CHAPTERS

Cash Flow Statement

Introduction
Cash Flow is the life blood of a business which plays a vital role in an entire economic life. As
discussed in the previous chapter, the word 'fund' is used in a narrower sense refers to 'cash'. When cash
is used as 'fund' the analysis relates to movement of cash. Cash flows refer to the actual movement of cash
into and out of an organization. In other words, the movement of cash inclusive of inflow of cash and outflow of cash. When the cash flows into the organization, it represents 'Inflow of Cash.' Similarly when the
cash flows out of the business concern, it called as "Cash Outflow."
In order to ensure cash flows are adequate to meet current liabilities such as tax payments, wages,
amounts due to trade creditors, it is essential to prepare a statement of changes in the financial position of
a firm on cash basis is called as "Cash Flow Statement." This statement depicting mQvement of cash
position from one period to another.
Uses of Cash Flow Statement
Cash Flow Statement is a useful tool to the management for taking important financial decision
making. The following are the uses of this statement:
(I)

This Statement is the most useful to the management to prepare dividend and retention policies.

(2)

It guides the management to evaluate the changes in cash position.

(3)

It presents in brief to the management about the performance of operational, financial and
investment rativities for effective decision.

(4)

It helps to know how the movement of cash took place and the factors .which caused the
changes in cash flows.

(5)

It guides the management in order to take decisions about short-term obligations.

(6)

It also presents the details about the sources of cash and applications of cash during the
particular period.

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Cash Flow Statement

Difference between Fund Flow Statement and Cash Flow Statement

Fund Flow Statement and Cash Flow Statement are the two useful tools of financial analysis and
interpretations of financial statements. But at the same time both the statements differ from each other in
the following manner:
(1)

Fund Flow Statement helps ~o measure the causes of changes in working capital whereas cash
flow statement focuses on the causes for the movement of cash during a particular period.

(2)

Fund flow statement is prepared on the basis of Fund or all financial resources while cash flow
statement is based on cash basis of accounting.

(3)

Cash Flow Statement guides to the management for short-term financial planning while Fund
flow analysis helps to the management for intermediate and long-term financial planning.

(4)

Statement of changes in working capital is required for the preparation of Fund flow statement
while for cash flow statement no such statement is required.

Limitations of Cash Flow Statement

(1)

Cash Flow Statement has limited scope as it compares with Fund flow statement. Because it
discloses inflows and outflows of cash alone. It does not reveal the overall financial position of
the concern.

(2)

Cash Flow Statement cannot provide a comprehensive picture of a financial position because
non-cash items of expenses and incomes are excluded.

(3)

The balances as disclosed by the cash flow statement may not be treated as actual liquid
position of a concern since it cannot be easily influenced by postponing purchases and other
payments.

Preparation of Cash Flow Statement

Cash Flow Statement is prepared like Fund Flow Statement. Preparation of this statement is based on
the movement of cash, may be an actual inflow of cash or outflow of cash, Profit and Loss Account and
other relevent informations. While preparing a cash flow statement, it starts with an opening balance of
cash in hand and cash at bank, all the sources of cash are added to an opening balance minus applications
of cash is reconciled with the closing balance of cash. The balance represents cash and bank balances at
the end of accounting period.

SOURCES AND APPLICATIONS OF CASH

Sources of Cash (Inflow of Cash)
The following are the main sources of cash such as:
(1)

Cash From Operations or Trading Profit.

(2)

Sale of Fixed Assets for Cash.

(3)

Sale of Investments for Cash.

(4)

Raising Long-Term Loans from Banks and Financial Institutions.

(5)

Issue of Shares and Debentures for Cash.

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212

Application of Cash (Outflow of Cash)

Application of cash can be involved in the following forms :
( 1)

Cash Lost in Operations or Trading Losses.

(2)

Redemption of Shares and Debentures by Cash.

(3)

Purchase of Fixed Assets.

(4)

Repayment of Long-Term Loans.

Computation of Cash Flow Statement

A comprehensive Cash Flow Statement is ascertained in two stages:
(I) Cash From Operations, Le., internal sources of cash calculated by preparing combined
statements of adjusted profit and loss account.
(II) External Sources and Applications of Cash, Le., Flow of Cash involves in non-current

items ascertained by the Statement of Sources and Applications of Cash.

Diagram of Sources and Applications of Cash
The summary of sources and applications of cash is presented in the chart given below :
Sources of Cash
(Inflow of Cash)
Cash From Operations
Sale of Fixed Assets
Sale of Investments
Issue of Shares
Issue of Debentures
Raising Long-Term Loans
Increase in any Liabilities
Decrease in any Assets

Applications of Cash
(Outflow of Cash)
Cash Lost in Operations
Purchase of Fixed Assets
Purchase of Investment
Redemption of Preference Shares
Redemption of Debentures
Decrease in any Liability
Decrease in any Assets

I. CASH FROM OPERATIONS

Cash from operations is the main source of inflow of cash. The Net Profit or Net Loss is the net
effect of business transactions shown by the profit and loss account. In order to find out the actual
movement of cash from trading operations, it is essential to ascertaining cash from operations. It can be
calculated under the following situations:
(a) When all Transactions are Cash Transactions.
(b) Wlien all Transactions are not Cash Transactions.
(a) When all Transactions are Cash Transactions: It assumes that where all the expenses and
losses, incomes and gains are paid or received in cash during the particular period. The Net Profit or Net
Loss shown by the profit and loss account is taken as the amount of cash from operations. Thus, Net Profit
or Net Loss is equal to cash from operations. When Net Profit made by a firm represents Cash Inflow or
Cash Profit From Operations. Similarly, the Net Loss shown by the profit and loss account refers to Cash
Outflow From Operations.
(b) When all Transactions are not Cash Transactions: In actual practice, in business transactions
are made either on cash basis or credit basis. For example, goods purchased or sold on cash as well as on
credit. Certain expenses are always outstanding and some of the incomes are not immediately realized

213

Cash Flow Statement

under such circumsta!lces, the net profit made by a firm cannot generate equivalent amount of cash.
Therefore, the charging of non-fund or non-cash items such as outstanding expenses, incomes received in
advances, prepaid expenses and outstanding incomes etc. to profit and loss account should be readjusted.
In such circumstances the actual cash from operations can be calculated by preparing adjusted profit and
loss account.

