Chap 2

2
Financial Statements of Companies
Unit 1: Preparation of Financial Statements of Companies
Question 1
A company lodged a claim to insurance company for ` 5,00,000 in September, 2006. The
claim was settled in February, 2007 for ` 3,50,000. How will you record the short fall in claim
settlement in the books of the company. (2 Marks, November, 2007) (PCC)
Answer
Journal Entry
` `
Profit and Loss A/c Dr. 1,50,000
To Insurance Claim A/c 1,50,000
[Being the shortfall in settlement of insurance claim charged to
Profit and Loss A/c]
Question 2
The Articles of Association of S Ltd. provide the following:
(i) That 20% of the net profit of each year shall be transferred to reserve fund.
(ii) That an amount equal to 10% of equity dividend shall be set aside for staff bonus.
That the balance available for distribution shall be applied:
(a) in paying 14% on cumulative preference shares.
(b) in paying 20% dividend on equity shares.
one-third of the balance available as additional dividend on preference shares and 2/3 as
additional equity dividend.
A further condition was imposed by the articles viz. that the balance carried forward shall be
equal to 12% on preference shares after making provisions (i), (ii) and (iii) mentioned above.
The company has issued 13,000, 14% cumulative participating preference shares of ` 100
each fully paid and 70,000 equity shares of ` 10 each fully paid up.
© The Institute of Chartered Accountants of India

Financial Statements of Companies 2.2
The profit for the year 2008 was ` 10,00,000 and balance brought from previous year
` 80,000. Provide ` 31,200 for depreciation and ` 80,000 for taxation before making other
appropriations. Prepare Profit and Loss Account –below the line.
(8 Marks, November, 2008) (PCC)
Answer
Statement of Profit and Loss∗ for the year ended 2008
Particulars `
a Profit 10,00,000
b Expenses:
Depreciation and amortization expense (31,200)
Total expenses (31,200)
c Profit before tax (a-b) 9,68,800
d Provision for tax (80,000)
e Profit (Loss) for the period 8,88,800
Balance of Profit and Loss account brought forward 80,000
f Total 9,68,800
g Appropriations (made in Notes to Accounts)
Transfers to Reserves (1,77,760)
Proposed preference dividend (1,82,000 + 93,450) (2,75,450)
Proposed equity dividend (1,40,000 + 1,86,900) (3,26,900)
Bonus to employees (14,000 + 18,690) (32,690)
Total (8,12,800)
h Balance carried to Balance sheet (f-g) 1,56,000
Working Note:
Balance of amount available for Preference and Equity shareholders and Bonus `
for Employees
Credit Side 9,68,800
Less: Dr. side [1,77,760 + 1,82,000+1,40,000+14,000 + 1,56,000] (6,69,760)
2,99,040
Suppose remaining balance will be = x
1 1
Suppose preference shareholders will get share from remaining balance = x × = x
3 3
∗
As per revised Schedule VI (now Schedule III to the Companies Act, 2013), Statement of Profit and Loss is
to be prepared upto profit for the current year only. Any appropriation to current year’s profit alongwith the
brought forward profit is to be shown in the ‘Notes to Financial Statements for Reserves and Surplus’.

2.3 Accounting
2 2
Equity shareholders will get share from remaining balance = x × = x
3 3
2 10 2
Bonus to Employees = x × = x
3 100 30
2 1 2
Now, x+ x+ x = 2,99,040
3 3 30
32 x = 89,71,200
x = 89,71,200/32 = ` 2,80,350
1
Share of preference shareholders - ` 2,80,350 × = ` 93,450
3
2
Share of equity shareholders - ` 2,80,350 × = ` 1,86,900
3
2
Bonus to employees - ` 2,80,350 × = ` 18,690
30
Question 3
The Managing Director of A Ltd. is entitled to 5% of the annual net profits, as his remuneration,
subject to a minimum of `25,000 per month. The net profits, for this purpose, are to be taken
without charging income-tax and his remuneration itself. During the year, A Ltd. made net profit
of ` 43,00,000 before charging MD’s remuneration, but after charging provision for taxation of
` 17,20,000. Compute remuneration payable to the Managing Director.
(2Marks, June, 2009) (PCC)
Answer
Calculation of remuneration of the Managing Director ` in Lacs
Net profit as per books 43.00
Add: Provision for taxation 17.20
Annual profit for the purpose of managerial remuneration 60.20
Managing Director’s Remuneration @ 5% of above 3.01

Minimum remuneration to be paid to the Managing Director
= ` 25,000 per month × 12 3.00
Hence, in this case, remuneration to be paid to the Managing Director of A Ltd.
= ` 3,01,000.in the year.

Question 4
(i) What are the basic characteristics of a Private Ltd. Company?
(ii) Sumo Ltd. has a profit of ` 25 lakhs before charging depreciation for financial year
2008-09. Depreciation in the books was ` 11 lakhs and depreciation chargeable under
Section 205* comes to ` 17 lakhs. Compute divisible profit for the year.
(iii) The Companies Act, 1956∗ limits the payment of managerial remuneration. What is the
maximum managerial remuneration, which can be paid in case of a company consistently
earning profits and has more than one managerial person?
(2 Marks each, November, 2009) (IPCC)
Answer
(i) According to Section 2 (68) of the Companies Act 2013, a private company means a
company which has a minimum paid-up capital of one lakh rupees or such higher paid-
up capital as may be prescribed, and which by its articles:
(a) Restricts the rights of members to transfer its shares.
(b) Except in the case of a one man company, limits the number of its member to 200
excluding: (i) persons who are in employment of the company; and (ii) persons who,
having been formerly in the employment of the company, were members of the
company while in that employment and have continued to be members after the
employment ceased. For the purpose of determining the number of members joint
holders of shares will be counted as single members.
(c) Prohibits any invitation to the public to subscribe to any securities of, the company.
(ii)
Computation of divisible profit (` in lakhs)
Profit for the year 2008-09. 25.00
Less: Depreciation chargeable under Section 205 of the (17.00)
Companies Act, 1956 (Refer note)
Divisible profit for the year 8.00
Note: Under section 123 (2) of the Companies Act 2013, depreciation has to be provided
in accordance with schedule II.
(iii) Under section 197(1) of the Companies Act 2013, the managerial remuneration payable
by a public company, to its directors, including managing director or whole time director
and its manager in respect of any financial year shall not exceed eleven percent of the
net profits of that company for that financial year computed in accordance with the
∗
The question requires the applicability of provisions of Companies Act, 1956 which is no more relevant.
Therefore, the answer has been given in line with Companies Act, 2013.

2.5 Accounting
provisions of section 198 of the Companies Act 2013 provided that the remuneration of
the directors shall not be deducted from the gross profits.
Provided that the company may in a general meeting may, with the approval of the
Central Govt., authorize the payment of managerial remuneration exceeding eleven
percent of the net profits subject to the provisions of schedule V of the Act.
Provided further that, except with the approval of the company in a general meeting:
(a) the remuneration payable to one managing director or a whole time director or a
manager shall not exceed 5% of its net profits, and if there is more than one such
director the maximum remuneration payable to all such directors and manager
taken together cannot exceed 10% of its net profits
(b) the remuneration payable to directors who are neither the managing director or
whole time director shall not exceed 1% of the net profits if there is a managing
director or a whole time director and 3% of the net profits in any other case.
Note: Since the question does not specify the nature of the managerial person an
elaborate answer as above is required.
Question 5
A company provided ` 10,00,000 for dividend payment. Is the Corporate Dividend Tax
payable in this case? If yes, please compute Corporate Dividend Tax assuming rate of 15%
plus surcharge of 10% and disclose as it would appear in profit and loss account of the
company. (4 Marks, November, 2009) (IPCC)
Answer
Note: Though current surcharge rate on DDT is 12% the question is solved on the basis of the
information given in the question. However, education cess of 3% is applied though not given
in the question. Therefore, total DDT arrives of 16.995%.
Yes, Corporate Dividend Tax (CDT)∗ is payable by the company which has provided for the
payment of dividend. CDT is payable even if no income tax is payable. This is payable by a
domestic company on distribution of profits to its shareholders.
In the given case Corporate Dividend Tax would be worked out as under:
(i) Grossing up of dividend:
10,00,000 x 100/85 = 11,76,470
(ii) CDT = 11,76,470 x 16.995 = 1,99,941
The liability in respect of CDT arises only if the profits are distributed as dividends
whereas the normal income-tax liability arises on the earning of the taxable profits.
∗
Corporate Dividend Tax is also known as ‘Dividend Distribution Tax’.

