Cash Flow Statement

[Indian Accounting Standard (Ind AS) 7 Statement of Cash Flows]

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[1] Meaning Introduction:
 Net Cash flow refers to the amount of cash a business generates for its shareholders in a
given year.
 It assesses the ability of the enterprise to generate cash and utilize cash.
 Cash Flow Statement is one of the tools for assessing the liquidity and solvency of the
enterprise.
 The management of the enterprise gets a picture of movement of cash resources from the
Cash Flow Statement and can assess the stronger and weaker area of movement of cash
for different activities of the business for drawing up the future planning.
 However, the fact that a company generates high cash flow doesn’t necessarily mean that
amount of cash reported on its balance sheet will also be high.
 The cash flow may be used in a variety of ways like
o to pay dividends,
o to increase inventories,
o to finance account receivables,
o to invest in fixed assets,
o to reduce debt or
o to buy back common stock.
 Positive cash flow reflects more cash in bank.

[2] Net Profit Vs Cash from Operating Activities

Points Net Profit Cash from Operating Activities
Meaning It indicates net result of operating and It indicates cash flow as result of
non-operating activities carried out operating activities
during accounting year
Non-Cash It is computed after taking into It is computed excluding the
Items consideration the effect of Non-cash effect of Non-cash items as it is
items merely book entries.
Note:
 It’s not profit that repays loan; it is the cash that repays loan.
 Non-cash items (shown as foot note) include
 Depreciation
 Issue of shares/dentures for consideration other than cash
 Conversion of debentures into equity shares
 Purchase of business by issue of shares

[3] Importance of Cash Flow

 Profit is an accounting concept.
 Profit is derived on accrual assumption.
 Dividend decision is taken on the basis of profit, although it is to be paid in cash.
 Similarly, debt servicing capacity of a company is determined on the basis of cash flows
from operations before interest.

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 Ploughing back of profit is a much talked about source of financing modernisation,
expansion and diversification.
 Unless retained profit is supported by cash, ploughing back is not possible.
 Thus cash flows analysis is an important basis for making several management decisions.

[4] Brief note on Cash Flow Statement

Meaning:
 It is a statement of change in Cash and cash equivalents.
 Statement covers three activities namely
o Net Cash from (Used) Operating Activities
o Net Cash from (Used) Investing Activities
o Net Cash from (Used) Financing Activities
 Cash Flows are Inflows and Outflows of cash and cash equivalents.
 It is normally prepared and presented for each period for which financial statements are
presented.

When does cash flow arise?

 Cash Flow arises when the net effect of transaction is either increase or decrease the amount
of cash and cash equivalents.

[5] Meaning cash and cash equivalents

[Indian Accounting Standard (Ind AS) 7 Statement of Cash Flows]
Meaning of cash:
 Cash includes Cash on hand and demand deposits with banks.
Meaning of Cash Equivalents:
 It is short term, highly liquid investments that are readily convertible into known
amount of cash and which are subject to an insignificant risk of changes in value.
 They are held for purpose of meeting short term cash commitments.
 Any investment normally qualifies as cash equivalent only when it has short maturity of
say 3 months or less from the date of acquisition.
 Bank borrowings are generally considered to be financing activities. However, where
bank overdrafts which are repayable on demand form an integral part of an entity’s cash
management, bank overdrafts are included as a component of cash and cash equivalents.
Computation of Cash and Cash equivalents
Cash in Hand ***
Cash at Bank ***
Marketable Securities ***
Bank Overdraft ***
Cash Credit ***
Cash and Cash equivalents ***
Example: From the following information, calculate cash and cash equivalents at the
beginning and at the end of the period:
Liabilities 2017 2018 Assets 2017 2018
B.O.D 20000 18000 Marketable securities 6000 4000
Cash credit 18000 10000 Cash in hand 10000 8000
Cash at bank 20000 12000

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 Cash from Operating Activities
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Q: What are the Operating Activities?
Ans:
 Operating Activities are the PRINCIPAL REVENUE PRODUCING ACTIVITIES of
business.
 They generally result from the transactions and other event that enter into the determination
of net profit or loss.
 Company’s ability to generate adequate operating cash flow helps in gaining confidence of
the external parties like lenders and investors.
 Company with high surplus cash flow from operation has high market capitalisation.
 It indicates quality of earnings.

Q: How to compute Cash from operating Activities?

Ans:
 It can be computed either by Direct Method or Indirect Method.
 Direct Method is a better indicator of company solvency and has sounder conceptual
framework and reflects accepted business practices.
 Direct method is not appropriate, the SEBI requires computation of cash flow from
operating activities using indirect method.

