unit 3cash flow analysis

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UNIT 3 CASH FLOW ANALYSIS

LESSON 7 CASH FLOW ANALYSIS -1



CONTEXT

THIS UNIT DEALS-

CASH FLOW STATEMENT- MEANING, OBJECTIVE, USERS, LIMITATIONS, PROBLEMS OF CASH FLOW

ANALYSIS.

OBJECTIVES-

AFTER STUDYING THIS UNIT YOU SHOULD BE ABLE TO UNDERSTAND -

- MEANING OF CASH

- MEANING OF CASH FLOW AND CASH FLOW STATEMENT

- OBJECTIVE, USERS CASH FLOW STATEMENT

- SOURCES OF CASH FLOW STATEMENT

- LIMITATIONS CASH FLOW STATEMENT

- COMPUTATION OF CASH FROM OPERATIONS AND

- PREPARATION OF CASH FLOW STATEMENT




TABLE OF CONTENTS:

7.0 OBJECTIVES

7.1 INTRODUCTION

7.2 CASH FLOW STATEMENT

7.2.1 MEANING OF CASH AND CASH FLOW

7.2.2. OBJECTIVE 7.2.3. USERS

7.2.4 LIMITATIONS

7.3 ASSIGNMENTS

7.3.1 CLASS ASSIGNMENTS

7.3.2 HOME ASSIGNMENTS

7.4 TERMINAL QUESTIONS

7.5 POSSIBLE ANSWER TO SELF-CHECK QUESTION

7.6 REFERENCES AND SUGGESTED FURTHER READING




7.0 Objectives

At the end of this lesson, you will be able to understand and learn about:

Meaning of Cash

Meaning of Cash Flow

Meaning of Cash Flow Statement

Objectives of Cash Flow Statement

Users of Cash Flow Statement

Limitations of Cash Flow Statement

7.1 INTRODUCTION

Cash is an important component of working capital of business, which

provides speed and power to business. Keeping in view the present wealth

dominated scenario, it can be said that cash is the life blood of business, as it

governs and operates all the activities of business. For all the activities of

business, continuous and healthy flow of cash is the main pillar of business

solvency, thus cash is both the beginning and end of working capital cycle. In all

the business organizations monetary and non-monetary activities takes place

and out of which monetary transactions result in inflow and outflow of cash, so it

is very important for business to know that from what sources and in how much

quantity cash has been used. The cash flow statement is prepared to attain the

above-mentioned objective.



7.2 CASH FLOW STATEMENT

7.2.1 MEANING

Cash flow statement is the statement, which depicts the inflow and

outflow of cash and equivalents during the specified period in an organization.

This statement shows the reasons for changes in cash balances during two

balance sheet periods.

A cash flow statement is a statement depicting change in cash position

from one period to another. A projected Cash Flow Statement or a cash budget

will help the management in ascertaining how much cash will be available to

meet obligations to trade creditors, to pay bank loans and to pay dividend to the

shareholders.

Cash Flow Statement is a statement of cash flow and cash flow signifies

the movement of cash in and out of a business concern. Inflow of cash is known

as source of cash and Outflow of Cash is called Use of Cash. This statement

also depicts factors for such inflow and outflow of cash. Thus, Cash Flow

Statement is a statement designed to highlight upon the causes, which bring

changes in cash position between two Balance Sheets dates. It virtually takes the

nature and character of cash receipts and cash payments, though the basicinformation used in the preparation of this statement differs from that which is

used in recording cash receipts and cash payments.

Meaning of Cash Flow: It means the movement of cash into enterprise referred

to as sources (cash inflow) and also movement of cash out of the enterprise

referred to as uses (Cash outflow). Thus cash flows are inflows and outflows of

cash and cash equivalents. The difference between the ‘cash inflows’ and ‘cash

outflows’ is known as net cash flow which can be either a net cash inflow or a net

cash outflow depending upon the magnitude or amount of two components. It is

clarified that the term cash when used in cash flow statement includes cash and

cash equivalents.

Definitions:



According to I.C.W.A. (India), “Cash Flow Statement is a statement

setting out the flow of cash under different heads of sources and their utilization

to determine the requirements of cash during the given period and to prepare for

its adequate provisions.”

7.2.2. OBJECTIVES OF CASH FLOW STATEMENT

1. Primary Objective: A primary purpose of cash flow statement is to

provide information about the cash receipts and cash payments of a

business entity for the accounting period covered by the income

statement. It is necessary to maintain a record of cash flows on a

continuing basis in order to keep the business free of troubles is respect of

liquidity problems.

