Cash Flow Statement

UNIT 5 CASH FLOW STATEMENT

Objectives
After you have studied this unit, you should be able to:

 Understand the purpose and preparation of cash flow statement;

 Distinguish between operating activities, investing activities and financing activities;

 Prepare the cash flow statement using the direct method;

 Prepare the cash flow statement using the indirect method.

Structure

5.1 Introduction

5.2 Importance and objectives of cash flow statement

5.3 Cash and cash equivalent

5.4 Types of activities and cash flow classification

5.5 Preparation of cash flow statement and illustrations

5.6 Activity: Cash flow statement of NTPC Ltd

5.7 Summary

5.8 Keywords

5.9 Self-assessment questions

5.10 Further readings

5.1 INTRODUCTION
The Cash flow statement is one of the three most important financial
statements. It shows the inflows and outflows of cash and cash equivalents
over a period of time. The users of financial information give substantial
importance to this statement as it acts as a tool to study the strength and long-
term future outlook of the company. It also takes into account various
activities of an enterprise.

The cash flow statement of an enterprise provides information about the

historical changes in cash and cash equivalents by classifying all cash flows
derived from operating, investing and financing activities. The revised
Accounting Standard -3 (AS-3) made it mandatory for all listed companies to
prepare and present an annual cash flow statement along with other financial
statements.

This unit discusses and explains the method of preparing a cash flow
statement for an accounting period.

127
 Accounting: An Features of Cash Flow Statement C
Overview
Features are mentioned as follows:

1. A cash flow statement is a periodic statement.

2. It is a statement of change in the financial position on a cash basis.
3. It shows the movement of cash and explains the reasons for changes in
cash position between two balance sheet dates.
4. It does not match cost against revenue.
5. It shows the inflow and outflow of cash and cash equivalents from
various activities.
6. It helps assess the company’s capability to generate cash and cash
equivalents and channels to utilise those cash flows.
7. It provides information on inflow and outflow of cash and cash
equivalents from various activities of a company under various heads,
i.e. operating, investing and financing activities.

Preparation of Cash Flow Statement

Following basic documents or data are required to prepare the statement:

Figure 5.1: Data used for Cash Flow Statement

5.2 OBJECTIVES AND BENEFITS OF CASH

FLOW STATEMENT
Objectives of Cash Flow Statement
The objectives of the cash flow statement are as follows:

 To make future financial policies.

 To identify the extent of major expenses.

 To devise the cash requirement for a period.

 To find reasons for the net cash inflows or outflows.

 To predict the financial strength of the company.

128
Benefits of Cash Flow Statement Cash Flow Statement

Benefits are mentioned as follows:

● Highlights liquidity position

Liquidity means one’s ability to pay the obligation on time or as soon as
it becomes due. A cash flow statement helps in determining the liquidity
position of the business. It shows the cash position and gives an idea of
the cash payments made in the course of business of the company, thus,
confirming the liquidity position of the same.
● Helps in cash management
A cash flow statement helps in the management of cash flow. With the
help of cash flow statements, companies can estimate both future cash
receipts and payments. With the help of this statement, it is easier for
companies to make future plans related to cash without compromising on
liquidity.
● Maintain optimal cash balance
Another benefit of a cash flow statement is that it facilitates the company
to maintain an optimal cash balance. It enables businesses to verify the
possible idle, excess or shortage of cash. After arranging for the required
Cash position, the companies can invest the excess cash or borrow funds
in case of any deficit.
● Comparability
A cash flow statement facilitates the accurate comparison of the cash-
based performance of different companies as it uses the same accounting
treatment for the same transactions and events. Companies can,
therefore, adjust their cash flows as per the industry norms or modify
them as per the structure of the industry leaders.
● Indicates future
One of the significant benefits of the cash flow statement is that
historical cash flow information is taken as an adequate indication of
future cash flows. Past information on cash amount, their timing and
certainty of their arrival may be used for the forecasting of the future
cash flows. It helps in confirming the accuracy of past assessments too.

5.3 CASH AND CASH EQUIVALENTS

Cash and Cash Equivalents
As per AS-31, Cash comprises cash in hand and demand deposits with banks.
Cash equivalents means short-term highly liquid investments that are readily
convertible into known amounts of cash and subject to an insignificant risk of
changes in value.

Cash equivalents have the following features:

1
https://www.mca.gov.in/Ministry/notification/pdf/AS_3.pdf 129
 Accounting: An  Cash equivalents can be readily converted into cash. C
Overview
 These are held to meet short-term cash requirements rather than for investments
purposes.