Calculation of Cash from Operations

Cash From Operations can be calculated by either of the following methods:
(A) Cash From Operations calculated with the help of Adjusted Profit and Loss Account. Under
this method, all non-fund or non-operations items should be readjusted to cash profit from
operations. The specimen form of cash from operations is given below :

Cash from Operations

(Adjusted Profit and Loss Account)
Particulars

Rs.

Particulars

To Depreciation on Fixed Assets

To Transfer to General Reserve
To Loss on Sale of Fixed Assets
To Increase in Outstanding Expenses
To Decrease in Prepaid Expenses
To Preliminary Expenses written off
To Balance cld
(Closing Balance of P & L Nc)

Rs.

By Balance bId
(Opening Balance of P & L Nc)
By Profit on Sale of Fixed Assets
By Profit on Sale of Investments
By Decrease in Outstanding Expenses
By Increase in Prepaid Expenses
By Cash From Operations
(Balancing figure)

(B) Cash From Operations can also be calculated on the basis of current assets and current
liabilities. Under this method, the amount of changes in the various items of current assets and
current liabilities other than cash and bank balances should be adjusted with the help of
Adjusted Profit and Loss Account. It may be noted that, as compared to above this method may
increase or decrease in items of creditors, stocks, debtors, bills receivable and bills payable are
not adjusted while calculating cash profit from operations and they may be directly taken as
Sources (inflow) of Cash or Application (outflow) of Cash. This method is generally adopted in
practice.
While applying this method, the following general principles may be taken for measuring cash from
operations :
Increase in Current Assets
Decrease in Current Assets
Increase in Current Liability
Decrease in Current Liability

---

Decrease in Cash
Increase in Cash
Increase in Cash
Decrease in Cash

A Textbook of Financial Cost and Management Accounting

214

Specimen Form
The specimen form for computation of cash from operations is given below:

Calculation of Cash from Operations :

(Combining Current Assets & Current Liabilities & Non-Cash & Non-Operating Items)
Rs.

Particulars
Net Profit
(Closing Balance of Profit & Loss Alc)
Add:
Depreciation on Fixed Assets
Transfer to General Reserve
Loss on Sale of Fixed Assets
Loss on Sale of Investments
Goodwill Written off
Increase in Outstanding Expenses
Decrease in Prepaid Expenses
Decrease in Current Assets
(Other than Cash and Bank)
Increase in Current Liabilities
Preliminary Expenses Written off

Less:

Rs.

***
***

***
***

Profit on Sale of Fixed Assets

Profit on Sale of Investments
Decrease in Outstanding Expenses
Increase in Prepaid Expenses
Increase in Current Assets
(Other than Cash and Bank)
Increase in Current Liabilities
Opening Balance of Profit & Loss Alc

.. *

***
***

Cash From Operations

Illustration: 1
From the following Balance Sheet of ABC Ltd., you are required to calculate Cash From Operations:
Particulars
Capital and Liabilities :
Share Capital
Profit made during the year
Provision for Depreciation
Long-Term Loans
Trade Creditors
Outstanding Expenses
Assets :
Plant and Machinery
Stocks
Trade Debtors
Cash Balances

2002
Rs.

2003
Rs.

20,000
14,100
1,000
2,000
6,450
850
44,400

20,000
17,300
1,400
3,000
5,300
150
47,150

28,500
9,800
3,950
2,150
44,400

30,000
11,300
2,850
3,000
47,150

215

Cash Flow Statement

Solution:
Calculation of Cash from Operations
Particulars

2002
Rs.

Profit made during the year

(Closing Balance of P & L Nc)
Add:
Provision for Depreciation
Decrease in Debtors

2003
R's.
17,300

400
1,100

1,500
18,800

Less:
Decrease in Creditors
Decrease in Outstanding Expenses
Increase in Stock
Net Profit (Opening Balance of P & L Nc)

1,150
700
1,500
14,100

17,450
1,350

Cash From Operations

Illustration: 2
From the following balance you are required to calculate cash from operations
Particulars
Trade Debtors
Bills Receivable
Trade Creditors
Bills Payable
Outstanding Expenses
Prepaid Expenses
Accrued Income
Income Received in Advance
Profit made during the year

2002

2003

Rs.

Rs.

1,00,000
20,000
40,000
16,000
2,000
1,600
1,200
600

94,000
25,000
50,000
12,000
2,400
1,400
1,500
500
2,60,000

Rs.

Rs.

Solution:
Calculation of Cash from Operations
Particulars
Net Profit (Closing Balance)

2,60,000

Add:
Decrease in Debtors
Increase in Creditors
Increase in Outstanding Expenses
Decrease in Prepaid Expenses

6,000
10,000
400
200

16,600
2,76,600

Less :
Increase in Bills Receivable
Decrease in Bills Payable
Increase in Accrued Income
Decrease in Income Received in Advance
Cash From Operations

5,000
4,000
300
100

9,400
2,67,200

A Textbook of Financial Cost and Management Accounting

216

Illustration: 3
From the following infonnation given by RR Ltd., you are required to prepare Cash From
Operations:
Particulars
Bills Payable
Trade Creditors
Outstanding Expenses
Bilis Receivable
Trade Debtors
Prepaid Expenses
Accrued Incomes
Incomes Received in Advance

2002

2003

Rs.

