Cash Flow Class 12 Accountancy

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Cash Flow Statements

Cash flow statements indicate the movement of cash in and out of the business. Cash flow statements are added as part of the final accounts of companies. Balance sheet at the end of a financial year gives a picture of financial position of a business. Cash flow statement for that period gives a closer view of how the assets, liabilities, capital and operating activities have generated and used up cash or cash equivalents in the business during the year. Cash flow statement is the summarized and reformatted version of the cash account in the business. The term cash includes cash in hand, cash at bank and cash equivalents that are having a definite value and easily converted into cash without loss.

In India, cash flow statements are prepared according to the Accounting Standard 3 issued by the Institute of Chartered Accountants of India, in accordance with the International Accounting Standards.

Cash flows are organized into thee categories in the statement:

Cash flow from Operating Activities

Cash flow from Investing Activities

Cash flow from Financing Activities

a. Cash flow from Operating Activities

Operating activity is the major business activity of a business. Sales is the most important source of cash. Expenses incurred in the normal running of business are called operating expenses. The difference between sales and operating expenses is operating net profit or loss. Cash received on paid in current assets and current liabilities are adjusted to operating net profit to arrive at the actual cash from operating activities.

b. Cash flow from Investing Activities

Purchase and sale of fixed assets are included in this section. Actual amount paid in buying or selling of fixed assets are shown as inflow or outflow of cash on investing activities.

Steps in Preparing Cash flow Statement

Your cash flow statement begins with Net Profit before tax and extraordinary items. Just ignore extraordinary item for the time being.

Normally you have P&L Account balances in the balance sheet. You can arrive at net profit before tax by adding back all the appropriations.

Step1:

Working out net profit before tax

Take the P&L Account difference
Add back PGP – Proposed dividend, General reserve, Provision for taxation
Add
Now you got Net profit before tax, the starting point for actual cash flow statement.

Step 2:

Begin the Cash flow statement with Net Profit before tax
Adjust non cash and/or non operating items such as depreciation, loss / gain on sale of fixed assets, interests, dividends
Here you got operating profit before working capital changes

Step 3:

Adjust the current assets and current liabilities
Here you have cash generated from operations

Step 4: (Except income tax, others are less frequent items)

Less interest received
Less income tax paid
Adjust cash flow from extraordinary items
Deferred revenue

You got Cash from (used in) operating activities – outer column

Step 5:

Start Cash flows from investing activities
Purchase / Sale of fixed assets and investments
Add: Interest / dividends received on investments

You got cash from (used in) investing activities

Step 6

Start cash flows from financing activities
Issue of share capital
Issue / redemption of debentures
Long term borrowings / repayments
Payment of dividend

Now you have the third major item Cash from (used in) financing activities

Step 7:

The total of the three major items in the outer column is the Net increase (Decrease) in cash and cash equivalents at the end of the year
Add Opening balance of cash
You have the final answer – Cash at the end of the year

1. From the following comparative balance sheets prepare cash flow statement

Balance Sheet

Liabilities	2001t	2002	Assets	2001	2002
Capital	90	130	Plant	130	150
Loan	70	50	Acc. Dep	-10	-20
P & L	80	90		120	130
Crs	40	22	Stock	80	90
			Debtors	60	50
			Cash	20	22
	280	292		280	292

Cash Flow Statement

	Rs.	Rs.
Cash Flow from Operating Activities
Net Profit before tax	10
Add Depreciation	10
Operating profit before working capital changes	20
- Increase in Stock	(10)
+ Decrease in debtors	10
- Decrease in creditors	(18)
Net cash from (used in) operating activities		2

Cash Flows from Investing Activities
Purchase of plant	(20)
Net cash from (used in) investing activities		(20)

Cash flows from Financing Activities
Issue of shares	40
Repayment of loan	(20)
Net Cash from (used in) financing activities		20
Net increase (decrease) in cash and cash equivalent at the end of the year		2
Add Balance of cash at the beginning of the year		20
Cash balance at the end of the year		22

2. From the following comparative balance sheets prepare cash flow statement for the year 2003.

Balance Sheet

Liabilities	2002	2003	Assets	2002	2003
Equity Shares	14000	20000	Fixed Assets	20000	25000
Debentures	9000	6000	Less Depreciation	-4000	-6000
P & L Account	4000	7000		16000	19000
Creditors	2000	4000	Stock	4000	7000
Outstanding Exp	1000	3000	Debtors	5000	4000
			Prepaid Expenses	2000	3000
			Cash at Bank	3000	7000
Total Liabilities	30000	40000	Total Assets	30000	40000