 Cash equivalents have a short term maturity, normally, three months or less.

 Cash equivalents are highly liquid and easily sellable in the market.

 Buyers of cash equivalents are easily accessible.

Marketable securities and money market instruments are considered cash

equivalents. Generally, it includes commercial paper, treasury bills, short-
term government bonds etc. with a maturity date of three months or less.

Cash Flows
A company creates value for the shareholders by generating positive cash
flows for them. As per AS-31, cash flows are inflows and outflows of cash
and cash equivalents, i.e. cash flows is the amount of cash and cash
equivalents move in and out of a business. Cash flow generated in a company
adds to its cash reserves, which further accelerate reinvestment in the
company.

5.4 TYPES OF ACTIVITIES AND CASH FLOW

CLASSIFICATION
As per AS-31, these activities can be put into three categories:

 Operating activities

 Investing activities, and

 Financing activities

This classification shows the cash flows generated and used in these
activities.

Figure 5.2 Types of Activities

Cash from Operating Activities

Operating activities comprised of the primary activities of a company. These
activities create the principal revenue stream for the company. Cash flow
from operating activities is the first subdivision portrayed on a cash flow
statement. Cash from operations is an indicator of the internal solvency of the
company.

 Cash from operating activities signifies the cash a company generates from its ongoing
and regular business activities.
130
 These activities include routine acts of manufacturing and selling goods or a service to Cash Flow Statement
clients.

 It focuses only on core business activities and does not include non-core, long-
term capital expenditures or investment revenues etc.

 As it considers only the core business, cash flow from operating activities is a yardstick
to verify the financial status of a company.

There are two different methods to identify cash from operating activities: the
indirect method and the direct method.

Figure 5.3 Methods to identify Cash from Operating Activities

Cash Inflows from Operating Activities

 Cash receipts from the sale of goods and the rendering of services.

 Cash receipts from royalties, fees, commissions and other revenues.

Cash Outflows from Operating Activities

 Cash payments to suppliers for goods and services

 Cash payments to employees

 Cash payment on behalf of the employees

 Cash payments for insurance premiums and claims, annuities, and other benefits.

 Cash payments or refunds of income taxes

Non-operating cash flows are clearly different from operating cash flows. For
example, non-operating cash flows include taking a loan or issuing new
shares and are usually non-recurring.

Cash from Investing Activities

As per AS-3, investing activities are the acquisition and disposal of long-
term assets and other investments not included in cash equivalents. Investing
activities are related to the purchase and sale of long-term or fixed assets of a
company. These assets include land and building, machinery, furniture etc.
These activities signify the extent to which expenditures are made for
acquiring resources to generate future cash flows. Cash flows related to long-
term investments are also known as investing activities. 131
 Accounting: An Cash Inflows from Investing Activities C
Overview
 Cash receipt from the disposal of fixed assets, including intangibles assets.

 Cash receipt from the disposal of intangibles assets.

 Cash receipt from the repayment of advances or loans made to third parties.

 Cash receipt from the disposal of shares, warrants or debt instruments of other
enterprises other than receipts from those instruments considered as cash or cash
equivalents or held for trading purposes.

 Interest received in cash from loans and advances.

 Dividend received from investments in other companies.

 Cash receipts from futures contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing, or trading purposes, or the
receipts are classified as financing activities

Cash Outflows from Investing Activities

 Cash payments to acquire fixed assets, including intangibles and capitalised research
and development.

 Cash payments to acquire shares warrants or debt instruments of other enterprises other
than the instruments considered to be cash equivalents or held for trading purposes.

 Cash advances and loans made to a third party (other than advances and loans made by
a financial enterprise, wherein it is operating activities).

 cash payments for futures, forward, options and swap contracts except when the
contracts are held for dealing or trading purposes, or the payments are classified as
financing activities; and

Cash from Financing Activities

As per AS-3, financing activities are activities that result in changes in the
size and composition of the owners’ capital (including preference share
capital in case of a company) and borrowings of the enterprise.

It is the part of a company’s cash flow statement, which shows the flows of
cash used to fund the company that involve equity, debt and dividends. It
provides an insight into a company’s financial strength and its capital
structure. These activities are related to long-term funds or capital as cash
proceeds from issue of equity shares, debentures, bank loans etc.

Cash Inflows from Financing Activities

 Cash proceeds from issuing shares or other similar instruments.

