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Cash Flow Statement

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Published in: Accountancy
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Kartik K / Guwahati

6 years of teaching experience

Qualification: B.Com (hons) in Accountancy, Finance Professional

Teaches: Accountancy, Chemistry, Mathematics, Physics, All Subjects, English, B.Com Tuition, Direct Tax, Indirect Tax, Business English, IELTS, Public Speaking, Spoken English, BBA Subjects

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  1. Cash Flow statement 1. Objectives: i) To ascertain the sources (receipts) of cash & cash equivalent from operating, investing and financing activities; To ascertain the applications (payments) of cash & cash equivalent under operating, investing and financing activities; To ascertain the net change in cash & cash equivalent under the three activities between the dates of two consecutive balance sheet; To highlight the major activities that have provided cash and that have used cash during a particular period and to show their effect on overall cash balance. 2. Use of Cash Flow Statement: i) v) vi) vii) viii) x) Useful for short term Financial Planning; Useful in the preparing Cash Budget; Useful for Comparison with Cash Budget; Useful for the study of the trend of cash receipts and payments; Enables management to assess the true position of the cash in nature; Explains the deviations of cash from Earning , Helpful in ascertaining cash flow from various activities separately; Helpful in making dividend decision• Test for the managerial decision; Useful to outsiders (i.e. investors, debenture holders, bankers, lenders, supplies of credit etc.) 3. Limitations of Cash Flow Statement: i) v) vi) It does not present true picture of the liquidity of the firm, because the liquidity does not depend upon cash flow alone• The possibility of window dressing is higher in case of cash position; It ignores non-cash transaction , It ignores the accrual concept of accounting as it is prepared on cash basis; No Substitute for an Income Statement; It reveals information of historical nature;
  2. Cash Flow Statement Vs. Cash Budget A CFS is prepared for a past period whereas a cash budget is prepared for a future period. A cash budget indicates in which months, there will be surplus cash and in which months there will be deficiency of cash reserves. Whereas, a CFS usually portray how cash was received and spent in the past period. Management can use the cash budget for future decision making; Whereas, a CFS is of limited use as it provides information of historical nature. Net Profit vs. Cash Flow from Activities: Refer the book. Cash & Cash Equivalent It includes — i) Cash in hand; ii) Cash at bank; iii) Current Investment; iv) Short term Investment or Marketable Securities. Note: Bank Overdraft and Cash Credit will be considered as financial activity as they are short term financing borrowing. Hence, they are not considered as cash & cash equivalent. Sl No 1 2 3 4 Particulars Interest Received Interest Paid Dividend Received Dividend Received Interest & Dividend In Case of Financing Companies Operating Activities Operating Activities Operating Activities Financing Activities In Case of Other Companies Investing Activities Financing Activities Investing Activities Financing Activities
  3. Rent Paid: Operating Activities Rent Received: i) Operating Activities ( if main business is property business) ii) Investing Activities ( In case of other business) Treatment of Proposed Dividend: Proposed Dividend Previous Year's Current Year's Important Notes: Meaning It represents the amount final dividend declared for the previous year but paid during the current year if there is no dividend at the It represents the amount of dividend proposed by the Board of Directors Treatment To be shown as Net Dividend paid(Proposed dividend-unpaid Dividend) under Financing Activities Add back to the current year's profits to find out cash from Operating Activities. Reasons It involves an outflow of cash. It is merely a book entry and does not involve an outflow of cash i) The term 'Proposed Dividend' should not be confused with the term 'Dividend Payable' or 'Unpaid Dividend' or 'Unclaimed Dividend' which is deducted from previous year's proposed dividend to compute Net Dividend Paid. Unless otherwise stated it is presumed that the 'Proposed Dividend' appearing in the previous year has been paid in the Current Year. Example.l Following are the extracts from the Balance Sheets of ABC Ltd. Prepare CFS. Liabilities Profit & Loss A/c Proposed Dividend Dividend Payable-a) b) 31.03.2016 31.03.2015 Assets 31.03.2016 31.03.2015 90,000 36,000 Nil 4,000 50,000 30,000 Nil Nil
