Management Accounting Unit 2 Cash Flow & Fund Flow Statement

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Management Accounting Unit 2 Cash Flow & Fund Flow Statement

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Management Accounting Unit 2 Cash Flow & Fund Flow Statement Notes cover all the exercise questions in UGC Syllabus. Management Accounting Unit 2 Cash Flow & Fund Flow Statement provided here ensures a smooth and easy understanding of all the concepts. Understand the concepts behind every Unit and score well in the board exams.

Cash Flow & Fund Flow Statement

MANAGEMENT ACCOUNTING

VERY SHORT TYPES QUESTION & ANSWERS

1. Fill in the blank:

(a) The word fund means the difference between ___________ and ___________.

Ans: Current assets, current liabilities.

(b) Purchase of the fixed assets will mean ___________  in working capital.

Ans: Decrease.

(c) Decrease in creditor is ___________ of cash.

Ans: Outflow.

(d) Income from investment is a cash flow from ___________ activities.

Ans: Investing.

(e) Cash flow statements are prepared as per as __________.

Ans: AS-3.

(f) Indirect method of cash flow statement is prepared according to Paragraph ___________.

Ans: [18(b)].

(g) Repayment of loan or redemption of debenture is an ________ of fund.

Ans: Application.

(h) Goodwill is a __________ transaction.

Ans: Non cash.

(i) Depreciation on assets is a __________ of funds.

Ans: Source.

(j) Cash and cash equivalent includes cash at bank, cash in  hand and _____________.

Ans: Marketable securities.

(k) Cash flow are classified under _____________ categories.

Ans: Three.

(l) Cash flow means _____________ and ____________ of cash.

Ans: Inflows and outflows.

(m) Issue of capital will mean ____________ in working capital.

Ans: Increase.

(n) Payment of dividend and taxes will mean ___________ in working capital.

Ans: Decrease.

(o) Cash received from sale of goods and rendering of services is an example of ___________ activities.

Ans: Operating.

2. Write ‘True’ or ‘False’ for each of the following statements.

(a) The term ‘fund’ is used to denote the excess of current assets over current liabilities.

Ans: True.

(b) Fund flow statement is a good substitute of income statement.

Ans: False.

(c) Increase in current asset means increase in working capital.

Ans : True.

(d) Cash equivalent are short term, highly liquid investment.

Ans: True.

(e) A transaction that increases working capital is a source of fund.

Ans: True.

(f) Net losses mean drain on working capital.

Ans: True.

(g) Cash flow statement is based on annual basis of accounting.

Ans: False.

(h) Stock in the beginning results in application of fund.

Ans: True.

(i) Cash from operation and funds from operation means the same thing.

Ans: False.

(j) Cash flow statement is a substitute of cash account.

Ans: False.

(k) Fund flow statement are prepared as per as 3.

Ans: False.

SHORT & LONG TYPE QUESTIONS & ANSWERS

1. What do you mean by Fund Flow Statement?

Ans: Fund Flow Statement is a statement which indicates the various means by which the funds have been obtained during a certain period and the way to which these funds have been used during that period. The term ‘funds’ used here means working capital i.e. excess of current assets over current liabilities.

In the words of Anthony, “The fund flow statement describes the sources from which additional funds were derived and the use to which these sources were put.”

2. What do you understand by cash flow statement?

Ans: Cash flow statement is a statement which describes the inflows (sources) and outflows (uses) of cash and cash equivalent of an enterprise during a specified period of time. Such a statement enumerates net effects of the various business transactions on cash and its equivalent and takes into account receipts and disbursement of cash. It summarises the causes of changes in cash position of a business between two balance sheets.

3. Define Cash and Cash equivalents.

Ans: Cash comprises cash in hand and demand deposits with bank.

Cash equivalent are short-term highly liquid investment that are readily convertible into known amount of cash and which are subject to an insignificant risk change in value.

4. What is Fund? Explain.

Ans : The term fund has been defined in number of ways viz in broader sense, in narrower sense and in a popular sense.

In Broader Sense: The term ‘funds’ refers to all financial resources or purchasing or spending powers of economic values possessed by a firm at a particular time.

In Narrower Sense: The term ‘funds’ refers to cash and bank balances and the statement prepared on this basis is called a ‘Cash Flow Statement’.

In Popular Sense: The term ‘funds’ is used to denote working capital i.e. current assets minus current labilities. The working capital concept has emerged out of the fact that the total business resources (funds) are invested partly in fixed assets and partly in liquid or near liquid form as working capital. As business transactions generally result in either increase or decrease in working capital. This concept of fund is usually adopted in Fund Flow Statement.

5. Difference between Cash flow statement and cash budget.

Ans:

BasisCash budgetCash flow statements
Purpose and scopeA financial plan outlining expected cash inflows and outflows, enabling businesses to forecast cash position, identify shortfalls, and plan funding or investments.Detailed records of cash inflows and outflows, analysing operating, investing, and financing activities, revealing how cash moves within a company’s operations, investments, and financing.
Level of DetailDetailed plans outlining specific cash inflows and outflows for activities like sales, purchases, salaries, rent, and debt payments, enabling businesses to anticipate cash flows and identify shortages or surpluses.Aggregated breakdowns of cash inflows and outflows, focusing on operating, investing, and financing activities to provide an overview of a company’s cash position.
Users Internal tool for financial managers and executives, aiding short-term planning, budgeting, working capital management, and cash flow optimization. Aligns resources with strategic objectives for financial stability.Informative for internal and external stakeholders, including investors, creditors, and analysts. Provides insights into liquidity, solvency, financial health, and ability to generate cash, meet obligations, and fund growth.

6. What do you mean by the term ‘Flow of Fund’?

Ans: Flow means both inflow and outflow. Therefore, the term flow of fund means transfer of economic value from one asset of equity to another. A flow of fund take place when any transaction makes a change in the amount of fund available before happening of the transaction. According to working capital concept of fund, the term flow of funds arises when a transaction affects a current and a non-current account i.e. a fund account and a non-fund account simultaneously.

Examples:

Flow of funds:

(a) Affecting current Assets and non-current assets

Purchase of furniture in cash.

Cash→ Current Assets

Furniture-non-current Asset

(b) Affecting non current Asset and another current liability.

Sale in machinery on credit.

Machinery – non current asset

Creditor for machinery – Current Asset

7. What do you mean by Fund Flow Statement? State the limitations of the Fund Flow Statement?

Ans: Fund Flow Statement is a statement which indicates the various means by which the funds have been obtained during a certain period and the way to which these funds have been used during that period. “The term ‘funds’ used here means working capital i.e. excess of current assets over current liabilities.

Despite of its usefulness, fund flow statement has the following limitations:

(a) It is non a substitute of a P/L A/C or Balance Sheet.

(b) It shows the changes between two periods. Continuous changes are not shown by a fund flow statement.

(c) Projected fund flow statement may not be accurate because the statement is totally based on historic data.

(d) It does not correctly show the cash position because cash is only one item comprising current assets.

8. Explain direct and indirect method of preparing cash flow statements.

Ans: A cash flow statement is a financial report that details how cash entered and left a business during a reporting period. According to the online course financial accounting: “The purpose of the statement of cash flows is to provide a more detailed picture of what happened to a business’s cash during an accounting period.”

Cash flow from operations are calculated using either the direct or indirect method.

(i) Direct Method: The direct method of calculating cash flow from operating activities is a straightforward process that involves taking all the cash collections from operations and subtracting all the cash disbursements from operations. This approach lists all the transactions that resulted in cash paid or received during the reporting period.

(ii) Indirect Method: The indirect method of calculating cash flow from operating activities requires you to start with net income from the income statement (see step one above) and make adjustments to “undo” the impact of the accruals made during the reporting period. Some of the most common and consistent adjustments include depreciation and amortization.