Cash Flow Statement
	Rs.	Rs.
Cash Flow from Operating Activities
Net Profit before tax	3,000
Add Depreciation	2,000
Operating profit before working capital changes	5,000
- Increase in Stock	(3,000)
+ Decrease in debtors	1,000
- increase in Pp expenses	(1,000)
+increase in os expenses	2,000
+ Inc in creditors	2,000
Net cash from (used in) operating activities		6,000

Cash Flows from Investing Activities
Purchase of plant	(5,000)
Net cash from (used in) investing activities		(5,000)

Cash flows from Financing Activities
Issue of shares	6,000
Red of Debentures	(3,000)
Net Cash from (used in) financing activities		3,000
Net increase (decrease) in cash and cash equivalent at the end of the year		4,000
Add Balance of cash at the beginning of the year		3,000
Cash balance at the end of the year		7,000

3. From the following comparative balance sheets prepare cash flow statement for the year 2003.

Balance Sheet

Liabilities	2002	2003	Assets	2002	2003
Equity Shares	25000	45000	Fixed Assets	40000	50000
Debentures	12000	6000	Less Depreciation	-8000	-12000
P & L Account	3000	7000		32000	38000
Creditors	10500	4000	Stock	7000	11000
Outstanding Exp.	2500	3000	Debtors	6500	5000
			Prepaid Expenses	2500	2000
			Cash at Bank	5000	9000
Total	53000	65000	Total	53000	65000

Cash Flow Statement

	Rs.	Rs.
Cash Flow from Operating Activities
Net Profit before tax	4,000
Add Depreciation	4,000
Operating profit before working capital changes	8,000
- Increase in Stock	(4,000)
+ Decrease in debtors	1,500
+ dec in Pp expenses	500
+increase in os expenses	500
- dec in creditors	(6,500)
Net cash from (used in) operating activities		-

Cash Flows from Investing Activities
Purchase of plant	(10,000)
Net cash from (used in) investing activities		(10,000)

Cash flows from Financing Activities
Issue of shares	20,000
Red of Debentures	(6,000)
Net Cash from (used in) financing activities		14,000
Net increase (decrease) in cash and cash equivalent at the end of the year		4,000
Add Balance of cash at the beginning of the year		5,000
Cash balance at the end of the year		9,000

4. From the following comparative balance sheets prepare cash flow statement for the year 2003.

Balance Sheet

Liabilities	2002	2003	Assets	2002	2003
			Machinery	40,000	50,000
Equity Shares	40,000	55,000	Less Depreciation	-8,000	-12,000
Debentures	12,000	6,000		32,000	38,000
P & L Account	3,000	7,000	Goodwill	15,000	10,000
Creditors	10,500	4,000	Stock	7,000	11,000
Outstanding Exp.	2,500	3,000	Debtors	6,500	5,000
			Prepaid Expenses	2,500	2,000
			Cash at Bank	5,000	9,000
Total	68,000	75,000	Total	68,000	75,000

Cash Flow Statement
	Rs.	Rs.
Cash Flow from Operating Activities
Net Profit before tax	4,000
Add Depreciation	4,000
Add Goodwill written off	5,000
Operating profit before working capital changes	13,000
- Increase in Stock	(4,000)
+ Decrease in debtors	1,500
+ dec in Pp expenses	500
+increase in os expenses	500
- dec in creditors	(6,500)
Net cash from (used in) operating activities		5,000

Cash Flows from Investing Activities
Purchase of plant	(10,000)
Net cash from (used in) investing activities		(10,000)

Cash flows from Financing Activities
Issue of shares	15,000
Red of Debentures	(6,000)
Net Cash from (used in) financing activities		9,000
Net increase (decrease) in cash and cash equivalent at the end of the year		4,000
Add Balance of cash at the beginning		5,000
Cash balance at the end of the year		9,000

5. From the following comparative balance sheets prepare cash flow statement for the year 2003.

Balance Sheet

Liabilities	2002	2003	Assets	2002	2003
Equity Shares	40,000	60,000	Machinery	40,000	40,000
Debentures	15,000	6,000	Less Depreciation	-8,000	-12,000
P & L Account	6,000	7,000		32,000	28,000
Creditors	9,000	4,000	Goodwill	15,000	10,000
Outstanding Exp.	5,000	3,000	Patents	7,000	4,000
			Discount on Shares	4,000	0
			Stock	6,000	9,000
			Debtors	5,000	14,000
			Prepaid Expenses	1,000	3,000
			Cash at Bank	5,000	12,000
Total	75,000	80,000	Total	75,000	80,000

