The document provides an overview of preparing a cash flow statement using the direct method. It explains that the direct method adjusts each income statement item to its cash equivalent basis by considering changes in related accounts like receivables, payables, accruals, and deferrals. The document demonstrates how to calculate cash receipts from customers and cash payments to suppliers by considering the movement in relevant balance sheet accounts under the direct method. It also discusses calculating cash payments for operating expenses in a similar manner. The goal is to directly show the actual cash flows for each operating item rather than indirectly reconciling net income to cash flows from operations.

1. Corporate Financial Reporting
Session‐ 13Ato 16A:
Cash Flow
Statement
IIMC‐MBA2022: Prof.Arpita Ghosh

2. At the end of a Round

3. Learning Goals : CashFlow Statement
• CashFlow statement – Purpose & Linkages
• Classification of transactions: Operating , Financing, Investing, Non‐cash
• Preparation of CashFlow Statement
– Computing CashFlow fromOperatingActivities (CFO)
• Direct Method and Indirect Method
– Computing CashFlow fromInvestingActivities (CFI)
– Computing CashFlow fromFinancingActivities (CFF)
• Analysis of CashFlows to evaluate a company
• CashFlow Statement of InfosysandAsian Paints
• Assignment Problems

4. CashFlow Statement – Purpose & Linkages
Beginning Cash Closing Cash
Add: Cash Receipts
Less: Cash Payments
Cash Flow Statement Closing Balance Sheet
Opening Balance Sheet
Isit a static report?
• Providesinformationaboutcashreceipts& cashpaymentsduringanaccounting period
• Explains the net increase (or decrease) in cash during an accounting period
• Why is it prepared ?
• IsIncomestatement, Balance sheet not good enough ?
• Isn’tcash account good enough to explain the change in cash during the year ?
• Showshowacompany’sOperating,InvestingandFinancingActivitieshaveaffected cash
• This along with other statements helps to understand the activities of an entity
• Helps understand the relation between Net Income and cash flow from operating activities

5. Format of CashFlow Statement
5
Cash here includes Cash and Cash equivalents (C&CE) (Disclosure required– with restrictions details):
CashEquivalents:Short term, highly liquid investments that can be readily converted into cash
• which are subject to insignificant risk of changesin value, & which have maturity < 3 Months
(90 days) from date of purchase likeTreasurybills, Termdeposits & Marketable debt securities<3M
• CashCredit, Bank Overdraft(which is repayable ondemand) is part of C&CE
So if Cash in hand+ Cheques=7, 2mth Bankterm deposit=3, BankOverdraft= 100
 C&CE = 10 ‐100 =
‐90

6. Classification of Cash Flows
CashReceipts and CashPayments are classified into three categories:
• OperatingActivities: Principal revenue generating activities or core operations of an
entity: Income Statementitems
• Cashinflows and outflows from activities that determine Net Incomelike
acquiring and selling of goods and services
• InvestingActivities : Activities relating to changes in size and composition of long‐
term assets and other investments (not included in cashequivalents)
• Cashtransactions concerned with Purchase and Sale of
 long term assets like PP&E, IntangibleAssets, Inter‐corporate Investments
(stocks/bonds of another company)
• Cashlent to borrowers & collection of Loan repayments,Acquisition of business
• FinancingActivities : Activities relating to change in capital structure of the entity ‐ that
cause changes in size and composition of an entity’sborrowings and stockholders’
equity ‐ Transactionswith Fundproviders
• Borrowings and repayments of loans (or issue and redemption of
bonds/debentures/ notes/preference shares), Issue(sale) and repurchase of
shares (treasury stock/ buyback), paying dividends

7. OperatingActivities
Investing Activities
FinancingActivities
Cash Inflows Activities Cash Outflows
CashReceived fromcustomers
(for Saleof Goods& Services,
other operatingactivities like
royalties, fees, commissions)
Cashpaidto Suppliers(for Inventory)
Cashpaidto Employees(Wages
)
Cashpaidfor other Expenses (eg.Ins.)
CashpaidforTaxes(net of refundif
any)
Cash Received from Sale of
PPE, Intangible Assets,
Divestment of business
CashReceived fromSale of
Investments (debt, equity), JVs
[Both Short‐ & long‐term
investments (except held for
Trading, Cash& Cash
Equivalent)]
CashReceived fromCollection of
Loans
Cashpaidfor purchaseof
PPE, IntangibleAssets
Cashpaidfor purchaseof
Investments, acquisition of
business
Cashlent to borrowers
(Making Loans)
CashReceived fromIssueof
Shares(commonor preferred
stock), Reissueof treasury stock
CashReceived fromborrowingsor
issuanceof Debentures, Bonds etc
CashPaid for repurchaseof
shares
(commonor preferred stock)
Cashpaidfor repayment/
redemptionof borrowings
Dividends Paid
InterestandDividend Received
CashPaidforInterest Expense
Non‐Cash Investing andFinancing Transactions
C
F
O
C
F
I
C
F
F

8. Classification DifferencesunderUSGAAP,IFRSandIndian GAAP
Item U
S GAAP(IGNORE) IFRS
(IGNORE)
Operatingor
Operating Investing
Operatingor
Operating Financing
Operatingor
Financing Financing
Classifiedas Consideredpartof
Financing cashequivalents
IndianGAAP(Followthis)
InterestReceived,
Dividend
Received
Investing
InterestPaid Financing
DividendPaid Financing
BankOverdraft
Consideredpartofcash
equivalents

9. Classification DifferencesunderUSGAAP,IFRSandIndian GAAP
Item U
SGAAP(IGNORE) IFRS(IGNORE) IndianGAAP(Followthis)
InterestReceived,
Dividend
Received
Operating
Operatingor
Investing Investing
InterestPaid Operating
Operatingor
Financing Financing
DividendPaid Financing
Operatingor
Financing Financing
BankOverdraft
Classified
as
Financing
Consideredpartof
cashequivalents
Consideredpartofcash
equivalents

10. Disclosure: Significant Non‐Cash Transactions
Significant transactions that involve only long‐term assets, long‐term liabilities,
or stockholders’equity
• SimultaneousInvestingandFinancingActivities
 Exchange of long‐term asset for a long‐term liability or stockholders’equity
 Issuanceof bondsor commonstock to purchase Land
 Takeout a long‐term mortgage to purchase real estate
 Exchange of old equipment for a new one
 Settle a debt by issuing capital stock, Conversion of bondsinto common stock
• NoCashinflows or Outflows involved
•So, not reflected on either of the three sections in the statement of
cash flows
• Tobe disclosed in a separate schedule (bottom of the statement) (US), or
as a separate note to the financial statements (IFRS & IndAS)
• since these have potential to impact future cash flows  Full Disclosure

11. Activity
Purchase of land
Exchange of land for patent
Retirement of bonds
Conversion of bondsinto common stock
Repurchased CommonStock or purchase of treasury stock
Declared and Issued a stock dividend
Purchased a 60‐day treasury bill
Issuanceof bondsfor land
Payment of interest on notes payable
Repaid notes payable
Investing activity.
Non‐cash investing activity
Financing activity.
Noncashfinancing activity.
Financing activity.
Non‐Cash financing activity
Cash Equivalent
Noncashinvesting and financing activity.
Financing activity.
Financing activity.
ClassifyTransactionsintoOperating,InvestingandFinancingActivitiesor CC&E

12. Activity
Purchase of land
Exchange of land for patent
Retirement of bonds
Conversion of bondsinto common stock
Repurchased CommonStock or purchase of treasury stock
Declared and Issued a stock dividend
Purchased a 60‐day treasury bill
Issuanceof bondsfor land
Payment of interest on notes payable
Repaid notes payable
Investing activity.
Non‐cash investing activity
Financing activity.
Noncashfinancing activity.
Financing activity.
Non‐Cash financing activity
Cash Equivalent
Noncashinvesting and financing activity.
Financing activity.
Financing activity.
ClassifyTransactionsintoOperating,InvestingandFinancingActivitiesor CC&E

13. 13
Bank overdraft
1
2
3
4
5
6
7
Brokeragepaid onissueof shares
Brokeragepaid onpurchaseof investments
Cash credit
Cash sales
Cashpurchaseof goods
Cashpaid to suppliers for goods
CCE
* FA
IA
CCE
OA
OA
OA
8 Cashrealised from customers O
A
9 Commissionandroyalty received O
A
10 Discountallowed to customers O
A
11 Discountreceived from suppliers O
A
12 Dividend paid on shares F
A
13 Dividend received oninvestment in shares IA
14 Incometax paid O
A
15 Interestpaid onlong‐term borrowings F
A
16 Interestpaid onshort‐term borrowings F
A
17
18
Interestreceived ondebenturesheld as investment
Buying back of own shares
IA
F
A
19 Issueof equity share capital F
A
*Ifoverdraft is not repayable on demand,it is treated as financing activity.
ClassifythefollowingactivitiesasOperatingActivities(OA), InvestingActivities(IA), Financing
Activities (FA), orCashandCashEquivalent (CCE)

14. 14
Bank overdraft
1
2
3
4
5
6
7
Brokeragepaid onissueof shares
Brokeragepaid onpurchaseof investments
Cash credit
Cash sales
Cashpurchaseof goods
Cashpaid to suppliers for goods
CCE
* FA
IA
CCE
OA
OA
OA
8 Cashrealised from customers O
A
9 Commissionandroyalty received O
A
10 Discountallowed to customers O
A
11 Discountreceived from suppliers O
A
12 Dividend paid on shares F
A
13 Dividend received oninvestment in shares IA
14 Incometax paid O
A
15 Interestpaid onlong‐term borrowings F
A
16 Interestpaid onshort‐term borrowings F
A
17
18
Interestreceived ondebenturesheld as investment
Buying back of own shares
IA
F
A
19 Issueof equity share capital F
A
*Ifoverdraft is not repayable on demand,it is treated as financing activity.
ClassifythefollowingactivitiesasOperatingActivities(OA), InvestingActivities(IA), Financing
Activities (FA), orCashandCashEquivalent (CCE)

15. ClassifythefollowingactivitiesasOperatingActivities(OA), InvestingActivities(IA), Financing
Activities (FA), orCashandCashEquivalent (CCE)
20. Manufacturing overhead paid OA
21. Office and administrative expenses paid OA
22. Purchase of current investments IA
23. Purchase of goodwill IA
24. Purchase of machinery IA
25 Purchase of marketable debt securities having maturity of three months CCE
26. Purchase of marketable debt securities having maturity of six months IA
27. Redemption of preference shares FA
28. Rent paid OA
29. Rent received on investment property IA
30. Refund of income tax received OA
31. Sale of investments IA
32. Sale of machinery
33 Rent received from a building classified as an investment property
IA
IA
34. Selling and distribution expenses paid OA
35 Short-term bank deposits having maturity of threemonths CCE
36 Underwriting commission paid FA
37 Wages and salaries paid OA

