 Interest received in advance on 1 January, 2013 1,000 3,000 Cash from operations 12,000 sematively, cash from operations can be computed as follows: ‘Net Profit for the year e210 000 ‘Add; Increase in outstanding expenses Wo ived in advance in 12,000 ‘Add; Increase in interest recei Cash from operations Thus, the effect of income received in advance and outstandin; can be shown as follows: 1g expenses on cash from operations, > Increase in outstanding expenses Net profit + Increase in income received in advance — Decrease in outstanding expenses — Decrease in income received in advance. Tacome, The effect of prepaid expenses and outstanding ie Prepaid Expenses a" © ilar ect of dios. While computing net roi ee ¢ of cash from operations © ranting year are charged 10 the Profit and Loss Account. _Perations, the expenses om! ‘and Loss Account. Thus, pre-payment of expenses ‘Similarly, income earned fit: paid in advance 2 re ca ‘cash from operations. snot decrease net profit for the YE oss Account whether it has been received or not. Thus, = ope de, increase the net profit forthe year f the following example: Cash from operations = (ting a year is credited t0 the pol Weta en ill be clear with the help o' me, which hi ithout as not been rece!v ! increasing cash from operations: This W!3.144 Management Accounting profit z oa Expenses paid 0,000 Interest re 2,000 for the next year, While interest of € 500 has become due The expenses paid include & 1,000 paid during the year, but it has not been received so far, The net profit for the year will be computed as follows: Profit and Loss Account Particulars ae: Particulars a To Expenses paid 10,000 By Gross profit 30,000 Less: Prepaid exp. 1,000 9,000. | By Interest received 2,000 To Net profit 23,500 _| Add: Interest accrued 500 2,500 32,500 32,500 ‘Now, the cash from operations will be computed as follows: Net profit for the year Less: Prepaid expenses 1,000 Less: Outstanding interest 500 Example 8 Net profit for the year 2013 Prepaid expenses 1 January 2013 Outstanding (accrued) income | January 2013 Prepaid expenses 31 December 2013 Outstanding income 31 December 2013 Cash from operations will be computed as follows: Net profit for the year % 20,000 Less: Prepaid expenses on 31 Dec. 2013 3,000 Outstanding income on 31 Dec. 2013 2,000 5,000 — 15,000 ‘Add: Prepaid expenses on 1 Jan, 2013 2,000 Income outstanding on | Jan. 2013 1,000 3,000 18. Alternatively, cash from operations can be computed as follows: Net Profit for the year % 20,000 Less: Increase in prepaid expenses 31,000 Increase in outstanding income 1,000 2,000 Thus, the effect of prepaid expenses and accrued income on cash from operations can be shown it the form of following equation: + Decrease in prepaid expenses + Decrease in accrued income. Cash from operations = Net profit _ = Increase in prepaid expenses — Increase in accrued income. ‘The overall effect of stock, debtors, creditors, outstanding expenses, income received in prepaid expenses and accrued income can be shown in the form of the following formula:3.145 Cash Flow Statement + Decrease in debtors + Decrease in stock + Decrease in prepaid expenses + Decrease in accrued income cash from operations = Net profi + Increase in creditors + Increase in outstanding expenses Increase in debiors ~ Increase in stock ~ Increase in prepaid expenses = Increase in accrued income = Decrease in creditors — Decrease in outstanding expenses mula may be summarised in the form of following general rules: Increase in a current asset Decrease in a current liability results in Decrease in cash AND Decrease in a current asset Increase in a current liability results in Increase in cash | ‘ontinuing the figures given as Illustration 4.1, calculate the cash from operations Mustration 4.2 Ce \dditional information: with the following a Balance as on 1 March, 2015 31 March, 2014 _ 3! z z 10,000 12,000 paces 15,000 20,000 (i) Debtors 5,000 7,500 (iii) Creditors " 5,000 8,000 | (iv) Bills receivable 3,000 5,000 | (v) Outstanding expenses 4,000 ne | (vi) Bills payable 1,000 (vi) Prepaid expenses 4 - ‘ . a rations can be done conveniently ifit is done, as explained before, in | ‘computation of cash from ope ‘ on | si vig teenie ee ii) Adjustment in the amo’ : f eae nputed in Iustrtion 41) Howenes adjustments ppbilites:' 3,000 (as comP' araties in order to compute cash The tions amount © 3) sand current liabilities in pute cas funds from oper t for current asselS Bi’ OF current assets and current liabilities : cul