Cash Flow Statement - Practical Paper 3B: Financial Management Chapter 3 Unit II CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA), EPBM (IIMC), MCT
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Learning Objectives
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Understand the intricacies in preparation of Cash Flow Statement
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Develop hands on skills in Cash Flow Statement preparation by solving variety of questions
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Recap – Classification of Cash Flows
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Recap - Cash Flow - Classification
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• Cash flow from Operating Activities • Principal revenue generating activities
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• Cash flow from Investing Activities • Acquisition and disposal of long term assets and other investments not included in cash equivalents
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• Cash flows from Financing activities • Activities that has an impact of owner’s capital and borrowings
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Cash Flow from Operating Activities Cash from Operating activities can be reported in two ways
Direct Method
Indirect Method
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Multiple Choice Questions Cash Flow Statement
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MCQ – 1 Principal revenue generating activities of an enterprise are called as – A. Operating Activities
B. Investing Activities
C. Financing Activities
D. None of the above
Answer: A. Operating Activities
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MCQ – 2 Short term highly liquid investments that are readily convertible in to known amounts of cash and which are subject to insignificant risk of changes in value is known as –
A. Cash at Bank
B. Investments in Shares
C. Cash Equivalents
D. None of the above
Answer: C. Cash Equivalents
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MCQ – 3 Cash Flows are – A. Inflows and Outflows of cash
B. Inflows and Outflows of cash equivalents
C. Inflows of Cash
D. Both A & B
Answer: D. Both A & B
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MCQ – 4 Purchase of Machinery by means of issue of shares should be ________________ from Cash Flow Statement A. Included
B. Excluded
C. Included with value as zero
D. None of the above
Answer: B. Excluded
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MCQ – 5 Unrealized gains and losses arising from foreign exchange rates are – A. Cash flows from operating activities
B. Cash flows from financing activities
C. Cash flows from investing activities
D. Not cash flows
Answer: D. Not cash flows
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MCQ – 6 Equity dividend paid should be classified as cash outflow from – A. Operating activities
B. Financing activities
C. Investing activities
D. Not cash flows
Answer: B. Financing activities
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Practical Illustrations – Question 1 IPCC – May 2011 – Paper – Accounting Using Indirect Method
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Question 1: Indirect method Balance Sheet of Lotus Ltd as on 31‐Mar‐2010 and 31‐Mar‐2011 31.03.2010 31.03.2011 Liabilities Equity Share @ Rs 10 each
Rs in 000 1000
Rs in 000 1250 10
31.03.2010 31.03.2011 Assets
Rs in 000
Rs in 000
Land & Buildings
400
380
Machinery
750
920
Capital Reserve Profit & Loss Account Long term loan from Bank
400
480
Investments
100
50
500
400
Inventories
300
280
Sundry Creditors
500
400
400
420
Provision for tax
50
60
Receivables Cash in Hand
200
140
Cash at Bank
300
410
2450
2600
2450
2600
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Question 1: Indirect method Additional Information 1. Depreciation written off on Building ‐ Rs 20,000 2. The Company sold some Investment at a profit of Rs 10, 000, which is credited to Capital Reserve 3. Income tax provided during the year Rs 55,000 4. Machinery purchased during the year for Rs 2,25, 000. They paid Rs 1,25,000 in cash and issue 10,000 equity shares of Rs 10 each at par.
