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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 |
|
|
|
| | 