The document discusses the cash flow statement and how it differs from the profit and loss statement. It explains that the cash flow statement reflects the inflow and outflow of cash from operating, investing, and financing activities. It also provides examples of transactions that would be classified under each type of activity. Finally, it discusses the direct and indirect methods for preparing the cash flow statement.

1. By Narain
narain@fms.edu
CASH FLOW STATEMENT
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2. Cash Flow Statement
• Profit ≠ Cash
• As P & L a/c is prepared on Accrual basis
• The term cash mean & include –
1. Cash in Hand
2. Demand deposit with banks
p
3. Cash Equivalents
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3. Cash Flow Statement
• AS-3 & IAS-7
• CFS reflects the movement of cash from three
types of Activities of the firm –
1. Operating Activities
2.
2 Investing Activities
3. Financing Activities
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4. Exercise
Identify the following transactions with the three activities:
1 Borrowed from a bank and purchased land 4,00,000
2 Sold investment securities 7,00,000
3 Paid dividends 3,00,000
4 Issued 500 equity shares 3,50,000
3 50 000
5 Purchased machinery and equipment 1,75,000
6 Bank loan paid 6,50,000
7 Received accounts receivable outstanding 1,00,000
8 Accounts payable increased narain@fms.edu 1,90,000

5. Preparation of CFS
• Direct Method
• Comparatively more useful
• Disclose gross receipts & gross payments
• I di t Method
Indirect M th d
• Profit & Loss a/c is reconciled for the effects of
transaction of non – cash nature
nat re
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6. Format: Direct Method
Statement of Cash Flows (Direct Method ) …..Company Name
For the year ended….
Cash flows from operating activities
Cash received from customers
Interest received
Cash paid for merchandise
Cash paid for Income taxes
Net cash flow from operating activities XXX (A)
Cash flows from investing activities
Purchase of marketable securities
Proceeds from sale of marketable securities
Cash paid for purchase of plant assets
Loan made to borrowers
Collection on loans
Cash received from sale of plant assets XXX (B)
Net cash from investing activities
Cash flows from financing activities
Proceeds from borrowings
Cash paid to settle short-term debts XXX (C)
Cash paid to retire long term debt
Cash received from issuing stock
Cash paid for dividends
Net cash provided by financing activities
A+B+C
Net increase (decrease) in cash
XXX
Cash and cash equivalent at the beginning of the year
Cash and cash equivalents at the end of the year narain@fms.edu XXX

7. Format: Indirect Method
Net profit before tax and extraordinary items
(+) Depreciation
(+) Amortization of intangible assets
(+) Preliminary expenses written off
(-) Gain on sale of fixed assets / investments
(+) Loss on sale of fixed assets / investments
Operating profit before working capital changes
(+) Decrease in current assets
( -) Increase in current assets
(+) Increase in current liability
(-) Decrease in current liability
(-) Income tax paid
(±) Extraordinary items A
NET CASH FLOW PROVIDED BY (or USED IN ) OPERATING ACTIVITIES
Cash flows from investing activities
(+) Sale of assets / investments
(-) Purchase of assets / investments
NET CASH FLOW PROVIDED BY (or USED IN ) INVESTING ACTIVITIES B
Cash flows from financing activities
(+) Proceeds f
P d from long t
l term b
borrowings
i
(+) Proceeds from issue of share capital
(-) Dividends paid
(-) Interest paid
NET CASH FLOW FROM FINANCING ACTIVITIES C
Net increase / decrease in cash and cash equivalents A+B+C
(+) Cash and cash equivalents in the beginning XXX
Cash and cash equivalents at the end narain@fms.edu XXXXX

8. CFS: Indirect Performa
• Classify the extraordinary items based on the
Activities
• Tax flow also to be classified based on the
Activities
• D not i l d the non – cash transactions
Do include h h i
• Generally put as note to the statement
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9. Non-Cash items
• Purchase of long – term assets by issuing
equity share capital.
q y p
• Retirement of bonds by issuing equity share
p
capital.
• Issue of debt to purchase fixed assets.
• Exchange of non cash assets for other non
cash assets.
• Conversion of preferred share to equity share
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10. Steps to Prepare CFS
• Information needed for its preparation –
1. Comparative Balance Sheet
2. Income Statement
3. Additional information
• Steps to prepare CFS
• Analyse the Non – Current Accounts
• Analyse the profit & loss figure
• Chart the cash flow statement
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12. Q1. Use the following information about X Ltd. to prepare the cash flow statement for the company:
Comparative balance sheet of X Ltd.
As on 31st March of...
Liabilities 2009 2008 Assets 2009 2008
Equity Share Capital 60,000 50,000 Land 10,000 10,000
Profit & Loss A/c 5,000 4,000 Furniture 17,000 11,000
Creditors 4,000 2,500 Vehicles 12,500 8,000
Provision for Taxation 1,500 1,000 Short-term Investments 2,000 1,000
Proposed Dividend 2,000 1,000 Stock 17,000 14,000
Debtors 8,000 6,000
Bank & Cash 6,000 8,500
72,500 58,500 72,500 58,500
The company also has the Profit and Loss Account as:
Profit and Loss Account
For the year ending 31st March 2009
Profit before tax 4,500
Less: Tax (1,500)
Profit after tax 3,000
Less: Proposed dividend (2,000)
Profit retained 1,000
The following additional information is also provided:
Furniture Vehicles
Depreciation for the year 1,000 2,500
Disposals
Proceeds from disposal 1,700
Written Down Value (1,000)
Profit on disposal 700
Q2. The following is the Balance sheet of MN Ltd.
Comparative balance sheet of MN Ltd.
As on 31st March of... (‘000)
Liabilities 2008 2009 Assets 2008 2009
Equity capital 60,00 60,00 Land & Buildings 14,20 17,50
General Reserve 30,90 34,10 Plant & Machinery 31,00 37,50
Profit & Loss Account 1,50 1,80 Furniture & Fixtures 8,40 9,80
9% Debentures – 15,00 Investment 50 60
Sundry Creditors 1,30 3,70 Stock 3,40 4,20
Proposed Dividends 1,80 Debtors 30,00 36,00
Cash and Bank 8,00 9,00
95,50 1,14,60 95,50 1,14,60
Additional information for the year ended 31 March 2009:
1. Dividend of Rs. 1,80,000 for the year ended 31 March 2008 was paid during 2009.
2. Investment costing Rs. 10,000 was sold for Rs. 12,000.
3. Depreciation on assets for the year ended 31 March 2009 was charged to Profit & Loss account
as follow:

13. Land and Buildings Rs. 42,000
Plant and Machinery Rs. 4,74,000
Furniture and Fixtures Rs. 184,000
4. Sales of fixed assets:
Machinery Sale value Rs. 1,00,000 (WDV Rs. 2,20,000)
Furniture Sale value Rs. 30,000 (WDV Rs. 20,000)
Prepare the cash flow statement of MN Ltd. for the year ended 31 March 2009.
Q3. Use the following information about KM Ltd.’s Balance sheet as on 31st December 2007 and 31st
December 2008 to prepare a statement of cash flows for the year ended 31st December 2008.
Comparative balance sheet of KM Ltd.
As on 31st December of .. (‘000)
Liabilities 2007 2008 Assets 2007 2008
Share capital 8,00 10,00 Plant & Machinery 5,00 7,00
Reserve 1,50 2,00 Land & Building 4,00 6,00
Profit & loss account 60 1,00 Investments – 1,00
Debentures – 2,00 Sundry debtors 7,00 5,00
Provision for taxation 70 1,00 Stock 2,00 4,00
Proposed dividend 1,00 2,00 Cash on hand/bank 2,00 2,00
Sundry creditors 8,20 7,00
20,00 25,00 20,00 25,00
The additional information relating to 2008 activities is as follows:
1. Depreciation @ 25% was charged on the opening value of Plant & Machinery.
2. During the year one old machine costing Rs. 50,000 (WDV 20,000) was sold for Rs. 35,000.
3. Rs. 50,000 was paid towards Income tax during the year.
4. Building under construction was not subject to any depreciation.
Solution indications:
Cash inflow from operating activities Rs. 3,10,000
Cash outflow from investing activities Rs. 6,10,000
Cash inflow from financing activities Rs. 3,00,000
Q4. The following is the Balance sheet of PQ Ltd.
Comparative balance sheet
As on 31st March of …
Liabilities 2008 2009 Assets 2008 2009
Share Capital 315,000 465,000 Plant 505,000 715,000
Reserves & Surplus 132,000 140,000 Less: Accumulated Dep. 68,000 103,000
Bonds 245,000 295,000 437,000 612,000
Current Liabilities Long Term Investments 127,000 115,000
Account Payable 43,000 50,000 Current Assets
Accrued Liabilities 9,000 12,000 Inventory 110,000 144,000
Income Tax Payable 5,000 3,000 Account Receivable 55,000 47,000
Cash 15,000 46,000
Prepaid Expenses 5,000 1,000
749,000 965,000 749,000 965,000

14. The profit and loss account of the company is as follows:
Profit & Loss Account
for the year ending on 31st March 2009
Cost of goods sold 520,000 Sales 698,000
Gross Profit 178,000
698,000 698,000
Depreciation 37,000 Gross Profit 178,000
Administration expenses 110,000 Interest received 6,000
Interest paid 23,000 Gain on sale of Investment 12,000
Loss on sale of Plant 3,000
Income tax 7,000
Net Profit 16,000
196,000 196,000
With the help of further information given below, prepare the cash flow statement of this
company:
1. Investment purchased for Rs. 78,000.
2. Investments costing Rs. 90,000 sold for Rs. 102,000.
3. Plant purchased for Rs. 120,000.
4. Plant costing Rs. 10,000, with accumulated depreciation of Rs. 2,000, was sold for Rs.
5,000.
5. Bonds with face value of Rs. 100,000 was issued in exchange of Plant bought on 31st
Mar. 09
6. Repaid Rs. 50,000 of bonds at face value at maturity.
7. Issued 15,000 shares of Rs. 10 each.
8. Paid cash dividends Rs. 8,000.

15. Solution to Q4
Cash Flow Statement of PQ Ltd.
for the year ending 31-03-2009
cash flow from operations
Net profit before taxation 23,000
Adjustments for:
Depreciation 37,000
Profit on sale of Investments 12,000
Loss on sale of Plant 3,000
Interest paid 23,000
Interest received 6,000
operating profit before WC changes 68,000
Decrease in account receivables 8,000
Increase in Inventories 34,000
Decrease in prepaid expenses 4,000
Increase in account payable 7,000
Increase in accrued liabilities 3,000
cash generated from operations 56,000
Income tax paid 9,000
Net cash inflow from operations 47,000
Cash flow from investing activities
Sale of Plant 5,000
Purchase of Plant 120,000
Purchase of Investments 78,000
Sale of Investments 102,000
Interest received 6,000
Net cash outflow from investing activities 85,000
Cash flow from financing activities
Issue of share capital 150,000
Repayment of bond 50,000
Interest paid 23,000
Dividend paid 8,000
Net cash inflow from financing activities 69,000
Net increase in cash & cash eq. 31,000
Cash & cash eq. at the beginning 15,000
Cash & cash eq. at the end 46,000