CBSE Class 12 Accounts, Cash flow statement

NOTES

CHAPTER 14: Cash Flow Statement

A Cash flow statement shows inflow and outflow of cash and cash equivalents from various activities of a company during a specific period. The primary objective of cash flow statement is to provide useful information about cash flows (inflows and outflows) of an enterprise during a particular period under various heads, i.e., operating activities, investing activities and financing activities

Benefits of Cash Flow Statement

  1. A cash flow statement when used along with other financial statements provides information that enables users to evaluate changes in net assets of an enterprise
  2. Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprise
  3. It also enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events.
    1. Cash from Operating Activities
      Operating activities are the activities that constitute the primary or main activities of an enterprise. Cash flows from operating activities are primarily derived from the main activities of the enterprise. 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:
      Cash Inflows from operating activities
      • Cash receipts from sale of goods and the rendering of services.
      • Cash receipts from royalties, fees, commissions and other revenue.
      2. Cash Outflows from operating activities
      • Cash payments to suppliers for goods and services.
      • Cash payments to and on behalf of the employees.
      • Cash payments to an insurance enterprise for premiums and claims, annuities, and other policy benefits.
      • Cash payments of income taxes unless they can be specifically identified with financing and investing activities.
    2. Cash from Investing Activities
      Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Investing activities relate to purchase and sale of long-term assets or fixed assets such as machinery, furniture, land and building, etc.
      Cash Outflows from investing activities
      • Cash payments to acquire fixed assets including intangibles and capitalised research and development.
      • Cash payments to acquire shares, warrants or debt instruments of other enterprises other than the instruments those held for trading purposes.
      • Cash advances and loans made to third party (other than advances and loans made by a financial enterprise wherein it is operating activities).
      Cash Inflows from Investing Activities
      • Cash receipt from disposal of fixed assets including intangibles.
      • Receipt from the repayment of advances or loans made to third parties (except in case of financial enterprise).
      • Cash receipt from disposal of shares, warrants or debt instruments of other enterprises except those held for trading purposes.
      • Interest received in cash from loans and advances.
      • Dividend received from investments in other enterprises.
    3. Cash from Financing Activities
      Financing activities relate to long-term funds or capital of an enterprise, e.g., cash proceeds from issue of equity shares, debentures, raising long-term bank loans, repayment of bank loan, etc.
      Cash Inflows from financing activities
      • Cash proceeds from issuing shares (equity or/and preference)
      • Cash proceeds from issuing debentures, loans, bonds and other short/ long-term borrowings.
      Cash Outflows from financing activities
      • Cash repayments of amounts borrowed.
      • Interest paid on debentures and long-term loans and advances.
      • Dividends paid on equity and preference capital.

Example 1:

From the following information, calculate cash flow from operating activities using direct method.


Solution:

Cash flow from operating Activities

Working Notes:

  1. Cash Receipts from Customers is calculated as under:
    2. Cash Receipts from Customers = Revenue from Operations + Trade Receivables in the beginning − Trade Receivables in the end
    = Rs 2, 20,000 + Rs 33,000 − Rs 36,000
    = Rs 2, 17,000
  2. Purchases = Cost of Revenue from Operations − Opening Inventory + Closing Inventory
    = Rs 1, 20,000 − Rs 22,000 + Rs 27,000 = Rs 1,25,000
  3. Cash payment to suppliers = Purchases + Trade Payables in the beginning − Trade Payables in the end
    = Rs 1,25,000 + Rs 17,000 − Rs 15,000 = Rs 1,27,000
  4. Cash Paid to Employees = Rs 30,000 + Rs 2,000 − Rs 3,000 = Rs 29,000
  5. Cash Paid for Insurance Premium = Rs 8,000 − Rs 5,000 + Rs 5,500 = Rs 8,500
  6. Income Tax Paid = Rs 10,000 + Rs 3,000 − Rs 2,000 = Rs 11,000

Example 2:

From the following calculate cash flow from investing activities:-

Particulars Closing balance Opening balance
Machinery (at cost)
Accumulated Depreciation
Patents
 4,20,000
1,10,000
1,60,000
 4,00,000
1,00,000
2,80,000

Additional Information:

  1. During the year a machine costing Rs. 40,000 with its accumulated depreciation of Rs. 24,000 was sold for Rs. 20,000.
  2. Patents written off were Rs. 40,000 and some patents were sold at a profit of Rs. 20,000.

 

Solution:

Cash flow from Investing Activities:-

Particulars Rs.
Proceeds from sale of machinery
Payment for purchase of machinery (WN1)
Proceeds from sale of patents (WN2)
  20,000
 (60,000)
 1,00,000
Cash flow from Investing activities
  60,000

Working notes:

Machinery Account
Particulars
 Rs.
Particulars
 Rs.
To bal b/d
To gain(profit) on sale of a machinery
To bank A/c (purchase) (bal fig)
 4,00,000
4,000
60,000
 By bank A/c (sale of machinery)
By accumulated depreciation A/c
By bal c/d
 20,000
24,000
4,20,000
 
 4,64,000
  
 4,64,000

Patent A/c
Particulars
Rs.
 Particulars
 Rs.
To bal b/d
To gain(profit) on sale of patent

