CASH FLOW STATEMENT
Definition
"A statement of changes in the
financial position of a firm on cash basis is called a cash flow
statement."
The cash flow statement describes the
inflow (sources) & outflow (uses) of cash. It summarises the causes of
changes in cash position of a business enterprise between two balance sheets.
Differences
between Fund Flow Statement & Cash Flow Statement
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Fund Flow Statement
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Cash
Flow Statement
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1)
It is based on a wider concept of funds i.e working capital
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1)
It is based on a narrower concept of funds i.e cash
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2)
It is based on accrual basis of accounting
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2)
It is based on cash basis of accounting
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3)
Changes in current assets & current liabilities appear separately in a
schedule of changes in working capital
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3)
No schedule of changes in working capital. The changes in current assets
& current liabilities are summarized in the cash flow statement.
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4)
It is useful in planning intermediate & long term financing.
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4)
It is useful for short term analysis & cash planning of the business.
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5)
It reveals the sources & applications of funds of an organization.
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5)
It classifies all cash inflows & outflows in terms of operating,
investing & financing activities.
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Classification
of Cash Flows
1)
Cash flows from operating activities
2)
Cash flows from investing activities
3)
Cash flows from financing activities
Cash
flows from Operating Activities
Operating activities are the basic revenue
producing activities of the enterprise. The amount of cash flows arising from
operating activities is an indicator of a firm's operating capability to
generate sufficient funds to meet its operating needs, pay dividends, repay
loans, etc. without depending on external sources of finance.
Examples
of cash flow from operating activities
1)
cash
receipts from sale of goods & rendering of services
2)
cash
receipts from royalties, fees, commissions, etc
3)
cash
payment to suppliers of goods & services
4)
cash
payment to & behalf of employees
5)
cash
receipts & payments of an insurance company for premiums, claims,
annuities, etc
6)
cash
payments or refunds of income tax relating to operating activities
Cash flows from Investing Activities
Investing activities are the acquisition & disposal of long term
assets & investments. A separate disclosure of cash flows arising from
investing activities is important because cash flows represent the extent to
which expenditure have been made for resources to generate future incomes.
Examples
of cash flow from investing activities
1)
cash payments to acquire fixed assets (including intangibles).
2)
cash receipts from disposal of fixed assets (including intangibles)
3)
cash receipts from disposal of shares, warrants, debt instruments, etc
4)
cash advances & loans made to third parties.
5)
cash receipts from the repayment of advances & loans made to third parties.
Cash
flows from Financing Activities
Financing
activities are activities that result in changes in the size & composition
of the owners' capital (including preference share capital in the case of a
company) & borrowings of the enterprise.
Examples
of cash flows from financing activities
1)
cash
proceeds from issuing shares or other similar instruments
2)
cash
proceeds from issuing debentures, loans, bonds & other short or long term
borrowings
3)
cash
repayments of amounts borrowed such as redemption of debentures, bonds,
preference shares.
Uses
& Significance of Cash Flow Statement
Cash Flow Statement is of vital importance
to the financial management & short term financial planning. Its various
uses are as follows:
1)
Cash Flow Statement is prepared on cash basis hence it is useful in evaluating
the cash position of an enterprise.
2)
A projected cash flow statement can be prepared so that it can enable the firm
to plan & co – ordinate its financial operations efficiently.
3)
A comparison of historical & projected cash flow statements will reveal
variations in the performance so that the firm can take immediate effective
action.
4)
It indicates whether a firm's short term paying capacity is improving or
deteriorating over a period of time by preparing cash flow statements for a
number of years.
5)
It helps in planning the repayment of loans, replacement of fixed assets etc.
It is also significant for making capital budgeting decisions.
6)
It clearly indicates the causes for poor cash position inspite of substantial
profits in a firm by throwing light on various applications of cash made by the
firm.
7)
Cash Flow Statement provides information of all activities classified under
operating, investing & financing activities.