You are required to prepare cash flow statement for the year ended 31st March 2011 as per AS‐3, by using indirect method
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Question 1: Identification of Working Notes
Income Tax Paid
Sales realization Investment sales
Depreciation on Machinery
Calculation of Net Profit before tax
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Question 1 : Indirect Method – Working Note 1 Working Note:1
(Rs. In 000)
Income Taxes Paid Provision for Tax during the year
55
Add: Opening Provision for tax (31.03.2010)
50 105
Less: Closing Provision for tax (31.03.2011)
60 45
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Question 1 : Indirect Method – Working Note 2 Working Note:2
(Rs. In 000)
Sales realisation from Investments Opening Balance of Investment (31.03.2010)
100
Add: Profit on sale of Investment (Credited to Capital Reserve)
10 110
Less: Closing Balance of Investment (31.03.2011)
50 60
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Question 1 : Indirect Method – Working Note 3 Working Note:3
(Rs. In 000)
Depreciation on Machinery Opening Balance of Machinery (31.03.2010)
750
Add: Cost of Machinery Purchased
225 975
Less: Closing Balance of Machinery (31.03.2011)
920 55
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Question 1 : Indirect Method – Working Note 4 Working Note:4
(Rs. In 000)
Net Profit before tax and extraordinary items: Profit & Loss Account ‐ 31‐.03.2011
480
Less: Profit & Loss Account ‐ 31‐.03.2010
400
Profit for the Year after Tax provision
80
Add: Provision for Taxation
55 135
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Question 1 : Cash Flow Statement (Indirect Method) CASH FLOW STATEMENT (Rs. In 000) Cash flows from Operating activities: Net Profit Before tax and extraordinary items:
135
Adjustments for: Depreciation Building Depreciation Machinery Operating profit before working capital changes
20 55 210
Adjustments for Working Capital Changes: Add: Decrease in Inventories Less: Increase in Receivables Less: Decrease in Sundry Creditors Cash Generation from Operations Less: Income Tax Paid Net Cash from Operating activities
20 (20) (100) (100) 110 45 65
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Question 1 : Cash Flow Statement - Continued (Rs. In 000) Cash flows from Investing activities: Purchase of Machinery Cash received on Sales of Investment Net Cash from Investing activities Cash flows from Financing activities: Issue of Shares Repayment of Long Term Loan Net Cash from Financing activities
(125) 60 (65) 150 (100) 50
Net increase in Cash and Cash equivalents
50
Cash and Cash equivalents at the beginning Cash in Hand Cash at Bank
200 300
500
Cash and Cash equivalents at the end Cash in Hand Cash at Bank
140 410
550
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Practical Illustrations – Question 2 IPCC – May 2007 – Paper – Cost Accounting Using Indirect Method
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Question 2: Indirect method Balance Sheet of JK Ltd as on 31‐Mar‐2005 and 31‐Mar‐2006 Liabilities Share Capital
31.03.05
31.03.06
Rs in 000
Rs in 000
1440
Capital Reserve
1920 48
31.03.05 31.03.06 Assets
Rs in 000 Rs in 000
Fixed Assets
3840
4560
Less: Depreciation
1104
1392
2736
3168
General Reserve
816
960
Profit & Loss Account
288
360
Investments
480
384
9% Debenture
960
672
210
312
Current Liabilities
576
624
Cash Other Current assets (including stock)
1134
1272
Proposed Dividend
144
174
Preliminary Expenses
96
48
Provision for Tax
432
408 4656
5184
Unpaid Dividend
18 4656
5184
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Question 2: Indirect method - Continued Additional Information 1. During the year 2005 ‐ 2006, Fixed Assets with a book value of Rs 2,40,000 (accumulated depreciation Rs 84,000) was sold for Rs 1,20,000 2. Provided Rs 4,20,000 as depreciation 3. Some investments are sold at a profit of Rs 48,000 and the Profit was credited to Capital Reserve 4. It was decided that stocks be valued at cost, whereas previously the practice was to value stock at cost less 10 percent. The stock was Rs 2,59,200 as on 31.03.2005. The stock as at 31.03.06 was correctly valued at Rs 3,60,000 5. It was decided to write off Fixed Assets costing Rs 60,000 on which depreciation amounting to Rs 48,000 has been provided. 6. Debentures are redeemed at Rs 105 Required: Prepare Cash Flow Statement