 Cash proceeds from issuing debentures, loans, bonds and other short or long-term
borrowings.

Cash Outflows from Financing Activities

 Cash repayments of amounts borrowed.

 Interest paid on loans, debentures and advances.

132  Dividends paid on equity and preference capital.

Sometimes, one transaction may fall into more than one different Cash Flow Statement
classification. For example, the purchase of shares is an operating activity for
a share broker, while it is referred to as investing activity for another
enterprise.

Non-cash Transactions
As per AS-3, investing and financing transactions that do not require the use
of cash or cash equivalents should be excluded from a cash flow statement.
Examples of such transactions are – acquisition of machinery by the issue of
equity shares or redemption of debentures by the issue of equity shares.

5.5 PREPARATION OF CASH FLOW

STATEMENT
Basic Structure of the Cash Flow Statement
The basic structure of the cash flow statement is presented as under:

Particulars Amount
(A) Cash flows from operating activities XX
(B) Cash flows from investing activities XX
(C) Cash flows from financing activities XX
Net increase /decrease in cash and cash equivalents (A + B + C) XX
+ Cash and cash equivalents at the beginning
= Cash and cash equivalents at the end XX

Figure 5.4 Basic Structure of the Cash Flow Statement

Cash Flow from Operating Activities

Calculation of cash flow from operation is considered to be the most complex
problem area while preparing the statement. As mentioned earlier, as per AS-
3, a company reports these cash flows either by direct or indirect method.
Detailed discussion is given below:

Direct Method
Under this method, cash receipts and cash payments are arranged and
presented in the cash flow statement. The difference between cash receipts
and payments is the net cash flow from operating activities. The financial
statement provides the summarised data for revenue and expenses. The
accrual basis of revenue and expenses are to be converted to equivalent cash
receipts and payments.

Some examples of cash receipts and payments are mentioned as under:

 Cash receipts from customers/debtors

 Cash receipts of royalties, fees, commission etc

 Cash paid to suppliers

 Cash paid for purchases 133

 Accounting: An  Cash paid for wages and salaries C
Overview
 Cash paid for various taxes , interest etc

Cash receipt from Customers/debtors:

In a standard scenario, if a business is run on an only cash basis, the sales
revenue in the income statement is as same as the cash collected from the
customers. However, normally, credit sales are also made. The uncollected
amount is reflected by the closing balance of debtors. To calculate the cash
received from debtors, the opening balance (debtors/bills receivable) should
be added to the amount of credit sales, and the closing balance should be
subtracted there from.

Cash Collected from Debtors can also be calculated as follows:

Cash Collected from Debtors = Credit Sales (+) Decrease in Accounts

Receivable or

(–) Increase in Accounts Receivable.

Cash paid to suppliers / Purchases

For purchases, cash payments to suppliers consider the cost of goods sold
from the Profit & Loss account and others from the Balance Sheet, etc. The
calculations are as follows:

Purchases = Cost of Goods Sold (+) Closing Stock (-) Opening Stock

Or

Purchases = Cost of Goods Sold (+) Increase in Stock or (-) Decrease in

Stock

Or

Cash Paid to Suppliers = Purchases (+) Opening Balance of Creditors

(Bills Payable)

(-) Closing Balance of Creditors (Bills Payable)

Or

Cash Paid to Suppliers = Purchases (+) Decrease in Accounts Payable or

(–) Increase in

Accounts Payable

Cash Paid to Employees

The calculation for cash payments is presented as under:

Cash Paid for Wages and Salaries =

Wages and Salaries Expenses (+) Opening Balance of Outstanding
Wages and Salaries (-) Closing Balance of Outstanding Wages and
134 Salaries.
Or Cash Flow Statement

Cash Paid for Wages and Salaries =

Wages and Salaries Expenses (+) Decrease in Wages and Salaries

Payable or (-) Increase in Wages and Salaries Payable

The following points should be noted:

 The sale of fixed assets and investments does not require any adjustment here.

 Bad debts, sales returns, purchases returns, discount allowed, discount received etc.
require adjustment.

 Items like depreciation, amortisation of intangible assets like goodwill, debenture

discount, preliminary expenses, premium on redemption of debentures and preference
shares are ignored.
 Non-cash items are omitted from a statement of cash flows.