Cash Flow Statement
	Rs.	Rs.
Cash Flow from Operating Activities
Net Profit before tax	1,000
Add Depreciation	4,000
Add Goodwill written off	5,000
Add Patents written off	3,000
Add Discount on shares	4,000
Operating profit before working capital changes	17,000
- Increase in Stock	(3,000)
- inc in debtors	(9,000)
- inc in Pp expenses	(2,000)
- dec os exp	(5,000)
- dec in creditors	(2,000)
Net cash from (used in) operating activities		(4,000)

Cash Flows from Investing Activities
Nil	-
Net cash from (used in) investing activities		-

Cash flows from Financing Activities
Issue of shares	20,000
Red of Debentures	(9,000)
Net Cash from (used in) financing activities		11,000
Net increase (decrease) in cash and cash equivalent at the end of the year		7,000
Add Balance of cash at the beginning of the year		5,000
Cash balance at the end of the year		12,000

6. From the following comparative balance sheets prepare cash flow statement for the year 2003.

Balance Sheet
Liabilities	2002	2003	Assets	2002	2003
			Machinery	35,000	50,000
Equity Shares	40,000	50,000	Less Depreciation	-8,000	-12,000
Debentures	15,000	10,000		27,000	38,000
P & L Account	6,000	8,000	Goodwill	15,000	10,000
General Reserve	0	5,000	Patents	7,000	5,000
Creditors	4,000	1,000	Discount on Shares	4,000	0
Outstanding Exp.	8,000	6,000	Stock	6,000	9,000
			Debtors	8,000	5,000
			Prepaid Expenses	1,000	3,000
			Cash at Bank	5,000	10,000
Total	73,000	80,000	Total	73,000	80,000

Cash Flow Statement
	Rs.	Rs.
Cash Flow from Operating Activities
Net Profit before tax	7,000
Add Depreciation	4,000
Goodwill written off	5,000
Patents written off	2,000
Discount on shares	4,000
Operating profit before working capital changes	22,000
- Increase in Stock	(3,000)
+ dec in debtors	3,000
- inc in Pp expenses	(2,000)
- dec in creditors	(3,000)
- dec in os exp	(2,000)
Net Cash from (used in) operating activities		15,000

Cash Flows from Investing Activities
Purchase of machinery	(15,000)
Net Cash from (used in) investing activities		(15,000)

Cash flows from Financing Activities
Issue of shares	10,000
Red of Debentures	(5,000)
Net Cash from (used in) financing activities		5,000
Net increase (decrease) in cash and cash equivalent at the end of the year		5,000
Add Balance of cash at the beginning		5,000
Cash balance at the end of the year		10,000

Working note
P&L account	2,000
Trf to general reserve	5,000
N/P before tax	7,000

7. From the following comparative balance sheets prepare cash flow statement for the year 2003.

Balance Sheet
Liabilities	2002	2003	Assets	2002	2003
			Machinery	50,000	65000
Equity Shares	50,000	65,000	Less Depreciation	-12,000	-15,000
Debentures	10,000	5,000		38,000	50,000
P & L Account	8,000	10,000	Goodwill	10,000	6,000
General Reserve	5,000	7,000	Patents	5,000	3,000
Provision for tax	1,500	5,000	Stock	9,000	11,000
Creditors	1,000	3,000	Debtors	5,000	8,000
Outstanding Expenses	4,500	4,000	Prepaid Expenses	3,000	6,000
			Cash at Bank	10,000	15,000
Total	80,000	99,000	Total	80,000	99,000

Cash Flow Statement
	Rs.	Rs.
Cash Flow from Operating Activities
Net Profit before tax	7,500
Add Depreciation	3,000
Goodwill written off	4,000
Patents written off	2,000
Operating profit before working capital changes	16,500
- Increase in Stock	(2,000)
- inc in debtors	(3,000)
- inc in Pp expenses	(3,000)
+ inc in creditors	2,000
- dec in os exp	(500)
Net Cash from (used in) operating activities		10,000

Cash Flows from Investing Activities
Purchase of machinery	(15,000)
Net Cash from (used in) investing activities		(15,000)

Cash flows from Financing Activities
Issue of shares	15,000
Red of Debentures	(5,000)
Net Cash from (used in) financing activities		10,000
Net increase (decrease) in cash and cash equivalent at the end of the year		5,000
Add Balance of cash at the beginning of year		10,000
Cash balance at the end of the year		15,000

