Management Accounting:

Concept
 Management accounting is wide area of accounting. The phrase Management
Accounting includes two words, Management and Accounting.
 It refers to Accounting for the Management. Management accounting is the
procedure to develop management reports and accounts that present precise and
timely financial and statistical information required by managers to make day-
to-day and short-term decisions.
 Management accounting can be seen as accounting associated with
management. Basically it is deep study of managerial characteristic of financial
accounting, "accounting in relation to management function".

Scope of Management Accounting

The scope of management accounting involves activities that help organizations
make better business decisions as mentioned below:
Financial Planning and Analysis: This area includes making budgets, predicting
future finances, and looking at financial trends. This helps in making big and small
decisions. The scope of management accounting covers setting financial goals and
help the company achieve them.
Cost Accounting and Management: Through management accounting, companies
keep a track of how much things cost to make or provide. It helps businesses decide
how much to charge for their products or services, find ways to spend less, and run
more smoothly by understanding different costs.
Decision-Making Support: Management accounting gives detailed information to
help managers make all kinds of decisions, like figuring out if something is worth
the cost or planning for different possible futures.
Performance Measurement and Evaluation: It involves setting up ways to check how
well different parts of the business are doing. This can show where the business is
doing well and where it can get better.
Investment Appraisal: This is about looking at possible investments to see if they are
suitable with the company's goals and if they're likely to pay off. It includes looking
at the risks and potential benefits.
Risk Management: A crucial aspect of risk management is finding, inspecting, and
dealing with risks. It is about managing risks in a way that company has an
understanding of what can go wrong and affect its plan in future.
Internal Reporting and Communication: The scope of management accounting also
involves creating detailed finance reports for people inside the company. These
reports indicate the financial health. It also explains how company is working
towards achieving its goals. This helps the company with making decisions.
Tax Planning and Strategy: This involves finding ways to handle taxes smartly so
the company follows the law but also pays as little in taxes as possible, based on its
business activities.

Cash Flow statement

 Financial Statement of companies are prepared following the accounting

standards prescribed in the companies Act, 2013. Accounting Standards are
notified under section 133 of the Companies Act, 2013 vide Accounting Standards
Rules, 2006 and are mandatory in nature. Companies Act, 2013 also specifies
that if the accounting standards are not followed, financial statements will not be
true and fair, which is a quality of financial statement. Financial Statements are
defined in Companies Act, 2013 (Section 2 (40)] and includes Cash Flow
Statement prepared in accordance with Accounting Standard- 3 (AS-3)- Cash
Flow Statement.
 A cash flow statement provides information about the historical changes in cash
and cash equivalents of an enterprise by classifying cash flows into operating,
investing and financing activities. It requires that an enterprise should prepare a
cash flow statement and should present it for each accounting period for which
financial statements are presented. This chapter discusses this technique and
explains the method of preparing a cash flow statement for an accounting period.

Benefits of Cash Flow Statement

Cash flow statement provides the following benefits :
 A cash flow statement when used along with other financial statements provides
information that enables users to evaluate changes in net assets of an enterprise,
its financial structure (including its liquidity and solvency) and its ability to affect
 the amounts and timings of cash flows in order to adapt to changing
circumstances and opportunities.
 Cash flow information is useful in assessing the ability of the enterprise to
generate cash and cash equivalents and enables users to develop models to assess
and compare the present value of the future cash flows of different enterprises.
 It also enhances the comparability of the reporting of operating performance by
different enterprises because it eliminates the effects of using different
accounting treatments for the same transactions and events.
 It also helps in balancing its cash inflow and cash outflow, keeping in response
to changing condition. It is also helpful in checking the accuracy of past
assessments of future cash flows and in examining the relationship between
profitability and net cash flow and impact of changing prices.

Classification of Activities for the Preparation of Cash Flow Statement

As per AS-3, these activities are to be classified into three categories:

(1) Operating, (2) investing, and (3) financing activities so as to show separately
the cash flows generated (or used) by (in) these activities. This helps the users of
cash flow statement to assess the impact of these activities on the financial position
of an enterprise and also on its cash and cash equivalents.

1. Cash from Operating Activities

Cash flows from operating activities are primarily derived from the main activities
of the enterprise. They generally result from the transactions and other events that
enter into the determination of net profit or loss. Examples of cash flows from
operating activities are:

Cash Inflows from operating activities

 cash receipts from 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 and on behalf of the employees.
 Cash payments to an insurance enterprise for premiums and claims, annuities,
and other policy benefits.
 Cash payments of income taxes unless they can be specifically identified with
financing and investing activities.

2. 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 relate to
purchase and sale of long-term assets or fixed assets such as machinery, furniture,
land and building, etc. Transactions related to long term investment are also
investing 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 those held for trading purposes.
 Cash advances and loans made to third party (other than advances and loans
made by a financial enterprise wherein it is operating activities).