Will have to be made in this ee py aking each from operations. This has t0 °° independently, as explained below:3.146 Management Accounting @ The investment in stock has increased by % 2,000 as compared to the previous year. This means cash mast have gone out to the extent of € 2.000. It will, therefore, decrease the cash balance, (@ Debtors have gone up from T 15,000 on 31 March, 2004 to € 20,000 on 31 March, 2005. There ig an increase of f 5,000. It shows that sales to the extent of % 5,000 have not been realised in cash Hence, cash from operations will be reduced by % 5,000 (Gi) Creditors have gone up by % 2,500. ‘Thus, purchases to the extent of this amount have not been paid in cash It is. therefore, a “source” of cash. (iv) Bills Receivable have increased by & 3,000. Thus sales to the extent of % 3,000 have not been paid im cash. Hence cash, on account of operations will be reduced by € 3.000. (*) Bills payable have come down by € 2.000. It showns more payments of cash. The cash from operations will stand reduced by % 2,000. (vi) Outstanding expenses have increased by % 2,000. Thus, expenses to this extent have not been paid resulting in increase of cash from operations by this amount. (vai) Prepaid expenses have come down by € 500. This shows less of payment and hence cash operations will increase by 7 500. Casts from operations now can be computed as follows: Increase (=) Decrease (-) Cash from operations 2s per P & L A/c (Illustration 4.1) 73,000 2,000 External sources The external sources of cash are: (i) Issue of new shares. In case shares have been issued for cash, the net cash received (ie., after deducting expenses on issue of shares or discount on issue of shares) will be taken as a source of cash. (ii) Raising long-term loans. Long-term loans such as issue of debentures, loans from Industral Finance Corporation, State Financial Corporation, IDBI, etc., are sources of cash. They should be shown separately. (iii) Purchase of plant and machinery on deferred payments. In case plant and machinery has purchased on a deferred payment system, it should be shown as a separate source of cash the extent of deferred credit. However, the cost of machinery purchased will be shown 35 application of cash. 4 (iv) Short-term borrowings—cash credit from banks. Short-term borrowing, etc., from banks i cash available and they have to be shown separately under this head. 7) Sil eal eects rca sak eae oa Decrease in various current assets and increase in various current liabilities (discussed be taken as external sources of cash, if they are not adjusted while computing cash from Applications of Cash OH a ain Applications of cash may take any of the following forms: pate ps meCash Flow statement 3.147 purchase of fixed assets:Cash may be uti ’ ewals OF 0 replacement of | existing fixed assets. be utilised for additional fixed assets OF ren long-t ; (a Pa” AO tr loans The payment of long-term loans such a institut ae eed results in decrease in cash. It is, therefore, an aPP. vase in deferred payment liabilities Payments for plant and machinery PU! ee ne deferred payment basis has to be made as per the agreement. It is, therefore, 4” app! s loans from financial ication of cash. rchased On lication of cash. Loss on account of operations Loss suffered on account of business operations wil] result in outflow of cash. io) Payment of tax Payment of tax will result in decrease of cash and hence it is an PI @ plication of cash. x) Payment of dividend This decreases the cash available for business and hence it is an application of cash. : Decrease in unsecured loans, deposits, ete. The decrease in these liabilities denotes that they fave been paid off to that extent. It results, therefore, in outflow of cash. increase in various current assets or decrease in erious current liabilities may be sh hile finding out cas! plications of cash, if changes, in these items have not been adjusted w operations, DIFFERENCE BE Following are the points of 1. A Cash Flow Analysi ‘Analysis is concerned with change 1» working Cash is only one of the constituents of working smventories, accounts receivable, prepaid expenses. 