2. Secondary Objective: A secondary purpose of cash flow statement is to

provide information about a business entity’s operating, investing and

financing activities during the accounting period.

7.2.3. USEFULNESS OF CASH FLOW STATEMENT

According to Accounting Standard –3 the main objective of preparation of

cash flow statement, is to provide information to users regarding cash flows

which gives description of changes in cash or cash equivalents. Following are the

objectives and uses of cash flow statement:

Objectives1. Helpful in short term policies of

financial planning2. Useful in preparing cash

budget3. Knowledge of solvency4. Helpful in control5. Helpful in internal financial

control6. Useful to external investors7. Study of trends of cash

receipts and payments fromvarious activities



1. Helpful in short term policies of financial planning: Cash flow

statement provides several information to finance managers for formulating

policies for short term financial requirements on the basis of which, finance

manager is able to ascertain the amount of cash which will be required in future

and how much cash will be available from internal sources and how much will

have to be arranged from external sources.

2. Useful in preparing cash budget: Cash flow statement helps

managers in preparing cash budget, it gives information about preparing cash

budget, it gives information about surplus or deficiency of cash to managers and

on the basis of this managers can plan to invest surplus of cash in short term

investments or to cover the deficit from the search of other sources of short term

goodwill.

3. Knowledge of Solvency: Knowledge of solvency can be obtained with

the help of cash flow statement, as it provides the real information about the

available cash in the organization.

4. Helpful in Control: Cash flow statement acts as a control device for

finance managers. With comparison of cash flows statement with cash budget

management can come to know about the extent, to which financial sources

have uses, in accordance with plan.1. Helpful in Internal Financial Management: On the basis of information

available from cash flows statement payment of long-term liabilities,

formulation of dividend policy is facilitated.

2. Useful to External Investors: External investors are able to obtain

information about liquidity of organization with the help of cash flows

statement on the basis of which they can take their decision regarding

lending loan to organization or not.

3. Study of the Trends of Cash Receipts and Payments from Various

Activities: With the help of this statement managers are able to obtain

information about the frequency of cash receipts from current assets and

what is frequency of payments of current liabilities so that future cash

requirements can be ascertained.



7.2.4 LIMITATIONS

Following are the main limitations of cash flow statement:

1. Incomplete Substitute: Cash flow statement is not a substitute of income

statement as net cash flow depicted by cash flows statement is not equal to net

profit shown by income statement.

2. It does not show the Liquidity Position of the Firm: This statement depicts the

inflow and outflow of cash, liquidity position of the firm cannot be ascertained

from this.

3. Accrual Basis: Cash flow statement does not pay attention to accrual basis

concept of accounting.

4. Misleading Comparison: Cash flows statement has proved to be misleading in

comparison of industry and firm.




TABLE OF CONTENTS:

8.0 OBJECTIVES

8.1 DIFFERENCE BETWEEN FUND FLOW STATEMENT & CASH FLOW STATEMENT

8.2 TECHNIQUES OF CASH FLOW STATEMENT

3.3 METHODS OF CASH FLOW STATEMENT

3.4 PROVISIONS OF CASH FLOW STATEMENT

3.5 CLASSIFICATION OF CASH FLOWS ACCORDING TO AS-3







8.0 Objectives

After Studying this lesson you should be able to understand: The difference between Fund Flow Statement & Cash Flow Statement

Various Techniques of Cash Flow Statement

Method to Prepare Cash Flow Statement

Provisions of Cash Flow Statement

Classification of Cash Flows According To AS-3

8.1 Difference Between Fund Flow Statement & Cash Flow Statement

Basis of

Difference

Fund Flow Statement Cash Flow Statement

Meaning

Uses

Basis of

accounting

Limitation

Fund Flow refers to the

changes in the Fund by

business transactions.

It helps the reader to

understand not only the

financial stability of the

business concern but

also the successful

implementation of

financial policies of

management.

Fund Flow Statement is

based on accrual basis of

accounting.Fund Flow Statement

does not provide

information about

changes in Cash; which

are more important and

Cash Flow Statement is a

statement of cash flow and cash

flow signifies the movement of

cash in and out of a business

concern.

A cash flow statement if of

primary importance to the

financial management. It is an

essential tool of short-term

financial analysis.

Cash Flow Statement is based on

cash basis of accounting.

Working Capital being a wider

concept of funds, a funds flow

statement presents a more

complete picture than Cash Flow



relevant than Working

Capital.

Statement.

