Cash-Flow Statement:

A cash flow statement is a statement showing inflows (receipts) and outflows

(payments) of cash during a particular period. In other words, it is a summary of
sources and applications of cash during a particular span of time. It analyzes the
reasons for changes in balance of cash between the two balance sheet dates. The
term ‘cash’ here stands for cash and cash equivalents. A cash-flow statement
includes only those items which affect cash.

A cash-flow statement can be for the past or can be projected for a future period.

Objectives of Cash-Flow Statements.

 To ascertain the sources (receipts) of Cash and Cash equivalents from

operating,investing and financing activities of the enterprise.
 To ascertain the applications (payments) of Cash and Cash Equivalents under
operating, investing and financing activities of the enterprise.
 To ascertain the net change in Cash and Cash Equivalents i.e. the difference
between sources ad applications under the three activities between the dates of
two consecutive Balance Sheets.
 To highlight the major activities that have provided cash and that have used cash
during a particular period and to show their effect on the overall cash balance.

Importance or Uses of Cash Flow Statements.

The main objectives behind prepaaring a cash-flow statement can be laid down as
under:-
1. Useful for Short-Term Financial Planning.
2. Useful in preparing the Cash Budget.
3. Comparison with the Cash Budget.
4. Study of the trend of Cash Receipts and Payments.
5. It explains the Deviations of Cash Flow from Earnings.
6. Helpful in Ascertaining Cash Flow from Various Activities separately.
7. Helpful in making Dividend Decisions.
8. Test for the Managerial Decisions.
9. Useful to Outsiders.

Limitations of Cash-Flow Statements.

I. Not Suitable for judging the liquidity.

II. Possibility of window-dressing
III. It ignores non-cash transactions.
IV. It ignores the accrual concept of accounting.
V. No substitute for income statement.
VI. Historical in nature.

Procedure of Preparing Cash-Flow Statement.

The Institute Chartered Accountants of India has issued Accounting Standards (AS)- 3
Revised, for preparing cash flow statements. This Accounting Standard has been
made mandatory in respect of accounting periods commencing on or after 1st April
2001, for certain enterprises. These enterprises are :

i. Enterprises whose equity or debt securities are listed on a recognized inventory

exchange in India, and enterprises that are in the process of issuing equity or
debt securities that will be listed on a recognized inventory exchange in India.
ii. All other commercial, industrial and business enterprises, whose turnover for
the accounting period exceeds 50 crore rupees.

As such, the Cash flow statement has been prepared according to AS-3 Revised in
this Chapter.
According to AS-3 Revised, the cash flow statement summarizes the cash inflows
and cash outflows and the net changes (increase or decrease) in cash and cash
equivalents resulting from operating, investing and financing activities of a firm
during a period.

Classification of Business Activities as per AS-3 showing Cash Inflows

and Cash Outflows.

Operating Activities

Cash Inflows Cash Outflows

a. Cash Sales a. Cash Purchases
b. Cash Received from Royalty, Fees and b. Cash paid to Creditors/ Trade
Commission. Payables.
c. Cash Received from Debtors/ Trade c. Payment of Operating Expenses like
Receivables. Wages, Salaries, Office and Selling
Expenses etc.
d. Payment of Income Tax.

Cash Inflows in case of Financial Companies: Cash Outflows in case of Financial

d. Interest and Dividend received in Cash. Companies:
e. Proceeds from Sale of Securities. e. Interest paid in Cash
f. Loans and Advances repaid by third f. Payment for purchase of Securities.
g. Loans and Advances to third parties
Parties.

Investing Activities

Cash Inflows
a) Proceeds from sale of fixed Cash Outflows
Assets. a) Purchase of Fixed Assets
b) Proceeds from sale of Non-current Investments b) Purchase of Non-Current
c) Interest received on debentures. Investments.
d) Dividend received on shares.

Financing Activities

Cash Inflows Cash Outflows

a) Proceeds from issue of Shares in Cash. a) Payment for Buy-back of Equity
b) Proceeds from issue of Debentures in Cash. Shares.
c) Loans raised (Long-term or Short-term) b) Payment for redemption of
d) Increase in Balance of Bank Overdraft or Preference Shares.
Cash Credit. c) Payment for Redemption of
Debentures.
d) Repayment of Loans (Long-term and
short-term)
e) Payment of Dividend
f) Payment of Interest on Long-term and
short-term Loans.
g) Payment of Interest on Bank
Overdraft/ Cash Credit
h) Payment or Preliminary exp.
(including share issue exp.)
i) Decrease in Balance of Bank Overdraft
or Cash Credit.
 FORMAT OF CASH-FLOW STATEMENT

XYZ Ltd.
CASH FLOW STATEMENT for the year ended……….
(Indirect Method)
(as per accounting standar- 3 Revised)
Particulars Rs. Rs.