Since the CDT liability relates to distribution of profits as dividends which are adjusted as
appropriation /allocation of profit in the ‘Notes to Accounts’ of ‘Reserves and Surplus’, it
is appropriate that the liability in respect of DDT should also be adjusted therein.
CDT liability should be presented separately in the ‘Notes to Accounts’ of ‘Reserves and
Surplus’, as follows:
Dividend xxxxx
Dividend Corporate tax thereon xxxxx xxxxx
Question 6
Calculate the maximum remuneration payable to the Managing Director based on effective
capital of a non-investment company for the year, from the information given below:
(` in ‘000)
(i) Profit for the year (calculated as per Section 349, 350 & 351 of 3,000
the Companies Act, 1956)
(ii) Paid up capital 18,000
(iii) Reserves & surplus 7,200
(iv) Securities premium 1,200
(v) Long term loans 6,000
(vi) Investment 3,600
(vii) Preliminary expenses not written off 3,000
(viii) Remuneration paid to the Managing Director during the year 600
(5 Marks, November, 2011) (IPCC)
Answer
Note: Under the Companies Act, 2013, the Profits for the purposes of determining managerial
remuneration are computed in accordance with Section 198. Further, there is no provision for
computation of managerial remuneration on the basis of effective capital except in the case of loss
or inadequacy of profits in a financial year, hence this question is irrelevant in the new context as
there is no inadequacy of profits. Please refer to Sec 197, 198 and Schedule V of the Companies
Act 2013.
Question 7
What are the maximum limits of managerial remuneration for companies having adequate
profits? (4 Marks, May 2012) (IPCC)
Answer
For companies having adequate profits, maximum limits of managerial remuneration in
different circumstances are as under:
(i) Overall (excluding fee for attending meetings) 11% of net profit

2.7 Accounting
(ii) If there is one managing director or whole time director or manager 5% of net profit
(iii) If there is more than one managing director, whole time director or manager 10% of net
profit
(iv) Remuneration of directors who are neither managing directors nor whole time directors:
(a) If there is no managing or whole-time director 3% of net profit
(b) If there is a managing or whole-time director 1% of net profit
However, the above limits can be exceeded by the company approval at general
meetings with the Central Govt. approval.
Question 8
On 31st March, 2013 Bose and Sen Ltd. provides to you the following ledger balances after
preparing its Profit and Loss Account for the year ended 31st March, 2013:
Credit Balances :
`
Equity shares capital, fully paid shares of ` 10 each 70,00,000
General Reserve 15,49,100
Loan from State Finance Corporation 10,50,000
(Secured by hypothecation of Plant & Machinery Repayable
within one year ` 2,00,000)
Loans: Unsecured (Long term) 8,47,000
Sundry Creditors for goods & expenses 14,00,000
(Payable within 6 months)
Profit & Loss Account 7,00,000
Provision for Taxation 3,25,500
Proposed Dividend 4,20,000
Provision for Dividend Distribution Tax 71,400
1,33,63,000
Debit Balances :
`
Calls in arrear 7,000
Land 14,00,000
Buildings 20,50,000
Plant and Machinery 36,75,000
Furniture & Fixture 3,50,000
Stocks : Finished goods 14,00,000
Raw Materials 3,50,000

Sundry Debtors 14,00,000

Advances: Short-term 2,98,900
Cash in hand 2,10,000
Balances with banks 17,29,000
Preliminary Expenses 93,100
Patents & Trade marks 4,00,000
1,33,63,000
The following additional information is also provided:
(i) 4,20,000 fully paid equity shares were allotted as consideration for land & buildings.
(ii) Cost of Building ` 28,00,000
Cost of Plant & Machinery ` 49,00,000
Cost of Furniture & Fixture ` 4,37,500
(iii) Sundry Debtors for ` 3,80,000 are due for more than 6 months.
(iv) The amount of Balances with Bank includes ` 18,000 with a bank which is not a
scheduled Bank and the deposits of ` 5 lakhs are for a period of 9 months.
(v) Unsecured loan includes ` 2,00,000 from a Bank and ` 1,00,000 from related parties.
You are not required to give previous year figures. You are required to prepare the Balance
Sheet of the Company as on 31st March, 2013 as required under Revised Schedule VI ∗ of
the Companies Act, 1956. (16 Marks, November 2013) (IPCC)
Answer
Bose and Sen Ltd.
Balance Sheet as on 31st March, 2013
Particulars Figures at the end of
current reporting
Notes period
`
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 69,93,000
b Reserves and Surplus 2 21,56,000
2 Non-current liabilities
a Long-term borrowings 3 16,97,000
∗
Now Schedule III to the Companies Act, 2013.

2.9 Accounting
3 Current liabilities
a Trade Payables 14,00,000
b Other current liabilities 4 2,00,000
c Short-term provisions 5 8,16,900
Total 1,32,62,900
Assets
1 Non-current assets
a Fixed assets
Tangible assets 6 74,75,000
Intangible assets ( Patents & Trade Marks) 4,00,000
2 Current assets
a Inventories 7 17,50,000
b Trade receivables 8 14,00,000
c Cash and cash equivalents 9 19,39,000
d Short-term loans and advances 2,98,900
Total 1,32,62,900
Notes to accounts
`
1 Share Capital
Equity share capital
Issued, subscribed and called up
7,00,000 Equity Shares of ` 10 each 70,00,000
(Out of the above 4,20,000 shares have been issued for
consideration other than cash)
Less: Calls in arrears (7,000) 69,93,000
Total 69,93,000
2 Reserves and Surplus
Surplus (Profit & Loss A/c) 7,00,000
Less: Preliminary expenses (93,100)∗ 6,06,900
Total 21,56,000
∗
Preliminary expenses have been written off in line with Accounting Standards.

3 Long-term borrowings
Secured
Term Loans
Loan from State Finance Corporation 8,50,000
(` 10,50,000 - ` 2,00,000)
(Secured by hypothecation of Plant and Machinery)
Unsecured
Bank Loan 2,00,000
Loan from related parties 1,00,000
Others 5,47,000 8,47,000
Total 16,97,000
4 Other current liabilities
Loan Instalment repayable within one year 2,00,000
5 Short-term provisions
Provision for taxation 3,25,500
Provision for Dividend Distribution Tax 71,400
Total 8,16,900
6 Tangible assets
Land 14,00,000
Buildings 28,00,000
Less: Depreciation (7,50,000) 20,50,000
Plant & Machinery 49,00,000
Furniture & Fittings 4,37,500
Less: Depreciation (87,500) 3,50,000
Total 74,75,000
7 Inventories
Raw Material 3,50,000
Finished goods 14,00,000
17,50,000
8 Trade receivables
Debts outstanding for a period exceeding six months 3,80,000

2.11 Accounting
Other Debts 10,20,000

Total 14,00,000
9 Cash and cash equivalents
Cash at bank with Scheduled Banks including Bank 17,11,000
deposits for period of 9 months amounting ` 5,00,000
with others 18,000 17,29,000
Total 19,39,000
Question 9
The Articles of Association of Samson Ltd. provide the following:
(i) That 25 % of the net profit of each year shall be transferred to reserve fund.
(ii) That an amount equal to 10% of equity dividend shall be set aside for staff bonus.
(iii) That the balance available for distribution shall be applied:
(1) in paying 15% on cumulative preference shares.
(2) in paying 20% dividend on equity shares.
(3) one-third of the balance available as additional dividend on preference shares and
two-third as additional equity dividend.
A further condition was imposed by the articles viz. that the balance carried forward shall be
equal to 14% on preference shares after making provision (i), (ii) and (iii) mentioned above.
The company has issued 12,000, 15% cumulative participating preference shares of ` 100
each fully paid and 75,000 equity shares of ` 10 each fully paid up.
The profit for the year 2013-2014, was ` 10,00,000 and balance brought from previous year
` 1,50,000. Provide ` 37,500 for depreciation and ` 1,20,000 for taxation before making other
appropriations.
Show net balance of Profit and Loss Account after making above adjustments.
(8 Marks, IPCC May, 2014)
Answer
Statement of Profit and Loss for the year ended 31st March, 2014
Particulars Amount `
a Profit 10,00,000
b Expenses: Depreciation and amortization (37,500)
Total expenses (37,500)

c Profit before tax (a-b) 9,62,500

d Provision for tax (1,20,000)
e Profit (Loss) for the period 8,42,500
Notes to Accounts
Profit (Loss) for the period 8,42,500
Balance of Profit and Loss account brought forward 1,50,000
Total 9,92,500
Appropriations (made in Notes to Accounts)