9. Distinguish between a Fund Flow Statement and a Balance Sheet.

Ans: Balance Sheet is a positional statement. It shows the assets and liabilities on a particular date. Hence, static in nature.

Fund Flow Statement shows the changes in the financial position between two dates. Fund Flow Statement is a post Balance Sheet exercise.

So following differences are observed between the two:

Fund Flow Statement Balance Sheet
(i) It is a statement of changes in financial position between two Balance Sheet dates.(i) It is a statement of financial position on a particular date.
(ii) It shows the sources and application of fund in a given period of time.(ii) It shows the resources of a firm and application of those resources on a given date.
(iii) Items of fund flow statement are usually taken from Profit and Loss Account and Balance Sheet.(iii) Items of Balance Sheet are taken from the ledger account balances from ledger.
(iv) It is a tool of management for financial analysis and very useful in decision making.(iv) It is not so much important in decision making purpose of the management.

10. What is the classification of activities of an undertaking for the preparation of a Cash Flow Statement?

Ans: According to AS-3, Cash Flow Statement classifies cash flows into 3 categories us follows:

(a) Cash Flows from operating Activities: It includes the flow of cash and its equivalents caused by the principal revenue producing activities and other activities which are not investing and financing activities.

Examples: Cash received from sale of goods or rendering services, cash payment to suppliers for goods, cash payment to employees etc.

(b) Cash Flows from Investing Activities: It includes the flow of cash caused by the activities relating to purchase and sale of long term assets (e.g. land, building etc.) and other investment not included in cash equivalents. Examples- Purchase of fixed asset for cash, cash received non sale of fixed assets, purchase of investment etc.

(c) Cash Flows from Financing Activities: It includes flow of cash caused by the activities that results in changes in the size and composition of:

(1) The owner’s capital (equity and preference shares); and

(ii) The borrowings of an enterprise (debentures, long term loan from banks or financial institutions)

Examples: Cash proceeds from Issue of Shares or debentures, Redemption of preference shares and debentures, dividend paid etc.

11. Difference between Funds flow statements and income statements.

Ans: 

BasisFund flow statementsIncome statements
Means of sourcesFund flow statements show where funds are received and how they are spent.Shows various expenses and types of income. When expenses exceed income there is a net loss.
Format Fund flow statements have no specific format. They can have either a horizontal or vertical format.Income statements are prepared according to a specified format. Trading and profit and loss accounts are maintained based on the rules of the double entry system of bookkeeping.
Benefits Always used for the benefits of top management.Useful to shareholders, owners and bankers.

12. What do you understand by cash flow statement? What are the objectives of Cash Flow Statement? State two limitations of Cash Flow Statement?

Ans: Cash flow statement is a statement which describes the inflows (sources) and outflows (uses) of cash and cash equivalent of an enterprise during a specified period of time. Such a statement enumerates net effects of the various business transactions on cash and its equivalent and takes into account receipts and disbursement of cash. It summarises the causes of changes in cash position of a business between two balance sheets.

Following are the objectives of preparing Cash Flow

Statement:

(a) To judge the ability of the organisation to generate cash and cash equivalent during a given period of time.

(b) To assess the timing and certainty of cash in an enterprise.

(c) To show the need for utilising the cash generated from cash flows in various sources

(d) To show the historical process of generating cash flows from different activities of an enterprise such as operating, investing and financing.

The following are the limitations of a Cash Flow Statement:

(a) No cash charges are important for judging profitability of an enterprise are ignored.

(b) Cash flow statement does not take into account the accurate concept of accounting. Hence the result of operation differs.

13. State the distinction between Fund Flow and Cash Flow Statement?

Ans: Following are the distinction between Fund Flow and Cash Flow Statement.

Fund Flow Statement Cash Flow Statement 
(i) Fund Flow Statement deals with the changes in working capital position between two points of time(i) Cash Flow Statement deals with the changes in cash position only between two point of time.
(ii) Fund Flow Statement does not contain any opening and closing balance of cash.(ii) Cash Flow statement includes both opening and closing Cash Balances and its equivalents.
(iii) A schedule of changes in working capital is prepared with Fund Flow Statement.(iii) No such statement is prepared along with cash flow statement.
(iv) It explains the causes of changes in working capital.(iv) It explains the reasons of changes in cash and cash equivalents.
(v) Preparation of Fund Flow Statement is not obligatory as per SEBI guidelines.(v) Preparation of Cash Flow Statement under AS-3 is obligatory as per SEBI guidelines.

14. What are the features of Cash flow statement?

Ans: The features of Cash flow statement are:

(i) A cash flow statement (CFS) is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company.

(ii) The CFS measures how well a company manages its cash position, meaning how well the company generates cash.

(iii) The CFS complements the balance sheet and the income statement.

(iv) The main components of the CFS are cash from three areas: operating activities, investing activities, and financing activities.

(v) The two methods of calculating cash flow are the direct method and the indirect method.

15. How the Cash Flow Statement Is Used?

Ans: The CFS allows investors to understand how a company’s operations are running, where its money is coming from, and how money is being spent. The CFS is important since it helps investors determine whether a company is on solid financial footing. Creditors, on the other hand, can use the CFS to determine how much cash is available (referred to as liquidity) for the company to fund its operating expenses and pay down its debts.

16. What Is the Difference Between Direct and Indirect Cash Flow Statements?

Ans: The difference lies in how the cash inflows and outflows are determined.

Using the direct method, actual cash inflows and outflows are known amounts. The cash flow statement is reported in a straightforward manner, using cash payments and receipts.

Using the indirect method, actual cash inflows and outflows do not have to be known. The indirect method begins with net income or loss from the income statement, then modifies the figure using balance sheet account increases and decreases, to compute implicit cash inflows and outflows.

17. Explain various sources and applications of funds.

Ans: The Source and Application of Funds Statement shows the total sources of new funds raised between Balance Sheet dates and the total uses of those funds in the same period.

Sources of Funds Can Be Flowed out From:

(i) Retained Earnings: Businesses maximise their business profits by selling the product or by rendering the services for a higher cost and to produce the goods and services. Retained earnings are the most primitive way to channelise their funding for any company.  

After the profits being generated, the company needs to decide what to do with the earned capital and how to distribute it efficiently. With the retained earnings at hand, the company can distribute it to the shareholders as dividends, or reduce the company’s outstanding loans.

(ii) Debt Capital: Debt is often taken as loans from the banks privately. The businesses also can source new funds by issuing the debt to the public. In debt financing, the issuer or the borrower issues debt securities, like the corporate bonds or the promissory notes. These debt issues also include debentures, leases and mortgages.  

Companies who initiate debt issues are the borrowers who exchange securities for cash which they acquire to perform certain business activities. At the time of repaying the loan, the companies will repay this debt (principal and interest) according to the already specified repayment schedule.

(iii) Equity Capital: Companies raise funds from the public in exchange for an ownership stake in the company. This is done in the form of issuing the shares to the investors who are the actual shareholders. After purchasing the share, they become members of the company or business. Alternatively, private equity financing can also be an option which provides entities or individuals to directly invest their money wherever the money is needed for. In comparison to the debt capital source, equity capital funding does not demand any interest or principal payment. 

18. Is the Indirect Method of the Cash Flow Statement Better Than the Direct Method?

Ans: Neither is necessarily better or worse. However, the indirect method also provides a means of reconciling items on the balance sheet to the net income on the income statement. As an accountant prepares the CFS using the indirect method, they can identify increases and decreases in the balance sheet that are the result of non-cash transactions.

It is useful to see the impact and relationship that accounts on the balance sheet have to the net income on the income statement, and it can provide a better understanding of the financial statements as a whole.

19. Who uses the Funds flow Statement?

Ans: Of course, the lenders of funds want to know the company’s health before investing in it. The funds flow statement would be of a significant area of interest since they assess the utilisation of funds rather than focusing on the operational losses or profits declared in a company’s financial statements. An excellent example of this is bankers who utilise the funds flow statement to assess the companies’ overdraft and cash credit facilities.

