Cash Flow Statement

Compiled by: Adv (Dr) Bhupendra Jain,

9811255704
Ph.D, LLB, MBA, PGDBM, [Link]

SEBI has issued vide letter on SMD (N)/JJ/2331/95 dated 26.6.1995 by amending
clause 32 of the listing agreement for submission of cash flow statement.

According to listing agreement between the listed companies and stock exchanges,
clause 32 stipulates that all listed companies/entities whose financial year ends on
March 1996 and thereafter will be required to give cash flow statements along with the
balance sheet and profit & loss account. This statement has to be verified by the
auditors of the company and is required to be prepared in accordance with the
requirements prescribed by SEBI.

Meaning: Cash flow is the movement of cash and its equivalents. It includes the inflow
and the outflow of cash during a particular period. All transaction which lead to increase
in cash and cash equivalents are classified as inflows of cash and all those transactions
which decrease in cash and cash equivalents are classified as outflows of cash.
Cash flow statement, therefore, is a statement that shows flow of cash and cash
equivalents during a period.

Cash comprises Cash on hand and demand deposits with banks.

Cash Equivalents are short term, highly liquid investments that are convertible into
cash.
Examples of cash equivalents are: (a) treasury bills, (b) money market funds,
(c) Investment in preference shares and redeemable with in three month can also be
taken as cash equivalents

Objectives
The objective of the cash flow Statement is to require reporting entities falling within its
scope to report on a standard basis their cash generation and cash absorption for a
period between two balance sheet dates. Standard headings have been devised for
assisting the users to assess the liquidity viability and financial adaptability of the
reporting entity. This will ensure that cash flows highlight the significant components of
the cash flow and facilitate comparison of the cash flow performance of different and
varying nature of business.

Accounting Standard – 3 (Revised) required a cash flow statement to be prepared and

presented in a manner that it shows cash flow from business transactions during a
period classifying into:
(i) Operating Activities:
(ii) Investing Activities; and
(iii) Financing Activities.
 Operating Activities

Cash Inflow Cash Outflow

Cash Sales Cash purchases
Cash received in debtors Payment to creditors
Cash received from commission & fees Cash operating expenses
Royalty Payments of wages
Income Tax
Investing Activities

Cash Inflow Cash Outflow

Sale of fixed assets Purchase of fixed assets
Sale of investment Purchase of investment
Dividend received
Financing Activities

Cash Inflow Cash Outflow

Investment in shares in cash Payment of loans
Issue of debenture in cash Redemption of pref. share
Long-term borrowing Payment of dividends
Interest paid
Importance and Relevance of the CFS
The CFS has gained importance in view of the fact that there are many managerial
decision which are taken in the light of the cash availability or cash position of the firm.
For example, declaration of dividend by a company requires cash disbursement and
there fore, the Board of Directors must consider the cash position before proposing a
dividend. Moreover, the CFS also provides information for the short-term financial
planning and in particular the short-term cash needs of the firm.
Classification of Cash Flows
Cash Flows from Operating Activities
 Cash receipts from the sale of goods and the rendering of service;
 Cash receipts from royalties, fees, commission, and other revenue;
 Cash payments to suppliers for goods and services;
 Cash payments to and on behalf of employees;
 Cash receipts and payments of an insurance enterprise for premiums and claims
annuities and other policy benefits;
 Cash payments or refunds of income taxes unless they can be specifically identified
with financing and investing activities, and
 Cash receipts and payments relating to future contracts, froward contracts, option
contracts, and swap contracts when the contracts are held for dealing or trading
purposes.

Cash Flows from Investing Activities

(a) Cash payments to acquire fixed assets (including intangibles). These payments
include those relating to capitalized research and development costs and self-
constructed fixed assets.
(b) Cash receipts from disposal of fixed assets (including intangibles).
(c) Cash payments to require shares, warrants, or debt instruments of other enterprises
and interest in joint ventures (other than payments for those instruments considered
to be cash equivalent and those held for dealing or trading purposes).
(d) Cash receipts from disposal of shares, warrants, or debt instruments of other
enterprises and interest in joint ventures (other than receipts from those instruments
considered to be each equivalent and those held for dealing or purposes).
(e) Cash advances and loans made to third parties (other than advances and loans
made by financial enterprises).
(f) Cash receipts from the repayment of advances and loans made to third parties
(other than advances and loans of a financial enterprise).
(g) Cash receipts and payments relating to futures contracts; option contracts, and
swap contracts except when the contracts are held for dealing or trading purposes,
or the receipts are classified as financial activities.

