Cash flow statement preparation

1. ACCOUNTING FOR MANAGEMENT
Dr. Mustafa K
Visiting Faculty
School of Management Studies,
DCMS, University of Calicut
mustafapsmo@gmail.com
M B A FIRST SEMESTER
CASH-FLOW STATEMENT

2. Contents
• Meaning
• Objective or uses
• Limitations of Cash-flow statement
• Difference between cash-flow statement & cash budget
• Procedures for preparing Cash-Flow Statement
• Some terms are used in preparing cash-flow statement
• Classification of cash flows
• Some special items
• Classification of business activities showing cash inflows &
• cash outflows
• Format of cash flow statement
• Illustration
• Exercise

3. Meaning
•Acash-flow statementis a statement
showing inflows (receipts) and outflows
(payments) of cash & cash equivalents
during a particular period.

4. Objective & Uses
o It is useful for short-term financial planning.
o It is useful in preparing cash budget.
o It ishelpful in studying the trend of cash
receipts & payments.
o It is helpful in making dividend decisions.
o It helps the investors, debenture- holders,
lenders etc.

5. Limitations
 It is not suitable for judging the
liquidity of a firm.
 There is a possibility of window-
dressing.
 It ignores non-cash transactions.
 It ignores the accrual concept of
accounting.
 It is historical in nature.

6. Difference between cash-flow statement
& cash budget
• There is not so much difference a
cash-flowstatement and a cash
budget.
• The only difference is that a cash-
flow statement is prepared for a
past period whereas cash budget is
prepared for a future period.

7. Procedure of preparing a Cash-Flow
Statement
ICAI has issued AS-3, for preparing
a cash flow statement. As per this
AS-3,some terms are mandatory for
certain enterprises.These are:-
o It is mandatory to prepare cash flow
statement to those commercial, industrial
and business enterprises whose turnover
exceeds ₹ 5o crore.
o It is also mandatory to prepare cash
flow statement those are listed in stock

8. Terms are used in preparing cash
flow statement
• Cash :- it consists cash-in-hand &
demand deposits with bank.
• Cash & cash equivalent :-it is short term
investments, which arematured within 3
months from acquisition.It consists of :
a. Cash in hand
b. Cash at bank
c. Short-term deposits
d. Short-term investments
e. Cheque and drafts on hand

9. Classification of cash flows
• According to AS-3,
• A cash flow statement should be
presented in a mannerthat it reports
inflows and out flowsof cash by classifying
them into three categories. These are :-
a. Cash flows from operating
activities.
b. Cash flows from investing activities.

10. Cash flows from operating activities
• Operating activities are the main revenue
generating activities of an enterprises.
• It includes cashflows from those transaction and
events which enter intothe ascertainment of net
profit or loss of the enterprises.

11. Continue…….
Examples :-
a. cash receiptsfrom the sale of goods &
rendering of services.
b. Cash receipts from royalties, fees,
commissions and other revenues.
c. Cash receipts from debtors and bills
receivables.
d. Cash payments for purchase of goods &
services.
e. Cash payments to creditors and bills
receivables.
f. Cash payments of wages, salaries and other
payment to employees.

12. Cash flows from investing activities
• Investing activities include the purchase and sale
of long-term assets suchas land, buildings,
plant and machinery etc. not held for resale.
• Example:-
1. Cash payments to acquire fixed assets
(including tangible)
2. Cash receipts from sale of fixed assets
3. Cash payments to acquire shares, warrants or
• debt instruments of other enterprise.
4. Cash receipts of insurance claim for property
involved in accident etc.

13. Cash flows from financial activities
• Financial activities are those activities
that result in change in capital and
borrowings of the enterprise.
•Examples:-
o Cash receipts from issuing shares or
other similar instruments.
o Cash receipts from issuing debentures,
loans, bonds, and other short-term or long-
term borrowings.

14. Continue….
o Cash payments of dividend both on
preference and equity shares and also
cash payments for interest on
debentures and loans.
o Cash payment for buy-back of equity
shares.
o Cash repayments of the amount borrowed
including redemption ofdebentures, bonds,
preferenceshares etc.