A. Cash Flows from Operating Activities :

Net Profit before Tax (See Note 1) ….……..
Adjustment for non cash and non operating items:
Add : Depreciation ……………..
Preliminary Expense/Discount on issue
of Debentures written off ……………..
Goodwill, Patents, and Trademarks
amortized Interest paid on short term
and long term Borrowings ………………
Interest paid on Bank Overdraft/Cash
credit ……………..
Loss on Sale of Fixed Asset ……………… ….……….

Less : Interest Income ( ……………..) ….……….

Dividend Income (………………)
Rental Income (………….)
Profit on Sale of Fixed Assets (………………) (….……..)

Operating Profit before Working Capital Changes

Add : Decrease in Current Assets ……………….
Increase in Current Liabilities .…………….. ….……….

Less : Increase in Current Assets (……………..)

Increase in Current Liabilities (……………..) (.………….)

Cash generated from operations .……………

Less : Income Tax paid (Net of Tax Refund received) (.…………)
Net cash from (or used in) operating activities ….……….. ….………

B. Cash Flow from Investing Activities :

Proceeds from Sale of Tangible Fixed Assets ….………….
Proceeds from Sale of Intangible Fixed Assets like goodwill ….………….
Proceeds from Sale of Non- Current Investment ….………….
Interest and Dividend Received ….………….
Rent Received ….………….
Purchase of Tangible Fixed Assets (….…………)
Purchase of Intangible Fixed Assets like Goodwill (….…………)
Purchase of Non-Current Investment (….…….….)

Net Cash from (or used in) Investing Activities ….…………..

….………

C. Cash Flows from Financing Activities :

Proceeds from issue of Shares and Debentures ….…………..
Proceeds from Other Long-term Borrowings ….…………..
Proceeds from Short-term Borrowings:
i. Increase in the Balance of Bank Overdraft and Cash Credit (….…………..)
ii. Decrease in the Balance of Bank Overdraft and Cash Credit (.……………..)
Final Dividend paid (.……………..)
Interest paid on Short-term and Long-term Borrowings (.……………..)
Interest paid on Bank Overdraft/Cash Credit (.……………..)
Repayment of Loans (Whether short-term or long-term) (.…………….)
Redemption of Debentures (.……………..) ….……….

Net cash from (or used in financing activities)

Net Increase (or Decrease) in Cash & Cash equivalent (A+B+C) ….………..
Add : Cash and Cash Equivalents in the beginning of the year ….………..

Cash and Cash Equivalents at the end of the year ….………..

Note No.1 : Calculation of Net Profit Before Tax :

Particulars Rs.
Net Profit of the Current year (after appropriation) ….………..
Add : Transfer to Reserve (all transfers to Reserves from the
balances of the statement of profit and loss) ….…………
Proposed Dividend of Previous year ….…………
Interim Dividend paid during the year ….…………
Provision for Tax made during the current year ….…………
Less : Refund of Tax (.…………..)
Net Profit before Tax ….………..
Calculation of cash flow from operating Activities :

The term ‘operating activities ‘ mean normal business transactions pertaining to

purchase and sale of god and services , employee benefit expenses , office expenses
etc. The basic information needed for the calculation of cash flow from operating
activities is obtained from comparative balance sheets , statement of profit and loss
of the current accounting period and the additional information . Figure of net profit
disclosed by statement of profit and loss cannot be taken as cash flow from
operating activities because there are some non-cash items in the statement of
profit and loss. Such items do not result in the inflow or outflow of cash . As such, in
order to ascertain the cash flow from operating activities , these non-cash items are
eliminated from the net profit disclosed by statement of profit and loss . AS-3
(Revised) has started two methods of ascertaining net cash flow from operating
activities:
i) Direct Method (this method is not in syllabus, hence it is not discussed)
ii) Indirect Method

Indirect Method of Calculating Cash Flow from Operating Activities:

In this method we start with the net profit before Tax:
Step 1:- Determination of Net Profit before Tax:
Net Profit before Tax is the starting point for the calculation of Cash Flow
from Operating Activities . It is calculated as follows:

RS.
Difference between Opening Balance and Closing Balance ................
Of statement of Profit and Loss ................
Add : Proposed Dividend (for previous year) ................
Interim Dividend paid during the year ...............
Transfer to Reserves ................
Provision for Tax (for current year) ................
................
Less : Refund of Tax Credited to Statement of Profit and
Loss ................
Net Profit before Tax

It may be noted that ‘Net Profit Tax’ must be calculated in ‘ Notes’ below
the Cash Flow Statement.
Proposed Dividend
AS-4, Contingencies and Events Occurring After the balance sheet date
(Revised) prescribes that proposed Dividend , both on Equity Shares and
Preference Shares should not be shown as short term Provision in the
balance sheet but should be disclosed in ‘Notes to Accounts’ as
Contingent Liability because it will be payable upon being declared
(approved) end of the financial year i.e., in the next financial year.
The effect of this on Cash Flow Statement will be as follows :
 i) Proposed Dividend for previous Year is shown as outflow of
cash assuming it has been declared (approved) at the AGM in
the Current year and has also been paid during the current
year.
It will also be added to Net Profit to determine the Net Profit
before tax since it must have been appropriated (paid) from
the net profit.
ii) Proposed Dividend for current Year: It is shown in Notes to
Accounts as Contingent Liability . Hence , no effect is to be
given to Proposed Dividend of the Current Year while
preparing Cash Flow Statement.

Reasons for Addition or deduction of various items for determining

Net Profit before Tax:
i) Interim Dividend paid during the year : It is paid during current year but it
is an item of financing activity and not operating activity . Hence , it is
added beck to Net Profit to find out Cash generated from operating
activities . It will be later shown as outflow under financing activities.

ii) Transfer of Reserves : Transfer to general reserves and other reserves is

added back to Net Profit because it is an appropriation of profit and does
not result in cash outflow.

iii) Provision for Tax for the current year : Provision of tax is added back to
Net Profit because creation of provision for tax does not result in outflow
of Cash.

iv) Refund of Tax : It must have been credited to current year’s Statement of
Profit and Loss . It is deducted from Net Profit because it is not current
year’s income .

Step 2: - Adjustment for non- Cash items:

A) Items to be added back to net profit :- There are some items shown as
expenses in the statement of profit and loss which do not result in the
outflow of cash . Such items are called non- cash items . These items
should be added back to net profit to calculate the cash profit . These
items are generally as follows:-

1) Depreciation :- Depreciation is shown as expenses in the statement of

profit and loss . This reduces the profit made during the year without
reducing the cash balance as it is a non- cash item . Hence , it is added
back to profits in order to find out the operating profit.
2) Amortisation of Fictitious or Intangible Assets :- When these assets are
written off , these are shown as expenses or losses in the statement of
profit and loss . But the writing off of these assets does not involve any
cash payment . Hence they are added back to the profit for calculating
the operating profit . These assets include the following:-
i) Goodwill written off;
ii) Preliminary expenses written off ;
iii) Discount on issue of debentures written off; and
iv) Trade Marks and Patent Rights Written off.
3) Bad Debts written off.
4) Loss on scale of fixed Assets :-Loss on scale of fixed assets is generally
taken to the statement of profit and loss. It should be added back to
profits so that operating profit can be ascertained . Net proceeds from
the scale of fixed assets will be shown as inflow of cash from investing
while preparing cash flow statement.
5) Interest on Long-term and short-term Borrowings:- Interest on long-
term borrowings such as ‘debenture interest’ and interest on short-
term borrowings such as interest on Bank Overdraft and cash Credit is
added back to Net Profit because it is an expense relating to Financing
Activity . It is shown as Outflow of Cash under Financing Activity.
6) Creation of Provisions :- If any provision has been created out of profits
such provision is added back to the Profit earned during the year for
calculating operating profit because such provision reduces the profits
made during the year without reducing the cash balance of the firm .
Such provisions may include the following:-
i) Provision for Doubtful Debts;
ii) Provision for Discount on Trade Receivables.
iii) Provision for Expenses.

