Cash Flow Statement

Meaning of Cash Flow Statement

▪ A Cash Flow Statement is a statement depicting change in
cash position from one period to another. The term ‘Cash’
here stands for cash and bank balances.
▪ The cash flow statement explains the reason for inflow or
outflow of cash, as the case may be and also helps
management in making plans for the immediate future.
▪ A proper planning of cash resources will enable the
management to have cash available whenever needed and
put it to some productive use in case there is surplus
available.

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 Preparation of Cash Flow Statement
Prepared on the same pattern as the Funds Flow Statement.
The change in cash position is computed by taking into
account the ‘sources’ and ‘applications’ of cash.
Sources Of Cash
Internal Sources
Cash from Operations is the main internal source. The Net
profit from the P & L account will be adjusted for the
following non-cash items to arrive at the cash from
operations:
i. Depreciation : Does not result in cash outflow, hence
added back to net profit.
ii. Amortization of intangible assets: Goodwill, preliminary
expenses etc. when written off, have to be added back
to the net profit.
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 Preparation of Cash Flow Statement ( Contd)
iii. Loss on sale of fixed assets :Added back to the net profit
iv. Gain on sale of fixed assets : Deducted from net profit.
v. Creation of reserves: If profit for the year has been
arrived at after charging transfers to reserves, the same
should be added back to the net profit.
Computation of cash from operations can be studied using
two different situations:
i. When all transactions are cash transactions: In this case
Cash from operations = Net Profit
ii. When all transactions are not cash transactions: In this
case, cash from operations is calculated in two stages:
a) Computation of funds from operations as explained
earlier.
b) Adjustment of funds so calculated for changes in current
assets ( excluding cash ) & current liabilities.
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 Preparation of Cash Flow Statement ( Contd )
Adjustments for changes in Current Assets & Current Liabilities
i. Effect of credit sales : Cash from operations can be
calculated as per the following equation if there are
debtors outstanding at the end as in the beginning of the
accounting year :
Cash from Operations = Net Profit + Decrease in Debtors
or - Increase in Debtors
ii. Effect of credit purchases :
Cash from operations = Net Profit + Increase in Creditors
or - Decrease in Creditors.
iii. Effect of opening and closing stocks: The amount of
opening stock is charged to the debit side of the P& L
account. It thus reduces net profit without reducing cash
from operations. Similarly, closing stock which appears
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 Preparation of Cash Flow Statement ( Contd )
On the credit side of the P& L Account increases net profit
without increasing cash from operations. The following
adjustment is made :
Cash from Operations = Net Profit + Decrease in Stock
or - Increase in Stock
iv. Effect of Outstanding expenses, income received in
advance etc. : Net profit is calculated after charging all
expenses, whether paid or outstanding and income
received in advance is not considered. Hence an increase
in outstanding expenses and income received in advance
will increase the cash from operations and vice versa. The
following adjustment is made:

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 Preparation of Cash Flow Statement ( Contd )
Cash from operations =
Net Profit + increase in Outstanding Expenses
+ Increase in income received in advance
- Decrease in Outstanding Expenses
- Decrease in income received in advance
v. Effect of Prepaid Expenses and outstanding Income : The
effect on cash from operations is exactly opposite to the
effect of outstanding expenses and income received in
advance . The following adjustment is made :
Cash from Operations =
Net Profit + Decrease in Prepaid expenses / Accrued Income
- Increase in Prepaid expenses/ Accrued Income.

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 Preparation of Cash Flow Statement ( Contd )
The above adjustments may be summarized as :
▪ Increase in Current Asset / Decrease in Current Liability
results in Decrease in Cash
▪ Decrease in Current Asset/ Increase in Current Liability
results in Increase in Cash.
External Sources of Cash :
i. Issue of New Shares
ii. Raising of long term loans
iii. Purchase of Plant & Machinery on deferred payment : This
should be shown as a separate source of cash to the extent
of the deferred credit. However, the cost of machinery
purchased will be shown as an application of cash.
iv. Short term borrowings – cash credit from banks
v. Sale of fixed Assets , Investments etc.
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 Preparation of Cash Flow Statement ( Contd )
Applications of Cash:
i. Purchase of Fixed Assets
ii. Payment of Long-term loans
iii. Decrease in deferred payment liabilities
iv. Loss on account of operations
v. Payment of tax
vi. Payment of Dividend
vii. Decrease in Unsecured loans , deposits etc.