 2,80,000
20,000
 
 By bank A/c (sale)
By ammortisation A/c
By bal c/d
 1,00,000
40,000
1,60,000
 
 3,00,000
  
 3,00,000

Format of cash flow statement
(i) Cash flows from operating Activities
 a) Net profit before tax and extraordinary items
  Adjustments for Non-cash and non-operating items.
 b) Items to be added
  Depreciation
  Goodwill patents
  Interest on borrowings
  Loss on sale of assets
  Increase in provision of debts
 c) Less:
  Interest income/received
  Dividend income received
  Rental income received
  Profit on sale of fixed asset
 d) Operating profits before working capital changes (A + B − C)
 e) Decrease in current assets and increase in current liabilities
 f) Less : Increase in current assets and decrease in current liabilities
 g) Cash generated from operations (D + E − F)
 h) Less : Income tax paid (Net tax refund received)
 i) Cash flow from before extraordinary items
  extraordinary items (+/−)
 j) Net cash from operating activities
 
(ii) Cash flow from investing activities
         Add: − Proceeds from sale of fixed assets
         Proceeds from sale of investments
         Proceeds from sale of intangible assets
         Interest and dividend received
         Less: – Rent income
         Purchase of fixed assets
         Purchase of investment
         Purchase of intangible assets like goodwill
         Advanced extraordinary items (+/−)
         Net cash from (or used in) investing activities
 
(iii) Cash flows from financing activities
  Add:
  Proceeds from issue of shares and debentures
  Proceeds from other long term borrowings
  Less : Final dividend fund
  Interim dividend fund
  Interest on debentures and loans paid
  Repayment of loans
  Redemption of debenture & preference shares
  Adjust extraordinary items (+/−)
  Net cash from (or used in) financing activities
 
(iv) Net increase/Decrease in cash and cash & equivalent (i + ii + iii)

(v) Add: cash and cash equivalents in the beginning of the year − cash in hand
  cash at bank overdraft
  short term deposit
  marketable securities
 
(vi) cash and cash equivalents in the end of the year
  cash in hand
  cash at Bank (by bank overdraft)
  short term deposits
  

 

Example 3:

From the following information. Calculate the Cash from financing activities:

Particulars 31.12.2006 31.12.2007
Equity share capital 4,00,000 5,00,000
10% debentures 1,50,000 100,000
Securities premium 40,000 50,000

 Additional Information: Interest paid on debentures Rs. 10,000.

Solution:

Particulars Rs
Cash proceeds from the issue of shares 110000 (Including premium)  
Interest paid on debenture   10,000
Redemption of debenture   50,000
  50,000

Example 4:

From the following Balance Sheet of Dreams Converge Ltd as at 31.3.2018 and 31.3.2017; Calculate Cash from operating activities. Showing your workings clearly

PARTICULARS NOTE NO. 31st March 2018 31st March 2017
I. EQUITY AND LIABILITY:
 1. Shareholder’s Fund:
  a. Share Capital
  b. Reserve and Surplus
 2. Non-Current Liabilities:
  Long Term Borrowings
 3. Current Liabilities:
  a. Trade Payables
  b. Short term Provisions (Provision for tax)
  
  
 
7,00,000
3,50,000
 
50,000
 
1,22,000
50,000
  
 
5,00,000
2,00,000
 
1,00,000
 
1,05,000
30,000
Total
 
 12,72,000
 9,35,000
II. ASSETS:
 1. Non-Current Assets:
  a. Fixed Assets:
   i. Tangible Assets
   ii. Intangible Assets
  b. Non-current Investments
 2. Current Assets:
  a. Inventory
  b. Trade Receivable
  c. Cash and Cash Equivalents
  
  
 
 
5,00,000
95,000
1,00,000
 
1,30,000
1,47,000
3,00,000
  
 
 
5,00,000
1,00,000
Nil
 
55,000
80,000
2,00,000
Total
  
 12,72,000
 9,35,000

NOTES

NOTE Number Particulars 31.3.2018 31.3.2017
1. Tangible Assets:
Machinery
Accumulated depreciation
  
2,80,000
(1,00,000)
  
2,00,000
(80,000)
 
  
 1,80,000
 1,20,000
 
 Equipment
  3,20,000
 3,80,000
2. Intangible Assets :
Goodwill
  
95,000
  
1,00,000
Additional Information:

Machinery of the book value of 80,000 (accumulated depreciation 20,000) was sold at a loss of 18,000

Solution:

Particulars Amount Amount
I Cash from Operating Activity
Net Profit Before Tax Profit during the year
Add transfer to Reserve
Add: Non Cash Non-Operating Expenses
Depreciation provided Loss on Sale of Assets
Goodwill Amortized
Less Non-Operating Income Operating Profit before Working Capital
Add Increase in Trade Payable
Less : Increase in Inventory
Increase in Trade Receivable
Cash From Operating Activities before Tax
Less Tax Paid Cash From Operating Activities After tax
 1,50,000
50,000
40,000
18,000
5,000
--
17,000
 (75,000)
 (67,000)
  
 
 
2,00,000
 63,000
2,63,000
17,000
2,80,000
(1,42,000)
1,38,000
(30,000)
1,08,000

Machinery Account
Particulars Amount Particulars Amount
To Balance b/d
To Bank A/c
(Purchases)
 2,00,000
1,60,000
 By Accumulated Depreciation
By Loss on sale of Fixed Asset
By Bank A/c
By Balance c/d
 20,000
18,000
42,000
2,80,000
 
 3,60,000
  
 3,60,000

Accumulated Depreciation
Particulars Amount Particulars Amount
To Machinery A/c
To Balance c/d
 20,000
1,00,000
 By balance b/d
By Statement of Profit and loss account
 80,000
40,000
 
 1,20,000
  
 1,20,000