Transfers to Reserves (2,10,625)
Proposed preference dividend (1,80,000 + 84,023) (2,64,023)
Proposed equity dividend (1,50,000 + 1,68,047) (3,18,047)
Bonus to employees (15,000 + 16,805) (31,805)
Total 8,24,500
Balance carried to Balance sheet (9,92,500 – 8,24,500) 1,68,000
Working Note:
Balance of amount available for Preference and Equity shareholders and Bonus for
Employees
Credit Side 9,92,500
Less: Dr. side (2,10,625 + 1,80,000 + 1,50,000 + 15,000 + 1,68,000
(i.e.12,000x100x14/100= 1,68,000) (7,23,625)
2,68,875
Suppose remaining balance will be = x
1 1
Preference shareholders will get share from remaining balance = x × = x
3 3
2 2
Equity shareholders will get share from remaining balance = x × = x
3 3
2 10 2
Bonus to Employees = x× = x
3 100 30
2 1 2
Now, x+ x+ x = 2,68,875
3 3 30

2.13 Accounting
32 x = 80,66,250 , than x = 2,52,070

Share of Preference Shareholders ` 2,52,070 x 1/3 = `84,023
Share of Equity Shareholders ` 2,52,070 x 2/3= `1,68,047
Bonus to employees ` 2,52,070 x 2/30 = `16,805
Note: Corporate dividend tax on dividend distributed has been ignored.
Question 10
From the following particulars furnished by Elegant Ltd., prepare the Balance Sheet as on 31st
March 2014 as required by Part I, revised Schedule VI of the Companies Act.
Particulars Debit ` Credit `
Equity Share Capital (Face value of ` 100 each) 50,00,000
Call in Arrears 5,000
Land & Building 27,50,000
Furniture 2,50,000
Loan from State Financial Corporation 7,50,000
Stock:
Finished Goods 10,00,000 12,50,000
Provision for Taxation 3,40,000
Sundry Debtors 10,00,000
Advances 2,13,500
Profit & Loss Account 5,00,000
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Preliminary expenses 66,500
Unsecured Loan 6,05,000
Sundry Creditors (for Goods and Expenses) 10,00,000
The following additional information is also provided:
(i) Preliminary expenses included ` 25,000 Audit Fees and ` 3,500 for out of pocket
expenses paid to the Auditors.

(ii) 10000 Equity shares were issued for consideration other than cash.
(iii) Debtors of ` 2,60,000 are due for more than 6 months.
(iv) The cost of the Assets were:
Building ` 30,00,000, Plant & Machinery ` 35,00,000 and Furniture ` 3,12,500
(v) The balance of ` 7,50,000 in the Loan Account with State Finance Corporation is
inclusive of ` 37,500 for Interest Accrued but not Due. The loan is secured by
hypothecation of Plant & Machinery.
(vi) Balance at Bank includes ` 10,000 with Global Bank Ltd., which is not a Scheduled
Bank. (10 Marks, IPCC November, 2014)
Answer
Elegant Ltd.
Balance Sheet as on 31st March, 2014
Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 49,95,000
b Reserves and Surplus 2 14,83,500
2 Non-current liabilities
Long-term borrowings 3 13,17,500
3 Current liabilities
a Trade Payables 10,00,000
b Other current liabilities 4 37,500
c Short-term provisions 5 6,40,000
Total 94,73,500
Assets
1 Non-current assets
Fixed assets
Tangible assets 6 56,25,000
2 Current assets
a Inventories 7 12,50,000
b Trade receivables 8 10,00,000
c Cash and cash equivalents 9 13,85,000
d Short-term loans and advances 2,13,500
Total 94,73,500

2.15 Accounting
Notes to accounts
`
1 Share Capital
Equity share capital
Issued & subscribed & called up
50,000 Equity Shares of ` 100 each
(of the above 10,000 shares have been issued for
consideration other than cash) 50,00,000
Less: Calls in arrears (5,000) 49,95,000
Total 49,95,000
2 Reserves and Surplus
Surplus (Profit & Loss A/c) 5,00,000
Less: Preliminary expenses (66,500) 4,33,500
Total 14,83,500
3 Long-term borrowings
Secured Term Loan
State Financial Corporation Loan (7,50,000- 37,500)
(Secured by hypothecation of Plant and Machinery) 7,12,500
Unsecured Loan 6,05,000
Total 13,17,500
4 Other current liabilities
Interest accrued but not due on loans (SFC) 37,500
Total 37,500
5 Short-term provisions
Provision for taxation 3,40,000

Total 6,40,000
6 Tangible assets
Land and Building 30,00,000


Furniture & Fittings 3,12,500
Less: Depreciation (62,500) 2,50,000
Total 56,25,000
7 Inventories
Finished goods 10,00,000
Total 12,50,000
8 Trade receivables
Outstanding for a period exceeding six months 2,60,000
Other Amounts 7,40,000
Total 10,00,000
9 Cash and cash equivalents
Cash at bank
with Scheduled Banks 12,25,000
with others (Global Bank Ltd.) 10,000 12,35,000
Total 13,85,000
∗ As per AS 26, preliminary expenses are not shown in the balance sheet, thus they are written off. The
amount of ` 25,000 as audit fee and out of pocket expenses paid to auditors amounting ` 3,500 have
been included in the amount of ` 66,500. The combined figure of ` 66,500 has been reduced from
Profit and Loss Account balance in the given solution.

2.17 Accounting
Unit 2: Cash Flow Statements
Question 1
ABC Ltd. gives you the following informations. You are required to prepare Cash Flow
Statement by using indirect methods as per AS 3 for the year ended 31.03.2004:
Balance Sheet as on
Liabilities 31st March 31st March Assets 31st March 31st March
2003 2004 2003 2004
` ` ` `
Capital 50,00,000 50,00,000 Plant & Machinery 27,30,000 40,70,000
Retained Earnings 26,50,000 36,90,000 Less: Depreciation 6,10,000 7,90,000
Debentures ― 9,00,000 21,20,000 32,80,000
Current Liabilities Current Assets
Creditors 8,80,000 8,20,000 Debtors 23,90,000 28,30,000
Bank Loan 1,50,000 3,00,000 Less: Provision 1,50,000 1,90,000
Liability for expenses 3,30,000 2,70,000 22,40,000 26,40,000
Dividend payable 1,50,000 3,00,000 Cash 15,20,000 18,20,000
Marketable 11,80,000 15,00,000
securities
Inventories 20,10,000 19,20,000
Prepaid Expenses 90,000 1,20,000
91,60,000 1,12,80,000 91,60,000 1,12,80,000
Additional Information:
(i) Net profit for the year ended 31st March, 2004, after charging depreciation ` 1,80,000 is
` 22,40,000.
(ii) Debtors of ` 2,30,000 were determined to be worthless and were written off against the
provisions for doubtful debts account during the year.
(iii) ABC Ltd. declared dividend of ` 12,00,000 for the year 2003-2004.
(16 Marks, May 2004) (PE-II)
Answer
Cash flow Statement of ABC Ltd. for the year ended 31.3.2004
Cash flows from Operating activities ` `
Net Profit 22,40,000
Add :Adjustment for Depreciation (`7,90,000 – `6,10,000) 1,80,000

Operating profit before working capital changes 24,20,000

Add: Decrease in Inventories (`20,10,000 – `19,20,000) 90,000
Increase in provision for doubtful debts
(` 4,20,000 – `1,50,000) 2,70,000
27,80,000
Less: Increase in Current Assets:
Debtors (` 30,60,000 – `23,90,000) 6,70,000
Prepaid expenses (` 1,20,000 – `90,000) 30,000
Decrease in current liabilities:

Creditors (` 8,80,000 – ` 8,20,000) 60,000
Expenses outstanding
(` 3,30,000 – `2,70,000) 60,000 8,20,000
Net cash from operating activities 19,60,000
Cash flows from Investing activities
Purchase of Plant & Equipment
(` 40,70,000 – ` 27,30,000) 13,40,000
Net cash used in investing activities (13,40,000)
Cash flows from Financing Activities
Bank loan raised (` 3,00,000 – ` 1,50,000) 1,50,000
Issue of debentures 9,00,000
Payment of Dividend (` 12,00,000 – ` 1,50,000) (10,50,000)
Net cash used in financing activities NIL
Net increase in cash during the year 6,20,000
Add: Cash and cash equivalents as on 1.4.2003
(` 15,20,000 + `11,80,000) 27,00,000
Cash and cash equivalents as on 31.3.2004
(` 18,20,000 + `15,00,000) 33,20,000
Note: Bad debts amounting ` 2,30,000 were written off against provision for doubtful debts
account during the year. In the above solution, Bad debts have been added back in the
balances of provision for doubtful debts and debtors as on 31.3.2004. Alternatively, the
adjustment of writing off bad debts may be ignored and the solution can be given on the basis
of figures of debtors and provision for doubtful debts as appearing in the balance sheet on
31.3.2004.