Cash Flows from Financial Activities

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. Following are the examples of cash flows arising from
financing activities;
(a) Cash proceeds from issuing shares or other similar instruments;
(b) Cash proceeds from issuing debentures, loans notes, bonds and other short term
borrowing;
(c) Cash repayments of amounts borrowed;
(d) Payment of dividend

CASH FLOW STATEMENT

(DIRECT METHOD)
Cash Flows from operating activities
Cash receipts from customers *****
Cash paid to suppliers and employees (*****)
Cash generated from operations *****
Income tax paid (*****)
Cash flow before extraordinary item ******
+ Extra-ordinary items *******
Net cash from operating activities *****
 Cash flows from investing activities
Purchase of fixed assets (*****)
Proceeds from sale of equipment *******
Interest received *******
Dividend received *******
Net cash from investing activities ******
Cash flows from financing activities
Proceeds from issuance of share capital ******
Proceeds from long-term borrowings ******
Repayments of long-term borrowings *******
Interest paid (******)
Dividend paid (******)
Net cash from financing activities *******
Net increase in cash and cash equivalents *******
cash and cash equivalents at beginning of period *******
Cash and cash equivalents at end of period *******

CASH FLOW STATEMENT

(INDIRECT METHOD)
Cash flows from operating activities
Net profit before taxation, and extraordinary item *****
Adjustment for
Depreciation *****
Foreign exchange loss *****
Interest income *****
Dividend income *****
Interest expense *****
Operating profit before working capital changes *****
Increase in sundry debtors *****
Decrease in inventories *****
Decrease in sundry creditors *****
Cash generated from operations *****
Income tax paid (*****)
Cash flow before extra-ordinary in terms ******
+ Extra –ordinary items ******
Net cash from operating activities ******
Cash flows from investing activities
Purchase of fixed assets (*****)
Proceeds from sale of equipment *******
Interest received *******
Dividends received *******
Net cash from operating activities ******
Cash flows from financing activities
Proceeds from issuance of share capital ******
proceeds from long-term borrowings ******
interest paid (******)
Dividend paid (******)
Net cash from financing activities (******)
Net increase in cash and cash equivalents *****
Cash and cash equivalent at beginning of period *****
Cash and cash equivalents at end of period *****

CASH FLOW FROM OPERATING ACTIVITIES

Amount
Net profit before tax and extraordinary items ******
+ Depreciation *********
+ provision for contingencies *********
+ Provision for retirement benefits *********
+ Loss on sale of fixed assets ********
+ Loss/(profit) on disposal of investments *********
+ Interest paid *********
- Dividend received *********
- Interest received *********
Operating profit before working capital changes ******
Adjustment for:
+ Decrease/(increase) in trade and other receivables *******
+ Decrease/(increase) in inventories *******
+ Increase/(decrease) in trade payables *******
Cash generated from operations *******
Direct taxes paid *******
Cash flow before extraordinary items *******
+ Extraordinary items *******
Net cash inflow/(outflow) from operations *******
Q. 1: Calculate cash from operating activities from the following balance sheet.
2019 2020
Debtors 50,000 40,000
Bills Receivable 10,000 12,500
Creditors 25,000 20,000
Outstanding Expenses 800 1,000
Bills Payable 40,000 25,000
Accrued income 6,000 7,000
Profit & Loss a/c 50,000 1,80,000

Q. 2: The financial position of ABC Ltd. as on 31st March was as follows:

Liabilities 2019 2020 Assets 2019 2020
Current Liabilities 72,000 82,000 Cash 8,000 7,200
Loan from Z Ltd. - 40,000 Debtors 70,000 76,800
Loan from Bank 60,000 50,000 Stock 50,000 44,000
Share Capital 2,00,000 2,00,000 Land 40,000 60,000
Profit & Loss A/c 96,000 98,000 Building 1,00,000 1,10,000
Machinery 2,14,000 2,44,000
Provision for dep. (54,000) (72,000)
4,28,000 4,70,000 4,28,000 4,70,000
During the year Rs. 52,000 were paid as dividend. Prepare cash flow statement as per
AS-3