15. Some special items
a. Interest & Dividends :- cash inflows & outflows from
interest & dividend should be disclosed separately.
Cash receive from interestanddividend shownin
investing activities;and cash payment of interest
and dividend shown in financial activities.
b. Taxes on income :- tax paid is a part of cash flows
from operating activities.
c. Extraordinary items :- itincludes baddebts
recovered, claims received frominsurance companies,
winning of a lottery or a law suit etc.
d. Significant non-cash transaction :- non-cash Expenses

16. Classification of business activities showing cash inflows & cash
outflows
I. Operating activities
Cash inflows:
i. Cash Sales
ii. Cash received from
royalty, fees and
commission
iii. Cash received from
debtors/trade receivables
Cash outflows:
i. Cash purchases
ii. Cash paid to
creditors/trade payables
iii. Payment of operating
expenses like wages,
salary. Office and selling
expenses.
iv. Payment of income tax

17. Continue…….
Operating activities
Cash inflows (in case of
financial companies) :
i. Interest and dividend
received in cash
ii. Proceeds from sale of
securities
iii. Loans and advance
repaid by third parties
Cash outflows (in case of
financial companies) :
i. Interest paid in cash
ii. Payment for purchase
of securities
iii. Loans and advances to
third parties

18. II. Investing activities
Cash inflows:
i. Proceeds from sale of fixed
assets
ii. Proceeds from sale of non-
current investments
iii. Interest received on debentures
iv. Dividend received on shares
Cash outflows :
i. Purchase of fixed assets
ii. Purchase of non-current
investments

19. III. Financial Activities
Cash inflows :
i. Proceeds from issue of
shares in cash
ii. Proceeds from issue of
debentures in cash
Proceeds from long-
term borrowings
iii.
Cash outflows:
i. Payment for buy-back of equity
shares
ii. Payment for redemption of
preference shares
Payment for redemption of
debentures
iv. Repayment of loans
v. Payment of dividend
vi. Payment of interest
iii.

20. CASH FLOW STATEMENT
PREPARATION –
FORMAT

21. Cash flow statement of ………
For the year ended…………………
Particulars
Detail
₹
Amount
₹
A. Cash flows from operating activities :
Net profit before tax*
Adjustments for non-cash & non-operating items-
Add : Depreciation
Preliminary expenses/discount on issue of shares &
debentures written off
Goodwill, patents and trademarks amortised
Interest on long-term borrowings
Loss on sale of fixed assets
Less : Interest income
Dividend income
Rental income
Profit on sale of fixed assets
Operating profit before working capital changes
Add : Decrease in current assets
Increase in current liabilities
Less : Increase in current assets
Decrease in current liabilities
Cash generated from operations
less : Income tax paid (Net of tax refund received)
Net cash from (or used in) operating activities

22. Continue……
B. Cash flows from investing activities :
Proceeds from sale of tangible fixed assets
Proceeds from sale of intangible fixed assets like goodwill
Proceeds from sale of non-current investments
Interest and dividend received
Rent received
Purchase of tangible fixed assets
Purchase of intangible fixed assets like goodwill
Purchase of non-current investments
Net cash from (or used in) investing activities
C. Cash flows from financial activities :
Proceeds from issue of shares & debentures
Proceeds from other long-term borrowings
Final dividend paid
Interim dividend paid
Interest on long-term borrowings paid
Repayment of loans
Redemption of debentures
Net cash from (or used in) financial activities
Net increase (or decrease) in cash & cash equivalents (A+B+C)
Add : Cash & Cash equivalents in the beginning of the year
Cash & Cash equivalents at the end of year

23. Note : 1 Calculation of net profit before tax:
Particulars Amount
₹
Net profit of the current year (after appropriation)
Add : Transfer to reserves (all transfers to reserves from
balances of the statement of profit & loss)
Proposed dividend for current year
Interim dividend paid during the year
Provision for tax made during the current year
Less : Refund of tax
Net profit before tax

24. ILLUSTRATION

25. Q1. From the following balance sheet of ABC Ltd; you are required to prepare a cash flow
statement :-
Particulars Note
no.
31-3-19
(₹)
31-3-18
(₹)
I. Equity & Liabilities :
(1) Shareholder’s Funds –
a. Share capital 2,00,000 2,00,000
b. Reserves & surplus 1,55,000 80,000
(2) Current liabilities –
a. Trade payables 1,28,000 1,45,000
b. Short-term provision 1 45,000 35,000
Total 5,28,000 4,60,000
II. Assets :
(1) Non-current assets –
a. Fixed assets
(i). Tangible assets 2 2,00,000 1,50,000
(ii). Intangible assets 3 33,000 40,000
(2) Current assets –