20. Give some Example of fund flow statement.

Ans: Companies have long-term funds in non-current assets like patents, other investments in various companies, plant and machinery, intellectual property rights, equipment, buildings etc. Thus, non-current assets are created in a financial year whose monetary value is not fully realised in that accounting and financial year. Due to this, two situations arise, such as:

(i) When the long-term funds finance the non-current asset: The fund flow statement will reflect these assets utilised from the long-term funds. These changes can be understood if the company is using only long-term funds to finance the non-current assets. It is deemed as a healthy organisational behaviour that is growing positively with the proper fund usage. 

(ii) When the short term funds finance the non-current assets: The changes in the fund flow statement reflect usage of short-term funds. This is undesirable as it indicates the dangerous use of short-term funds on a long-term investment which is risky. Especially when the company is likely to be cash strapped for its short-term needs and financial obligations since the investments are long-term and cannot be easily liquidated. Thus, the fund flow analysis can pinpoint the change and application of working capital, be it long or short term funds, through its utilisation and is an index of its financial health. It is widely used to interpret the impact of changes in funds position and its uses in the interim period between two balance sheets through its proper interpretation.

21. How the Cash Flow Statement Is Used? How Cash Flow Is Calculated?

Ans: The CFS allows investors to understand how a company’s operations are running, where its money is coming from, and how money is being spent. The CFS is important since it helps investors determine whether a company is on solid financial footing. Creditors, on the other hand, can use the CFS to determine how much cash is available (referred to as liquidity) for the company to fund its operating expenses and pay down its debts.

There are two methods of calculating cash flow: (i) The direct method and (ii) The indirect method.

(i) Direct Cash Flow Method: The direct method adds up all the various types of cash payments and receipts, including cash paid to suppliers, cash receipts from customers, and cash paid out in salaries. This method of CFS is easier for very small businesses that use the cash basis accounting method. These figures can also be calculated by using the beginning and ending balances of a variety of asset and liability accounts and examining the net decrease or increase in the accounts. It is presented in a straightforward manner.

(ii) Indirect Cash Flow Method: Most companies use the accrual basis accounting method, where revenue is recognized when it is earned rather than when it is received. This causes a disconnect between net income and actual cash flow because not all transactions in net income on the income statement involve actual cash items. Therefore, certain items must be reevaluated when calculating cash flow from operations. With the indirect method, cash flow is calculated by adjusting net income by adding or subtracting differences resulting from non-cash transactions. Non-cash items show up in the changes to a company’s assets and liabilities on the balance sheet from one period to the next. Therefore, a company’s accountant will identify the increases and decreases to asset and liability accounts that need to be added back to or removed from the net income figure, in order to identify an accurate cash inflow or outflow.

22. What are the Objectives of Fund Flow Statement?

Ans: The Objectives of Fund Flow Statement are:

(i) It help in identifying the sources from where funds have been obtained as well as where have they been utilized.

(ii) It highlights the financing pattern of the expansion of the firm.

(iii) It pinpoints the use of debt finance in the financing structure.

(iv) It describes the relationship between liquidity, financing, investment and dividend decision of a firm.

(v) Fund flow statement reveals clearly the changes in items of financial position between two different balance sheet dates showing clearly the different sources and applications of funds. Thus, it summarizes the financing and investing activities of the enterprise.

(vi) It also reveals how much of the total funds is being collected by disposing of fixed assets, how much from issuing shares or debentures, how much from long-term or short-term loans, and how much from normal operational activities of the business.

(vii) It also provides information about the specific utilisation of such funds i.e., how much has been used for acquiring fixed assets, how much for redemption of preference shares, debentures or short-term loans as well as payment of tax, dividend etc.

(viii) It helps the management in depicting all inflows and outflows of fund which cause a change in working capital of a business organisation.

(ix) The projected fund flow statement helps management to exercise budgetary control and capital expenditure control in the enterprise.

23. Write the Advantages of Fund Flow Statement.

Ans: Following are the Advantages of Fund Flow Statement:

(i) Fund flow statement helps in understanding the effectiveness of use of working capital. 

(ii) It helps the management of a company to define its investment policy by highlighting the changes in working capital.

(iii) It enables the firm to evaluate its current financing pattern and take suitable corrective measures in case it finds any inadequacies. 

(iv) It assists the creditors, financial institutions and banks in understanding the financial soundness of the firm.

(v) Financial policies like dividend etc. are guided by fund flow statement.

(vi) It helps one understand the effects of business operations on the financial and operational position of the firm.

(vii) It acts as a guide to the management to maintain the working capital at the optimum level through either purchase or sale of marketable securities during the periods of adequate and inadequate working capital respectively.

(viii) An aid to fund managers in explaining the strain on working capital and liquidity of a company, though the P&L Statement may declare it to be profitable.

(ix) It helps the fund managers explain the financial strengths of a company despite its operational losses.

(x) It helps the fund managers analyse the fund flow and risk level when misusing short-term funds to finance long-term assets. Usually, this is a grey area that is not reflected in either the company’s balance sheet or P&L statement.

24. Explain the Importance of Fund Flow Statement. 

Ans: The importance of fund flow statement may be summarised: 

(i) Analyses Financial Statements: Balance Sheet and Profit and Loss Account do not reveal the changes in the financial position of an enterprise. Fund flow analysis shows the changes in the financial position between two balance sheet dates. It provides details of inflow and out- flow of funds i.e., sources and application of funds during a particular period.

Hence it is a significant tool in the hands of the management for analysing the past, and for planning the future. They can infer the reasons for imbalances in the uses of funds in the past and take corrective measures for the future.

(ii) Answers Various Financial Questions: Fund flow statement helps us to answers various financial questions such as:

(a) How much fund flowed into the business?

(b) How much of these funds were provided by the operations?

(c) What are the other sources of funds?

(d) How were these funds used?

(e) Why was there less/more amount of net working capital at the end of the period than at the beginning?

(f) Why were the dividends not larger?

g) How was the purchase of fixed assets financed?

h) Where have the net profits gone?

(i) How were the loans repaid?

(iii) Rational Dividend Policy: Sometimes it may happen that a firm, instead of having sufficient profit, cannot pay dividend due to inadequate working capital. In such circumstances, fund flow statement shows the working capital position of a firm and helps the management to take policy decisions on dividend etc.

(iv) Proper Allocation of Resources: Financial resources are always limited. So it is the duty of the management to make its proper use. A projected fund flow statement enables the management to take proper decision regarding allocation of limited financial resources among different projects on priority basis.

(v) Guide to Future Course of Action: The future needs of the fund for various purposes can be known well in advance from the projected fund flow statement. Accordingly, timely action may be taken to explore various avenues of fund.

(vi) Proper Managing of Working Capital: It helps the management to know whether working capital has been effectively used to the maximum extent in business operations or not. It depicts the surplus or deficit in working capital than required. This helps the management to use the surplus working capital profitably or to locate the resources of additional working capital in case of scarcity.

(vii) Guide to Investors: It helps the investors to know whether the funds have been used properly by the company. The lenders can make an idea regarding the creditworthiness of the company and decide whether to lend money to the company or not.

(viii) Evaluation of Performance: Fund flow statement helps the management in judging the financial and operating performance of the company.

(ix) It Helps in the Formation of a Realistic Dividend Policy: Sometimes a firm has sufficient profits available for distribution as dividend but yet it may not be advisable to distribute dividend for lack of liquid or cash resources. In such cases, a funds flow statement helps in the formation of a realistic dividend policy.

(x) It Acts as a Future Guide: A projected funds flow statement also acts as a guide for future to the management. The management can come to know the various problems it is going to face in near future for want of funds. The firm’s future needs of funds can be projected well in advance and also the timing of these needs. The firm can arrange to finance these needs more effectively and avoid future problems.