Cash Inflows from Investing Activities

 Cash receipt from disposal of fixed assets including intangibles.
 Cash receipt from the repayment of advances or loans made to third parties
(except in case of financial enterprise).
 Cash receipt from disposal of shares, warrants or debt instruments of other
enterprises except those held for trading purposes.
 Interest received in cash from loans and advances.
 Dividend received from investments in other enterprises.

3. Cash from Financing Activities

As the name suggests, financing activities relate to long-term funds or capital of an
enterprise, e.g., cash proceeds from issue of equity shares, debentures, raising long-
term bank loans, repayment of bank loan, etc. 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. Separate disclosure of cash flows arising from financing activities is
important because it is useful in predicting claims on future cash flows by providers
of funds (both capital and borrowings) to the enterprise.
Examples of financing activities are:

Cash Inflows from financing activities

 Cash proceeds from issuing shares (equity or/and preference).
 Cash proceeds from issuing debentures, loans, bonds and other short/ long-term
borrowings.

Cash Outflows from financing activities

 Cash repayments of amounts borrowed.
 Interest paid on debentures and long-term loans and advances.
 Dividends paid on equity and preference capital.
Format of Cash Flow from Operating Activities
* Net profit before taxation and extraordinary items is calculated as:
Format of Cash Flow from Investing Activities
Format of Cash Flow from Financing Activities

Question – 1
Calculate cash flows from operating activities from the following information

Statement of Profit and Loss for the year ended March 31, 2020
Particulars Note No. Amount (Rs.)
i) Revenue from Operations 60,000
ii) Other Income 1 5,000
iii) Total Revenue (i+ii) 65,000
iv) Expenses
Cost of materials consumed 15,000
Employees benefits expenses 10,000
Depreciation and Amortisation expenses 2 7,000
Other expenses 3 13,000
45,000
v.) Profit before tax (iii-iv) 20,000
vi) Provision for taxation 8,000
vii) Profit after tax (v-vi) 12,000

Note 1 : Notes to Accounts

Note 1: Other Income
Particulars Amount(Rs.)
Profit on Sale of Machinery 2,000
Income Tax Refund 3,000
5,000

Note 2: Depreciation and Amortization expenses

Particulars Amount(Rs.)
Depreciation 5,000
Goodwill Amortised 2,000
7,000

Note 3: Other expenses

Particulars Amount(Rs.)
Rent 10,000
Loss on sale of equipment 3,000
13,000

Additional Information
March 31, 2019 March 31, 2020
Provision for taxation 10,000 13,000
Rent payable 2,000 2,500
Trade payable 21,000 25,000
Trade receivables 15,000 21,000
Inventories 25,000 22,000
Solution
Cash Flow from Operating Activities
Particulars Amount
(Rs.)
Net Profit before Taxation and Extraordinary items 17,000
Adjustment for Non Cash and Non-Operating items:
Depreciation 5,000
Goodwill amortised 2,000
Loss on Sale of Equipment 3,000
27,000
Less-Profit on Sale of Machinery (2,000)
Operating Profit before Working Capital Changes 25,000
Adjustment for Working Capital Charges
Decrease in Inventories 3,000
Decrease in Rent Payable 500
Increase in Trade Payable 4,000
32,500
Less-Increase in Trade Receivable (6,000)
Cash generation from Operation 26,500
Income Tax Paid (5,000)
Income Tax Refund 3,000
Net Cash Inflow from Operating Activities 24,500

1. Working Notes:
Net Profit before Tax and Extraordinary items:
Net Profit after Tax 12,000
Provision for Taxation made 8,000
20,000
Less-Income tax refund (3,000)
17,000

Income tax paid during the year has been ascertained by preparing provision for
Taxation accout as follows:
Provision for Taxation Account
Particulars Amount Particulars Amount
To Bank (Income Tax paid By Balance b/d 10,000
during the year 5,000 By Statement of Profit 8,000
To Balance c/d 13,000 and loss

18,000 18,000
Question – 2
Welprint Ltd. has given you the following information: Rs.
Machinery as on April 01, 2016 50,000
Machinery as on March 31, 2017 60,000
Accumulated Depreciation on April 01, 2016 25,000
Accumulated Depreciation on March 31, 2017 15,000
During the year, a Machine costing Rs. 25,000 with Accumulated Depreciation of
Rs. 15,000 was sold for Rs. 13,000.
Calculate cash flow from Investing Activities on the basis of the above information.

Solution:
Cash Flows from Investing Activities Rs.
Sale of Machinery 13,000
Purchase of Machinery (35,000)
Net cash used in Investing Activities (22,000)

Working Notes:
Machinery Account
Particulars Amount Particulars Amount
To Balance b/d 50,000 By Cash (proceeds 13,000
To Statement of Profit and Loss from sale of machine)
(profit on sale of machine) 3,000 By Accumulated 15,000
To Cash (balancing figure: new Depreciation 60,000
machinery purchased) 35,000 Balance c/d

88,000 88,000

Accumulated Depreciation Account

Particulars Amount Particulars Amount

To Machinery 15,000 By Balance b/d 25,000
To Balance c/d 15,000 By Statement of Profit
and Loss 5,000
(Depreciation provided
during the year)

30,000 30,000
 Fund flow statement

A fund flow statement is a financial document that systematically presents the inflow
and outflow of funds within an organization over a specified period. Also known as
a statement of changes in a company’s financial position, it provides a detailed
account of how funds move through various activities. More importantly, it
highlights the sources and applications of capital.