Rs.

10,000
24,000
4,000
40,000
80,000
4,000
10,000
4,000

16,000
32,000
2,000
36,000
1,20,000
6,000
16,000

2,000

AdditionallnConnation
RR Ltd., earned profit of Rs. 4,00,000 after charging or crediting the following items to its profit and loss
account d!lring the year 2003:
(1)

Profit on Sale of Investments Rs. 8,000

(2)

Loss on Sale of Building Rs. 18,000

(3)

Depreciation on Fixed Assets Rs. 14,000

(4)

Good Will Written off Rs. 4,000

Solution:
Calculation of Cash from Operations
Particulars
Net Profit during the year
Add:
Loss on Sale of Building
Depreciation on Fixed Assets
Good will Written off
Increase in Bills Payable
Increase in Trade Creditors
Decrease in Bills Receivable

Rs.

Rs.
4,00,000

18,000
14,000
4,000
6,000
8,000
4,000

54,000
4,54,000

Less :
Profit on Sale of Investments
Decrease in Outstanding Expenses
Decrease in Income Received in Advance
Increase in Trade Debtors
Increase in Prepaid Expenses
Increase in Accrued Income
Cash From Operations

8,000
2,000
2,000
40,000
2,000
6,000

60,000
3,94,000

Cash Flow Statement

217

II. EXTERNAL SOURCES AND APPLICATIONS OF CASH

External Sources of Cash
The following are the external sources of cash such as:
(1) Fresh Issue of Shares: Cash is received by issue of fresh shares to the public, after deducting
necessary expenses and discount on issue of shares will be treated as sources of cash.
(2) Issue of Debentures: The Net Cash is received by the issue of debentures is source of cash.
(3) Raising Long-Term Borrowings: Long-tenn loans received from banks and financial institutions
refer to inflow of cash.
(4) Sale of Fixed Assets and Investments: Net cash received from the sale of pennanent assets and
investments are treated as sources of cash.
Applications of Cash
Applications of cash or cash outflows or uses of cash may take any of the following fonns:
(1) Redemption of Shares and Debentures: When redeemable preference shares and debentures are
redeemed by paid in cash. It refers to as application or outflow of cash.
(2) Purchase of Fixed Assets: Cash used for purchase of plant and machinery, land and building,
furniture and fixtures etc., or renewals and replacement of fixed assets are to be treated as outflow of cash.
(3) Payment of Long-Term Loans: The repayment or discharge of long-tenn loans received from
banks and financial institutions results in outflow of cash.
Specimen From of Cash Flow of Statement
Cash Flow Statement is prepared in anyone of the following two ways :
(1)

Account Fonn.

(2)

Report Fonn.

(1) Account Form:

Cash Flow Statement
Sources or Inflow of Cash

Rs.

Applications or Outflow of Cash

Rs.

Cash Lost in Operations

Redemption of Preference Shares
Redemption of Debentures
Repayment of Long-Term Loans
Purchase of Fixed Assets
Purchase of Investments
Tax Paid
Dividend Paid
Closing Balance:
Cash
Bank

Opening Balances :
Cash
Bank
Fresh Issue of Shares
Issue of Debentures
Raising Long-Term Loans
Sale of Fixed Assets
Sale of Investments
Dividends Received
Cash From Operations

***

***

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A Textbook of Financial Cost and Management Accounting

(2) Report Form:

Cash Flow Statement
Rs.

Particulars
Opening Balances :
Cash
Bank
Add: Sources of Cash :
Fresh Issue of Shares
Issue of Debentures
Long-Term Loans from Bank and Financial Institutions
Sale of Fixed Assets
Sale of Investments
Dividends Received
Cash From Operations

Rs.

'" * *

Total Inflow of Cash (A)

Less : Applications of Cash :
Redemption of Preference Shares
Redemption of Debentures
Repayment of Long-Term Loans
Purchase of Fixed Assets
Payment of Dividends
Payment of Tax
Cash Lost of in Operations

**
*
**

Total Outflow of Cash (B)

Closing' Balance of Cash and Bank

Illustration: 4
From the following Balance sheets of ABC Ltd., you are required to prepare a Cash Row Statement:

Balance Sheet
Liabilities
Share Capital
Profit & Loss Nc
General Reserve
Debenture
Trade Creditors
Outstanding Expenses

2002

2003

Rs.

Rs.

20,000
10,000
6,000
10,000
6,000
2,000

30,000
16,000
8,000
12,000
8,000
3,000

54,000

77,000

Assets
Fixed Assets
GoodWill
Stock
Trade Debtors
Bills Receivable
Bank Balance

2002

2003

Rs.

Rs.

20,000
10,000
10,000
10,000
2,000
2,000

30,000
8,000
16,000
16,000
4,000
3,000

54,000

77,000

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Cash Flow Statement

Solution:
Calculation of Cash from Operations
Particulars

Rs.

Net Profit during the year

(Closing Balance of Profit & Loss Ale)
Add:
General Reserve (6000 - 8000)
Good Will Written off (10,000 - 8000)
Increase in Outstanding Expenses
Increase in Trade Creditors

Rs.
16,000

2,000
2,000
1,000
2,000

7,000
23,000

Less:
Increase in Stock (10000 - 16000)
Increase in Debtors (10000 - 16000)
Increase in Bills Receivable
Opening Balance of P & L Alc

6,000
6,000
2,000
10,000

Cash Lost in Operations

24,000
1,000

Cash Flow Statement

Sources of Cash

Rs.

Opening Balances :
Cash at Bank
Add:
Issue of Shares
Issue of Debenture

2,000
10,000
2,000

Applications of Cash
Purchase of Fixed Assets
Cash lost in Operations
Closing Balance:
Cash at Bank

Rs.
10,000
1.000
3,000
14,000

14,000

Illustration: 5
From the following informations, Prepare Cash From Operations and Cash Flow Statement:
Particulars

Rs.

