Cash Flow Statement AS-3

Dr.Smita Sahoo

Purpose of Cash Flow Statement
Provide information about cash receipts and payments during an accounting period s Helps us see how financial position changes during an accounting period s Only statement that collects and shows in one statement the causes of changes in cash during a financial reporting period
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Cash and Cash Equivalents
Cash includes currency on hand and demand deposits s Cash equivalents are short-term, highly liquid investments that are xReadily convertible to known amounts of cash
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xSo near maturity that they are not likely to

change in value due to changes in interest rates.

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Classification of Cash Receipts & Cash Payments
Operating Activities Investing Activities Financing Activities
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Operating Activities
Operating activities are the principal revenueproducing activities of the enterprise .
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Transactions that generally involve producing and delivering goods and providing services Inflows x Selling goods and services, Receipts from debtors etc. Outflows x Purchase of RM, salary exp, Other operating exp.
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Investing Activities
Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
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Inflows x Selling of fixed assets and marketable securities, receiving dividend on investments etc. Outflows x purchasing fixed assets, marketable securities etc.

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Financing Activities
Financing activities are activities that result in changes in the size and composition of the owners’ capital and borrowings of the enterprise.
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Inflows x Issuing shares, debentures, and long-term borrowing Outflows x Repayment of Long-term loans, redemption of Debentures, payment of dividend & interest etc.
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Basic Interpretation of Statement of Cash Flows
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Overall, how successful has management been in generating and investing cash flows? How does accrual basis net income compare with cash basis? What cash uses have been made for investing activities, and to what extent has cash from operations been sufficient to pay for these investments? What sources and uses have been generated from financing activities?
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Direct versus Indirect Method for Operating Activities
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Direct shows major classes of gross cash receipts and cash payments xDifference is net cash provided by,

used in, operating activities
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Indirect starts with net income (loss) and adjusts for revenues and expenses that did not cause changes in cash

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Direct Method of Cash Flow Statement
A) Cash Flows from Operating Activities
Rs. Rs.

Cash sales Cash collected from customers/debtors Cash purchases Cash paid to suppliers/ creditors and employees Cash paid for operating exp.
Cash generated from operations

XXX XXX (XXX) (XXX) (XXX)
XXX (XXX)

Income Tax paid Net cash from operating activities (A)
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XXX

Indirect/Direct Method of Cash Flow Statement
B) Cash Flows from Investing Activities
Rs. Rs.

Purchase of Fixed Assets Proceeds from sale of Fixed Assets Interest & Dividend received on investment out side the business Net cash from investing activities (B)

(XXX) XXX XXX XXX

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Indirect/Direct Method of Cash Flow Statement
C) Cash flows from Financing activities
Rs. Rs.

Proceeds from issuance of share capital Proceeds from long-term borrowings Repayment of long-term borrowings Interest & Dividend paid Net cash from financing activities (C)
NET CASH FLOW(A+B+C) Add: Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period
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XXX XXX (XXX) (XXX) XXX
XXX XXX xxx

Indirect Method of Cash Flow Statement
A) Cash Flows from Operating Activities Net profit before tax Add: Depreciation Goodwill, Preliminary Exp. Written off Dividend paid Loss on sale of FA Less: Dividend & Interest on investment received Profit on sale of fixed assets Operating profit before working capital changes Less: Increase in CA & Decrease in CL Add: Decrease in CA & Increase in CL Less: Income taxes paid
Rs. Rs.

XXX XXX XXX XXX XXX (XXX) (XXX) XXX (XXX) XXX (XXX)

Net cash from operating activities (A)
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XXX

Adjustments
1) Accumulated Depreciation A/c

To Plant A/c
(Accm. Dep. on plant sold)

XXX XXX XXX

To Balance c/d

By Balance b/d By P& L A/c
(Depreciation for CY)

XXX XXX

xxx
INVESTING ACTIVITY-CI

Less: CFO

INVESTING ACTIVITY-CO

Add: To CFO

To Balance b/d To Bank (purchase of
plant)

To P&L A/c (profit)

PLANT A/C XXX By Bank XXX By P&L A/c (loss) By Accu.Dep.a/c XXX By Balance c/d

XXX XXX XXX XXX xxx

xxx
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ADJUSTMENTS
2) Provision for Tax A/c

To Bank A/c
(Tax paid during CY)

XXX XXX XXX

To Balance c/d

By Balance b/d By P& L A/c
(Balancing fig.)

XXX XXX xxx

LESS:CFO(TAXPAID)

Add: To CFO (if EAT is given)

Consider Provision for Tax as a current liability and ignore the related adjustment OR consider it as a provision and prepared above account for adjustment.

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Adjustments
3. Dividend

Current year’s dividend has to be added in the CFO & previous year dividend has to be shown in the financing activity as cash out flow. Interim dividend has to be added in the CFO & to be shown as Cash out flow in financing activity. FIN AN
Balance Sheet

Liabilities Proposed Dividend
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2007 80,000

2006 60,000

CIN G

Ad d: CF O

AC TIV I

TY :CI

Adjustments
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Increase in the Share Premium A/c will be shown in the Financing activity as Inflow of cash. Increase in the Goodwill a/c will be shown in the Investing activity as Cash outflow for purchase of Goodwill. While preparing asset account opening and closing balance should be taken at Gross Value of the asset.

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