Till now, we have discussed about two financial statements i-c., Balance sheet & Statement of Profit and Loss, but there is another financial statement known as Cash flow statement, which shows inflows and outflows of Cash & Cash Equivalents. Cash Flow Statement Firstly, lets discuss about Cash in Cash Flow statement. Cash here means Cash & Cash Equivalents. * Cash in Hand * Deposits with Bank * Highly Liquid Instruments: Readily Convertible into cash * Insignificant risk of change in value * Current Investments, Treasury Bills, Commercial Papers, etc. Equivalent Important. Curent Investments are considered as Cash Equivalents, if nothing is mentioned in the question, How to Identify Cash Equivalent?? fal Ot j a} ® 2)Cash Inflow Cash Outflow > Cash Sales > Cash Purchases > Cash Received from Debtors > Cash paid to Creditors > Sale of Fixed Assets > Payment of Expenses > Issue of Shares > Purchase of Fixed Assets > Loans or Advances received > Redemption of Shares > Issue of debentures > Payment of Loans Cash Flows exclude movements between items of Cash & Cash Equivalent ash flows. For example: Cash is withdrawn from Bank , sale of Marketable Securities, these are not Cash Flow from Operating Activities C1 Operating Activities are the main or primary activities of the business. Q These activities are the principal revenue producing activities. D1 All the activities other than Financing or Investing Activities are considered as Operating Activities O Examples: Receipt from sale of Goods or servi Receipts from Trade Receivab! Payment for purchase of goods Payment to Trade Payables Payment of Expenses like Sala Payment of Incom: es ary VV¥VVVY late the Cash flow from operating Activit There ate two methods to c: = > Direct Method - Not in the syllabus.Indirect Method of Calculating Cash Flow from Operating Activities As per Indirect method, cash flow from operating activity is determined with the help of Net profit or loss. Net profit/Loss is adjusted for the effects of non-cash transactions, non-operating Cash Flow from Operating Activities Net Profit/Loss before Tax and Extraordinary Items (WN. 1) XXX, Add: Deductions already made in Statement of Profit and Loss on account of non-cash items such as Depreciation, Goodwill to be Written-off, Provision | XXX for Doubtful Debts, Bad Debts ete. Add: Deductions already made in of Non-operating items such as Interest paid on loan, loss on sale of fixed | XXX atement of Profit and Loss on Ac count Assets, Discount on Debentures, ete. Less: of Non-operating items s of Fixed / ditions (incomes) made in Statement of Profit and Loss on Account Dividend or Interest received, Profit on sale | (XXX) sets, etc. Operating Profit Before Working Capital Changes XXX i sh equivalent (other than | XXX Provision for tax & Bank overdraft) Less: In case of decrease in current assets (other than cash and cash equivalent) and decrease in curtent liabilities XXX) Cash Generated from Operations XXX Less: Income tax Paid eos Add: Income Tax Refund Cash Flows from Operation Activities Extraordinary items OX Less/Add: Effects of Extraordinary Items XXX Net Cash from (used in) Operating Activities XXX Aw Stp#t = —= Calculation of Net Profit Before Tax & Extra-ordinary Items The first step in Calculating Cash Flow from Opera before Tax & Extraordinary items. It can be calet ing Activities is determining Net Profit ed as follows: 1) If the Net Profit as per Statement of Profit & Loss is given =— — While calculating Net profit, provision for tax of the current year is debited, extra- o debited and extraordinary incomes are credited. So, ordinary expenses or losses ar we have to reverse the effects Extraordinary items. s in order to calculate Net Profit before tax &(Profipas per Statement of Profit & Loss XXX Add: Provision for Income Tax made during the year XXX — Extra-ordinary Items debited to Profit & Li XXX ncome Tax Refupdsredited to Statement of profit & loss (Xxx) Extra-ordinary items credited to statement of Profit & loss Net Profit Before Tax & Extraordinary Items For Example: Net Profit after Tax & Extra-ordinary Items 1,00,000 Provision for Tax for the current year 420,000 | Loss due to earthquake 4¢ 100,000 J'2*.08 Insurance Proceeds from Earthquake disaster settlement 20,000 } Acvoo Refund of Tax 45,000 — Answer: Profit as per Statement of Profit & Loss 1,00,000 Add: Provision for Income Tax made during the year 20,000 Loss due to Earthquake (Extraordinary Items debited to Profit & Loss) | 1,00,000 Less: Income Tax Refund credited to Statement of profit & loss (5,000) Insurance Proceeds (Extraordinary items credited to Profit & loss