CA.

Ritesh Rampuria

Cash Flow Statement

A Cash Flow Statement is a statement which discloses the changes in cash position between the two
periods.

Utility of Cash Flow Analysis

A Cash Flow Statement is useful for short-term planning. A business enterprise needs sufficient cash
to meet its various obligations in the near future such as payment for purchase of fixed assets, payment
of debts maturing in the near future, expenses of the business, etc. A historical analysis of the different
sources and applications of cash will enable the management to make reliable cash flow projections for
the immediate future. It may then plan out for investment of surplus or meeting the deficit, if any.
Thus, a Cash Flow Analysis is an important financial tool for the management.
Its chief advantages are as follows:
➢ Helps in efficient cash management.
➢ Helps in internal financial management.
➢ Discloses the movements of cash.
➢ Discloses the success or failure of cash planning.

Limitations of Cash Flow Analysis

Cash Flow Analysis is a useful tool of financial analysis. However, it has its own limitations. These
limitations are as under:
1. Cash Flow Statement cannot be equated with the Income Statement. An Income Statement takes
into account both cash as well as non-cash items and, therefore, net cash flow does not necessarily
mean net income of the business.
2. The cash balance as disclosed by the cash flow statement may not represent the real liquid position
of the business since it can be easily influenced by postponing purchases and other payments.
3. Cash flow statement cannot replace the Income Statement or the Funds Flow Statement. Each of
them has a separate function to perform.
In spite of these limitations it can be said that cash flow statement is a useful supplementary
instrument. It discloses the volume as well as the speed at which the cash flows in the different
segments of the business. This helps the management in knowing the amount of capital tied up in a
particular segment of the business. The technique of cash flow analysis, when used in conjunction with
ratio analysis, serves as a barometer in measuring the profitability and financial position of the
business.

The Cash Flow Statement is prepared in accordance with the provisions contended in AS-3 (Revised)
issued by the Council of the Institute of Chartered Accountants of India.
The AS-3 (Revised) while laying down its objectives says that information about the cash flows of an
enterprise is useful in providing users of financial statements with a basis to assess the ability of the
enterprise to generate cash and cash equivalents and the needs of the enterprise to utilize those cash
flows. The economic decisions that are taken by users require an evaluation of the ability of an
enterprise to generate cash and cash equivalents and the timing and certainty of their generation.
The Statement deals with the provision of information about the historical changes in cash and cash
equivalents of an enterprise by means of a Cash Flow Statement which classifies Cash Flows during
the period from Operating, Investing and Financing Activities.

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Cash Flow Statement CA. Ritesh Rampuria

Cash comprises cash on hand and demand deposits with banks.

Cash Equivalents are short term, highly liquid investments that are readily convertible into known
amounts of cash and which are subject to an insignificant risk of changes in value.
Cash Flows are inflows and outflows of cash and cash equivalents.
Operating Activities are the principal revenue-producing activities of the enterprise and other
activities that are not investing or financing activities.
Investing Activities are the acquisition and disposal of long-term assets and other investments not
included in cash equivalents.
Financing Activities are activities that result in changes in the size and composition of the owners’
capital (including preference share capital in the case of a company) and borrowings of the enterprise.

Cash Flows exclude movements between items that constitute cash or cash equivalent because these
components are part of the cash management of an enterprise rather than part of its operating, investing
and financing activities. Cash management includes the investment of excess cash in cash equivalents.

The Cash Flow Statement should report Cash Flows during the period classified by Operating,
Investing and Financing Activities.
Classification by activity provides information that allows users to assess the impact of those activities
on the financial position of the enterprise and the amount of its cash and cash equivalents. This
information may also be used to evaluate the relationships among those activities.

Operating Activities
The amount of cash flows arising from operating activities is a key indicator of the extent to which the
operations of the enterprise have generated sufficient cash flows to maintain the operating capability of
the enterprise, pay dividends, repay loans and make new investments without recourse to external
sources of financing.
Cash flows from operating activities are primarily derived from the principal revenue-producing
activities of the enterprise. Therefore, they generally result from the transactions and other events that
enter into the determination of net profit or loss.
Examples of cash flows from operating activities are:
(a) Cash receipts from the sale of goods and the rendering of services;
(b) Cash receipts from royalties, fees, commissions and other revenue;
(c) Cash payments to suppliers for goods and services;
(d) Cash payments to and on behalf of employees;
(e) Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and
other policy benefits;
(f) Cash payments or refunds of income taxes unless they can be specifically identified with financing
and investing activities; and
(g) Cash receipts and payments relating to futures contracts, forward contracts, option contracts and
swap contracts when the contracts are held for dealing or trading purposes.