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Question 2: Identification of Working Notes
Purchase of Fixed Assets, Sales of Fixed Assets, Fixed Assets Written Off, Depreciation Account (Optional)
Sales Realizati on from Investme nt
Opening Stock Revaluatio n and Opening Profit and Loss (Adjustmen t for stock revaluation )
Payment towards Redempti on of 9% Debenture
Calculation of Net Profit before tax and Extraordinar y Items
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Question 2 : Indirect Method – Working Note 1
Working Note:1
(Rs. In 000) Fixed Assets Account
Particulars To Balance b/d To Purchases (Balancing amount)
Rs
Particulars
3840.00
By Sale of Assets
1020.00
By Fixed Assets Written Off A/c By Balance c/d
4860.00
Rs 240.00
60.00 4560.00 4860.00
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Question 2 : Indirect Method – Working Note 2 Working Note:2
(Rs. In 000) Depreciation Account
Particulars
Rs
Particulars
To Sales of Assets
84.00
By Balance b/d
48.00
By Profit & Loss a/c (Depreciation Provision)
To Fixed Assets Written off A/c To Balance c/d
Rs 1104.00
420.00
1392.00 1524.00
1524.00
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Question 2 : Indirect Method – Working Note 3 (Rs. In 000)
Working Note:3 Sale of Fixed Assets Account Particulars To Fixed Assets a/c
Rs 240.00
Particulars
Rs
By Depreciation a/c
84.00
By Cash By Profit and Loss A/c ‐ Loss on Sales (Balancing Amount) 240.00
120.00
36.00 240.00
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Question 2 : Indirect Method – Working Note 4 Working Note:4
(Rs. In 000) Fixed Assets Written Off Account
Particulars
Rs
Particulars
Rs
To Fixed Assets a/c
60.00
By Depreciation a/c
48.00
By Profit and Loss A/c (Balancing Amount)
12.00
60.00
60.00
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Question 2 : Indirect Method – Working Note 5
Working Note:5
(Rs. In 000) Investment Account
Particulars To Balance b/d
To Capital Reserve A/c (Profit on sale)
Rs 480.00
48.00 528.00
Particulars By Cash (Balancing Amount)
Rs 144.00
By Balance c/d
384.00 528.00
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Question 2 : Indirect Method – Working Note 6
Working Note:6
(Rs. In 000) Opening Stock Revaluation Account
Particulars
Rs
To Balance b/d
259.20
To Profit & Loss A/c (31.03.2005)
28.80 288.00
Particulars
By Balance c/d
Rs
288.00 288.00
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Question 2 : Indirect Method – Working Note 7 Working Note:7
(Rs. In 000) 9% Debentures a/c
Particulars To Cash (Balancing Amount)
Rs
Particulars
Rs
302.40
To Balance c/d
672.00
By Balance b/d 960.00 By Profit and Loss A/c ‐ Premium on Redemption (Rs 288000*5%) 14.40
974.40
974.40
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Question 2 : Indirect Method – Working Note 8 Working Note:8 Particulars To Proposed Dividend To Transfer to General Reserve To Provision for Tax To 9% Debentures (Premium on Redemption) To Loss on Sales of Assets To Preliminary Expenses (Written off) To Fixed Assets Written Off A/c To Balance c/d
(Rs. In 000) Profit and Loss A/c Rs Particulars 174.00 By Balance b/d 144.00
By Opening Stock Revaluation a/c
408.00
By Profit Before Tax and Extraordinary Items
Rs 288.00 28.80 879.60
14.40 36.00 48.00 12.00 360.00 1,196.40
1,196.40
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Question 2 : Cash Flow Statement (Indirect Method) CASH FLOW STATEMENT (Rs. In 000) Cash flows from Operating activities: Net Profit Before tax and extradinary items:
879.60
Adjustments for: Depreciation Operating profit before working capital changes Adjustments for Working Capital Changes: Less: Increase in Other Current Assets Add: Increase Current Liabilities
420.00 1299.60
(109.20) 48.00
Cash Generation from Operations
(61.20) 1238.40
