DEPARTMENT OF COMMERCE AND MANAGEMENT, NIEFGC

MANAGEMENT ACCOUNTING
UNIT 4: CASH FLOW STATEMENT
A Cash Flow Statement is a statement showing inflows and outflows of cash and cash equivalents from
operating investing and financing activities of a company during a particular period. It explains the reasons of
receipts and payments in cash and change in cash balances during an accounting year in a company.
According to AS -3 the cash flows are classified into 3 main catagories :
Cash flow from operating activity
Cash flow from investing activity
Cash flow from financing activity
Objectives of Cash Flow Statement
A Cash flow statement shows inflow and outflow of cash and cash equivalents from various activities of a
company during a specific period. The primary objective of cash flow statement is to provide useful information
about cash flows (inflows and outflows) of an enterprise during a particular period under various heads, i.e.,
operating activities, investing activities and financing activities.
This information is useful in providing users of financial statements with a basis to assess the ability of the
enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows. The
economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash
and cash equivalents and the timing and certainty of their generation.
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.
Disadvantages of Cash Flow Statement
Since it shows only cash position, it is not possible to deduce the actual profit and loss of the company by just
looking at this statement.
In isolation, this is of no use and it requires other financial statements like balance sheet, profit and loss etc…,
and therefore limiting its use.
Cash from Operating Activities
Operating activities are the activities that constitute the primary or main activities of an enterprise. For example,
for a company manufacturing garments, operating activities are procurement of raw material, incurrence of
manufacturing expenses, sale of garments, etc. These are the principal revenue generating activities (or the main
activities) of the enterprise and these activities are not investing or financing activities.

The amount of cash from operations’ indicates the internal solvency level of the company, and is regarded as
the key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to
maintain the operating capability of the enterprise, paying dividends, making of new investments and repaying
of loans without recourse to external source of financing.
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
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 Rationalised 2023-24 Cash Flow Statement 245 as machinery, furniture, land and building, etc.
Transactions related to long-term investment are also investing activities. Separate disclosure of cash flows from
investing activities is important because they represent the extent to which expenditures have been made for
resources intended to generate future income and cash flows.
Examples of cash flows arising from investing activities are:
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.

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.
Meaning of Fund Flow
Fund flow refers to the working capital of the company, and a fund flow statement is prepared to visualize the
changes in working capital of the company over a period of time. Investors use the fund flow information to
determine where capital needs to be invested.
There are two types of inflow of funds in a business
Funds generated by the business operations
Long term funds raised by issuing shares or sale of fixed assets.
Difference between fund flow statement and cash flow statement .

Basis Cash Flow Fund Flow

Definition Cash flow is based on the concept Fund flow is based on the concept of
of outflow and inflow of cash and changes in working capital over a period
cash equivalents during a of time
particular period
What is calculated? Cash from the operations is Fund from the operation is calculated.
calculated
What it shows It shows the short term position of It shows the position of the business in
the business the long term

Purpose To show the movement of cash To show the changes in the financial
during the beginning and end of position of business between previous
an accounting period and current accounting periods

Discloses Inflows and Outflows of cash Source and application of the available
funds

Accounting Basis Cash Basis of accounting Accrual basis of accounting

Schedule of In cash flow statement changes in

 Changes in current assets and current In funds flow statement changes in
working capital liabilities are shown in the cash current assets and current liabilities are
flow statement itself. shown through the schedule of changes
in working capital.
Used for Cash budgeting Capital budgeting

FORMAT OF CASH FLOW STATEMENT (UNDER INDIRECT METHOD FOR THE YEAR ENDED …..)

PARTICULARS AMOUNT AMOUNT

1. Cash flow from operating activities
Net profit before tax
(+) Non cash and non operating expenses
Transfer to general reserve
Depreciation on fixed assets
Loss on sale of fixed assets
Loss on sale of investment
Provision for taxation
Interim dividend paid
Premium on redemption
Goodwill /patents written off
Preliminary expenses written off
(-) Non operating incomes :
Profit on sale of investment
Profit on sale of fixed assets
Appreciation of fixed assets
Income from investments
Cash from operations
(+) increase in current current liability
Decrease in current assets
(-) decrease in current current liability
increase in current assets
Cash generated from operations
(-) income tax paid
Net cash flow from operating activity(A)

2. Cash flow from investing activities

Sale of fixed Assets
Sale of investments
(-)purchase of fixed assets
Purchase of investments
Net cash flow from investing activity(B)
3, cash flow from financing activities :
Issue of shares
Issue of debentures
Raising of loan
(-) Redemption of preference shares
Redemption of debentures
Repayment of loan
Payment of interim / final dividend
Net cash flow from financing activity(C)
Net increase or decrease in cash and cash equivalents (A+B+C)
(+) Cash and cash equivalents at the beginning
Closing cash and cash equivalents .
1. Following are the balance sheets of Chandrika LTDas on 31.03,2011 and 31.03.2012