2.19 Accounting
Question 2
The following figures have been extracted from the Books of X Limited for the year ended on
31.3.2004. You are required to prepare a cash flow statement.
(i) Net profit before taking into account income tax and income from law suits but after
taking into account the following items was ` 20 lakhs:
(a) Depreciation on Fixed Assets ` 5 lakhs.
(b) Discount on issue of Debentures written off ` 30,000.
(c) Interest on Debentures paid ` 3,50,000.
(d) Book value of investments ` 3 lakhs (Sale of Investments for ` 3,20,000).
(e) Interest received on investments ` 60,000.
(f) Compensation received ` 90,000 by the company in a suit filed.
(ii) Income tax paid during the year ` 10,50,000.
(iii) 15,000, 10% preference shares of ` 100 each were redeemed on 31.3.2004 at a
premium of 5%. Further the company issued 50,000 equity shares of ` 10 each at a
premium of 20% on 2.4.2003. Dividend on preference shares were paid at the time of
redemption.
(iv) Dividends paid for the year 2002-2003 ` 5 lakhs and interim dividend paid ` 3 lakhs for
the year 2003-2004.
(v) Land was purchased on 2.4.2003 for ` 2,40,000 for which the company issued 20,000
equity shares of ` 10 each at a premium of 20% to the land owner as consideration.
(vi) Current assets and current liabilities in the beginning and at the end of the years were as
detailed below:
As on 31.3.2003 As on 31.3.2004
` `
Stock 12,00,000 13,18,000
Sundry Debtors 2,08,000 2,13,100
Cash in hand 1,96,300 35,300
Bills receivable 50,000 40,000
Bills payable 45,000 40,000
Sundry Creditors 1,66,000 1,71,300
Outstanding expenses 75,000 81,800
(20 Marks, May 2005) (PE-II)

Answer
X Ltd.
Cash Flow Statement
for the year ended 31st March, 2004
` `
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 20,00,000
Adjustments for:
Depreciation on fixed assets 5,00,000
Discount on issue of debentures (Non cash charge to P/L) 30,000
Interest on debentures paid 3,50,000
Interest on investments received (60,000)
Profit on sale of investments (20,000) 8,00,000
Adjustments for:
Increase in stock (1,18,000)
Increase in sundry debtors (5,100)
Decrease in bills receivable 10,000
Decrease in bills payable (5,000)
Increase in sundry creditors 5,300
Increase in outstanding expenses 6,800 (1,06,000)
Cash generated from operations 26,94,000
Income tax paid (10,50,000)
16,44,000
Cash flow from extraordinary items:
Compensation received in a suit filed 90,000
Net cash flow from operating activities 17,34,000
Cash flow from Investing Activities
Sale proceeds of investments 3,20,000
Interest received on investments 60,000
Net cash flow from investing activities 3,80,000
Cash flow from Financing Activities
Proceeds by issue of equity shares at 20% premium 6,00,000
Redemption of 10% preference shares at 5% premium (15,75,000)

2.21 Accounting
Preference dividend paid (1,50,000)

Interest on debentures paid (3,50,000)
Dividend paid (5,00,000 + 3,00,000) (8,00,000)
Net cash used in financing activities (22,75,000)
Net decrease in cash and cash equivalents during the year (1,61,000)
Add: Cash and cash equivalents as on 31.3.2003 1,96,300
Cash and cash equivalents as on 31.3.2004 35,300
Note: Purchase of land in exchange of equity shares (issued at 20% premium) has not been
considered in the cash flow statement as it does not involve any cash transaction.
Question 3
(a) Raj Ltd. gives you the following information for the year ended 31st March, 2006:
(i) Sales for the year ` 48,00,000. The Company sold goods for cash only.
(ii) Cost of goods sold was 75% of sales.
(iii) Closing inventory was higher than opening inventory by ` 50,000.
(i) Trade creditors on 31.3.2006 exceed the outstanding on 31.3.2005 by ` 1,00,000.
(ii) Tax paid during the year amounts to ` 1,50,000.
(iii) Amounts paid to Trade creditors during the year ` 35,50,000.
(iv) Administrative and Selling expenses paid ` 3,60,000.
(v) One new machinery was acquired in December, 2005 for ` 6,00,000.
(vi) Dividend paid during the year ` 1,20,000.
(vii) Cash in hand and at Bank on 31.3.2006 ` 70,000.
(viii) Cash in hand and at Bank on 1.4.2005 ` 50,000.
Prepare Cash Flow Statement for the year ended 31.3.2006 as per the prescribed
Accounting standard.
(b) What all are the differences between Cash Flow statement and Fund Flow statement?
(12+4= 16 Marks, May 2006) (PE-II)
Answer
(a) Cash flow statement of Raj Limited
for the year ended 31.3.2006
Direct Method
` `
Cash flow from operating activities:
Cash receipt from customers (sales) 48,00,000

Cash paid to suppliers and expenses 39,10,000

(`35,50,000 + `3,60,000)
Cash flow from operation 8,90,000
Less: Tax paid 1,50,000
Cash flow from investing activities:
Purchase of fixed assets (6,00,000)
Cash flow from financing activities:
Dividend Paid (1,20,000)
Net cash from financing activities (1,20,000)
20,000
Add: Opening balance of Cash in Hand and at Bank 50,000
Cash in Hand and at Bank on 31.3.2006 70,000
(b) The fund flow statement is no more included in the syllabus therefore the question is not
relevant.
Question 4
The following are the summarized Balance Sheets of ‘X’ Ltd. as on March 31, 2005 and 2006:
Liabilities As on 31.3.2005 As on 31.3.2006
(`) (`)
Equity share capital 10,00,000 12,50,000
Capital Reserve --- 10,000
General Reserve 2,50,000 3,00,000
Profit and Loss A/c 1,50,000 1,80,000
Long-term loan from the Bank 5,00,000 4,00,000
Sundry Creditors 5,00,000 4,00,000
Provision for Taxation 50,000 60,000
Proposed Dividends 1,00,000 1,25,000
25,50,000 27,25,000
Assets Year 2005 Year 2006

(`) (`)
Land and Building 5,00,000 4,80,000
Machinery 7,50,000 9,20,000

2.23 Accounting
Investment 1,00,000 50,000

Stock 3,00,000 2,80,000
Sundry Debtors 4,00,000 4,20,000
Cash in Hand 2,00,000 1,65,000
Cash at Bank 3,00,000 4,10,000
25,50,000 27,25,000
Additional Information:
(i) Dividend of ` 1,00,000 was paid during the year ended March 31, 2006.
(ii) Machinery during the year purchased for ` 1,25,000.
(iii) Machinery of another company was purchased for a consideration of ` 1,00,000 payable
in equity shares.
(iv) Income-tax provided during the year ` 55,000.
(v) Company sold some investment at a profit of ` 10,000, which was credited to Capital
reserve.
(vi) There was no sale of machinery during the year.
(vii) Depreciation written off on Land and Building ` 20,000.
From the above particulars, prepare a cash flow statement for the year ended March, 2006 as
per AS 3 (Indirect method). (16 Marks, November 2006)(PE-II)
Answer
Cash Flow Statement for the year ending on March 31, 2006
` `
I. Cash flows from Operating Activities
Net profit made during the year (W.N.1) 2,60,000
Adjustment for depreciation on Machinery (W.N.2) 55,000
Adjustment for depreciation on Land & Building 20,000
Operating profit before change in Working Capital 3,35,000
Decrease in Stock 20,000
Increase in Sundry Debtors (20,000)
Decrease in Sundry Creditors (1,00,000)
Income-tax paid (45,000)
II. Cash flows from Investing Activities
Purchase on Machinery (1,25,000)

Sale of Investments 60,000 (65,000)