[Direct Method]
Statement showing computation of cash flow from (used in) Operating activities
Particulars Amount ₹
Cash Sales
Cash receipts from debtors
Trading commission received
Total Receipts [A]
Cash Purchases
Cash paid to suppliers
Expense paid [Factory/O&A/S&D]
Total Payments [B]
Cash generate from operation before Tax [A-B]
Less: Income tax paid (Net of refund of taxes)
Cash flow before extraordinary items
Add/less: Extraordinary items (Note:1)
Net Cash From (Used) operating Activities [I]
Note:1 Extraordinary Items includes
 Insurance Proceeds from earthquake disaster settlement
 Claims for loss of stock (O.A)
 Claims for loss of stock assets (I.A)
 Recovery of bad debt (O.A)
 Damages paid/received for breach of contract (O.A.)
 Winning from lotteries (I.A.)
 Cost of legal action to protect property title (I.A)

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 [Indirect Method]
Statement showing computation of cash flow from (used in) Operating activities
Particulars Amount Rs
Net profit as per P&L account (Closing Balance – Opening Balance)
Add:
 Depreciation/Depletion
 Loss on sale of Non-current Assets
 Preliminary expense / Underwriting commission/Discount on
issue of shares written off
 Goodwill/Patent/Copyright/Trademark written off
 Premium on redemption of preference shares/debentures
 Interest on debentures or borrowings
 Proposed Dividend (CY)
 Interim Dividend paid (CY)
 Transfer to reserves
 Provision for taxation made (CY)
Less:
 Profit on sale of non-current assets
 Interest/Dividend/Rental income
 Refund of taxes credited to P&L account
 Extraordinary items credited to P&L account
Operating Profit before Working Capital Changes
Add: Decrease in CA and Increase in CL
Less: Increase in CA and Decrease in CL
Cash Generated from Operation
Less: Income tax paid (Net of Refund)
Add/Less: Extraordinary items
Net Cash From (Used) operating Activities

Current Assets includes:

 Stock
 Debtors
 Bills Receivables
 Prepaid expense
 Accrued Commission
Current Liabilities includes:
 Creditors
 Outstanding expenses
 Commission received in advance
 Provision for doubtful debts / Discount on debtors

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 Cash from Investing Activities
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Q: How to compute Cash from Investing Activities?
Ans:
 It basically deals with
 Proceeds from sale/disposal of Non-Current Assets (whether
Tangible/Intangible/Depreciable/Non-Depreciable)
 Non-Operating incomes from investments shall be added namely
 Dividend received on shares held as investment
 Interest received on debentures held as investment
 Rent received from property held as investment
 Lenders will be able to know where company has deployed the cash
 Whether company has acquired assets related to business, purchased machinery or made
investment outside business.
 If company keeps investing in the CAPEX that indicates the company is focused on
capacity building for future growth.
 If company keeps investing in financial assets like shares, debentures etc would
indicate that management is not very much focused on expansion.

Cash Inflow from Investing Activities Cash Outflow from Investing Activities
Proceeds from sale/disposal of Purchase of
Non-Current Assets Non-Current Assets
(Tangible/Intangible/Depreciable/ (Tangible/Intangible/Depreciable/
Non-Depreciable) Non-Depreciable)
Sale of Purchase of
 Plant & Machinery  Plant & Machinery
 Land & Building  Land & Building
 Furniture & Fixture  Furniture & Fixture
 Investments  Investments
 Goodwill/Patent/Copyrights/Trademark  Goodwill/Patent/Copyrights/Trademark

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 Cash flow from Financing Activities
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Q: How to compute Cash from Financing Activities?
Ans:
 It demonstrates the nature of capital structure of entity.
 It reflects the picture of borrowers financing policy.
 As a lender, it is inevitable to match dividend pay-out with operating cash flow.
 Amount of dividend should not exceed the operating cash flow.

Cash Inflow from Financing Activities Cash Outflow from Financing Activities
Proceeds from issue of share capital and Redemptions/Repayments/Buyback of
Borrowings (Including Premium) securities (Including Premium) &
(Excluding Discount & Issue expenses) Dividend paid, Interest paid
 Issue of Equity Share capital  Redemptions of preference shares
 Issue of Preference Share capital  Buyback of Equity shares
 Long term borrowings  Repayment of long-term borrowings
(Debentures/Loans) (Debentures/Loans)
 Dividend Paid (Interim & Final) [Eq. &
Pref.)
 Interest paid on long term borrowings.

How to prepare Cash Flow Statement

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Particulars Amount Rs
Net Cash From (Used) Operating Activities [A] ***
Net Cash From (Used) Investing Activities [B] ***
Net Cash From (Used) Financing Activities [C] ***
A+B+C ***
Add: Opening balance of Cash and Equivalents ***
Closing balance of Cash and Equivalents ***
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 Cash Flow Statement
(Conceptual Problems)
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[1] Income statement of X ltd for the year ended was as follows:
Net sales 4032000
Cost of sales (3168000)
Depreciation (96000)
Salaries and Wages (384000)
Opex (128000)
Provision for taxation (140800)
Net Operating Profit 115200
Compute Net profit before working capital changes. [Ans: 352000]