1. A Cash Flow Statement 1s merely a record of cash receipts and disbur: is valuable in its own way but it fails to bring to light many important cl disposition of resources. While studying the short-term solvency of'a business one i not only in cash balance but also in the assets which can be easily convertible into cash. 4. Cash flow analysis is more useful to the srranagement as a tool of financial analysis in short. periods as compared to funds flow anal ightly been said that shorter the period covered lysis. Ithas ris by the analysis, greater is the importance of cash flow analysis. For example, if it is to be found) out whether the business can mect its ‘maturing after 10 years from now, a good estimate can be made about the firm’s capacity t0 meet its long-term obligations if changes in working capital position on ‘account of operations are observed, However, if the firm’s capacity to meet a liability maturing after one ‘month is to be seen t he realistic approach would be to consider the projected change in the cash position rather than an expected change in the working capital Position. ital and, Cash is part of working CaP improvement in the funds ition but Fesults in “inflow of fun flow the fund: not necessarily means soul a) own as h from ND FUNDS FLOW ANALYSIS ‘Analysis and a Funds Flow Analysis: e in cash position while a Fund Flow .en two balance sheet dates. | other constituents such as TWEEN CASH FLOW ANALYSIS A! tween a Cash Flow d only with the chang capital position, betwe capital besides several difference bet is is concernes sements. Of course, it changes involving the is interested therefore, an improvement in cash position results in the reverse is not true. In other words “inflow of cash” is may not necessarily result in “inflow of cash.” nd cash position but a sound ay ds” but in! yn does ; , ind funds position. ‘a cash flow analysis and @ funds flow analysis can be made on the current liability or decrease in a reparation. ‘An increase in ac tal and vice versa. While an increase in a current current working cap!a 3.148 Management Accounting liability or deere: rent asset (other than cash) will result in inerease in cash ang yy iability le View eine versa, Some people, as stated before, use term “t nds? ina very narrow sense OF ‘cash’ only. thy gueh an event the two terms “Funds” and ‘Cash’ will have synonymous meanings UTILITY OF CASH FLOW ANALYSIS A Cash Flow Statement is useful for short-term planning, to meet its various obligations in the near future such as payment for purchase of fixed assets, paymen, of debts maturing in the near future, expenses of the business, ete, A historical analysis of the differen, sources and applications of cash will enable the mana; nt to make reliable cash flow projection, for the immediate future. In may then plan out for investment of surplus or meeting the deficit, if any, Thus, a cash flow analysis is an important financial tool for the mar ent. Its chief advantages are as follows: Helps in efficient cash management Cash flow analysis helps in evaluating financial policies and cash position. Cash is the basis for all operations and hence a projected cash flow statement will enable the management to plan and coordinate the financial operations properly. The management can know how much cash is needed, from which source it will be derived, how much can be generated internally and how much could be obtained from outside. Helps in internal financial management Cash flow analysis provides information about funds which will be available from operations. This will help the management in determining policies regarding internal financial management, e.g., possibility of repayment of long-term debts, dividend policies, planning replacement of plant and machinery, etc Discloses the movements of cash Cash flow statement discloses the complete story of cash movement. The increase in or decrease of cash and the reasons therefore can be known, It discloses the reasons for low cash balance in spite of heavy operating profits or for heavy cash balance in spite of low profits However, comparison of original forecast with the actual results highlights the trends of movements of cash which may otherwise go undetected. Discloses success or failure of cash planning The extent of success or failure of cash planning ean be known by comparing the projected cash flow statement with the actual cash flow statement and necessary remedial measures can be taken, LIMITATIONS OF CASH FLOW ANALYSIS Cash flow analysis is a useful tool of financial analysis. However, it has its own limitations. These limitations are as under: 1, Cash flow statement cannot be equated with the Income Statement, An Income Statement takes into account both cash as well as non-cash items and, therefore, net cash flow does not necessarily means net income of the business, ; 2. The cash balance as