Cash Flows from Operating Activities (Direct Method)

Amount

Cash receipts from customers XX

xxx
(–) Cash paid to suppliers and employees XX
xxx
= cash generated from operations XX
xxx
(–) Income tax paid XX
xxx
= Cash flow before extra-ordinary items XX
xxx
(+/–) Extra-ordinary items XX
xxx
= Net cash from operating activities XX

Figure 5.5 Cash Flows from Operating Activities (Direct Method)

Indirect Method
In the indirect method, the net profit/loss forms the base to calculate net cash
flow. Non-cash and non-operating charges put in the Profit & Loss account
are added back, whereas non-cash and non-operating incomes are deducted to
calculate operating profit. Adjustments are further needed in current assets
and current liabilities to obtain net cash from operating activities.

Cash flows from Operating Activities (Indirect Method)

Amount

Net profit for the year XX

(+) Non-cash and non-operating expenses:
● Depreciation XX
● Goodwill written off XX
135
 Accounting: An ● Provision for taxation XX C
Overview
● Preliminary expenses written off XX
● Loss on sale of fixed assets, investment etc XX
(-) Non-cash and non-operating incomes
● Loss on sale of fixed assets, investment etc
Net profit after adjustment of non-cash items XX
(+) Increase in current liabilities
(+) Decrease in current assets
(-) Increase in current assets XX
(-) Decrease in current liabilities XX
(-) Income tax paid XX
Cash from operating activities XX
XX
XX

Figure 5.6 Cash Flows from Operating Activities (Indirect Method)

Illustration 5.1
From the following information, calculate the net cash flow from operating
activities for the year ended March 31, 2020, using direct method.

Amount (Rs)
Cash Sales 1,50,000
Credit Sales 75,000
Receivables collections 1,50,000
Cash Purchases 35,000
Credit Purchases 40,000
Creditors Paid 87,500
General Expenses Paid 25,000
Unpaid Expenses 30,000
Wages Paid 45,000
Outstanding Wages 15,000
Salaries Paid 55,000
Total Salaries 1,25,000
Interest Received 7,500
Income Tax Paid 14,000
Depreciation 10,000
Loss due to Fire 9,000
Insurance Claims 7,500
136
Solution: Cash Flow Statement

Amount (Rs) Amount

(Rs)
Cash Receipts:
Cash Sales 1,50,000
Receivables collections 1,50,000 3,00,000
(Less) Cash Paid to Suppliers and
Employees:
Cash Purchases 35,000
Payment to Creditors 87,500
Payment of wages 45,000
Payment of Salaries 55,000
Payment of General Expenses 25,000 2,47,500
Cash from Operations* 52,500
(Less) Payment of Income Tax 14,000
Cash Flow before Extra-ordinary items 38,500
(Add) Extra-ordinary Income:
Insurance Claim received 7,500
Net Cash Flow from Operating Activities 46,000

*Only operating income and expenses are considered.

Illustration 5.2
From the following Profit and Loss Account, calculate the Net Cash flow
from Operating Activities using the indirect method.

Profit and Loss Account for the year ended March 31st, 2020

Dr. Cr.
Rs Rs Rs Rs
To Opening Stock 22,500 By Sales:
To Purchases: Cash 42,500
Cash 25,000 Credit 1,75,000 2,17,500
Credit 90,000 1,15,000 By Closing 17,500
To Wages: Stock
Paid 26,000 By
Outstanding 5,000 31,000 Dividend 5,000
To Salaries from
Investment
Paid 15,000
Outstanding 5,000 20,000
To Rent Paid 4,000
To Depreciation 12,500
To Preliminary
Expenses
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 Accounting: An write-off 8,000 C
Overview
To Provision of 5,000
Taxation

To Net Profit 22,000

2,40,000 2,40,000

Additional information is:

 Tax paid during the year is Rs 25,000

 The opening and closing balances of debtors are Rs 24,000 and Rs 29,000

 The opening and closing balance of creditors are Rs 22,500 and Rs 20,000

Solution:

Amount Amount
(Rs) (Rs)
Net Profit 22,000
Add: Non-operating and Non-cash items
charged to Profit &Loss A/C 12,500
Depreciation 8,000
Preliminary Expenses written off 5,000 25,500
Provision for Taxation 47,500

Less: Non-operating and Non-current items

credited to Profit &Loss
Dividend from Investment 5,000
Operating profit before working capital 42,500
changes
Add: Increase in Operating Current
Liabilities
Outstanding Wages
5,000
Outstanding Salaries
5,000
Decrease in Operating Current Assets
15,000
Stock
5,000
57,500
138 Less: Increase in Operating Current Assets
Debtors 7,500 Cash Flow Statement

Decrease in Operating Current Liabilities 10,000 50,000

Creditors 25,000
Cash Generated From Operations 5,000
Less: Payment of Income Tax 25,000

Net Cash Flow from Operating

Activities

Cash Flow Statement

There is no specific format of cash flow statement in Accounting Standard-3
(Revised). A widely accepted format under direct method and indirect
method is being provided below:

Proforma for Cash Flow Statement (under Direct Method)

Statement of .................for the period ended...................