Net Profit Before Tax & Extraordinary Items (20,000) 1,95,000 D Ff the Surplus Balance is given i.e., Balance in Statement of Profit & Loss in the beginning of the year and at the end of the year. Now, Let's understand the journey of Net profit as per statement of Profit & loss to the Balance in Surplus » Frorsfer 7 Susfles To Rest Various Appropriations are made towards Reserves and Dividend and the remaining amount is transferred in the Balance as per Surplus. In order to calculate Net Profit Before tax & Extraordinary items, all these appropriations have to be added back.Diffgsence between closing & opening balance of Surplus XXX Add\ Final Dividend paid during the year XXX interim dividend paid during the year XXX Transfer to Re: For ex- General Reserves) XXX Add: Provision for Income Tax made during the year XXX 7 Extraordinary Items debited to Profit & Loss XXX Less: Income Tax Refund credited to Statement of profit & loss (XXX) Extraordinary items credited to statement of Profit & loss (XXX) Net Profit Before Tax & Extraordinary Items XXX Example: Following are the extracts from the Balance Sheet of MAH Ltd. as at 31st March, 2021: 31° March 2021 | 31% March 2020 ®@ A 590,00 Particular Surplus, ie., Balance in Statement of Profit and Loss ‘Additional Information: Proposed Dividend for the years ended ise March, 202and 202] are ©4,00,000 and % 5,00,000 Fespectively. Prepare the Note to show Net Profit before Tax and Extraordinary Items. Answer: Difference between closing & opening balance of Surplus 5,00,000 Add: Proposed Dividend of the Previous Year 4,00,000 — Net Profit Before Tax & Extraordinary Items Y 2,009,000Example; From the following information, calculate Net Profit before Tax and Extraordinary Items: z Surplus, ie., Balance in Statement of Profit and Loss (Opening) 1,00,000 Surplus, ie., Balance in Statement of Profit and Loss Closing) 3,36,000 Dividend paid.in the current year +=_ 72,000 Interim Dividend Paid during the year = 90,000, Transfer to Reserve 1,00,000 Provision for Tax forthe current year 1,50,000 Refund of Tax 3,000 Loss due to earthquake 2,00,000 Insurance Proceeds from Earthquake disaster settlement 1,00,000 Answer: erence between closing & opening balance of Surplus ‘nal Dividend paid during the year 7 Interim dividend paid during the 90,000 Transfer to Reserves >| 1,00,000 ‘Add: Provision for Income Tax made during the year. ——> __| 1,50,000 Loss due to Earthquake (Extraordinary Items debited to Profit & Loss) | 2,00,000 Less: Income Tax Refund credited to Statement of profit & loss (3,000) Insurance Proceeds (Extraordinary items credited to statement of Profit | (1,00,000) & loss) row Net Profit Before Tax & Extraordinary Items 7,45,000 — guest Calculation of Operating Profit Before Working Capital changes After calculation of Net Profit before Tax & Extraordinary Items, adjustments for non-cash. and non-operating items are made Non-Cash Experises“Mll the non-cash operating expenses which are debited to statement of profit & Fear aed back since tdocs not involve any Assets, Amortization of Intangible Assets, Bad debts, provi hon Operating ExpeBSer& Losses: Nonoperating Expenses & Losses which are debited 0 profit & loss statement is added back since these are non-operating in nature, For Example Interest on Long term borrowings, discount ot loss on is le of fixed Example: Depreciation of Fixed ion for doubtful debts, ete. ue of debentures, Loss ofNon-Cash Incomes: Operating incomes which are credited to Statement of profit & loss and. are nonash in nature are deducted from the profit as it does not involve any cash, Example: Excess provision written back, writing off a liability, etc. —— _ASon-Operating Incomes: Non-operating incomes & gains which are credited to profit & loss statement are deducted as they are not operating in nature. For Example: Gain on sale of fixed Interest received on investments, rent received, etc. eve — Example: From the following information, calculate Operating Profit before Working Capital Changes: x x Net Profit before Tax and Extraordinary Items _—>| _4,47,000 Depreciation on Machinery +E 84,000 Interest on Borrowings 16,800 Goodwill Amortised 18,600 Loss on Sale of Furniture -F 18,000 Gain (Profit) on Sale of Investments =] 12,000 Tnterest and Dividend Received on Investments (=). 