16. 20. Manufacturing overhead paid OA
21. Office and administrative expenses paid OA
22. Purchase of current investments IA
23. Purchase of goodwill IA
24. Purchase of machinery IA
25 Purchase of marketable debt securities having maturity of three months CCE
26. Purchase of marketable debt securities having maturity of six months IA
27. Redemption of preference shares FA
28. Rent paid OA
29. Rent received on investment property IA
30. Refund of income tax received OA
31. Sale of investments IA
32. Sale of machinery IA
33 Rent received from a building classified as an investment property IA
34. Selling and distribution expenses paid OA
35 Short-term bank deposits having maturity of three months CCE
36 Underwriting commission paid FA
37 Wages and salaries paid OA
ClassifythefollowingactivitiesasOperatingActivities(OA), InvestingActivities(IA), Financing
Activities (FA), orCashandCashEquivalent (CCE)

17. Preparation of CFS
Three sourcesof information :
• IncomeStatement to help usfind the CFO
• Comparative Balance Sheets showing changesinA,L, SE
• Additional Information on how cash was usedor provided
(Illustration 12‐5, p 634)

18. Investing
Financing
(COG
S)
Simple
Problem
KWK‐Illustration12A‐1,p564
All sales are credit sales
Indirect Method

19. CFO: DirectvsIndirect Method
Inorderto determine CFO, the Incomefigure in ISmustbe converted from
accrual basis to cashbasis.
• Direct Method
– Adjusts each item in the income statement (accrual basis) to its cash
equivalent (cash basis)
– More easily understood by the average reader but costly to prepare
– US GAAP encouragesit, Might become moreimportant underIFRS
because: Shows Operating Cash Receipts and CashPayments
• Indirect Method
– Lists necessary adjustments to convert Profit to net CFO
• Adjusts Profits to adjust the effect of all deferrals, accruals & non‐cash
– Superior froman analyst’sperspective
– Used by most companies because:
• Easier and less costly to prepare.
• Reconciles Income Figure withCFO
– SEBIrequires companieslisted in Indianstock exchangesto use this
• Both methods produce sameCFOfigure
CFO: Only section of statementthat differsin formbetween
direct andindirect method

20. ComputingCFO‐DirectMethod
• Under the direct method, each item in the income statement is adjusted
fromthe accrual basis to the cash basis
– Takeeach item of Revenue and Expense in the income statement
– Adjust it for its related deferrals/accruals like CAor CLto arrive at the related
cash flow
CashFlowStatement( DirectMethod):
Cash Flow from Operating Activities:
Cash Receipts from customers (for sale of goods and the rendering of services)
Less: Cash paid to suppliers (for Inventory)
Less: Cash paid to employees (Wages and Salaries)
Less: Cash paid for other Operating Expenses
Less: Income Tax paid (unless otherwise specified)
Net Cash from Operating Activities (CFO) (A)

21. Calculating CashReceipts/ Payments
CashReceipts
(Payments)for
Revenue(Expense) =
Revenue (or
Expense) for
the period
+ Increase in
Deferral (Prepaid/
Unearned)
‐ Increase in
Accrual
(Receivables
/ Payables)
Prepaid Expense Unearned Revenue
Ending Balance Ending Balance
+ Expense for
the Period
+ Revenue for the
Period
–
Beginn
ing
Balanc
e
–
B
eginni
ng
Balanc
e
CashPayments for
Expenses
CashReceipts from
Revenues
Accrued Payable Accrued Receivable
Beg. Balance Beg. Balance
+ Expense for the
Period
+ Revenue for the
Period
–
Endin
g
Balanc
e
–
Endin
g
Balanc
e
CashPayments for
Expenses
CashReceipts from
Revenues
For Deferrals ForAccruals

22. 22
Accounts Receivable
Beg.
Bal.
End. Bal. 20,000
Sales Revenue
Cash Receipts
from Customers
30,000
507,000
517,000
Accounts receivable decreased $10,000
 CollectionsorCashReceiptsfromCustomers
Credit Sales
Add: Opening Balance ofAccounts Receivable
Less: Closing Balance ofAccounts Receivable
CalculatingCashReceiptsfor Direct Method
From Beg.
BS
From End.
BS
FromIS
A/R balance has declined from 30,000 to 20,000 by $10,000
Collections or Cash Receipts from Customers
= Credit Sales + Decrease in A/R
= 507,000 + 10,000 = 517,000
CreditSales+IncreaseinAdvancefromCustomers– IncreaseinA/R
Gross
A/R
What if there isAdvance from Customers ?
=CreditSales– Increasein A/R

23. Calculating CashPaymentsfor Direct Method
23
 CashPaymenttosuppliers
COGS+ Closing Inventory – Opening Inventory = Purchases
Inventory
Beg.
Bal.
End. Bal. 15,000
Assume all purchases to be on credit : Cashpaidto Suppliers
=Credit Purchases + OpeningAccounts Payable – ClosingAccounts
Payable
FromIS
Purchases
10,000 150,000 COGS
1,55,000
Accounts Payable
End. Bal. 28,000
Purchases
12,000
155,000
139,000 Beg.
Bal.
CashPaid to
Suppliers
Increase in Inventory
= 15,000 ‐10,000 =
5,000
Increase inAccounts Payable
= 28,000 ‐ 12,000 = 16,000
CashpaidtoSuppliers=COGS+↑Inventory– ↑inA/P
=150,000 +5,000 – 16,000 = 139,000
So,CashpaidtoSuppliers= COGS+ Closing Inventory – OpeningInventory
+ OpeningAccounts Payable – Closing Accounts Payable

24.  CashPaymentforOperating Expenses
Operating Expenses (say Salaries Expense, Insurance Expense
etc.)
+ (Closing Prepaid – Opening Prepaid)
‐ (Closing Payable – Opening Payable)
= Cashpaidfor Operating Expenses
Calculating CashPaymentsfor Direct Method
Cashpaymentfor Operating Expenses
=Operating Expenses(excl.Depn.) +↑Prepaid‐↑Payables
= 111,000 +4000 =115,000
Prepaid Expense
Ending Balance
+ Expense forthe Period
– BeginningBalance
CashPaymentsfor Expenses
Accrued Payable
Beg. Balance
+ Expense forthe Period
– Ending Balance
CashPaymentsfor Expenses
Increase in Prepaid = 4,000
Note: Non‐cash expenses(like Depreciation,
Provisionsetc) if includedin Operating
expenses must be first adjusted beforeone
starts adjusting for prepaid andpayables –
towards arriving at ‘
c
a
s
hpayment foroperating
expenses’
ANS:Cashpaid=90,000 ‐7,200 ‐ 4,400 = 78,400

25. + (ClosingAdvance Tax– OpeningAdvance
Tax)
‐ (Closing TaxPayable – OpeningTax Payable)
= Cashpaid for Income Tax
↑DTE ↑DTL
↓DTE ↑DTA
CalculatingCashPaymentsfor DirectMethod
 IncomeT
axPaid
CurrentTaxExpense (= IncomeTaxExpense – ↑DTEif any+ ↓DTE if any)
IncomeT
axPaid
=CurrentT
axExpense+↑AdvanceT
ax(currenttaxassets)+↓T
axPayable(currenttax liability)
= (ITE – DTE) 47,000 + 0 + 2,000
= 49,000
Income T
axPayable
Beg. Bal. 8,000
End. Bal. 6,000
IncomeTax Expense
Decrease in Tax
Payable
= 8000 ‐6000 = 2,000
47,000
49,000
Cash Paid for Income Tax
(Assuming zero
DTE)
CurrentTaxAssets/ITA
CurrentTax Liability/ITL
CurrentTaxExpense= (Income Tax Expense – ↑DTE+↓DTE)
OR CTE = ( IncomeTaxExpense– ↑DTL+ ↑ DTA)
cases A B
ITE 100 100
CTE 70 130
DTE 30 ‐30
If↑DTL=2K
CTE=47K– 2K
=45 K

26. CashFlow from Operating Activities:
CashReceipts from customers (for sale of goods and the rendering of
services) 517,000
Less: Cashpaid to suppliers (for raw materials) (139,000)
Less: Cashpaid to employees (Wages and Salaries) 0
Less: Cashpaid for other Operating Expenses (115,000)
Less: IncomeTaxpaid (unless otherwise specified) (49,000)
NetCashfromOperatingActivities (CFO) 214,000
Cash Flow Statement ( Direct Method):
CashFlow from InvestingActivities ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐
CashFlow from Financing Activities ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐

27. Revision:CFO‐DirectMethod
+ Increase in Unearned Service Revenue
Or
- Decrease in Unearned Service Revenue
(Assuming zero
DTE)
+ Increase in Advance Taxes
Or
- Decrease in Advance Taxes
i. e. Income T
ax Paid =CurrentT
axExpense+↑AdvanceT
ax(ITA)+↓T
axPayable(ITL)
CTE = ( IncomeTaxExpense – ↑DTL+ ↑DTA)
CashReceiptsfor
Revenue(Cash Payments
for Expense) =
Revenue (or
Expense) for
the period
+ Increase in
Deferral (Prepaid/
Unearned
‐ Increasein Accrual
(Receivables /
Payables)

28. 28
Required:
Calculate the amount of cash flows from operating activities for the year 2020 -2021
using
the following additional information:
(a) As on 31 March 2021 INR 2,000 were due from customers
(b)As on 31 March 2021 INR 1,000 were due to creditors for goods and INR 500 were
due to creditors for services
(c) The total amount of current tax liability has already been paid as advance tax.

30. IndirectMethod : CFO
Income Statement
CashFlowsfromOperatingActivities
Conversion
of accrual
tocash
basis

31. Determine net cash provided/used by operating activities by converting income figure
from accrual basis to cash basis
Commonadjustmentsto Incomefigure (PBT) to move towards CFO:
 Non‐cashitems‐ Non‐cash expenses like depreciation, amortization, impairment,
depletion expense, Provisions, unrealized gains (like unrealized forex gains) etc
 Non‐OperatingItems‐ Gains or Loss on sale of PPE/ Investments, Interest expense ,
Interest income, Dividend Income
 ChangesinWorkingcapital items‐ Operating assets (like TradeReceivables, Inventory,
Prepaid Expense,Accrued Income, Unbilled Revenue), Operating liabilities (like
TradePayables, Unearned Revenue,Accrued Expenses)
ComputingCFO‐IndirectMethod
Adjustments to
Reconcile Profits to
CFO
PBT

32. CFO(Indirect Method) : Non‐Cash& Non‐Operating
 NON‐CASHITEMS
 Depreciation Expense:
• Reducesprofit, does not reduce cash  Must be added back to PBT.
 Unrealized Gains
• Increases profit, does not increase cash  Must be deducted from PBT.
 NON‐OPEARTINGITEMS
 Lossor GainonSaleof Equipment:
Full amount of cash received fromthe sale (including the gain or excluding the loss)
Reported as a sourceof cash in the investing activities section. So, to avoid double counting:
• Any losson sale is to be addedto PBTin the operating section.
• Any gain on sale is to be deducted fromPBTin the operating section
 InterestExpense  Add, InterestIncome, Dividend Income  Deduct
Cashflows fromoperating activities
Profit Before Tax $192,000
Adjustmentstoreconcilenetincometo net
cashflows fromoperating activities
Depreciation $9,000
Losson sale of plant assets 3,000
Interest Expense 42,000 54,000
246,000
From
Income
Statement