Amount Amount
(Rs) (Rs)

A. Cash flows from Operating Activities

Cash receipts from customers
Less: Cash paid to suppliers and employees
Cash generated from operations
Less: Income taxes paid
Cash flows from operations before extra-ordinary
item
Add: Proceeds from any disaster settlement
Net Cash Flow from Operating Activities
B. Cash flows from Investing Activities
Proceeds from Sale of Fixed Assets including
Investments
Less: Purchase of Fixed Assets including Investments
Add: Interest received
Dividend received
Net Cash from Investing Activities
C. Cash flows from financing activities
Proceeds from issuance of share capital
Proceeds from long-term borrowings
Less: Repayments of long-term borrowings
Redemption of Preference Shares
139
 Accounting: An Less: Interest paid C
Overview
Dividend paid
Net Cash from Financing Activities
Net Increase (Decrease) in Cash and Cash
Equivalents (A + B + C)
Add : Cash and Cash Equivalents at the Beginning
of Period

Cash and Cash Equivalents at End of Period

Proforma for Cash Flow Statement (under Indirect Method)

Statement of .................for the period ended...................

Amount Amount
(Rs) (Rs)

A. Cash flows from Operating Activities

Net profit before tax and extra-ordinary items
Add: Adjustments for Non-cash and Non-operating
items charged
to Profit and Loss A/c
Depreciation
Interest Paid
Foreign Exchange Loss
Loss on sale of fixed assets and Investments
Less: Adjustments for Non-cash and Non-operating
items credited
to Profit and Loss A/c
Interest earned
Dividend earned
Profit on sale of fixed assets and Investments
Operating profit before working capital changes
Add: Increase in Operating Current Liabilities
Decrease in Operating Current Assets
Less: Increase in Operating Current Assets
Decrease in Operating Current Liabilities
Cash generated from Operations
Less: Income Tax Paid
140
Add: Proceed from any Disaster Settlement Cash Flow Statement

Net Cash Flow from Operating Activities

B. Cash flows from Investing Activities
Proceeds from Sale of Fixed Assets including
Investments
Less: Purchase of Fixed Assets including Investments
Add: Interest received
Dividend received
Net Cash from Investing Activities
C. Cash flows from financing activities
Proceeds from issuance of share capital
Proceeds from long-term borrowings
Less: Repayments of long-term borrowings
Redemption of Preference Shares
Less: Interest paid
Dividend paid
Net Increase (Decrease) in Cash and Cash
Equivalents (A + B + C)
Add: Cash and Cash Equivalents at the Beginning of
Period Cash and Cash Equivalents at End of Period

Illustration5.3
Prepare a cash flow statement of ABC Ltd on the basis of given information:

Liabilities 2019 2020 Assets 2019 2020

(in Rs) (in Rs) (in Rs) (in Rs)
Share Capital 3,00,000 3,75,000 Land and 3,00,000 4,20,000
Building
12% Debentures 1,50,000 1,20,000 Machinery 1,50,000 1,95,000
Reserve 7,5000 1,05,000 Debtors 60,000 90,000
Bills Payables 30,000 1,50,000 Stock 1,05,000 1,35,000
Outstanding 37,500 30,000 Cash 22,500 27,000
Expenses
Creditors 60,000 90,000 Goodwill 15,000 3,000
Total 6,52,500 8,70,000 Total 6,52,500 8,70,000

141
 Accounting: An Solution C
Overview
Cash Flow Statement for the year ended March 31st 2020

(Rs) (Rs)
Cash from operating Activities
Profit during the year* 30,000
Add: Goodwill written off 12,000
Increase in creditors 30,000
Increase in bills payables 1,20,000 1,92,000

Less : Increase in debtors (30,000)

Increase in stock (30,000)
Decrease in outstanding expenses (7,500) (67,500)
1,24,500
A. Cash outflow from operating
activities

Cash from investing activities (1,20,000)

Purchase of land and building (45,000) (1,65,000)45,000
Purchase of machinery
B. Cash outflow from investing
activities 75,000 4,500
Cash from Financing Activities (30,000) 22,500
Issue of shares 27,000
Redemption of debentures

C. Cash inflow from financing

activities

Net Increase in Cash (A+B+C)

Add: Cash balance in the beginning of the
year
Cash balance at the end of the year

*Change in General Reserve

Illustration 5.4
Summary of cash transactions of XYZ Ltd is extracted from their books. You
are required to prepare a cash flow statement for the period ended 31st
March, 2020 in accordance with the Accounting Standard- 3 (Revised).