25. Write the Limitations of Fund Flow Statement. Give some Example of fund flow statement.

Ans: Despite its various advantages, the fund flow statement suffers from certain limitations:

 (i) Historical Nature: The information used for the preparation of the fund flow statement is essentially historical in nature. It does not estimate the sources and application of funds for the near future.

(ii) Structural Changes Not Disclosed: The fund flow statement does not disclose the structural changes in financial relationship in a firm. In other words, it does not reveal shifts among items making up the current assets and current liabilities. It does not tell us whether any loss of working capital has unduly weakened the financial position or not.

(iii) Not Foolproof: The fund flow statement is prepared from the data provided in the balance sheet and profit and loss account. Hence, the defects in financial statements will be carried over to the fund flow statement also.

(iv) Ignores Non-Fund Items: As fund flow statement ignores non- fund items, it becomes a crude device compared to income statement and balance sheet.

(v) Not Relevant: A study of changes in cash (i.e., cash flow statement) is more relevant than a study of changes in funds for the purpose of managerial decision-making.

(vi) It is essentially historic in nature and projected funds flow statement cannot be prepared with much accuracy.

(vii) Changes-in cash-are more important and relevant for financial management than the working capital.

(viii) It should be remembered that a funds flow statement is not a substitute of an income statement or a balance sheet. It provides only some additional information as regards changes in working capital.

(ix) It is not an original statement but simply are-arrangement of data given in the financial statements.

(x) It cannot reveal continuous changes.

26. Define the term “flow of funds”. How do you determine whether a particular change is in the nature of a source or of an application of fund?

Ans: The financial statement of the business indicates assets, liabilities and capital on a particular date and also the profit or loss during a period. But it is possible that there is enough profit in the business and the financial position is also good and still there may be deficiency of cash or of working capital in business. Financial statements are not helpful in analysing such situations. Therefore, a statement of the sources and applications of funds is prepared which indicates the utilisation of working capital during an accounting period. This statement is called Funds Flow statement.

To know whether a transaction results in flow of funds the following procedure can be applied:

(i) Analyse the transaction and find out the accounts involved.

(ii) Make a journal entry of the transaction.

(iii) Determine whether the accounts involved in the transaction are current or non current.

(iv) If both accounts are current, either current assets or liabilities, it doesn’t result in flow of funds.

(v) If both accounts are noncurrent, either noncurrent assets or noncurrent liabilities, it doesn’t result in flow of funds.

(vi) If accounts involved are such that one is a current account while the other is a non current account, it results in flow of funds.

27. Give the specimen of preparation of funds flow statement.

Ans: Step I: Prepare Statement of Changes in Working Capital: For preparing the Funds Flow Statement, the first step is to prepare the Statement of Changes in Working Capital. There may be several reasons for changes in the Working Capital Position of a Company, some of which have been discussed below:

(i) Purchase of Fixed Assets or Long Term Investments without raising Long Term Funds

(ii) Payments of Dividends in excess of the Profits earned

(iii) Extension of Credit to the Customers

(iv) Repayment of a Long Term Liability or Redemption of Preference Shares without raising Long Term Resources.

Eg: From the Balance Sheet of X Ltd for the year ending 2010 and 2011, prepare Statement of Changes in Working Capital.

Particulars 20102011Change in Working Capital
Current Assets 
Inventory 15241491-33
Sundry Debtors 126183+57
Cash and Bank134166+32
Other Current Assets 89+1
Loans and Advances11761474+298
29683323+355
(Less) Current Liabilities 
Liabilities 17761483-293
Provision for Tax622745+123
Proposed Division 65207+142
24632435-28
Working Capital 505888383

Step II: Prepare Funds from Operations: The next Step is to prepare the Funds generated only from the Operating Activities of the Business and not from the Investing/Financing Activities of this business. The Funds from Operations shall be prepared as follows:

Particulars                                                                                                                 Amount 
Net Income                                                                                                                      XXX
ADD:
1. Depreciation on Fixed Assets                                                                                      XXX
2. Amortization of Intangible Assets                                                                                XXX
3. Amortisation of Loss on Sale of Investments                                                              XXX
4. Amortisation of Loss on sale of Fixed Assets                                                              XXX
5. Losses from Other Non-Operating Incomes                                                                XXX    
6. Tax Provision (Created out of Current Profits)                                                             XXX
7. Proposed Dividend                                                                                                      XXX
8. Transfer to Reserve                                                                                                     XXX
LESS:
1. Deferred credit                                                                                                             XXX
2. Profit on Sale of Investments                                                                                       XXX
3. Profit on Sale of Fixed Assets                                                                                     XXX
4. Any written back Reserve & Provision

Step III: Preparation of Funds Flow Statement: While preparing the Funds Flow Statement, the Sources and Uses of Funds are to be disclosed clearly so as to highlight the Sources from where the Funds have been generated the Uses to which these Funds have been applied. This Statement is also sometimes referred to as the Sources and Applications of Funds Statement or Statement of Changes in Financial Position.

Sources of Funds: Items to be shown under the head Sources of Funds are as follows:

Issue of Shares and Debentures for Cash: The total amount received from the Issue of Shares or Debentures is to shown under this head. But, the Issue of bonus Shares or Conversion of Debentures into Equity Shares or Shares issued to vendors shall not be shown here as there is no inflow of Cash.

Long Term Loans: The Amount received on raising Long Term Loans is shown under this head. Short Term Loans are not to be shown here as their treatment has already been done while preparing the Statement of Changes in Working Capital.

Sale of Investments and other Fixed Assets: The Total Amount received on the sale of Investments and other Fixed Assets is to be shown under this head.

Funds from Operations: The Funds generated from Operations as computed in Step II are also required to be shown here.

Decrease in Working Capital: This would be the Balancing Figure of the Statement and will come from change in Working Capital Statement

Application of Funds: Items to be shown under Application of Funds are as follows:

Purchase of Fixed Assets and Investments: The Cash Payment made for purchase of Fixed Assets and Investments is an application of Funds. But if the purchase if made by issue of shares or debentures, such a transaction will not constitute application of funds. Similarly, if the purchases are on credit, these will not constitute fund applications.

Redemption of Debentures, Preference Shares and Repayment of Loan: Payment made including Premium (less: Discount) is to be taken as fund application.

Payment of Dividend & Tax: Payment of Dividend and Tax are to be taken as applications of fund if the provisions are excluded from Current Liabilities and Current Provisions are added back to profit to determine the “Funds from Operations”.

Increase in Working Capital: This would be the Balancing Figure of the Statement and will come from change in Working Capital Statement.

As explained above, the Funds Flow Statement summarises for a particular period the resources made available to finance the activities of an enterprise and the uses to which such resources have been put.

28. What is a cash flow statement? How is it prepared? Distinguish between a cash flow statement and a cash book.

Ans. Cash flow statement is a statement which shows the movement of cash and cash equivalents over a particular period of time. It comprised three sections, operating activities, investing activities and financial activities. These are two methods of preparing cash flow statements: The direct method preferred by FASB and indirect method preferred by M.st business because of its simplicity. The difference between the two methods lies in the operating section only. Investing and financing activities calculation are the same under both the methods.

(A) Section one:

(i) Cash flow from operating activities: Operating activities are the principal revenue generating activities of the business. These are Cash flow from regular course of operation such as manufacturing, trading etc. All activities that are not investing or financing activities are included under operating activities.

Example of operating activities: Cash receipts from the sale of goods and sending of service (source).

Cash payment to suppliers of goods and services (application) under indirect method cash flow from operating activities is calculated with the help of net profit before tax and extraordinary items. Non-cash and non-operating expenses and losses are added and non-cash and non-operating incomes are deducted from net profit tax and extraordinary items to find net cash flow from operating activities before working capital change. After this change in working capital is adjusted and payment of taxes during the year is deducted to find cash flow from operating activities.