Rs.

5,000
15,000
17,500
40,000
20,000
17,500

3,500
25,000
12,500
27,500
25,000
30,000

1,15,000

1,23,500

62,500
20,000
12,500
20,000

76,500
25,000

1,15,000

1,23,500

Assets :
Cash Balances
Trade Debtors
Stock
Machinery
Land
Building

Capital and Liabilities :

Capital
Long-Term Loans
Mortgage Loans
Trade Creditors

22,000

A Textbook of Financial Cost and Management Accounting

220

Additional Information
(1)

During the year a machine costing Rs. 5,000 (accumulated depreciation Rs. 1,500) was sold for Rs. 2,500.

(2)

The provision for depreciation against machinery during the year 2002 was Rs. 12,500 and
Rs. 20,000 in 2003.
-

(3)

Net Profit earned during the year 2003 was Rs. 22,500.

Solution:
Cash Flow Statement
Sources of Cash

Rs.

Opening Balances :
Cash at Bank
Add:
Long-Term Loans
Sale of Machinery
Cash From Operations

5,000
5,000
2,500
29,500

Applications of Cash

Purchase of Land
Purchase of Building
Mortgage Loan repaid
Drawings
Closing Balances:
Cash at Bank

42,000

Rs.

5,000
12,500
12,500
8,500
3,500

42,000

Working Note:
(1)

Calculation of Cash from Operations

Particulars

Rs.

Rs.

22,500

Net Profit during the year

Add:
Depreciation on Machinery
Loss on Sale of Machinery
Decrease in Stock
Increase in Creditors

9,000
1,000
5,000
2,000

17,000
39,500

Less:

10,000

Decrease in Creditors
Cash From Operations

(2)

10,000
29,500

Machinery Account
Particulars

To Balance bId

Rs.

Particulars

Rs.

52,500

By Bank
By Loss on Sale of Machinery
By Provision for Depreciation
By Balance c/d
(40,000 + 5000 + 2500)

2,500
1,000
1,500

52,500

47,500
52,500

Cash Flow Statement

221

(3)

Provision for Depreciation

Rs.

Particulars

1,500
20,000

To Machinery Nc
To Balance cld

Particulars

Rs.

By Balance bId
By P & L Nc
(Depreciation Charged Balancing Figure)

12,500

9,000

21,500

(4)

21,500

Capital Account
Rs.

Particulars
Opening Balance of Capital
Add: Profit

62,500
22,500

Less : Closing Balance of Capital

85.000
76,500

Drawings

8,500

Illustration: 6
The summarized balance sheet of William & Co. Ltd., you are required to prepare a Cash Flow
Statement.
Balance Sheet
Liabilities
Share Capital
General Reserve
Profit & Loss Nc
Creditors
Provision for Tax
Mortgage Loan

2002

2003

Rs.

Rs.

90,000

90,000
62,000
13,600
26,800
2,000
54,000

60,000
11,200
33,600
15,000

2,09,800

Assets
Fixed Assets
Investments
Stock
Debtors
Bank

2,48,400

2002

2003

Rs.

Rs.

80,000
10,000
48,000
42,000
29,800

64,000
12,000
42,000
91,000
39,400

2,09,800

2,48,400

Additional Information
(1)

Investments costing Rs. 1.600 were sold during the year 2003 for Rs. 1,700.

(2)

Provision for tax made during the year was Rs. 1,800.

(3)

During the year part of the fixed assets costing Rs. 2,000 was sold for Rs. 2,400 and the profit was
included in profit and loss account.

(4)

Dividend paid during the year amounted to Rs. 800.

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A Textbook of Financial Cost and Management Accounting

Solution:
Calculation of Cash from Operations
Particulars

Rs.

Net Profit during the year

(13600 - 11200)
Add:
Transfer to General Reserve
Provision for Tax
Dividend
Depreciation
Decrease in Stock

Rs.
2,400

2,000
1,800
8,000
14,000
6,000

31,800
34,200

Less:
Profit on Sale of Investments
Profit on Sale of Fixed Assets
Increase in Debtors
Decrease in Creditors

100
400
49,000
6,800

Fund Lost in Operations

56,300
22.100

Solution:
Cash Flow Statement
Sources of Cash
Opening Balances :
Cash at Bank
Add:
Sale of Investments
Sale of Fixed Assets
Mortgage Loan

Rs.
29,800
1,700
2,400
54,000

Applications of Cash
Cash Lost in Operations
Payment of Tax
Payment of Dividend
Purchase of Investment
Closing Balances:
Cash at Bank

87,900

Rs.
22,100
14,800
8,000
3,600
39,400
87,900

Working Notes:
Provision for Tax Account
To Bank (Balancing Figure)
To Balance c/d
(Closing Balance)

14,800
2,000

By Balance bId
(Opening Balance)
By P & L Nc
(Provision for 2003)

16,800

15,000
1,800
16,800

Investment Account
To Balance bId
To Bank
(Purchased of Investments
- Balancing Figure)

10,000
3,600

13,600

By Cash Nc
(Sold during the year)
By Balance cld

1,600
12,000
13,600

223

Cash Flow Statement

Illustration: 7
From the following information, prepare
(a) Cash From Operations

(b) Cash Flow Statement

(c) Statement of Changes in Working Capital and

(d) Fund Flow Statement

Balance Sheet
Particulars

Assets :
Furniture and Fittings
Motor Vans
Long-Tenn Investments
Stock
Trade Debtors
Cash at Bank
Preliminary Expenses
Capital and Liabilities :
Equity Share Capital
Preference Share Capital
Profit & Loss Account
Debentures
Bank Loan
Bills Payable
Trade Creditors
Outstanding Expenses
Provision for Taxation