26. Continue……….
(2) Tangible assets :
Machinery
(3) Intangible assets :
2,00,000 1,50,000
a. Current investments 4 15,000 12,000
b. Inventory 2,15,000 1,80,000
c. Trade receivables 50,000 60,000
d. Cash & cash equivalents 10,000 8,000
e. Other current assets 5 5,000 10,000
Total 5,28,000 4,60,000
Notes :- 31-3-19 31-3-18
(1) Short term provision :
Provision for taxation 45,000 35,000
Goodwill 33,000 40,000
(4) Current investments :
Marketable securities 15,000 12,000
(5) Other current assets :
Prepaid expenses 5,000 10,000

27. Additional information :-
I. Machinery whose original cost was ₹
50,000 was sold for ₹ 10,000 during
the year. Accumulated depreciation
on this machinery was ₹ 26,000.
II.Depreciation on machinery charged
during the year ₹ 20,000.
III.Dividend paid during the year @
10% on equity share capital.

28. Cash flow statement of ABC Ltd.
For the year ended 31st march 2018 & 2019
Particulars Details
₹
Amount
₹
A. Cash flows from operating activities :
Net profit before tax (note - 1) 1,40,000
Adjustments for non-cash & non-operating activities –
Add : Depreciation on machinery 20,000
Trade receivables 14,000
Goodwill written off 7,000 41,000
Operating profit before working capital changes 181,000
Add : Decrease in current assets –
Trade receivables 10,000
Prepaid expenses 5,000 15,000
1,96,000
Less : Increase in current assets –
Inventory 35,000
Decrease in current liabilities-
Trade payable 17,000 (52,000)

29. Continue………
1,44,000
Payment of tax (for 2014) (35,000)
Net cash from operating activities 1,09,000 1,09,000
B. Cash flows from investing activities :
Purchase of machinery (note-2) (94,000)
Sale of machinery 10,000
Net cash used in investing activities (84,000) (84,000)
C. Cash flows from financial activities :
Dividend paid (20,000) (20,000)
Net increase in cash and cash equivalents (A+B+C) 5,000
Add : Cash & cash equivalents in the beginning of the
period(note-3)
20,000
Cash & cash equivalents at the end of the period 25,000

30. Notes –
₹
1. Profit before tax –
Balance of reserves & surplus on
31-3-2019
(-) Balance of reserves & surplus on
1,55,000
31-3-18 80,000
75,000
Add : Provision for taxation for 2015 45,000
Dividend paid (10% on ₹
2,00,000) 20,000
1,40,000

31. 2.
Dr.
Machinery A/c
Cr.
Particulars Amount
₹
Particulars Amount
₹
To balance b/d 1,50,000 By bank 10,000
To bank A/c (bal. fig. being
purchase)
94,000 By loss on value 14,000
By depreciation 20,000
By balance b/d 2,00,000
2,44,000 2,44,000
3. Cash & cash equivalents : 31-3-19 31-3-18
Cash & cash equivalents 10,000 8,000
Marketable securities 15,000 12,000
25,000 20,000

32. Q 2. From the following balance sheet of Rajan Ltd. Prepare cash flow statement :
Particulars Note no. 31-12-17
₹
31-12-16
₹
I. Equity & Liabilities :
(1) Shareholder’s Funds –
a. Share capital 1 2,50,000 2,25,000
b. Reserves & surplus 2 59,000 35,000
(2) Current liabilities –
a. Trade payables 49,500 37,500
Total 3,58,500 2,97,500
II. Assets :
(1) Non-current assets –
a. Fixed assets :
(i). Tangible assets 3 1,60,000 1,20,000
(ii). Intangible assets 4 20,000 36,000
(2) Current assets –
a. Inventory 15,000 10,000
b. Trade receivables 1,54,500 1,19,000