An enterprise should report cash flows from operating activities using either:
(a) Direct Method: whereby major classes of gross cash receipts and gross cash payments are
disclosed.
(b) Indirect Method: whereby net profit or loss before tax and extraordinary items is adjusted for the
effects of transactions of a non-cash nature, and items of income or expense associated with
investing or financing cash flows.

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Cash Flow Statement CA. Ritesh Rampuria

Investing Activities
The separate disclosure of cash flows arising from investing activities is important because the cash
flows represent the extent to which expenditures have been made for resources intended to generate
future income and cash flows.
Examples of cash flows arising from investing activities are:
(a) Cash payments to acquire fixed assets (including intangibles). These payments include those
relating to capitalized research and development costs and self-constructed fixed assets;
(b) Cash receipts from disposal of fixed assets (including intangibles);
(c) Cash payments to acquire shares, warrants or debt instruments of other enterprises and interests in
joint ventures (other than payments for those instruments considered to be cash equivalents and
those held for dealing or trading purposes);
(d) Cash receipts from disposal of shares, warrants or debt instruments of other enterprises and
interests in joint ventures (other than receipts from those instruments considered to be cash
equivalents and those held for dealing or trading purposes);
(e) Cash advances and loans made to third parties (other than advances and loans made by a financial
enterprise);
(f) Cash receipts from the repayment of advances and loans made to third parties (other than advances
and loans of a financial enterprise);
(g) Cash payments for futures contracts, forward contracts, option contracts and swap contracts except
when the contracts are held for dealing or trading purposes, or the payments are classified as
financing activities; and
(h) Cash receipts from futures contracts, forward contracts, option contacts and swap contracts except
when the contracts are held for dealing or trading purposes, or the receipts are classified as
financing activities.

Financing Activities
The separate disclosure of cash flows arising from financing activities is important because it is useful
in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the
enterprise.
Examples of cash flows arising from financing activities are:
(a) Cash proceeds from issuing shares or other similar instruments;
(b) Cash proceeds from issuing debentures, loans, notes, bonds and other short or long-term
borrowings; and
(c) Cash repayments of amounts borrowed.

Foreign Currency Cash Flows

Cash flows arising from transactions in a foreign currency should be recorded in an enterprises
reporting currency by applying to the foreign currency amount the exchange rate between the reporting
currency and the foreign currency at the date of cash flow.
Unrealised gains and losses arising from changes in foreign exchange rates are not cash flows and
hence should be excluded from the operating profit if included.
The difference of amount raised due to changes in exchange rate should not be included in operating,
investing and financing activities.

Extraordinary Items
Any cash flows relating to extraordinary items should as far as possible be classified into operating,
investing or financing activities and those items should be separately disclosed in the cash flow
statement. Some of the examples for extraordinary items are bad debts recovered, claims from
insurance companies, winning of a law suit or lottery etc.

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Cash Flow Statement CA. Ritesh Rampuria

Interest and Dividends

Cash flows from interest and dividends received and paid should each be disclosed separately.
The treatment of interest and dividends, received and paid, depends upon the nature of the enterprise
i.e., financial enterprises and other enterprises.
In case of financial enterprises,
Cash flows arising from interest paid and interest & Dividends received, should be classified as cash
flows from operating activities.
In case of other enterprises,
Cash flows arising from interest paid should be classified as cash flows from financing activities while
interest and dividends received should be classified as cash flows from investing activities.
Dividends paid should be classified as cash flows from financing activities.

Investments in Subsidiaries, Associates and Joint Ventures

Any such investments should be reported in the cash flow statement as investing activity.
Any dividends received should also be reported as cash flow from investing activity.

Non-Cash Transactions
Investing and financing transactions that do not require the use of cash or cash equivalents should be
excluded from a cash flow statement. Such transactions should be disclosed elsewhere in the financial
statements in a way that provides all the relevant information about these investing and financing
activities. The exclusion of non-cash transactions from the cash flow statement is consistent with the
objective of a cash flow statement as these do not involve cash flows in the current period.
Examples of non-cash transactions:
(a) The acquisition of assets by assuming directly related liabilities.
(b) The acquisition of an enterprise by means of issue of shares.
(c) Conversion of debt into equity.