(B) Section two:

(ii) Cash from investing activities: The investing activities of a business included all cash flow areas due to acquisition and disposal of long term assets and investments. Acquisition or disposal of companies also comes under investing activities. These are separately disclosed in the cash flow statement.

Example of Investing Activities:

(i) Cash payment to acquire long term and fixed assets and investments(application).

(ii) Cash receipts from the disposal of long term fixed assets and investments.

All the sources of cash from investing activities are added and all the applications of cash in investing activities are deducted to find net cash flow from investing activities.

(C) Section three:

(iii) Cash flows from financing activities: Financing activities are the activities which results in change in the size and borrowing of the enterprise from other sources. The financing activities of a firm include issuing or redemption of share capital, issue and redemption of debentures, raising and repayment of long term loans etc. Dividends and Interest paid are also come under financing activities.

Example of financing Activities: 

(i) Cash proceeds from the issue of shares or other similar instruments (source).

(ii) Cash proceeds from the issue of debentures, loans, bonds and other short term borrowings.

All the sources of cash from financing activities ore added and all the applications of cash in financing activities are deducted to find net cash flow from financing activities.

(D) Last Section:

(iv) Bottom line: All the cash flows from three sections are added to find net cash flow during the year. These after opening balance of cash and cash equivalents are added with this amount and the resulting amount will be the closing balance of the cash and cash equivalents. 

Here cash and cash equivalents means: 

Cash: Cash comprises cash on hands and demand deposits with banks.

Cash equivalents: Cash equivalents are short-term, highly liquid investments that are readily convertible cash.

Example of cash equivalents are:

(a) Treasury bills.

(b) Commercial paper

(c) Money market funds. and

(d) Investments in preference shares and redeemable within three months.

BasicCash flow statement Cashbook 
Meaning It means inflows and outflows of cash and cash equivalents.It is a book of prime or original entries where every transaction is recorded first.
ObjectiveIt is prepared to explain to management the source of cash and its uses during a particular period time It is prepared to record the receipts and payment for the accounting year.
Technique of analysis It is a technique of past analysis.It is a technique of future financial forecasting.
Coverage It summarises the effect of specific cash transactions into three categories, operating, investing and financing activities of an enterprise during a period prescribed format.Each and every transaction is recorded in cash book in chronological order.
Period It is prepared at the end of the accounting year.It is prepared during the accounting year.
NatureIt is a statement.It is a journal.

PRACTICAL PROBLEMS

1. The Balance Sheets of Monish Enterprise as on January 1 and December 31, 1999 were given below.

Balance Sheet in Rs.

Liabilities 1.1.9931.12.991.1.9931.12.99
Computer 1,55,0001,75,000
Capital 1,50,0001,78,000Inventory of 
Loan from Bank50,00060,000Misc. items10,0005,000
Loan from Richa15,000Accounts Receivables65,00080,000
Accounts payables 50,00054,000Cash35,00032,000
2,65,0002,92,000265,0002,92,000

During the year a computer was sold (including a loss of Rs 2000) for Rs 5000. Depreciation provided on computer during the year was Rs 18000. A net profit of Rs. 45000 was earned during the year 1999.

Solution:

Schedule of Changes in Working Capital

Particulars As on 1.1.99As on 31.12.99Changes in working up
Current Assets (CA):Increase Decrease 
Cash 35,00032,0003,000
Accounts Receivable 65,00080,00015,000
Inventory of Misc. items 10,00050005,000
Total CA 1,10,0001,17,000
Current Liabilities (CL):
Loan from Richa 15,00015,000
Accounts Payable50,00054,00040,000
Total CL 65,00054,000
Working Capital (CA-CL)45,00063,000
Net Increase in works18,00018,000
Capital (W/C)63,00063,00030,00030,000

Fund Flow Statement 

Sources Amount ApplicationsAmount 
Loan from Bank10,000Purchase of computer 45000
Sale of computer 5000Drawings 17000
Fund from operation65000Net Increase in W/C18000
80,00080,000

Working Notes:

Computer A/C

Dr.                                                                                   Cr.

DateParticulars Amount Date Particulars Amount 
1.1.99To Balance B/d1,55,000By Cash (Sale)5,000
To CashBy AdJ. P/LA/C2,000
(Purchases)45,000By Depreciation 18,000
31.12.99 By Balance c/d1,75,000
2,00,000200,000

Capital A/C

Dr.                                                                                   Cr.

DateParticulars AmountDateParticulars Amount 
1.1.99By Balance B/d150,000
To Cash –
(Drawings)17,000By Net Profit 45,000
31.12.99To Balance c/d1,78,000
1,95,0001,95,000

Adjusted P/L A/C

Particulars Amount Particulars Amount 
To Depreciation on computer 18,000By Funds from Operation (Balancing figure)65,000
To Loan on Sale of computer 2,000
To Balance c/d45,000
65,00065,000

2. From the following Balance Sheet of Bimal Ltd as on 31.12.89 and 31.12.90. You are required to prepare a statement of sources and applications of fund for the year ended 31.12.90

Balance Sheet

Liabilities 31.12.8931.12.90Assets31.12.8931.12.90
Share Capital 1,00,000125,000Land & Buildings1,00,00095,000
General Reserve 25,00030,000Machinery 75,00034,500
Profit & Loss A/C15,25015300Stock 50,00037,000
Bank loan35,000
Creditors 75,00067600Debtors 40,00032,100
Cash250300
Provision for tax15,00017,500Bank4,000
Goodwill 2,500
2,65,2502,55,4002,65,2502,55,400

The following information is provided:

(i) Dividend paid during the year 1990 Rs 11,500

(ii) Depreciation written off on Machinery Rs 7,000

(iii) Tax provision made in 1990 Rs 16,500

Solution: 

Schedule of Changes in Working Capital (Rs)

Particulars 31.12..8931.12.90Changes in working capital 
Current Assets (CA):Increase Decrease 
Cash 250
Bank-4000
Stock50,000
Debtors 40,000
Total CA90,250
Current Liabilities (CL)
Creditors 
Working Capital (W/C)
(CA/CL)
Net Decrease in W/C

Fund Flow Statement 

Sources Amount Application Amount (Rs)
Issue of share capital 25,000Purchase of Machine 16,500
Dividend paid 11500
Sale of Land and Building 5,000Tax paid 14000
Net Decrease in W/C9450Payment of Bank loan35000
Fund from operation 37,550
77,00077,000

1. Working notes:

Rs.
Tax paid during the year:15,000
Provision for taxation on 31.12.8916,500
Add: Provision during the year31,500
Less: Tax paid (Balancing figure)14,000
Provision for taxation on 31.12.9017,500

2. Purchase of Machine

Rs.
Machinery on 31.12.8975,000
Less: Depreciation 7,000
68,000
Add: Machinery Purchased (Balancing figure)16,500
Machinery on 31.12.9034,500

3. Fund From Operation.

Adjusted Profit and Loss A/C

Dr.                                                                                   Cr.

Particulars Amount (Rs)Particulars Amount (Rs)
To General Reserve 5,000Balance B/d15,250
To Depreciation 
Machinery 7,000By Goodwill raised2,500
To Dividend paid11,500By Fund from 
Operation 37,550
To Tax provision 16500(Bal. fig)
To Balance/d15,300
55,30055,300

3. Following are the comparative balance sheets of Sweetwill company as December 31.

Liabilities 19901991Assets 19901991
Share Capital 70,00074,000Cash9,000
Debentures 12,0006,000Debtors (good)14,900
Creditors 10,36011,840Inventory 49,200
Provision for doubtful Land20,000
debts700800Goodwill 10,000
Profit & Loss A/C10,04010,560
103100103200103100101200

Information:

(i) Dividend were paid totalling Rs 3,500

(ii) Land was purchased for Rs 10,000 and amount provided for amortisation of goodwill Rs 5,000

(iii) Debentures loan was repaid Rs 6,000

Solution: 

Fund Flow Statement

Sources Amount (Rs)Application Amount (Rs)
Issue 4,000Redemption of debentures 6000
Fund from operation 9,000Purchase of Land 10,000
Decrease in working 
Capital 6480Payment of Dividend 3,500
19,50019,500

Schedule of Changes in working Capital

Particulars 19901991Changes in working capital 
Increase Decrease 
Current Assets (CA):
Cash9,0007,8001,200
Debtors 14,90017,7002,800
Inventory 49200427006500
7130068200
Current Liabilities (CL)
Creditors 10360118401480
Provision for Doubtful debt700800100
Total CL 11,06012,640
Working Capital (CA-CL)62,04055,560
Net Increase in working capital 6480
62040620409280

Working:

(1) Purchase of Land:

Balance of land on 199020,000
Add: Purchase during the year10,000
Balance of land on 199130,000

(2) Fund from operation:

Adjusted Profit & Loss A/C (Rs.)