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 Format of Cash Flow Statement
Cash Flow Statement

Particulars Amount
Profit made during the year xxxx
Add: Depreciation on Fixed Assets xxxx
Add: Loss on sale of Fixed Assets xxxx
Less: Profit on sale of Fixed Assets xxxx
Funds from Operations xxxx
Add: Decrease in Current Assets xxxx
Add: Increase in Current Liabilities xxxx
Less: Increase in Current Assets xxxx
Less: Decrease in Current Liabilities xxxx
1:Cash From Operations xxxx

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 Cash Flow From Investing Activities :
Sale (Purchase ) of Fixed Assets xxxx
2:Net Cash from Investing Activities xxxx

Cash Flow from Financing Activities :

(Payment of Dividend) xxxx
Issue (Redemption) of Debentures xxxx
Issue (buyback) of equity shares xxxx
Loan from bank xxxx
(repayment) of loan xxxx
3:Net Cash Flow from Financing Actvities xxxx

Net Increase (Decrease)in Cash:1+2+3 xxxx

Add: Opening Balance of Cash xxxx
Closing Balance of Cash xxxx
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 Cash Flow Vs. Funds Flow Analysis
▪ Cash flow analysis is concerned with the change in cash
position, while funds flow analysis is concerned with
change in working capital between two balance sheet
dates.
▪ Cash flow statement is merely a record of cash receipts
and disbursements. While studying short term solvency of
a business, one is interested not only in cash balance but
also assets which can be easily converted to cash.
▪ Cash flow analysis is more useful as a tool for financial
analysis in short periods as compared to funds flow
analysis.
▪ Cash is part of working capital , hence inflow of cash
results in inflow of funds but reverse is not true.

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 Utility of Cash Flow Analysis
▪ Helps in efficient Cash Management : The management can
know how much cash is needed, from which source it will
be obtained, how much can be generated internally and
how much could be obtained from outside.
▪ Helps in Internal Financial Management: Provides
information about funds which will be available from
operations. This helps the management in determining
policies regarding internal financial management e.g
dividend policy, possibility of repayment of long term debts.
▪ Discloses the movements of cash
▪ Discloses the success / failure of cash planning : This is
determined by comparing projected with actual cash flow
statement.

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 Limitations of Cash Flow Analysis
▪ Cash flow statement cannot be equated with the income
statement. Income statement takes into account both cash
and non- cash items and hence, net cash does not
necessarily mean the net income of the business.
▪ The cash balance as per the cash flow statement may not
represent the real liquid position of the business since it can
be easily influenced by postponing purchases and other
payments.
▪ Cash flow statement can not replace income statement or
funds flow statement. Each of them has a separate function
to perform.

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 Summary
In this chapter you have studied :
▪ The meaning of Cash Flow Statement
▪ Sources and Applications of cash
▪ Differentiation between Cash Flow and Funds Flow Analysis
▪ Utility and Limitations of Cash Flow Analysis
▪ Preparation of Cash Flow Statement.

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Q1.Balance Sheet of A&B as on 31 December,1992 and 31 December,1993
were as follows:

Balance Sheet
Liabilities 31.12.1992 31.12.1993 Assets 31.12.1992 31.12.1993
Creditors 40000 44000 Cash 10000 7000
A,s Loan 25000 0 Debtors 30000 50000
Loan from Bank 40000 50000 Stock 35000 25000
Capital 125000 153000 Machinery 80000 55000
Land 40000 50000
Building 35000 60000
230000 247000 230000 247000

During the year a machine costing Rs.10000(accumulated depreciation

Rs.3000) was sold for Rs.5000. The provisions for depreciation against
Machinery as on 31 December,1992 was Rs. 25000 and as on 31
December,1993 was Rs. 40000. Net profit for the year 1993 amounts to Rs.
45000. You are required to prepare Cash Flow Statement.
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 Privision for Depreciation a/c
Date Particulars Amount Date Particulars Amount
31.12.1993 To M/C Disposal a/c 3000 1.12.1993 By bal b/d 25000
31.12.1993 To bal c/d 40000 31.12.1993 By Depreciation 18000
43000 43000

Machine A/c
Date Particulars Amount Date Particulars Amount
1.01.1993 To bal b/d 105000 31.12.1993 By m/c disposal a/c 10000
31.12.1993 By bal c/d 95000
105000 105000

Machine Disposal A/c

Date Particulars Amount Date Particulars Amount
31.12.1993 To Machine a/c 10000 31.12.1993 By cash 5000
31.12.1993 By prov. For Dep. a/c 3000
31.12.1993 By loss on sale 2000
10000 10000

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 Cash Flow Statement

Particulars Amount
Profit made during the year 45000
Add: Depreciation on Machinery 18000
Add: Loss on sale of Machinery 2000
Funds from Operations 65000
Add: Decrease in Stock 10000
Add: Increase in Creditors 4000
Less: Increase in Debtors 20000
1:Cash From Operations 59000

