*4.

34 ADVANCED MANAGEMENT ACCOUNTING

VI,IssueCapital as per contra:

of Shares for convefsion of debentures 2,00,000
Issue of Shares for tixed Assets (at 20% Premium) 1,20,000
10,60,000
Uses
Purchase of Fixed Assets for Cash (4) 4,05,000
Dividends paid 2,00,000
Purchase of Trade Investment 1,00,000
Repayment of ublic Deposits 50,000
Uses
Financing add Investing Activities not afecting working/
Capitl as per contra.
Purchase pf fxed assets against shares 1,20,000
Redempfion of Debentures for shares 2,00,000/
10,75,080
Net Decrease in Working Capital (15000)
10,60,000

Working otes:
(1) Sinde Premium on issue of Shares issued against purchase of machinery has not been
trahsferred separately to "Securities Premiun"Alc, it should have been transfefred to Reserves
a/d Surplus Alc, hence adjusted.
(2) Shart Capital Ale
()
25,00,000 By Balance b/d 20,00,000
To Balance cdd
2,00,000
By 9% Debentures
By Fixed Assets 1,00,000
By Bonus Issue 2,00,000
25,00,000
25,00,000
CASH FLOW STATEMENT
CONCEPT
ACash flow statement discloses net increase (or decrease) in cash during an accounting period.
Asper As-3 (Revised) the objective of cashflow statement is to provide infornation about cash lows
statementsa basis to assess the
of anenterprise which is useful in providing the users of financial those cash flows. The statemnent
ability of anenterprise to generate cash and cash equivalents to utiliseand cash equivalents during the
deals with the provisions of information about the changes in cash
accounting year, It classifies Cash flows into operating, investing and financing activities.
 14.36

sTATEMENT OF CHANGES IN FINANCIAL POSITION (SCFP) 14:

COUNTING
pefinitions in As 3
2,00,000 The following terms are used in this Statement with the meanings specified:
1,20,000 Cash comprises cash on hand and demand deposits with banks.
10,60,000 Cash equivalents are short-term, highly liquid investments that are readily convertible into
known amounts of cash and which are subject to an insignificant risk of changes in value.
4,05,000 Cash flows are inflows and outfows of cash and cash equivalents.
2,00,000 Operating açtivities are the principal revenue-producing activities of the enterprise and other
1,00,000 activities that are not investing or financing activities.
S0,000 Investing activities are the acquisition and disposal of long-term assets and other investments
not inchuded in cash equivalents.
Financing activities are activities that result in changes in the size and composition of the
owners' capital (inchuding preference share capital in the case of acompany) and borrowings of the
enterprise.
1,20,000 Cash and Cash Equivalents
2,00,000
1. Cash equivalents are held for the purpose of meeting short - term cash commitments rather
10,75,000 than for investment or other purposes. For an investment to qualify as a cash equivalent, it
(15,000) must be readily convertible to a known amount of cash and be subject to an insigniicant risk of
10,60,000 changes in value. Therefore, an investment normally qualifies as acash equivalent only when
it has a short maturity of, say, three months or less from the date of acquisition. Investments in
shares are excluded from cash cquivalents unless they are, in substance, cash equivalents; for
s DOt been Cxample, preference shares of a company acquired shortly before their specified redemption
to Reseves date (provided there is only an insignificant risk of failure ofthecompany to repay the
at maturity). amount
2. Cash flows exclude movements between items that constitute cash or cash
equivalentsbecause
these components áre part of the cash management of an enterprise rather than part of its
operating, investing and financing activities. Cash management includes the investment of
excess cash in cash equivalents.
20,00,000
2,00,000 -Classification of Cash Inflows and Outflows
1,00,000 A
cash flow statement focuses on various activities and items which bring about changes in
2,00,000 the cash balance between two balance sheet dates. This statement covers all items which increase or
25,00,000
decrease the cash ofa business enterprise. For example, this statement includes items like receipts
from debtors and payments to creditors. On the contrary, this statement will not cover items which
have no immediate effect on cash increase or decrease. For instance, goods purchased on credit and
gOOds sold on credit will not be included in this statement as these transactions have no efect on
inlow and outfiow of cash.
Acashflow statement aims to determine the effects on cash of diferent types of cash inflows
ting period. and outfiows. In this process, all cash flows, i.e., activities resulting into cash flows are classified
tcash lows
)assess the nto different categories. The ICAl's AS 3'Cash Flow Statement' has classifedcash flows into three
c statemeot
categories:
iduring the (1) Operating Activities (or Flows)
(2) Investing Activities (or Flows)
(3) Pinancing Activities (or Plows)
tibleinto 145 ADVANCED MANAGEMENT ACCOUNTINa STATEMENT O
14.36
(5
outflowS relating to operatin.
Exhibit 14.4 displays the classifcation of cash inflows and cash (c)
activities, investing activities and financing activities.
(d
(1) Operating Activities : Operating activitiesinfiowsare those transactions which are considerea
in thiscategory are cash received fro (e)
in the determination of net income. Examples of cash received on loans and investment. Examnles
debtors for goods and services, interest and dividend goods and services; merchandise; wages.
of cash outflows in this category are cash payments
for
interest; taxes; supplies and others.
Outflows (g)
Classification of Cash Inflows and Cash
Activities CashOutflows (ii) Son
Cash Inflows Cash payments for goods and services, is ir
Cash received from debtors for goods merchandise
suc
and services
(i9) Cas
Interest and dividends on loans and Cash payments for wages to t
investment Operating Cash payments for interest to creditors fina
Activities
Similarly
Payments to government for taxes case they are s
Cash sales of property plant, equip
ment, otber long-term assets, and in the purchase a
tangibles Payments to others for expenses manner, cash
activities since
Cash sales of investments in shares, Investing Purchase of shares, debentures and securities
debentures and other securities Activities (2) In
of other enterprises
assets; disposa
Purchase of property, plant, equipment and and sale of sha
Cash collection (loan repayments) from Cash infiows,f
borrowers
other long-term assets
intangible asse
Loans given to otber firms (loan repayme
of other enter
Proceeds from issue of shares to other firms.
Financiag Repayment of loans
Activities
Proceeds from short-term and long
term debt
Payment to owncrs, inchhding cash dividend According
() The se,
Reacquiring preference or equity shares cash fic
Investing to gene
Operating Activities,,
Exhibit. 14.4 Classification of Cash Inflows and Outflows Relating to activiti
Activities and Financing Activities
(a) Ca
AS 3 Cash flow Statement states:
th
activities is a key indicator of the
() The amount of cash flows arising from operating generated sufficient cash flows to as:

extent to which the operations of the enterprise have (6) Ca

repay loans and make
maintain the operating capability of the enterprise, pay dividends,
financing. Information about the (c) Ca
new investments without recourse to external source of useful, in conjunction with other in
specific components of historicaloperating cash flows is
information, in forecasting future operating cash flows.
ca

from the principal revenue () Ca

(ún Cash flows from operating activities are primarily derived
generally result from the transactions
producing activities of theenterprise. Therefore, they
an