disclosed by the cash flow statement may not represent the real liquid position of the business since it can be easily influenced by postponing purchases and other payments: 3. Cash flow statement cannot replace the Income Statement or the Funds Flow Statement. E them has a separate function to perform, In spite of these limitations it can be said that cash flow statement is a useful supplemelay instrument. It discloses the volume as well as the speed at which the cash flows in the different sea™ of the business. This helps the management in knowing the amount of capital tied up in @ patiulat segment of the business. The technique of cash flow analysis, when used in conjunction with 1 analysis, serves as a barometer in measuring the profitability and financial position ofthe business ‘A business enterprise needs sufficient gayThe concept and technique yp jtions given in the f Preparin, following pages, ' Cash Flo Statement 3.149 © Cash How iyst FROM OPERATIONS ilemem wil be clear with the help of tion 4.3 From the poration 43 ¢ following balances you g € require “quired to calculate cash from operations 41 December a. 2008 2004 ’ z pillsreceivable SOKA) 0D) Creditors son 12,500 ils payable 20,00) 25,00) uistanding expenses 4000) 600 Prepaid expenses: 1m 120 Accrued income un 10) Income received in advance 600 Tso frofit made during the ye: oe oe —_e te year 130,00 Solution 3 Cash from Operations Ee z ? Profit made during the year bs | 130000 Add; Decrease in debtors Increase in creditors Increase in outstanding expenses Decrease in prepaid expenses | | | | L | lx: Increase in bills receivable | Decrease in bills payable | Increase in accrued income | ie Decrease in income received in advance Cash from operations 48 3 (REVISED): CASH FLOW STATEMENTS! ekiuansee | fea f the Revised Accounting Standar¢ ) ‘ast low \ . by the Council of the Inst ee eal lis accounting standard (A‘ 42001 for the following enterprises. ; tics fae 4) Enterprises whose debt or equity securities are y Ai er commercial, industrial and business Fel counting period exceeds ® 50 crore I 1g to be listed on a recognised stock porting enterprises whose turnover for the3.150 Management Accounting Objectives Information about the cash flows of an enterprise is useful in providing users of financial statements With a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing ang certainty of their generation. The Statement deals with the provisions of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities. Scope 1. Anenterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented. Users ofan enterprise’s financial statements are interested in how the enterprise generates and uses cash and cash equivalents. This is the case regardless of the nature of the enterprise’s activities and irrespective of whether cash can be viewed as the product of the enterprise, as may be the case with a financial enterprise. Enterprises need cash for essentially the same reasons, however different their principal revenue-producing activities might be. They need cash to conduct their operations, to pay their obligations, and to provide returns to their investors. Benefits of Cash Flow Information 1. Accash flow statement, when used in conjunction with the other financial statements, provides information that enables users to evaluate the changes in net assets of an enterprise, its financial structure (including its liquidity and solvency), and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises. 2. Italso enhances the comparability of the reporting of operating performance by different enterprise because it eliminates the effects of using different accounting treatments for the same transactions and events. 3. Historical cash flow information is often used as an indicator of the amount, timing and certainty of future cash flows. It is also usefull in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and the impact of changing prices. Definitions The following terms are used in this Statement with the meanings specified: (1) Cash comprises cash on hand and demand deposits with banks. (2) Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. (3) Cash flows are inflows and outflows of cash and cash equivalents. (4) Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. (5) Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.Financing activities are ac © capital (including prefer enterprise. tion of a Cash Flow State cash flow statement should re sifincing activities, ies Cash flows from enue-producing