33. Continue…….
Notes : 31-12-17 31-12-16
c. Cash & cash equivalent 9,000 12,500
Total 3,58,500 2,97,500
1. Share capital :
Equity share capital 2,00,000 1,50,000
12% Preference share 50,000 75,000
2,50,000 2,25,000
2. Reserves & surplus :
General Reserve 35,000 20,000
Profit & loss balance 24,000 15,000
59,000 35,000
3. Tangible assets :
Building 60,000 80,000
Plant 1,00,000 40,000
1,60,000 1,20,000
4. Intangible assets :
Goodwill 20,000 36,000

34. Cash flow statement of Rajan Ltd.
For the year ended 31st December 2016 & 2017
Particulars Detail
₹
Amount
₹
A. Cash flows from operating activities :
Net profit before profit (note-1) 24,000
Adjustments for non-cash and non-operating items –
Add: Depreciation on plant 10,000
Depreciation on building 60,000
Goodwill written off 16,000
Operating profit before working capital changes 1,10,000
Add : Increase in current liabilities-
Trade Payables 12,000
Less : Increase in current assets –
Inventory 5,000
Trade receivables 35,500 (40,500)
Net cash from operating activities 81,500 81,500
B. Cash flows from investing activities :
Purchase of building (note-2) (40,000)

35. Continue ……..
Working notes :-
Purchase of plant (note-3) (70,000)
Net cash used in investing activities (1,10,000) (1,10,000)
C. Cash flows from financial activities :
Issue of equity share capital 50,000
Redemption (repayment) of preference share capital (25,000)
Net cash flows from financing activities 25,000 25,000
Net decrease in cash & cash equivalent (A+B+C) (3,500)
Add : Cash & cash equivalent in the beginning of the period 12,500
Cash & cash equivalents at the end of the period 9,000
1. Calculation of net profit before tax –
Profit & loss balances on 31-12-17
24,000
Less : Profit & loss balances on 31-12-16 (15,000)
9,000
Add : Transfer to general reserves (35,000 - 20,000) 15,000
Net profit before tax 24,000

36. 2.
Dr
.
Building A/c
Cr.
3.
Dr
.
Plant A/c
Cr.
Particulars Amount
₹
Particulars Amount
₹
To balance b/d 80,000 By depreciation 60,000
To bank a/c (bal. fig., being
purchase)
40,000 By balance c/d 60,000
1,20,000 1,20,000
Particulars Amount
₹
Particulars Amount
₹
To balance b/d 40,000 By depreciation 10,000
To bank a/c (bal. fig., being
purchase)
70,000 By balance c/d 1,00,000
1,10,000 1,10,000

37. PROBLEMS:

38. Q 1. Prepare a cash flow statement from the following balance sheet of XYZ Ltd. :-
Particular Note
no.
31-12-19
₹
31-12-18
₹
I. Equity & liabilities :
(1) Shareholder’s Funds –
a. Share capital 1 8,50,000 4,60,000
b. Reserves & surplus 2 1,70,000 2,40,000
(2) Non-current liabilities –
a. Long-term borrowings 3 1,80,000 2,00,000
Total 12,00,000 9,00,000
II. Assets :
(1) Non-current assets –
a. Fixed assets 7,00,000 5,00,000
(2) Current assets –
a. Inventory 2,50,000 2,10,000
b. Trade receivables 1,90,000 1,40,000
c. Cash & cash equivalents 60,000 50,000
Total 12,00,000 9,00,000

39. Continue……….
Notes : 31-12-18 31-12-19
1. Share capital –
Equity share capital 7,50,000 4,00,000
8% preference share capital 1,00,000 60,000
8,50,000 4,60,000
2. Reserves & surplus –
General reserves 50,000 70,000
Profit & loss balances 1,20,000 1,70,000
1,70,000 2,40,000
3. Long-term borrowings 1,80,000 2,00,000

40. Q 2. From the following information, prepare a cash flow statement :
₹
Opening cash balance 15,000
Closing cash balance 17,000
Decrease in inventory 8,000
Increase in bills payables 12,000
Sale of fixed assets 30,000
Repayment of long-term loan 50,000
Net profit for the year 2,000

41. Q 3. Calculate cash from operating activities :-
31-3-19
₹
31-3-18
₹
Profit & loss balances 30,000 35,000
General reserves 10,000 15,000
Provision for depreciation on plant 30,000 35,000
Outstanding expenses 5,000 3,000
Goodwill 20,000 10,000
Trade receivables 40,000 35,000