2002
Rs.

2003
Rs.

1,17,000
1,54,000
3,00,000
8,29,000
90,000
1,43,000
10,000

1,30,000
80,000
2,60,000
8,00,000
1,09,000
1,40,000
15,000

16,43,000

15,34,000

9,00,000
1,10,000
2,50,000
75,000
45,000
1,50,000
18,000
95,000

6,00,000
2,00,000
75,000
3,00,000
1,00,000
40,000
1,15,000
19,000
85,000

16,43,000

15,34,000

Solutron:
Cash Flow Statement
Sources of Cash

Opening Balances;
Cash at Bank
Add:
Cash From Operations
Depreciation on Furniture
Preliminary ExpenseS}
written off
Issue of Share Capital
Decrease in Debtors
Increase in Bills Payable
Increase in Trade Creditors
Increase in Provision Tax

Rs.

1,40,000
35,000
13,000
5,000
3,00,000
19,000
5,000
35,000
10,000
5,62,000

Applications of Cash

Redemption of Preference Shares

Redemption of Debenture
Repayment of Bank Loan
Purchase of Motor Vans
Purchase of Long-Tenn }
Investments
Increase in Stock
Decrease in Outstanding Expenses
Closing Balances :
Cash at Bank

Rs.

2,00,000
50,000
25,000
74,000
40,000
29,000
1,000
1,43,000

5,62,000

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A TeXlbook of Financial Cosl and Managemenl Accounling

Cash Flow Statement

Sources of Cash

Applications of Cash

Rs.

Fund From Operations

Issue of Equity Shares
Decrease in Working }
Capital

53,000
3,00,000
36,000

Rs.

Redemption of preference shares

Redemption of Shares
Repayment of Bank Loan
Purchase of Motor Vans
Purchase of Long-Term}
Investments

3,89,000
Note:

2,00,000
50,000
25,000
74,000
40,000
3,89,000

While preparing Cash Flow Statement. increase or decrease in the various items of current assets and current liabilities are
taken as Sources of Cash or Applications of Cash. Here they are not adjusted while computing Cash from Operations.

Calculation of Cash from Operations

(Adjusted Profit and Loss Account)
Paniculars

Particulars

Rs.

To Depreciation on Furniture }
& Fixtures
To Preliminary Expenses }
Written off
To Closing Balance of }
Profit and Loss Nc

Rs.

By Opening Balance
}
of Profit & Loss Nc
By Cash From Operations}
(Balancing figure)

13,000
5,000

75,000
53,000

1,10,000
1,28,000

1,28,000

Statement of Changes in Working Capital

Paniculars
Current Assets :
Cash at Bank
Trade Debtors
Stock

2002

2003

Rs.

Rs.

1,40,000
1,09,000
8,00,000

1,43,000
90,000
8,29,000

Changes in Working Capital

Increase
Decrease
3,000

29,000

10,49,000

10,62,000

Current Liabilities :
Bills Payable
Trade Creditors
Outstanding Expenses
Provision for Taxation

40,000
1,15,000
19.000
85,000

45,000
1,50,000
18,000
95,000

Total Current Liabilities (8)

2,59,000

3,08,000

Working Capital (Total A - B)

Net Decrease in Working Capital

7,90,000

7,54,000
36,000

36,000

7,90,000

69,000

Total Current Assets (A)

7,90,000

1,000

19,000

5,000
35,000

10,000

69,000

225

Cash Flow Statement

Illustration: 8 .

From the following Balance sheet of Brard Well & Co. Ltd., make out the statement of Cash Flow:
Particulars

Assets :
Good Will
Land & Buildings
Machinery
Trade Debtors
Stock
Bills Receivable
Cash in Hand
Cash at Bank
Capital & Liabilities :
Equity Share Capital
Preference Share Capital
General Reserve
Profit and Loss Alc
Proposed Dividend
Trade Creditors
Bills Payable
Provision for Taxations

2002

2003

Rs.

Rs.

5,750
10,000
4,000
8,000
3,850
1,000
750
500
33,850

4,500
R,500
10,000
10,000
5,450
1,500
500
400
40,850

15,000
7,500
2,000
1,500
2,100
2,750
1,000
2,000
33,850

20,000
5,000
3,500
2,400
2,500
4,150
800
2,500
40,850

Additional Information
(1)

Depreciation on Machinery of Rs. 500 during the year 2003.

(2)

Depreciation on Land and Building of Rs. 1,000 during the year 2003.

(3)

An interim dividend of Rs. 1,000 was paid during the year 2003.

(4)

Income Tax Rs. 1,750 was paid during the year 2003.

Solution:
Cash Flow Statement
Sources of Cash

Opening Balances :
Cash in Hand
Cash at Bank
Add:
Cash From Operations
Issue of Equity Shares
Sale of Buildings

Rs.

750
500
8,000
5,000
500
14,750

Applications of Cash

Rs.

Redemption of Preference Shares

Machinery Purchased
Interim Dividend Paid
Proposed Dividend of 2002 paid
Tax Paid
Closing Balances :
Cash in Hand
Cash at Bank

2,500
6,500
1,000
2,100
1,750
500
400
14,750

226

A Textbook of Financial Cost and Management Accounting

Calculation of Cash from Operations

Rs.

Particulars

Rs.

900

Net Profit during the year (Rs. 2,400 - Rs. 1,500)

Add:
Depreciation on Machinery
Depreciation on Land & Buildings
Transfer to General Reserve
Interim Dividend
Proposed Dividend
Provision for Tax
Good Will Written off
Increase in Creditors

500
1,000
1,500
1,000
2,500
2,250
1,250
1,400

ll,4oo
12,300

Less:
Increase in Debtors
Decrease in Bills Payable
Increase in Stock
Increase in Bills Receivable

2,000
200
1,600
500

4,300
8,000

Cash From Operations

Note: Provision for Tax and Dividend are treated as Non-current items.