8.2 Technique of Cash Flow Statement- It would be more useful to describethe technique of Cash Flow Statement before highlights upon its nature andutility. As mentioned above, cash inflow and cash outflow are explained andshown in Cash Flow statement. On the one hand, all sources from which cashmoves in the concern are natured and on the other hand, the various uses towhich cash is put on and thus cash moves out of the concern are shown in thisstatement. The net effect of such cash movements is known as Net Cash Flowwhich is added/deducted to the opening balance of Cash/Bank to give closingbalance of Cash/Bank. Therefore, it becomes necessary to have at leasttheoretical knowledge about the various items of cash inflow and the variousitems of cash outflow.

1. Items of Cash Inflow (Sources)- The various sources from which cashmoves in the business concern may be put into two categories: (a) Activitiesrelating to current operations; (b) Financial activities. A number of sub-activitiesmay be grouped within these two categories. A summary of these activities isgiven below:

Activities relating to Current operations:Cash sale of goods and servicesCash sale of waste, bye-product and spoilageCollection from customers- receipts from debtors and Bills ReceivablesRent received from assets let out on rentCash dividends and interest received on Investments.Refund of TaxCash sale of fixed assets and current investments.

Financial Activities:Discounting of Bills ReceivablesIssue of debentures for cashRaising loans for cashIssue of shares for cash

2. Items of Cash Outflow (uses)- The activities for which cash is put to use in abusiness concern may be (a) operational activities (b) activities relating to the



purchase of fixed assets and (c) financial activities. A number of sub-activitiesmay be grouped into these three distinct activities as summarised below:

Operational activities:Cash payment of wages, production expenses and other operating expenses.

Cash purchase or raw materialsCash payment to creditors and bills payableCash payment of interestCash payment of income-taxCash dividendsCash payment of any sum payable under some legal decisions.

Activities relating to the purchase of fixed assets:Cash purchase of fixed assetsCash expenses on the extraordinary repairs of plant and other equipmentsCash purchase of temporary investments.

Financial Activities:Repayment of long-term loan and redemption of debenture in cashRedemption of preference shares for cash.

Self Check QuestionsWhat is Cash?What is difference between cash and fund?Write any four items of investment activities.

In practice information collected for the construction of Cash Flow Statement maycontain the items of non-cash transactions also. Such transactions will have to beseparated. Thus, knowledge about such non-cash items is also imperative for thepreparation of this statement. The following are included in such non-cashtransactions:Recognition of depreciation, diminution and wastage in the value of assets.Recording of prepaid expensesWriting-off obsolete and irrecoverable assets and receipts,Appropriations of earned profit,Increased/decrease in the value of fixed asses on account of revaluationRecording of fixed assets written-off.

In addition to the above, it also becomes necessary that after taking into accountthe adjustments made for outstanding expenses and receivable incomes,suitable adjustments should be made, so that accurate information in respect of current expenses and incomes may be obtained. The changes in stock, debtors,bills receivables, creditors and bills payable should be examined and analysed in



such a way that their probable impact on cash position may easily and correctlybe measured.

8.3 Formats of cash flow statement

Accounting Standard-3 (Amended) has not prescribed any format for cash flowsstatement. Following is the pro forma of cash flows statement, prepared by direct

and indirect method and which has been prescribed by SEBI and is used by

maximum number of organizations.

Cash Flow Statement (Direct Method)For the year ended 31st March,….

Particulars Rs. Rs.

A. Cash Flows From OperatingActivities: Cash receipts from customers (Seenote 1)

Cash paid to suppliers and employees (See.Note 2)

Cash generated from operatingactivities

Income Tax Paid

Cash flow before extraordinary items(+) or (-) Extraordinary items

Net Cash from operating activities

B. Cash Flows From Investing Activities Purchase of Fixed Assets

Sales of Fixed AssetsPurchase of Investment (Long-term)Sales of Investment (Long-term)Interest received

Dividend received

Net Cash from investing activities

C. Cash Flows From FinancingActivities

Proceeds from issue of share capital

……(……)

……

……

……

……(……)

…………

……

(……)……(……)………………

……

…………(……)(……)(……)

……



Proceeds from long-term borrowingsRepayments of long-term borrowingsInterest PaidDividend Paid

Net cash from financing activities

Net Increase (or decrease) in cash (A + B+ C)

Cash and Cash equivalents at the beginning of the period

Cash and Cash equivalents at the end of theperiod

………………

Note 1.

