Management Accounting Unit 2 Cash Flow & Fund Flow Statement

By Dev Kirtonia / Management Accounting

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Management Accounting Unit 2 Cash Flow & Fund Flow Statement

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:

Basis	Cash budget	Cash flow statements
Purpose and scope	A 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 Detail	Detailed 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.

(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:

Basis	Fund flow statements	Income statements
Means of sources	Fund 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?

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.

(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?

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?

(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	2010	2011	Change in Working Capital
Current Assets
Inventory	1524	1491	-33
Sundry Debtors	126	183	+57
Cash and Bank	134	166	+32
Other Current Assets	8	9	+1
Loans and Advances	1176	1474	+298
	2968	3323	+355
(Less) Current Liabilities
Liabilities	1776	1483	-293
Provision for Tax	622	745	+123
Proposed Division	65	207	+142
	2463	2435	-28
Working Capital	505	888	383

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

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

Basic	Cash 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.
Objective	It 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.
Nature	It 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	1.1.99	31.12.99		1.1.99	31.12.99
			Computer	1,55,000	1,75,000
Capital	1,50,000	1,78,000	Inventory of
Loan from Bank	50,000	60,000	Misc. items	10,000	5,000
Loan from Richa	15,000	–	Accounts Receivables	65,000	80,000
Accounts payables	50,000	54,000	Cash	35,000	32,000
	2,65,000	2,92,000		265,000	2,92,000

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 1.1.99	As on 31.12.99	Changes in working up
Current Assets (CA):			Increase	Decrease
Cash 35,000	32,000	–	3,000
Accounts Receivable	65,000	80,000	15,000	–
Inventory of Misc. items	10,000	5000		5,000
Total CA	1,10,000	1,17,000
Current Liabilities (CL):
Loan from Richa	15,000		15,000
Accounts Payable	50,000	54,000		40,000
Total CL	65,000	54,000
Working Capital (CA-CL)	45,000	63,000
Net Increase in works	18,000	18,000
Capital (W/C)	63,000	63,000	30,000	30,000

Fund Flow Statement

Sources	Amount	Applications	Amount
Loan from Bank	10,000	Purchase of computer	45000
Sale of computer	5000	Drawings	17000
Fund from operation	65000	Net Increase in W/C	18000
	80,000		80,000

Working Notes:

Computer A/C

Dr. Cr.

Date	Particulars	Amount	Date Particulars	Amount
1.1.99	To Balance B/d	1,55,000	By Cash (Sale)	5,000
	To Cash		By AdJ. P/LA/C	2,000
	(Purchases)	45,000	By Depreciation	18,000
			31.12.99 By Balance c/d	1,75,000
		2,00,000		200,000

Capital A/C

Dr. Cr.

Date	Particulars	Amount	Date	Particulars	Amount
			1.1.99	By Balance B/d	150,000
	To Cash –
	(Drawings)	17,000		By Net Profit	45,000
31.12.99	To Balance c/d	1,78,000
		1,95,000			1,95,000

Adjusted P/L A/C

Particulars	Amount	Particulars	Amount
To Depreciation on computer	18,000	By Funds from Operation (Balancing figure)	65,000
To Loan on Sale of computer	2,000
To Balance c/d	45,000
	65,000		65,000

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	31.12.89	31.12.90	Assets	31.12.89	31.12.90
Share Capital	1,00,000	125,000	Land & Buildings	1,00,000	95,000
General Reserve	25,000	30,000	Machinery	75,000	34,500
Profit & Loss A/C	15,250	15300	Stock	50,000	37,000
Bank loan	35,000	–
Creditors	75,000	67600	Debtors	40,000	32,100
			Cash	250	300
Provision for tax	15,000	17,500	Bank	–	4,000
			Goodwill		2,500
	2,65,250	2,55,400		2,65,250	2,55,400

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..89	31.12.90	Changes in working capital
Current Assets (CA):			Increase	Decrease
Cash	250
Bank-	4000
Stock	50,000
Debtors	40,000
Total CA	90,250
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	25,000	Purchase of Machine	16,500
Dividend paid	11500
Sale of Land and Building	5,000	Tax paid	14000
Net Decrease in W/C	9450	Payment of Bank loan	35000
Fund from operation	37,550
	77,000		77,000

1. Working notes:

	Rs.
Tax paid during the year:	15,000
Provision for taxation on 31.12.89	16,500
Add: Provision during the year	31,500
Less: Tax paid (Balancing figure)	14,000
Provision for taxation on 31.12.90	17,500

2. Purchase of Machine

	Rs.
Machinery on 31.12.89	75,000
Less: Depreciation	7,000
	68,000
Add: Machinery Purchased (Balancing figure)	16,500
Machinery on 31.12.90	34,500

3. Fund From Operation.

Adjusted Profit and Loss A/C

Dr. Cr.

