Cash Flow Statement - Practicalpromrek.ru/littledms/folder1/cash-flow-statement...Cash Flow Statement - Practical Paper 3B: Financial Management Chapter 3 Unit II CA B. Hari Gopal

Cash Flow Statement - PracticalPaper 3B: Financial Management Chapter 3 Unit II

CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA), EPBM (IIMC), MCT

Learning Objectives

Understand the intricacies in preparation of Cash Flow Statement

Understand the intricacies in preparation of Cash Flow Statement

Develop hands on skills in Cash Flow Statement preparation by solving variety of questions

Develop hands on skills in Cash Flow Statement preparation by solving variety of questions

2

1

2

Recap –Classification of Cash Flows

3

Recap - Cash Flow - Classification

1• Cash flow from Operating Activities

• Principal revenue generating activities

2• Cash flow from Investing Activities

• Acquisition and disposal of long term assets and other investments not included in cash equivalents

3• Cash flows from Financing activities

• Activities that has an impact of owner’s capital and borrowings

4

Cash Flow from Operating Activities

Cash from Operating activities can be

reported in two ways

Direct Method

Indirect Method

5

Multiple Choice QuestionsCash Flow Statement

6

MCQ – 1

7

Principal revenue generating activities of an enterprise are

called as –

A. Operating Activities

C. Financing Activities

B. Investing Activities

D. None of the above

Answer: A. Operating Activities

MCQ – 2

8

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

C. Cash Equivalents

B. Investments in Shares


Answer: C. Cash Equivalents

MCQ – 3

9

Cash Flows are –

A. Inflows and Outflows of cash

C. Inflows of Cash

B. Inflows and Outflows of cash equivalents

D. Both A & B

Answer: D. Both A & B

MCQ – 4

10

Purchase of Machinery by means of issue of shares should

be ________________ from Cash Flow Statement

A. Included

C. Included with value as zero

B. Excluded


Answer: B. Excluded

MCQ – 5

11

Unrealized gains and losses arising from foreign exchange rates are –

A. Cash flows from operating activities

C. Cash flows from investing activities

B. Cash flows from financing activities

D. Not cash flows

Answer: D. Not cash flows

MCQ – 6

12

Equity dividend paid should be classified as cash outflow from –

A. Operating activities

C. Investing activities

B. Financing activities

D. Not cash flows

Answer: B. Financing activities

Practical Illustrations – Question 1IPCC – May 2011 – Paper – Accounting

Using Indirect Method

13

Question 1: Indirect method14

Balance Sheet of Lotus Ltd as on 31‐Mar‐2010 and 31‐Mar‐2011

31.03.2010 31.03.2011 31.03.2010 31.03.2011Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000

Equity Share @ Rs 10 each 1000 1250

Land & Buildings 400 380

Capital Reserve 10 Machinery 750 920Profit & Loss Account 400 480 Investments 100 50Long term loan from Bank 500 400 Inventories 300 280Sundry Creditors 500 400 Receivables 400 420

Provision for tax 50 60Cash in Hand 200 140Cash at Bank 300 410

2450 2600 2450 2600

Question 1: Indirect method15

Additional Information

1. Depreciation written off on Building ‐ Rs 20,0002. 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

Question 1: Identification of Working Notes

Income Tax Paid

Sales realization Investment sales

Depreciation on Machinery

Calculation of Net Profit before tax

16

Question 1 : Indirect Method – Working Note 1

17

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


18


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


19


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


20


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

Question 1 : Cash Flow Statement (Indirect Method)

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CASH FLOW STATEMENT(Rs. In 000)

Cash flows from Operating activities:Net Profit Before tax and extraordinary items: 135

Adjustments for:Depreciation Building 20Depreciation Machinery 55Operating profit before working capital changes 210

Adjustments for Working Capital Changes:Add: Decrease in Inventories 20Less: Increase in Receivables (20)Less: Decrease in Sundry Creditors (100)

(100)Cash Generation from Operations 110

Less: Income Tax Paid 45Net Cash from Operating activities 65

Question 1 : Cash Flow Statement - Continued

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(Rs. In 000)Cash flows from Investing activities:Purchase of Machinery (125)Cash received on Sales of Investment 60Net Cash from Investing activities (65)Cash flows from Financing activities:Issue of Shares 150Repayment of Long Term Loan (100)Net Cash from Financing activities 50

Net increase in Cash and Cash equivalents 50

Cash and Cash equivalents at the beginning Cash in Hand 200Cash at Bank 300 500

Cash and Cash equivalents at the endCash in Hand 140Cash at Bank 410 550

Practical Illustrations – Question 2IPCC – May 2007 – Paper – Cost Accounting

Using Indirect Method

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Question 2: Indirect method

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Balance Sheet of JK Ltd as on 31‐Mar‐2005 and 31‐Mar‐2006