Calculation of Cash Receipts From CustomersRs. Rs.Cash Sales ……Credit Sales (as stated in P&L A/c) ……Add: Debtors and B/R at the beginning ……Less: Debtors and B/R at the end ……Less: Discount allowed ……Less: Bad Debts written off……

Cash Generated from Credit Sales …… ……Cash Received Sales and Customers ……

Note 2.Calculation of Paid to Suppliers and Employees

Rs. Rs.Cost of Goods Sold* (as stated in P&L A/c) ……Operating Expenses (Adm. + Sell. + Fin exp) ……

……Add: Creditors at the beginning ……

Outstanding expenses at the beginning ……Stock at the end ……

Prepaid expenses at the end …………Less: Creditors at the end ……

Outstanding expenses at the end ……Stock at the beginning ……

Prepaid expenses at the beginning …… ……Cash paid to suppliers and employees ……



*If Purchases are given in the question instead of cost of goods sold, adjustmentwill not be made for stock at the end and stock at the beginning.

Cash Flow Statement (Indirect Method)For the year ended 31st March,….

Particulars Rs. Rs.

A. Cash Flows From OperatingActivities: Net profit before tax and extraordinaryitems Adjustment For:

DepreciationLoss on sale of fixed assets

Gain on sale of fixed assetsInterest paidInterest receivedDividend receivedGoodwill written off Preliminary Exp. written off Provision for taxation (See Note-3)Proposed Dividend (Current Year)

Operating profit before working capital ChangesAdd: Decrease in Current Assets

Increase in Current Liabilities

Less: Increase in Current Assets……

Decrease in Current Liabilities……

Cash generated from operatingactivities

Income Tax Paid

Cash flow before extraordinary items

(+) or (-) extraordinary items Net Cash from operating activities

B. Cash Flows From Investing Activities Purchase of Fixed Assets (See Note-5)

Sales of Fixed AssetsPurchase of Investment (Long-term)Sales of Investment (Long-term)

……

…………(……)……

(……)(……)……………………

……………………

………………

………………

(……)

……(……)………………

……

……

……



Interest receivedDividend received

Net Cash from investing activities

C. Cash Flows From FinancingActivitiesProceeds from issue of share capitalProceeds from long-term borrowingsRepayments of long-term borrowingsInterest PaidProposed Dividend Paid (Previous

Year)

Net cash from financing activities

Net Increase (or decrease) in cash (A + B+ C)Cash and Cash equivalents at the beginning of

the periodCash and Cash equivalents at the end of the

period

…………(……)(……)

(……)

…… ……

………………

Note 3.

Provision For Taxation

Adjustment for Tax depends upon, whether Provision for tax account is given or not given in the question.1. When provision for tax account is not given in the Balance Sheet- In thiscase, there will be an adjustment or additional information given in the question.It will regarding the income tax paid. This item will affect Cash Flow fromOperating Activities in the sense that it will be deducted from operating net profitafter carrying out adjustment for increase/decreae in Current Assets/CurrentLiabilities.It Should be noted that income tax paid will be added to net profit during the year also.2. When provision for Taxation Account is given in the question- In this case

there are two situations.(a) When provision for tax account is given in the balance sheet and there isno adjustment: Under this situation provision for Tax should be treated as currentliability and given effect in the calculation of Cash Flow from operating activities.

(b) When provision for taxation account is given in the balance sheet as wellas there is an adjustment also in the question. It is always advised that Provisionfor Taxes A/c should be prepared (See Note.4) to dig out the missing informationregarding taxes paid/taxes provided.



Note 4.Provision For Taxation Account

Particulars Amount Particulars Amount

To Bank A/c(Paid Tax)To Balance C/d(Current Year)

……

……

By Balance B/d(Previous Year)By P & L A/c(Provision for tax)

……

……

…… ……

Note 5.

Fixed Assets A/cParticulars Amount Particulars Amount

To Balance b/d(Current Year)To P & L A/c(Profit on Sales of F.A.)To Bank A/c (BalanceFigure)(Purchase of assets)

……

……

…….

By Bank A/c(Sale Price of Assets)By Depreciation A/cBy P & L A/c(Loss on Sales of F.A.)

……

…………

…… ……

8.6 Classification of Cash Flows According to AS-3

Meaning of Cash Flows: In any organization inflows and outflows of cash andcash equivalents are termed as cash flows.

Meaning of Cash: Cash refers to cash in hand and demand deposits with bank.

Meaning of Cash Equivalents: Cash equivalents are short-term, highly liquidinvestments that are readily convertible into known amounts of cash. For example: treasury bills, commercial papers etc.

Cash flows or sources and applications of cash: According to accountingStandard –3 cash flows has been divided into three parts:

1. Cash flows from operating activities: Operating activities refer to those

activities, which generate revenue or are those activities, which generate



sufficient cash flows. Cash flows from operating activities is a result of those

transactions which determine net profit/loss.