  4. Treatment of Interim Dividend An Interim Dividend is that dividend which is declared between two Annual General Meetings (AGMs). a) Add back to current year's profits in order to find out cash from operating activities. b) Show as Cash used in Financing Activities in the Cash Flow Statement. Treatment of Provision for Taxation Item Previous Year's Provision Current Year's Provision Meaning It represents the amount of tax paid in the current year It represents the amount of tax provided for current year Treatment Subtract the net tax paid (i.e. Previous year's tax provision- Refund of Tax) Add back to the current year's profits to calculate Cash from operating activities. Reason It involves outflow of Tax It is merely a book entry book and does not involve an outflow of cash Note: Unless otherwise stated, it presumed that the Provision for Tax appearing in the previous year's Balance Sheet has been paid subsequently during the current year. Provision for Taxation A/c Dr Particulars To Bank A/c (Tax Paid) To Balance c/d xxx xxx xxx Particulars By Balance b/d By Profit & Loss A/c (Provision for the current year) xxx xxx xxx
  5. Preparation of Fixed Assets Account 1. Fixed Asset Account (on Original Cost Basis): If the Balance Sheet contains an item of provision for depreciation or accumulated depreciation, it means that the fixed assets are shown in the balance sheet at their original cost. In such cases, fixed assets fixed assets and provision for depreciation account should be prepared. Fixed asset account will disclose the purchase and sale of the fixes asset during the year and by preparing provision for depreciation account the amount of depreciation charged during the year will be found out. 2. Fixed Asset Account (on the Written Down Value Basis): When the Balance sheet does not contain the item of provision for depreciation or accumulated depreciation for both the years, it means that the fixed assets are shown in the Balance sheet at their written down value (after depreciation) and hence the fixed asset account will be prepared on the written down value basis. In this case the amount of current year's depreciation should be credited to the Asset Account. Treatment of Depreciation At the time of calculating profit/loss, depreciation is debited to profit and loss account. It does not involve cash but is a book entry. Therefore, depreciation is to be added back to net profit before tax for calculating cash flow. Treatment of profit or loss on sale of Fixed Assets For calculating net profit/loss, loss on sale of fixed assets is debited to profit and loss account. Similarly, profit on sale of fixes assets is credited to profit and loss account. It does not involve cash. Rather cash is involved on sale of fixed assets. Profit or loss is a result of sale. Therefore, loss on sale of fixed assets is added back and profit on sale of fixed assets is deducted from net profit before tax for arriving at the cash flow from operating activities. Note: Sale proceeds of fixed assets will, of course, result in a cash inflow but this inflow will be shown in the cash now statement under cash flow from investing activities. Ascertaining Missing Amounts regarding Fixed Assets or Depreciation. CASE 1: When the Fixed Asset is shown at the Written down Value. Under this case, depreciation is charged to the Asset Account and the balance of the Asset Account shows the written down value of the asset, which is also called the book value.
  6. Fixed Asset A/c( At Cost) Dr Particulars To Balance b/d To Profit & loss A/c (Profit on sale of Fixed asset) To Bank A/c (Purchase of Fixed Asset) Xxx Xxx xxx Xxx Particulars By Bank A/c (Sale of Fixed Asset) By Accumulated Dep. A/c (Accumulated Dep. On fixed asset sold) By Profit & loss A/c (loss on sale of Fixed Asset) By Balance c/d Xxx xxx xxx xxx Xxx NOTE: Normally, the purchase of fixed asset is a balancing amount on the debit side of the account and the sale of fixed asset on the credit side of the account. Accumulated Depreciation Account(or Provision for Depreciation Account) Dr Particulars To Fixed Asset A/c (Accumulated Dep. On fixed asset sold) To Balance c/ d xxx xxx Particulars By Balance b/d By Profit & loss A/c (Dep. Charged for current year) Cr Xxx xxx NOTE: Accumulated depreciation on the fixed asset sold or depreciation charged for the current accounting year may not be given, which shall be the balancing amount.

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