31.03.05 31.03.06 31.03.05 31.03.06Liabilities Rs in 000 Rs in 000 Assets Rs in 000Rs in 000

Share Capital 1440 1920 Fixed Assets 3840 4560

Capital Reserve 48 Less: Depreciation 1104 1392

General Reserve 816 960 2736 3168Profit & Loss Account 288 360 Investments 480 384

9% Debenture 960 672 Cash 210 312

Current Liabilities 576 624Other Current assets (including stock) 1134 1272

Proposed Dividend 144 174 Preliminary Expenses 96 48

Provision for Tax 432 408Unpaid Dividend 18

4656 5184 4656 5184

Question 2: Indirect method - Continued

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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 1,20,0002. Provided Rs 4,20,000 as depreciation3. 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


Purchase of Fixed

Assets, Sales of

Fixed Assets,

Fixed Assets Written Off,

Depreciation Account

(Optional)

Sales Realization from

Investment

Opening Stock

Revaluation and

Opening Profit and

Loss (Adjustment for stock revaluation

)

Payment towards

Redemption of 9%

Debenture

Calculation of Net Profit before tax

and Extraordinar

y Items

26


27


Fixed Assets Account

Particulars Rs Particulars Rs

To Balance b/d 3840.00 By Sale of Assets 240.00

To Purchases (Balancing amount) 1020.00

By Fixed Assets Written Off A/c 60.00

By Balance c/d 4560.00

4860.00 4860.00


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Depreciation Account


To Sales of Assets 84.00 By Balance b/d 1104.00

To Fixed Assets Written off A/c 48.00

By Profit & Loss a/c (Depreciation Provision) 420.00

To Balance c/d 1392.00

1524.00 1524.00


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Working Note:3(Rs. In 000)

Sale of Fixed Assets Account


To Fixed Assets a/c 240.00 By Depreciation a/c 84.00

By Cash 120.00By Profit and Loss A/c ‐Loss on Sales (Balancing Amount) 36.00

240.00 240.00


30


Fixed Assets Written Off Account


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


31


Investment Account


To Balance b/d 480.00By Cash (Balancing Amount) 144.00

To Capital Reserve A/c (Profit on sale) 48.00 By Balance c/d 384.00

528.00 528.00


32


Opening Stock Revaluation Account


To Balance b/d 259.20

To Profit & Loss A/c (31.03.2005) 28.80 By Balance c/d 288.00

288.00 288.00


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9% Debentures a/c

Particulars Rs Particulars RsTo Cash (Balancing Amount) 302.40 By Balance b/d 960.00


By Profit and Loss A/c ‐Premium on Redemption (Rs 288000*5%) 14.40

974.40 974.40


34

Working Note:8 (Rs. In 000)Profit and Loss A/c

Particulars Rs Particulars RsTo Proposed Dividend 174.00 By Balance b/d 288.00

To Transfer to General Reserve 144.00 By Opening Stock Revaluation a/c 28.80

To Provision for Tax 408.00 By Profit Before Tax and Extraordinary Items 879.60

To 9% Debentures (Premium on Redemption) 14.40 To Loss on Sales of Assets 36.00

To Preliminary Expenses (Written off) 48.00 To Fixed Assets Written Off A/c 12.00 To Balance c/d 360.00

1,196.40 1,196.40

Question 2 : Cash Flow Statement (Indirect Method)

35


Cash flows from Operating activities:Net Profit Before tax and extradinary items: 879.60

Adjustments for:Depreciation 420.00Operating profit before working capital changes 1299.60

Adjustments for Working Capital Changes:Less: Increase in Other Current Assets (109.20)Add: Increase Current Liabilities 48.00

(61.20)Cash Generation from Operations 1238.40

Less: Tax Paid 432.00Net Cash from Operating activities 806.40

Question 2 : Cash Flow Statement - Continued

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(Rs. In 000)Cash flows from Investing activities:Purchase of Fixed Assets (1020.00)Cash received on Sales of Fixed Assets 120.00Cash received on Sale of Investment 144.00Net Cash from Investing activities (756.00)

Cash flows from Financing activities:Issue of Shares 480.00Redemption of 9% Debentures (302.40)Dividend Paid (126.00)Net Cash from Financing activities 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

Practical Illustrations – Question 3IPCC – May 2008 – Paper – Cost Accounting and Financial Management

Projected Cash flow Statement and Estimated Bank Balance

37

Question 3

38

X Ltd has the following balances as on 01 April 2007

Rs in 000

Fixed Assets 1140

Less: Depreciation 399

741

Stocks and Debtors 475

Bank Balance 66.5

Creditors 114

Bills Payable 76

Capital (Shares of Rs 100 each) 570

Question 3 – Continued

39

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


Profit on sale of Machine

Dividend payment and Dividend Tax

40

Question 3 : Working Note 1

41


Profit on Sale of Fixed Assets:

Cost of sold Equipment 95.0

Accumulated Depreciation on Equipments sold 66.5Written Down Value of Equipment sold 28.5

Less: Sale value 38.0

9.5


42


Dividend and Dividend Tax:

Net Dividend : 10% on Rs 570,000 57.0

Gross Dividend (57 / 75%) x 100% 76.0

Dividend Tax 19.0

Question 3 : Cash Flow Statement

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Cash flows from Operating activities:Net Profit Before tax and extradinary items:Profit for the year 104.5Less: Profit on sale of assets 9.5 95.0Adjustments for:Depreciation 114.0Operating profit before working capital changes 209.0

Adjustments for Working Capital Changes:Less: Increase in Stocks and Debtors (85.5)Add: Increase Creditors 34.2Add: Increase Bills payable 22.8

(28.5)Net Cash from Operating activities 180.5

Question 3 : Cash Flow Statement (Continued)

44

(Rs. In 000)Cash flows from Investing activities:Purchase of Fixed Assets (190.0)Cash received on Sales of Fixed Assets 38.0Net Cash from Investing activities (152.0)

Cash flows from Financing activities:Dividend Paid (57.00)Dividend Tax Paid (19.00)Net Cash from Financing activities (76.0)

Net increase / (decrease)in Cash and Cash equivalents (47.5)

Bank Balance at the beginning 66.5

Bank Balance on 31.03.2008 19.0

Practical Illustrations – Question 4IPCC – May 2011 – Paper – Cost Accounting and Financial Management

Under Indirect Method

45


46

Summarised Balance Sheet of XYZ Ltd as on 31‐Mar‐2010 and 31‐Mar‐201131.03.10 31.03.11 31.03.10 31.03.11

Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000Preference Share Capital 400 200 Plant & Machinery 700 820

Equity Share Capital 400 660 Long Term investment 320 400Share Premium 40 30 Goodwill 30Capital redemption reserve 100 Current Assets 910 1141

General Reserve 200 120Short term investment (Less than 2 months) 50 84

P & L A/c 130 175 Cash and Bank 100 80Current Liabilities 640 900 Preliminary Exps 40 20Proposed Dividend 160 210Provision for Tax 150 180

2120 2575 2120 2575


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Additional Information1. 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 dividend2. 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 acquisition3. 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


Depreciation on

Plant and Machinery

Provision for

Taxation

Transfer to

General reserve

Calculation of Net

Profit before

tax

Net increas

e in Current Assets

48


49


Plant and Machinery Account


To Balance b/d 700.00 By Depreciation 80.00

To Bank 95.00To Acquired from other company 105.00 By Balance c/d 820.00

900.00 900.00


50


Provision for Tax Account


To Bank 140.00 By Balance b/d 150.00

By Profit & Loss a/c (Tax Provision) 170.00


320.00 320.00


51


General Reserve Account

Particulars Rs Particulars RsTo Capital redemption reserve 100.00 By Balance b/d 200.00

By Profit & Loss a/c 20.00


220.00 220.00


52


Profit and Loss A/c


To Provision for Tax 170.00 By Balance b/d 130.00

To Transfer to General Reserve 20.00

By Profit Before Tax and Extraordinary Items 445.00

To Proposed Dividend 210.00


575.00 575.00


53


Net increase in Current Assets

Current Assets as on 31.03.2011 1141.00

Less: Stock acquired by issue of shares 25.00

1116.00

Less: Current Assets as on 31.03.2010 910.00

206.00

Question 4 : Cash Flow Statement54


Cash flows from Operating activities:Net Profit Before tax and extradinary items: 445.00Adjustments for:Depreciation on Plant and Machinery 80.00Foreign Exchange Loss 1.60Preliminary expenses written off 20.00 101.60Operating profit before working capital changes 546.60

Adjustments for Working Capital Changes:Less: Increase in Current Assets (206.00)Add: Increase Current Liabilities 260.00 54.00Cash Generation from Operations 600.60

Less: Tax Paid 140.00Net Cash from Operating activities 460.60

Question 4 : Cash Flow Statement..Continued

55

(Rs. In 000)Cash flows from Investing activities:Purchase of Machinery (95.00)Purchase of Investment (80.00)Net Cash from Investing activities (175.00)

Cash flows from Financing activities:Issue of Shares @ 10% premium for cash 110.00Redemption of Preference Share Capital (220.00)Dividend Paid (160.00)Net Cash from Financing activities ‐270.00

Net increase in Cash and Cash equivalents 15.60

Cash and Cash equivalents as on 31‐Mar‐2010 150.00Cash and Cash equivalents as on 31‐Mar‐2011 165.60

Thank You

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Cash Flow Statement - Practicalpromrek.ru/littledms/folder1/cash-flow-statement...Cash Flow Statement - Practical Paper 3B: Financial Management Chapter 3 Unit II CA B. Hari Gopal