loss. Examples of cash be

and other events that enter into the determination of net profit or
ffows from operating activities are: (e) Ci
services;
(a) cash receipts from the sale of goods and the rendering of
a
 STATEMENT OF CHANGES IN FINANCIAL POSITION (SCFP)
OUNTING
(b) cash receipts from royalties, fees, commissions and other revenue:
ooperating
(c) cash payments to suppliers for goods and services;
considered () cash payments to and on behalf of employees;
xeived from (e) cash receipts and cash payments of an insurance enterprise for premiums and claims.
.Examples
ise; wages;
annuities and other policy benefits;
) cash payments or refunds of income taxes, unless they can be specifically identiñed
with financing and investing activities; and
(8) cash receipts and payments relating to future contracts, forward contracts, option
contracts and swap contracts when the contracts are held for dealing or trading purposes.
vices,
(ii) Some transactions, such as the sale ofan item of plant, may give rise to a gain or loss which
is included in the determinationof net profit or loss. However, the cash ffows relating to
such transactions are cash flows from investing activities.
() Cash fAlows from operating activities are determined according to the activities relating
to the business in whiçh the enterprise deals in e.g. interest and dividend received by
ditors financial institutions will be treated as operating cash flow.
Similarly, an enterprise may hold securities and loans for dealing or trading purposes, in which
case they are similar to inventory acquired specifically for resale. Therefore, cash flows
the purchasé and sale of dealingor trading securities are classified as arising from
operating activities. In
manner, cash advances and loans made by financial enterprises are usually classified as the same
activities since they relate to the main revenue-producing activity of that enterprise. operating
d securities
(2) Investing Activities: Investing activities include acquisiion of
assets; disposal of long-term or fixed assets; acquisition and disposal long-term or fixed
of intangible assets; purchase
mcot and and sale of shares, debentures and other securities; lending of money and its
Cash inflows, from investing activities generally include cash sales subsequent collection.
of property, plant, equipment and
intangible assets, cash sales of investments in shares, debentures and other
(loan repayments) from borrowers. Cash outflows are purchase of shares, securities, cash collection
of other enterprises, purchase of property, plant, debentures and securities
to other fims. equipment and other long-term assets, loan given
sh dividend
According to AS 3Cash Flow Statement :
() The separate disclosure of cash flows arising from
shares
investing activities is important because the
cash flows represent the extent to which expenditures have been made for
to generate future income and cash flows. Examples of cash flows resources intended
Investing arising from investing
activities are:
(a) Cash payments to acquire fixed assets (including intangibles). These
cator of the those relating to capitalised research and development costs and selfpayments includes
constructed fixed
ash flows to assets;
ns and make (6) Cash receipts from disposal of fixed assets (including intangibles);
on about the
n with other (c) Cash payments to acquire shares, warrants or debt instruments of other enterprises and
interests in joint ventures (other than payments for those instruments considered to be
cash equivalents and those held for dealing or trading purposes);
pal revenue
:transactions () Cash receipts from disposal of shares, warrants or debt instruments of other enterprises
iples ofcash and interests in joint ventures (other than receipts from those instruments considered to
be cash equivalents and those held for dealing or trading purposes):
(e) Cash advances and loans made to third parties (other than advances and loans made by
a financial enterprise);
ed claims,
d
143 ADVANCED MANAGEMENT ACCOUNTINO
STATEMENT O
third parties (other he
) Cash receipts from the repayment of advances and loans made to determination 1
advances and loans of a financial enterprise); outflow relating
option contracts and sw
(8) Cash payments from future contracts, forward contracts, Cash pro
contracts except when the contracts are held for dealing or trading purposes, or the
relating to oper
payments are classified as financing activities; and For example, i:
(h) Cash receipts from future contracts, forward contracts, option contracts and swap contracte cash profit. Sin
except when the contracts are held for dealing or trading purposes, or the receipts are determining ca
classifñed as financing activities.
() When a contract is accounted for as a hedge of an identifiable position, the cash flows of the
contract are classified in the same manner as the cash flow of the position being hedged.
(3) Fingncing Activiries : Financing actiities relate to long-term liability andequity capital. A A
cash fl
fim engages in financing activities when it obtains resources from owners, returns resources to own fnancing sectic
ers, borrows resources from creditors and repays amounts borrowed. Cash inflows include proceeds Direct Meth
from issue of shares and short-term and long-term borowings. Cash outflows include repayment of
loans and payments to owners, including cash dividends. Repayments of accounts payable or accrued Direct m
liabilities are not considered repayment of loans under financing activities but are classified as cash ment are discl

outflows under operating activities. Enterpri:

operating cash
AS 3Cash Flow Statement observes: 1. Cas
The 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) 2. Int
to the enterprise. Examples of cash flows arising from financing activities are: 3. Ott
() cash proceeds from issuing shares or other similar instruments; 4. Ca:
(6) cash proceeds from issuing debentures, loans, notes, bonds, and other short or long- term ady
borrowings; and 5. Int
(c) cash repayments of amounts borrowed. 6. Inc
7. Ot
CASH FLOW STATEMENT AND CASH RECEIPTSAND DISBURSEMENTS
Compan
A
cash flow statement differs from the summary of cash receipts and disbursements. A cash flow from ope
flow statement is prepared by rearrangement of items on the income statement and balance sheet, Accordi
rather than from entries made to the cash account. Cash flow statement may also highlight the amount
The dire
of cash generated by the firm's operations. This is not réported in statement of cash receipts and
and which is n
disbursements. than the indirr

