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Course : BBA
Semester : 3rd
CLASS NOTES (MAIMS) Subject Course Topic
Meaning It was stated in the previous chapter that a statement of changes in financial position may be made out in two ways: (a) Working capital basis i.e., Funds Flow Statement, and (b) Cash basis i.e., Cash Flow Statement. A cash flow statement is statement of changes in cash position between the beginning and end of the period. It is a statement which summarizes the sources from which cash payments are made during a particular period of time, say a months or a year. In order words, a cash flow statement shows the various sources of cash inflow and uses of cash outflow during a period thus explaining the changes in cash position of the business. A cash flow statement is not very much different from a funds flow statement. In fact, the main difference between funds flow statement and cash flow statement relates to meaning and concept of the term “fund” as used in funds flow statement means net working capital i.e., the difference between current assets and current liabilities. But in a cash flow statement the term ‘fund’ means cash fund as defined by AS-3. Distinction between Funds Flow Statement and Cash Flow Statement The main points of distinction between the two statements are as follows:
Management Accounting BBA Cash Flow Statement
Page 1 of 19
By : Nakul Anand, MAIMS
A cash flow statement is mainly concerned with changes in cash position while a funds flow statement is concerned with changes in working capital. This standard supersedes AS-3: Changes in Financial Position which was issued in June 1981.Topic : Cash Flow Statement Course : BBA Semester : 3rd 1. In cash flow statement opening and closing balances of cash and cash equivalents are given. Usefulness in short-term financial analysis. There is no legal requirement to prepare funds flow statement. stock in trade etc. For short term financial analysis. Opening and closing balances. It should be understood that working capital is a wide term and includes cash besides other current assets like debtors. But a funds flow statement does not contain any opening and closing balances. But a cash flow statement is not followed by any other such statement. But cash flow statement is to be prepared by every listed company as per AS-3 as required by SEBI. 2. Legal requirements. Thus. Techniques of preparing cash flow statement and funds flow statement are different. 5. A funds flow statement is generally followed by a scheduled of changes in working capital.e. In funds flow statement. cash is only one of the constituents of the working capital. Method of preparation. Accounting Standard-3 (AS-3) : Cash Flow Statement The Institute of Chartered Accountant of India (ICAI) issued AS-3 (Revised): Cash Flow Statement in March 1997.f. bills receivable. Schedule of changes in working capital. 4. 1-4-2001 for the following enterprises: Page 2 of 19 By : Nakul Anand. It is in tune with international trends because Cash Flow Statements have replaced Statement of Changes in Financial Position in almost every country. This AS-3 has become mandatory w. cash flow analysis will prove more realistic than funds flow analysis. an increase in a current liability or decrease in a current asset result liability or decrease in a current asset (other than cash) might result in increase in cash and viceversa. 6. 3. Cash position and working capital position. MAIMS . cash flow statement is considered to be more useful to management as compared to funds flow obligations maturing within one month.
These 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. Meaning of Cash Flow Cash flow means inflow and outflow of cash. the term cash includes: 1. Cash in hand 2. Securities and Exchange Board of India (SEBI) requires that all listed companies should submit a Cash Flow Statement alongwith other financial results of the company. 50 crores. Definition of Cash Fund As per Accounting Standard (AS-3) issued by the Institute of Chartered Accountants of India. MAIMS . 1956. It should be noted that cash flow statement deals with flow of cash fund but does not consider movement among cash. Cash equivalents. An inflow i.e.e. Demand deposits with banks 3. The difference between cash inflows and cash outflows is known as net cash flow which can be either net cash inflow or net cash outflow. (ii) All other commercial. use of cash decreases it. industrial and business reporting enterprises whose turnover for the accounting period exceeds Rs.e.Topic : Cash Flow Statement Course : BBA Semester : 3rd (i) Enterprises whose equity or debt securities are listed or going to be listed on a recognized stock exchange in India. This means that statutory auditors of such companies are required to give an assertion in respect of companies with AS-3. current assets and current liabilities. 211 of the Companies Act. Page 3 of 19 By : Nakul Anand. The companies in respect of which AS-3 is mandatory are required to comply with AS-3 under Sec. bank balance and cash equivalents. source of cash increases the total cash available at the disposal of the firm while an outflow i. prepared as per accounting standard AS-3 issued by ICAI. This is in line with funds flow statement which exclude movements between items that constitute working capital i.