III. Cash flows from Financing Activities
Issue of equity shares (2,50,000-1,00,000) 1,50,000
Repayment of Long term loan (1,00,000)
Dividend paid (1,00,000) (50,000)
Net increase in cash and cash equivalent 75,000
Cash and cash equivalents at the beginning of the 5,00,000
period
Cash and cash equivalents at the end of the period 5,75,000
Working Notes:
Note: Amount received on issue of equity shares is net of the shares issued in consideration
of purchase of machinery for ` 1,00,000
(i) Net Profit made during the year ended 31.3.2006
Increase in P & L (Cr.) Balance 30,000
Add: Transfer to general reserve 50,000
Add: Provision for taxation made during the year 55,000
Add: Provided for proposed dividend during the year 1,25,000
2,60,000
Note: The increase in General Reserve balance is attributed to transfer from P/L A/c.
However, the increase in Capital Reserve is independent of the P/L A/c and hence is not
shown in the profit for the year.
(ii) Machinery Account
` `
To Balance b/d 7,50,000 By Depreciation (Bal. Fig.) 55,000
To Bank 1,25,000 By Balance c/d 9,20,000
To Equity share capital 1,00,000
9,75,000 9,75,000
(iii) Provision for Taxation Account
` `
To Cash (Bal. Fig.) 45,000 By Balance b/d 50,000
To Balance c/d 60,000 By P & L A/c 55,000
1,05,000 1,05,000

2.25 Accounting
(iv) Proposed Dividend Account

` `
To Bank 1,00,000 By Balance b/d 1,00,000
To Balance c/d 1,25,000 By P & L A/c (Bal. Fig.) 1,25,000
2,25,000 2,25,000
(v) Investment Account
` `
To Balance b/d 1,00,000 By Bank A/c 60,000
To Capital Reserve A/c (Profit (Balancing figure for
on sale of investment) 10,000 investment sold)
By Balance c/d 50,000
1,10,000 1,10,000
Question 5
What is meant by ‘Cash’ and ‘Cash equivalents’ as per AS 3? (4 Marks, May, 2007)(PCC)
Answer
As per AS 3 ‘Cash Flow Statements’, the term ‘Cash’ and ‘Cash equivalents’ mean the
following:
Cash: It includes cash on hand and demand deposits with banks.
Cash Equivalents: It means short-term, highly liquid investments that are readily convertible
into known amounts of cash and which are subject to insignificant risk of changes in value.
Cash equivalents are held for the purpose of meeting short-term cash commitments rather
than for investment or other similar purposes. For an investment to qualify as a cash
equivalent, it must be readily convertible into a determinatble amount of cash and is subject to
an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash
equivalent only when it has a short maturity of, say, three months or less from the date of
acquisition and is virtually risk free. A short term investment in a highly risky asset will not
qualify as Cash Equivalent.
Question 6
J Ltd. presents you the following information for the year ended 31st March, 2007:
(` in lacs)
(i) Net profit before tax provision 36,000
(ii) Dividend paid 10,202
(iii) Income-tax paid 5,100

(iv) Book value of assets sold 222

Loss on sale of asset 48
(v) Depreciation debited in P & L account 24,000
(vi) Capital grant received - amortized in P & L A/c 10
(vii) Book value of investment sold 33,318
Profit on sale of investment 120
(viii) Interest income from investment credited in P & L A/c 3,000
(ix) Interest expenditure debited in P & L A/c 12,000
(x) Interest actually paid (Financing activity) 13,042
(xi) Increase in working capital 67,290
[Excluding cash and bank balance]
(xii) Purchase of fixed assets 22,092
(xiii) Expenditure on construction work 41,688
(xiv) Grant received for capital projects 18
(xv) Long term borrowings from banks 55,866
(xvi) Provision for Income-tax debited in P & L A/c 6,000
Cash and bank balance on 1.4.2006 6,000
Cash and bank balance on 31.3.2007 8,000
You are required to prepare a cash flow statement as per AS-3 (Revised).
(16 Marks, November, 2007) (PCC)
Answer
Cash Flow Statement as per AS 3
Cash flows from operating activities: ` in lacs
Net profit before tax provision 36,000
Add: Non cash expenditures:
Depreciation 24,000
Loss on sale of assets 48
Interest expenditure (non operating activity) 12,000 36,048
72,048
Less: Non cash income
Amortisation of capital grant received (10)

2.27 Accounting
Profit on sale of investments (non operating income) (120)

Interest income from investments (non op income) (3,000) 3,130
Operating profit 68,918
Less: Increase in working capital (67,290)
Cash from operations 1,628
Less: Income tax paid (5,100)
Net cash generated from operating activities (3,472)
Cash flows from investing activities:
Sale of assets (222 – 48) 174
Sale of investments (33,318+120) 33,438
Interest income from investments 3,000
Purchase of fixed assets (22,092)
Expenditure on construction work (41,688)
Net cash used in investing activities (27,168)
Cash flows from financing activities:
Grants for capital projects 18
Long term borrowings 55,866
Interest paid (13,042)
Dividend paid (10,202)
Net cash from financing activities 32,640
Net increase in cash 2,000
Add: Cash and bank balance as on 1.4.2006 6,000
Cash and bank balance as on 31.3.2007 8,000
Question 7
From the following summarised Cash account of S Ltd., prepare cash flow statement for the
year ended 31st March, 2009 in accordance with AS 3 (revised) using direct method.
Summarised Cash Account
(` 000) (` 000)
Opening balance 50 Payment to suppliers 2,000
Issue of share capital 300 Purchase of fixed assets 200
Received from customers 2,800 Overhead expenses 200

Sale of fixed assets 100 Wages and salaries 100

Tax paid 250
Dividend paid 50
Bank loan 300
Closing balance 150
3,250 3,250
(8 Marks, June, 2009) (PCC)
Answer
Cash Flow Statement for the year ended 31.3.2009
` in ‘000
Cash flow from Operating Activities
Cash received from customers 2,800
Less: Cash paid to suppliers 2,000
Cash paid for overhead expenses 200
Cash paid for wages and salaries 100 2,300
500
Less: Income tax paid 250
Net cash generated from Operating Activities 250
Cash flow from Investing Activities
Sale of fixed assets 100
Less: Purchase of fixed assets 200
Net cash used in Investing Activities (100)
Cash flow from Financing Activities
Received from issue of share capital 300
Less: Repayment of bank loan 300
Payment of dividend 50 350
Net cash used in Financing Activities (50)
Net increase in cash and equivalents 100
Add: Cash and equivalents at the beginning of the year 50
Cash and equivalents at the end of the year 150
Question 8
Balance Sheet of Raman Ltd. is given below:
(` in ‘000)
Liabilities 31.3.08 31.3.09 Assets 31.3.08 31.3.09
Share capital 500 500 Land & building 300 300

2.29 Accounting
9% Debentures 200 160Machinery 164 180

Sundry creditors 230 216Stock-in-trade 200 228
Profit and Loss A/c 40 54Sundry debtors 170 162
Depreciation fund 80 88Cash and bank 120 110
balances
Contingency reserve 140 110 Current Investment 262 190
Outstanding expenses 30 48 Pre-paid expenses 4 6
1,220 1,176 1,220 1,176
The following information is furnished:
(i) One old machinery which has original cost of ` 30,000 was sold for ` 10,000. The
accumulated depreciation in respect of the said machinery amounts to ` 16,000.
(ii) One new machinery was acquired for ` 46,000.
(iii) 9% Debentures were redeemed at a discount of 4% of their face value.
(iv) Dividend at 12% was declared and paid in cash.
(v) Income-tax liability of ` 30,000 paid was debited to contingency reserve.
You are required to prepare Cash Flow Statement in accordance with the Accounting
Standard 3. (16 Marks, November, 2009) (PCC)
Answer
Cash Flow Statement of Raman Ltd.
` `
A. Cash flow from Operating Activities
Net profit before tax (` 54,000 – ` 40,000 + ` 60,000) 74,000
Add: Adjustment for depreciation (W.N.1) 24,000
Interest on debentures∗ (`1,60,000 x 9%) 14,400
Loss on sale of machinery (W.N.2) 4,000
1,16,400
Less: Profit on redemption of debentures (Non
Operating Income) (1,600)
1,14,800
Less :Income tax paid (30,000)
Operating profit before changes in Working Capital 84,800
Add: Increase in outstanding expenses 18,000
∗
It is assumed that debentures were redeemed at the beginning of the year. Hence, interest has been considered on the
bal debs only.

Decrease in sundry debtors 8,000

Decrease in current investment∗∗ 72,000 98,000
1,82,800
Less: Decrease in sundry creditors 14,000
Increase in stock in trade 28,000
Increase in prepaid expenses 2,000 (44,000)
B. Cash flow from Investing Activities
Sale of old machinery 10,000
Purchase of machinery (46,000)
C. Cash flow from Financing Activities
Redemption of debentures (` 40,000 – `1,600) (38,400)
Payment of dividend (60,000)
Payment of interest on debentures (14,400)
Net cash used financing activities (1,12,800)
Net decrease in cash and cash equivalents during the year (10,000)
Cash and cash equivalents at the beginning of the year 1,20,000
Cash and cash equivalents at the end of the year 1,10,000
Working Notes:
1. Depreciation Fund
` `
To Machinery A/c 16,000 By Balance b/d 80,000
To Balance c/d 88,000 By Profit and Loss A/c 24,000
(Current year depreciation)
1,04,000 1,04,000
2. Machinery A/c
` `
To Balance b/d 1,64,000 By Depreciation Fund 16,000
To Bank (Purchased) 46,000 By Bank (realized on sale of old
machinery 10,000
By Profit and loss A/c (loss on 4,000
∗∗
It is assumed that current investments cannot be liquidated within short duration of 3 months, therefore it has not been
considered as part of cash and cash equivalents.