Particulars	Amount (Rs)	Particulars	Amount (Rs)
To General Reserve	5,000	Balance B/d	15,250
To Depreciation
Machinery	7,000	By Goodwill raised	2,500
To Dividend paid	11,500	By Fund from
		Operation	37,550
To Tax provision	16500	(Bal. fig)
To Balance/d	15,300
	55,300		55,300

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

Liabilities	1990	1991	Assets	1990	1991
Share Capital	70,000	74,000	Cash	9,000
Debentures	12,000	6,000	Debtors (good)	14,900
Creditors	10,360	11,840	Inventory	49,200
Provision for doubtful			Land	20,000
debts	700	800	Goodwill	10,000
Profit & Loss A/C	10,040	10,560
	103100	103200		103100	101200

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	4,000	Redemption of debentures	6000
Fund from operation	9,000	Purchase of Land	10,000
Decrease in working
Capital	6480	Payment of Dividend	3,500
	19,500		19,500

Schedule of Changes in working Capital

Particulars	1990	1991	Changes in working capital
			Increase	Decrease
Current Assets (CA):
Cash	9,000	7,800	–	1,200
Debtors	14,900	17,700	2,800	–
Inventory	49200	42700	–	6500
	71300	68200
Current Liabilities (CL)
Creditors	10360	11840	–	1480
Provision for Doubtful debt	700	800	–	100
Total CL	11,060	12,640
Working Capital (CA-CL)	62,040	55,560
Net Increase in working capital	–	6480
	62040	62040		9280

Working:

(1) Purchase of Land:

Balance of land on 1990	20,000
Add: Purchase during the year	10,000
Balance of land on 1991	30,000

(2) Fund from operation:

Adjusted Profit & Loss A/C (Rs.)

Particulars	(Rs)	Particulars	(Rs)
To Goodwill written off	5,000	By Balance B/d	10,040
To Dividend paid	3,500	By Funds from operation	9,020
To Balance c/d	10,560
	19,060		19,060

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

Liabilities	2001	2002	Assets	2001	2002
Share Capital	500,000	700,000	Land & Building	80,000	120,000
Profit & Loss	100,000	160,000	Plant & Machinery	500,000	800,000
General Reserve	50,000	70,000	Stock	100,000	75,000
Sundry Creditors	153,000	190,000	Debtors	150,000	160,000
Bill Payable	40,000	50,000	Cash	20,000	15,000
Outstanding
Express	7,000	5,000	Prepaid Expenses	–	5000
	850000	1175000		850000	1175000

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 2001	As on 2002	Changes in Working Capital
			Increase	Decrease
Current Assets
Stock 100,000	75000	–	25000
Debtors	150000	160000	10000	–
Cash 20000	15000	–	5000
Prepaid Expenses		5000	5000
Total CA	270000	255000
Current Liabilities
Sundry Creditors	153000	190000	–	37000
Bills Payable	40000	50000	–	10000
Outstanding Expenses	7000	5000	2000
Total CL	200000	245000
Working Capital (W/C) (CL-CL)	70000	10000
Net decrease in working capital	60000	60000
	70000		77000	77000

Fund Flow Statement

Sources	Rs.	Application	Rs.
Issue of Share Capital	200,000	Purchase of
Sale of Machinery	8000	Land and Building	40000
Funds from operation	127000	Purchase of plant
Decrease in working capital		and Machinery	355000
	395000		395000

Workings:

1. Profit on sale of Machinery:

	Rs.
Cost of the machine sold	12,000
Less: Depreciation	7,000
	5,000
Less: Sale Proceeds	8,000
Profit on Sale	3,000

2. Purchase of machine during 2002

Plant and Machinery on 2001	5,00,000
Less: Cost of Machinery Sold	12,000
	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 2002	8,00,000