CASH FLOW AND INCOME STATEMENTS receipts and g

(a) fro
Cash flow statement apparently differs from income statement. An income statement includes
adjustments in respect of expenses accrued in the calculation of periodic income, whereas cash flow (b) by
Sin
statement excludes such adjustments. The largest,item of difference between them is the allocation los
of fixed assets costs as depreciation. Also, the procedures adopted in the two statements are reflected
in changes in balance sheet items. These would include changes in balances of trade debtors and (
trade creditors. (i)
(i)
CASH PROFIT (CASH NET INCOME)
Indirect Me
Accrual-based profit and loss account reveals accrual net income. By adjusting the items on the
Under t
proit and lossaccount, one can arive at cash profit or cash net income. It should be noted that cash
profit relates to operating activities in the same way as profit and loss account focuses on net income ing net proit
 OUNTING STATEMENT OF CHANGES IN FINANCIAL POSITION (SÇFP)
14
(other than
determination from operating activities. But profit and loss account does not show cash inflow and
; and swap outfiow relating to operating activities because profit and loss account is prepared on accrual basis
ses, or the Cash profit and cash flow is not the same thing. Cash profit is confined to indicating cash fow
relating to operating activities. But cash flow is atotal concept indicating total inflows and outflows.
ap contracts For example, issue of equity shares is asource of cash inflow but wil not be used for determining
receipts are cash pront. Similarly, plant purchased willbe cash outflow for its full value, but will not be used for
determining cash profit.
fAows of the PRESENTATION OF CASH FLOW STATEMENT
nedged.
ity capital. A Acash flow statement can be presented in either the direct or indirect
rces to own financing sections willbe the same under either format. However, the operatingformat. The investing and
section willbe different.
de proceeds
*payment of Direct Method
e or accrued Direct method is that method whereby major class of gross cash
ified as cash ment are disclosed. receipts and gross cash pay
Enterprises that utilize the direct
operating cash receipts and payments: method should report separately the following classes of
because it is 1. Cash collected from customers,
including lessees, licensee, and other similar items
borrowings) 2. Interest and dividends received
3. Other operating cash receipts, if any
4. Cash paid to employees and other
rlong - term suppliers of goods or services, including insurance,
advertising, and other similar expenses.
5. Interest paid
6. Income taxes paid
MENTS 7. Other operating cash
payments, if any
Companies that use the direct method must provide a
ents. A cash
alance sheet,
fow from operating activities in a separate reconciliation of net
schedule in the financial statements. income to net cash
t the amount According to AS 3 Cash Flow Statement :
receipts and The direct method provides
and which is not available under theinformation which may be useful in estimating future cash flows
than the indirect method. Under the indirect method and is, therefore, considered more appropriate
direct method., information about major
receipts and gross cash payments may be obtained either: classes of gross cash
() from the accounting records of the
(6) by adjusting sales, cost of sales enterprise;
1ent includes or
eas cash flow
he allocation
(interest and similar incom and interest expense and
similar charges for a financial enterprise)
loss for: and other items in the statement of profit
iare reflected and
:debtorS and ) changes during the period in
(ú) other non-cash items; and
inventories and operating receivables and payables;
(#) other items for which the cash
effects are investing or inancing cash flows.
e items on the Indirect Method
ted that cash Under the indirect method, the net cash flow from
n net income ing net profit or loss for the effects of: operating activities is determined by adjust
 cash basis.salflowand
flow
usedbutflows.
ermining
for
.
14
K40 ADVANCED MANAGEMENT AGCOUNTINC
STATEMENT
(a) changes during the period in inventories and operating receivables and payables;
() Ai
(6) non-cash items such as depreciation, provisions, deferred taxes, and unrealised foreign
exchange gains and losses; and (i) Di
(c) allother items for which the cash effects are investing or financing cash flows. (ii) In
Alternatively, the net cash flow from operating activities may be presented under the indirect (iv) U:
method by showing the operating revenues and expenses exchuding non-cash items disclosed in the () M
statement of profit and loss and the changes during the period in inventories and operating receiv (vi) R
bles and payables. Exhibit
The indirect method starts with net income and reconciles it to net cash flow from operating statement.
activities. The cash flow from operating activities is found by adjusting net income for () changes
in current assets and current liabilities and (i) depreciation expense. Depreciation expense is not a
cash flow. Because it decreases net income, it is added back to net income, in order to arrive at the
operating cash flow. The following summarizes the process:
Change Adjustment to Net Income
(A) Cash Fk
Decrease in a current asset Add Cash Re
Increase in a current asset Subtract S:
Decrease in a current liability Subtract
Increase in a current liability Add
Cash Pa
The indirect method is more widely used, since it shows the relationship between the incon.8 P
statement and the balance sheet and therefore aids in the analysis of these statements.
Reporting Cash Flows from Investing and Financing Activities
Anenterprise should report separately major classes of gross cash receipts and gross ash pay
ments arising from investing and financing activities.
Net Cas
Comparison Between Direct and Indirect Method
Both the approaches, direct and indirect resut in the sarne amount for cash flow from operations
after making necessary adjustments. However, both the approaches have the arguments, pros and cons. (B) Cash FI
The arguments in favour of direct approach are that it identifies the major categories of cash Sale of
receipts and cash payments arising from operating activities; it provides a more useful basis for Sale of
estimating future cash flows; and it provides information that is not otherwise available in the balance
sheet and proftand loss account. The direct method is abetter indicator of company solvency, has Purcha
a sounder conceptual framework and refects accepted business practice. It permits an evaluation of Purcha
cash flow relating to specific line items ofincome statement such as sales and cost of goods sold. The
Net Ca
empirical evidence indicates that the direct method is superior over the indirect method in predicting
future operating cash flows and future net operating cash flows. (C) Cash F
On the other hand, followers of the indirect approach argue that indirect method is less costly Repayr
and more convenient to use by firms. It is argued that the direct approach would require information Issue o
that is hard to collect and sensitive. One difficulty with the direct approach is that some of the cash
fiows may have characteristics of more than one category of cash flow. Divide
However, the indirect method has also been criticised on two grounds. First, it contains unnec Net Ca
ssary detail and may confuse the users. Another limitation of the indirect method is that the adding Net Inc
of expenses such as depreciation suggests that expenses are a source of cash. The conceptual and
practical problems which underlie the indirect method are as follows:
 14.42
:OUNTING STATEMENT OF CHANGES IN FINANCIAL POSITION (SCFP)
iles; 144
sed foreign (0 Ambiguity in the definition of "operdtions."
() Diversity in reporting practices.
(ii) Impact of changes in the reporting entity oh the non-cash current accounts.
the indirect (~) Use of absorption costing in accounting fon manufactured inventory.
losed in the () Measurement of current portion of long-term leases.
ng receiva (v) Reclassifications between current and non-current accounts.
n operating
Exhibit 14.5 and 14.6 show respectively direct and indirect method of preparing cash flow
statement.
() changes
nse is not a
rive at the ABC Company
For the Year Ended December 31, 2012

(A) Cash Flow from Operating Activities

Cash Receipts from:
Sales
Interest Received
the inco Cash Payments for:
Purchases
Operating Expen_es
ss cash pay Interest Payments
Income Taxes
Net Cash Flow from Operating Activitie_
Doperations
os and cons (B) Cash Flows from Investing Activities:"
ies of cash Sale of Plant Assets
ul basis for
the balance Sale of Investments
sBvency, has Purchase of Plant Assets
valuatioa of
Purchase of Investments
ds sold. Tbe
opredicting Nt Cash Flows Used by Investing Activities
(C) Cash Flows from Financing Activities:
sless costy
information
Repayment of Bonds and Debentures
:of the cash Issue of Common Shares
Dividends Paid
tains unnec
Ne Cash Flows from Financing Activities
t the adding
Iceptual and Net Increase (Decrease) in Cash

Ezbibit 14.5 : Cash Flow Statement (Dicct Method)

14.4N
ADVANCED MANAGEMENT ACCOUNTING STATEME!
14.42

ABC Company (2)

For the Year Ended December 31, 2012 (3)
Afte
three steps
(A) Cash Flows from Operating Activities
Net Income Cash flo
Adjustments to Reconcile Net Income to Net The |
ever, it doe
Cash provided by Operating Activities: loss accoui
Depreciation even thoug
Gain on Sale of Investments may not ha
basis inco.
Loss on Sale of Plant Asset
revenues w
Decrease in Accounts Receivable converted:
Increase in Inventory The
required ac
Decrease in Prepaid Expenses
The
Increase in Accounts Payable cut calcula
Increase in Accrued Liabilities.
Acerual
Decrease in Income Taxes Payable
Net Cash Flows from Operating Activities
Ded
(B) Cash Flows from Investing Activities:
Dedi
Sale of Plant Assets
Ded1
Sale of Investnents
Add
Purchase of Plant Assets
Add
Purchase of Investment Add
Net Cash Flows Used by Investing Activities.
(C) Cash Flows from Financing Activities Cash B:
Repayment of.Bonds and Debentures
Whil
Issue of common shares
accounts an
Dividends Paid as it relates
difference l
Net Cash Flows from Financing Activities
Net Increase (Decrease) in Cash
changes in
of an expen
aset or liat
Exhibit 14.6 :Cash Flow Statement (Indirect Method) for an item
esuted in
PREPARING CASH FLOW STATEMENT
between son
Before preparing cash flow statement, first ofall, the following three steps have to be competed:
(0) Determining cash flows from operations or operating activities.
OUNTING STATEMENT OF CHANGES IN FINANCIAL POsITION (SCFP)
14.43
(2) Determining cash flows from investing activities.
(3) Determining cash flows from financing activities.
After obtaining information regarding the above, a cash fiow statement can be
three steps have been discussed below: prepared. The

Cash flow from Operations

The profit and loss account focuses on net income
ever, it does not show cash inflow and outflow relating determination from operating activities. How
to operating activities because the profit and
loss account is prepared on accrual basis. In preparing
profit and loss account, revenues are recorded
even though cash for them has not been received. Similarly,
may not have been paid. Therefore, to find cash flows expenses are recorded even though they
from operations, one need to convert accrual
basis income statement figures to cash basis by making
revenues will be converted into cash received from salesadjustments. By way of adjustrments, earned
or customers and incurred expenses willbe
converted into cash expended, i.e., expenses actually paid in cash.
The conversion of accrual basis income
statement to cash basis income statement along with
required adjustment has been shown in Exhibit 14.7.
The conversion process displayed in Exhibit 14.7 can be
Cut calculation: described as follows, using a short
Accrual-Basis Net Income

Deduct Increase in Accounts Receivable (or Add

Decrease in Accounts Receivable)
Deduct Increase in Merchandise Inventory (or Add Decrease in
Deduct Increase in Prepaid Expenses (or Add Decrease in Merchandise Inventory)
Prepaid Expenses)
Add Increase in Accounts Payable (Or Deduct
Decrease in Accounts Payable)
Add Increase in Accrued Expenses (Or Deduct
Decrease in Accrued Expenses)
Add Depreciation and Amortization Expenses for the
Year

