Unit VI

Cash Flow Statement

Introduction
 An enterprise should prepare a cash flow statement and should
present it for each period for which financial statements are
presented.
 Users of an enterprise’s financial statements are interested in how
the enterprise generates and uses cash and cash equivalents.
 A cash flow statement, when used in conjunction with the other
financial statements, provides information that enables users to
evaluate the changes in net assets of an enterprise, its financial
structure (including its liquidity and solvency) and its ability to
affect the amounts and timing of cash flows in order to adapt to
changing circumstances and opportunities.
 Definitions
1. Cash comprises cash on hand and demand deposits with banks.

2. 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.

3. Cash flows are inflows and outflows of cash and cash equivalents.

4. Operating activities are the principal revenue-producing activities of the enterprise and other
activities that are not investing or financing activities.

5. Investing activities are the acquisition and disposal of long-term assets and other investments
not included in cash equivalents.

6. Financing activities are activities that result in changes in the size and composition of the
owners’ capital (including preference share capital in the case of a company) and borrowings of the
enterprise.
Investing
Activity
Performa
Additional Information:
(a) A Machine costing Rs. 1,40,000 (Depreciation provided
thereon Rs. 60,000) was sold for Rs. 50,000. Depreciation
charged during the year was Rs. 1,40,000.
 Asset 31/03/2022 31/03/2023

10% Long term investment 60,000 1,60,000

Machinery 10,20,000 12,40,000

1. A Machine Costing Rs. 1,40,000 (Depreciation provided

thereon Rs. 60,000) was sold for Rs. 50,000. Depreciation
charged during the year was Rs. 1,40,000.
2. On March 31, 2023, 10% Investments were purchased
for Rs. 1,80,000 and some investments were sold at a
profit of Rs. 20,000.
Dr. Machinery Account Cr.
Particulars Amount Particulars Amount
To Bal b/d 10,20,000 By Depreciation 1,40,000
To Bank (Purchase) (Balancing Fig.) 4,40,000 By Bank (Sale) 50,000
By P&L (Loss) 30,000
By Bal c/d 12,40,000

14,60,000 14,60,000
Dr. 10% Long Term Investment Account Cr.
Particulars Amount Particulars Amount
To Bal b/d 60,000 By Bank(Sale)(Bal fig.) 1,00,000
To Bank (Purchase) 1,80,000 By Bal c/d 1,60,000
To P&L A/C (Profit) 20,000
2,60,000 2,60,000
Additional Information:
1. During the year Income Tax paid was Rs. 2,80,000
 Provision for Income Tax Account
Dr. Cr.
Particulars Amount Particulars Amount

To Bank (Tax Paid) 2,80,000 By Bal b/d 3,20,000

To Bal c/d 4,00,000 By P&L (Provision Made for the year) 3,60,000

6,80,000 6,80,000
Financing
Activity
Performa
Operating
Activity
Performa
Illustration: Net Profit of a company before tax is Rs. 25,00,000 as on March
31st March 2017 after considering the following:
Depreciation of Fixed Assets: 50,000 ; Loss on sale of machinery: 12,000
Goodwill written off: 15,000; Tax paid : 83,000
The CA & CL of the company in the beginning & at the end of the year were
as follows:
31/03/2016 31/03/2017

Accounts Receivable 50,000 31,000

Accounts Payable 20,000 25,000

Debtors 60,000 75,000

Stock in Hand 30,000 28,000

Outstanding Expenses 15,000 10,000

 Cash Flow From Operating Activity

Net Profit before Tax 25,00,000

Add: Depreciation on Fixed Asset 50,000
Goodwill written off 15,000
Loss on Sale of Machine 12,000
Operating Profit Before Working Capital Change 25,77,000
Add: Decrease in Accounts Receivable 19,000
Decrease in Stock 2,000
Increase in Accounts Payable 5,000
Less: Increase in Debtors (15,000)
Decrease in Outstanding Expenses (5,000)
Cash Generated from Operations 25,83,000
Less: Tax Paid (83,000)
Cash Flow from Operating Activity 25,00,000
 Cash Flow From Operating Activity
Net Profit before Tax 90,000
Add: Proposed Dividend 10,000
Provision of Tax 3,000
Depreciation on Plant & Machinery 14,000
Goodwill amortized 12,000
Loss on Sale of Machiery 17,000
Preliminary Exp. Written off 200
Less: Profit on Sale of Land (5,000)
Operating Profit Before Working Capital Change 1,41,200
Add: Decrease in Stock 3,000
Increase in Expense Payable 1,000
Less: Increase in Accounts Receivable (4,000)
Decrease in Accounts Payable (2,000)
Increase in Short term Investments (3,000)
Cash Generated from Operations 1,36,200
Less: Tax Paid (5,000)
Working Notes:

(Prov. for Tax)

 Cash Flow From Investing Activity

Add: Sale of Land 10,000

Sale of Investment 20,000

Interest Received on Investment 20,000

Less: Purchase of Patents (25,000)

Purchase of furniture (2,25,000)

Net Cash Flow Used in Investing Activity (2,00,000)

A. Cash Flow from Operating Activity

Profit as per statement of Profit & Loss 1,01,000

Add: Interest on Debenture 7,500

Operating Profit before Working Capital Change 1,08,500

Add: Increase in Current Liability & Decrease in Current Asset

Trade Payables 40,000

Trade Receivable 38,000

Less: Decrease in Current Liability & Increase in Current Asset

Other Current Liability (8,000)

Inventories (56,000)

Cash generated from operations 1,22,500

Less: Tax Paid -

Net Cash Flow from Operating Activity 1,22,500

B. Cash Flow from Investing Activity

Purchase of Fixed Asset (1,57,000)

Purchase of Non-Current Investment (13,000)

Net Cash Flow Used in Investing Activities (1,70,000)

C. Cash Flow from Financing Activities

Issue of Share Capital 50,000

Issue of 15% Debenture 30,000

Less: Interest on Debenture (7,500)

Net Cash Flow from Financing Activity 72,500

D. Net Increase or Decrease in Cash Equivalent (A+B+C) 25,000

Add: Cash & Cash equivalent at the begining of the year 70,000

Cash & Cash Equivalent at the end of the year 95,000

 4,02,000

(Short term less than 3 months)

6,92,000
A. Cash Flow from Operating Activity
Profit as per statement of Profit & Loss 36,000
Add: General Reserves 30,000
Interim Dividend 1,20,000
Provision for Taxation 27,000
Depreciation 2,10,000
Less: Profit on Sale of Investment (1,500)
Profit on sale of Fixed Asset (6,000)
Operating Profit before Working Capital Change 4,15,500
Add: Increase in Current Liability & Decrease in Current Asset
Inventories 90,000
Less: Decrease in Current Liability & Increase in Current Asset
Trade Payable (1,02,000)
Trade Receivables (7,35,000)
Cash generated from operations (3,31,500)
Less: Tax Paid (2,22,000)
Net Cash Flow used in Operating Activity (5,53,500)
B. Cash Flow from Investing Activity

Sale of Investment 25,500

Sale of Fixed Assets 36,000

Purchase of Investment (54,000)

Net Cash Flow from Investing Activities 7,500

C. Cash Flow from Financing Activities

Issue of 10% Mortgage Loan 8,10,000

Interim Dividend paid (1,20,000)

Net Cash Flow from Financing Activity 6,90,000

D. Net Increase or Decrease in Cash Equivalent (A+B+C) 1,44,000

Add: Cash & Cash equivalent at the begining of the year 4,47,000

Cash & Cash Equivalent at the end of the year 5,91,000