2. Cash flows from Investing Activities: Investing activities are the acquisition

and disposal of long-term assets and other investments not included in cash

equivalents. For example: Land, Building, Plant, Machinery etc.

3. Cash Flows from Financing Activities: Financing activities refers to those

activities, which are related to cash flows, which provide capital and loan to

organization. Cash flows from financing activities change the size and structure

of capital and loan.

Clarification by Table of Cash Flows from Operating Activities

Cash Inflow Cash Outflow

1. Cash sale of goods and services.

2. Cash received from debtors.

3. Cash receipts from royalties, fees,

commissions and other revenue

receipts.

4. Cash receipts from claims, annuity

and other policy profits in case of

insurance company.

5. Refund of Income tax unless it is

related to specific financing and

investing activities.

6. Cash receipts relating to future

contracts, forward contracts, option

contracts and swap contracts when the

contracts are held for dealing or trading

purposes.

1. Cash payments to suppliers of goods

and services.

2. Cash payments to employers or their

representatives.

3. In case of insurance company cash

payments for insurance claims, annuity

and other policy profits.

4. Cash payments of Income tax.

5. Cash payments relating to future

contracts, forward contracts, option

contracts and swap contracts when the

contracts are held for dealing or trading

purposes.



CLARIFICATION OF OPERATING ACTIVITIES BY CHART

OPERATING ACTIVITIES

Cash in Flow Cash Out Flow

CASH FLOWS FROM INVESTING ACTIVITIES

CASH INFLOWS CASH OUTFLOWS

1. Amount received from sale of

fixed assets (Including intangible

assets)

2. Amount received from sale of

shares, bonds or debentures of

other companies excluding

those receipts, which are treatedas cash or cash equivalent for

business purposes.

3. Amount received as repayment

of loans or advances given to

third parties previously.

1. Purchase of fixed assets

(Including intangible assets)

2. Purchase of shares, bonds or

debentures of other companies.

3. Cash advances and loans given

to third parties.

4. Cash payments for futurecontract, forward contract, option

contract and swap contracts.



4. Cash receipts from future

contracts, forward contracts,

option contracts and swap

contracts.

5. Dividend and Interest received

in cash.

6. Insurance claim received from

insurance company for assets

destroyed in accident.

CLARIFICATION OF INVESTMENT ACTIVITIES BY CHART

INVESTING ACTIVITIES

Cash in Flow Cash Out Flow

CLARIFICATION OF FINANCING ACTIVITIES BY CHART

Cash Sales of fixed

assets

Sales of investments

and collection of loan

Interest and dividend

received on loan and

InvestingActivities

Purchase of fixed

assets

Purchase of

Investments

Loan and advances to

3rd parties



FINANCING ACTIVITIES

Cash In Flow Cash Out Flow


TABLE OF CONTENTS:

9.0 OBJECTIVES

9.1 PREPARATION OF CASH FLOW STATEMENT

8.2 SOURCES OF CASH

Amount received from

issue of share capital

Amount received fromlong-term loans

Amount received from

issue of debentures

Financing

Activities

Redemption of

shares & Debentures

Payment of loans

Payment of finance

and lease liabilities

Payment of interestand dividend

Terminal Questions1. What do you understand by Cash flow statement? How does it

differ from Fund flow statement? Discuss their importance.

2. Explain the difference between Investing and Financing

activities.

3. Prepare a Cash Flow statement by using imaginary figures (at

least eight items in total)



3.6 COMPUTATION

3.7 PROVISIONS OF CASH FLOW STATEMENT

3.8 CLASSIFICATION OF CASH FLOWS ACCORDING TO AS-3






CASH FLOW ANALYSIS-III

9.0 CONTEXT

THIS LESSON DEALS-

PROBLEMS OF CASH FLOW ANALYSIS.

9.1 OBJECTIVES-

AFTER STUDYING THIS UNIT YOU SHOULD BE UNDERSTAND-

- COMPUTATION CASH FROM OPERATIONS AND

- PREPARATION OF CASH FLOW STATEMENT

ILLUSTRATION-1 FROM THE FOLLOWING INFORMATIONS CALCULATE NET CASH FLOWS FROM

OPERATING ACTIVITIES BY DIRECT AND INDIRECT METHOD:

TRADING AND PROFIT & LOSS A/C

FOR THE YEAR ENDED 31ST MARCH 2009.