Cash Basis Net Income

While making conversion, one should know the

accounts and balance sheet changes. Each individual item onrelationship between income statement
the income statement should be viewed
s it relates to a balance sheet. account. On the
accrual basis of
difference between the amount of sales revenue and the receiptsaccounting,
from thos
the explanation for the
changes in accounts receivable and debtors account. Similarly, the sales is found in the
of an expense and the amount of payments for that differençe between the amount
expense is found in the changes of its associated
2sset or liability, such as prepaid rent or rent payable. If there is no
or an item on the income statement, it is presumed that the amountassociated balance sheet account
shown on the income statement
Tesulted in a cash flow exactly equal to that revenue or expense. Exhibit 14.8 shows
between some income statement accounts and balance sheet relationship
ecompleted: accounts.
ared.
The
14.43
STATEMENT
14.44 ADVANCED MANAGEMENT ACCOUNTING
Provision:
Conversion of AccrualBasis Income Statement to Cash BasisIncome 1. Intert
Statement Cash
Accrual-Basis Adjustments Cash Basis Income classit
Income Statement Statement For F

+ Beginning Balance of Accounts Cash Received

Receivables -EQUALS from Customers
Sales Revenue Eaned Ending Balance of Accounts Re (sales on cash basis)
ceivables For O

LESS
+ Ending Balance of Merchandise 2. Extra
Cost of Goods Sold Inventory The c
Beginning Balance of Merchan
dise Inventory -EQUALS Cash Paid for operal
LESS + Beginning Balance of Accounts Merchandise Few e
Payable Inventory () C
-Ending Balance of Accounts Pay
able (i) C
(ji) R
(i) D
Expenses (other than + Ending Balance of Prepaid Ex
- () V
depreciation and penses
amortization) Beginning Balance of Prepaid (v) C
Expenses EQUALSCash Paid for 3. Taxs
+ Beginning Balance of Accrued
LESS Expenses Cash 1
Expenses
Ending Balance of Accrued Ex as cas
penses and in
Depreciation For in
and Amortization |Eliminate Depreciation and Amorti
|zation () P
EQUALS EQUALS (n T

Net Income (accrual basis)

Net Income () C
(cash basis) () C
Exhibit 14.7: Relationship ofAccrual Basis and Cash Basis of Accounting 4. Forei
Financial Statement Relationship Foreis
Excba
Income StatementAccounts Related to Balance Sheet Accounts s par
Debtors report
1. Sales
S. No
2. Cost of goods sold (Inventory) (Creditors)
Invest
3. Salaries Expenses Salaries payable DOt sh
4. Rent Expenses Rent payable () k
$. Depreciation Expenses Accumulated depreciation
6. Insurance Expenses Prepaid insurance (i) C
7. Interest Expenses Interest payable (ii) P
8. Income Tax Expenses Income taxes payable
Eshibit 14.8: Relationship Between Income Státement and Balance Sheet,
 STATEMENT OF CHANGES IN FINANCIAL POSITION (SCFP)
UNTING
Provisions of AS-3 on Treatment of Certain Items
Dme
1. Interest and Dividend
Cash fAlows from interest and dividends received and paid should be disclosed separately and
sIncome classiied on the basis of nature of the enterprise as shown below:
ment For Financial enterprises
ccived " interest paid and received, dividend received as operating activities.
stomers " dividend paid as financing activities.
sh basis) For Other enterprises
" interest and dividend received as investing activities.
SS " interest and dividend paid as financing activities.
2. Extrn Ordinary items
The cash flows associated with extraordinary items should be
'aid for operating, investing or financing activities as appropriate. It shouldclassified
be
as arising from
disclosed
andise Few examples of such items are : separately.
Dtory () Claim for loss of Stock - operating
(i) Claims for loss of assets activity
-investing activity
(ii) Recovery of baddebts operating
activity
(iv) Damages paid/ received for breach of
contraçtoperating activity
() Winnings from lotteries -Investing activity
(v) Cost of legal action to protect property
aid for
nses
3. Taxes on Income title.-Investing activity.
Cash flows arising from taxes on income should be
separately disclosed and should be classified
as cashflows from operating activities under they can
and investing activities. be specifically ideDtified with financing
For instance:
() Provision for Taxation for the current year
ALS Non cash charge under operatingactivity
(i) Tax paidOperating cash out flow
(iin) Income tax refund Cash inflow from operating activity
(i) Capital gains tax Cash out flow from investing activity
basis)
() Corporate dividend tax -Cash out flow from
4. Foreign Currency Cash Flows
financing activity.
Foreign currency cash fiows should be converted at the
Exchange gain/loss on cash and cash equivalents heldexchange
in
rate of the date of cash flow.
foreign currency will be reported
as part of reconciliation of change in cash and cash
reported in cash flow statement. equivalents for the period and hence, not
S. Non--Cash Transactions
Investing and financing transactions that do not require the use of cash or
not shown in the cash flow statement. Examples of cash equivalents are
such non-cash transactions åre:
() Issue of shares or debentures for a
consideration other than cash i.e. against building,
machinery etc.
() Conversion of debentures into equity
shares.
(ii) Purchase of business by issue of shares.
barately
and

.46 ADVANCED MANAGEMENT ACCOUNTINQ

STATEMENT
AS:3 (Revised) recommends that such transactions may be disclosed under footnote to cash Offica
flow statement.
Sellin
6. Investments in Subsidiaries, Associates and Joint Venture
Cash
Acquisition of interest in any subsidiary, associates or in any joint venture is treated as "Investine
Activity". Similarly, sale or disposal of such interest and receipt of interest or dividends on Less:
such investments is treated as "Investing Activity".
llustrative Problem 9 Notes :
From the following Profit and Loss Account ofABC Ltd for the year ended 31st March, 2012 (1) Non ca
calculate Cash generated from "Operating Activities" by Direct Method. off hav
(2) Divide
Profit and Loss Account for the year ended 31st March 2012 activiti
(3) Comm

To Opening Stock 1,60,000By Sale (Cash) 42,50,000 (4) Chang

To Purchases (Cash) 31,00,000 By Commission accrued 40,000
Illustrative
To Wages 4,40,000 By Dividend received 60,000 From th
Add. Outstanding 60,000 5,00,000By Profit on sale of Plant 2,40,000 compute cash
To Salaries 2,20,000 (Sale proceeds 22,40,000
Add: Outstanding 20,000 -book value? 20,00,000)
2,40,000 By Closing Stock 2,20,000
Less: Prepaid 10,000 2,30,000
80,000 To Opening
To Office Expenses To Purchase
To Selling Expenses 1,20,000
Cash
To Depreciaion 1,10,000
Credit
To Income Tax paid 20,000 ToWages
To Goodwill written 44,000 To Office E:
To Preliminary Expenses To Selling E
written off 20,000 To Bad debt
To Net profit 4,26,000 To Discount
48,10,000 48,10,000 To Deprecia
To Provisiot
Solution: To Net Profi
Cash Flow from Operations
Additional

(A) Cash Receipts from Operating Activities : 42,50,000 Debtors

Cash Sales
Credito
Less : O/s Sell
(8) Cash payments due to operating activities : Prepaid
31,00,000 Accrue
Purchases
4,40,000 Advanc
Wages 2,20,000 Provisik
Salaries
 sdjas9g(v)
JNTING STATEMENT OF CHANGES IN FINANCIAL POSiTION (SCFP)

to cash
Office Expenses 80,000
Selling Expenses 1,20,000 39,60,000
Cash Flow from operations before Tax 2,90,000
nvestingon
lends Less: Income Tax paid 20,000
Net Cash inflow from Operations 2,70,000
Notes :
ch, 2012 (1) Non cash chargessuch as depreciations, Goodwillwritten off, Preliminary expenses written
off have been ignored as these do not involve any outfiow of cash.
(2) Dividend received and profit on Sale ofPlant are to be treated under cash flow from 'Investing
actívities'.
(3) Commission Accrued does not involve any cash infiow, hence
50,000
ignored.
(4) Changes in current assets and curTent liabilities are ignored.
40,000
60,000
Illustrative Problem 10
40,000 From the following Profit and Loss A/c and additional information of M/s Anurag
compute cash flow from operations. Enterprises,
Profit and Loss Account
20,000 for the year ended 31st March, 2012