Provision for Taxation Account

To Bank (Tax Paid)
To Balance cld
}
(Closing Balance)

1,750
2,500

}
By Balance bid
(Opening Balance)
By Profit & Loss Alc

4,250

2,000
2,250
4,250

Machinery Account
To Balance bid
To Bank (Purchases) }
(Balancing Figure)

4,000
6,500

By Depreciation
By Balance cld
}
(Provision for 2003)

500
10,000
10,500

10,500

Land and Buildings Account

To Balance bid
}
(Opening Balance)

10,000

10,000
Note:

By Depreciation
}
By Bank (Sale)
(Balancing Figure)
By Balance cld
}
(Closing Balance)

1,000
500
8,500
10,000

Balancing figure in Land and Buildings is treated as sale of building because closing balance of depreciation on Land and
Buildings already given in the problem (Rs. 10,000 - Rs. 8,500 =Rs. 1.5(0).

227

Cash Flow Statement

QUESTIONS

1.
2.
3.
4.
5.
6.

What is meant by Cash Flow Statement?

Explain briefly the uses of Cash Flow Statement.
What are the differences between Cash Flow Statement and Fund Flow Statement?
What are the limitations of Cash Flow Statement?
Explain the procedure for preparing a Cash Flow Statement.
What are the components of Sources and Applications of Cash?

PARTICULAR PROBLEMS
(1)
From the following Balance sheet of Gupta & Co. Ltd., as on 31st Dec. 2002 and 2003, you are required to prepare
Cash Flow Statement:

Particulars

Capital and Liabnities :

Equity Share Capital
General Reserve
Profit and Loss Account
Debenture
Bills Payable
Outstanding Salary
Depreciation Fund
Assets :
Cash Balances
Trade Debtors
Bills Receivable
Stock
Prepaid Expenses
Land & Building
Machinery

2002

2003

Rs.

Rs.

2,30,000
60,000
16,000
90,000
1,03,000
13,000
40,000

2,30,000
60,000
23,000
70,000
96,000
12,000
44,000

5,52,000

5,35,000

90,000
67,000

90,000
43,000
74,000
1,06,000
2,000
1,50,000
70,000

l,lO,OOO
82,000
1,000
1,50,000
52,000
5,52,000

5,35,000

Additional InCormation
Now machinery for Rs. 30.000 was purchased but old machinery costing Rs. 6,000 was sold for Rs. 4,000;
accumulated depreciation was Rs. 6,000.
(2) Rs. 20,000 8% Debenture were redeemed by purchase from open market @ Rs. 96 for a debenture of Rs. 100.
(3) Rs. 36,000 investments were sold at book value.
(4) 10% dividend was paid in cash.

(I)

[Aos : Cash From Operations Rs. 54,200; Cash Flow Statement Rs. 2,08,200]
(2) The summarized Balance sheet of X Y Ltd. as on 31st December 2002 & 2003 you are required to prepare (a) Cash
From Operations and (b) Cash Flow Statements.
Particulars

Assets :
Plant and Machinery
Land and Buildings
Furniture and Fixtures
Investments
Stock
Bills Receivable
Trade Debtors
Bank Balances

2002

2003

Rs.

Rs.

1,00,000
2,00,000
1,00,000
50,000
2,00,000
1,40,000

1,00,000
1,50,000
1,30,000
60,000
2,00,000

l,lO,OOO
1,49,000

2,95,000
1,97,000

10,49,000

12,42,000

l,lO,OOO

228

A Textbook of Financial Cost and Management Accounting

Particulars
Capital and Liabilities :
Equity Share Capital
Preference Share Capital
General Reserve
Profit and Loss Nc
Bills Payable
Trade Creditors
Tax Provisions
Long-Term Loans

2002

2003

Rs.

Rs.

2,00,000
2,50,000
3,00,000
56,000
1,20,000
48,000
75,000

2,00,000
4,50,000
3,10,000
68,000
1,10,000
24,000
10,000
70,000

10,49,000

12,42,000

Additional Information
(1) Tax Provision made during the year was Rs. 9,000.
(2) Investment costing Rs. 8,000 was sold for Rs. 8,500.
(3) A part of the land and building costing Rs. 10,000 was sold for Rs. 12,000 and the profit was included in profit and
loss Nc.
[Ans : Cash lost in operations Rs. 1,50,500; Cash flow statements Rs. 4,39,500].
(3)
Statement:

The financial position of RX Ltd. as on 31st December 2002 and 2003, you are required to prepare the Cash Flow

Particulars
Assets :
Cash in Hand
Cast at Bank
Trade Debtors
Bills Receivable
Stock
Land
Buildings
Machinery
Capital and Liabilities :
Trade Creditors
Bills Receivable
Long-Term Loans
Short-Term Loans
Capital and Reserves

2002

2003

Rs.

Rs.

1,000
3,000
35,000
15,000
10,000
20,000
50,000
80,000

1,500
2,100
38,400
13,000
9,000
30,000
55,000
86,000

2,14,000

2,35,000

28,000
8,000
30,000
1,48,000

30,000
11,000
20,000
25,000
1,49,000

2,14,000

2,35,000

Addltlonallnlonnatlon
(1) Dividend of Rs. 26,000 was paid during the year.
(2) The provision for depreciation against machinery of Rs. 27,000 was made during the year 2002 and Rs. 36,000
was during the year 2003.
[Ans : (a) Cash From Operations Rs. 36,000; (b) Cash Flow Statement Rs. 68,000; (Total Figure).]
(4)
Statement:

The following are the summarized Balance sheet of PH & Co. Ltd .. you are required to prepare the Cash Flow

Particulars
Assets :
Land and Buildings
Machinery
Stock

2002

2003

Rs.