Less: Tax Paid Net Cash from Operating activities
432.00 806.40
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Question 2 : Cash Flow Statement - Continued (Rs. In 000) Cash flows from Investing activities: Purchase of Fixed Assets Cash received on Sales of Fixed Assets Cash received on Sale of Investment Net Cash from Investing activities
(1020.00) 120.00 144.00
Cash flows from Financing activities: Issue of Shares Redemption of 9% Debentures Dividend Paid Net Cash from Financing activities
480.00 (302.40) (126.00)
(756.00)
51.60
Net increase / (Decrease) in Cash and Cash equivalents
102.00
Cash and Cash equivalents at the beginning
210.00
Cash and Cash equivalents at the end
312.00
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Practical Illustrations – Question 3 IPCC – May 2008 – Paper – Cost Accounting and Financial Management Projected Cash flow Statement and Estimated Bank Balance
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Question 3 X Ltd has the following balances as on 01 April 2007 Rs in 000 Fixed Assets Less: Depreciation
1140 399 741
Stocks and Debtors
475
Bank Balance
66.5
Creditors
114
Bills Payable Capital (Shares of Rs 100 each)
76 570
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Question 3 – Continued The Company made the following estimates for the financial year 2007 ‐ 08 1. The company will pay a free of tax dividend of 10% and the rate of tax being 25% 2. The company will acquire fixed assets costing Rs 1,90,000 after selling one machine for Rs 38,000 costing Rs 95,000 and on which depreciation provided amounted to Rs 66,500 3. Stocks and Debtors, Creditors and Bills payables at the end of financial year are expected to be Rs. 5,60,500, Rs 1,48,200 and Rs 98,800 respectively 4. Profit would be Rs 1,04,500 after depreciation of Rs 1,14,000 Prepare the projected cash from operations and ascertain the bank balances of X Ltd at the end of the Financial year 2007 ‐ 08
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Question 3: Identification of Working Notes
Profit on sale of Machine
Dividend payment and Dividend Tax
41
Question 3 : Working Note 1
Working Note:1
(Rs. In 000)
Profit on Sale of Fixed Assets: Cost of sold Equipment
95.0
Accumulated Depreciation on Equipments sold Written Down Value of Equipment sold
66.5
Less: Sale value
38.0
28.5
9.5
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Question 3 : Working Note 2
Working Note:2
(Rs. In 000)
Dividend and Dividend Tax: Net Dividend : 10% on Rs 570,000 Gross Dividend Dividend Tax
57.0 (57 / 75%) x 100%
76.0 19.0
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Question 3 : Cash Flow Statement CASH FLOW STATEMENT (Rs. In 000) Cash flows from Operating activities: Net Profit Before tax and extradinary items: Profit for the year Less: Profit on sale of assets Adjustments for: Depreciation Operating profit before working capital changes Adjustments for Working Capital Changes: Less: Increase in Stocks and Debtors Add: Increase Creditors Add: Increase Bills payable Net Cash from Operating activities
104.5 9.5
95.0 114.0 209.0
(85.5) 34.2 22.8 (28.5) 180.5
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Question 3 : Cash Flow Statement (Continued) (Rs. In 000) Cash flows from Investing activities: Purchase of Fixed Assets Cash received on Sales of Fixed Assets Net Cash from Investing activities
(190.0) 38.0
Cash flows from Financing activities: Dividend Paid Dividend Tax Paid Net Cash from Financing activities
(57.00) (19.00)
(152.0)
Net increase / (decrease)in Cash and Cash equivalents
(76.0) (47.5)
Bank Balance at the beginning
66.5
Bank Balance on 31.03.2008
19.0
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Practical Illustrations – Question 4 IPCC – May 2011 – Paper – Cost Accounting and Financial Management Under Indirect Method
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Question 4 : Cash Flow Statement Summarised Balance Sheet of XYZ Ltd as on 31‐Mar‐2010 and 31‐Mar‐2011 31.03.10 31.03.11 31.03.10 31.03.11 Liabilities Preference Share Capital Equity Share Capital Share Premium Capital redemption reserve General Reserve P & L A/c Current Liabilities Proposed Dividend Provision for Tax