142
 (` in Rs ’000) Cash Flow Statement

Balance as on 1st April, 2019 140

Receipts from customers 11132
Issue of shares 1200
Sale of fixed assets 512
12984

Payments to suppliers 8188

Payments for fixed assets 920
Payments for overheads 460
Wages and salaries 276
Taxation 972
Dividends 320
Repayment of bank loans 1000
12136
Balance as on 31st March, 2020 848

Solution:

Cash Flow Statement for the period ending 31st March, 2020

(` in ‘000s)
A. Cash Flow from Operating Activities
Receipts from customers 11132
Payment to suppliers (8188)
Payment of Wages and Salaries (276)
Payment of Overheads (460)
Payment of Taxes (972)
Net Cash from Operating Activities(A) 1236
B Cash Flow from Investing Activities
Proceeds on sale of fixed assets 512
Acquisition of (payments) fixed assets (920)
Net Cash Used in Investing Activities (B) (408)
C Cash Flow from Financing Activities
Proceeds on issue of shares 1200
Payments of dividends (320)
Repayments of bank loans (1000)
Net Cash Used in Financing Activities (C) (120)

143
 Accounting: An Net increase in cash and cash equivalents 708 C
Overview
(A)+(B)+(C)
Cash and cash equivalents at the beginning of the 140
period
Cash and cash equivalents at the end of the period 848

Illustration 5.5
From the following information, prepare a cash flow statement using: (i)
Direct Method and (ii) Indirect Method.

Income Statement and Reconciliation of Earnings for the year ended

31.3.2020

`
Net Sales 630000
Less: Cost of sales 495000
Depreciation 15000
Salaries and wages 60000
Operating expenses 20000
Provision for taxation 22000 612000
Net operating profit Non-recurring income: 18,000
Profit on sale of equipment
3,000
21,000
Retained earnings (balance in Profit & Loss Account 37950
brought forward)
58950
Dividend declared and paid during the year 18000
Profit & Loss Account balance as on 31.3.2020 40950

Balance Sheets
As at As at
31.3.2019 31.3.2020
Capital 90,000 110000
Surplus in profit and loss A/c 37950 90950
Sundry creditors 60,000 58500
Outstanding expenses 6000 12000
Income tax payable 3000 3300
Accumulated depreciation on building and 30000 33000
equipments
22695 258750
Fixed assets Land 12000 24,000
144
Building and equipments 90000 1,44,000 Cash Flow Statement

Current assets Cash 15,000 18,000

Debtors 42,000 46,500

Stock 66000 24,000
Advances 1950 2250
22695 258750

Cost of equipment sold was 18,000.

Solution:

` `
Cash Flows from Operating Activities:
Cash receipts from customers WN1 625500
Cash paid to suppliers and employees 528800
WN2
Cash generated from operations 96700
Income tax paid WN3 (21700)
Net Cash from Operating Activities 75000
Cash Flows from Investing Activities:
Purchase of land (12,000)
Purchase of building and equipment WN6 (72000)
Sale of equipment WN5 9000
Net cash used in Investing Activities
Cash Flows from Financing Activities: (75000)
Issue of share capital 21000
Dividend paid (18000)
Net Cash from Financing Activities 3000
Net Increase in Cash and Cash Equivalents 3000
Cash and Cash Equivalents at the beginning 15,000
Cash and Cash Equivalents at the end 18000

Working Notes (WN):

1) Cash receipts from customers:WN1
`
Sales revenue 630000
Add: Debtors at the beginning 42000
672000
Less: Debtors at the end 46500
625500
2) Cash paid to suppliers and 145
 Accounting: An employees:WN2 C
Overview
Cost of goods sold 495000
Add: Operating expenses 20000
Salaries and wages 60000
575000
Add: Creditors at the beginning 60000
Stock at the end 24000
Advances at the end 2250
Outstanding expenses at the beginning 6000 92250
667250
Less: Creditors at the end 58500
Stock at the beginning 66000
Advances at the beginning 1950
Outstanding expenses at the end 12000 138450
528800