(iv) Cash payment of wages and salaries to employees.) and other investments not included in cash equivalents. commission and other revenue. such as payment of expenses like lighting and power. (ii) Cash receipts from royalties. land and building etc. Operating Activities: Operating activities are the principal revenue activities of the enterprise. etc.Topic : Cash Flow Statement Course : BBA Semester : 3rd CLASSIFICATION OF CASH FLOWS Accounting Standard (AS-3) requires that cash flow statement should report cash flow during the period classified by operating. machinery. Page 4 of 19 By : Nakul Anand. Examples of cash flow operations are: (i) Cash receipts from the sale of goods and the rendering of services usually form a major share of cash inflow. furniture. Cash flows from these activities result from transactions and other events that enter into the determination of net profit or loss. investing and financing activities. 2. 1. (iii) Cash payment to suppliers for goods and services. Examples of cash flow arising from investing activities are: (i) Cash receipts from disposal of fixed assets. fees. Investing Activities: These are the acquisitions and disposal of long term assets (such as plant. MAIMS . rent. insurance etc. (v) Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities.
(iv) Buy back of equity shares. (v) Cash advances and loans made to third parties.Topic : Cash Flow Statement Course : BBA Semester : 3rd (ii) Cash payments to acquire fixed assets. (ii) Cash receipts from loans raised (iii) Cash payments for redemption of preference shares and debentures. (iii) Cash payments to acquire shares/debentures of other enterprises. (iv) Cash receipts from disposal of shares. Financing Activities: These are the activities that result in changes in the size and composition of the owner’s capital and borrowings of the enterprise. (vi) Cash receipts from repayment of advances and loans made to third parties. 3. etc. MAIMS . debenture of other enterprises. Page 5 of 19 By : Nakul Anand. Examples of cash flow arising from financing activities are: (i) Cash receipts from issue of shares and debentures.
3. cash flows interest paid and interest and dividend received should be treated as cash flows from operating activities. Net profit is adjusted for non-operating expenses and incomes for calculating profits as shown below: Net profit Add: Non-operating Less: Non-operating incomes Non operating profit ……… ………. investing and financing can be positive or negative. (ii) In the cash of other enterprises. The net cash flow an activity – operating. followed by investing activities. ………. Treatment of Other Items 1. 2. payments exceed receipts. which is reconciled with opening and closing balance of cash. and then financing activities. Income tax: Cash flows arising income tax should be classified as flows from operating activities unless they can be specifically identified with Page 6 of 19 By : Nakul Anand. MAIMS . Dividend paid should be classified as cash flows from financing activities.e. 2. Order followed for presenting the cash flow is to show operating activities. receipts exceed payments. cash flow arising from interest and dividend paid should be classified as cash flows from financing activities while interest and dividend received should be classified as cash flows from investing activities. ………. Positive cash flow means net inflow i. Negative cash flow means net outflow i. The sum of net inflows or outflows of all the activities represents an increase or decrease in cash flows.e. Interest and Dividends: (i) In cash of a financing enterprise.Topic : Cash Flow Statement Important Points for Students Course : BBA Semester : 3rd 1.
Preparation of Cash Flow Statement Preparation of cash flow statement is similar a to that of funds flow statement. 4. on credit etc.. it should be shown as outflow from investing activities. Cash Flows from Operating Activities Net profit before tax and extra ordinary items Adjustment for: Depreciation Interest Income Dividend income Interest expense By : Nakul Anand. Extra ordinary items: The cash flows associated with extra ordinary items should be classified as arising from operating. For example.. capital gain tax on sale of land can be identified with investing and therefore in the cash flow statement. Performa of cash flow statement Rs.. …….. ……. they are excluded from cash flow statement for obvious reasons. the basic difference arises from the definition of funds. MAIMS Rs. cost of winning a law suit or lottery. Although they do effect the capital and assets of an enterprise. For example. In funds flow statement. Non cash transactions: There are certain transactions which do not involve cash inflow or cash outflow. AS-3 has not prescribed any specified format of cash flow statement but SEBI has approved the cash flow statement to be prepared in the following form. Examples non-cash transactions are: (i) Acquisition of assets by issue of shares/debentures. In fact.Topic : Cash Flow Statement Course : BBA Semester : 3rd financing and investing activities. fund means ‘net working capital’ while in cash flow statement it means ‘cash’. investing and financing activities as appropriate and separately disclosed. ……. ……. (ii) Conversion of convertible debentures into shares. (iii) Acquisition of a fixed asset. say machinery. receipt of claim from an insurance company etc. are extra ordinary items. legal claim. Page 7 of 19 . 3.