Particulars (Rs)Particulars (Rs)
To Goodwill written off5,000By Balance B/d10,040
To Dividend paid3,500By Funds from operation 9,020
To Balance c/d10,560
19,06019,060

4. The Balance Sheet of National Co. On 31st December, 2001 and 31st December 2002 are as follows:

Liabilities 20012002Assets 20012002
Share Capital 500,000700,000Land & Building 80,000120,000
Profit & Loss100,000160,000Plant & Machinery 500,000800,000
General Reserve 50,00070,000Stock 100,00075,000
Sundry Creditors 153,000190,000Debtors 150,000160,000
Bill Payable 40,00050,000Cash 20,00015,000
Outstanding 
Express 7,0005,000Prepaid Expenses 5000
85000011750008500001175000

Additional information:

(i) Rs 50,000 depreciation has been charged on Plant and machinery during 2002.

(ii) A piece of machinery was sold for Rs 8000 during the year 2002. It had cost Rs 12000. Depreciation of Rs 7000 had been provided on it.

Prepare a schedule of changes in working capital and a statement of sources and Application of Fund for 2002.

Solution:

Schedule of Changes in Working Capital 

Particulars As on 2001As on 2002Changes in Working Capital 
Increase Decrease 
Current Assets 
Stock 100,0007500025000
Debtors 15000016000010000
Cash 20000150005000
Prepaid Expenses 50005000
Total CA270000255000
Current Liabilities 
Sundry Creditors 15300019000037000
Bills Payable 400005000010000
Outstanding Expenses700050002000
Total CL 200000245000
Working Capital (W/C) (CL-CL)7000010000
Net decrease in working capital 6000060000
700007700077000

Fund Flow Statement

Sources Rs.Application Rs.
Issue of Share Capital 200,000Purchase of 
Sale of Machinery 8000Land and Building 40000
Funds from operation 127000Purchase of plant 
Decrease in working capital and Machinery 355000
395000395000

Workings:

1. Profit on sale of Machinery:

Rs.
Cost of the machine sold12,000
Less: Depreciation 7,000
5,000
Less: Sale Proceeds8,000
Profit on Sale3,000

2. Purchase of machine during 2002

Plant and Machinery on 20015,00,000
Less: Cost of Machinery Sold12,000
4,88,000
Less: Depreciation [Rs 50000-Rs 7000]43,000
4,45,000
Add: Purchase during 2002 (B/d)3,55,000
Plant & Machinery on 20028,00,000

3. Funds from Operation

Particulars RsParticulars Rs
To General Reserve 20,000By Balance B/d1,00,000
To Depreciation (7000+43000)50,000By Profit on Sale of Machine 3,000
To Balance c/d1,60,000By Funds from Operation 1,27,000
2,30,0002,30,000

5. Prepare a Fund Flow Statement from the following data.

Liabilities 31.12.0131.12.02Assets 31.12.01.31.12.02
Equity Capital 50005300Cash20002500
Long term Debts14001300Accounts 
Receivable 24002700
Retained Earnings 28003700Inventories 31003300
Accumulated depreciation21002500Fixed Assets 50005800
Accounts Payable 20002100Other Assets 800700
13,30014,90013,30014,900

Additional information:

(i) Fixed assets costing Rs 1200 were purchased for cash.

(ii) Fixed assets (original cost Rs 400, accumulated depreciation Rs 150) were sold at book value.

(iii) Depreciation for the year 2002 amounted to Rs 550 and duly debited to Profit & Loss account.

Solution:

Schedule of changes in Working Capital

Particulars 31.12.0131.12.02Changes in working capital 
Increase Decrease 
Current Assets (CA)
Cash2,0002,500500
Accounts Receivable 2,4002,700300
Inventories 3,1003,200100
Other Assets 800700100
Total CA 8,3009,100
Current Liabilities 
Accounts Payable2,0002,100100
Total CL 2,0002,100
Working Capital (CA-CL)6,3007,000
Net Increase in Working Capital 700700
7,0007,000900900

Fund Flow Statement

Sources Rs.Application Rs.
Issue of Share Capital 300Repayment of Long term debt100
Sale of Fixed Assets 250Purchase of Fixed Assets 1,200
Fund from operation 1,750Payment of Dividend 300
Net Increase in working capital 700
2,300

Working:

1. Profit or loss on sale of Fixed Assets:

Rs
Cost of Fixed Assets sold400
Less: Accumulated depreciation on the machine sold150
Rs 250
Less: Sale Proceeds 250
Profit or Loss on Sale 

2. Purchase of fixed Assets:

Fixed Assets on 31.12.01 (cost)5,000
Less: Cost of sold Fixed Assets 400
Unsold Asset 4,600
Add: Purchase of fixed Asset1,200
Fixed Assets on 31.12.025,800

3. Depreciation of Fixed Assets:

Accumulated Depreciation on 31.12.012,100
Less: Accumulated depreciation on Sold machine 150
Add: Depreciation during the year 1,950
Accumulated depreciation on 31.12.02550
Adjusted Profit and Loss Account 2,500

Dr.                                                                                  Cr.

Particulars Rs.Particulars Rs.
To Dividend 300By Balance B/d2,800
To Depreciation 550By Fund from operation 1,750
To Balance c/d3,700
4,5504,550

Cash Flow Statement: Cash Flow Statement may be prepared either by direct or indirect method, format under both the methods are given below.

Cash Flow Statement for the year ending …………..

(Direct Method)

Particulars Rs.Rs.
A. Cash flows from operating Activities.
Cash received from customers.…………..
Cash paid to supplier & employees.(……………)
Cash generated from operating Activities.…………..
Income tax paid (…………..)
Cash flows before extra ordinary item………….
(+/-) Extra ordinary item………….
Net cash from operating Activities XXX
B. Cash Flows from Investing Activities:
Purchase of fixed Assets (………….)
Sale of fixed Assets …………
Purchase of Investment (………….)
Sale of Investment …………
Interest Received …………
Dividend Received …………
Net Cash from Investing Activities XXX
Cash Flows from Financing Activities 
Proceeds from Sale of Share capital …………
Proceeds from Long term borrowings …………
Repayment of Loan (………….)
Interest paid (………….)
Dividend paid (………..)
Net Cash from financing Activities XXX
Net Increase Decrease inXXX
Cash and Cash equivalent (A+B+C)
Cash and Cash equivalent at the beginning XXX
Cash and Cash equivalent at the end XXX

Cash Flow Statement for the year ending………….