33. Accounts Receivable
Beg.
Bal.
End. Bal. 20,000
Sales Revenue
Cash Receipts
from Customers
30,000
507,000
517,000
 CollectionsorCashReceiptsfromCustomers
Credit Sales
Add: Opening Balance ofAccounts Receivable
Less: Closing Balance ofAccounts Receivable
CFO (Indirect Method) ‐ Decrease inOperating Assets: Add
From Beg.
BS
From End.
BS
FromIS
A/R balance has declined from30,000 to 20,000 by $10,000
Collections or CashReceipts from Customers
= Credit Sales + Decrease in A/R
= 507,000 + 10,000 =
517,000
Or,
CreditSales+DecreaseinA/R
For Computer Services,
accounts receivable decreased
$10,000
Cash Receipts from Customers > Sales
• Decreases inoperatingcurrentassets(frees upcash) have a positive effect on cash flows
• Toreconcile PBTto cash flows,
• Decreases in Operating CurrentAssets is addedto PBT
• DeclineinA/R of 10,000 needstobeaddedto PBT
Cash↑+ Non‐CashAssets ↓= L+ SE

34. CFO (Indirect Method) ‐Increase inOperating Assets: Deduct
Beg.
Bal.
End. Bal. 15,000
COGS FromIS
Purchase Increase in Inventory
= 15,000 ‐10,000 = 5,000
Inventory
10,000 150,000
155,000
When the Inventorybalance increases,Cost of merchandise purchased > Cost of goods
sold (included in IS)
• Increasesinoperatingcurrentassets(consumescash)have a negative effect on
cash flows.
• Toreconcile PBTto cash flows,
– anincreaseinoperating currentassetsissubtractedfrom PBT
• Increasein Inventoryof 5,000 needstobedeductedfrom PBT
CashPaidfor Operating Expenses
=Operating Expenses + ↑ in Prepaid Expense
• When the PrepaidExpense Increases,
Cash paid for expenses > Expenses reported in IS on an accrual basis
• Increasein PrepaidExpensesof 4000 tobedeductedfrom PBT
Increase in Prepaid
= 5,000 ‐1,000 = 4,000
Cash↓+ Non‐CashAssets ↑= L+ SE

35. CFO(IndirectMethod) ‐IncreaseinOperatingLiabilities Add
Accounts Payable
Beg.
Bal.
End. Bal. 28,000
Purchase
12,000
155,000
139,000
CashPaid to
Suppliers
Increase inAccounts Payable
= 28,000 ‐ 12,000 = 16,000
Credit Purchases – IncreaseinAccounts Payable =CashpaidtoSuppliers
 CashpaidtoSuppliers<CreditPurchases 16,000 ↑inA/P tobeaddedtoPBT
• Increases in current liabilities represent a postponement of cash payments
– It frees upcash and increases cash flows in the current period
• Toreconcile PBTwith CFO: Increases in current liabilities are added to PBT
Operating Expenses ‐ Increasein Payables =Cashpaidfor Operating Expenses
•When the ExpensePayableIncreases,
Cashpaid for operating expenses < Op. Expenses reported in ISon an accrual basis
• Increasein ExpensesPayabletobeaddedto PBT
Cash↑+ Non‐CashAssets = L↑+ SE

36. CFO(IndirectMethod) ‐DecreaseinOperatingLiabilities:Deduct
– Decreases in operating liabilities represent the use of cash, thereby decreasing cash
flows
Cash↓+ Non‐CashAssets = L↓+ SE
• Toreconcile PBTwith CFO: Decreases in current liabilities are deductedfrom PBT
Add to
Net Income
Deduct from
Net Income
OperatingAssets:
A/R Decrease Increase
Inventory Decrease Increase
Prepaid expenses Decrease Increase
Operating Liabilities:
A/P Increase Decrease
Accrued Liabilities Increase Decrease
Income Taxes Payable
PBT PBT
Increase Decrease
Cash↑+ Non‐CashAssets ↓= L+ SE

37. IndirectMethod: CFO(ComputerServicesCompany)
Cashflowsfromoperatingactivities
Profit Before Tax $192,000
Adjustmentstoreconcileprofitstonetcashflows from
operating activities
Depreciation $9,000
Losson sale of plant assets 3,000
Interest Expense 42,000 54,000
246,000
Changes in Operating Assets & Operating Liabilities
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Increase in prepaid expenses (4,000)
Increase in accounts payable 16,000
17,000
263,000
Less: Income taxes paid (calculated before) (49,000)
Netcashflowsfromoperatingactivities $214,000

38. 39
Required:
Calculate the amount of cash flows from operating activities for the year 2020 -2021
using
the following additional information:
(a) As on 31 March 2021 INR 2,000 were due from customers
(b)As on 31 March 2021 INR 1,000 were due to creditors for goods and INR 500 were
due to creditors for services
(c) The total amount of current tax liability has already been paid as advance tax.

40. CF
O:
Indirect
Method Profit before tax
Adjustment for reconciliation of PBT to CFO:
– Non-cash items like
Add: Depreciation on PPE, Provisions
Add: Amortization of intangible Assets, Impairment Losses
– Non-operating and non-recurring items like
Add: Loss on sale of assets/investments
Less: Gain on sale of assets/investment 
Less: Interest Income / Dividend Income
Add: Interest expense
Gain on sale of asset
= Cash Received from sale of the asset
Less: (Cost of the asset – Accumulated Depreciation)
- Changes in Operating Assets & Operating Liabilities
Add: Decrease in Accounts Receivable/Inventory/Prepaid Expense/Unbilled revenue
Add: Increase in Accounts Payable/ Salaries Payable/ Rent Payable/ Unearned revenue
Less: Increase in Accounts Receivable/Inventory/Prepaid Expense/Unbilled revenue
Less: Decrease in Accounts Payable/ Salaries Payable/ Rent Payable/Unearned revenue
Cash Flow from Operating Activities
Less : Income Tax Paid
Net Cash Flow from Operating Activities (CFO)

41. Let’sSummarize …

42. Revision:CFO‐DirectMethod
+ Increase in Unearned Service Revenue
Or
- Decrease in Unearned Service Revenue
(Assuming zero
DTE)
+ Increase in Advance Taxes
Or
- Decrease in Advance Taxes
i. e. Income T
ax Paid =CurrentT
axExpense+↑AdvanceT
ax(ITA)+↓T
axPayable(ITL)
CTE = ( IncomeTaxExpense – ↑DTL+ ↑DTA)
CashReceiptsfor
Revenue(Cash Payments
for Expense) =
Revenue (or
Expense) for
the period
+ Increase in
Deferral (Prepaid/
Unearned
‐ Increasein Accrual
(Receivables /
Payables)

43. DecreaseinCurrentLiabilities: DeductfromPBT
Net Income Net Income
OperatingAssets:
A/R Decrease Increase
Inventory Decrease Increase
Prepaid expenses Decrease Increase
Operating Liabilities:
A/P Increase Decrease
Accrued Liabilities Increase Decrease
Income Taxes Payable Increase Decrease
Add to
PBT
Deduct from
PBT
Cash↓+ Non‐CashAssets = L↓+ SE
DecreaseinCurrentAssets:Addto PBT
Cash↑+ Non‐CashAssets ↓= L+ SE
Revision:CFO‐IndirectMethod
Commonadjustmentsto Incomefigure (PBT) to move towards CFO:
Non‐cashitems
Non‐OperatingItems
Changesin Workingcapitalitems

44. ComputingCashFlowfromInvestingActivities (CFI)
• Examine individual CashReceipts and CashPayments related to Investing
Activities
– Todetermine Cashflow fromInvesting Activity
• Analyze increases and decreases in Longterm assets and Investments to
determine effects on Cash account
• Objective
– Explain the change in each account balance fromone year to the next
• Focus
– Longterm assets and Investments(balance sheet)
– Short‐term investments (current asset section of the balance sheet)
– Investmentgains and losses (income statement)
– Interest and dividend Received on Investment (Calculate)

45. ComputingCashFlowfromInvestingActivities (CFI): Building
Building
1/1/14 Balance 40,000
Purchase of building 120,000
12/31/14 Balance 160,000
From the additional information:
The company acquired a buildingfor $120,000 cash.
This is a cash outflow reported in the investing section.

46. ComputingCashFlowfromInvestingActivities (CFI)‐ Equipment
• Purchased Equipment of $25,000.
• Sold Equipment with book value of 7,000 . Its cost was $8,000, accumulated
depreciation was 1,000 . It was sold for $4,000
• Depreciation expense comprised of $6000 for building and $3000 for equipment
Cost of the Plant Asset 8,000
Less: Accum. Depreciation 1,000
Net Block or Book Value
or Carrying Value 7,000
Sale Proceeds 4,000
Losson sale of Equipment 3,000
EquipmentAccount
10,000
25,000
Beg. Bal.
PurchaseofPA
Costof
Equipment
Sold
8,000
AccumulatedDepreciation:Equipment
End. Bal. 3,000
Beg.
Bal. Dep
Exp
1,000
3,000
Sale of P
A 1,000
Investingactivitiessection
Purchase of Equipment ($25,000)
Sale of plant assets 4,000
End. Bal. 27,000
•ForAsset sold: ReduceEquipment ( PPE) by cost,
• ReduceAcc Depn by Depreciation accumulated forthe asset
• Loss:If Sales Proceeds < Carrying Value
Cash Dr. 4,000
Accumulated Depreciation Dr. 1,000
LossonDisposalof Equipment
Equipment
Dr.
Cr.
3,000
8,000

47. Cash flows fromInvesting activities (CFI)
 Interest(Dividend) Received (ifany)
Interest (Dividend) Incomefor the year
+ Decrease in Interest Receivable (Accrued Dividend Income)
(or, ‐ Increase in Interest Receivable (Accrued Dividend Income)
= Cash received for Interest (Dividend) Income
NetCashprovided byOperating Activities 214,000
Cashflows fromInvestingactivities(CFI)
Purchase of Building ($120,000)
Purchase of Equipment (25,000)
Sale of Equipment 4,000
Netcashusedbyinvestingactivities (141,000)

48. CFI ‐Summarized
CashFlow fromInvesting Activities
Add: CashReceipts fromSale of fixed assets like Building, Plant, Equipment & Machinery
Add: CashReceipts fromSale of investmentsin equity or debt of other entities (current & non‐current)
Add: Collection of repayments –related to loans/advancesmadeto other parties (current & non‐current)
Less: CashPaymentsfor Purchaseof fixed assets like Building, Equipment, Intangible assets
Less: CashPaymentsfor Purchase of Investments ‐ equity/debt of other entities (current & non‐current)
Less: Loans andAdvances madeto other parties (current & non‐current)
Add: InterestReceived (not the Interest Income)
Add: Dividend Received (not the Dividend Income)
NetCashfromInvestingActivities (CFI) (B)