PARTICULARS AMOUNT PARTICULARS AMOUNT



TO PURCHASES

CASH

CREDIT

TO WAGES

TO GROSS PROFIT C/D

TO DEPRECIATION ON PLANT

TO SALARIES

TO LOSS ON SALE OF PLANT

TO NET PROFIT

60,000

20,000

10,000

10,000

B Y SALES:

CASH

CREDIT

B Y GROSS PROFIT

B Y INTEREST

RECEIVED

B Y PROFIT ON SALE

OF LONG-TERMS

INVEST.

90,000

10,000

1,00,000 1,00,000

1,800

5,000

700

7,500

10,000

2,500

2,500

15,000 15,000

Solution:

Computation of Net Cash Flow From Operating Activities (Direct Method)

For the year ended 31st March, 2009

CASH RECEIPTS FROM CUSTOMERS:

CASH SALES

CASH PAID TO SUPPLIERS AND EMPLOYEES:

CASH PURCHASE

WAGES

SALARIES

Rs.

90,000

Rs.

90,000

(75,000)

(60,000

)

(10,000

)

(5,000)

15,000



Net Cash Flow From Operating Activities

Computation of Net Cash Flow From Operating Activities (Indirect Method)


NET PROFIT OF THE YEAR

ADJUSTMENTS:

DEPRECIATION

LOSS ON SALE OF PLANT

INTEREST RECEIVED

PROFIT ON SALE OF LONG-TERMS INVESTMENTS

CASH GENERATED BEFORE WORKING CAPITAL

CHANGES

INCREASE IN CREDITORS

Increase in Debtors

Net Cash Flow From Operating Activities

Rs.

1,800

700

(2,500)(2,500)

Rs.

7,500

(2,500)

20,000

(10,000

)

5,000

10,000

15,000

ASSIGNMENT.1 FROM THE FOLLOWING INFORMATIONS CALCULATE CASH FLOW FROM OPERATING

ACTIVITIES BY APPLYING DIRECT METHOD AND INDIRECT METHOD.

TRADING AND PROFIT & LOSS A/C

FOR THE YEAR ENDED 31ST MARCH 2009.




TO COST OF GOODS SOLD

TO GROSS PROFIT C/D

TO SALARIES

TO INSURANCE PREMIUM

TO DEPRECIATIONS

TO NET PROFIT

1,00,000

50,000

B Y SALES

B Y GROSS PROFIT

1,50,000

1,00,000 1,00,000

12,000

3,000

10,000

25,000

50,000

50,000 50,000

ADDITIONAL INFORMATIONS:

1.4.2008 1.4.2009

RS. RS.

DEBTORS 18,000 25,000

BILLS RECEIVABLE 7,000 4,000

CREDITORS 8,000 6,000

STOCK 20,000 25,000

SALARIES OUTSTANDING 2,000 3,000



PREPAID INSURANCE PREMIUM 1,000 1,000

[Ans. Cash flow from Operating Act. Rs. 25,000.]

ILLUSTRATION.-2 FROM THE FOLLOWING INFORMATION CALCULATE NET CASH FLOW FROM

INVESTING ACTIVITIES:

DURING THE YEAR A MACHINE COSTING RS. 50,000 WITH ACCUMULATED DEPRECIATION OF RS.

30,000 WAS SOLD FOR RS. 25,000.

SOLUTION:

Computation of Net Cash Flow From Investing Activities


Sale of Machine

Purchase of Machine

Net Cash Used From Investing Activities

Rs.

25,000

(1,70,000)

(1,45,000)

PARTICULARS 31.3.2008 31.32009

MACHINERY (AT COST)

ACCUMULATED DEPRECIATION

5,00,000

1,00,000

6,00,000

1,20,000



Machinery Account


TO BALANCE B /D

(OPENING BALANCE)

TO PROFIT & LOSS A/C

[25,000 – 20,000

(50,000-30,000)]

TO BANK A/C (PURCHASE)

(BALANCE FIGURE)

5,00,000

5,000

1,70,000

B Y BANK A/C

(SALE OF MACHINE)

B Y DEPRECIATION A/C

(20,000+30,000)

B Y BALANCE C /D

(CLOSING BALANCE)

25,000

50,000

6,00,000

6,75,000 6,75,000

ASSIGNMENT.2 FROM THE FOLLOWING INFORMATION CALCULATE CASH FLOW FROM INVESTING

ACTIVITIES:

DURING THE YEAR A MACHINE COSTING RS. 80,000 WITH ACCUMULATED DEPRECIATION OF RS.

48,000 WAS SOLD FOR RS. 40,000.

[Ans. Cash flow form Investing Activities Rs. 1,00,000.]