(Indirect Method)

Particulars Rs.Rs.
A. Cash flows from operating Activities:
Net profit before tax and extra 
Adjustment for-ordinary items…………
Depreciation ………..
loss on sale of fixed asset………..
Interest paid……….
Interest Received (……….)
Dividend received (……….)
Gain on sale of fixed Assets(……….)
Operating profit before working capital changes-XXX
Add: Decrease in Current Assets XXX
Increase in Current Liabilities XXX
Less: Increase in Current Assets (XXX)
Decrease in Current Liabilities (XXX)
Cash generated from operating activities XXX
Income Tax paid (XXX)
Cash Flow from extra-ordinary itemXXX XX
(+) or (-) Extra ordinary itemsXXX
Cash Flows from operating Activities XXX
B. Cash Flows from Investing Activities 
(same as direct method)XXX
Cash flows from Financing Activities 
(same as direct method)XXX
Net increase or decrease in cash and cash 
equivalent (A+B+C)XXX
cash and cash equivalent at the beginning XXX
Cash and cash equivalent at the end XXX

6. Prepare a cash flow statement from the following Balance Sheets of Gujarat Spinning Mills Ltd.

Liabilities 19921993Assets 19921993
Share capital 4,00,0005,00,000Machinery 500,000700,000
General reserve 1,25,0001,35,000Long term Investment 70,00056000
Profit and loss A/C1,10,000190,000
12% Debentures 2,00,000150,000Stock 210,000280,000
Creditors 80,00095,000Debtors 140,000114,000
Cash20,00040,000
Bank50,00020,000
Share Issue Exp.25,00020,000
10,15,00012,30,00010,15,00012,30,000

Total Investment paid during the year amounted to Rs 37,800.

Solution:

Cash Flow Statement (Indirect Method)

Rs.Rs.
A. Cash flows from operating Activities:
Net profit before tax 
Profit as per P/L A/C80,000
Adjustment for
General Reserve 10,000
Share Issue expenses 5,000
Interest paid 37,800
1,32,800
Operating profit before working changes
Add: Decrease in current assets 
Debtor  26000
Increase in current Liabilities 
Creditors  1500041000
173800
Less: Increase in current Assets stock 700001,03,800
Net cash from operating Activities 
B. Cash flows from Investing activities 
Purchase of machinery 2,00,000
Sale of Long term Investment14000
Net cash used in Investing Activities.1,86,000
C. Cash flows from financing Activities 
Issue of shares1,00,000
Proceeds from Raising of Mortgage Loan 60,000
Redemption of Debenture50,000
Interest paid 37,800
Net cash from financing Activities 72,200
Net Decrease in cash & cash equivalent10,000
Cash & cash equivalent at the beginning 70,000
Cash & cash equivalent at the end 60,000

7. From the following summary of cash account of Rangiya Hotel Ltd. Prepare a cash flow statement for the year ended 31st March, 2005 in accordance with AS-3 using direct method. The company does not have any cash equivalent.

Particulars Rs.Particulars Rs.
Cash balance 1.4.200450Payment of supplier 2,000
Issue of equity shares 300Purchase of fixed assets 200
Receipts from customers 2,800Administrative Expenses 200
Sale of fixed assets100Wages and Salaries 100
Taxation 250Dividend 50
Payment to Bank Loan 300Cash Balance on 31.03.2005150
3,2503,250

Solution:

As-3

Cash flow statement (Direct Method)

Rs.
A. Cash Flows from Operating Activities:
Cash Received from Customers 2,800
Cash Paid to supplier 2,000
Cash paid to Employee
Wages & Salaries-100
Administrative Exp.200300
Cash Generated from operation 500
Income tax paid 250
Net cash flows from Operating Activities 250
B. Cash Flows from Investing Activities 
Sale of fixed Asset100
Purchase of fixed assets 200
Net Cash used in Investing Activities 100
C. Cash flows from Financing Activities:
Proceeds from fresh Issue of equity shares 300
Bank Loan repaid300
Dividend Paid 50
Net cash used in financing Activities 50
Net increase in cash and cash equivalent 100
Opening balance of cash 50
Closing balance of cash 150

8. From the following Balance Sheet of xLtd., you are required to prepare a cash flow statement:

Liabilities 19921993Assets 19921993
Goodwill 4000030000
Share Capital 200000200000Machinery 150000200000
Reserve 110000175000Investment 
(Short term)1200015000
Provision for taxation 3500045000Stock 180000215000
Accounts Payable139000128000Accounts 
Receivable 6000050000
Outstanding salaries 6000Prepaid 
Expenses 100005000
Bank800010000
Preliminary Exp2000016000
Underwritten 
Commission 100007000
490000548000490000548000

Additional Information:

(i) Machinery whose original cost was Rs 50,000 was sold for Rs.10000. Accumulated depreciation on this machinery was Rs 26,000.

(ii) Depreciation on Machinery charged during the year Rs 20000.

(iii) Dividend paid during the year @ 10% on equity share capital.

Cash Flow Statement (Indirect Method)

Rs.
A. Cash Flows from operation:
Net profit before taxation 
Increase in Reserve 65,000
(+) Provision for taxation (93)45,000
(+) Dividend paid @ 10%20,000
Adjustment for:-1,30,000
Depreciation on Machinery 20000
Loss on sale of Machinery 14000
Goodwill written off10000
Preliminary Expenses written off4000
Under writing Commission 3000
1,81,000
Operating profit before working capital changes
Add: Decrease in Current Assets:
Accounts Receivable 10,000
Prepaid expenses 5,000
15000
196000
Less: Increase in Current 
Assets stock 
Less: Decrease in Current Liabilities 
Accounts Payable 11000
Outstanding salaries 6000
52000
144000
Payment of tax (92)35000
Net Cash flow from Operating Activities 109000
B. Cash Flows from Investing Activities 
Purchase of machinery 94000
(200,000+24,000-1,50,000)
Sale of Machinery 
Net cash used in Investing Activities 84,000
C. Cash Flows from financing Activities 
Dividend paid 20000
20,000
Net Increase in Cash and Cash 
equivalent (A+B+C)500
Cash & Cash equivalent at the beginning 
(8000+1200)20000
Cash and Cash equivalent at the end 25000

9. From the following Balance Sheet of × Co. Ltd as on 31st March 2000 and 2001, prepare a cash flow statement.

Liabilities 31.3.200031.3.2001Assets 31.3.200031.3.2001
Equity Share Capital 3,00,0004,00,000Fixed Assets 2,00,0005,00,000
Preference share capital 1,00,00075,000Investment 4000045,000
15% Debentures 2,00,0002,50,000Stock 1,50,0002,00,000
Securities premium 60,000Debtors 1,76,00056,000
Profit & Loss A/C72,000Discount on Issue 
Of Debentures 20,00016,000
Accumulated Cash 94,0002,14,000
Depreciation 30,00048,000P/LA/C10,000
Provision for doubtful 
debts10,00016,000
Creditors 50,0001,10,000
6,90,00010,31,0006,90,00010,31,000

Additional Information:

(i) Dividend paid during the year Rs 36,000

(ii) Investment costing Rs 10,000 were sold at a profit of 40%.

(iii) Fixed Assets costing Rs 20,000 (accumulated depreciation Rs 8000) were sold for Rs 17,000

(iv) Additional debentures amounting to Rs 50,000 were issued on 1st Aug. 2,000. Interest on debentures has been paid regularly.

Solution:

Cash Flow Statement

Rs.
A. Cash flows from operating activities:
Net profit before tax 82000
Dividend paid 36000
118000
Adjustment for
Depreciation of fixed assets 26000
Provision for doubtful debts 6000
Discount on issue written off 4000
Interest paid 35000189,000
Less: Profit on sale of Investment 400
Profit on sale of fixed Asset50009000
Operating profit before working 
capital changes
Add: Decrease in current Liabilities 
Debtors 1,20,000
Increase in current Liabilities 
Creditors 60,000180000
360000
Less: Increase in Current Assets 50000
Net Cash flows from operating Activities 3,10,000
B. Cash Flows from Investing Activities:
Purchase of fixed assets 3,20,000
Sale of fixed assets 17,000
Purchase of fixed investment 15,000
Sale of Investment 14,000
Net cash used in Investing Activities 3,04,000
C. Cash flows from financing activities:
Issue of Equity Shares 1,00,000
Redemption of Preference Shares60,000
Dividend paid 50,000
Interest paid 25,000
Net Cash from financing Activities 36,000
Net Increase in cash and cash equivalent 35,000
Cash and Cash equivalent at the beginning 94,000
Cash and Cash equivalent at the end 2,14,000

Working notes:

1. P/L A/C balance of Rs 10,000 appearing on the assets side of previous year’s balance sheet represents an amount of loss. In the current year after covering the loss of Rs 10,000. The net profit of Rs 72000 is appearing on the liabilities side. It means that net profit during the year must have been Rs 72,000+10,000=Rs 82,000.