Rs in 000 Rs in 000 400 200 400 40
200 130 640 160 150 2120
660 30 100 120 175 900 210 180 2575
Assets Plant & Machinery
Rs in 000 Rs in 000 700 820
Long Term investment Goodwill Current Assets Short term investment (Less than 2 months) Cash and Bank Preliminary Exps
320 910
400 30 1141
50 100 40
84 80 20
2120
2575
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Question 4 : Cash Flow Statement Additional Information 1. Preference Share Capital was redeemed at a premium of 10% partly out of proceeds from issue of 10000 equity shares of Rs 10 each issued at 10% premium and partly out of profits otherwise available for dividend 2. The company purchased plant and machinery for Rs 95000. It also acquired another company stock Rs 25000 and plant and machinery Rs 105000 and paid Rs 160000 in equity share capital for the acquisition 3. Foreign Exchange loss of Rs 1600 represents loss in value of short term investment 4. The company paid tax of Rs 140000 Required: Prepare Cash Flow Statement
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Question 4: Identification of Working Notes
Depreciati on on Plant and Machinery
Provision for Taxation
Transfer to General reserve
Calculati on of Net Profit before tax
Net increas e in Current Assets
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Question 4 : Working Note 1 Working Note:1
(Rs. In 000) Plant and Machinery Account
Particulars To Balance b/d
Rs 700.00
To Bank 95.00 To Acquired from other company 105.00 900.00
Particulars
Rs
By Depreciation
80.00
By Balance c/d
820.00 900.00
50
Question 4 : Working Note 2 Working Note:2
(Rs. In 000) Provision for Tax Account
Particulars To Bank
To Balance c/d
Rs 140.00
Particulars
Rs
By Balance b/d
150.00
By Profit & Loss a/c (Tax Provision)
170.00
180.00 320.00
320.00
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Question 4 : Working Note 3 Working Note:3
(Rs. In 000) General Reserve Account
Particulars To Capital redemption reserve
Rs 100.00
Particulars By Balance b/d By Profit & Loss a/c
To Balance c/d
Rs 200.00 20.00
120.00 220.00
220.00
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Question 4 : Working Note 4 Working Note:4
(Rs. In 000) Profit and Loss A/c
Particulars To Provision for Tax
Rs 170.00
To Transfer to General Reserve 20.00 To Proposed Dividend
210.00
To Balance c/d
175.00 575.00
Particulars By Balance b/d By Profit Before Tax and Extraordinary Items
Rs 130.00
445.00
575.00
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Question 4 : Working Note 5 Working Note:5
(Rs. In 000) Net increase in Current Assets
Current Assets as on 31.03.2011 Less: Stock acquired by issue of shares
1141.00 25.00 1116.00
Less: Current Assets as on 31.03.2010
910.00 206.00
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Question 4 : Cash Flow Statement CASH FLOW STATEMENT (Rs. In 000) Cash flows from Operating activities: Net Profit Before tax and extradinary items: Adjustments for: Depreciation on Plant and Machinery Foreign Exchange Loss Preliminary expenses written off Operating profit before working capital changes Adjustments for Working Capital Changes: Less: Increase in Current Assets Add: Increase Current Liabilities Cash Generation from Operations Less: Tax Paid Net Cash from Operating activities
445.00 80.00 1.60 20.00
(206.00) 260.00
101.60 546.60
54.00 600.60 140.00 460.60
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Question 4 : Cash Flow Statement..Continued (Rs. In 000) Cash flows from Investing activities: Purchase of Machinery Purchase of Investment Net Cash from Investing activities Cash flows from Financing activities: Issue of Shares @ 10% premium for cash Redemption of Preference Share Capital Dividend Paid Net Cash from Financing activities Net increase in Cash and Cash equivalents Cash and Cash equivalents as on 31‐Mar‐2010 Cash and Cash equivalents as on 31‐Mar‐2011
(95.00) (80.00) (175.00)
110.00 (220.00) (160.00) ‐270.00 15.60 150.00 165.60
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Thank You