... …….... ……….. …….. …….. …………. ……. …………..... Calculation of cash flows from Operating or Operations Activities There are two methods of calculating cash flows operation activities: (a) Direct method. ………… ……… ……… …….. ………. MAIMS .. …………. Direct method: Under this method.... ………. ………….. ………. …….. cash receipts from operating revenues and cash payments for operating expenses are calculated and shown in the cash flow Page 8 of 19 By : Nakul Anand. ……….. and (b) indirect method. ..Topic : Cash Flow Statement Course : BBA Foreign Exchange loss Operating profit before working capital changes Adjustment for changes in current assets and current liabilities Cash generated from or used in operations before tax Income tax paid Cash flow before extra ordinary items Extra ordinary items Net cash from (or used in) operating activities Cash Flows from Investing Activities Purchase of fixed assets Proceeds from sale of fixed assets Interest and dividend received Net cash from (or used in) investing activities Cash Flows from Financing Activities Proceeds from issue of shares/debentures Proceeds from long term borrowings Repayment of long term borrowings Interest paid Dividends paid Net cash from (or used in) financing activities Net increase (or decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period Semester : 3rd ……… ……..
salaries and other operating expenses. Page 9 of 19 By : Nakul Anand. Cash received from debtors Cash payment for purchase of inventories. Necessary adjustments are made to these items to convert them into cash based items. Cash payment for wages. etc.Topic : Cash Flow Statement Course : BBA Semester : 3rd statement. There are many items which appear in the Profit and Loss Account on accrual basis. Adjustments in net profit or loss are for the effects of: (a) Non-cash items like depreciation. (b) Changes during the period in inventories and operating receivables and payable. Examples of usual cash receipts and payments resulting from operating activities are: (i) (ii) (iii) (iv) (v) (vi) Cash sales of goods and services. Cash payment to creditors. Cash payment of income tax. Indirect Method. MAIMS . The difference between the total cash receipts and total cash payments as shown as the net cash flow from operating activities. Under the indirect method. (c) All other items for which cash effects are investing and financing cash flows. the net cash from operating activities is determined by making necessary adjustments in the net profit (or loss) as disclosed by Profit and Loss Account.
if any. The method of calculating cash from operating activities is as follows: Particular 1. insurance proceeds from earthquake disaster settlement) B. Premium payable on redemption of preference By : Nakul Anand. and extraordinary item C. MAIMS Rs.g. Net profit before taxation. Net profit as per profit & loss a/c or difference between closing Balance and opening Balance of P & L a/c Add: proposed dividend for the current year Add: proposed dividend for the current year Add: interim dividend paid during the current year Add: transfer to reserve Add: provision for tax made during the current year Less: refund of Tax credited to P& L a/c Less: extraordinary item. Cash flows from operating activities: A.. XXX XXX XXX XXX (XXX) (xxx) XXX XXX XXX XXX XXX XXX XXX XXX Page 10 of 19 . credited to P & L a/c (e.Topic : Cash Flow Statement Course : BBA Semester : 3rd The indirect method is also known as ‘Reconciliation Method’ as it involves a reconciliation of the net profit with net cash flows from operating activities. Add: items to be added: (for example) Depreciation Interest on borrowing Preliminary expenses/ underwriting commission/ discount on Issue of debenture/shares written off Goodwill/patents/trade Marks/copyright amortized Loss on sale of Machinery/Land & /Building/investments etc.