To Opening Stock 1,60,000By Sale:

To Purchases
Cash 6,00,000
Cash 2,00,000 Credit
Credit 10,00,000
6,00,000 8,00,000 By Closing Stock 2,08,000
To Wages 48,000. By Commission
To Ofice Expenses 1,12,000
1,76,000 By Royaties 80,000
To Selling Expenses 96,000 By Discount Received
To Bad debts 40,000
16,000
To Discount Allowed 32,000
,10,000
To Depreciation 1,20,000
To Provision for Tax
2,40,000
To Net Profit
3,52,000
20,40,000 20,40,000
Additional Information March 31, 2011 March 31, 2012
!,50,000 Debtors
Creditors 120,000 1,44,000
1,12,000 80,000
Ols Selling Expenses 24,000 32,000
Prepaid Ofice Expenses 16,000 24,000
Accrued Royalties 96,000 88,000
Advance Commission 72,000
Provision for Tax 64,000
3,20,000 4,30,000
000 ,90,000
20,000 .60,000
14 STATEMENT
ADVANCED MANAGEMENT ACCOUNTINQ

Solution:

Cash Flow from Operations Cash

Debtors
(A) Receipts from Operations : Inventories
Cash Sales 6,00,000 Prepaid Exp
Accounts Pz
Cash Received fromn Debtors' 9,76,000
88,000 Calculate to
Cash from Royalties?
Cash from Commission' 1,04,000 Solution:
17,68,000
Less
(B) Operating Cash Payments Net Income
Cash Purchases 2,00,000
6,32,000
Add: Depr
Cash paid to Creditors. Operating p
Cash Selling Expenses 88,000 Add: Decr
Cash Office Expenses 1,92,000 11,12,000 Decr
Cash infiow from operations before tax 6,56,000
80,000 Deduct: Inc
Less: Income Tax paid (on operating incomes) De
Net Cash flow from operations 5,76,000
Net Cash F
"1Cash Received from debtors ’ prepare debtors alc
Illustrative
Debtors Ale From tt

To Balance b/d 1,20,000By Cash Received (Bal. (Fig.) 9,76,000

10,00,000 By Balance c/d 1,44,000
To Sales (Credit)
11,20,000
11,20,000 ToOpening
"2 Cash from Royalties To Purchase
Royalties
Opening Bal. + Royalties as per P & LAcClosing Bal. = Cash from To Wages
+Outstandi
96,000 + 80,000- 88,000 =R88,000 To Manufac
"3Cash from Commission To Gross Pr
Commission
Closing bal. + Commission as per P & LAc-Opening Bal. = Cash from
of Advance To Salaries
of Advance
Add Outstar
64,000 + 1,12,000 - T2,000 = 1,04,000 To Insurano
4Cash paid toCreditors Less: Prepi
Op. bal. Purchases -CI. Bal.= Cash paid to creditors To Ofice E:
80,000 +6,00,000 - 1,12,000 = 6,32,000 To Selling E
To Deprecia
Illustrative Problem 11 :(Cash Flows from Operating Activities)
To Share Iss

The net income reported on the income statement for thetheyear was 1,10,000 and deprecia
current asset and current liability
tion of fixed assets for the year was 44,000. The balances of
1ccounts at the beginning and end of the year are as follows:
 FINANCIAL POSITION (SCFP)
STATEMENT OF CHANGES IN
INTING End of the Year Beginning of
the year

1,30,000 1,40,000
Cash 2,00,000 1,80,000
Debtors 2,90,000 3,00,000
Inventories 15,000 16,000
D0,000 Prepaid Expenses 1,02,000 1,16,000
76,000
Accounts Payable
Calculate total cash from operating activities
38,000
4,000 Solution:
58,000 Cash from Operating Activities
1,10,000
Net Income
Add: Depreciation 44,000
Operating profit before working capital changes 1,54,000
Add: Decrease in Inventories 10,000
12,000 Decrease in prepaid expenses 1,000 11,000
1,65,000
S6,000
Deduct: Increase in Debtors 20,000
80,000
Decrease in Accounts Payable 14,000 34,000
76,000 1,31,000
Net Cash Flow from Operating Activities
Illustrative Problem 12 (Cash flow from Operation-Indirect Method
From the following, calculate cash from operation by Indirect Method,
Profit and Loss Account
76,000 for the year ended 31st March, 2012
44,000
20,000
To Opening Stock 2,00,000 By Sales 45,00,000
To Purchases 36,40,000 By Closing Stock 2,40,000
To Wages 2,25,000
+ Outstanding 25,000 2,50,000
To Manufacturing Expenses 75,000
To Gross Profit c/d 5,75,000
sion 47,40,000 47,40,000
To Salaries 1,37,500 By Gross Profit b/d 5,75,000
Add Outstanding 62,500 2,00,000 By Rent Received 37,500
To Insurance 30,000 By Commission Accrued 17,500
Less: Prepaid 7500 22,500 By Net Loss S5,000
To Office Expenses 1,17,500
ToSelling Expenses 1,45,000
To Depreciation 1,25,000
To Share Issue Expenses w/o 75,000
Jeprecia 6,85,000 6,85,000
tliability
00 000 000 .000 ningor

50 ADVANCED MANAGEMENT ACCOUNTING STATEMENT

Solution: Solution:

Calculation of Cash From Operating Activities

(Indirect Method)
Net Profit a
Net Loss as per Profit and Loss A/c (before tax and Add: Depi
extraordinary item) (55,000) Less: Profi

Adjustments for Non cash charges and Non-operating items. Operating

1,25,000 Less : Incr
Add Depreciation
Add Share Issue Expenses written off 75,000 2,00,000 Add: Incr
1,45,000 Net cashfr
Less Rent Received (Non-operating) (37,500)
Operating profit before Working apital Changes 1,07,500
Sale of Ma
Adjustment for current assets/liabilities:
Purchaseo
Add Increase in Current liabilities
25,000 Net cashu
Wages O/s
Salaries 62,500 87,500
1,95,000
Calcu
Less Increase in Current Assets
Stock 40,000 Illustrativ
Prepaid Insurance 7,500 From
Accrued Commission 17,500 (65,000)
Net Cash fróm operating Activities 1,30,000

Illustrative Problem 13 (Cash Flows from Operating Activities)

X Ltd. has the following balance on 01.01.2012: To Openi
To Purcha
To Wages
Fixed Assets 15,00,000 To Gross
(5,00,000) 10,00,000
Less: Depreciation
Bank 87,500 To Opera
Other Curent Assets
6,25,500 To Intere
2,50,000 To Depre
Current Liabilities
To Lossc
Next year's estimate are : To Disco
) The company will acquire fixed assets costing 2,50,000 after selling one machine for To Good
70,000, costing 1,50,000 on which depreciation provided will amount to ? 90,000. To Provis
(úÝ The net profits will be 1.75,000 after providing for depreciation of? 1,50,000. To Gener
(Gi) Curent assets and current liabilities (other than bank balance) at 31.12.2012 are estimated To Propo
To Interi
to be? 7,50,000 and 4,00,000 respectively. To Net P
At the end of the accounting year, the company deposits all the cash into the bank. Calculate
the cash fows from operations and investing activitics for the year 2012.
OUNTING STATEMENT OF CHANGES IN FINANCIAL POSITION (SCFP)

Solution:
Cash Flow from Operating Activities

Net Profit after depreciation 1,75,000

Add: Depreciation provided 1,50,000
(S5,000) Less: Profit on sale of machinery (10,000)
Operating profit before working capitalchanges 3,15,000
Less : Increase in assets
(1,25,000)
2,00,000 Add: Increase in current liabilities 1,50,000
1,45,000 Net cash from operating activities 3,40,000
(37,S00)
1,07,500 Cash Flow from Investing Activities
Sale of Machine
70,000
Purchase of Machine (2,50,000)
Net cash used in investing activities
(1,80,000)
87,500
1,95,000 Working Note
Calculation of Profit on sale of machinery:70,000(1,50,000 - 90,000) =?10,000.
Illustrative Problem 14 (Cash from Operation and Extra Ordinary Activities)
From the following information cálculate cash from operations.
(65,000)
130,000 Profit and Loss Account
for the yèar ended 31st March, 2012

