CASH FLOW STATEMENT

Points to remember:
Cash flow from operating activities is calculated by either:
a) Direct Method b) Indirect method

Indirect method
Step1: Determination of Net Profit before tax and Extra Ordinary Items
1. Provision for tax
Case1 when only opening and closing balance of provision for tax is given in
balance sheet.
Add: Closing balance to the profit
Deduct- Opening balance at the end to access cash flow from operating
activities.
Case2 When opening and closing balance of provision for tax is given in the
balance sheet and provision for tax made during the year is given in additional
information.
Here, Prepare provision for tax account.
Add- provision made during the year to profit.
Deduct- tax paid the end (balancing figure)to access cash flow from operating
activities.
Case3 When opening and closing balance of provision for tax is given in the
balance sheet and provision for tax paid during the year is given in adjustment.
Here, Prepare provision for tax account.
Add- Provision made during the year (balancing figure) to profit.
Deduct- tax paid (given) at the end to assess cash flow from operating activities.
Case 4 when only tax paid during the year or provision for tax made during the
year is given in the additional information.
Add- the amount of profit (operating activities) as provision for tax made during
the year.
Deduct- the amount at the end (operating activities) as income tax paid during the
year.

2.Proposed Dividend
When proposed dividend for current year and previous year are given in
additional information.
Add- the previous year proposed dividend to profit(operating activities)
Deduct- the previous year proposed dividend in financing activities.
3.Interim Dividend
When interim dividend paid is given in adjustment.
Add- to the current year’s profit.
Deduct- in financing activities.
4. Transfer to Reserve
Transfer out of reserve is added to net profit as it is an appropriation of net
profit for the year.
Decrease in general reserve will be deducted from surplus to determine the net
profit before tax as it is utilized of past reserve.
5. Deferred tax liabilities(net)
The difference between opening and closing balance is added to net profit.
 Provision for tax account

Particular Amount Particular Amount

To Bank(tax paid) By balance b/d
To Balance c/d By Statement of
Profit & Loss

Extraordinary item
Extraordinary items shown as an expenses in the statement of profit and loss are
added to the net profit while items shown as an income in statement of profit and
loss are deducted.
At the end, previously added items are deducted and previously deducted items
are added.
7. Deferred tax Assets
The difference between the opening balance and closing balance is deducted from
net profit.
8. Taxes on income and refund of tax
Income tax paid is classified as an operating activities and shown separately.
However, if taxes are identified with financing or investing activity then cash flow
on account of tax is classified as financing or investing activities.
Step2 Adjustment for non cash and non operating items
1. Non cash and non operating items, expenses and losses
a) Provision for expenses
It is added to net profit. The provision may be doubtful debts, discount on
debtors or expenses. Provision for doubtful debts and provision for discount on
debtors are shown as current assets by way of deduction from trade
receivable. the provision does not involve cash.
 Depreciation and amortization
It is added to the net profit before tax and extra ordinary items .
b) Bad debts
It is added to the net profit before tax and extra ordinary items.it is an
expenses.
c) Loss on sale of property, plant equipment and investment
It is added to the net profit before tax and extra ordinary items The gross
receipt from sale of fixed assets and investment are shown as inflow of cash
under investing activities.
If the amount of depreciation or profit and loss on sale of fixed assets is not
given, then fixed assets account is prepared to know depreciation or profit on
sale of fixed assets.

d) Interest on borrowing-
Interest on long term borrowing (debenture) and short term borrowing
(bank draft and cash credit is added back to net profit before tax and extra
ordinary items , being an expense related to financing activities.

Non- Operating incomes and gains

a) Interest and dividend received-
They are deducted from net profit before tax and extra ordinary items
and are shown as inflow of cash under cash flow from investing
activities.
b) Rent Received
It is being related to investment , is deducted from net profit before tax
and extra ordinary items and is shown as cash inflow under investing
activities.

c)Gain on sale of property, plant , equipment and investment

 It is deducted from net profit before tax and extra ordinary items and is
shown as cash inflow under investing activities.
c) Re transfer of excess Provision
It is deducted from profit because they do not affect flow of cash in the
current year in any way.
The amount after the above adjustment is operating profit before
working capital changes.

Step3 Adjustment in respect to changes in current assets and current

liabilities.
In this step operating profit before working capital changes, is adjusted
for changes in working capital.
The amount after the above adjustment is cash generated from
operations.
Step4 Adjustment in respect of income tax paid
In this step, income tax paid is deducted from cash generated from
operation.
The amount after the above adjustment is cash flow from operating
activities before extra ordinary items.
Step5 Adjustment in respect of extra ordinary items
Here, extra ordinary items are deducted or added from cash flow from
operating activities before extra ordinary items.
The amount after adjustment is net ash flow from operating activities.

Cash flow from investing activities

Cash inflow
1.Proceed from sale of property
2.Proceed from sale of investment(non current and current other than
marketable securities)
3. Interest received on debenture
4. Dividend received on shares
5. Rent received from property is held as investment
Cash out flow
 1. Purchase of plant ,property and equipment
2. Purchase of non -current investment
3. Income tax paid(related to investing activities only)
4. Loans and advances granted
5. Brokerage paid on purchase of investment
Case-1 fixed assets account on written down value basis

Particular Amount(₹ Particular Amount(₹)

)
To balance b/d By bank(sale proceed)
To bank(purchase) By statement of p&l
To statement of p&l (loss on sale of fixed
(gain on sale of fixed assets)
assets) By depreciation a/c
By balance c/d

Case2 fixed assets account on original cost basis

particular Amount(₹) Particular Amount(₹)

To balance b/d By bank(sale proceed)
To statement of profit By Accumulated
&loss Depreciation
To bank(purchase of By statement of profit
fixed assets &loss
By balance c/d

Accumulated Depreciation Account

Particular Amount Particular Amount

To Fixed Assets a/c By balance b/d
(accumulated By statement of profit
Depreciation on fixed &loss
assets (Depreciation charged for
To balance c/d current year)

Cash flow from financing Activities

Cash inflow
1. Proceed from issue of shares
2. Proceeds from issue of debentures in cash
3. Proceed from long term borrowing
4. Securities premium reserved received
5. Interest received on calls in arrears
6. Increase in balance of bank overdraft or cash credit account
Cash out flow
 Payment of loans(short term or long term)
 Payment of redemption debentures, preference shares in cash
 Payment for buy back of equity shares
 Payment of dividend
 Payment of interest on loans and debentures
 Premium paid on redemption of preference shares or debentures
 Payment of interim dividend and previous years proposed dividend
 Brokerage and under writing commission paid on issue of shares or
debentures
 Decrease in balance of bank overdraft or cash credit account
 Payment of interest on bank overdraft
 Payment of preliminary expenses(including shares issue expenses)
Important points
 An increase in share capital due to bonus issue will not be shown in cash
flow statement, since it is capitalization of reserve.
 When share or debentures are issued at premium ,the cash flow statement
shows total cash received from issue of shares(face value+premium)
 Conversion of debentures into shares will not be recorded in cash flow
statement.
 Increase in under writing commission means payment of under writing
commission in raising capital/debentures. It is cash out flow of financing
activities.
 Bank overdraft and cash credit are short term borrowings. Thus two items
are shown under financing activities.
Format of Cash Flow Statement