[2] Net Profit before working capital changes ₹352000 and changes in WC during year is as:
Decrease in stock 268800
Decrease in creditors 9600
Increase in debtors 28800
Increase in advances 1920
Increase in outstanding expenses 38400
Compute cash generated from operation. [Ans:618880]

[3] Extracts o cash flow statement prepared by X ltd are as follows:

Cash generated from operation 541000
Income tax Paid 180000
Sale of fixed assets 50000
Voluntary separation payment paid 80000
Law compensation suit received 125000
Compute cash flow from operating activities. [Ans:406000]

[4] Accounts of X ltd shows that balance of cash and cash equivalents has been increase by
Rs19200 as compared to last year. If cash flow statement reveals net cash inflow from financing
activities is Rs19200 and cash outflow from investing activities Rs480000. Compute cash from
operating activities. [Ans: 480000]

[5] From the following information compute cash flow from operating activities.
Particulars 31.12.2020 31.12.2021
Creditors 95000 110000
Bills payable 70000 50000
Outstanding expense 75000 100000
Provision for taxation 180000 170000
Proposed dividend 60000 72000
Debtors 285000 265000
Bills receivable 102000 110000
Stock 120000 150000
Net profit before working capital changes is Rs5390000. [Ans:361000]

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[6] From the following details compute cash generated from operations. (Rs in lacs)
Net profit before WC changes 3051
Net increase in Current assets 3205
Net increase in Current liabilities 9
[Ans: -145]

[7] Cash flow statement of DD ltd shows following positions:

Cash inflow from operating activities 406000
Cash outflow from investing activities 318000
Cash outflow from financing activities 18000
Cash and cash equivalents at the end 135000
Cash and cash equivalents at the beginning ?
[Ans:65000]

[8] Prepare cash flow statement from the following information.

Cash and cash equivalents (1.4.2021) 90000
Redemption of preference shares 200000
Plant and machinery purchased 350000
Income tax paid 100000
Increase in current assets 45000
Increase in current liabilities 15000
Net profit before WC changes 353000
Voluntary separation payments 110000
Land and building sold 150000
Proposed dividend paid 60000
10% Debenture issued 100000
Interest on debenture paid 18000
Plant and machinery sold 90000
Investment sold 50000
Issues of share capital 100000
[Ans: 65000]

[9] Followings are the summary of cash transactions extracted from the books of X ltd. (Rs in
‘000)
Balance as on 1.4.2021 70
Receipts from customers 5566
Issue of shares 600
Sale of fixed assets 256
6492
Payment to suppliers 4094
Payment for fixed assets 460
Payment for overheads 230
Wages and salaries 138
Taxation 486
Dividend paid 160
Repayment of bank loans 500
6068
Balance as on 31.3.2022 424
Prepare cash flow statement based on direct method.

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[10] Income statement of X ltd for the year was as follows:
Net sales 1350000
Less: COGS (Including depreciation of Rs18000) 1258950
Net operating profit 91050
Gain on sale of trade investments 6400
Gain on sale of machinery 1850
PBT 99300
Income tax 48250
PAT 51050
Compute Net Profit before WC Changes. [Ans: 109050]

[11] Income statement of X ltd for the year ended was as follows:
Net sales 20301
Less:
Cost of sales 15984
Depreciation 2534
Salaries and wages 375
Opex 891
Provision for tax 57
Net operating profit 460
Other income 645
Profit on sale of assets 42
Profit for the year 1147
Compute Net Profit before WC Changes. [Ans: 3051]

[12] Income statement of X ltd for the year ended was as follows:
Sales 4637200
COGS (3721200)
Gross Profit 916000
Less:
Opex 317500
Depreciation on building 45000
Depreciation on furniture 8500
Loss on disposal of furniture 2000
Preliminary expenses 7000
Net profit before income tax 536000
Provision for taxation (268000)
PAT 268000
Compute net profit before working capital changes. [Ans: 598500]

[13] X ltd provides following information:

Net Income 100000
Account receivables increased 9000
Prepaid insurance decreased 3000
Depreciation 15000
Gain on sale of land 2000
Wages payable decreased 7000
Outstanding expenses increased 11000
Compute cash flow from operating activities. [Ans: 111000]

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[14] X ltd issued Rs50000 of bonds, paid cash dividend of Rs8000, sold long term investments
for Rs12000, received Rs5000 of dividend, purchase treasury stock for Rs15000 and purchased
new equipment for Rs19000. What is the net cash flow from financing activities? [Ans:
+42000]

[15] DP&Co. had EBIT of Rs500000 and had a depreciation of Rs200000 this last year. If the
firm was subject to an average tax rate of 30%. Compute Operating Cash flow assuming interest
expense was zero. [Ans: 550000]

[16] DP&Co. had Operating Cash flow equal to Rs850 and EBIT was Rs1000 while tax bill
was Rs300. Compute depreciation for the year. [Ans: 150]

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 Points to be noted (For Students)
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