27,600 Answer: Cash Flow Statement for the year ended March 31, ... Particulars ‘Amount | Amount ®@ ®, ‘A | Cash Flow from Operating Activities 7 | Net Profit Before Taxation and Extraordinary Items 7) 447,000 Teer to be Added: Depreciation on Machinery 84,000 Loss on Sale of Furniture 18,000 Interest on Borrowings 16,800 Goodwill Amortized 18,600, 1,37,400 Terns to be Deducted: Profit on Sale of Investment (12,000) Interest and Dividend Received on Investment (27,600) | (39,600) Operating Profit before Working Capital AdjustmentsExample: Compute C: from the following information: sh Flow from Operating Activities before Working capital changes Particulars z ‘Net Profit after Provision for Tax and Payment of Dividend 2,15,000 Provision for Tax 45,000 Final Dividend paid during the year 50,000 Depreciation 25,000 Loss on Sale of Machinery 10,000 Patents Amortised 30,000 Gain on Sale of Land 70,000 Income Tax Refund 30,000 Answer: Cash Flow from Operating Activities , Amount | Amount Particulars Irs) Re) Net Profit Before Tax & Extra-Ordinary Items (WN) 280,000 Items to be Added: Depreciation 25,000 Loss on Sale of Machinery 10,000 Patents Amortised 30,000 | 65,000 3,45,000 Teems to be Deducted: Gain on Sale of Land (70,000) _| (70,000) Operating Profit before Working capital Changes 2,75,000) Working Note: Net Profit after Provision for Tax and Payment of Dividend 2,15,000 Add: Provision for Income Tax made during the year 45,000 Final Dividend during the year 50,000 Less: Income Tax Refund credited to Statement of profit & loss (30,000) Net Profit Before Tax & Extraordinary Items 280,000After calculation of Operating profit before working capital changes, changes in working capital are adjusted, Working capital means Cunent Assets less Curent Liabilities. Let's understand why we have to adjust working capital changes in the operating profit to calculate the % Calculation of Cash Generated from Operations sh flow, Example: Let's take an example of Debtors and prepare Debtors A/c with the help of following information: Balance of Debtors as on 1/4/2020 ~ Rs. 1,00,000 Balance of Debtors as on 31/3/2021 - Rs. 80,000 tt sales during the year - Rs. 70,000 Debtors A/e Particulars Amount _| Particulars [Amount To balance b/d 1,00,000, To Sales A/e 70,000 By Bank A/c (Balancing figure) | 90,000 [ [By balance ¢/d [80,000 Now, if we try to analyse the Debtors A/c, we will find out that: > Cash received from the debtors during the year is Rs. 90,000 > Credit sales during the year is Rs. 70,000 While calculation of Operating profit, sales during the year is already considered so we can say that Operating profit before working capital changes includes the credit sales amounting to Rs. 70,000 but, cash received from the debtors is Rs-90,000. So, which amount should be included in the Cash flow, 70,000 or 90,0007 of course 90,000. So, 20,000 should be added to the operating profit to calculate the eash flow. This 20,000 is actually the difference between the closing balance and opening balance. So, this is the reason it is important to adjust the Working capital changes in the Operating profit. Working capital changes are adjusted as follows; Q Decrease in the Current Assets are added: As we have seen in the Debtors A/c, opening hralance was Rs, 1,00,000 and closing balance was Rs. 80,000 and the difference of Rs. 20,000 is required to he added to the operating profit. Important: Cash & Cash Equivalents and Current Investments are excluded since they are part of Cash & Cash Equivalents. C2 Increase in current Assets are deducted: Increase in Assets indicate outflow. For example: If Opening balance of Debtors is Rs. 80,000 and closing balance is Rs. 1,00,000 then ¢ means cash received is Rs. 20,000 less than the credit sales so, it should be deducted from, the operating profit.C Increase in Current Liabilities are Added: Lets’ take an example of Creditors. Balance in the beginning of the year was Rs. 50,000 and at the end of the year is Rs. 60,000 then this increase in creditors shows that they were paid Rs. 10,000 less than the amount of credit purchases during the year so, it should be added. Important: Bank overdraft and Cash credit is excluded since they are shown as financing activity and Provision for Tax is also not included since it is added to the Net profit in the first step. Q Decrease in Current Liabilities are deducted: Lets’ take an example of Creditors. Balance in the beginning of the year was Rs. 60,000 and at the end of the year is Rs. 50,000 then this decrease in creditors shows that they were paid Rs, 10,000 more than the amount of credit purchases during the year so, it should be deducted. | Curzent Lisbiiies fad Added } _ Ea { Deducted | FE is For example: Calculate Cash generated from operations from the following details: 31st March, | 31st March, Outstanding Rent ¥ aH Goodwill Prepaid Insurance. Trade Payables Particulars 2019 @) 2018 ® Surplus, be, Balance