Liabilities 31.3.11 31.3.12 Assets 31.3.11 31.3.12

Eq share capital 9,00,000 11,50,000 Goodwill 1,50,000 1,20,000
10% preference 5,00,000 3,50,000 Building 6,00,000 5,70,000
shares
Reserve fund 3,10,000 3,70,000 Machinery 8,55,000 12,90,000
Profit and loss A/C 70,000 95,000 Furniture 80,000 72,000
12% Debentues 3,00,000 5,00,000 Stock 3,20,000 3,68,00
Creditors 2,10,000 2,45,000 Debtors 2,90,000 2,70,000
Bills payable 90,000 70,000 Stock 3,20,000 3,68,000
Tax provision 75,000 90,000 Cash 40,000 50,000
Total 24,55,000 28,70,000 24,55,000 28,70,000

Additional information :

Preference shares were redeemed at 10 premium .

A new plant was purchased and installed during the year at a cost of 5,65,000 and an old machinery
costing Rs 75,000.
Income tax paid during the year Rs 80,000.
You are required to prepare cash flow statement As -3 under indirect method .

2. Given below are the Balance sheets of Nishitha Ltd as on 31.3.11 &31.3.12

Capital and 2011 2012 Assets 2011 2012

liabilities
Eq. share 2,00,000 2,30,000 Land 1,00,000 1,10,000
capital &BUILDING
Securities - 6,000 P&M 2,40,000 2,90,000
premium
P&L a/c 76,000 1,86,000 Investments 80,000 90,000
6% debentures 1,20,000 60,000 Stock 72,000 80,000
G.reserve 72,000 80,000 Debtors 1,20,000 1,28,000
Creditors 1,11,000 80,000 Cash at bank 21,000 29,000
Provision for 24,000 41,000
tax
Proposed 30,000 44,000
dividend
Total 6,33,000 7,27,000 Total 6,33,000 7,27,000

Adjustments :

A machinery costing Rs 60,000 was sold during the year for Rs 36,000. The written down value of
machine was 24,000
Income tax paid during the year was Rs 30,000
6% debentures have been redeemed .
A new machinery was purchased for Rs 98,000. Prepare cash flow statement as per AS -3 under indirect method
.

Problem no 3 :
The balance sheets of Sri Ganesh co ltd are given below :

Liabilities 2009 2010 Assets 2009 2010

Eq . share 7,00,000 9,00,000 Land 3,00,000 3,00,000
capital
R.fund 1,80,000 2,10,000 Building 4,50,000 4,05,000
Profit and loss 50,000 85,000 Machinery 3,70,000 5,30,000
A/c
10% 3,00,000 1,50,000 Stock 1,80,000 2,40,000
debentures
Mortgage loan 1,00,000 1,50,000 Debtors 1,50,000 1,35,000
Creditors 90,000 75,000 Prepaid 30,000 40,000
expenses
Bills payable 30,000 40,000 Cash in hand 15,000 20,000
o/s expenses 20,000 25,000 Cash at bank 35,000 45,000
Provision for 75,000 90,000 Discount on 15,000 10,000
tax debentures
15,45,000 17,25,000 15,45,000 17,25,000
Additional information :
A machinery costing Rs 60,000 ( whose book value Rs35,000) has been sold for 40,000
Depreciation charged on building Rs 45,000 and on machinery Rs 65,000.
Debentures were redeemed at 96%.
A cash dividend of Rs 70,000 was paid during the year.
A tax provision made during the year Rs 80,000.
Prepare cash flow statement as per AS -7 under indirect method.

Problem no 4 :
Balance sheet of Gangadhar mills ltd

Liabilities 2006 2007 Assets 2006 2007

Eq share capital 3,00,000 4,00,000 Buildings 2,50,000 3,00,000
10% redeemable 2,00,000 - Machinery 3,00,000 3,20,000
preference shares
CRR - 1,00,000 Furniture 20,000 18,000
Reserve fund 2,00,000 1,20,000 Investments 1,00,000 1,50,000
Share premium 30,000 30,000 Stock 3,00,000 2,50,000
P and L A/C 1,20,000 1,80,000 Debtors 1,40,000 2,00,000
12% debentures 2,00,000 3,00,000 Cash at bank 20,000 32,000
Creditors 80,000 1,40,000
11,30,,00 12,70,000 11,30,000 12,70,000
0
Additional information:

Preference shares were redeemed at 10% premium .

Rs 20,000 were transfered to R.fund from profit and loss A/c .
Investments ( book value Rs 40,000) was sold for Rs 70,000
Depreciation provided on building, machinery and furniture Rs 20,000, Rs 30,000, and Rs 2,000
respectively.
Dividend paid Rs 50,000, income tax paid Rs 45,000.
Prepare cash flow statement as per AS -3 under indirect method .