Q. 3: From the following prepare Cash Flow Statement:

Liabilities 1-1-19 31-12-19 1-1-19 31-12-19
Sh. Capital 3,00,000 4,00,000 Goodwill 1,00,000 90,000
Profit & Loss A/c 1,10,000 1,50,000 Machinery 2,98,000 4,30,000
Debenture 1,50,000 1,00,000 Investment 1,00,000 60,000
Creditors 90,000 70,000 Stocks 50,000 80,000
Provision for taxation 80,000 80,000 Debtors 1,60,000 1,10,000
Cash at bank 10,000 20,000
Preliminary exp. 12,000 10,000
7,30,000 8,00,000 7,30,000 8,00,000
Adjustments: 1. Investment were sold at a profit of Rs. 10,000
2. Debenture were redeemed at 10% premium.
3. Rs. 75,000 was paid as income tax.
4. Depreciation charged amounted to Rs. 70,000
Q.4: From the following Balance Sheet of Raja mills limited, prepare statement of Cash
Flow Statement.
Liabilities 31.03.19 31.03.20 Assets 31.03.19 31.03.20
Capital 4,00,000 5,00,000 Machinery 3,00,000 3,38,000
General Reserve 1,00,000 1,20,000 Debtors 2,00,000 1,48,000
P&L Accounts 61,000 61,200 Business 4,00,000 3,80,000
Bank Loan 1,40,000 - Premises 1,000 27,200
Creditors 2,80,000 2,60,000 Cash 1,60,000 1,28,400
Bills Payable 20,000 10,400 Stock
Provision for 60,000 70,000
taxation
10,61,000 10,21,600 10,61,000 10,21,600
Additional Information:
1. Dividend paid during the years. 46,000.
2. Depreciation on machinery written off Rs. 28,000.
3. Provision for taxation was made Rs. 66,000.

Q. No.5: From the following Balance Sheet of Gupta Co. Ltd, you are required to prepare a
Cash Flow Statement as per As-3
Balance Sheet
Liabilities 2019 2020 Assets 2019 2020
Equity Share Capital 2,00,000 3,25,000 Goodwill 30,000 25,000
Pref. Share Capital 1,50,000 65,000 Machinery 1,75,000 1,10,000
General Reserve 10,000 17,500 Debtors 45,000 1,50,000
Securities Premium 5,000 25,000 Bills Receivable 17,500 12,500
Profit & Loss A/c 12,500 17,500 Stock 37,500 40,000
Creditors 40,000 60,500 Cash 1,12,500 1,73,000
4,17,500 5,10,500 4,17,500 5,10,500

Additional Information:
(i) Machinery having book value of Rs. 50,000 was sold for Rs. 40,000.
(ii) Dividend paid during the year Rs. 20,000.
(iii) Depreciation provided during the year Rs. 20,000.
[Ans. Operating Activity (14,500); Investing Activity 35,000 Financing Activity Rs. 40,000]
[Link].6: From the following balance sheets of X Ltd. made out the statement of sources and
uses of cash as per AS-3 (Revised);
2019 2020
liabilities Rs. Rs.
Equity share capital 3,00,000 4,00,000
8% preference share capital 1,50,000 1,00,000
General reserve 40,000 70,000

Profit and Loss Account 30,000 48,000

Proposed dividend 42,000 50,000
Creditors 55,000 83,000
Bills payable 20,000 16,000
Provision for taxation 40,000 50,000
6,77,000 8.17,000
Assets
Goodwill 1,15,000 90,000
Land & Building 2,00,000 1,70,000
Plant 80,000 2,00,000
Debtors 1,60,000 2,00,000
Stock 77,000 1,09,000
Bills receivable 20,000 30,000
Cash in hand` 15,000 10,000
Cash at bank 10,000 8,000
6,77,000 8,17,000
Additional information;
(i) Depreciation of Rs.10,000 and Rs.20,000 have been charged on plant and land &
building respectively in 2020.
(ii) An interim dividend of Rs.20,000 has been paid in 2020.
(iii) Rs.35,000 income tax was paid during the year 2020.

Q. No. 7: From the following Balance sheets of Nagina Ltd., prepare a Cash Flow statement:
Liabilities 31-3-2019 31-3-2020 Assets 31-3-2019 31-3-2020
Share Capital 1,00,000 1,60,000 Building 65,200 81,200
Securities Premium 5,000 10,000 Machinery 25,100 51,000
General Reserve 8,000 12,000 Furniture & Fittings 12,400 2,500
Profit & Loss A/c 17,500 20,000 Stock 31,500 42,000
10% Debentures 6,000 21,000 Sundry Debtors 22,000 40,000
Sundry creditors 21,500 20,100 Bank 15,800 53,600
Provision for Patents 5,000 ------
Taxation 7,000 10,200
Proposed Dividend 12,000 15,000
Unclaimed Dividend ------ 2,000
1,77,000 2,70,300 1,77,000 2,70,300

Additional Information:
(i) Interim Dividend of Rs. 10,000 was paid during the year.
(ii) Income Tax Provision was made during the year for Rs. 9,000.
(iii) Provision for Depreciation on machinery on 31-3-2019 and 31-3-2020 were Rs. 5,000 and
 Rs. 10,000 respectively.
(iv) A part of the Furniture sold at book value.
(v) Fresh shares were issued on 1-4-2020.
[Ans. Operating Activity 16,900; Investing Activity (37,000); Financing Activity 57,900]