Cash flow before extraordinary item [H – I] K. Less: income taxes paid (net of Refund) J. Less: increase in current assets & decreases in current Liabilities: Increase in stock Increase in Debtors B/R Increase in Prepaid expenses Increase in accrued commission Increase in Accrued Commission Decrease in creditors for goods Decrease in outstanding expenses Decrease in commission received in advance Decrease in Provision for Doubtful debts/discount on debtor H. E. Operating profit before working capital [B + C + D] F.Topic : Cash Flow Statement Course : BBA share/debentures D. Add: decrease in current assets & increase in current Liabilities: Decrease in stock Decrease in Debtors/B/R Decrease in prepaid expenses Decrease in accrued commission Increase in outstanding expenses Increase in commission received in advance Increase in Provision for Doubtful Debts or Discount on Debtors G. investments etc. Extraordinary items L. Less: item to be deducted: (for example) Interest income Dividend income Rental income Profit o sale of Machinery/Land & building etc. MAIMS . Net cash from (used in) operating activities Calculation of Cash Flows from investing Activities Semester : 3rd (XXX) (XXX) (XXX) (XXX) XXX XXX XXX XXX XXX XXX XXX XXX (XXX) (XXX) (XXX) (XXX) (XXX) (XXX) (XXX) (XXX) (XXX) XXX (XXX) XXX XXX XXX Page 11 of 19 By : Nakul Anand. Cash generated from operations [E + F – G] I.
Topic : Cash Flow Statement Course : BBA Semester : 3rd Cash inflows and cash outflows from investing activities result from acquisition and disposal of long term assets. Assesses cash flow from operating activities. Cash flow statement provides information about cash generated from operating activities. Payment of dividends. Such estimated amounts are used for preparing cash budget. It provides explanation for the difference net profit and cash from operations. 3. namely investing Page 12 of 19 By : Nakul Anand. Cash provided by operating activities is very important to assess the cash generated by internal sources. non-operating current assets and investments. 4. The net effect of cash inflows and outflows is determined and shown as cash flows from investing activities in the cash flow statement. redemption of preference shares and debentures. Availability of profit in the form of cash is also important for dividend disbursement. raising of loans and repayment of loans etc. Decisions to pay dividends cannot be based on net profit only. Thus cash provided by operating activities assumes importance for declaration of dividend. Useful in cash planning. Objectives and Uses of Cash Flow Statement 1. Cash flow statement provides information not only about cash provided by operating activities but also by non-operating activities under two heads. A cash flow statement proves very useful to management by providing a basis to evaluate the ability of a company to generate cash. Cash from investing and financing activities. MAIMS . The net effect of inflows and outflows of cash relating to these financing activities is determined and shown in the cash flow statement under this head of Cash Flows from Financing Activities. 2. A cash flow statement prepared on an estimated basis for the next accounting period enables the management to know how much cash can be generated internally and how much it should arrange from outside. Calculation of Cash Flows from Financing Activities These activities relate to issue of shares and debentures.
d) Cash payment to acquire a fixed asset. Which are the various sources and uses of cash flows from operating activities? 3. machinery. classify the following into cash flows from: (i) Operating activities. Explains reasons for surplus or shortage of cash. MAIMS . This helps to explain the overall liquidity position of the enterprise and its ability to meet its cash commitments. c) Cash payments of salaries and wages to employees. Giving reasons. and (iii) Financing activities. Similarly a business may have suffered a loss and still has sufficient cash at the bank. a) Cash sales of goods-in-trade. b) Cash paid to suppliers of raw materials. A business may have made profit and yet running short of cash. Distinguish between cash flow statement and funds flow statement.Topic : Cash Flow Statement Course : BBA Semester : 3rd activities and financing activities. (ii) Investing activities. Page 13 of 19 By : Nakul Anand. e) Cash proceeds from issuing shares at a premium. say. Questions for Practice 1. What is a cash flow statement? State its uses and limitations. 2. 4. A cash flow statement discloses reasons for such increases or decreases of cash balance. What do you mean by cash from operating activities? How is this calculated? 5. 5.