Working note
P&L account	2,000
Trf to general reserve	2,000
Prov for tax	3,500
N/P before tax	7,500

8. Prepare Cash flow statement from the following balance sheets.

Balance Sheet
Liabilities	2002	2003	Assets	2002	2003
			Machinery	40,000	65000
Equity Shares	50,000	60,000	Less Depreciation	-12,000	-15,000
Debentures	10,000	5,000		28,000	50,000
P & L Account	5,000	11,000	Goodwill	12,000	6,000
General Reserve	5,000	7,000	Patents	8,000	3,000
Provision for Tax	3,000	4,000	Stock	14,000	11,000
Proposed dividend	0	5,000	Debtors	5,000	8,000
Creditors	1,000	3,000	Prepaid Expenses	3,000	6,000
Outstanding Expenses	6,000	4,000	Cash at Bank	10,000	15,000
Total	80,000	99,000	Total	80,000	99,000

Cash Flow Statement
	Rs.	Rs.
Cash Flow from Operating Activities
Net Profit before tax	14,000
Add Depreciation	3,000
Goodwill written off	6,000
Patents written off	5,000
Operating profit before working capital changes	28,000
+ Decrease in Stock	3,000
- inc in debtors	(3,000)
- inc in Pp expenses	(3,000)
+ inc in creditors	2,000
- dec in os exp	(2,000)
Net Cash from (used in) operating activities		25,000

Cash Flows from Investing Activities
Purchase of machinery	(25,000)
Net Cash from (used in) investing activities		(25,000)

Cash flows from Financing Activities
Issue of shares
Red of Debentures	(5,000)
Net Cash from (used in) financing activities		5,000
Net increase (decrease) in cash and cash equivalent at the end of the year		5,000
Add Balance of cash at the beginning of the year		10,000
Cash balance at the end of the year		15,000

Working note
P&L account	6,000
Transfer to general reserve	2,000
Transfer to provision for tax	1,000
Transfer to proposed dividend	5,000
N/P before tax	14,000

9. Prepare Cash flow statement from the following balance sheets.

Balance Sheet
Liabilities	2002	2003	Assets	2002	2003
			Machinery	40,000	65000
Equity Shares	50,000	60,000	Furniture	8,000	12000
Debentures	15,000	5,000	Less Depreciation	-12,000	-18,000
P & L Account	6,000	7,000		36,000	59,000
General Reserve	4,000	9,000	Goodwill	11,000	6,000
Provision for Tax	3,000	4,000	Patents	9,000	5,000
Proposed dividend	4000	5,000	Stock	11,000	8,000
Creditors	1,000	3,000	Debtors	5,000	8,000
Outstanding Expenses	2,000	4,000	Prepaid Expenses	4,000	6,000
			Cash at Bank	9,000	5,000
Total	85,000	97,000	Total	85,000	97,000

Cash Flow Statement
	Rs.	Rs.
Cash Flow from Operating Activities
Net Profit before tax	12,000
Add Depreciation	6,000
Goodwill written off	5,000
Patents written off	4,000
Operating profit before working capital changes	27,000
+ Decrease in Stock	3,000
- inc in debtors	(3,000)
- inc in Pp expenses	(2,000)
+ inc in creditors	2,000
+ inc in os exp	2,000
Cash from (used in) operating activities		29,000

Cash Flows from Investing Activities
Purchase of machinery	(25,000)
Purchase of furniture	(4,000)
Cash from (used in) investing activities		(29,000)

Cash flows from Financing Activities
Issue of shares	10,000
Red of Debentures	(10,000)
Dividend paid	(4,000)
Cash from (used in) financing activities		(4,000)
Net increase (decrease) in cash and cash equivalent at the end of the year		(4,000)
Add Balance of cash at the beginning of year		9,000
Cash balance at the end of the year		5,000

Note:

Treatment of proposed dividend is different from other appropriations such as general reserve or provision for taxation. You must assume the opening balance of proposed dividend is paid even if the question does not mention anything about it, and it must be shown in financing activities. The closing balance of proposed dividend is fresh provision of the made during the year, hence shown the working note for profit before tax.

Working note
P&L account	1,000
Transfer to general reserve	5,000
Transfer to provision for tax	1,000
Transfer to proposed dividend	5,000
N/P before tax	12,000

Proposed Dividend Account

Particulars	Dr.	Particulars	Cr.
		By balance b/d	4,000
To Bank	4,000
		By P&L Account	5,000
To Balance c/d	5,000

10. Prepare cash flow statement from the following balance sheets

Balance Sheet
Liabilities