activities of the ente jpjother events that enter into the dete ing activities are: (g) Cosh receipts from the sale of goods and the Tendering of services. {) Cash receipts from roy alties, fees, commissions, and other revenu (9 Cash payments to suppliers for goods and services, H (@ Cash payments to and on behalf of employees: (@) Cash receipts and cash payments of an ine and other policy benefi (0 Cash payments or refunds of income taxes unles and investing activities; and (g) Cash receipts and payments relating to futures contracts, forward contracts, option contracts, and swap contracts when the contracts are held for dealing or trading purposes. nesting activities. Examples of cash flows arising from investing activities are: (cash payments to acquire fixed assets (including intangibles). There payments include those relating to capitalised research and development costs and self-constructed fixed assets; (0) cash receipts from disposal of fixed assets (including intangibles); (0) cash 5 to acquire shares, warrants, or debt instruments of other enterprises and interests ) cash payment: a ks 0 a f : injoint ventures (other than payments for those instruments considered to be cash equivalents an th or trading purposes); cash eerece aang fF shares, warrants, or debt instruments of other enterprises and i) cash receipts from disposal of sl r i an i i than receipts from those instruments considered to be cash imerests in joint ventures (other than recess aa jing purposes); Squivalents and those held for dealing or wad aa aa tanec Voant rasta aT (©) cash advances and loans made to third pat enterprise); Cash receipts. from the repayment O} and loans of a financial enterprise): ‘i ts, option contracts, and swap contracts forward contracts, opt ©@sh payments for futures contracts, i classified i .ding purposes, or the payments are Id for dealing or tra xcept when the contracts are hel 4 financing activities; and Sash receipts from futures ¢* cept when the contracts are ee CA a ising from financing activities are imilar instruments; () cash proceeds from issuing shares OF OUT ands, and other short- or long-term ) is fro . loans, “sh proceeds from issuing debentures, 6 borrowings; and Sesh repayments of am Cash Flow Statement 3.151 tivities that result in o ie shart Stn cha c Wes in the si; capital in ia the case id composition of the owner's, of a company) and borrowings of the Ment Port cash flows dur ' the period classified by operating, investing Operating activities are "Prise. Therefore, the g. ‘mination of net profit Primarily derived from the principal fenerally result from the transactions or loss. Examples of cash flows from ‘urance enterprise for premiums and claims, annuities ss they can be specifically identified with financing Fadvances and loans made to third parties (other than advances, forward contracts, option contracts, and swap contracts oa. ealing or trading purposes, oF the receipts are classified as held for deal ounts borrowed.3.152 Management Accounting Reporting Cash Flows from Operating Activities (1) An enterprise should report cash flows from operating a lasses of gross cash receipts and gross cash payments are ivities using either: (a) the direct method, whereby major el a disclosed; or p > o ) Pe: (b) the indirect method, whereby net profit or loss is adjusted for the effects of transactions = (°° yj of a non-cash nature, ments, and items of i (2) The direct method provid cals ot accruals of past or future operating cash receipts pay- t me or expense associated with investing or financing cash flows, o information which may be useful in estimating future cash flows and f : ; i which is not available under the indirect method and is, therefore, con sidered more appropriate oO e than the indirect method. Under the direct method, information about major classes of gross cash Cl receipts and gross cash payments may be obtained either: tin (a) from the accounting records of the enterprise; or " vee! (b)_ by adjusting cost of sales (interest and similar income and interest expense and similar gt nat for a financial enterprise) and other items in the statement of profit and loss for: pt chargs bg (i) changes during the period in inventories and operating receivables and payables; pt (i) other non-cash items; and valent (iii) other items for which the cash effects are investing or financing cash flows. Sos it (3) Under the indirect method, the net cash flow from operating activities is determined by adjusting _ggordi net profit