B) Items to be deducted from Net Profits :- There are some incomes

which are shown in the statement of profit and loss , but they are non-
operating incomes . These items should be deducted from net profits to
find out the operating profit . These items are as follows:-
1) Profit on sale of fixed assets :- Total amount of cash received from
sale of fixed assets is shown separately under investing activity in
the cash flow statement as inflow of cash . Therefore profit on sale
of fixed assets shown in statement of profit and loss must be
deducted from the amount of profit.
2) Receipt of interest and Dividend etc. :- Receipt of interest and
dividend from investments are receipts from non-operating
activities . Hence, they are deducted from Net Profits and are shown
as inflow of Cash under Investing Activities.
3) Rent Received :- It is also receipt from non-operating activities .
Hence , it is also deducted from Net Profit and is shown as inflow of
Cash under Investing Activities.
 4) Re-transfer of Excess Provisions :-When provisions for depreciation ,
doubtful debts etc.are made in excess of business needs , they
should also be deducted from profits because they do not affect the
flow of cash in the current year in any way.
In addition to the above , the increase or decrease in current assets
and current liabilities also influence the flow of cash from operating
activities . Therefore , in Step 3 , further adjustments in respect of
increase or decrease in current assets and current liabilities except
cash and cash equivalents are to be made to arrive at the cash flow
from operating activities . This has been explained as below:-

Step 3 :- Adjustment in respect of changes in current Assets and

current Liabilities:
Current assets and current liabilities go on changing frequently . Although these
changes do not affect the amount of net profit , they affect the amount of cash
generated from operating activities . Hence, in order to arrive at the figure of cash
from operating activities , there is need for adjustments in respect of these changes .
These adjustments will be made in the following manner:

1) Effect of decrease in current assets such as Trade Receivables ,

Inventories, Prepaid Expenses , Accrued in incomes etc. :- For example ,
Trade Receivables at the beginning of the year were Rs. 1,00,000 and trade
receivables at the end of the year were Rs. 80,000 . Decrease in trade
receivables indicates that collections from trade receivables are more than
the amount of credit sale during the year , hence Rs. 20,000 should be added
to operating profit for arriving at the figure of net cash generated from
operating activities.
The same treatment is made for the decrease in other current assets. Thus,
decrease in current assets should be added to the figure of operating profit.

2) Effect of increase in current assets such as Trade Receivables , Inventories ,

Prepaid Expenses , Accrued incomes etc :- For example- , trade receivables at the
beginning of the year were Rs. 1,00,000 and trade receivables at the end of the year
were Rs. 1,50,000 . Increase in trade receivables indicates that collections from trade
receivables are less than the amount of credit sales during the year , hence Rs.
50,000 should be deducted from operating profit for arriving at the figure of net cash
generated from operating activities .
The same treatment is made for the increase in other current assets.
Thus, increase in current assets should be deducted from the figure
of operating profit.

3) Effect of decrease in current liabilities such as Trade Payable , Outstanding

Expenses . Incomes received in advance etc. :- For example, Trade payable at the
beginning of the year were Rs. 60,000 and trade payable at the end of the year were
Rs. 10,000more than the amount of credit purchases during the year . Hence ,
decrease in trade payable indicates that they are being paid more amount ,, which
decreases the cash generated from operations . Therefore , the decrease in trade
payable should be deducted from operating profit for arriving at the figure of net
cash generated from operating activities.
The same treatment is made for the decrease in other current
liabilities .
Thus, decrease in current liabilities should be deducted from the
figure of operating profit.

5) Effect of increase in current liabilities such as trade payable ,

outstanding expenses , incomes received in advance etc. :- For
example , trade payable at the beginning of the year were Rs.
60,000 and trade payable at the end of the year were Rs. 75,000.
Increase in trade payable indicates that payments to trade payable
were Rs. 15,000 less than the amount of credit purchases during the
year. Hence, increase in trade payable indicates that they are being
paid less amount , which increases the cash generated from
operations. Therefore , the increase in trade payable should be
added.

Cash Flows from Investing Activities :

Investing Activities of an enterprise refer to acquisition (purchase) and
disposal (sale) of Long term and Other Investment which are not interested in
Cash equivalents.

CALCULATION OF NET CASH FROM INVESTING ACTIVITIES

Particulars Rs.
Proceeds from Sale of Fixed Assets ….……….
Payment for Purchase of Fixed Assets (.………….)
Proceeds from Sale of Non-Current Investment ….……….
Payment of Purchase of Non-Current Investments (.………….)
Interest Received on Debentures ….………..
Dividend Received on Shares ….………

Net Cash Inflows/Used from Investing Activities ….………..

Preparation of Provision for Tax Account

Case 1: Sometimes Opening and Closing amounts of Provision for Tax are given in
the question and actual tax paid during the year is also given in additional
information . In such a case ‘Provision for tax A/c’ has to be prepared to ascertain
the amount of provision for tax made the current year.
Payment of Interim Dividend : If interim dividend paid is given in adjustments, it will
be added back to profits while calculating ‘Net Profit before Tax’ and will also be
shown as payment of cash under the heading ‘Cash flows from financing activities’.