Rs.

1,00,000
75,000
50,000

95,000
84,500
37,000

Cash Flow Statement

Sundry Debtors
Cash Balances
Bank Balances
Good will

229
40,000
250

Capital & Liabilities :

Share Capital
General Reserve
Profit and Loss Alc
Long-Tenn Loan
Trade Creditors
Provision for Taxation

32,100
300
4,000
2,500 .

2,65,250

2,55,400

1,00,000
25,000
15,250
35,000
75,000
15,000

1,25,000
30,000
15,300

2,65,250

2,55,400

67,500
17,500

Additional Information
During the year ended 31st December 2003 :
(1) Dividend of Rs. 11,500 was paid.
(2) Assets of another company are purchased for a consideration of Rs. 25,000 payable in shares.
(3) Purchase of Stock Rs. 10,000.
(4) Purchase of Machinery Rs. 12,500 on shares.
(5) Machinery was further purchased for Rs. 4,000 for cash.
(6) Depreciation written off of machinery Rs. 6,000.
(7) Income tax-provided during the year Rs. 16,500.
(8) Loss 011 sale of machinery Rs. 100 was written off to General Reserve.
[Ans : Cash From Operations Rs. 44,150; Cash Flow Statement Rs.68,8(0).
(5)

From the following Balance Sheet of Ram & Co. Ltd., you are required to prepare Cash Flow Statement:
Paniculars

Assets :
Goodwill
Land & Buildings
Stock
Trade Debtors
Bank Balances
Capital and Liabilities :
Share Capital
Debentures
Trade Creditors
Profit and Loss Alc
Provision for Doubtful Debts
Bank Overdraft

2002
Rs.

2003

20,000
40,000
98,400
29,800
18,000

10,000
81,200
85,400
35,400

2,06,200

2,12,000

1,40,000
24,000
20,720
20,080
1,400

1,48,000
12,000
23,680
21,120
1,600
5,600

2,06,200

Additional Information
(1)- During the year a building costing of Rs. 41,200 was purchased.
(2) Goodwill written off Rs. 10,000.
(3) Dividend of Rs. 7,000 has been paid during the year 2003.
(4) Debenture loan of Rs. 1,200 was repaid during the year 2003.
(5) An overdraft of Rs. 5,600 availed during the year 2003.
[Ans : Cash From Operations Rs. 18,240; Cash Flow Statement Rs. 65,8(0).

Rs.

2,12,000

23()

A Textbook of Financial Cost and Management Accounting

(6)
Statement:

The Balance Sheet of Nair & Co. Ud., as on 31st Dec. 2002 and 2003, you are required to prepare a Cash Flow
Balanee Sheet
Liabilities

Share Capital
Profit & Loss Alc
Accumulated
Depreciation
Debenture
Trade Debtors

2002

2003

Rs.

Rs.

2002

Assets

2003

Rs.

2,00,000
1,40,500

3,20,000
1,70,600

1,20,000
1,00,000
56,000

80,000
%,000

6,16,500

6.66,600

Fixed Assets
Stock
Trade Debtors
Prepaid. Expenses
Bank Balances

Rs.

3,04,000
1,86,800
61,600
7,900
56,200

4,00,000
1,78,400
42,200
6,000
40,000

6,16,500

6,66,600

Additional Information
(1) Profit earned during the year was Rs. 54,100.
(2) Depreciation charge Rs. 20,000.
(3) Cash dividend declared during the year Rs. 24,000.
(4) An addition to the building was made during the year at cost of Rs. 1,56,000 and fully depreciated equipment
costing Rs. 60,000 was discarded as no salvage being realized.
[Aos: (1) Cash From Operations Rs. 82,000; (2) Closing Balance of Cash Rs. 40,000]
(7)
From the following Balance sheet of Ratha & Co. Ltd., as on 31st December 2003, you are required to prepare a Cash
Row Statement.
Balance sheet
Particulars
Assets :
Land and Buildings
Plant and Machinery
Stock
Trade Debtors
Bills Receivable
Cash Balances
Capital and Liabilities :
Share Capital
Bank Overdraft
Bills Payable
Sundry Creditors
Outstanding Wages

2002

2003

Rs.

Rs.

3,20,000
1,80,000
60,000
1,20,000
20,000
40,000

3,82,000
2,76,000
80,000
1,60,000
28,000
60,000

7,40,000

9,86,000

4,00,000
2,40,000
28,000
68,000
4,000

5,60,000
3,20,000
32,000
68,000
6,000

7,40,000

9,86,000

Additional Information
(1) Profit earned during the year was Rs.l,6O,OOO.
(2) A machine costing Rs.4O,OOO included in the plant and machinery was sold at Rs.30,OOO.
(3) The depreciation so charged on it up to the date of sale was Rs. 6,000.
(4) Accumulated Balance of depreciation on Plant and Machinery during the year 2002 was
Rs. 60,000 and Rs. 80,000 was in 2003.

231

Cash Flow Statement

(8) From the following Balance sheet as at 31" December 2002 and 31" December 2003, you are required to prepare a Cash
Flow Statement:
Balance Sheet

Liabilities
Share Capital
Profit & Loss Alc
General Reserve
12% Bonds
Sundry Creditors
Outstanding Expenses

2002

2003

Rs.

Rs.

Assets

2002

2003

Rs.

1,00,000
50,000
30,000
50,000
30,000
10,000

1,50,000
80,000
40,000
60,000
40,000
15,000

2,70,000

3,85,000

Fixed Assets
Goodwill
Inventories
Debtors
Bills Receivable
Bank Balance

Rs.