To Opening Stock 1,50,000 By Sales 32,75,000

To Purchases
14,50,000By Closing Stock. 3,25,000
To Wages 70,000
To Gross Profit c/d 19,30,000
0,00,000
36,00,000 36,00,000
81,500 To Operating Expenses 11,10,000 By Gross Profit b/d 19,30,000
6,25,500 To Interest on debentures 18,000 By Interest on Investments 15,000
2,50,000 To Depreciation 1,20,000 By Dividend Received 18,000
To Loss on Sale of Plant 40,000 By Profit on Sale of Land 20,000
To Discount on lssue of shares 10,000 By Rent Received
shine for 12,000
To Goodwill written off 15,000 By Refunds of Tax
0,000. 8,000
To Provision for Tax 30,000 By Insurance claims for Loss of
)0. 1,25,000
To General Reserve 25,000 Stock
:estimated To Proposed, Dividend 1,80,000
To Interim Dividend 70,000
Calculate To Net Profit
5,10,000
21,28,000 21,28,000
 ADVANCED MANAGEMENT ACCOUNTING
62 STATEMENT

Additional Information: Working D

31.03.2011 31.03.2012 (1) Net
Add. Tax
1,40,000 1,00,000 Prov
Stock
25,000 1,00,000 Prop
Debtors Inte
Creditors 15,000 50,000 Gen
Provision for Tax 50,000 60,000
18,000 20,000 tess: Ta
Prepaid Expenses (8,0
20,000 25,000
Outstanding Salaries (2) Inte
Accrued Commission 15,000 15,000 Inte
(3)
Solution: ing
(4) Ins1
CASH FLOW FROM OPERATING ACTIVITIES und

Net Profit before Tax and Extraordinary items (1) 6,82,000 Illustratiy
Adjustment for: Non Cash Charges and Non-operating items The fi

Add: Depreciation 1,20,000

Goodwill 15,000
Discount on issue of shares 10,000
40,000 Revenues
Loss on sale of plant
Interest on Debentures (2) 18,000 2,03,000 Cost of g
8,85,000 Depreciat
Interest e:
Less: Profit on Sale of Land (3) 20,000
Interest Received (3) 15,000 Other exp
Net incon
Dividend Received (3) 18,000 (53,000)
Operating profit before working Capital Changes 8,32,000
Adjustment for Working Capital:
Add: Decrease in CurrentAssets and Increase in current liabilities:
Current e
Stock 40,000
Cash
Debtors 35,000
Debtors (
Ols Salaries 5,000 80,000 Stock in l
9,12,000 Non Cur.
Less: Increase in current assets and decrease in curent liabilities: Plant and
75,000 Less :Ac
Debtors
Total Ass
Accrued.Commission 15,000
Liabibitie
Prepaid Expenses 2,000 (92,000) Creditors
8.20,000
Non-curr
Less: Tax Paid (12,000) Less: Dis
808,000
Cash flow before Extraordinary items
Add. Cash from Extra ordinary items Owner
(Insurance claims for loss of Stock (4) 1,25,000 Equity S
933,000 Retained
Net Cash Flow from Operations
 Solution:
54
JNTING STATEMENT OF CHANGES IN FINANCIAL POSITION (SCFP)

Working notes
2012 (1) Net Profit as per P and LAlc 5,10,000
Add: Tax and Appropriations: 30,000
,000 Provision for Tax
Proposed Dividend 1,80,000
000
Interim Dividend 70,000
,000 25,000 3,05,000
General Reserve
,000 8,15,000
,000 tess: TaxRefund and Extra Ordinary Receipts 1,33,000
,000 (8,000 + 1,25,000) 6,82,000
000 (2) Interest on Debentures to be adjusted against Financing Activities.
(3) Interest Received, Dividend Received, Profit on sale of Fixed Assets are covered by Invest
ing Activities,
(4) Insurance claims for loss of Stock is treated under Operating Activities while loss of assets
under "Investing Activities".
82,000 Illustrative Problem 15: (Indirect Method)
The following data are provided for ABC Ltd.:
Income Statement DataFor 2012

Revenues 84,000
03,000 Cost of goods sold (48,000)
85,000 Depreciation expense (4,000)
Interest expense (6,000)
Other expenses (22,000)
Net income 4,000
53,000)
32,000
Comparative Balance Sheets Data
2012 2011
CurrentAssets
Cash 20,000 16,000
Debtors (net) 12,000 7,000
80,000 Stock in hand 16,000 14,000
,12,000 Non Current Assets
Plant and Machinery 24,000 20,000
Less :Accumulated Depreciation (8,000) (4,000)
Total Assets 64,000 53,000
Liabilities
2,000) Creditors
20,000 12,000 14,000
Non-current Note Payable 20,000 20,000
12,000) Less: Discount on Note (1,600) (2,000)
,08,000 30,400 32,000
Owner's Equity
25,000 Equity Share Capital 24,000 14,000
33,000 Retained Eanings 9,600 7,000
33,600 21,000
5,10,000

4.54 ADVANCED MANAGEMENT ACCOUNTING STATEMEN

Required: Prepare statement of cash flows using the Indirect Method as per, [AS-3 (Revised)) Illustratiy
From
Solution: 2012 using
ABC Ltd. (a) ]
Cash Flow Statement For the Year Ended 31 December, 2012 (b) )
[AS-3 (Revised)] (Indirect Method)

(A) Cash Flows from Operating Activities Tu

Net Income before tax 4,000
Less C¡:
Adjustments for: Add Ot
Depreciation 4,000 Ins
Amortization of discount on note payable 400

Interest expense 6,000

Less Op
Operating Proft beforè working capital changes 14,400 Int
Increase in Debtors (5,000) De
Increase in Inventories (2,000) Di:
Decrease in Creditors (2,000) Pr
Net cashprovided by operating activities 5,400 Less PrT
(B) Cash Flows from Investing Activities Pr
Purchase of Plant and Machinery (4,000) (b) The
Nd cash used in investing activities (4,000)
(C) Cash Flows from Financing Activities
Issues of Share Capital 10,000 St
Interest Paid (6,000) D
Dividends Paid (1,400) Bi
Net cash from financing activities 2,600 Ca
Net inerease in cash and cash equivalents (A+ B+C) 4,000 C
Cash and cash equivalents at the beginning of the period 16,000 Bi
Cash and cash equivalents at the end of the period 20,000

Note: (C) Ad
Dividends paid have been calculated as under : ()
()
Retained earnings at the beginning 7,000
Add: Net Income 4,000 (im)
11,000 ()
9,600
Less: Retained carnings at the end ()
1,400
Dividend paid
 Cash
Flow
Solution:

POSITION (SCFP) 4.55

STATEMENT OF CHANGESIN FINANCIAL
DUNTING
evised) llustrative Problem 16: (Direct and Indirect Methods)
From the following particulars, prepare Cash Flow Statement for the year ended 31st Moeat
2012 using.
(a) Direct Method
(b) Indirect Method
(A) Income Statement For the year ended 31st March, 2012

Turnover 12,80,000
Less Cost of Goods Sold 8,00,000
Add Other Receipts : 4,80,000
Insurance Claims for loss of Stock due to fire 20,000
5,00,000
Less Operating Expenses 3,16,000
Interest on Debentures 6,000
Depreciation 84,000
Discount on Debentures w/o 400 4,06,400
Profñt before Tax 93,600
5,400
Less Provision for Tax 36,800
Profit after Tax 56,800
b) The Assets and Liabilities as on 31.3.201land 31st March, 2012 were as under:
Goo0)
31.03.2011 31.03.2012