3. Funds from Operation

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

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

Liabilities	31.12.01	31.12.02	Assets	31.12.01.	31.12.02
Equity Capital	5000	5300	Cash	2000	2500
Long term Debts	1400	1300	Accounts
			Receivable	2400	2700
Retained Earnings	2800	3700	Inventories	3100	3300
Accumulated depreciation	2100	2500	Fixed Assets	5000	5800
Accounts Payable	2000	2100	Other Assets	800	700
	13,300	14,900		13,300	14,900

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	31.12.01	31.12.02	Changes in working capital
			Increase	Decrease
Current Assets (CA)
Cash	2,000	2,500	500	–
Accounts Receivable	2,400	2,700	300	–
Inventories	3,100	3,200	100	–
Other Assets	800	700	–	100
Total CA	8,300	9,100
Current Liabilities
Accounts Payable	2,000	2,100	–	100
Total CL	2,000	2,100
Working Capital (CA-CL)	6,300	7,000
Net Increase in Working Capital	700		–	700
	7,000	7,000	900	900

Fund Flow Statement

Sources	Rs.	Application	Rs.
Issue of Share Capital	300	Repayment of Long term debt	100
Sale of Fixed Assets	250	Purchase of Fixed Assets	1,200
Fund from operation	1,750	Payment 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 sold	400
Less: Accumulated depreciation on the machine sold	150
	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 Asset	1,200
Fixed Assets on 31.12.02	5,800

3. Depreciation of Fixed Assets:

Accumulated Depreciation on 31.12.01	2,100
Less: Accumulated depreciation on Sold machine	150
Add: Depreciation during the year	1,950
Accumulated depreciation on 31.12.02	550
Adjusted Profit and Loss Account	2,500

Dr. Cr.

Particulars	Rs.	Particulars	Rs.
To Dividend	300	By Balance B/d	2,800
To Depreciation	550	By Fund from operation	1,750
To Balance c/d	3,700
	4,550		4,550

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 in		XXX
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 item		XXX XX
(+) or (-) Extra ordinary items		XXX
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	1992	1993	Assets	1992	1993
Share capital	4,00,000	5,00,000	Machinery	500,000	700,000
General reserve	1,25,000	1,35,000	Long term Investment	70,000	56000
Profit and loss A/C	1,10,000	190,000
12% Debentures	2,00,000	150,000	Stock	210,000	280,000
Creditors	80,000	95,000	Debtors	140,000	114,000
			Cash	20,000	40,000
			Bank	50,000	20,000
			Share Issue Exp.	25,000	20,000
	10,15,000	12,30,000		10,15,000	12,30,000

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/C	80,000
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 15000	41000
	173800
Less: Increase in current Assets stock	70000	1,03,800
Net cash from operating Activities
B. Cash flows from Investing activities
Purchase of machinery	2,00,000
Sale of Long term Investment	14000
Net cash used in Investing Activities.	1,86,000
C. Cash flows from financing Activities
Issue of shares	1,00,000
Proceeds from Raising of Mortgage Loan	60,000
Redemption of Debenture	50,000
Interest paid	37,800
Net cash from financing Activities		72,200
Net Decrease in cash & cash equivalent		10,000
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 1.4.2004	50	Payment of supplier	2,000
Issue of equity shares	300	Purchase of fixed assets	200
Receipts from customers	2,800	Administrative Expenses	200
Sale of fixed assets	100	Wages and Salaries	100
Taxation	250	Dividend	50
Payment to Bank Loan	300	Cash Balance on 31.03.2005	150
	3,250		3,250

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.	200	300
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 Asset	100
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 repaid	300
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	1992	1993	Assets	1992	1993
			Goodwill	40000	30000
Share Capital	200000	200000	Machinery	150000	200000
Reserve	110000	175000	Investment
			(Short term)	12000	15000
Provision for taxation	35000	45000	Stock	180000	215000
Accounts Payable	139000	128000	Accounts
			Receivable	60000	50000
Outstanding salaries	6000	–	Prepaid
			Expenses	10000	5000
			Bank	8000	10000
			Preliminary Exp	20000	16000
			Underwritten
			Commission	10000	7000
	490000	548000		490000	548000