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 Cash Flow From Investing Activities :
Sale of Machinery 5000
Purchase of Land -10000
Purchase of Building -25000
2:Net Cash from Investing Activities -30000

Cash Flow from Financing Activities :

Loan from bank 10000
A's loan repaid -25000
Drawings -17000
3:Net Cash Flow from Financing Actvities -32000

Net Increase (Decrease)in Cash:1+2+3 -3000

Add: Opening Balance of Cash 10000
Closing Balance of Cash 7000

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 Q2.The following are the summarised Balance Sheet of a company as on
December 1992 and 1993:

Balance Sheet
Liabilities 31.12.1992 31.12.1993 Assets 31.12.1992 31.12.1993
share capital 200000 250000 Cash 500 8600
General Reserves 50000 60000 Debtors 80000 64200
P&L 30500 30600 Stock 100000 74000
Bank Loan 70000 0 Machinery 150000 169000
Creditors 150000 135200 Land & Building 200000 190000
Provision for Taxation 30000 35000 Goodwill 0 5000
530500 510800 530500 510800

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Additional Information:
During the year ended 31 December,1993:

1. Dividend of Rs. 23000 was paid.

2. Assets of another company were purchased for a consideration of Rs. 50000
payable in shares.
The following Assets were purchased: Stock Rs. 20000: Machinery Rs. 25000
3. Machinery was further purchased for Rs. 8000.
4. Depreciation written off on Machinery Rs. 12000.
5. Income tax provided during the year Rs. 33000.

You are required to prepare Cash Flow statement.

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 Cash Flow Statement

Particulars Amount
Profit made during the year 100
Add: Depreciation on Building 10000
Dividend paid 23000
Provision for Taxation 33000
Transfer to General Reserves 10000
Depreciation on Machinery 12000
Funds from Operations 88100

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 Cash Flow Statement

Particulars Amount
Funds from Operations 88100
Add: Decrease in Stock 46000
Decrease in Debtors 15800
Less: Decrease in Creditors -14800
Tax Paid -28000
1:Cash From Operations 107100

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 Cash Flow From Investing Activities :
Sale of Machinery 2000
Purchase of Machinery -8000
2:Net Cash from Investing Activities -6000

Cash Flow from Financing Activities :

Payment of Dividend -23000
Mortgage loan repaid -70000
3:Net Cash Flow from Financing Actvities -93000

Net Increase (Decrease)in Cash:1+2+3 8100

Add: Opening Balance of Cash 500
Closing Balance of Cash 8600

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 Machine A/c
Date Particulars Amount Date Particulars Amount
1.01.1993 To bal b/d 150000 31.12.1993 By Depreciation 12000
1.01.1993 To share Capital 25000 31.12.1993 By Bank 2000
1.01.1993 To Bank 8000 31.12.1993 By balance c/d 169000
183000 183000

Provision for Taxation a/c

Particulars Amount Particulars Amount
To cash 28000 By balance b/d 30000
To Balance c/d 35000 By P&L a/c 33000

63000 63000

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 Q3.Wearwell ltd. Supplies you the following Balance sheets as on 31
December:
Balance Sheet
Liabilities 31.12.1994 31.12.1995 Assets 31.12.1994 31.12.1995
share capital 70000 74000 Cash 9000 7800
Bonds 12000 6000 Debtors 14900 17700
Accounts payables 10360 11840 Stock 49200 42700
Prov. For doubtful debts 700 800 Land 20000 30000
Reserves & Surplus 10040 10560 Goodwill 10000 5000

103100 103200 103100 103200

Following additional information has also been supplied to you:

1) Dividends amounting to Rs. 3500 were paid during the year .
2) Land was purchased for Rs. 10000.
3) Rs. 5000 were written off on Goodwill during the year.
4) Bonds of Rs. 6000 were redeemed during the year.
You are required to prepare the Cash flow statement.

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 Q4.Tiny Tots ltd. Furnish you the following Balance sheet s for the years
ending on 31 December,1994 and 1995. You are required to prepare a Cash
flow statement for the year.
Balance Sheet
Liabilities 31.12.1992 31.12.1993 Assets 31.12.1992 31.12.1993
Share capital 10000 10000 Cash 660 1520
General Reserves 1400 1800 Debtors 2000 2220
P&L 1600 1300 Stock 3000 2340
Outstanding expenses 120 80 Investments 1000 1100
Creditors 800 540 Land 4000 3600
prov. For Doudtful debts 40 60 Building 3700 3600
Provision for Taxation 1600 1800 Goodwill 1200 1200
15560 15580 15560 15580

Additional Information:
1) A piece of land has been sold for Rs. 400
2) Depreciation amounting to Rs. 700 has been charged on building.
3) Provision for taxation has been made for Rs. 1900 during the year.

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