00.000 have been paid during the year.000 2.000 6.000 5.) 60.000 Cash dividends of Rs.00. 25.50.20. 2005 and 31st March.000 80.00.000 1. You are required to prepare a cash flow statement on indirect basis.000 6. Q:2 The Balance Sheets of X Ltd.000 1. g) Interest received on investments.000 1.65.000 1.000 5. Assignment Q:1 The balance sheets of XYZ Limited as at December 31 or two years are given below: Assets Cash balances Trade debtors Inventory Land Plant and Machinery Total Liabilities and Capital Trade creditors Debentures Provision for depreciation on plant Equity share capital Retained earnings Total 40.) 50.65.40. h) Interest paid on debentures i) Payment of income tax.000 2006 (Rs. Discuss briefly the major classification of cash flows as per AS-3 (Revised).000 1.000 1. 6. and j) Cash repayment of a long-term loan.40.00.10.000 80.Topic : Cash Flow Statement Course : BBA Semester : 3rd f) Payment of dividends. 2006 were as follows: Page 14 of 19 By : Nakul Anand. As on 31st March.10.25.000 1.000 60.50.60. MAIMS .000 2.000 30.000 2.000 2005(Rs.000 90.000 75.000 2.
00.44.) share 2.50. It had cost Rs.000 1.000 11. 7. 50.) 1.000 70.000 1. MAIMS .200 1.00. Liabilities Equity capital Reserves 2003 2004 Assets (Rs.) & 1.) 20.48.000 5. prepare cash flow statement.000 30.000 1.50.000 40.000 16.20.000 8.000 has been provided on it.00.16.000 18.000 1.00.60.75.000 5.000 12.15.000 during 2006.000 8.Topic : Cash Flow Statement Course : BBA 31st March 2005 (Rs.000 7. Q:3 From the following Balance Sheet of PK Ltd.00.00.000 50.000 14.) (Rs.000 1.000 1. 2006.000 2.000 75.000 7.500 2004 (Rs.000 8.12.000 depreciation has been charged to Plant and Machinery during the year.000 5.00. depreciation of Rs.75.000 Machinery 2003 (Rs.40.000 Assets: Land and Buildings Plant and Machinery Stock Sundry Debtors Prepaid Expenses Cash at Bank Liabilities and Capital: Share capital Profit & Loss Account General Reserve Sundry creditors Bills payable Outstanding expenses 80. Prepare Cash Flow Statement from the above details. 12.000 Additional Information: (i) (ii) Rs.50. For the year ending 31-12-2003 and 31-12-2004.250 Page 15 of 19 By : Nakul Anand.000 40.000 11.000 Goodwill Plant 40. A piece of machinery was sold for Rs.75.000 2.000 1. 8.) Semester : 3rd 31st March 2006 (Rs.950 1.000.63.
58.50.00. the company purchased another company and paid Rs. 21.640 and plant Rs.00.00. A dividend of Rs.690 Provision for tax 40.000.000 11.00.90.50.530 1.00.Topic : Cash Flow Statement Profit & loss A/c 39. 3.500 7.000 2.700 4.00.000 3.000 1.00.00.70.) 3. It purchases machinery costing Rs. Equity share capital Long-term loan Creditors Bills payable Retained earnings Cash Stock Debtors Goodwill Plant & Machinery Land & Buildings Furniture 2003 (Rs.000 2.000 1. It acquired stock Rs. 25. the company paid tax of Rs.00. 18.660 4. 2.220 Land & Building 50.000 in share capital.00.000 Current assets _ Cash 52.000 1.000 2004 (Rs.000 8.530.000 Additional information: Page 16 of 19 By : Nakul Anand.20. As on 31st March 2003 and 31st March 2004. 62.000 30.000 2.000 70.00.) 2. MAIMS .30.000 80.000 10.000 4.67.000 8.000 1.000 1.000 11.000 Bank loan 59. 5.20.880 Semester : 3rd 1.000 1.000 2.000 1.30.000 60. Q:4 Given below are the balance sheets of Glow Ltd.67.650 during the year.58.480 4.000 1. 60.000 2.730 7.000 was paid during the year 2004. 4.00.360.480 Course : BBA 41.280 4.000 2.00.880 The following information is also provided: 1. 5. 26.00. During the year.00.98. During the year 2004.80.000 1.510 Current liabilities 73. Profit before tax for the year was Rs.