3) Income tax paidWN3

Tax payable at the beginning 3000
Add: Provision for taxation 22000
25000
Less: Tax payable at the end 3300
Tax paid during the year 21700
4) Accumulated depreciation written off
on equipments (sold)WN4

Accumulated depreciation at the beginning 30000

Add: Depreciation for the year 15,000
45000
Less: Accumulated depreciation at the end 33000
12,000
5) Sale price of equipmentWN5
Cost price 18000
Less: Accumulated depreciation WN4 12000
6000
Add: Profit on sale 3000
9000
6) Purchase of building and
equipmentsWN6
146 Balance at the beginning 90000
Less: Cost of equipment sold 18,000 Cash Flow Statement

Balance 72000
Balance at the end 144000
Purchased during the year 72000

Indirect Method

Cash flow statement for the year ended 31.3.2020

Cash Flows from Operating Activities:

Net profit before taxation and extra-ordinary item

40000

Adjustments for:

Depreciation 15,000
Operating profit before working capital changes 55,000

Increase in debtors (4500)

Decrease in stock 42000

Increase in advances (300)

Decrease in creditors (1500)

Increase in outstanding expenses 6000

Cash generated from operation (96700)

Income tax paid 21700

Net Cash from Operating Activities 75000

Cash Flows from Investing Activities:

Purchase of land (12000)

Purchase of building and equipments (72000)

Sale of equipment
9,000

Net Cash Used in Investing Activities (75000)

Cash Flows from Financing Activities:

Issue of share capital 21000

Dividend paid (18000)
Net Cash from Financing Activities 3000
Net Increase in Cash and Cash Equivalents 3000 147
 Accounting: An Cash and Cash Equivalents at the beginning 15000 C
Overview
Cash and Cash Equivalents at the end 18000

5.6 ACTIVITY 1: CASH FLOW STATEMENT OF

NTPC LTD
Cash Flow of three years of NTPC Ltd is produced here. Create a group of
your classmates and compare the figures of each year with another year.
Further, comment on the increase/decrease of cash flows in various activities.
Also, discuss the reasons for such increase/decrease.

Comparative Cash Flow Statement of NTPC Ltd*

Particulars ----------------- in Rs. Cr. -----------

March March March
2020 2019 2018

Net Profit/Loss Before Extraordinary

20,317.07 7,776.05 12,339.46
Items And Tax
Net Cash Flow From Operating
22,014.26 16,030.47 19,248.35
Activities
- - -
Net Cash Used In Investing Activities
27,677.12 20,894.22 20,388.19
Net Cash Used From Financing
5,658.88 4,827.65 1,043.21
Activities
Foreign Exchange Gains / Losses -0.03 -0.01 0
Net Inc/Dec In Cash And Cash
-4.01 -36.11 -96.63
Equivalents
Cash And Cash Equivalents Begin of
24.38 60.49 157.12
Year
Cash And Cash Equivalents End Of
20.37 24.38 60.49
Year

*Source: https://www.moneycontrol.com/financials/ntpc/cash-flowVI/NTP#NTP

5.7 SUMMARY
The cash flow statement shows cash inflows and outflows and cash
equivalents. Enterprises give substantial importance to this statement as it
gives a tool to the users of financial information and make them aware of the
sources and uses of cash and cash equivalents over a period of time.
A cash flow statement is a periodic statement. It is a statement of change in
the financial position on cash basis. It shows the cash movement and explains
148 the reasons for changes in cash position between two balance sheet dates. It
shows the inflow and outflow of cash and cash equivalents from various Cash Flow Statement
activities. It helps in the assessment of the company’s capability to generate
cash and cash equivalents and channels to utilise those cash flows. It provides
information on inflow and outflow of cash and cash equivalents from various
activities of a company under various heads, i.e. operating, investing and
financing activities.

Cash comprises cash in hand and demand deposits with banks. Cash
equivalents means short-term highly liquid investments that are readily
convertible into known amounts of cash and are subject to an insignificant
risk of changes in value. Marketable securities and money market instruments
are considered cash equivalents. Generally, it includes commercial paper,
treasury bills, short-term government bonds etc. with a maturity date of three
months or less.