2.31 Accounting
sale) – Balancing Fig

By Balance c/d 1,80,000
2,10,000 2,10,000
Question 9
The following particulars relate to Bee Ltd., for the year ended 31st March, 2010 :
(i) Furniture of book value of ` 15,500 was disposed off for ` 12,000.
(ii) Machinery costing ` 3,10,000 was purchased and ` 20,000 were spent on its erection.
(iii) Fully paid 8% preference shares of the face value of ` 10,00,000 were redeemed at a
premium of 3%. In this connection 60,000 equity shares of ` 10 each were issued at a
premium of ` 2 per share. The entire money being received with applications.
(iv) Dividend was paid as follows:
On 8% preference shares ` 40,000
On equity shares for the year 2009-10 ` 1,10,000
(v) Total sales were ` 32,00,000 out of which cash sales were ` 11,50,000.
(vi) Total purchases were ` 8,00,000 including cash purchase of ` 60,000.
(vii) Total expenses were ` 12,40,000 charged to Profit and Loss A/c.
(viii) Taxes paid including dividend distribution tax of ` 22,500 were ` 3,30,000.
(ix) Cash and cash equivalents as on 31st March, 2010 were ` 1,25,000.
You are requested to prepare Cash Flow Statement as per AS 3 for the year ended
31st March, 2010 after taking into consideration the following also:
On 31st March, 2009 (`) On 31st March, 2010 (`)
Sundry debtors 1,50,000 1,47,000
Sundry creditors 78,000 83,000
Unpaid expenses 63,000 55,000
(8 Marks, May, 2010) (IPCC)
Answer
Cash Flow Statement for the year ended 31st March, 2010
` `
I. Cash flow from operating activities
Cash receipts from customers (W.N.1) 32,03,000
Cash paid to suppliers and payment for expenses (W.N.3) (20,43,000)


Income tax paid (`3,30,000 – `22,500) (3,07,500)
II. Cash flows from investing activities
Sale of furniture 12,000
Purchase of machinery (3,30,000)
III. Cash flow from financing activities
Proceeds from issue of equity shares 7,20,000
Redemption of 8% preference shares (10,30,000)
Dividend paid (`40,000 + `1,10,000) (1,50,000)
Dividend distribution tax paid (22,500)
Net cash used in financing activities (4,82,500)
Net increase in cash and cash equivalents 52,000
Add: Cash and cash equivalents as on 31st March, 2009 (Bal. fig.) 73,000
Cash and cash equivalents as on 31st March, 2010 1,25,000
Working Notes:
1. Credit sales = `32,00,000 – `11,50,000 = `20,50,000
Total Debtors Account
` `
To Balance b/d 1,50,000 By Cash/Bank (Bal. fig.) 20,53,000
To Credit sales 20,50,000 By Balance c/d 1,47,000
22,00,000 22,00,000
Total sale receipts = ` 20,53,000 + `11,50,000 = ` 32,03,000
2. Credit Purchases = ` 8,00,000 – `60,000 = ` 7,40,000
Total Creditors Account
` `
To Cash/Bank (Bal. fig.) 7,35,000 By Balance b/d 78,000
To Balance c/d 83,000 By Credit purchases 7,40,000
8,18,000 8,18,000
Total payments to suppliers = ` 7,35,000 + ` 60,000 = ` 7,95,000

2.33 Accounting
3. Total payment
`
Outstanding expenses as on 31.3.2009 63,000
Add: Expenses charged to Profit and loss account 12,40,000
13,03,000
Less:Outstanding expenses as on 31.3.2010 55,000
Payment on account of expenses 12,48,000
Total of payment to suppliers and payment for expenses = ` 7,95,000 + ` 12,48,000 = ` 20,43,000
Question 10
From the following information, prepare a Cash Flow Statement as per AS 3 for Banjara Ltd.,
using direct method:
Balance Sheet as on March 31, 2010 (`’ 000)
2010 2009
Assets:
Cash on hand and balances with bank 200 25
Marketable securities (having one month maturity) 670 135
Sundry debtors 1,700 1,200
Interest receivable 100 -
Inventories 900 1,950
Investments 2,500 2,500
Fixed assets at cost 2,180 1,910
Accumulated depreciation (1,450) (1,060)
Fixed assets (net) 730 850
Total assets 6,800 6,660
Liabilities:
Sundry creditors 150 1,890
Interest payable 230 100
Income tax payable 400 1,000
Long term debt 1,110 1,040
Total liabilities 1,890 4,030
Shareholder’s fund:
Share capital 1,500 1,250

Reserves 3,410 1,380

4,910 2,630
Total liabilities and shareholders’ fund 6,800 6,660
Statement of Profit or Loss for the year ended 31-3-10
(` ‘000)
Sales 30,650
Cost of sales (26,000)
Gross profit 4,650
Depreciation (450)
Administrative and selling expenses (910)
Interest expenses (400)
Interest income 300
Dividend income 200
Net profit before taxation and extraordinary items 3,390
Extraordinary items:
Insurance proceeds from earthquake disaster settlement 140
Net profit after extraordinary items 3,530
Income tax (300)
3,230
Additional information:
(i) An amount of ` 250 was raised from the issue of share capital and a further ` 250 was
raised from long-term borrowings.
(ii) Interest expense was ` 400 of which ` 170 was paid during the period. ` 100 relating to
interest expense of the prior period was also paid during the period.
(iii) Dividends paid were ` 1,200.
(iv) Tax deducted at source on dividends received (including in the tax expense of ` 300 for
the year) amounted to ` 40.
(v) During the period the enterprise acquired fixed assets for ` 350. The payment was made
in cash.
(vi) Plant with original cost of ` 80 and accumulated depreciation of ` 60 was sold for ` 20.
(vii) Sundry debtors and Sundry creditors include amounts relating to credit sales and credit
purchase only. (16 Marks, November, 2010) (IPCC)

2.35 Accounting
Answer
Cash Flow Statement (direct method)
` in ‘000
Cash flows from Operating Activities
Cash receipts from customers (W.N.2) 30,150
Cash paid to suppliers, employees and for expenses (W.N.3) (27,600)
Cash generated from operations 2,550
Income tax paid (W.N.4) (860)
1,690
Cash flow before extraordinary item:
Proceeds from earthquake disaster settlement 140
Net cash generated from operating activities 1,830
Cash flows from Investing Activities
Purchase of fixed assets (350)
Proceeds from sale of equipment 20
Interest received (300 – 100) 200
Dividends received (200 – 40) 160
Net cash from investing activities 30
Cash flows from Financing Activities
Proceeds from issuance of share capital 250
Proceeds from long term borrowings 250
Repayment of long term borrowings (W.N.5) (180)
Interest paid (W.N.6) (270)
Dividend paid (1,200)
Net cash used in financing activities (1,150)
Net increase in cash and cash equivalents 710
Cash and cash equivalents at beginning of the period (W.N.1) 160
Cash and cash equivalents at end of the period (W.N.1) 870
Working Notes:
(1) Cash and cash equivalents
Cash and cash equivalents consist of cash in hand and balances with banks and
investments in money market instruments for short period.

`’000
2010 2009
Cash in hand and balance with bank 200 25
Short-term investments 670 135
Cash and cash equivalents 870 160
(2) Cash receipts from customers
`’000
Total sales 30,650
Add: Sundry debtors at the beginning of the year 1,200
31,850
Less: Sundry debtors at the end of the year (1,700)
Cash sales 30,150
(3) Cash paid to suppliers, employees and for expenses
`’000
Cost of sales 26,000
Administrative and selling expenses 910
26,910
Add: Sundry creditors at the beginning of the year 1,890
Inventories at the end of the year 900 2,790
29,700
Less: Sundry creditors at the end of the year (150)
Inventories at the beginning of the year (1,950) (2,100)
27,600
(4) Income tax paid (including TDS from dividends received)
`’000
Income tax expense for the year 300
(including tax deducted at source from dividends received)
Add: Income tax liability at the beginning of the year 1,000
1,300
Less: Income tax liability at the end of the year (400)
900
Out of ` 900 thousands, tax deducted at source on dividends received (amounting to `40
thousands) is included in cash flows from investing activities and the balance of `860
thousands is included in cash flows from operating activities.