1,00,000
50,000
50,000
50,000
10,000
10,000

1,50,000
40,000
80,000
80,000
20,000
15,000

2,70,000

3,85,000

[Ans : Cash from Operations Rs. 5,000; Total Cash Flow Statements Rs. 60,000]
(9)

From the following Balance sheet of Gupta & Co. Ltd., you are required to prepare a Cash Flow Statement:
Balance Sheet

Liabilities
Equity Share Capital
Preference Share Capital
Bills Payable
Sundry Creditors
Profit and Loss Alc

2002

2003

Rs.

Rs.

2,00,000
2,00,000
40,000
1,00,000
20,000

2,50,000
2,50,000
50,000
40,000
46,000

5,60,000

6,36,000

Assets
Cash in Hand
Cash at Bank
Sundry Debtors
Bills Receivable
Inventories
Land Buildings
Plant & Machinery

2002

2003

Rs.

Rs.

30,000
30,000
2,00,000
40,000
1,60,000
50,000
50,000

50,000
44,000
1,90,000
40,000
1,80,000
60,000
72,000

5,60,000

6,36,000

2002

2003

[Ans : Cash From Operations Rs. 34,000; Total of Cash Flow Statements Rs. 16,000]
(10)

Prepare Cash Flow Statement of Rajan & Co. Ltd. from the following information :
Balance Sheet

Liabilities
Share Capital
8% Debentures
Retained Earnings
Sundry Creditors
Bills Payable
Provision for Tax

2002

2003

Rs.

Rs.

1,00,000

60,000
40,000
20,000
30,000

4,00,000
2,00,000
90,000
1,00,000
40,000
40,000

2,50,000

8,70,000

Assets

Rs.
Goodwill
Machinery
Stock
Sundry Debtors
Cash at Bank
Cash in hand

Rs.

1,25,000
20,000
30,000
50,000
25,000

20,000
4,75,000
80,000
1,00,000
1,50,000
45,000

2,50,000

8,10,000

Additional Information
(1) Depreciation charge on Machinery was Rs. 30,000
(2) . The debenture were issued at a premium of 5% which is included in the retained earnings
(3) Provision for tax charged in 2003 was Rs. 35,000
(4) During 2003, the business ofa firm was purchased by issuing shares for Rs. 2,00,000. The assets 'acquired from the
firm were ; Goodwill Rs. 20,000 ; Machinery Rs. 1,00,000; Stock Rs. 50,000 and Debtors Rs. 30,000
[Ans : Cash From Operations Rs. 1,15,000 ; Total of Cash Flow Statements Rs. 5,00,000]

232

A Textbook of Financial Cost and Management Accounting

(11)
From the following Balance sheet of Patil & Co. Ltd. on 31" December 2002 and 2003, yO!! are required to prepare a
Cash Flow Statements :
Balance Sheet
Liabilities
Equity Share
(Rs. 100 each)
Redeemable Preference
Shares (Rs. 100 each
Rs. 50 Paid)
Share Premium
Capital Redemption
Reserve
General Reserve
Profit & Loss Nc
Current Liabilities

2002

2003

Rs.

Rs.

2002

2003

Rs.

Rs.

15,00,000
6,00,000
15,00,000
2,00,000

18,00,000
3,00,000
10,00,000
5,00,000

38,00,000

36,00,000

Assets

10,00,000

15,00,000

5,00,000

25,000

10,00,000
2,75,000
10,00,000

5,00,000
7,00,000
3,00,000
6,00,000

38,00,000

36,00,000

Plant & Machinery

(at Cost)
Inventory
Sundry Debtors
Cash at Bank

Additional Information
(1) During the year the company paid Rs. 2,00,000 as equity dividend and Rs. 56,250 as preference dividend
(2) The company redeemed the preference shares at a premium of 5% after making a call of Rs. 50 per share to make
the shares fully paid
(3) During the year one plant, the book value of which was Rs. 1,00,000, was sold at Rs. 25,000 and the company
purchased plant for Rs. 6,00,000
[Ans: Cash From Operation Rs. 7,56,250; Total of Cash Flow Statement Rs. 27,81,000]
(12)

Mohan & Co. Ltd. gives you the following balance sheet as at 31" December 2002 and 2003
Balance Sheet
Liabilities

Equity Share Capital

8% Redeemable
Preference Shares
Capital Redemption reserve
Share Premium
Profit and ~ss Nc
General Reserve
Taxation Reserve
Proposed Dividend
Sundry Creditors
Provision for Depreciation

2002

2003

Rs.

Rs.

50,000

60,000

20,000

Assets

2002
Rs.

5,000
14,000
10,000
7,000
5,000
14,000
18,000

10,000
5,000
27,000
13,000
9,000
6,000
18,000
23,000

1,43,000

1,71,000

Fixed Assets
Investments
Preliminary Expenses
Stock
Sundry Debtors
Cash balances

2003
Rs.

85,000
10,000
4,000
20,000
18,000
6,000

1,04,000
8,000
3,000
28,000
17,000
11,000

1,43,000

1,71,000

Additional Information
(1) During 2003 the proposed dividend was paid in addition to the preference dividend up to 3()1h June, 2003 on which
date the preference shares were reduced at a per cent of 5. The premium had been provided out of share premium
account.
(2) Tax liability in respect of 2002 carne to Rs. 5,500, the balance in the Taxation reserve as on 31" December 2002
was transferred to general reserve.
(3) During the year a fixed costing Rs. 3,000 (depreciation provided for Rs. 1,600) was sold for
Rs.l,OOO.
(4) Investment costing Rs. 2,000 we~ realized for Rs. 1,600. these matters havebeen adjusted in the profit and loss
account. Prepare a statement showing the source and application of cash during 2003.
[Aos: Cash from operations Rs. 48,700; Total of cash flow statement Rs. 73,300]

000