Limitations
of Cash Flow Statement
Despite
of a number of uses, cash flow statement also suffers from the following
limitations:
1)
As cash flow statement is based on cash basis of accounting, it ignores the
basic accounting concept of accrual basis.
2)
Cash Flow statement is not suitable for judging the profitability of a firm as
non – cash charges are ignored while calculating cash flows from operating
activities.
3)
Funds flow statement presents a more complete picture than Cash flow statement.
4)
It is difficult to define the term "cash". There are no controversies
over a number of items like cheques, stamps, postal orders etc whether they are
to be included in cash.
Note:
1)
An increase in liability is a source of cash or cash inflow eg increase in
creditors implies purchase of goods on credit. Although no cash is received we
can say that creditors have given us loans which we have utilized to purchase
goods from them.
2)
A decrease in liability is an application of cash or cash outflow. Eg sundry
creditors are paid off.
3)
An increase in asset is an outflow of cash. Eg goods sold on credit.
4)
A decrease in asset is an inflow or source of cash. Eg sale of stock, cash
received from debtors.
Actual
flow of cash
It is the movement of cash that results in
actual inflow or outflow of from the firm. Eg When shares are issued for cash
or when loan is repaid or when assets are sold for cash.
Notional
flow of cash
It refers to delayed receipts &
payments. Increase in current liabilities like trade creditors, bills payable,
etc results in notional inflow of cash as here cash inflow is implied.
Usually
increase in long term liabilities generate actual cash & increase in
current liabilities generate notional cash.
Problems
Cash flow statement of sole
proprietors
1. Balance Sheet of Mr. A on 01.01.2005 &
31.12.2005 were as follows.
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LIABILITIES
|
1.1.2005
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31.12.2005
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ASSETS
|
1.1.2005
|
31.12.2005
|
|
Capital
Mrs
B's Loan
Loan
from SBI
Sundry
Creditors
|
1,50,000
30,000
60,000
50,000
|
1,90,000
--------
80,000
56,000
|
Cash
Debtors.
Stock
Furniture
Machinery
Land
Buildings
|
20,000
54,000
48,000
2,000
90,000
36,000
40,000
|
26,000
76,000
42,000
2,000
65,000
45,000
70,000
|
|
|
2,90,000
|
3,26,000
|
|
2,90,000
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3,26,000
|
During the year.
1. A
Machine costing is 12,000/- (accumulated depreciation of Rs 4000/-) was sold
for Rs.5, 500/-
2. The
provision for depreciation against machinery as on 1.1.2005 was Rs.24,000/- and
on 31.12.2005 was Rs.37,000/-
3. Net
profit for the year 2005 amounted to Rs.60, 000/-
You are required to prepare cash flow statement.
2.
Prepare a cash flow statement of Mr. Kumar.
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LIABILITIES
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1.1.2006
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31.12.2006
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ASSETS
|
1.1.2006
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31.12.2006
|
|
Current
liabilities
Loan
from Mrs.X
Bank
Loan
Capital
|
35,000
--------
40,000
1,50,000
|
40,000
25,000
30,000
1,54,000
|
Cash
Debtors.
Stock
Land
Buildings
Machinery
|
5000
40,000
30,000
30,000
50,000
70,000
|
4,000
45,000
25,000
40,000
55,000
80,000
|
|
|
2,25,000
|
2,49,000
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|
2,25,000
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2,49,000
|
During the year Kumar brought in
additional capital of Rs.10,000 and his drawings
during the year was Rs.31,000.
Provision for depreciation on machinery
opening balance Rs.30, 000 and closing
balance Rs 40,000. No depreciation needs
to be provided for other assets.
Cash
flow statements of companies
- The following details are available from a company
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LIABILITIES
|
31-12-98
Rs.
|
31-12-99
Rs.