Problem no 5 :
From the following balance sheet of avanti Ltd . you are required to prepare CFS

LIABILITIES 2010 2011 ASSETS 2010 2011

EQ . share 3,00,000 4,00,000 Goodwill 1,15,000 90,000
capital
8% 1,50,000 1,00,000 Buildings 2,00,000 1,70,000
redeemable
preference
share
Securities 20,000 40,000 P&M 80,000 2,00,000
premium
Profit and loss 30,000 48,000 Debtors 1,60,000 2,00,000
a/c
Proposed 40,000 50,000 Stock 80,000 1,10,000
dividend
Bills payable 22,000 16,000 Bills 17,000 29,000
receivable
Creditors 55,000 83,000 Cash 25,000 18,000
Bank loan 50,000 30,000 Advances 20,000 15,000
(short term)
Provision for 20,000 30,000 Patents 30,000 15,000
doudtful debts
Provision for 40,000 50,000
tax
7,27,000 8,47,000 7,27,000 8,47,000

Additional information :

Depreciation charged during the year were on building Rs 10,000 and machinery Rs 20,000
Interim dividends paid Rs 30,000
Provision for taxation made during the year Rs 38,000
8% preference shares have been redeemed at 10 % premium .

Problem no 6
Given below are the balance sheet of Indian cement Ltd as on 31.12.2008 & 2009

Liabilities 2008 2009 Assets 2008 2009

Eq . share capital 3,00,000 4,00,00 Goodwill 1,00,000 80,000
0
10% redeemable preference 1,50,000 1,00000 Land and building 2,00,000 1,70,000
share
Capital reserve - 20,000 Plant and machinery 80,000 2,00,000
General reserve 40,000 50,000 Investments 20,000 30,000
P&l a/c 30,000 48,000 S.debtors 1,40,000 1,70,000
Proposed dividend 42,000 50,000 Stock 77,000 1,09,000
S . creditors 25,000 47,000 B/R 20,000 30,000
B/P 20,000 16,000 Cash in hand 15,000 10,000
Liability for expenses 30,000 36,000 Cash at bank 10,000 8,000
Provision for tax 40,000 50,000 P.expenses 15,000 10,000
Total 6,77,000 8,17,00 Total 6,77,000 8,17,000
0
Additional information :

A piece of land had been sold out in 2009 and the profit on sale has been credited to capital
reserve .A machine has been sold for Rs 10,000 . the written down value of the machine was Rs
12,000 depreciation of Rs 10,000is charged on Pand M in 2009Rs 3,000 dividend received on
investment has been credited to investment A /c .
An interim dividend of Rs 20,000 has been paid in 2009.
Prepare a statement of CFS for the year ending 31.12.2009 as per AS -3 by indirect method .
Problem no 7 :
The balance sheets of Sri parameshwara Co. ltd as on 1 st April 2008and 31st march 2009 are as follows :

Liabilities 2008 2009 Assets 2008 2009

Eq . share capital 2,50,000 2,50,000 L&B 1,50,000 1,50,000
5%debentures 1,00,000 80,000 Machinery 82,000 90,000
Creditors 1,15,000 1,08,000 Stock 1,00,000 1,14,000
P and Loss a/c 20,000 27,000 Debtors 85,000 81,000
Depreciation fund 40,000 44,000 Cash and bank balances 60,000 55,000
Reserve for 70,000 55,000 Temporary investments 1,31,000 95,000
contingencies
O/S expenses 15,000 24,000 Prepaid expenses 2000 30000
Total 6,10,000 5,88,000 Total 6,10,000 5,88,000

Additional information :
New machinery was purchased for Rs 23,000 but old machinery costing Rs 15,000 was sold for Rs 5000
( accumulated depreciation was Rs 8,000.
Rs 20,000 , 5 % debentures were redeemed by purchase in open market at Rs 96.
Rs 36,000 investmnets were sold at book value .
12% dividend was paid in cash .
Rs 15,000 was debited to contingency reserve for settlement of provisions tax liability .
You are required to Prepare “ Cash flow Statement’’ by Indirect method ( as per AS -7)

PROBLEM NO 8
The balance sheet of PQR Ltd ., as on 31.3,06 and 31.3.07

Liabilities 2006 2007 Assets 2006 2007

Share capital 4,00,000 5,20,000 Cash in hand 5,000 5400
Creditors 79,000 82,270 Debtors 1,70,350 1,45,250
B/P 67,560 23,050, Advances 4,630 1,470
Bank O/D 1,19,020 - Stock 2,22,080, 1,94,740
Provision for 80,000 1,00,000 Buildings 2,97,000 2,88,500
tax
Reserves 1,00,000 1,00,000 Machinery 2,25,900 2,32,400
P&l a/c 79,380 82,440 Good will - 40,000
Total 9,24,960 9,07,760 9,24,960 9,07,760
Additional information :
During the year 2007 a dividend of Rs 52,000 was paid .
The assets of another Company were purchased for Rs 1,20,000 payable in fully paid shares of the company .
these assets consisted of Stock Rs 43,280, machinery Rs 36,720,and goodwill 40,000.
In addition some other machinery was purchased for cash 11,300
Income tax paid during the year 2006 and 07 was Rs 50,000
The net profit for the year before tax Rs 1,25,060
Prepare CFS .