49. • Issued$110,000of long‐termbondsindirectexchangefor land.
• There are no cash inflows or outflows
•But it is a significant noncashinvesting and financing transaction that merits
disclosure in a separate schedule.
Disclosure : Scheduleof NoncashInvestingandFinancingTransactions
Issuance of bonds to purchase Land $110,000
Land Dr. 110,000
Bonds Payable Cr. 1,10,000
Non‐Cash: Investing& FinancingActivities
Land
1/1/14 Balance 20,000
Issued bonds 110,000
12/31/14 Balance 130,000
Bonds Payable
1/1/14 Balance 20,000
For land 110,000
12/31/14 Balance 130,000

50. ComputingCashflow fromfinancingactivities
• T
odetermine cash flows from financing activities,
– accounts involving cash receipts and cash payments from
financing activities are examined individually
• Focus
– Short‐term borrowings
– Long‐term liabilities
– Stockholders’equityaccounts
• Must also consider
– Cash dividends from the statement of stockholders’equity
– Interest paid on borrowings

51. ComputingCashflow fromfinancingactivities (CFF)
Issuedcommonstockfor$20,000cash.
Dividends 29,000
1/1/14 Balance Net
income
48,000
145,000
12/31/14 Balance 164,000
Financingactivitiessection
Issueof common stock $20,000
Paymentof dividends ($29,000)
Common Stock
1/1/14 Balance 50,000
Shares Issued 20,000
12/31/14 Balance 70,000
Thecompanydeclaredandpaid$29,000cashdividends.
This amount decreased Retained Earnings and caused an $29,000
decrease in cash flows (cash paid).
Retained Earnings

52. CFF
 Interest Paid
Interest Expense for the year
+ Opening Balance of Interest Payable
– Closing Balance of Interest Payable
= Cashpaid for Interest Expense or Interest Paid
Interest Paid = Interest Expense +
Decrease in Interest Payable
Interest Paid = 42,000 + 0 = 42,000
Issueof common stock $20,000
Paymentof dividends ($29,000)
Interest Paid ($42,000)
NetcashusedbyFinancingactivities (51,000
)

53. CFF Summarized
Cash Flow from Financing Activity:
Add: Cash proceeds from issuing shares (or common or preference stock)
Add: Cash proceeds from issuing debentures, loans, notes, borrowings, bonds,
mortgages (current & non-current)
Less: Cash payments for Shares Repurchase (Buy Back)
Less: Repayment/ Prepayment of borrowings/debt (current & non-current)
Less: Interest Paid (not the Interest Expense)
Less: Dividend Paid (Dividend declared adjusted for dividend payable if any)
Net Cash from Financing Activities (CFF) (C)

54. Statementof CashFlows ‐Summarized
Computer Services Company
Statement of Cash Flows
For the YearEnded December 31, 2014
Net cash flows from operating activities $214,000
Net cash flows from investing activities (141,000)
Net cash flows from financing activities (51,000)
Netincrease(decrease) in cash $22,000
Cashat beginning of year $33,000
Cashat end of year $55,000
Schedulefor Non‐CashTransactions
Issueof bondspayablefor plantassets 110,000

55. Cashflowsfromoperatingactivities
Profit Before Tax $192,000
Adjustments to reconcile PBTto net cashflows fromoperating activities
Depreciation $9,000
Lossonsale of equipment $3,000
Interest Expense $42,000
Changesin Operatingassets andOperating liabilities
Decreasein accounts receivable 10,000
Increasein inventory (5,000)
Decreasein prepaid expenses (4,000)
Increasein accounts payable 16,000 71,000
cash flows fromoperating activities 263,000
Less: Incometaxes paid ($49,000)
Netcashflowsfromoperating activities $214,000
Cash flows from Investing activities (CFI)
Purchaseof Building ($120,000)
Purchaseof Equipment (25,000)
Sale of Equipment 4,000
Net cash flows from investing activities ($141,000)
Cash flows from Financing Activities (CFF)
Issueof common stock $20,000
Paymentof dividends ($29,000)
Interest Paid ($42,000)
NetcashusedbyFinancingactivities (51,000)
NetincreaseinCashandCashEquivalents $22,000
Cashandcashequivalentsatthebeginning $33,000
Cashandcashequivalentsattheendof theyear $55,000
Cash
Flow
Statement
:
Indirect
Method
Scheduleof NoncashInvesting andFinancingTransactions
Issuance of bonds to purchase Land $110,000

56. Cashflowsfromoperatingactivities
Cash Receipts from customers (for sale of goods and the rendering of services) 517,000
Less: Cashpaid to suppliers (for goodsand services) (139,000)
Less: Cash paid for other Operating Expenses (115,000)
263,000
Less: Incometaxes paid ($49,000)
Netcashflowsfromoperating activities $214,000
Cash flows from Investing activities (CFI)
Purchaseof Building ($120,000)
Purchaseof Equipment (25,000)
Sale of Equipment 4,000
Net cash flows from investing activities ($141,000)
Cash flows from Financing Activities (CFF)
Issueof common stock $20,000
Paymentof dividends ($29,000)
Interest Paid ($42,000)
NetcashusedbyFinancingactivities (51,000)
NetincreaseinCashandCashEquivalents $22,000
Cashandcashequivalentsatthebeginning $33,000
Cashandcashequivalentsattheendof theyear $55,000
Cash
Flow
Statement
:
Direc
t
Method
Scheduleof NoncashInvesting andFinancingTransactions
Issuance of bonds to purchase Land $110,000

57. Cash
Flow
Statement
:
Indirect
Method CashFlow fromOperating Activities:
Profitbeforetax
Adjustmentfor reconciliation of PBT to CFO:
– Non‐cashitems:Add: Depreciation‐PPE, Provisions, Amortization of intangible Assets, ImpairmentLosses
– Non‐operatingitems : Add: Losson sale of assets/investments, Interestexpense
Less: Gain on sale of assets/investment, Interest Income
‐ ChangesinWorkingcapital items
Add: Decrease in Current Assets , Increasein Current Liabilities ; Less: Increasein CA, Decrease in CL
Less: IncomeTax paid(unless otherwise specified)
NetCashfrom/ (usedin) OperatingActivities (CFO) (A)
CashFlow fromInvesting Activities
CashReceipts fromSale of fixed assetsorPPE,Intangibles like trademarks
Add: Cash Receipts fromSale of investmentsin equity or debt of other entities
Less: Cash advancesandloansmadeto otherparties
Less: CashPayments for Purchase of fixed assets ( including Capital Advances), Intangibles
Less: Cash Payments for Purchase of Investmentsin equity or debt of other entities
Add: Repayment collections related to advances and loansmadeto other parties
Add:InterestReceived (nottheInterestIncome),DividendReceived(nottheDividend Income)
NetCashfrom/ (usedin) Investing Activities(CFI) (B)
CashFlow fromFinancing Activity:
Cash proceeds fromissuing shares(orcommonorpreferencestock)
Add: Cash proceeds fromissuingdebentures,loans,notespayable,borrowingsbonds& mortgagespayable andothershort‐
termorlong‐termdebt
Less: Cash paymentsfor shares repurchase
Less: Repayment of borrowings
Less:InterestPaid(nottheInterestExpense),Dividend Paid( onpreferredorcommonstock)(includingdividendtaxif any)
NetCashfrom/ (usedin) FinancingActivities (CFF) (C)
Netincrease/ (decrease)inCashandCashEquivalents(CFO+CFI+CFF) (D)=(A+B+C)
Cashandcashequivalentsatthebeginningoftheyear(Adj: EffectofExchangeRateson CCE) (E)
Cashandcashequivalents attheendofthe year Inordertoreconcilethe movement in foreign currency CCE from (E)+ (D)
openingto closing balance sheet

58. Cash
Flow
Statement
:
Direc
t
Method Cash Flow from Operating Activities:
Cash Receipts from customers (for sale of goods and the rendering of services)
Less: Cash paid to suppliers (for goods and services)
Less: Cash paid to employees
Less: Cash paid for other Operating Expenses
Less: IncomeTaxpaid (unless otherwise specified)
NetCashfrom / (used in) Operating Activities (CFO) (A)
Cash Flow from Investing Activities
Cash Receipts from Sale of fixed assetsor PPE,Intangibles liketrademarks
Add: Cash Receipts from Sale of investments in equity or debt of other entities
Less: Cash advancesandloansmade to other parties
Less: Cash Payments for Purchase of fixed assets ( including Capital Advances), Intangibles
Less: Cash Payments for Purchase of Investments in equity or debt of other entities
Add: Repayment collections related to advances and loans made to other parties
Add: InterestReceived (not theInterest Income)
Add: Dividend Received
NetCashfrom/ (used in) InvestingActivities (CFI) (B)
Cash Flow from Financing Activity:
Cash proceeds from issuing shares(or commonor preference stock)
Add: Cash proceeds from issuing debentures,loans,notespayable,borrowings
bonds& mortgagespayableandother short‐termor long‐termdebt
Less: Cash payments for shares repurchase
Less: Repayment of borrowings
Less: Interest Paid (not the Interest Expense)
Less:Dividend Paid( onpreferred orcommonstock) (including dividend taxif any)
NetCashfrom/ (used in) FinancingActivities (CFF) (C)
Netincrease/ (decrease) inCashandCashEquivalents (CFO+CFI+CFF) (D)=(A+B+C)
Cashandcashequivalentsatthebeginningof theyear (Adj: Effect of ExchangeRates onCCE) (E)
Cashandcashequivalentsattheendof the year Inordertoreconcilethe movement inforeign
currency CCE from openingto closing balance sheet (E)+ (D)

59. Problems from AKB Book
5C.1, 5F.3, 5F.4, 5F.7, 5F.9
Review Problems: R5.1 to
R5.5

60. Amount (INR)
Discountallowed to customers 4,000
Discountreceived from suppliers 3,000
Return inward 5,000
Return outward 6,000
Office andselling expenses 50,000
Depreciation 20,000
Provisionfor tax 40,000
Trading commission earned 1,00,000
Total sales(net of return) 6,00,000
Total purchasesnet of return 4,00,000
Bad debt 5,000
AKB Problem 5F.3 (p226) :
From the following information calculate the cashflowfromoperatingactivities using the direct method:
• Cash sales one‐fourth of the net credit sales.
• Net credit purchases are four times of cash purchases
Soln5F.3: Cash flow from operating activities using the direct method
Amount Amount
Total cash collected from customers 5,46,000
Total cash paid to suppliers of goods ‐4,37,000
Cash paid towards office and selling expenses ‐52,000
Cash inflow from trading commission earned 1,00,000
Cash flow from operating activities 1,57,000
Income tax paid 62
‐30,000
Net cash flow from operating activities 1,27,000
(i) Cash sales: ¼ of net credit sales or 1/5 of the total sales.
Total sales: INR 6,00,000; Cash sales=1,20,000; credit sales: 4,80,000
(ii) Net credit purchases: 4 times of cash purchases or 4/5 of total purchases.
Total purchases: INR 4,00,000; Cash purchase: 80,000; Credit purchase: INR 3,20,000
(iii) Cash collected from customers against credit sales:
[INR 4,80,000 – 4,000 – (2,00,000 - 1,50,000) = INR 4,26,000
Total cash collected from customers: (INR 4,26,000 +1,20,000) = INR 5,46,000
(iv)Cash paid to suppliers of goods against credit purchases:
[INR 3,20,000 – 3,000 – (60,000 -1,00,000) = INR 3,57,000
Total cash paid to suppliers of goods: (INR 80,000 + 3,57,000) = INR 4,37,000
(v) Cash paid towards office and selling expenses:
[INR 50,000 - (1,000 – 2,000) + (2,000 - 1,000)] = INR 52,000
(vi) Cash inflow from trading commission earned:
[INR 1,00,000 - (3,000 – 2,000) + (2,000 – 1,000)]= INR 1,00,000
(vii) Income tax paid
[INR 40,000 – (50,000 – 40,000)] = INR 30,000
Opening Closing
Trade receivables 1,50,0002,00,000
Trade payables 1,00,000 60,000
Outstandingoffice andselling expenses 2,000 1,000
Prepaidoffice andselling expenses 1,000 2,000
Accrued trading commission 2,000 3,000
Advance trading commission 1,000 2,000
Provisionfor income tax 40,000 50,000
Increase
50,000
‐40,000
‐1,00
0
1,00
0
1,000
1,000
10,000
CashReceipts(Paid)
= Revenue(Expense) + ↑Deferral‐ ↑Accrual
CashReceipts(Paid)
= Revenue(Expense) ‐↓Deferral+↓Accrual
Tradereceivables
Opening
1,50,00
0
Cr Sales
4,85,00
0
Sales Returns
5,00
0
Discount Allowed
4,00
0
Cash Collected 4,26,000
6,35,000 4,35,000