600 800 9.) 66.60.00.12.) 62.000. The written down value of the machine was Rs. Prepare a Statement of Cash Flow for the year ending 31-3-2004.400 Assets Plant & Machinery Accumulation Dep. 50.900 loan Creditors 2. (f) Rs.220 8.000 and amortization of goodwill Rs.820 20. (g) Net profit for the year ending 31-3-2004 was Rs.620 Page 17 of 19 By : Nakul Anand. 1.000 30.000 11. 1.000) (26. 2. (e) Equity shares were issued for cash Rs.200) 95.000 Outstanding salaries 1. 80.400 1.000 (43.000 dividend was paid in cash. Q:5 From the following condensed comparative Balance Sheets of Bangalore Mills Ltd.000 (37.720 Additional information: 2004 (Rs.720 1.00.000.12.600 720 6.820 earnings _ 7% Mortgage 6.000 1. Liabilities 2003 (Rs.000 1.000. on plant & mach.Topic : Cash Flow Statement Course : BBA Semester : 3rd (a) Operating expenses include depreciation Rs. (d) Furniture was sold for cash Rs.) Share capital 70.000) 12. MAIMS . (c) Plant and Machinery was purchased for cash Rs.180 (45. 80.000 Provision for taxation 1. prepare a Cash Flow Statement for the year 2004.000 10.620 1.) 80.800 1. 40. (b) A machine has been sold for Rs.000 9.000 and Rs.50.000 Retained 23. on building Land Stock Debtors Prepaid expenses Cash 2003 (Rs.000.000 Share premium 9.40. 20. and additional information.000.16. Building Accumulation dep.000 2004 (Rs.000 6. 60.000) 10.620 7.000 and Land and Buildings for Rs.000 depreciation is changed on the same in 2004.50. 15.000. 1.
000 Prepaid 6.000 1. 1. (d) A sum of Rs.07.) Creditors 66.000 (1.000 66.00.000 expenses 69.000 payable 26.000 79.000 1.000 payable 3.000) depreciation 3.000 3.40.) 13.72.56.000 2003 (Rs.000 66.000 3.000 Page 18 of 19 By : Nakul Anand.07.Topic : Cash Flow Statement Course : BBA Semester : 3rd (a) Plant costing Rs. 6. 13.000 (2.03. In addition to cash payment of Rs.000 26.800) was sold during the year for Rs.000 42. MAIMS .000 Land Machinery and 1.000) doubtful debts Inventory 1.000.000.000 _ 5. (c) Dividend of Rs.000 Income Statement for the year ended 31 December 2004 Net Sales Revenue Less: Cost of Goods Sold Gross margin Less: Operating Expenses Operating income Rs.13.00.000 5. 1. Q:6 Balance sheets for 2003 and 2004 and income statement for 2004 of ABX Ltd. 21. (b) Building was acquired during the year at a cost of Rs. 8.00. 16. are presented below: Balance sheets as on 31 December 2003 and 2004 Liabilities 2004 (Rs.000) 3.000 Income tax 75.40.) 78.000 Debtors 95.000 Provision for (3.000 Dividends 2.68.02.000 Assets 2003 (Rs.000 capital Profit & loss Appropriation A/c 2004 (Rs.000 (accumulated depreciation Rs.000 Long term debt Equity share 1.000 1.000 Equipment Provision for (1. a mortgage loan was raised for the balance.200.000 5.56.) Cash 11.000) 92. 14.900 was transferred to provision for taxation account in 2004.000 was paid during the year.000 34.
000 35.000.000 17. MAIMS . II.000 Semester : 3rd The following additional information is available: I.000 5. There were no accruals and prepaid amounts for interest.Topic : Cash Flow Statement Less: Interest expenses Income before tax Add: Law suit compensation Less: Income tax Net income Course : BBA 4. . Rs.000 30. Land was acquired for Rs. 6. Page 19 of 19 By : Nakul Anand. IV.000. Equipment worth Rs. 3.000 18. III. 16. 6. Dividends declared during 2004. Prepare a Cash Flow Statement for the year 2004.000 and by paying cash Rs.000.000 was acquired by the issuance of long term note Rs. 10.
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