CASH FLOW STATEMENT:

Changes in cash position between two accounting periods

Useful tool to make short term financial decisions
Guide to forecasting
Effective cash management
Reveals Liquidity position
Cash: Cash in hand and demand deposits with bank
Cash equivalents: highly liquid instruments that are readily convertible
into cash – short term –ex: T.bills
Cash flows: Cash inflow increases cash total and outflow decreases
cash.

Cash flow statement is prepared with operating, investing and financing

activities.
Two methods of converting net profit shown by profit and loss account
into net cash flows from operating activity:
Direct Method- Cash flow from operating activities:
Determines changes in cash receipts and payments reported in the cash
flow from the operations section
Indirect method- takes net income generated in a period and adds or
subtracts changes in the asset and liability accounts to determine cash
flow.
 Particulars Rs. Rs. Rs.
1. Cash from operating activities:      
Net profit   xxx  
Add: Intangible assets written off xxx    
Add: Transfer to general reserve xxx    
Add: Proposed dividend xxx    
Add: Provision for tax xxx    
Add: Interim dividend paid xxx  
Add: Fictitious assets written off [Discount on issue of debentures and
preliminary expenses] xxx    
Less: Income tax refund xxx    
Net Profit Before Tax & Extraordinary Items   xxxx  
Add: Adjustments for Non cash, Non operating items and      
Loss on sale of fixed assets & investments:      
Depreciation on fixed assets xxx    
Interest expenses or Interest paid on debentures xxx    
Loss on sale of fixed assets or investments xxx    
Premium on redemption of debentures xxx xxx  
     
Less: Adjustments for non operating incomes & gains:      
Gain on sale of fixed assets or investments xxx    
Interest or dividend received on long term investments xxx xxx  
Operating Profit Before Working Capital Changes   xxxx  
Add: Adjustments for Increase in Current liabilities &      
Decrease in Current Assets [Except cash & cash equivalents] xxx xxx  
Less: Adjustments for Increase in Current Assets & Decrease      
in Current Liabilities [Except cash & cash equivalents] xxx xxx  
Cash generated from operations   xxxx  
Less: Income tax paid   xxx  
Cash flow before extraordinary items   xxxx  
Add/Less: Extraordinary losses/gains   xxx  
Net Cash From Operating Activities     xxxx
2. Cash flows from investing activities:      

Add: Sale of fixed assets or investments   xxx  

Add: Dividend or Interest received   xxx  

Less: Purchase of fixed assets or investments   xxx  

Net Cash From Investing Activities     xxxx

3. Cash flows from financing activities:      
Add: Issue of shares or debentures   xxx  
Add: Loan received   xxx  
Less: Interest or dividend paid   xxx  
Less: Repayment of loan   xxx  
Less: Redemption of Preference shares or debentures   xxx  
Less: Drawings   xxx  
Net Cash From Financing Activities     xxxx
Net Increase or Decrease in cash & cash equivalents     xxxx
Add: Cash & cash equivalents at the beginning of the period     xxxx
Cash & cash equivalents at the end of the period     xxxx
 Balance sheet of ABC Ltd. Prepare cash flow statement:
Liabilities 2019 2020 Assets 2019 2020
Equity share capital 9,00,000 6,00,000 Furniture & Fittings 1,17,000 1,30,000
Preference share capital ------- 2,00,000 Machine 1,54,000 80,000
P&L Account 1,10,000 75,000 Long term investments 3,00,000 2,60,000
Debentures 2,50,000 3,00,000 Stock 8,29,000 8,00,000
Bank loan 75,000 1,00,000 Trade debtors 90,000 1,09,000
Bills payable 45,000 40,000 Cash at bank 1,43,000 1,40,000
Trade creditors 1,50,000 1,15,000 Prepaid expense 10,000 15,000
Outstanding expenses 18,000 19,000      
Provision for tax 95,000 85,000      
  16,43,000 15,34,000   16,43,000 15,34,000
 Particulars Rs. Rs. Rs.
1. Cash from operating activities:      
Net balances of P&L Account[Rs.75,000 – Rs.1,10,000]   [35,000]  
Add: Provision for tax 85,000 85,000  
Net Profit Before Tax & Extraordinary Items   50,000  
Add: Adjustments for Non cash, Non operating items and Loss on sale of fixed      
assets & investments:      
Depreciation on machine 74,000 74,000  
Less: Adjustments for non operating incomes & gains xxx xxx  
Operating Profit Before Working Capital Changes   1,24,000  
Add: Adjustments for Increase in Current liabilities & Decrease in Current      
Assets:      
Increase in Outstanding expenses 1,000    
Decrease in Stock 29,000 30,000  
Less: Adjustments for Decrease in Current Liabilities & Increase in Current      
Assets:      
Increase in prepaid expense 5,000    
Decrease in Bills payable 5,000    
Decrease in Trade creditors 35,000    
Increase in Trade debtors 19,000 [64,000]  
Cash generated from operations before tax   90,000  
Less: Income tax paid   [95,000]  
Cash flow before extraordinary items   [5,000]  
Add/Less: Extraordinary losses/gains   xxx  
Net Cash From Operating Activities     [5,000]
 Particulars Rs. Rs. Rs.
2. Cash flows from investing activities:      
Add: Sale of long term investments 40,000    
Less: Purchase of Furniture & Fittings [13,000] 27,000  
Net Cash From Investing Activities     27,000
3. Cash flows from financing activities:      
Add: Issue of Preference shares 2,00,000    
Add: Issue of Debentures 50,000    
Add: Bank loan borrowed 25,000    
Less: Redemption of equity shares [3,00,000] [25,000]  
Net Cash From Financing Activities     [25,000]

Net Decrease in cash & cash equivalents     [3,000]

Add: Cash & cash equivalents at the beginning of     143,000

the period
Cash & cash equivalents at the end of the period     140,000