Stock 72,000 88,000

Debtors 16,000 15,200
Bills Receivable 12,000 22,000
2,600
Cash and Bank balance 44,800 99,200
4,000
Creditors 31,200 38,000
6,000
Bills Payable ,000 6,000
0,000
O/s Expenses 12,400 17,600
() Additional Information:
() Fully paid Equity shares ofthe face value of? 80,000 were allotted at apremium of@20%.
) Fixed assets were acquired for 60,000 and the payment was made in 6% convertible
7,000 | debentures at par.
4,000 (ii) Income Tax paid uring the year amounted to ? 38,000.
11,000 (b)Company paida dividend and corporate dividend tax there on for the year ended 31st
9,600 March, 2011 amounting to 44,000.
1,400 () 9% Debentures for 1,20,000 were redeemed at a premium of 2%.
March,st
STATEMENT
4.56 ADVANCED MANAGEMENT ACCOUNTING

Solution:
(0) Cash Flow Statement (Direct Method) To Cash Pa
To Balance
Cash Flow from Operating Activities :
(à) Operating Cash Receipts :
12,70,800
Cash from customers (1)
11,22,000 Purc
(6) Operating cash Payments (2)
148,800 Purcha
Cash Flow from Operations (a -b)
Income Tax Paid (38,000) operat
1,10,800 and op

Cash Flow from Extra Ordinary items:

20,000 (3) Fa
Add: Claims Received
1.30,800 Ada
Net Cash Flow from operating activities:
Cash Flow from Financing Activities:
Issue of shares at premium (3) 96,000
Redemption of Debentures (1,22,400)
" Interest on Debentures (6,000)
" Dividend and Corporate dividend Tax (44,000) Cas
Net cash used in financing Activities (76,400) Net
Net Increase in Cash and Cash Equivalents 54,400
Adj
Cash and Cash equivalents in the beginning 44,800
I
Cash and Cash equivalents at the end 99,200
Dis

Financing and Investing Activities not affecting Inte

Cash flow -Issue of debentures against acquisition of land - 60,000 Op

Adjustme
Working Notes: -Inc

(1)Receivables A/e (Debtors + Bills Receivables) -Inc

-De
12.70,800 +De
To Balance b/d 28,000 By Cash Received (B.F)
37,200 +Inc
To Sales (credit) 12,80,000 By Balance c/d
13,08,000 +Inc
13,08,000
Ca

(2) Payables Ale (Creditors + Bills Payable) Less

Ca

8,11,200 By Balanceb/d 39,200 Add

To Cash Paid
44,000 By Purchases 8,16,000 Ne
To Balance dd
8,55,200 8,55,200 Casl
 STATEMENT OF CHANGES IN FINANCIAL POSITION (SCFP) S8

COUNTING Operating Expenses Ale

To Cash Paid (Bal. Figure) 3,10,800By Balance b/d 12,400

To Balance cld 17,600 By Profit and Loss A/c 3,16,000
(Income statement)
3,28,400 3,28,400
°Purchases Closing Stock +Cost of Goods Sold -Opening Stock
Purchases= 88,000 + 8,00,000 -72,000 =8,16,000
operating cash payment 8,11,200 (To creditors)
and operating Expenses paid 3,10,800
11,22,000

(3) Face Value of Shares issued 80,000

130,800 Add Premium @ 20% 16,000
96,000.
(3) CASH FLOW STATEMENT AS PER AS-3
(REVISED)
(Indirect Method)
(76,400) Cash Flow from Operating Activities:.
54,400 Net Profit before Tax and Extraordinary Item:
73,600
4,800 Adjustment for Non Cash and Non operating items:
99,200 Depreciation
84,000
Discount on Issue of Debentures
400
Interest on Debentures
60,000 6,000
Operating profit before Working Capital Changes 1,64,000
Adjustment for current items.
-Increase in Stock
-Increase in Bills Receivable (16,000)
(10,000)
-Decrease in Bills Payable
12.70,800
(2,000)
+Decrease in Debtors
800
37,200 +Increase in Creditors
6,800
13,08,000 +Increase in o/s Expenses
5,200
Cash generated from operation
1,48,800
Less Income Tax paid
38,000
Cash flow from operation before
39,200 Add
Extraordinary item 1,10,800
Insurance Claim for Loss of Stock 20,000
8,16,000 Nt Cash generated from operation
8,55,200 Cash Flow from Investing Activities 1,30,800
400 16,000
12,400

58 ADVANCED MANAGEMENT ACCOUNTINe STATEMENT

III Cash Flow fom Financing Activities Solution:

Issue of shares at premium 96,000
Redemption of Debentures (1,22,400)
Interest on Debentures (6,000)
Dividend and corporate dividend Tax (44,000)
Net cash used in Financing Activities (76,400) (A) Cash J
Net Increase in Cash and Cash Equtvalents 54,400 Net Pr
Cash and Cash Equivalents in the beginning 44,800 Adjust
Cash and Cash Equivalents at the end 99,200 Transf

Illustrative Problerm 17 Depre

Profit
From the following details relating to the accounts of Grow More Ltd., prepare Cash Flow
Statement : Opers
Increa
31.03.2012 31.03.2011 Decre
Decre
Liabilities Cash
Share Capital 10,00,000 8,00,000 Incom
Reserve 2,00,000 1,50,000 Net ca
Profit and Loss Account 1,00,000 60,000 (B) Cash
Debentures 2,00,000 Purch
Provision for taxation 1,00,000 70,000 Exper
2,00,000 1,00,000 Increa
Proposed dividend
7,00,000 8,20,000 Sale c
Sundry Creditors
Net ca
25,00,000 20,00,000
(C) Cash
Assets
Proce
Plant and Machinery 7,00,000 5,00,000
Proce
Land and Building 6,00,000 4,00,000
Divid
Investments 1,00,000 Naa
Sundry Debtors 5,00,000 7,00,000 Net ii
Stock 4,00,000 2,00,000 Cash
Cash on hand/Bank 2,00,000 2,00,000 Cash
25,00,000 20,00,000
WORKINe
) Depreciation @25% was charged on the opening value of Plant and Machinery.
()-During the year oneold machine costing 50,000 (WDV?20,000) was sold for 35,000.
(ti) S0,000 was paid towards income tax during the yçar.
() Building under construction was not subject to any depreciation. Bank (Paik
Prepare Cash flow Statement. Balance d
 Balance
b/d
(E
Bank

OUNTING STATEMENT OF CHANGES IN FINANCIAL POSITION (SCFP)

Solution:
Grow More Ltd.
Cash Flow Statement
For The Year Ended 31 March, 2012

"76,400) (A) Cash Flows from Operating Activities

54,400 Net Profit before Tax and Extra-ordinary, items 3,20,000
44,800
Adjustment for:
99,200 Transfer to General Reserve
50,000
Depreciation 1,25,000
Cash Flow Profit on sale of Plant and Machinery (15,000)
Operating Proit before Working Capital changes 4,80,000
Increase in Stock
1.03.2011 Decrease in debtors
(2,00,000)
2,00,000
Decrease in creditors
(1,20,000)
Cash generated from operations 3,60,000
3,00,000
1,50,000
Income tax paid (S0,000)
Net cash provided by operating activities
60,000 3,10,000
(B) Cash Flows from Investing Activities
Purchase of fixed assets
70,000 (3,45,000).
Expenses on building (2,00,000)
I,00,000 Increase in investments
3,20,000 Sale of old machine
(1,00,000)
35,000
),00,000 Net cash used in investing activities
(6,10,000)
(C) Cash Flows from Financing Activities
5,00,000 Proceeds from issue of shares 2,00,000
1,00,000 Proceeds from issue of debentures 2,00,000
Dividend paid (1,00,000)
,00,000
Net cash provided by financing activities 3,00,000
Net increase in cash and cash equivalents (A + B + C) Nil
2,00,000
Cash and Cash equivalents at the beginning of the year 2,00,000
2,00,000 Cash and Cash equivalents at the end of the year
D,00,000 2,00,000
WORKING NOTES
ry.
R35,000. Provision for Taxation Account