61. Particulars 31‐03‐202
1
31‐03‐2020
ASSETS
Non‐current Assets
Land 68,000 ‐
Building 1,40,000 ‐
Accumulated depreciation ‐ building ‐14,000 ‐
Property plantand equipment 30,000 35,000
Accumulated depreciation ‐equipment ‐18,000 ‐25,000
Patents 9,000 6,000
Total non‐current assets 2,15,000 16,000
Current Assets
Inventory 1,20,000 1,40,000
Prepaid expenses 30,000 20,000
Tradereceivables (net) 1,00,000 75,000
Cash 20,000 28,000
Total current assets 2,70,000 2,63,000
Total Assets 4,85,000 2,79,000
EQUITYANDLIABILITIES
EQUITY
Share capital (Face value INR 10) 1,70,000 1,50,000
Securities premium 60,000 40,000
Retained earnings 60,000 30,000
Total equity 2,90,000 2,20,000
LIABILITIES
Non‐current Liabilities
Long‐term borrowings 1,40,000 ‐
Current Liabilities
Trade payables 30,000 40,000
Notes payable (short‐term) 20,000 ‐
Accrued liabilities 5,000 19,000
Total liabilities 1,95,000 59,000
Totalequityplusliabilities 4,85,000 2,79,000
AKB Problem 5C.1 (p223) :
Additional information regarding AF &
Co’s operations for the years 2020 & 2021:
(a) Net profit: INR 30,000;
(b) Income tax expense: INR 10,000;
(c) Depreciation for the year: Building:
INR 14,000, PP&E: INR 5,000;
(d) Gain from the sale of a piece of
equipment (cost: INR 15,000,
accumulated depreciation: INR
12,000): INR 6,000;
(e) Patent amortization: INR 3,000;
(f) Funds borrowed by issuing notes
payable: INR 30,000, repayment of
notes payable: INR 10,000;
(g) Amount borrowed INR 170,000;
(h) 2,000 shares were issued at INR 20
each.
Required:
(a)Prepare a statement of cash flows of AF
& Co. using the indirect method;
(b)Analyze the cash generating capacity of
AF & Co.; and
(c)Develop your view on whether a
financier would lend further money to AF
& Co

62. Particulars Amount INR Amount INR
A. CASH FLOW FROM OPERATING ACTIVITIES
Net profit 30,000
Add income tax expense 10,000
Profit before tax 40,000
Non-cash expenses
Deprecation for the year (INR 14,000 + 5,000) 19,000
Patent amortisation 3,000 22,000
Non-operating items
Gain from the sale of a piece of equipment -6,000
Cash flow from operating activities before working capital adjustments 56,000
Adjustments for changes in working capital
Decrease in inventory (INR 140,000 – 120,000) 20,000
Increase in pre-paid expenses (INR 30,000 – 20,000) -10,000
Increase in trade receivables (INR 100,000 – 75,000) -25,000
Decrease in trade payables (INR 40,000 – 30,000) -10,000
Decrease in accrued liabilities (INR 19,000 – 5,000) -14,000 -39,000
Cash flow from operating activities 17,000
Income tax paid -10,000
Net cash flow from operating activities 7,000
B. CASH FLOW FROM INVESTINGACTIVITIES
Purchase of building -1,40,000
Purchase of items of PP&E -10,000
Sale of an item of PP&E (INR 15,000 – 12,000 + 6,000) 9,000
Purchase of land -68,000
Purchase of patent [INR 9,000 – (6,000 – 3,000)] -6,000 -2,15,000
C. CASH FLOW FROM FINANCING ACTIVITIES
Issue of notes payable 30,000
Repayment of notes payable -10,000
Long-term borrowings 1,70,000
Repayment of long-term borrowings -30,000
Issue of equity shares 40,000 2,00,000
Total cash flow during the year -8,000
Cash balance at the beginning of the year 28,000
Cash balance at the close of the year 20,000
Solution 5C.1
Purchase of PP&E Amt.
Balance as at Apr 1, 2021 30,000
Add: Cost of the item sold 15,000
45,000
Less Balance as at Apr 1, 2020 35,000
10,000

63. Particulars Amount INR Amount INR
A. CASH FLOW FROM OPERATING ACTIVITIES
Net profit 30,000
Add income tax expense 10,000
Profit before tax 40,000
Non-cash expenses
Deprecation for the year (INR 14,000 + 5,000) 19,000
Patent amortisation 3,000 22,000
Non-operating items
Gain from the sale of a piece of equipment -6,000
Cash flow from operating activities before working capital adjustments 56,000
Adjustments for changes in working capital
Decrease in inventory (INR 140,000 – 120,000) 20,000
Increase in pre-paid expenses (INR 30,000 – 20,000) -10,000
Increase in trade receivables (INR 100,000 – 75,000) -25,000
Decrease in trade payables (INR 40,000 – 30,000) -10,000
Decrease in accrued liabilities (INR 19,000 – 5,000) -14,000 -39,000
Cash flow from operating activities 17,000
Income tax paid -10,000
Net cash flow from operating activities 7,000
B. CASH FLOW FROM INVESTING ACTIVITIES
Purchase of building -1,40,000
Purchase of items of PP&E -10,000
Sale of an item of PP&E (INR 15,000 – 12,000 + 6,000) 9,000
Purchase of land -68,000
Purchase of patent [INR 9,000 – (6,000 – 3,000)] -6,000 -2,15,000
C. CASH FLOW FROM FINANCING ACTIVITIES
Issue of notes payable 30,000
Repayment of notes payable -10,000
Long-term borrowings 1,70,000
Repayment of long-term borrowings -30,000
Issue of equity shares 40,000 2,00,000
Total cash flow during the year -8,000
Cash balance at the beginning of the year 28,000
Cash balance at the close of the year 20,000
Solution 5C.1
Purchase of PP&E Amt.
Balance as at Apr 1, 2021 30,000
Add: Cost of the item sold 15,000
45,000
Less Balance as at Apr 1, 2020 35,000
10,000

64. 5F.5 Particulars 2020‐2021
AmountINR
2019‐2020
AmountINR
Equityshare capital 400,000 300,000
15%Preferenceshare capital 150,000 200,000
General reserve 60,000 50,000
Retained earnings 50,000 30,000
Liability for dividend 50,000 40,000
Current tax liability 20,000 40,000
Trade payables 120,000 100,000
Property, plant, andequipment (Net block) 310,000 300,000
Goodwill 80,000 100,000
Trade receivables 100,000 90,000
Inventories 50,000 40,000
Additional information:
(i)Sold machine for INR20,000 (cost
INR 100,000, accumulated depreciation
INR 60,000);
(ii)A machine was purchased for INR
120,000;
(iii) Cash dividend paid: INR 35,000;
(iv) Income tax paid INR 30,000
Opening +Add= Dedn +Closing
∆Retained Earningsand Reserves
= PAT–
Dividends PBT= PAT
+Tax Expense
PBT= ∆Retained Earnings and
Reserves
+ Dividends +T
ax Expense

65. 67
5F.5 Particulars 2020‐2021
AmountINR
2019‐2020
AmountINR
Equityshare capital 400,000 300,000
15%Preferenceshare capital 150,000 200,000
General reserve 60,000 50,000
Retained earnings 50,000 30,000
Liability for dividend 50,000 40,000
Current tax liability 20,000 40,000
Trade payables 120,000 100,000
Property, plant, andequipment (Net block) 310,000 300,000
Goodwill 80,000 100,000
Trade receivables 100,000 90,000
Inventories 50,000 40,000
Additional information:
(i)Sold machine for INR20,000 (cost
INR 100,000, accumulated depreciation
INR 60,000);
(ii)A machine was purchased for INR
120,000;
(iii) Cash dividend paid: INR 35,000;
(iv) Income tax paid INR 30,000
1. Profit before tax
• Increase in Reserves and surplus = [(INR 60,000 + 50,000) – (50,000+30,000)] = INR 30,000
• Dividend liability created for the year: [INR 50,000 - (40,000 –35,000)] = INR 45,000
• [Assumed that dividend on the preference shares is included in this amount.]
• Tax Expense = [INR 20,000 – ( 40,000 - 30,000)] = INR 10,000
• Profit before tax = [INR 30,000 + 45,000 + 10,000] = INR 85,000
2. Depreciation on property, plant, and equipment
[INR 3,00,000 (Opening PP&E (Net) - 40,000 ( WDV of the machine sold)] + 1,20,000 (Purchases) – [3,10,000 (Closing
balance)] = INR 70,000
Opening +Add= Dedn +Closing
∆Retained Earningsand Reserves
= PAT–
Dividends PBT= PAT
+Tax Expense
PBT= ∆Retained Earnings and
Reserves
+ Dividends +T
ax Expense
(NBV) Opening+Purchase = Sold + Dep+ Closing
300 + 120 = (100‐60) + Dep+ 310
Depreciation =420 ‐350 =70,000

66. 5F.5‐ Solution Amount
INR
Amount
INR
Profit beforetax [See Working Note 1] 85,000
Non‐operating items
Lossfromthe sale of a machine(N0te 3) 20,000
Non‐cash expenses
Impairment of goodwill 20,000
Depreciation of PP&E [Working note 2] 70,000 90,000
Working capital adjustments
(Increase)/Decrease in trade receivables (10,000)
(Increase)/Decrease in inventories (10,000)
Increase/(Decrease) in trade payables 20,000 0
Cashflow fromoperating activities 1,95,000
Incometax paid (30,000)
Net cashflow fromoperating activities 1,65,000
3. Loss from sale of Machine =
• NBV= Cost INR 100,000 - accumulated depreciation INR 60,000 = $40,000
• Sold machine for INR20,000
• Loss on Sale of Machine= Sales Proceeds –NBV = 20,000 =40,000 = 20,000