in Statement of Profit 80,000 60,900 cr 25,000 00% 31,000 Provision for Deptectitiony 49,000 #828° 30/500 Inventories 80,000 60,000 12,000 21,900 70.00048809 38000 1,000, 13,000 2,000 13,900 |Answer Particulars Amount | Amount @ @ [Net Profit before Tax & Extraordinary items 20,000 Items to be Added: Depreciation — 10,000 Goodwill written off / 4,000 18,000 Operating Profit before Working Capital Changes 38,000 |Add: Decrease in Current Assets = ~~ Trade Receivables 7 [76,900 Prepaid Insurance 7 Less: Increase in Current Assets Inventories (6,000) Less: Decrease in Current Liabilities Outstanding Rent 7 “1 (9,000) Trade Payables \Cash Generated from operations 46,000) | (28,000) =| 10,000 Example: Grand Hospitality Ltd., reported Net Profit after Tax of & 6,40,000 for the year ended 31st March, 2019. The relevant extract from Balance Sheet as at 31st March, 2019 is: Particulars 3st March, | 31st March, 2019 @ 2018 @ Inventories 1,15,000 1,25,000 Trade Receivables 1,50,000 1,10,000 Prepaid Expenses 20,000 6,000 Trade Payables 1,10,000 80,000 Provision for Tax 20,000 15,000 Depreciation charged on Plant and Machinery 55,000, insurance claim received & 50,000, gain (profit) on sale of investment & 20,000 appeared in the Statement of Profit and Loss for the year ended 31st March, 2019. Calculate Cash Flow from Operating Activities.Cash Flow from Operating Activities Particulars Amount | Amount ®@ ® [Profit Before Tax and Extraordinary items (WN) 6,10,000| Items to be Added: Depreciation on Plant and Machinery 55,000 6,65,000 Items to be Deducted: |Gain on Sale of Investments (20,000)| Operating Profit before Working Capital Adjustments 6,45,000] |Add: Increase in Current Liabilities Trade Payables 30,000] Add: Decrease in Current Assets Inventories 10,000] _ 40,000 Less: Increase in Current Assets 6,85,000| Trade Receivables (40,000)| Prepaid Expen: (14,000) (54,000) L__|cash Generated from Operations 6,31,000| WN-1 Net Profit after Provision for Tax and Extraordinary items 6,40,000 Add: Provision for Income Tax made during the year 20,000 Less: Insurance claim received 50,000 Net Profit Before Tax & Extraordinary Items 6,10,000 _— Cash Flow from {Operating ing Activiti es pefore Extraordinary items) Income tax paid is deducted and Income tax Refund is added to the Cash generated from operations to calculate Cash flow from Operating Activities before Extraordinary items. sh Generated from Operations XXX Income Tax Paid (Income Tax paid ~ Refund) ox ) Cash Flow from Operating Activities before Extraordinary items | XXXExtraordinary items are added or deducted from Cash flow from Operating Activities before Extraordinary items to calculate Net Cash flow from or used in Operating Activities. Cash Flow from (or used_in) Operating Activities Cash Generated from Operations XXX Income Tax Paid (Income Tax paid - Refund) (XXX) sh Flow from Operating Activities before Extraordinary items XXX Add/Less: Extraordinary items involving cash flow like Insurance claim | XXX received. Cash Flow from or used in Operating Activities (Gaxk) —— Example: From the following information, calculate Net Cash Flow from Operating Activities and Financing Activities: 31 March | 31% March Particular 2019 2018 ® @ Equity Share Capital 13,75,000 | 11,25,000 5% Preference Share Capital 000] 7,50,000 General Reserve 3,75,000 3,00,000 Surplus i. Balance in itement of Profit and Loss 3,75,000 | (3,50,000) Securities Premium Reserve 25,000, Provision for Tax 1,00,000 50,000 Non-current Liabilities (8% Debentures) 6,50,000 | — 3,75,000 Shoreterm Borrowings (8% Bank Loan) 1,00,000 Trade Payables 000 Trade Receivables and Inventories 13,00,000 | 11,50,000 Additional Information: (i) During the year additional debentures were issued at par on Ist October and Bank Loan, was repaid on the same date. (ii) Dividend on Equity Shares @ 8% was paid on Opening Balance. (iii) Income tax & 1,12,500 has been provided during the year. (iv) Preferen s were redeemed at par at the end of the yAnswer: Cash Flow Statement i Amount] Amount Particulars ®@ ® [Cash Flow from Operating Activities Profit as per Statement of Profit and Loss 7,25,000) tems to be Added Dividend on Equity Shares 90,000 Dividend on Preference Shares 37,500 Interest on Debentures 41,000 Interest on Bank Loan 9,000 Provision for Tax 1,12,500 [Transfer to General Reserve 75,000) 3,65,000) Operating Profit before Working Capital 10,90,000} Adjustments in Current Assets (1,50,000)| in Current Liabilities Trade Payables 2,50,000 1,00,000] Cash Generated from Operations 11,90,000] Less: Taxes Paid 62,500 Cash Flow from Operating Activities 11,27,500]