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 off		10000
Preliminary Expenses written off		4000
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	31.3.2000	31.3.2001	Assets	31.3.2000	31.3.2001
Equity Share Capital	3,00,000	4,00,000	Fixed Assets	2,00,000	5,00,000
Preference share capital	1,00,000	75,000	Investment	40000	45,000
15% Debentures	2,00,000	2,50,000	Stock	1,50,000	2,00,000
Securities premium		60,000	Debtors	1,76,000	56,000
Profit & Loss A/C		72,000	Discount on Issue
			Of Debentures	20,000	16,000
Accumulated			Cash	94,000	2,14,000
Depreciation	30,000	48,000	P/LA/C	10,000
Provision for doubtful
debts	10,000	16,000
Creditors	50,000	1,10,000
	6,90,000	10,31,000		6,90,000	10,31,000

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		35000	189,000
Less: Profit on sale of Investment		400
Profit on sale of fixed Asset		5000	9000
Operating profit before working
capital changes
Add: Decrease in current Liabilities
Debtors		1,20,000
Increase in current Liabilities
Creditors		60,000	180000
			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 Shares			60,000
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.

Fixed Assets A/C

Particulars	Rs.	Particulars	Rs.
To Balance B/d	200000	By Bank ( Sale)	17000
To P/L (Profit Sale)	5000	By Accumulated Dep. A/C	8000
To Bank A/C (Bal.fig)	320000	By Balance c/d	500000
	525000		525000

Accumulated Depreciation A/C

Particulars	Rs.	Particulars	Rs
To fixed assets	8000	By Balance B/d	30000
To Balance c/d	48000	By P/L A/C (Bal.fig)	26000
	56000		56000

Investment A/C

Particulars	Rs.	Particulars	Rs.
To Balance b/d	40000	By Bank (Sale)	14000
To P/L (Profit on Sale)	4000	By Balance c/d	45000
To Bank A/C (Bal.fig)	15000
	59000		59000

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 tax	5,000
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/C	20,000
Amortisation of capital grant	6
Profit on sale of Investment	100
Carrying amount of Investment sold	27000
Interest income	2,506
Interest Expenses	10,000
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 Venture	3,850
Expenditure on construction, work in progress	34,740
proceeds from Calls in Arrear	2
Receipt of grant for capital projects	12
Proceeds from Long term borrowings	25,980
Opening cash and bank balance	20,575
Closing cash and bank balances	5,003
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 expenses	10,000
Operating profit before working
capital changes	57428
Adjustment for increase in working capital	56,075
Cash generated from operations	1,353
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 projects	12
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 on	8,535
Net cash flow from financing Activities		27,514
Net Increase in cash & cash equivalent (A+B+C)		1,985
Cash and Cash equivalent on 1.4.05		5,003
Cash & Cash equivalent on 31.3.06		6,998

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

	2006	2007
Share Capital	4,500	4,500
General Reserve	3,000	3,100
P/L A/C	560	680
Creditors	1,680	1,340
Provision for tax	750	100
Mortgage loan	2,700
	10,490	12,420
Fixed Asset	4,000	3,200
Investment	500	600
Inventory	2,400	2,100
Debtors	2,100	4,550
Bank	1,490	1,970
	10,490	12,420

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/C	120
Transfer to G/R	100
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 asset	20
Profit on sale of Investment	5
Adjustment for CA & CL	1025
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 equivalent		480
Cash & cash equivalent at the beginning		1490
Cash & cash equivalent at the end		1970

Provision for tax A/C

		By Balance b/d	750
To cash tax paid (Bal. fig)	740	By P/L A/C	90
To Balance c/d	100
	840		840

Fixed Asset A/C

To Balance b/d	4,000	By Bank – Sale	120
To P/L	20	By Depreciation (B/f)	700
		By Balance c/d	3,200
	4,020		4,020

Investment A/C

To Balance b/d	500	By Bank – Sale	85
To P/L	5
To Cash- Purchase (B/f)	180	By Balance c/d	600
	685		685

12. Following is the Balance Sheet of Abacus Ltd.

	2005	2006		2005	2006
Share Capital	80,000	90,000	Fixed Assets	40000	56000
P/L A/C	30,000	48,000	Inventories	20000	14000
Creditors	20,000	30,000	Debtors	60000	90000
			Cash	10000	14000
Outstanding Exp.	6,000	10,000	Prepaid Exp.	6000	4000
Advance Income	4,000	2,000	Deferred Exp	4000	2000
	1,40,000	1,80,000		140000	180000

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 item	26,000
Depreciation	5000
Deferred Exp. written off	2000
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/d	40000	By cash – Sale	10000
To P/L A/C	5000	By depreciation	5000
To Cash – Purchase	26000	By Balance c/d	56000
	71000		71000

Dev Kirtonia

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