PARTICULARS 31.3.2008 31.32009

MACHINERY (AT COST)

ACCUMULATED DEPRECIATION

8,00,000

2,00,000

8,40,000

2,20,000



ILLUSTRATION.-3 FROM THE FOLLOWING INFORMATION CALCULATE NET CASH FLOWS FROM

FINANCING ACTIVITIES:

ADDITIONAL INFORMATION:

DIVIDEND PAID ON SHARES RS. 15,000.

INTEREST PAID ON DEBENTURES RS. 20,000.

SOLUTION:

Computation of Net Cash Flow From Investing Activities


Proceeds from issue of share capital

Repayment of Preference Share Capital

Repayment of 10% Debentures

Preceeds from 8% Debentures

DIVIDEND

PAID

ON

SHARES

INTEREST PAID ON DEBENTURES

Net Cash Used From Financing Activities

Rs.

1,00,000

(40,000)

(1,00,000)

10,000

(15,000)

(20,000) (65,000)

PARTICULARS 2008 2009

EQUITY SHARE CAPITAL

PREFERENCE SHARE CAPITAL

10% DEBENTURES

8% DEBENTURES

3,00,000

1,00,000

2,00,000

30,000

4,00,000

60,000

1,00,000

40,000



ASSIGNMENT.3 FROM THE FOLLOWING INFORMATION CALCULATE NET CASH FLOWS FROM FINANCING

ACTIVITIES:


DIVIDEND PAID ON SHARES RS. 30,000.

INTEREST PAID ON DEBENTURES RS. 40,000.

[ANS. NET CASH USED FROM FINANCING ACTIVITIES RS. 1,30,000]

ILLUSTRATION:4 THE BALANCE SHEETS OF PRIYA T YRES LTD. AS OR 31ST MARCH 2008 AND

2009 ARE AS FOLLOWS:

LIABILITIES 2008 2009 ASSETS 2008 2009


EQUITY SHARE CAPITAL

PREFERENCE SHARE CAPITAL

10% DEBENTURES

8% DEBENTURES

6,00,000

2,00,000

4,00,000

60,000

8,00,000

1,20,000

2,00,000

80,000



SHARE CAPITAL

RETAINED

EARNINGS

ACCUMULATED

DEPRECIATION

1 2 % DE B E N T U R E.

CREDITORS

1,00,000

70,250

60,000

50,000

28,000

1,60,000

85,300

40,000

-

48,000

FIXED

ASSETS

INVENTORY

DEBTORS

PREPAIDEXP.

BANK

1,52,000

93,400

30,800

3,950

28,100

2,00,000

89,200

21,100

3,000

20,000

3,08,250 3,33,300 3,08,250 3,33,300

THE FOLLOWING ADDITIONAL INFORMATION FOR THE YEAR 2009 IS ALSO AVAILABLE:

A. NET PROFIT RS. 27,050.

B. DEPRECIATION CHARGE RS. 10,000.

C. CASH DIVIDEND DECLARED DURING THE PERIOD RS. 12,000.

D. AN ADDITION TO THE BUILDING WAS DURING THE YEAR AT A COST OF RS.

78,000 AND FULLY DEPRECIATED EQUIPMENT COSTING RS. 30,000 WAS DISCARDED, NO

SALVAGE BEING REALIZED.

PREPARE A CASH FLOW STATEMENT

SOLUTION:

CASH FLOW STATEMENT

FOR THE YEAR ENDED 31ST MARCH, 2009

PARTICULARS RS. RS.



A. CASH FLOWS FROM OPERATING ACTIVITIES:

NET PROFIT BEFORE TAX AND EXTRAORDINARY

ITEMS

ADJUSTMENT FOR:

DEPRECIATION

OPERATING PROFIT BEFORE WORKING CAPITALCHANGES

ADD: DECREASE IN INVENTORY

DECREASE IN DEBTORS

DECREASE IN PREPAID EXPENSES

INCREASE IN CREDITORS

NET CASH FROM OPERATING ACTIVITIES

B. CASH FLOWS FROM INVESTING ACTIVITIES

PURCHASE OF FIXED ASSETS

NET CASH FROM INVESTING ACTIVITIES

C. CASH FLOWS FROM FINANCING ACTIVITIES

27,050

10,000

37,050

4,200

9,700

950

20,000

71,900

(78,000

)

(78,000

)

71,900

(78,000)



PROCEEDS FROM ISSUE OF SHARE CAPITAL

REPAYMENT OF 6% DEBENTURE

DIVIDEND PAID

NET CASH FROM FINANCING ACTIVITIES

NET DECREASE IN CASH (A + B + C)