67. Required:
Prepare a statement of cash flows of GH & Co. for the year
ended on March 31, 2021, considering the following
additional information:
(i)The firm issued a note payable and used the money for the
purchase of furniture (presented as borrowings in the balance
sheet): INR 40,000;
(ii)Sold furniture at written down value (cost: INR 50,000,
accumulated depreciation 20,000);
(iii)Recognized depreciation on furniture INR 40,000 in the
statement of profit and loss for the current year;
(iv) Repaid loan INR 35,000;
(v) Issued share capital at par INR 50,000;
(vi) Paid cash dividend INR 10,000.
Particulars Amount
Sales 2,50,000
Cost of goods sold ‐1,50,000
Gross profit 1,00,000
Operating expenses ‐50,000
Operating profit 50,000
Interest expense ‐5,000
Profit before tax 45,000
Incometax expense ‐15,000
Net profit 30,000
Particulars 31‐03‐2021 31‐03‐2020
ASSETS
Non‐current Assets
Furniture 1,10,000 1,20,000
Accumulated depreciation ‐50,000 ‐30,000
Total non‐current asses 60,000 90,000
Current Assets
Inventory 90,000 1,00,000
Pre‐paid expenses 10,000 5,000
Trade receivables 2,00,000 70,000
Cash 19,000 30,000
Total current assets 3,19,000 2,05,000
Total Assets 3,79,000 2,95,000
EQUITYAND LIABILITIES
EQUITY
Share capital 2,30,000 1,80,000
Retained earnings 30,000 10,000
Total equity 2,60,000 1,90,000
LIABILITIES
Non‐current Liabilities
Borrowings (Notes payable) 85,000 80,000
Current Liabilities
Trade payables 30,000 20,000
Incometax payables 4,000 5,000
Total Liabilities 1,19,000 1,05,000
Total Equity and Liabilities 3,79,000 2
69
,95,000
5F.4 The following are the statement of profit and loss of GH & Co. for the year ended on March 31,
2021, and the balance sheet on that date:
Balancesheet of GH& Co. as onMarch 31, 2021(Amount in INR)
Statement of profit andloss of GH& Co. for the year
endedonMarch 31, 2021 (Amount in INR)

68. SOLUTION5F.4
Amount Amount
INR INR
A. CASH FLOW FROM OPERATING ACTIVITIES
Profit before tax 45,000
Adjustments of non‐operating items
(Gain)/Loss on sale of furniture ‐
Interest expense 5,000
Adjustments for non‐cash expenses
Depreciation on furniture 40,000
Adjustments for changesin the working capital
(Increase)/Decrease in inventories 10,000
(Increase)/Decrease in pre‐paid expenses ‐5,000
(Increase)/Decrease in trade receivables ‐1,30,00
0
Increase/(Decrease) in trade payables 10,000‐1,15,000
Cashflow fromoperating activities ‐25,000
Incometax paid (5,000 + 15,000 – 4,000) ‐16,000
Netcashflowfromoperating activities ‐41,000
B. CASH FLOW FROM INVESTING ACTIVITIES
Purchaseof furniture ‐40,000
Sale of furniture 30,000
Cashflowfrominvestingactivities ‐10,000
C. CASH FLOW FROM INVESTING ACTIVITIES
Amountborrowedthroughnotes payables 40,000
Repaymentof amount borrowedthroughnotes payables
(80,000+40,000 ‐85,000)
‐35,000
Issueof share capital 50,000
Dividend paid ‐10,000
Interest paid ‐5,000
Cashflowfromfinancingactivities 40,000
Net cash flow for the year ‐11,000
Opening cashandcash equivalents 30,000
Closing cash balance 19,000
Working note:
In absence of information on sale proceeds
from the sale of the old furniture and
disclosure in the statement of profit or loss
on the gain/loss from the sale of furniture, it
is assumed that the entity sold the item of
furniture at the WDV.

69. 71
5F.7: The following are the balance sheet as of March 31, 2021, and the statement of profit and loss for the
year ended on March 31, 2021 of JJ & Co.:
Particulars Amount
A.INCOME
Sales 1,00,000
Gain fromsale of investments 1,000
Lossonsale of machinery ‐3,000
Dividend income 1,500
Interest income 500
Total income (A) 1,00,000
B.EXPENSES
Cost of goods sold 80,000
Selling andadministrative expenses 20,000
Interest expense 5,000
Total expenses (B) 1,05,000
Profit beforetax (A – B) ‐5,000
Incometax expense 0
Net profit ‐5,000
Particulars 31‐03‐202
1
31‐03‐2020
A.ASSETS
Non‐Current Assets
Property, plant, andequipmentat cost 70,000 70,000
Accumulated depreciation ‐34,000 ‐30,000
Property, plant, andequipment (Net block) 36,000 40,000
Non‐current investments 8,000 10,000
Total non‐current assets 44,000 50,000
Current Assets
Inventories 14,000 15,000
Trade receivables 26,000 25,000
Pre‐paid expenses 2,000 1,000
Cashandcash equivalents 3,000 4,000
Total current assets 45,000 45,000
Total assets 89,000 95,000
B.EQUITY AND LIABILITIES
EQUITY
Equity share capital 45,000 40,000
Retained earnings 2,000 9,000
Total equity 47,000 49,000
LIABILITIES
Non‐current liabilities
Long‐term borrowings 8,000 12,000
8% Debentures 13,500 10,000
Current liabilities
Trade payables 20,500 20,000
Currenttax liabilities 0 4,000
Total liabilities 42,000 46,000
Total Equity and Liabilities 89,000 95,000
Required:
Prepare the statement of cash flows (a) using the direct
method, and (b) using the indirect method, considering the
following additional information:
(i)Sold an item of machinery for INR 5,000 (cost 10,000,
accumulated depreciation 2,000)
(ii) Borrowed INR 8,000
(iii) Issued equity shares at par INR 5,000
(v) Sold investments for INR 6,000 (cost INR 5,000)
(vi) Issued debentures INR 5,500
(vii) Redeemed debentures INR 2,000
(viii) Cost of goods sold includes depreciation INR 6,000

70. 72
Solution 5F.7:
Statementof cashflows(DirectMethod)
Amount Amount
A.CASH FLOW FROM OPERATING
ACTIVITIES
Profit before tax ‐5,000
Adjustments for non‐operating items
Gain from sale of investments ‐1,000
Loss on sale of machinery 3,000
Dividend income ‐1,500
Interest income ‐500 ‐
Interest expense 5,000 5,000
Adjustment for non‐cash expenses B.CASH FLOW FROM INVESTING ACTIVITIES
Depreciation 6,000 Sale of machinery 5,000
Adjustments for changes in working capital Purchase of machinery [70,000 – (70,000 –
10,000)
‐10,000
Decrease/(Increase) in inventories 1,000 Sale of investment 6,000
Decrease/(Increase) in trade receivables ‐1,000 Purchase of investment [8,000 – (10,000 ‐5,000)] ‐3,000
Decrease/(Increase) in pre‐paid expenses ‐1,000 Interest income 500
(Decrease)/Increase in trade payables 500 ‐500 Dividend income 1,500
Operating cash flows 5,500 Cash flow from investing activities 0
Income tax paid [0 + (4,000 – 0)] ‐4,000 C.CASH FLOW FROM FINANCING ACTIVITIES
Net cash flow from operating activities 1,500 Issue of shares 5,000
Amount borrowed 8,000
Repaid loan ‐12,000
Issued debentures 5,500
Redeemed debentures ‐2,000
Interest paid ‐5,000
Dividend paid [9,000 – 5,000 – 2,000] ‐2,000
Cash flow from financing activities ‐2,500
Total net cash flow during the year ‐1,000
Opening balance of cash and cash equivalents 4,000
Closing balance of cash and cash equivalents 3,000
Cash flow statement of JJ & Co. for the year ended on
March 31, 2021
Solution5F.7
(Indirect Method)

71. 73
5F.7: The following are the balance sheet as of March 31, 2021, and the statement of profit and loss for the
year ended on March 31, 2021 of JJ & Co.:
Particulars Amount
A.INCOME
Sales 1,00,000
Gain fromsale of investments 1,000
Lossonsale of machinery ‐3,000
Dividend income 1,500
Interest income 500
Total income (A) 1,00,000
B.EXPENSES
Cost of goods sold 80,000
Selling andadministrative expenses 20,000
Interest expense 5,000
Total expenses (B) 1,05,000
Profit beforetax (A – B) ‐5,000
Incometax expense 0
Net profit ‐5,000
Particulars 31‐03‐202
1
31‐03‐2020
A.ASSETS
Non‐Current Assets
Property, plant, andequipmentat cost 70,000 70,000
Accumulated depreciation ‐34,000 ‐30,000
Property, plant, andequipment (Net block) 36,000 40,000
Non‐current investments 8,000 10,000
Total non‐current assets 44,000 50,000
Current Assets
Inventories 14,000 15,000
Trade receivables 26,000 25,000
Pre‐paid expenses 2,000 1,000
Cashandcash equivalents 3,000 4,000
Total current assets 45,000 45,000
Total assets 89,000 95,000
B.EQUITY AND LIABILITIES
EQUITY
Equity share capital 45,000 40,000
Retained earnings 2,000 9,000
Total equity 47,000 49,000
LIABILITIES
Non‐current liabilities
Long‐term borrowings 8,000 12,000
8% Debentures 13,500 10,000
Current liabilities
Trade payables 20,500 20,000
Currenttax liabilities 0 4,000
Total liabilities 42,000 46,000
Total Equity and Liabilities 89,000 95,000
Required:
Prepare the statement of cash flows (a) using the direct
method, and (b) using the indirect method, considering the
following additional information:
(i)Sold an item of machinery for INR 5,000 (cost 10,000,
accumulated depreciation 2,000)
(ii) Borrowed INR 8,000
(iii) Issued equity shares at par INR 5,000
(v) Sold investments for INR 6,000 (cost INR 5,000)
(vi) Issued debentures INR 5,500
(vii) Redeemed debentures INR 2,000
(viii) Cost of goods sold includes depreciation INR 6,000

72. Amount Amount
A.CASH FLOW FROM OPERATING ACTIVITIES
Cashcollected fromcustomers[100,000 + 25,000 – 26,000] 99,000
Cashpaid to suppliers of goods ‐72,500
Cashpaid for expenses ‐21,000
Operating cash flows 5,500
Incometax paid [0 + (4,000 – 0)] ‐4,000
Net cashflow fromoperating activities 1,500
B.CASH FLOW FROM INVESTING ACTIVITIES
Sale of machinery 5,000
Purchase of machinery [70,000 – (70,000 – 10,000) ‐10,000
Sale of investment 6,000
Purchase of investment [8,000 – (10,000 ‐5,000)] ‐3,000
Interest income 500
Dividend income 1,500
Cash flow frominvesting activities 0
C.CASH FLOW FROM FINANCING ACTIVITIES
Issue of shares 5,000
Amount borrowed 8,000
Repaid loan ‐12,000
Issued debentures 5,500
Redeemed debentures ‐2,000
Interest paid ‐5,000
Dividend paid [9,000 – 5,000 – 2,000] ‐2,000
Cash flow fromfinancing activities
‐2,50
0
T
otal net cash flow during the year
‐1,00
0
Cash flow statement of JJ & Co. for the year ended on March 31, 2021
Solution5F.7
(Direct Method)
 Cash paid to suppliers for goods:
= Cost of goods sold – Depreciation
– Decrease in inventories
+ (Closing Trade Payables – Opening
Trade Payables)
= INR 80,000 – 6,000 – (15,000 – 14,000)
- (20,500 – 20,000) = INR 72,500
 Cash paid for expenses:
Selling and administrative expenses +
(Closing balance of pre-paid expenses –
Opening balance of pre-paid expenses)
= INR 20,000 + (2,000 – 1,000) = INR
21,000