2.37 Accounting
(5) Repayment of long term borrowings during the year

`’000
Long term debts at the beginning of the year 1,040
Add: Long term borrowings made during the year 250
1,290
Less: Long term borrowings at the end of the year (1,110)
180
(6) Interest paid during the year
`’000
Interest expense for the year 400
Add: Interest payable at the beginning of the year 100
500
Less: Interest payable at the end of the year (230)
270
Question 11
The following are the summarized Balance Sheets of Lotus Ltd. as on 31st March 2010 and 2011:
Liabilities 31-3-2010 31-3-2011
` `
Equity share capital (` 10 each) 10,00,000 12,50,000
Capital reserve 10,000
Profit and loss A/c 4,00,000 4,80,000
Long term loan from the bank 5,00,000 4,00,000
Sundry creditors 5,00,000 4,00,000
Provision for taxation 50,000 60,000
24,50,000 26,00,000
Assets ` `
Land and building 4,00,000 3,80,000
Machinery 7,50,000 9,20,000
Investment 1,00,000 50,000
Stock 3,00,000 2,80,000
Sundry debtors 4,00,000 4,20,000
Cash in hand 2,00,000 1,40,000
Cash at bank 3,00,000 4,10,000
24,50,000 26,00,000

(1) Depreciation written off on land and building ` 20,000.
(2) The company sold some investment at a profit of ` 10,000, which was credited to Capital
Reserve.
(3) Income-tax provided during the year ` 55,000.
(4) During the year, the company purchased a machinery for ` 2,25,000. They paid
` 1,25,000 in cash and issued 10,000 equity shares of ` 10 each at par.
You are required to prepare a cash flow statement for the year ended 31st March, 2011 as per
AS 3 by using indirect method. (16 Marks, May, 2011) (IPCC)
Answer
In the books of Lotus Ltd.
Cash Flow Statement for the year ending 31st March, 2011
` `
I Cash flow from Operating Activities
Net Profit before tax for the year (W.N.1) 1,35,000
Add: Depreciation on machinery (W.N.2) 55,000
Depreciation on land & building 20,000
Operating profit before change in working capital 2,10,000
Add: Decrease in stock 20,000
Less: Increase in sundry debtors (20,000)
Less: Decrease in sundry creditors (1,00,000)
Cash generated from Operations 1,10,000
Less: Income tax paid (W.N.3) (45,000)
Net cash generated from operating activities 65,000
II Cash flow from Investing activities
Purchase of machinery (2,25,000 – 1,00,000) (1,25,000)
Sale of investment (W.N. 4) 60,000
III Cash flow from financing activities
Issue of equity shares (2,50,000-1,00,000) 1,50,000
Repayment of long term loan (1,00,000)
Net cash generated from financing activities 50,000
Net increase in cash and cash equivalents 50,000

2.39 Accounting
Cash and cash equivalents at the beginning of the year

(2,00,000 + 3,00,000) 5,00,000
Cash and cash equivalents at the end of the year 5,50,000
(1,40,000+4,10,000)
Working Notes:
1. Calculation of Net Profit before tax
`
Increase in Profit & Loss (Cr.) balance 80,000
1,35,000
2. Calculation of Depreciation charged during the year on Machinery account
Particulars Amount (`) Particulars Amount (`)
To Balance b/d 7,50,000 By Depreciation (Bal.fig.) 55,000
To Bank 1,25,000 By Balance c/d 9,20,000
To Equity share capital 1,00,000
9,75,000 9,75,000
3. Calculation of tax paid during the year
Provision for Taxation A/c
To Cash (Bal.fig.) 45,000 By Balance b/d 50,000
To Balance c/d 60,000 By Profit and Loss A/c 55,000
1,05,000 1,05,000
4. Calculation of sales value of investment sold
Investment A/c
To Balance b/d 1,00,000 By Bank A/c (Bal.fig.) 60,000
To Capital reserve (Profit By Balance c/d 50,000
on sale of investments) 10,000
1,10,000 1,10,000

Question 12
Balance Sheet of M/s Hero Ltd. as on 31st March, 2010 and 2011 are as follows:
(` in ’000)
Liabilities 31-3-10 31-03-11 Assets 31-3-10 31-03-11
Equity share capital 1,000 1,150 Land & buildings 500 480
Capital reserve - 10 Machinery 750 820
General reserve 250 300 Investments 100 50
Profit and loss A/c 150 180 Stock 300 280
Long term loan from bank 500 400 Sundry debtors 400 420
Sundry creditors 500 400 Cash in hand 200 165
Provision for taxation 50 60 Cash at bank 300 410
Proposed dividends 100 125
2,550 2,625 2,550 2,625
(i) Dividend of ` 1,00,000 was paid during the year ended 31st March, 2011.
(ii) Machinery purchased during the year for ` 1,25,000.
(iii) Company sold some investment at a profit of ` 10,000 which was credited to capital
reserve.
(iv) Depreciation written off on land and building ` 20,000.
(v) Income tax provided during the year ` 55,000.
From the above particulars, prepare a cash flow statement for the year ended 31st March,
2011 as per AS 3 using indirect method. (10 Marks) (November, 2011) (IPCC)
Answer
Cash Flow Statement for the year ended on 31st March, 2011
` `
I Cash flow from Operating Activities
Net profit made during the year (W.N.1) 2,60,000
Add: Depreciation on machinery (W.N.2) 55,000
Add: Depreciation on land and building 20,000
Operating profit before change in working capital 3,35,000
Add: Decrease in stock (3,00,000 – 2,80,000) 20,000
Less: Increase in sundry debtors(4,20,000 – 4,00,000) (20,000)

2.41 Accounting
Less: Decrease in sundry creditors (5,00,000 – 4,00,000) (1,00,000)

Less: Income tax paid (W.N.3) (45,000)
Net cash generated from operating activities 1,90,000
II Cash flow from Investing Activities
Purchase of machinery (1,25,000)
Sale of investment (50,000 + 10,000) 60,000
III Cash flow from Financing Activities
Issue of equity shares (11,50,000 – 10,00,000) 1,50,000
Repayment of long term loan from bank
(5,00,000 – 4,00,000) (1,00,000)
Dividend paid (1,00,000)
Net cash used in financing activities (50,000)
Net increase in cash and cash equivalent 75,000
Add: Cash and Cash Equivalents at the beginning of the
period (2,00,000 + 3,00,000) 5,00,000
Cash and cash equivalents at the end of the period (1,65,000 +
4,10,000) 5,75,000
Working Notes:
1. Net profit (before tax) made during the year `
Increase in Profit and Loss A/c balance (1,80,000 – 1,50,000) 30,000
Add: Transfer to General Reserve (3,00,000 – 2,50,000) 50,000
Add: Provided for proposed dividend during the year (W.N.4) 1,25,000
2,60,000
2. Machinery Account
` `
To Balance b/d 7,50,000 By Bank (machinery sold) 55,000
(Bal. Fig.)
To Bank (machinery 1,25,000 By Balance c/d 8,20,000
purchased)
8,75,000 8,75,000

3. Provision for Taxation

` `
To Cash (Bal. fig.) 45,000 By Balance b/d 50,000
To Balance c/d 60,000 By Profit & Loss A/c 55,000
1,05,000 1,05,000
4. Proposed Dividend A/c

` `
To Bank 1,00,000 By Balance b/d 1,00,000
To Balance c/d 1,25,000 By Profit & Loss A/c (Bal. fig.) 1,25,000
2,25,000 2,25,000
Question 13
On the basis of the following information prepare a Cash Flow Statement for the year ended
31st March, 2013:
(i) Total sales for the year were ` 199 crore out of which cash sales amounted to
` 131 crore.
(ii) Cash collections from credit customers during the year, totalled ` 67 crore.
(iii) Cash paid to suppliers of goods and services and to the employees of the enterprise
amounted to ` 159 crore.
(iv) Fully paid preference shares of the face value of ` 16 crore were redeemed and equity
shares of the face value of ` 16 crore were allotted as fully paid up at a premium of 25%.
(v) ` 13 crore were paid by way of income tax.
(vi) Machine of the book value of ` 21 crore was sold at a loss of ` 30 lakhs and a new
machine was installed at a total cost of ` 40 crore.
(vii) Debenture interest amounting ` 1 crore was paid.
(viii) Dividends totalling ` 10 crore was paid on equity and preference shares. Corporate
dividend tax @ 17% was also paid.
(ix) On 31st March, 2012 balance with bank and cash on hand totalled ` 9 crore.
(8 Marks, May 2013) (IPCC)