or loss for the effects of: soa fron (a) changes during the period in inventories and operating receivables and payables; seta (b) non-cash items such as depreciation, provisions, deferred taxes, and unrealised foreign ex- Fino sy change gains and losses; and ee f (c) all other items for which the cash effects are investing or financing cash flows. a (4) Alternatively, the net cash flow from operating activities may be presented under the indirect i= m™ iC method by showing the operating revenues and expenses, excluding non-cash items disclosed in the statement of profit and loss and the changes during the period in inventories and operating esting a receivables and payables. ues on Ir Reporting Cash Flows from Investing and Financing Activities classifi ‘An enterprise should report separately major classes of gross cash receipts and gross cash payments acing g arising from investing and financing activities, except to the extent that cash flows described in hnesmen; paragraphs VI are reported on a net basis. Beriate 0 Reporting Cash Flows on a Net Basis (1) Cash flows arising from the following operating, investing or financing activities may be reported on a net basis: (a) cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the enterprise. Examples of cash receipts and payments referred above are as follows: (i) the acceptance and repayment of demand deposits by a bank; (ii) funds held for customers by an investment enterprise; and (iii) rents collected on behalf of, and paid over to, the owners of properties. (b) cash receipts and payments for items in which the turnover is quick, the amounts are large. and the maturities are short. Examples of cash receipts and payments referred above are advances made for, and the Te payments of: d (i) principal amounts relating to credit card customers;153 Cash Flow statement 3 (ji) the purchase and sale of investments; and (iii) other short-term borrowings, for example, those which have a mal months or less: 4) cash flows arising from each of the following activities of a financial ente turity period of three d prise may be reporter © jnanet ba cash receipts and payments for the acceptance and repayment of de} rity date: (b) the placement of depos posits with a fixed matu- ses; ? enterpri S with and withdrawal of deposits from other financial and ns. {@) cash advances and loans made to customers and the repayment of those advances on ad Fs ign Currency Cash Flows Cash flows arising from transactions in a foreign currency S10 in an enterprise’s reporting currency by applying to the foreign currency amount the e? ite pewween the reporting currency and the foreign currency at the date of the cash flow. A rat ees oF nimates the actual rate may be used if the result is substantially the same as would ate ad atthe dates ofthe cash flows were used. The effect of changes in exchange rates on cash and &A. Srivalents held in a foreign currency should be reported as a separate part of the reconciliation o' ‘ergs in cash and cash equivalents during the period. fuimordinary Items The cash flows associated with extraordinary items should be classified as sising from operating, investing or financing activities as appropriate and separately disclosed. Inerest and Dividends Cash flows from interest and dividends received and paid should each be ‘isclosed separately. Cash flows arising from interest paid and interest and dividends received in the case of a financial enterprise should be classified as cash flows arising from operating activities. In te case of other enterprises, cash flows arising from interest paid should be classified as cash flows fm financing activities while interest and dividends received should be classified as cash flows from inesting activities. Dividends paid should be classified as cash flows from financing activities. Taeson Income Cash flows arising from taxes on income should be separately disclosed and should te classified as cash flows from operating activities unless they can be specifically identified with ‘nancing and investing activities. Imestments in Subsidiaries, Associates, and Joint Ventures When accounting for an investment inan “a ora subsidiary or a joint venture; an investor restricts its reporting in the cash flow statement re Bier oeeveen itself and the investee/joint venture; for example, cash flows relating to advances, ‘ctuisiions and Disposals of Subsidiaries and Other Business Units ® aggregate cash flows arising from acquisitions and from disposals of st siness units