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ASSETS
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31-12-98
Rs.
|
31-12-99
Rs.
|
|
Share capital
Debentures
Reserve for doubtful debts
Trade creditors
Profit and Loss A/c
|
70,000
12,000
700
10,360
10,040
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74,000
6,000
800
11,840
10,560
|
Cash
Debtors
Stock
Land
Goodwill
|
9,000
14,900
49,200
20,000
10,000
|
7,800
17,700
42,700
30,000
5,000
|
|
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1,03,100
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1,03,200
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1,03,100
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1,03,200
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In addition, you are
given:
- Dividend paid total Rs.3,500
- Land purchased for Rs.10,000
- Amount provided for amortisation of goodwill Rs.5,000
- Debentures paid off Rs.6,000
Prepare Cash flow
statement
- The following are the comparative balance sheets of XYZ as on 31st December 2005 and 2006
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LIABILITIES
|
2005
|
2006
|
ASSETS
|
2005
|
2006
|
|
Share capital
(shares of Rs.10 each)
Profit and loss a/c
9% Debentures
Creditors
|
3,50,000
50,400
60,000
51,600
|
3,70,000
52,800
30,000
59,200
|
Land
Stock
Goodwill
Cash & Bank
Temporary investments
Debtors
|
1,00,000
2,46,000
50,000
42,000
3,000
71,000
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1,50,000
2,13,500
25,000
35,000
4,000
84,500
|
|
|
5,12,000
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5,12,000
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|
5,12,000
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5,12,000
|
Other
particulars provided to you are : (a)
Dividends declared and paid during the year Rs.17,500 (b) Land was revalued
during the year at Rs.1,50,000 and the profit on revaluation transferred to
profit and loss a/c. you are required to prepare a cash flow statement for the
year ended 31-12-2006.
5. From following
information calculate C.F.S
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LIABILITIES
|
2006
|
2007
|
ASSETS
|
2006
|
2007
|
|
Equity
capital
Reserves
Sundry
creditor.
O/s
wages paid
Miscellaneous
expenses o/s
|
1,40,000
74,000
32,000
3,000
11,000
|
1,40,000
1,05,000
35,000
4,000
3,000
|
Fixed
Assets (net)
Cash
Sundry
Debtors.
Inventories.
Prepaid
Rent
|
90,000
75,000
43,000
49,000
3,000
|
87,000
97,000
40,000
58,000
5,000
|
|
|
2,60,000
|
2,87,000
|
|
2,60,000
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2,87,000
|
1. Accumulated depreciation was Rs.16,000 at
the end of 2006 and Rs. 19,000 at the end of 2007.
2. Other information:
Wages Rs.23,000
Sales 3,00,000
Miscellaneous
operating Expenses Rs.47,000
Depreciation Rs.3000
Cost of Goods sold
Rs.1,90,000
6. From following
information, prepare a cash flow statement of C.P. Ltd. For the year ended 31st
December, 2007
BALANCE SHEET |
|||||
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LIABILITIES
|
2006
Rs.
|
2007
Rs.
|
ASSETS
|
2006
Rs.
|
2007
Rs.
|
|
Share capital
Secured loans(repayable in 2015)
Creditors
Tax payable
Profit and Loss A/c
|
70,000
-----
14,000
1,000
7,000
|
70,000
40,000
39,000
3,000
10,000
|
Plant and Machinery
Inventory
Debtors
Cash
Prepaid Expenses
|
50,000
15,000
5,000
20,000
2,000
|
91,000
40,000
20,000
7,000
4,000
|
|
|
92,000
|
1,62,000
|
|
92,000
|
1,62,000
|
PROFIT AND LOSS ACCOUNT
(for
the year ended 31st December
2007)
|
|
Rs.
|
|
Rs.
|
|
To opening inventory
To purchase
To gross profit C/d
To general expenses
To depreciation
To taxes
To net profit C/d
To dividend
To balance C/f
|
15,000
98,000
27,000
1,40,000
11,000
8,000
4,000
4,000
27,000
1,000
10,000
11,000
|
By Closing stock
By Sales
By Gross profit b/d
By balance b/f
By net profit b/d
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40,000
1,00,000
_______
1,40,000
27,000
_______
27,000
7,000
4,000
11,000
|
- ABC Ltd. has submitted the following condensed balance sheet as on 31st December 2006 and 31st December 2007 and the statement of income and reconciliation of retained earnings for the year ended 31st December, 2007.