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Cash Flow Statement CA. Ritesh Rampuria

Practical Problems

Problem.1. From the following particulars of Bharat Ltd., Calculate Cash Flows from Investing
Activities.
Liabilities 2006 2007 Assets 2006 2007
₹ ₹
Goodwill 1,00,000 3,00,000
Patents 2,80,000 1,60,000
Plant & Machinery 10,20,000 12,40,000
10% Long-term Investments 60,000 1,60,000
Shares of X Ltd. 1,00,000 1,00,000
Investment in Land 1,00,000 1,00,000

Additional Information:
(a) Patents were written off to the extent of ₹ 40,000 and some patents were sold at a profit of ₹
20,000.
(b) A machine costing ₹ 1,40,000 (depreciation provided thereon ₹ 60,000) was sold for ₹ 50,000.
Depreciation charged during the year was ₹ 1,40,000.
(c) On 31st December, 2007 10% investment were purchased for ₹ 1,80,000 and some investments
were sold at a profit of ₹ 20,000. Interest on Investments was received on 31st December, 2007.
(d) X Ltd paid dividend @ 10% on its shares.
(e) A plot of land was purchased out of surplus funds for investment purposes and let out for
commercial use and rent received ₹ 30,000.

Answer: Net cash used in investing activities ₹ (5,24,000)

Problem.2. From the following particulars of Tushar Ltd., Calculate Cash Flows from Financing
Activities.
Liabilities 2006 2007 Assets 2006 2007
₹ ₹ ₹ ₹
Equity Share Capital 6,00,000 8,00,000 Discount on Issue
18% Preference Share 4,00,000 2,00,000 of Debentures 5,000 6,000
Capital Underwriting Com.
Securities Premium 1,00,000 1,30,000 on issue of share -- 10,000
14% Debentures 2,00,000 3,00,000

Additional Information:
(a) Preference Dividend on preference shares and an Interim Dividend @ 15% were paid on equity
Shares on 31.12.2007.
(b) Preference shares were redeemed on 31.12.2007 at a premium of 5%. Such premium has been
provided out of profits.
(c) New shares and debentures were issued on 31.12.2007.

Answer: Net cash used in financing activities ₹ (81,000)

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Cash Flow Statement CA. Ritesh Rampuria

Problem.3. Prepare Fixed Assets Account.

Year 1 Year 2
Fixed Assets at cost less depreciation ₹ 5,10,000 ₹ 6,20,000
A machine costing ₹ 70,000, written down value ₹ 40,000 was disposed off for ₹ 25,000.
The provision for depreciation stood at ₹ 1,50,000 in Year 1 and ₹ 1,90,000 in Year 2.

Problem.4. From the following particulars, Calculate Cash Flows from Operating Activities
₹ ₹
Cash Sales 2,00,000 Manufacturing Overheads paid 30,000
Cash Purchases 50,000 Office & Administration Expenses paid 20,000
Cash receipts from customers 4,00,000 Selling & Distribution Expenses paid 10,000
Cash Paid to suppliers 1,00,000 Income Taxes paid 1,18,000
Trading Commission received 1,00,000 Insurance proceeds from earthquake
Trading Commission paid 25,000 disaster settlement 1,00,000
Wages & Salaries paid 40,000 Income Tax Refund received 3,000
Rent paid 10,000

Answer: Net cash from operating activities ₹ 4,00,000.

Problem.5. From the following information, Calculate Cash Flows from Operating Activities
Particulars As on 31.12.2006 As on 31.12.2007
₹ ₹
Goodwill 50,000 40,000
Fixed Assets (Net) 40,000 35,000
Debtors 70,000 85,000
Bills Receivable 9,000 14,500
Prepaid Expenses 1,000 500
Stock 38,500 54,500
Cash and Bank 12,500 9,000
Preliminary Expenses 7,500 5,000
General Reserve 20,000 25,000
Profit and Loss A/c 15,000 24,000
Proposed Dividend 21,000 25,000
Trade Creditors 12,500 23,500
Bills Payables 10,000 8,000
Outstanding Expenses 15,000 18,000
Provision for Taxation 20,000 25,000
Accrued Income 3,000 3,500
Income received -in-advance 3,000 3,500
Note: There was no sale/purchase of fixed assets during 2007.

Answer: Net cash from operating activities ₹ 37,500.