should be presented separately and classified as investing act An enterprise should disclose, in aggregate, in respect of both ‘Subsidiaries or other business units during the period each of the foll '9) the total purchase or disposal consideration; and ) the portion of the purchase or disposal consideration disch y Sauivatents, hog): ausactions Investing and financing transactions that do n¢ i they Valents should be excluded from a cash flow statement. Such aes = Sine ‘eine the financial statements in a way that provides all the relevant intyy road PF disclosed and financing activities. “rmation about these ubsidiaries or other ies. acquisition and disposal of lowing: arged by means of cash and cash3.154 Management Accoureng Disclosure Components of cash and cash equivalents An caterprise should disclose the Componeats f cath sag cash equivalents and should present a reconciliation of the amounts ms cast flow statement wits q_ equivalent items reported in the balance sheet ‘ Other disclosures An enterprise should disclose, together with 2 commentary SY Mumugemen: ge amount of significant cash and cash equivalent balances held by the enterprise that are mot availabe foe use by it Mlustration 4.4 From the following information prepare 2 Cash Flow ‘Scmement sccomting wp (a) Direct Method (6) Indirect Method. Work o Balance Sheet as on 31122016 Assets (Cash on hand and balances with banks ‘Short-term investments ‘Sundry debtors Interest receivable Inventories Long-term investments Fixed assets at cost Less: Accumulated depreciation Fined assets (net)OO 5 Cash Flow Statement 3.15! sain ordinary item oe penit proceeds from earthquake disaster settlement 180, Ios oft after extraordinary item as oa 300) = 3,230 et Profit sional Information: (Figures are in "Ooqy, *) an amount of 250 was raised from the 0 png-term borrowings, Interest expense was 400 of which 170 w, Oke ior period was also pad during «9 Dividends paid were 1,200, : (@ Tix deducted at source on dividends received (included in the tax expense of 300 for the ye: amounted to 40. , (9 During the period, the enterprise acquired fixed assets for 350. The payment was made in cash. (f Plant with original cost of 80 and accumulated depreciation of 60 was sold for 20. (@ Foreign exchange loss of 40 represents the reduction in the carrying amount of a short-term investment in foreign currency designated bonds arising out of a change in exchange rate between the date of acquisition of the investment and the balance sheet date. (t) Sundry debtors and sundry creditors include amounts relating to credit sales and credit purchases only. Solution i m. Issue of share capital and a further 250 was raised fro1 he per relating to int e s paid during the period. 100 relating to interest expens the period, Cash Flow Statement onan (in ‘000) 2016 Cash flows from operating activities Cashreceipts from customers 30,150 Cish paid to suppliers and employees (27,600) Cish generated from operations 2,550 Income taxes paid (860) Gish flow before extraordinary item 1,690 Proceeds from earthquake disaster settlement 180 Netcash from operating activities 1,870 sh flows from investing activities Purchase of fixed assets (350) eds from sale of equipment 20 received 200 prided received 160 cash from investing activities 30 2ahfons from financing a Si from issuance of share capital 250 Repa from long-term borrowings 250 ie of long-term borrowings (180) Divider (270) Paid (Contd)3.156 Management Accounting Net cash used in finaneing activities Net increase in cash and cash eq Cash and cash equivalents at begh Cash and cash equivalents at end of period (Se Notes to the Cash Flow Statement (Direct & Indirect Method) 1. Cash and cash equivalents Cash and cash equivalents consist of cash on hand and balance banks, and investments in money-market instruments, Cash and cash equivalents included in th flow statement comprise the following balance sheet amounts. ivales period (See Note 1) Note 1) 8 with 1 cash = : == Cash on hand and balances with banks a Short-term investments 135 ‘Cash and cash equivalents 160 Effect of exchange rate changes Cash and cash equiv restated eae Cash and cash equ at the end of the period include deposits with banks of 100 held bya branch which are not freely permissible to the company because of currency exchange restrictions The company has undrawn borrowing facilities of 2,000 of which 700 may be used only for future expansion. 