BALANCE SHEETS |
|||||
|
LIABILITIES
|
2006
Rs.
|
2007
Rs.
|
ASSETS
|
2006
Rs.
|
2007
Rs.
|
|
Share
capital
General
Reserve
Retained
Earnings
6%
Debentures
Loans o
mortgage
Sundry
Creditors
Wages
Outstanding
Provision
for income tax
|
3,00,000
80,000
60,000
2,00,000
--------
1,85,000
3,000
75,000
|
4,00,000
1,00,000
90,000
1,25,000
40,000
1,05,000
5,000
1,40,000
|
Fixed
Assets
Less:
accumulated depreciation
Stock
Sundry
Debtors
Cash in
hand/bank
Prepaid
Expenses
Preliminary
expenses
|
7,00,000
2,25,000
4,75,000
1,25,000
1,80,000
95,000
3,000
25,000
|
8,00,000
2,60,000
5,40,000
2,00,000
1,50,000
89,000
6,000
20,000
|
|
|
9,03,000
|
10,05,000
|
|
9,03,000
|
10,05,000
|
STATEMENT OF INCOME AND RECONCILIATION OF RETAINED EARNINGS
(For the year
ended 31st December 2007)
|
Sales
Less: Cost of goods sold: stock of 1st
Jan,2007
Add:
Purchases
Less: Stock on31st Dec, 2007
Less: Wages
Gross Income
Less:
sundry expenses
Preliminary
expenses written off
Depreciation
Less: provision for income tax
General reserve
Dividend paid
Net income for the year (Retained)
Add: retained earnings on 31-12-2006
|
1,25,000
10,00,000
11,25,000
2,00,000
2,05,000
5,000
35,000
20,000
1,00,000
|
15,00,000
9,25,000
5,75,000
40,000
5,35,000
2,45,000
2,90,000
1,40,000
1,50,000
1,20,000
30,000
60,000
90,000
|
Additional Information
During 2007, the company purchased a building
for Rs.1,00,000 you are required to prepare cash flow statement for the year
ended 31st December 2007
8
From the following balance sheet of X Co prepare cash flow statement
|
LIABILITIES
|
2006
|
2007
|
ASSETS
|
2006
|
2007
|
|
Share Capital
Share premium
P/L appropriation
Profit for the year
8% Debentures
Profit on redemption
Of debentures
Sundry creditors.
Provision for Tax
Proposed Dividend
|
4,50,000
-----
60,000
----
2,50,000
----
2,20,000
40,000
45,000
|
6,00,000
15,000
60,000
50,000
2,00,000
1,000
1,90,000
50,000
60,000
|
Plant & Machinery
Less: depreciation
Land
Loan to subsidiary
Co.
Shares in subsidiary
Stock
Debtors
Bank
|
6,00,000
1,20,000
4,80,000
1,83,000
25,000
30,000
1,60,000
1,20,000
67,000
|
7,25,000
1,45,000
5,80,000
1,98,000
----
40,000
1,48,000
1,62,000
98,000
|
|
|
10,65,000
|
12,26,000
|
|
10,65,000
|
12,26,000
|
Additional Information
1) During the year
plant costing Rs.40,000 was sold for Rs.15,000. Accumulated
Depreciation on plant
was Rs.20,000.