2.

Fixed Assets A/C

Particulars Rs.Particulars Rs.
To Balance B/d200000By Bank ( Sale)17000
To P/L (Profit Sale)5000By Accumulated Dep. A/C8000
To Bank A/C (Bal.fig)320000By Balance c/d500000
525000525000

Accumulated Depreciation A/C

Particulars Rs.Particulars Rs
To fixed assets 8000By Balance B/d30000
To Balance c/d48000By P/L A/C (Bal.fig)26000
5600056000

Investment A/C

Particulars Rs.Particulars Rs.
To Balance b/d40000By Bank (Sale)14000
To P/L (Profit on Sale)4000By Balance c/d45000
To Bank A/C (Bal.fig)15000
5900059000

10. Ms. Joymoti Ltd. has collected the following information for the preparation of cash flow statement for the year ended 31st March, 2006.

Rs. in Lakh
Net Profit 25,000
Dividend and tax paid there on 8,535
Provision for Income tax5,000
Income tax paid during the year 4,248
Loss on sale of fixed assets (net)40
Book value of fixed assets sold 185
Depreciation charged to P/L A/C20,000
Amortisation of capital grant6
Profit on sale of Investment 100
Carrying amount of Investment sold 27000
Interest income 2,506
Interest Expenses10,000
Interest paid during the year 10,520
Increase in working capital (excluding cash and Bank balance)56,075
Purchase of fixed assets.10,560
Investment in Joint Venture3,850
Expenditure on construction, work in progress 34,740
proceeds from Calls in Arrear2
Receipt of grant for capital projects 12
Proceeds from Long term borrowings25,980
Opening cash and bank balance 20,575
Closing cash and bank balances5,003
You are required to prepare a cash flow statement 6,998

Solution:

Joymoti Ltd.

Cash Flow Statement 

Rs. (In Lakhs)Rs. (In Lakhs)
A. Cash flows from operating Activities 
Net profit before tax (25,000+5,000)30,000
Adjustment for:
Depreciation 20,000
Loss on sale of fixed assets 40
Amortisation of capital grant (6)
Profit on sale of investment (100)
Interest income 2,506
Interest expenses10,000
Operating profit before working 
capital changes 57428
Adjustment for increase in working capital 56,075
Cash generated from operations1,353
Tax paid 4,248
Net cash used in operating Activities
B. Cash flows from Investing Activities:
Sale of fixed assets (185-40)145
Sale of Investment (27765+100)27,965
Interest income 2,506
Purchase of fixed assets 14,560
Investment of Joint Venture 3,850
Expenditure on Construction 34,740
Net cash flows from Investing Activities 22634
Net cash flows from financing Activities:
Proceeds from calls in Arrear 2
Receipt of grant for capital projects12
Proceeds from Long term borrowings 25,980
Proceeds from Short term borrowings 20,575
Interest paid during the year 10,520
Dividend & tax paid there on8,535
Net cash flow from financing Activities 27,514
Net Increase in cash & cash equivalent (A+B+C)1,985
Cash and Cash equivalent on 1.4.055,003
Cash & Cash equivalent on 31.3.066,998

11. The summarised Balance Sheet of Boni Trading Ltd. as at 31st Dec, 2006 & 2007 are given below:

20062007
Share Capital 4,5004,500
General Reserve 3,0003,100
P/L A/C560680
Creditors 1,6801,340
Provision for tax 750100
Mortgage loan 2,700
10,49012,420
Fixed Asset4,0003,200
Investment 500600
Inventory 2,4002,100
Debtors 2,1004,550
Bank1,4901,970
10,49012,420

Additional Information:

(i) Investment costing Rs 80 were sold during the year 2007 for Rs 85. 

(ii) Provision for tax made during the year was Rs 90.

(iii) During the year, part of the fixed assets costing Rs 100 was sold for Rs 120 and the profit was included in P/L A/C.

(iv) Dividend paid during the year amounted to Rs 40. Prepare a cash flow statement.

Solution: 

Cash flow statement of Boni Trading Ltd. AS-3 (Indirect Method)

Rs.Rs.
A. Net Cash flows from operating Activities:
Difference in P/L A/C120
Transfer to G/R100
Dividend 40
Prov. for taxes 90
Adjustment for the non cash and non operating items 350
Depn. on Fixed Assets 700
Profit on sale of fixed asset20
Profit on sale of Investment 5
Adjustment for CA & CL1025
Decrease in Creditors 340
Increase in Debtors 2,450
Decrease in Inventory 300
Tax paid 1,465
Net cash used in operating Activities 740
B. Cash flows from Investing Activities 2,205
Sale of Fixed Assets 120
Sale of Investment 85
Purchase of Investment 180
Net cash flows from Investing Activities 
C. Cash flows from financing Activities 
Raising of mortgage loan 2,700
Payment of Dividend 40
Net cash flow from financing Activities 2,660
Net Increase in cash & cash equivalent480
Cash & cash equivalent at the beginning 1490
Cash & cash equivalent at the end 1970

Provision for tax A/C

By Balance b/d750
To cash tax paid (Bal. fig)740By P/L A/C90
To Balance c/d100
840840

Fixed Asset A/C

To Balance b/d4,000By Bank – Sale 120
To P/L20By Depreciation (B/f)700
By Balance c/d3,200
4,0204,020

Investment A/C

To Balance b/d500By Bank – Sale85
To P/L5
To Cash- Purchase (B/f)180By Balance c/d600
685685

12. Following is the Balance Sheet of Abacus Ltd.

2005200620052006
Share Capital 80,00090,000Fixed Assets 4000056000
P/L A/C30,00048,000Inventories 2000014000
Creditors 20,00030,000Debtors 6000090000
Cash1000014000
Outstanding Exp.6,00010,000Prepaid Exp. 60004000
Advance Income 4,0002,000Deferred Exp40002000
1,40,0001,80,000140000180000

An old machine has been sold in Rs 10000 (wd2 Rs 5000) dividend paid during the year Rs 8000 and depreciation charged to P/L amounted to Rs 5000. Deferred expenses w/off Rs 2000. Prepare a cash flow statement.

Solution: 

Rs.
A. Cash flow operating activities 
Difference in P/L A/C…….18000
Dividend paid 8000
Adjustment for non cash and non operating item26,000
Depreciation 5000
Deferred Exp. written off2000
Profit on sale of fixed Asset 5000
Operating profit before changes in working capital 28000
Adjustment for CA & CL
Decrease in Inventories 6000
Decrease in Prepaid Expenses 2000
Increase in Debtors 30000
Increase in Creditors 10000
Increase in outstanding Exp 4000
Dec. in Advance Income 2000
Net Cash from operating Activities 18,000
B. Cash flows from Investing Activities 
Sale of fixed Asset 10000
Purchase of fixed Assets 26000
Net cash used in Investing Activities 16,000
C. Cash flows from financing Activities 
Issue of Share Capital 10000
Dividend paid 8000
Net cash flows from financing Activities 2000
Net increase in cash and cash equivalent 4000
Cash and cash equivalent at the beginning 10000
Cash and cash equivalent at the end 14000

Fixed Asset A/C

To Balance B/d40000By cash – Sale10000
To P/L A/C5000By depreciation 5000
To Cash – Purchase 26000By Balance c/d56000
7100071000

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