2.43 Accounting
Answer
Cash flow statement
(` in crores) (` in crores)
Cash flow from operating activities
Cash sales 131
Cash collected from credit customers 67
Less: Cash paid to suppliers for goods & services and to employees (159)
Cash from operations 39
Less: Income tax paid (13)
Net cash generated from operating activities 26.00
Cash flow from investing activities
Payment for purchase of Machine (40.00)
Proceeds from sale of Machine 20.70
Net cash used in investing activities (19.30)
Cash flow from financing activities
Redemption of Preference shares (16.00)
Proceeds from issue of Equity shares 20.00
Debenture interest paid (1.00)
Dividend Paid (11.70)
Net cash used in financing activities (8.70)
Net decrease in cash and cash equivalent (2.00)
Add: Cash and cash equivalents as on 1.04.2012 9.00
Cash and cash equivalents as on 31.3.2013 7.00
Question 14
Surya Ltd. has provided you the following particulars. Prepare Cash Flow from Operating
Activities by Indirect Method in accordance with AS 3 :
Profit & Loss Account of Surya Ltd.
Particulars ` Particulars `
To Depreciation 86,700 By Operating Profit before depreciation 11,01,600
To Patents written off 35,000 By Profit on Sale on Investments 10,000
To Provision for Tax 1,25,000 By Refund of Tax 3,000
To Proposed dividend 72,000 By Insurance Claim-Major Fire Settlement 1,00,000
To Transfer to Reserve 87,000

To Net Profit 8,08,900

12,14,600 12,14,600
Additional information :
in `
31.3.2012 31.3.2013
Stock 1,20,000 1,60,000
Trade Debtors 7,500 75,000
Trade Creditors 23,735 87,525
Provision for Tax 1,18,775 1,25,000
Prepaid Expenses 15,325 12,475
Marketable Securities 11,775 29,325
Cash Balance 25,325 35,340
(8 Marks) (IPCC, November 2013)

Answer
Indirect Method
Cash flow from Operating activities for the year ended 31st March, 2013
`
Net Profit as per Profit & Loss A/c 8,08,900
Add: Proposed dividend 72,000
Add: Transfer to reserve 87,000
Add: Provision for Tax made during the Current Year 1,25,000
Less: Refund of tax (3,000)
Less: Extraordinary items (i.e. Insurance Claim – Major Fire
Settlement) (1,00,000)
Net Profit before taxation, and extraordinary items 9,89,900
Add: Depreciation 86,700
Add: Patents written off 35,000
Less: Profit on sale of investments (10,000)
Increase in stock (40,000)
Increase in trade debtors (67,500)
Increase in trade creditors 63,790
Decrease in prepaid expenses 2,850 (40,860)

2.45 Accounting
Income taxes paid (net of refund) 1,15,775

Cash flow before extraordinary item 9,44,965
Insurance claim recovery (major fire settlement) 1,00,000
Working Note:
Payment of Income Tax
Opening Balance 1,18,775
Add: Provision made in the year 1,25,000
Less: Refund received in the year (3,000)
Less: Closing Balance (1,25,000)
Amount paid in the year 1,15,775
Question 15
Intelligent Ltd., a non financial company has the following entries in its Bank Account. It has
sought your advice on the treatment of the same for preparing Cash Flow Statement.
(i) Loans and Advances given to the following and interest earned on them:
(1) to suppliers
(2) to employees
(3) to its subsidiaries companies
(ii) Investment made in subsidiary Smart Ltd. and dividend received
(iii) Dividend paid for the year
(iv) TDS on interest income earned on investments made
(v) TDS on interest earned on advance given to suppliers
(vi) Insurance claim received against loss of fixed asset by fire
Discuss in the context of AS 3 Cash Flow Statement (4 Marks, IPCC May, 2014)
Answer
(i) Loans and advances given and interest earned
(1) to suppliers Operating Cash flow
(2) to employees Operating Cash flow
(3) to its subsidiary companies Investing Cash flow
(ii) Investment made in subsidiary company and dividend received
Investing Cash flow

(iii) Dividend paid for the year

Financing Cash Outflow
(iv) TDS on interest income earned on investments made
Investing Cash Outflow
(v) TDS on interest earned on advance given to suppliers
Operating Cash Outflow
(vi) Insurance claim received of amount loss of fixed asset by fire
Extraordinary item to be shown under a separate heading as ‘Cash inflow from Operating
activities’.
Question 16
Prepare Cash flow for Gamma Ltd., for the year ending 31.3.2014 from the following
information:
(1) Sales for the year amounted to ` 135 crores out of which 60% was cash sales.
(2) Purchases for the year amounted to ` 55 crores out of which credit purchase was 80%.
(3) Administrative and selling expenses amounted to ` 18 crores and salary paid amounted
to ` 22 crores.
(4) The Company redeemed debentures of ` 20 crores at a premium of 10%. Debenture
holders were issued equity shares of ` 15 crores towards redemption and the balance
was paid in cash. Debenture interest paid during the year was
` 1.5 crores.
(5) Dividend paid during the year amounted to ` 10 crores. Dividend distribution tax @ 17%
was also paid.
(6) Investment costing ` 12 crores were sold at a profit of ` 2.4 crores.
(7) ` 8 crores was paid towards income tax during the year.
(8) A new plant costing ` 21 crores was purchased in part exchange of an old plant. The
book value of the old plant was ` 12 crores but the vendor took over the old plant at a
value of ` 10 crores only. The balance was paid in cash to the vendor.
(9) The following balances are also provided:
` in crores ` in crores
1.4.2013 31.3.2014
Debtors 45 50
Creditors 21 23
Bank 6
(6 Marks, IPCC November, 2014)

2.47 Accounting
Answer
Gamma Ltd.
Cash Flow Statement for the year ended 31st March, 2014
(Using direct method)
Particulars ` in crores ` in crores
Cash flows from operating activities
Cash sales (60% of 135) 81
Cash receipts from Debtors 49
[45+ (135x40%) - 50]
Cash purchases (20% of 55) (11)
Cash payments to suppliers (42)
[21+ (55x80%) – 23]
Cash paid to employees (22)
Cash payments for overheads (Adm. and selling) (18)
Cash generated from operations 37
Income tax paid (8)
Net cash generated from operating activities 29
Cash flows from investing activities
Sale of investments (12+ 2.40) 14.4
Payments for purchase of fixed assets (11)
Net cash used in investing activities 3.4
Cash flows from financing activities
Redemption of debentures (22-15) (7)
Interest paid (1.5)
Dividend paid (10.0)
Dividend Distribution Tax paid (1.7)
Net cash used in financing activities (20.2)
Net increase in cash 12.2
Cash at beginning of the period 6.0
Cash at end of the period 18.2

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2

Financial Statements of Companies

Unit 1: Preparation of Financial Statements of Companies

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Managing Director’s Remuneration @ 5% of above 3.01

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Sundry Debtors 14,00,000

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Other Debts 10,20,000

© The Institute of Chartered Accountants of India

c Profit before tax (a-b) 9,62,500

Appropriations (made in Notes to Accounts)

© The Institute of Chartered Accountants of India

32 x = 80,66,250 , than x = 2,52,070

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Proposed Dividend 3,00,000

© The Institute of Chartered Accountants of India

Less: Depreciation (8,75,000) 26,25,000

© The Institute of Chartered Accountants of India

Unit 2: Cash Flow Statements

© The Institute of Chartered Accountants of India

Operating profit before working capital changes 24,20,000

Decrease in current liabilities:

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Preference dividend paid (1,50,000)

© The Institute of Chartered Accountants of India

Cash paid to suppliers and expenses 39,10,000

Assets Year 2005 Year 2006

© The Institute of Chartered Accountants of India

Investment 1,00,000 50,000

© The Institute of Chartered Accountants of India

Sale of Investments 60,000 (65,000)

© The Institute of Chartered Accountants of India

(iv) Proposed Dividend Account

© The Institute of Chartered Accountants of India

(iv) Book value of assets sold 222

© The Institute of Chartered Accountants of India

Profit on sale of investments (non operating income) (120)

© The Institute of Chartered Accountants of India

Sale of fixed assets 100 Wages and salaries 100

© The Institute of Chartered Accountants of India

9% Debentures 200 160Machinery 164 180

© The Institute of Chartered Accountants of India

Decrease in sundry debtors 8,000

© The Institute of Chartered Accountants of India

sale) – Balancing Fig

© The Institute of Chartered Accountants of India

Cash generated from operations 11,60,000

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Reserves 3,410 1,380

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India