2) Tax paid during
the year Rs.55,000
9.Balance Sheet of Smith John Ltd.,
|
LIABILITIES
|
2005
|
2006
|
ASSETS
|
2004
|
2005
|
|
Equity Share Capital
8% redeemable Preference share
Capital reserve
General reserve
P/L/ a/c
Proposed dividend
Sundry creditors
Bills Payable.
Liability for outstanding expenses
Provision for Tax
|
3,00,000
1,50,000
---
40,000
30,000
42,000
25,000
20,000
30,000
40,000
|
4,00,000
1,00,000
20,000
50,000
48,000
50,000
47,000
16,000
36,000
50,000
|
Goodwill
Buildings
Investments
Plants
Sundry debtors
Stock
Bills Receivables
Cash
Bank
Preliminary Expenses
|
1,00,000
2,00,000
20,000
80,000
1,40,000
77,000
20,000
15,000
10,000
15,000
|
80,000
1,70,000
30,000
2,00,000
1,70,000
1,09,000
30,000
10,000
8,000
10,000
|
|
|
6,77,000
|
8,17,000
|
|
6,77,000
|
8,17,000
|
- A portion of the building was sold in 2006 and the profit has been transferred to capital reserve.
- The written down value of a machine was Rs.12,000. It was sold for Rs.10,000. Depreciation of Rs.10,000 is charged in 2006.
- Investments are trade Investments Rs.3000 by way of dividend is received including Rs.1000 from pre-acquisition profits which has been credited to the Investments a/c.
- An Interim dividend of Rs.20,000 has been paid in 2006.
Prepare Cash Flow statement.
10.Given is the
balance sheet below:
|
LIABILITIES
|
2004
|
2005
|
ASSETS
|
2004
|
2005
|
|
Share Capital
General Res.
P&L a/c
Bank Loan
(long term)
Sundry creditors
Provision for Tax
|
2,00,000
50,000
30,500
70,000
1,50,000
30,000
|
2,50,000
60,000
30,600
-----
1,35,200
35,000
|
Land & Buildings
Machinery
Sundry debtors
Cash
Bank
Goodwill
Stock
|
2,00,000
1,50,000
80,000
500
----
Nil
1,00,000
|
1,90,000
1,69,000
64,200
600
8,000
5,000
74,000
|
|
|
5,30,500
|
5,10,800
|
|
5,30,500
|
5,10,800
|
Additional Information
During
the year ended 31-12-2005
Dividend of Rs.23,000 was paid
Assets of another Co. was purchased for a
consideration of Rs.50,000 payable
in shares.
The following assets were purchased: stock
Rs.20,000, machinery Rs.25,000
Machinery was further purchased: Rs.8,000
Depreciation written off on machinery Rs
12,000
Income tax provision made during the year
Rs.33,000
Loss on sale of machinery Rs.200 was written
off to the general reserve
- Following schedule shows the balance sheet in condensed form of Sanjeev ltd. At the end of the year 2005
|
|
2004
|
2005
|
Assets
Cash and bank balances
Sundry Debtors
Temporary investments
Prepaid expenses
Stock in trade
Land and buildings
Machinery
Liabilities and Capital
Sundry creditors
Outstanding expenses
8% Debentures
Depreciation fund
Reserve for contingencies
Profit and Loss account
Capital
|
45,000
33,500
55,000
500
41,000
75,000
26,000
2,76,000
51,500
6,500
45,000
20,000
30,000
8,000
1,15,000
2,76,000
|
45,000
21,500
37,000
1,000
53,000
75,000
35,000
2,76,000
48,000
6,000
35,000
22,000
30,000
11,500
1,15,000
2,76,000
|
The following
information is also available.
10% dividend was paid in cash
New machinery for Rs.15,000 was purchased but
old machinery costing
Rs.6,000 was sold for Rs.2,000
accumulated depreciation was Rs.3,000
Rs.10,000 8% debentures were redeemed by
purchase from open market
@ Rs.96 for a debenture of Rs.100
Rs.
18,000 investment were sold at book value
You are required to
prepare cash flow statement.
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