These activities can be put into three categories: Operating activities,

investing activities, and Financing activities. Operating activities are
comprised of the primary or main activities of a company. These activities
create the principal revenue stream for the company. There are two different
methods to identify cash from operating activities, the indirect method and
the direct method. Investing activities are the acquisition and disposal of
long-term assets and other investments not included in cash equivalents.
Investing activities are related to the purchase and sale of long-term or fixed
assets of a company. Financing activities are activities that result in changes
in the size and composition of the owners’ capital (including preference share
capital in case of a company) and borrowings of the enterprise.

5.8 KEYWORDS
Cash from Operations
It refers to "Profit from Operation" duly adjusted against the increase or
decrease in the current assets and liabilities.

Cash Equivalents
These are highly liquid short-term investments that could be readily
converted to cash and are subject to an insignificant risk of changes in value.

Cash Flows
A company creates value for the shareholders by generating positive cash
flows for them. As per AS-31, cash flows are inflows and outflows of cash
and cash equivalents,
Cash Flow Statement
A cash flow statement is one of the three most important financial statements.
It shows cash inflows and outflows, and cash equivalents over a period of
time. It provides information about the historical changes in cash and cash
equivalents by classifying all cash flows that derive from operating, investing
and financing activities

149
 Accounting: An Cash from Operating Activities C
Overview
Operating activities comprise the primary or main activities of a company.
These activities create the principal revenue stream for the company
Cash from Investing Activities
Investing activities are the acquisition and disposal of long-term assets and
other investments not included in cash equivalents. Investing activities are
related to the purchase and sale of long-term or fixed assets of a company.
Cash from Financing Activities
Financing activities result in changes in the size and composition of the
owners’ capital (including preference share capital in the case of a company)
and borrowings of the enterprise.

5.9 SELF ASSESSMENT QUESTIONS

1. What are cash and cash equivalents?
2. Explain the meaning of a cash flow statement. Discuss its benefits.
3. Howls a cash flow statement prepared?
4. Discuss the proforma of a cash flow statement as described in AS-3.
5. Elaborate:
a. Operating Activities
b. Investment Activities and
c. Financing Activities
6. The following information is available from the books of XYZ Ltd.
Calculate cash flow from operations.
Particulars 2019 2020
Profit made during the year 5,00,000
Income received in advance 1,000 1,200
Prepaid expenses 3200 2800
Bills receivables 52000 45000
Bills Payable 27000 31000
Outstanding expenses 5500 4500
Accrued income 3000 3500
Debtors 160000 190000
Creditors 90000 80000
7. From the following information, calculate cash from operations

Profit and Loss Account for the year ended 31st March 2020

Particulars Rs Particulars Rs
Salaries 15000 Gross Profit 48000
Rent 5000 Profit on sale on land 7000
150
 Depreciation 3500 Income tax refund 4000 Cash Flow Statement

Loss on sale of plant 1200

Goodwill written off 6000
Proposed dividend 6800
Provision for tax 6000
Net Profit 20900
59000 59000

8. The balance sheets of XYZ Ltd as on 31st December 2019 and 2020 are
presented as under:

Particulars 2019 2020

(in Rs) ( in Rs)
Assets
Land and Building 160000 200000
Plant and Machinery 500000 400000
Inventory 240000 280000
Cash Balance 120000 100000
Debtors 200000 150000
Total 1220000 1130000

Liabilities and Capital

Equity Shares 480000 400000
Retained Earnings 320000 250000
Debentures 180000 300000
Creditors 80000 60000
Provision on depreciation 160000 120000
:Plant
Total 1220000 1130000
Additional Information:
 Cash dividend of Rs 50,000 has been paid during the year
You are required to prepare cash flow statement.

5.10 FURTHER READINGS: (USE LATEST

EDITIONS)
 Bhattacharyya, D. (2011). Management Accounting. Pearson India (Chapter 04)

 Maheshwari, S.N. and Maheshwari, S.K. (2012). Management Accounting.Vikas

Publications. New Delhi (Section -III)

 Kishore, R.M. (2006).Financial Management Taxmann’s Publication , New

Delhi(Chapter 04)
151
 Accounting: An  Khan , M.Y. and Jain, P.K. (2019). Financial ManagementMcGraw-Hill, New Delhi C
Overview
(Chapter 5)

 Arora, M.N. (2011) Cost and Management Accounting. Vikas Publications. New Delhi
(Chapter 16)

 Hingorani, N.L. and A.R. Ramanathan (1986) Management Accounting, Sultan Chand :
New Delhi. (Chapter 8).

152