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Cash Flow Statement CA. Ritesh Rampuria

Problem.6. From the following details relating to the Accounts of Grow More Ltd. prepare Cash Flow
Statement:
Liabilities 31.03.2002 (₹) 31.03.2001 (₹)
Share Capital 10,00,000 8,00,000
Reserve 2,00,000 1,50,000
Profit and Loss Account 1,00,000 60,000
Debentures 2,00,000 --
Provision for Taxation 1,00,000 70,000
Proposed Dividend 2,00,000 1,00,000
Sundry Creditors 7,00,000 8,20,000
25,00,000 20,00,000
Assets
Plant and Machinery 7,00,000 5,00,000
Land/Building 6,00,000 4,00,000
Investments 1,00,000 --
Sundry Debtors 5,00,000 7,00,000
Stock 4,00,000 2,00,000
Cash on Hand/Bank 2,00,000 2,00,000
25,00,000 20,00,000
Additional Information:
a) Depreciation @ 25% was charged on the opening value of Plant and Machinery.
b) During the year one old machine costing ₹ 50,000 (WDV ₹ 20,000) was sold for ₹ 35,000.
c) ₹ 50,000 was paid towards Income tax during the year.
d) Building under construction was not subject to any depreciation.

Problem.7. ABC Ltd. gives you the following informations. You are required to prepare Cash Flow
Statement by using indirect methods as per AS-3 for the year ended 31.03.2004:
Balance Sheet as on
st st
Liabilities 31 March 31 March Assets 31st March 31st March
2003 2004 2003 2004
(₹) (₹) (₹) (₹)
Capital 50,00,000 50,00,000 Plant & Machinery 27,30,000 40,70,000
Retained Earnings 26,50,000 36,90,000 Less: Depreciation 6,10,000 7,90,000
Debentures -- 9,00,000 21,20,000 32,80,000

Current Liabilities Current Assets

Creditors 8,80,000 8,20,000 Debtors 23,90,000 28,30,000
Bank Loan 1,50,000 3,00,000 Less: Provision 1,50,000 1,90,000
Liability for 22,40,000 26,40,000
Expenses 3,30,000 2,70,000 Cash 15,20,000 18,20,000
Dividend Payable 1,50,000 3,00,000 Marketable
securities 11,80,000 15,00,000
Inventories 20,10,000 19,20,000
. . Prepaid Expenses 90,000 1,20,000
91,60,000 1,12,80,000 91,60,000 1,12,80,000
Additional Information:
a) Net profit for the year ended 31st March 2004, after charging depreciation ₹ 1,80,000 is ₹
22,40,000.
b) Debtors of ₹ 2,30,000 were determined to be worthless and were written off against the provision
for doubtful debts account during the year.
c) ABC Ltd. declared dividend of ₹ 12,00,000 for the year 2003-2004.

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Cash Flow Statement CA. Ritesh Rampuria

Problem.8. The Balance Sheet of New Light Ltd. for the years ended 31st March, 2001 and 2002 are
as follows:
Liabilities 31st March 31st March Assets 31st March 31st March
2001 2002 2001 2002
(₹) (₹) (₹) (₹)
Equity Share Capital 12,00,000 16,00,000 Fixed Assets 32,00,000 38,00,000
10% Preference Less: Depreciation 9,20,000 11,60,000
Share Capital 4,00,000 2,80,000 22,80,000 26,40,000
Capital Reserve -- 40,000 Investment 4,00,000 3,20,000
General Reserve 6,80,000 8,00,000 Cash 10,000 10,000
Profit & Loss A/c 2,40,000 3,00,000 Other current assets 11,10,000 13,10,000
9% Debentures 4,00,000 2,80,000 Preliminary
Current Liabilities 4,80,000 5,20,000 expenses 80,000 40,000
Proposed Dividend 1,20,000 1,44,000
Provision for Tax 3,60,000 3,40,000
Unpaid Dividend . 16,000 . .
38,80,000 43,20,000 38,80,000 43,20,000
Additional information:
(a) The company sold one fixed assets for ₹ 1,00,000 the cost of which was ₹ 2,00,000 and the
depreciation provided on it was ₹ 80,000.
(b) The company also decided to write off another fixed asset costing ₹ 56,000 on which depreciation
amounting to ₹ 40,000 has been provided.
(c) Depreciation on fixed assets provided ₹ 3,60,000.
(d) Company sold some investment at a profit of ₹ 40,000, which was credited to capital reserve.
(e) Company decided to value stock at cost, whereas previously the practice was to value stock at cost
less 10%. The stock according to books on 31-3-2001 was ₹ 2,16,000. The stock on 31-3-2002 was
correctly valued at ₹ 3,00,000.
(f) Debentures and preference share capital redeemed at 5% premium.

Prepare Cash Flow Statement as per revised Accounting Standard-3 by Indirect Method.