This statement includes changes in net working capital, investments, and financing
activities to offer stakeholders a comprehensive understanding of a company’s
working capital and financial dynamics. Analyzing the statement allows investors
and analysts to gain insights into the organization’s liquidity and operational
efficiency.

Importance of fund flow statement

Here are five reasons why a fund flow statement holds immense importance.

1. Liquidity assessment
Outlining the sources and uses of funds helps the statement provide insights into the
organization’s ability to meet short-term financial obligations and operational
needs.

2. Capital utilization efficiency

This financial document offers a detailed breakdown of fund allocation across
various activities, including investments and working capital. The analysis is
instrumental in optimizing resource allocation and enhancing financial
performance.

3. Trend analysis
The statement facilitates trend analysis by presenting a historical perspective of fund
movement over different periods. Stakeholders can identify patterns and trends to
predict future financial activities.

4. Strategic decision support

As a comprehensive financial document, it provides management and investors with
a clear understanding of the economic drivers shaping the organization’s growth.

5. Financial performance evaluation

The analysis provided by the statement goes beyond traditional profit and loss
considerations. It offers a better understanding of the financial dynamics that impact
an organization’s bottom line.

Uses of fund flow statement

Here are some significant uses and advantages of a fund flow statement.
1. Strategic planning
The statement offers valuable insights into the allocation of funds across different
activities. The information assists management in aligning financial strategies with
organizational goals.

2. Investor decision-making
Investors rely on the statement to decide about a company’s financial stability and
growth potential. Understanding the movement of funds allows investors to check
the organization’s ability to generate returns and meet obligations.

3. Creditworthiness assessment
Scrutinizing the sources and uses of funds helps creditors gauge the company’s
ability to meet its financial obligations.

4. Risk management
The statement helps identify potential financial risks and mitigate strategies. It
allows organizations to navigate challenges and uncertainties better.

5. Budgetary planning
Organizations use the fund flow statement for budgetary and financial planning, as
it offers a granular account of expected cash outflows and inflows.

Sources of Funds Uses of Funds

I. Net Increase in Working Capital
1. Increase in Current Assets [List of specific items]
2. Decrease in Current Liabilities [List of specific items]
II. Long-term Sources
1. Issuance of Equity Shares
2. Long-term Borrowings
III. Additional Income
1. Non-operating Income
2. Sale of Investments
3. Other Inflows

Total Sources of Funds [Sum of all sources]

IV. Net Decrease in Working Capital

1. Decrease in Current Assets [List of specific items]
2. Increase in Current Liabilities [List of specific items]
V. Long-term Uses
1. Repayment of Long-term Borrowings
2. Purchase of Fixed Assets
3. Investments in Marketable Securities
VI. Operating Expenses [List of specific expenses]
VII. Dividend Payments

Total Uses of Funds

[Total Sources – Total

VIII. Net Change in Funds Uses]
IX. Opening Balance of Funds [Opening balance amount]
[Opening balance + Net
X. Closing Balance of Funds Change]
Limitations of a fund flow statement
1. Non-inclusion of non-cash transactions
Fund flow statements focus on actual cash transactions, leading to the exclusion of
non-cash transactions. These include depreciation and changes in non-cash working
capital. The limitation can impact the representation of an organization’s financial
position.

2. Limited information on current financial position

The statement primarily emphasizes changes over a specific period. It provides
limited information about the current financial position. For a real-time assessment
of an organization’s financial health, stakeholders may need to refer to other
financial statements.

3. Subject to manipulation
The format and classification of items in the statement may be subject to
manipulation and obscure the accurate financial picture of an organization.

4. Complexity in interpretation
Fund flow statements can be intricate and require a sound understanding of
accounting periods and principles for accurate interpretation.

5. Relies on historical data

The statement primarily relies on historical data, reflecting financial activities that
have occurred in the past. As a result, the statement may not capture sudden changes
or events after the reporting period.

6. No distinction between permanent and temporary changes

It treats all changes in working capital as equal, without distinguishing between
permanent and temporary changes. Lack of differentiation can affect the accuracy
of long-term financial projections.

7. Influence of accounting policies

Variations in accounting policies, especially in the treatment of non-operating
activities, can impact the comparability of the statements between companies.
Different accounting methods may yield different interpretations of financial health.

8. Ignores financing through non-conventional means

The statement may not adequately capture financing through non-conventional
means, like barter transactions or other in-kind contributions. The limitation may
result in an incomplete representation of funding sources.
9. Limited insight into profitability
While the statement provides insights into the movement of funds, it does not
explicitly address profitability. Stakeholders seeking a detailed understanding of an
organization’s earnings may need to refer to the income statement for a
comprehensive analysis.