Bank (Paid) 50,000 Balance bd 70,000

Balance c/d 1,00,000Profit and Loss Account
(Balancing Figure) 80,000
1,50,000 1,50,000
 ADVANCED MANAGEMENT ACCOUNTINO
STATEMENT

** 40,000+2,00,000 (Provision for dividend) + 80,000(Provision for Tax).

Solution:
Plant and Machinery Account

Balance b/d 5,00,000 Depreciation 125,000

3,45,000Bank (Sale) 20,000
Bank (Balance Fig.) Cash Flow
Balance C/d 7,00,000
Net I
8,45,000 Total 8,45,000
Adjustmen
llustrative Problem 18
Depr
Following are the Balance Sheets of SuhaniLtd. as on 31st March, 2011 and 2012. Goo

Liabilities
31.03.12 31.05.11 Loss
Profi
4,00,000 3,00,000 Profi
Share Capital
1,00,000 80,000 Loss
General Reserve
Profit & Loss A/c 50,000 30,000 Disc
Debentures 1,00,000 1,50,000 Cast
Provision for Taxation 40,000 50,000 Less Tax
40,00C 30,000 Cash gener
Proposed Dividend
Trade Creditors 70,000 90,000 Adjustmer
8,00,000 7,30,000 Deci

Assets Incr
Goodwill 90,000 1,00,000 Incr

Plant and Machinery 4,29,250 2,98,000 Deci

60,000 1,00,000 Net
· Investment
1,10,000 1,60,000 Cas
S, Debtors
Stock 80,000 50,000 Sale
5,750 4,000 Sale
Prepaid Expenses
Cash and Bank balance 20,000 10,000 Purt
Discount on Debentures 5,000 8,000 Net
8,00,000 7,30,000 Cas
Issu
Additional Information :
Red
) Depreciation on Plant and Machinery has been charged @ 15%. Pay
old machine costing
() Amachine costing? 10,000 (W.D.V.33,000) has been discarded. An Net
? 50,000 (W.D.V.?20,000) has been sold for 35,000,
investments. Net
(iii) A profit of? 10,000 has been earned by sale of
Cas
() Debentures have been redeemed at 5% premium.
provision for taxation. Cas
() ?45,000 income tax has been paid and adjusted against
Prepare Statement of Changes in Financial Position on cash basis.
 for
Provision
OUNTING STATEMENT OF CHANGESIN FINANCIAL POSITION (SCFP) 62 To
Solution:
Statement of Changes in Financial Position (Cash Basis)
1,25,000 for the year ended 31st March, 2012
20,000
7,00,000 Cash Flow from operating
Activities
8,45,000 Net Profit before tax and
extraordinary items
Adjustment for Non cash and Non-operating 1,75,000
Items:
Depreciation
Goodwill written off 75,750
1.05.11 Loss on machine discarded 10,000
Profiton sale of Investrment 3,000
,00,000 (10,000)
Profit on sale of Machine
80,000
Loss (premium) oh (15,000)
30,000 Redemption of
Discount on Issue of Debentures Debentures 2,500
S0,000
Cash generated from operation 3,000
S0,000 before Tax
Less Tax paid 1,84,250
30,000
Cash generated from Operating 45,000
90,000 activities before Working Capital 1,39,250
'30,000 Adjustments for Working Capital
Decrease in Debtors
Increase in Stock .50,000.
,00,000
Increase in Prepaid Expenses (30,000)
"98,000
Decrease in Trade Creditors (1,750)
00,000
Net cash flow from Operating (20,000)
60,000
Cash Flow from Investing
Activities 137,500
S0,000 Activities:
Sale of Investments
4,000 50,000
10,000
Sale of Machinery
35,000
8,000 Purchase of Machinery
Net cash used in Investing Activities (2,30,000)
30,000 (1,45,000)
Cash Flow from Financing Activities:
Issue of Shares
1,00,000
Redemption of Debentures (52,500)
áne costing Payment of Dividend
Net Cash generated from Financing Activities (30,000)
17,500
Net Increase in Cash and Cash
Equivalents 10,000
Cash and Cash equivalents at the beginning 10,000
r taxation.
Cash and Cash equivalents at the end
20,000
AN

ADVANCED MANAGEMENT ACCOUNTINA STATEMENT

14.62

Working notes:
(1)Profit and Loss Ale (Adjusted) Cash
Accounts F

35,000 By Balance b/d 30,000 Inventory

To Provision for Tax
20,000 By Net Profit before Tax and 1,15,000 Prepaid ex
To General Reserve Land
40,000 Extraordinary items
To Proposed dividend
To Balance cld 50,000 Equipment
1,45,000 Accumula
1,45,000
Building
(2) Plant and Machinery A/c Accumula

2,98,000By Depreciation 75,750 Accounts

To Balance b/d
1s,000 By Bank (sale) 35,000 Bonds Pay
To Profit on sale
By Loss on sale 3,000 Equity Sh
(Tr. to P and LA/c)
2,30,000 (Tr. to P and LA/c) Retained I
To Bank (Purchases)
By Balance c/d 4,29,250
(Bal. figure) 5,43,000
5,43,000 Addition
(
2,98,000
W.D.V. as on 1.4.2011
23,000 ()
Less W.D.V. of machine sold (20,000 +3,000)
2,75,000 (im)
41,250 (iv)
"Depreciation @15%
2,33,750 ()
W.D. V. after Depreciation
2,30,000* (vi)
Cost of Machinery acquired
*Depreciation on Machinery Purchased 34,500 Instructi
1,95,500
W.D.V. Prep
75,750
*Thus total Depreciation charged (41,250 + 34,500) = Solution:
100 2,30,000
*(429250-233,750),=(195,500 x85
(3) Provision for Tax A/c

45,000 By Balance b/d S0,000 A) C

To Bank 35,000
To Balance cld 40,000 By P and LAc (B.F)
85,000 A
85,000
D
Illustrative Problem 19: (Indirect Method) A
March:
Presented below is the comparative balance sheets for Jyoti Ltd. at 31 G
 STATEMENT OF CHANGES IN FINANCIAL POSITION (SCFP) 14.63
3OUNTING 2011
2012

Cash 40,000 57,000

Accounts Receivable 77,000 64,000
30,000 Inventory 132,000 1,40,000
1,15,000 Prepaid exxpenses 12,140 16,540
Land 1,25,000 1,50,000
Equipment 2,00,000 1,75,000
1,45,000 Accumulated Depreciation-Equipment (60,000) (42,000)
Building 2,50,000 2,50,000
Accumulated Depreciation-Building8 (75,000) (50,000)
7,01,140 7,60,540
75,750 Accounts Payable 33,000 45,000
35,000 Bonds Payable 2,35,000 2,65,000
3,000 Equity Share Capital ( 10per share) 2,80,000 2,50,000
Retained Earnings 1,53,140 2,00,540
4,29,250
7,01,140 7,60,540
5,43,000
Additional information:

2,98,000
() Operating expenses include depreciation expense of? 70,000 and amortization of prepaid
cxpenses of 4,400.
23,000 () Land was sold for cash at book value.
2,75,000 (ii) Cash dividends of 74,290 were paid.
41250 (i) Net income for 2012 was26,890.
2.33,750 () Equipment was purchased for 65,000 cash. In addition equipment costing? 40,000 with
a book value ofk 13,000 was sold for 15,000 cash.
30,000se (vi) Bonds were redeemed at face value by issuing 3,000 equity shares of? 10 at par.
34500
Instructions:
195,500
75,750 Prepare a statement of cash flow for 2012 using the indirect method [AS-3 (Revised)
Solution:
2,30,000 Jyoti Ltd.
Cash FlowsStatement For the Year Ended 31 December, 2012
[AS-3 (Revised)) (Indirect Method)
50,000
35,000 (A) Cash Flows from Operating Activities
Net Income 26,890
85,000 Adjustments for:
Depreciation 70,000
Amortization of prepaid expenses 4400
Gain on sale of equipment (2,000)