73. Amount Amount
A.CASH FLOW FROM OPERATING ACTIVITIES
Cashcollected fromcustomers[100,000 + 25,000 – 26,000] 99,000
Cashpaid to suppliers of goods ‐72,500
Cashpaid for expenses ‐21,000
Operating cash flows 5,500
Incometax paid [0 + (4,000 – 0)] ‐4,000
Net cashflow fromoperating activities 1,500
B.CASH FLOW FROM INVESTING ACTIVITIES
Sale of machinery 5,000
Purchase of machinery [70,000 – (70,000 – 10,000) ‐10,000
Sale of investment 6,000
Purchase of investment [8,000 – (10,000 ‐5,000)] ‐3,000
Interest income 500
Dividend income 1,500
Cashflow frominvesting activities 0
C.CASH FLOW FROM FINANCING ACTIVITIES
Issueof shares 5,000
Amount borrowed 8,000
Repaid loan ‐12,000
Issued debentures 5,500
Redeemed debentures ‐2,000
Interest paid ‐5,000
Dividend paid [9,000 – 5,000 – 2,000] ‐2,000
Cashflow fromfinancing activities ‐2,500
Total net cash flow during the year ‐1,000
Openingbalanceof cash andcash equivalents 4,000
Closingbalanceof cash andcash equivalents 3,000
Cash flow statement of JJ & Co. for the year ended on March 31, 2021
Solution5F.7
(Direct Method)
 Cash paid to suppliers for goods:
= Cost of goods sold – Depreciation
– Decrease in inventories
+ (Closing Trade Payables – Opening
Trade Payables)
= INR 80,000 – 6,000 – (15,000 – 14,000)
- (20,500 – 20,000) = INR 72,500
 Cash paid for expenses:
Selling and administrative expenses +
(Closing balance of pre-paid expenses –
Opening balance of pre-paid expenses)
= INR 20,000 + (2,000 – 1,000) = INR
21,000

74. 5F.9 : Balance sheet of BC & Co., which is in merchandising
business, as at March 31, 2021, and the statement of profit and loss
for the year ended March 31, 2021:
Balance sheet of BC & Co. as at March 31, 2021 (Amount in INR)
Particulars Amount
Sales 16,00,000
Cost of goods sold ‐11,00,000
Gross profit 5,00,000
Operating expenses
(including depreciation INR 40,000)
4,40,000
Operating income 60,000
Gain fromsale of furniture 5,000
Interest expense ‐20,000
Incomebeforeincome taxes 45,000
Incometax expense ‐12,000
Net profit 33,000
Particulars
2020‐21 2019‐20
Amount Amount
ASSETS
Non‐Current Assets
Furniture and fixtures 1,60,0001,50,000
Accumulated depreciation ‐45,000 ‐30,000
Total non‐current assets 1,15,0001,20,000
Current Assets
Inventory of stock‐in‐trade 3,80,0004,00,000
Trade Receivables 2,30,0002,00,000
Pre‐paid rent 15,000 10,000
Cash 1,20,000 60,000
Total current assets 7,45,0006,70,000
Total assets 8,60,0007,90,000
EQUITYAND LIABILITIES
EQUITY
Sharecapital (par value INR10)2,40,0002,00,000
Securities premium 2,10,0001,50,000
Retained earnings 78,000 50,000
Total equity 5,28,0004,00,000
LIABILITIES
Non‐current Liabilities
Notes payable 65,000 50,000
Bonds payable 1,00,0002,00,000
Total non‐current liabilities 1,65,0002,50,000
Current Liabilities
Accounts payable 1,55,0001,35,000
Incometax payable 12,000 5,000
Total current liabilities 1,67,000 1,407
,0
60
0
Total equity plus liabilities 8,60,0007,90,000
Statement of profit and loss of BC & Co. for the year ended
March 31, 2021 (Amount in INR)
Additional information:
(a)Gain from sale of furniture 5000 (cost INR 30,000, accumulated
depreciation INR 25,000)
(b) Purchased furniture and fixtures INR 40,000
(c)Repaid INR 25,000 borrowed against notes payable and borrowed
INR 40,000 against fresh notes issued
(d) Converted bonds payable at INR 100,000 into 4,000 equity shares
(e)Paid cash dividend of INR 5,000
Required:
(f)Prepare the cash flow statement using the indirect method with proper
disclosure.
(g) Explain the increase in the cash balance.
(h)Use cash efficiency ratios to explain the firm’s cash-generating ability.

75. Amount Amount
A.CASH FLOW FROM OPERATING
ACTIVITIES
Profit before tax 45,000
Non‐operating items
Gain fromsale of furniture ‐5,000
Interest expense 20,000 15,000
Non‐cash expenses
Depreciation 40,000
Adjustments forchanges in workingcapital
(Increase)/Decrease in inventories 20,000
(Increase)/Decrease in trade receivables ‐30,000
(Increase)/Decrease in pre‐paid rent ‐5,000
Increase/(Decrease) in accounts payable 20,000 5,000
Cashflow fromoperating activities 1,05,000
Incometax paid [12,000+5,000‐12,000] ‐5,000
Net cashflow fromoperating activities 1,00,000
B.CASHFLOW FROM INVESTING ACTIVITIES
Sale of furniture 10,000
Purchase of furniture ‐40,000
Cash flow frominvesting activities
‐30,00
0
C.CASHFLOW FROM FINANCING ACTIVITIES
Issueof Notes Payable 40,000
Repayment of Notes Payable ‐25,000
Dividend paid ‐5,000
Interest paid ‐20,000
Cash flow fromfinancing activities
‐10,00
0
Cash flow during the year
60,00
0
(i) Cash Flow Statement of BC & Co. for the year ended March 31, 2021
SOLUTION 5F.9
(ii)Cash balance has increased, as net cash flow
generated by operating activities was more than
sufficient to meet investment needs and needs for
the payment of dividends.
(iii)The entity’s efficiency in generating cash flows
can be measured by the cash flow to sales ratio (or
cash turnover ratio which is the inverse of the cash
flow to sales ratio.
Cashflow-to-Sales ratio = (Cash flow from operating
activities) ÷ (Sales) = (100,000/1,600,000) or 0.0625
or 6.25 per cent.
In absence of a benchmark ratio, it is difficult to
comment on whether the ratio is good or bad, as this
ratio depends on the nature of the industry in which
the firm operates and the age of the firm (like
whether the firm is in the growth stage.)
Disclosure
The entity converted bonds payable at INR
100,000 into 4,000 equity shares of INR 10
face value at a premium of INR 15.

76. Amount Amount
A.CASH FLOW FROM OPERATING
ACTIVITIES
Profit before tax 45,000
Non‐operating items
Gain fromsale of furniture ‐5,000
Interest expense 20,000 15,000
Non‐cash expenses
Depreciation 40,000
Adjustments forchanges in workingcapital
(Increase)/Decrease in inventories 20,000
(Increase)/Decrease in trade receivables ‐30,000
(Increase)/Decrease in pre‐paid rent ‐5,000
Increase/(Decrease) in accounts payable 20,000 5,000
Cashflow fromoperating activities 1,05,000
Incometax paid [12,000+5,000‐12,000] ‐5,000
Net cashflow fromoperating activities 1,00,000
B.CASH FLOW FROM INVESTING
ACTIVITIES
Sale of furniture 10,000
Purchase of furniture ‐40,000
Cashflow frominvesting activities ‐30,000
C.CASH FLOW FROM FINANCING
ACTIVITIES
Issueof Notes Payable 40,000
Repayment of Notes Payable ‐25,000
Dividend paid ‐5,000
Interest paid ‐20,000
Cashflow fromfinancing activities ‐10,000
Cashflow during the year 60,000
Openingcash balance 60,000
Closingcash balance 1,20,000
(i) Cash Flow Statement of BC & Co. for the year ended March 31, 2021
SOLUTION 5F.9
(ii)Cash balance has increased, as net cash flow
generated by operating activities was more than
sufficient to meet investment needs and needs for
the payment of dividends.
(iii)The entity’s efficiency in generating cash flows
can be measured by the cash flow to sales ratio (or
cash turnover ratio which is the inverse of the cash
flow to sales ratio.
Cashflow-to-Sales ratio = (Cash flow from operating
activities) ÷ (Sales) = (100,000/1,600,000) or 0.0625
or 6.25 per cent.
In absence of a benchmark ratio, it is difficult to
comment on whether the ratio is good or bad, as this
ratio depends on the nature of the industry in which
the firm operates and the age of the firm (like
whether the firm is in the growth stage.)
Disclosure
The entity converted bonds payable at INR
100,000 into 4,000 equity shares of INR 10
face value at a premium of INR 15.

77. Session 16A:
CFR&A Analysis of
Cash Flows

78. 82
Statement of Cash Flows
For the Year Ended December 31, Year 20XX
PBT 90,000
Add (deduct):
Depreciation & amortization expense 40,000
Gain on sale of assets (5,000)
Increase in Accounts receivable (9,000)
Decrease in Inventories 6,000
Decrease in Accounts payable (5,000)
Net cash flow from operating activities 117,000
Purchase of equipment (170,000)
Purchase of investment (40,000)
Sale of equipment 7,000
Net cash flow from investing activities (203,000)
Mortgage payable (50,000)
Preferred stock 175,000
Dividends (51,000)
Net Cash flow from financing activities 74,000
Net increase in cash (12,000)
Beginning cash 51,000
Ending cash 39,000
A measure of Earnings Quality  CashFlow Yield = CFO/NetProfit <1 ?
CFO=-20,000,CFI=30,000,CFF=40,000,Netcashincrease=50,000
A successfulcompanycanexperienceproblemsin cashflows
whileanunsuccessfulonemightbeloadedwithpositivecashbalance
CFO > PBT ?
Working Capital:
Net user?
Trend in
• CA& CL
• Capex,
• Dividends
• Net borrowings