CASH ANDCASH EQUIVALENTS AT THE BEGINNING OF THE

PERIOD

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD

60,000

(50,000

)

(12,000

)

2,000

(2,000)

(8,100)

28,100

20,000

ASSIGNMENT.4 FROM THE FOLLOWING BALANCE SHEETS AS ON MARCH 31, PREPARE CASH FLOW

STATEMENT:


ASSETS:

CASH

INVESTMENT (LONG TERM)

SUNDRY DEBTORS

STOCK IN TRADE

NET FIXED ASSETS

1,06,000

1,74,000

6,92,000

8,64,000

22,26,000

62,000

-

10,56,000

13,66,000

27,96,000

40,62,000 52,80,000



EQUITY

SHARE

CAPITAL

8% RED.

PREF. SHARE

GENERAL

RESERVE

P & L A /C

PROPOSED

DIVIDEND

CREDITORS

BILLS

PAYABLE

PROV. FOR

TAXATION

6,00,000

3,00,000

80,000

60,000

84,000

1,10,000

40,000

80,000

8,00,000

2,00,000

1,40,000

96,000

1,00,000

1,66,000

32,000

1,00,000

GOODWILL

BUILDING

PLANT

DEBTORS

STOCK

BILL

RECEIVABLE

CASH IN HAND

CASH AT

BANK

2,30,000

4,00,000

1,60,000

3,20,000

1,54,000

40,000

30,000

20,000

1,80,000

3,40,000

4,00,000

4,00,000

2,18,000

60,000

20,000

16,000

13,54,000 16,34,000 13,54,000 16,34,000


1. DEPRECIATION OF RS.20,000 AND RS.40,000 HAVE BEEN CHARGED ON PLANT ACCOUNT

AND BUILDINGS ACCOUNT RESPECTIVELY IN 2008-09.

2. AN INTERIM DIVIDEND OF RS.40,000 HAS BEEN PAID IN 2008-09.

3. INCOME TAX RS.70,000 WAS PAID DURING THE YEAR 2008-09.

Assignment 5: From the following particulars prepare a cash flow statement:

Balance Sheets

Liabilities 2008

Rs.

2009

Rs.

Assets 2008

Rs.

2009

Rs.



Share Capital

8% Debentures

Reserves Trade

Creditors

Bills Payable

Bank overdraft

70,000

12,000

700

10,360

10,040

74,000

6,000

800

11,840

10,560

Fixed Assets

Discount on

Debentures

Debtors

Stock

Bank

5,10,000

10,000

40,000

30,000

10,000

6,20,000

5,000

75,000

1,00,000

-

6,00,000 8,00,000 6,00,000 8,00,000



Additional Information:

1. Provision for deprecation was on 31.12.2008 Rs.1,50,000 and on 31.12.2009

Rs.1,90,000

2. A machine costing Rs.70,000 (Depreciation written-off Rs.30,000) was sold for

Rs. 25,000.

3. Dividend paid was Rs.30,000

[Ans: Cash from operations Rs.25,000; Cash inflow Rs.2,00,000; Cash outflows

Rs.2,50,000]



SELF CHECK QUESTION

1. WHAT DOES CASH FLOW STATEMENT?

2. EXPLAIN THE METHOD OF COMPUTATION OF CASH FLOW FROM OPERATIONS?

3. DISTINGUISH BETWEEN CASH FLOW STATEMENT AND FUND FLOW STATEMENT.

4. THE BALANCE SHEETS OF SUPER MACHINE LTD. AS AT 31ST MARCH 2007 AND

2009 ARE AS UNDER:

LIABILITIES 31.3.08 31.3.09 ASSETS 31.3.08 31.3.09

SHARE CAPITAL

P & L A/C

GENERAL RES.

CREDITORS

B/P

OUTSTANDING

EXPENSES

50,000

10,000

5,000

15,000

4,000

1,000

70,000

15,000

8,000

19,000

5,000

500

BUILDING

PLANT

STOCK

DEBTORS

CASH

50,000

8,000

5,000

20,000

2,000

80,000

12,000

7,500

15,000

3,000

8,50,000 9,00,000 8,50,000 9,00000


1. DURING THE YEAR A DEPRECIATION OF RS. 5,000 ON BUILDING AND OF RS.

2,000 ON PLANT HAS BEEN CHARGED.

2. A PIECE OF PLANT WAS SOLD FOR RS. 800 DURING THE YEAR. IT COST RS.

1,200 AND DEPRECATION OF 700 WAS PROVIDED ON IT.

unit 3cash flow analysis

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