2. Total tax paid during the year (including tax deducted at source on dividends received) amounted to 900. Cash Flow Statement (Indirect Method) (in 000), " 2016 Cash flows from operating activities Net profit before taxation, and extraordinary item 3,350 Adjustments for: Depreciation 450 Foreign exchange loss 40 Interest income (300) Dividend income (200) Interest expense 400 Operating profit before working capital changes 3,740 Increase in sundry debtors (500) Decrease in inventories 1,050 Decrease in sundry creditors (1,740) Cash generated from operations 2,550 Income taxes paid (860) Cash flows before extraordinary item 1,690 Proceeds from earthquake disaster settlement 180 Net cash from operating activities F Cash flows from investing activities Purchase of fixed assets (050) Proceeds from sale of equipmentCash Flow Statement 3.157 pers eceived pividends received: ma wucash from investing activities i sh lows from financing activities Pneet eeds from issuance of share capita, ‘ seeds from long-term borrowings ah gepoyment of long-term borrowings i one (180) ses (270) Netcash used in financing activities ate Net increase in eash and eash equivatents Ot Cash and cash equivalents at beginni, i fa Ca cerca ten a erative Presentation (Indirect Method) san alternative, in an indirect method cash flow state i it : , ment changes is sometimes presented as follows: ads ae aa Revenues excluding investment income rc 30,650 Operating expenses excluding depreciation (26,910) Operating profit before working capital changes 3.240 Working Notes: The working notes given below do not form part of the cash flow statement and, accordingly, need not be published. The purpose of these working notes is merely to assist in understanding the manner in which Various figures in the «ash flow statement have been derived. (Figures are in & °000) 1. Cash receipts from customers Sales Add: Sundry debtors at the beginning of the year Less: Sundry debtors at the end of the year 2. Cash paid to suppliers and employees Cost of sales Administrative & selling expenses 1,890 Add: Sundry creditors at the beginning of the year pu B Inventories at the end of the year 2m 150 Less: Sundry creditors at the end of the aa bm ‘i Inventories at the beginning of the y' 1,950 ae 3 Income taxes paid (including tax deducted at source from dividends received) Income tax expense ar Fe I ee ores from dividends ae & Add: Income tax liability at the beginning of the y‘ 1 400 Less: Income tax liability at the end of the Year eataiaaeiiama. a 3.158 Management Accounting Out of 900, tax deducted at source on dividends received (amounting to 40), is included in cash flows from investing activities and the balance of 860 is included in cash flows from operating activities, 4. Repayment of long-term borrowings Long-term debt at the beginning of the year 1,040 Add: Long-term borrowings made doing the year 250 1,290 Less: Long-term borrowings at the end of the year 5. Interest paid Interest expense for the year 400 Add: Interest payable at the beginning of the year 100 500 Less: Interest payable at the end of the year 230 270 As a result of AS 3 (Revised) the presentation of a Cash Flow Statement has undergone a change, In the following pages we are giving illustrations involving presentation of Cash Flow Statement as per AS 3 (Revised). COMPREHENSIVE CASH FLOW STATEMENTS Mlustration 4.5 Prepare Cash Flow from ‘Inyesting Activities of M/s. Creative Furnishings Limited for year ended 31-3-2015. Particulars z Plant acquired by the issue of 8% Debentures 1,56,000 Claim received for loss of plant in fire 49,600 Unsecured loans given to subsidiaries 4,85,000 Interest on loan received from subsidiary companies 82,500 Pre-acquisition dividend received on investment made 62,400 Debenture interest paid : 116,000 Term loan repaid 4,25,000 Interest received on investment 68,000 (TDS of ® 8.200 was deducted on the above interest) Book value of plant sdd (loss incurred ® 9,600) 84,000 (IPC, Intermediate, May 2015) Solution Cash Flow Statement from Investing Activities of M/s Creative Furnishing Limited for th year ended 31-03-2015 ‘Cash generated from investing activities z z Interest on loan received 82,500 Pre-acquisition dividend received on investment made 62,400 Unsecured loans given to subsidiaries (4,85,000) Interest received on investments (gross value) 76,200 TDS deducted on interest (8200) Sale of Plant 74,400 Cash used in investing activities (before extraordinary item) Extraordinary claim received for loss of plant ‘Net Cash used in investing activities (after extraordinary item)