79. Analysis of Cash Flows : Free Cash Flow
Freecashflow Amount of cash that remains after deducting the funds a company
must commit to continue operating at its planned level
= Net CashFlows from OperatingActivities (as per Indian GAAP)
– Dividends Paid# ‐ Interest Paid + Dividend Received + Interest Received
– Capital expenditure (Net of Proceeds fromsale of Fixed Assets)*
• If free cash flow is positive,the company
– Hasmet all of its planned cash commitments
– Hascash available to reduce debt or expand
• If free cash flow is negative,the companywill have to
– Sell investments
– Borrow money
– Issuestock in the short term to continue at its planned level of operation
#(including Dividend Distribution Tax), * (Purchase of PPE ‐ Sale of PlantAssets),
85
FreeCashFlow=
Net CashFlows fromOperatingActivities (as per IndianGAAP)
– Dividends Paid‐ Interest Paid
+ Dividend Received + Interest Received
– Capital expenditure(Net of Proceedsfromsale of Fixed Assets)
OSBORNECOMPANY 2,014 2,013
CFO 2,20,000 2,00,000
Interest Paid 22,000 20,000
Dividends Paid 70,000 65,000
Capital Expenditure 1,36,000 1,30,000
Free Cash Flow (FCF) -8,000 -15,000
CFOto Capital Expenditure 1.62 1.54
Recalling Ratios:
• Current Cash debt coverage
• Cash Debt coverage
• Cash Flow Yield

80. Ortega Corporation
Schedule of Cash Flows from Operating Activities
For the Year Ended December 31, 2010
Cash flows from operating activities
PBT $153,800
Adjustments to reconcile net income to net cash flows
from operating activities
Depreciation 60,000
Loss on Sale of Equipment 4000
Interest Expense 37600
Changes in current assets and current liabilities
Decrease in accounts receivable 20,000
Decrease in inventories 40,000
Decrease in prepaid expenses 400
Increase in accounts payable 22000 184,000
Cash flows from operating activities 337,800
Income Tax Paid (26200)
Net cash flows from operating activities $311,600
Cash flows from Investing activities
Sale of Equipment 3000
Cash flows from Financing activities
Repayment of Mortgage (20000)
Repayment of Notes payable (80000)
Issue of Notes payable 30000
Payment of dividends (60000)
Interest Paid (37600)
Net cash flows from Financing activities ($167,600)
Net Increase in Cash $147,000
Cash at the Beginning of the year $20,000
Cash at the End of the year $167,000

81. The Corporate Life Cycle
PHASE CFO CFI CFF
Introductory ‐27 ‐45 72
Growth 12 ‐40 28
Mature 40 ‐25 ‐15
Decline 17 3 ‐20
PHASE CFO CFI CFF
Introductory ‐ve ‐ve +ve Funds needed to support operations
Growth +ve (rises) ‐ve +ve CFO< NI
Mature +ve (high) ‐ve/+ve +ve/‐ve CFO > CFI, CFO ~ NI
Decline +ve (falls) +ve ‐ve (high) Selling off assets , retiring debt, buying back

82. IdentifyPhases
of PLC
(pointA) ‐ introductoryphase‐ net CFOandCFIare expected to be negative while CFF would be positive
(pointD
)
‐growthphase‐ a company would continue to show negative net CFOandCFIwhile positive CFF
(pointC
)
‐maturityphase‐net CFOandnet income would be approximately the same. Net CFOactivities would exceed
investing needs.
(pointB)‐declinephase‐net CFOwould diminishwhile CFF would benegative
AsianPaints: CashFlowStatementfortheyearended31stMarch
INFOSYS:CashFlowStatement

83. AsianPaints: CashFlowStatementfortheyearended31st March
2022 2021

84. AsianPaints: CashFlowStatementfortheyearended31st March

85. INFOSYS:
CashFlowStatement

86. INFOSYS:
CashFlowStatement

87. INFOSYS:
CashFlowStatement

88. MORE
PRACTICE

89. 95
5A.9 :The balance sheet of CX & Co. as on March 31, 2021, shows the following amount:
Plant and Machinery INR 20 lakhs and accumulated depreciation INR 10 lakhs (previous year INR 22
lakhs and accumulated depreciation INR 9 lakhs).
The statement of profit and loss for the year ended on March 31, 2021, shows depreciation on plant and
machinery for the year at INR 3 lakhs and gains from the sale of plant and machinery at INR 50,000. The
firm provided the information that an item of plant and machinery with cost INR 5 lakhs was sold in which
the gain of INR 50,000 was recognized.
Required: Calculate the proceeds from the sale of the machinery and the cost of new machineries
purchased during the year.
A. PROCEEDSFROM THESALEOFTHEMACHINERY
Cost of the machine 500,000
Accumulated depreciation on the machine(9 +3 ‐10) lakhs (200,000)
WDV of the machine sold 300,000
Profit onsale of the machine 50,000
Proceeds fromthe sale of the machine 350,000
B.COSTOFTHENEWMACHINERIESPURCHASED
Cost of the machinesheld at the close of the year 20,00,000
Cost of the machines held at the beginningof the year (22,00,000)
(200,000)
Cost of machinessold during the year 500,000
Cost of the new machineries purchased 300,000
Accumulateddepreciationontheitem of
plantandmachinerysold
Inlakhs
Opening accumulateddepreciation 9
Add depreciation for the year 3
12
Less Closing accumulated depreciation 10
Accumulated depreciation on the item of
plant andmachinery sold
2
NCV of P&M:
Opening+ Purchase= Depn. + Sold + Closing
(22‐9) + Purchase = 3 + Sold (5‐2) + (20‐10)
 Purchase= 16‐13 = 3 L
 NCV of Plant Sold = 3
 CashInflow fromthe plant sold
= NCV of 3 + Profit onsale of .5 = 3.5

90. B.CASH FLOWSFROM INVESTING ACTIVITIES
Purchaseof items of PP&E (1,20,000)
Sale of an item of PP& 50,000
Cash flow frominvesting activities (70,000)
C.CASHFLOWSFROM FINANCING ACTIVITIES
Issueof equity shares 1,60,000
Issueof debentures 1,00,000
Redemption of preference shares (2,10,000)
Repayment of short‐term borrowings (20,000)
Interestpaid (16,000 + 4,000) (20,000)
Preferencedividend paid (5,000)
Cashdividend paid (50,000)
Cash flow fromfinancing activities (45,000)
Total cashflow forthe year 40,000
Openingcashandcashequivalents, adjusted for
overdrafts (30‐20) 96
10,000
Closing cashand cashequivalents, adjusted for 50,000
5F.6
A.CASH FLOW FROM OPERATING ACTIVITIES
Profit before tax 2,50,000
Non‐operating items:
(Gain)/loss fromthe sale of anitem of PP&E
(10,000)
Interest on debentures 16,000
Preferencedividend recognized as interest
(5%on INR 1,00,000)*
5,000
Interestonshort‐term borrowings 4,000 15,000
Non‐cash items: Amortization of goodwill 20,000
Depreciation 60,000
(Increase)/Decrease in the fair value of
investments in mutualfund units
(10,000)
(Increase)/Decrease in the fair value of
investments in equity shares
(20,000) 50,000
Cash flow before adjustmentsfor working capital 3,15,000
Adjustments for changes in working capital
(Increase)/Decrease in current assets (80,000)
Increase/(Decrease)in trade payables (20,000) (1,00,000)
Cash flow fromoperating activities 2,15,000
Incometax paid (40,000 + 50,000 – 30,000) (60,000)
Net cashflow fromoperating activities 1,55,000
*Preference Dividend is payable only on the outstanding preference
shares i.e 100,000 *.05 = 5000.
The preference shares were redeemed at a 5 per cent premium, perhaps
to compensate for the loss of dividend.

91. Working Notes
1. Profit before tax
(a)Net profit = Increase in the total general reserve plus retained earnings plus dividend paid = INR
1,20,000 – (-30,000) + 50,000 = INR 2,00,000
(b) Profit before tax = INR 2,00,000 + 50,000 (Tax expense) = INR 2,50,000
2. Interest on debentures:
8% on INR 1,50,000 + 8% on INR 1,00,000 for 6 months = INR 12,000 + 4,000 = INR16,000
3.Interest on short-term borrowings
10% on INR 50,000 for 6 months and 10% on INR 30,000 for 6 months = INR 4,000
4. Purchase of items of PP&E
INR 6,70,000(Closing WDV) – [ INR 6.50,000 (Opening WDV) – INR 40,000 (WDV of items sold)] +
INR 60,000 (depreciation for the current year) = INR 1,20,000
5. Cash flow from the issue of fresh equity shares
Increase in share capital + Increase in securities premium + Amount used to adjust the premium on the
redemption of preference shares = INR 1,00,000 + INR 50,000 + 5% of INR 2,00,000 = INR 1,60,000

92. A.CASH FLOW FROM OPERATING
ACTIVITIES
Profit beforetax (25,00,000 + 80,000) 25,80,000
Non‐operating items
Discount on issue of debentures written off 50,000
Intereston debentures 3,50,000
Gain onsale of investment (50,000)
Interestreceived on investment (60,000)
Dividend on preference shares* 1,50,000 4,40,000
Non‐cash items
Depreciation onfixed assets 5,00,000
Adjustments for changes in working capital
(Increase)/Decreasein inventories (1,00,000)
(Increase)/Decreasein trade receivables (5,00,000)
Increase/(Decrease)in trade payables 1,00,000
Increase/(Decrease)in outstanding expenses 10,000 (4,90,000)
Cash flow fromoperating activities 30,30,000
Incometax paid (7,00,000)
Net cashflow fromoperating activities 23,30,000
Dividend on preference shares is recognised as interest in the statement of
profit and loss.
**It is assumed that the figure for cash in hand given in the question is
correct. Therefore, the reasonable assumption is that fresh non-current
investment was made for INR 3,90,000.
Disclosure: Notes to the cash flow statement (Non-cash transactions)
A piece of land was purchased for INR 3,00,000 for which the company
issued 20,000 equity shares of INR 10 each at a premium of 50 per cent
5F.8
B.CASHFLOW FROM INVESTING ACTIVITIES
Sale of investment 3,50,000
Interestreceived on investment 60,000
Purchaseof investments (Balancing figure)** (3,90,000)
Cash flow frominvesting activities 20,000
C.CASHFLOW FROM FINANCING ACTIVITIES
Redemption of preference shares (16,50,000)
Equity sharesissued 7,50,000
Interestondebentures paid (3,50,000)
Final dividend paid (10,00,000)
Dividend paid on preference shares (1,50,000)
Cash flow fromfinancing activities (24,00,000)
Cash flow for the year (50,000)
Opening cashin hand 1,00,000
Closing cashin hand 50,90800

93. Tata Motors Maruti Suzuki
Cash flow yield (29,000) ÷ (‐13,395)
=‐2.165
8,856÷4,389
=2.018
Cash flow‐to‐Sales 29,000 ÷ 249,795
=0.116
8,856÷70,372
=0.126
Cash flow‐to‐Assets 29,000 ÷ 332,624
=0.087
8,856÷67,456
=0.131
5F.10
Lets discuss the review problems
Corrections inAKB Book Chapter 5:
R5.2solution in page 215 Typos
• “ii)Openingbalance …
.
.
”
• “
v
)Profit beforeincome tax (4700 +300) or INR5,000”
R5.3Page209
• “PrepaidExpenses : Openingbalance5,500; ClosingBalance 6,300”
5F
.4Page227
• “(i)The firm issued note payable and used the money for purchase of furniture”
• Solution (page 217): Interest and Dividend Received should appear in CFI and not in CFF section

94. ENDOFCFS
CLASS
THANKS 