CASH FLOW STATEMENT

 Cash flow statement is a statement that shows the cash flows, i.e., inflow and outflow of cash and cash
equivalent during the accounting period (usually between two b/s) from operating, investing and financing
activities.
 Transaction that ↑cash and cash equivalent - inflow
Transaction that↓cash and cash equivalent - outflow
 cash and cash equivalent includes cash on hand, bank balance, demand deposits with bank, marketable
securities
CLASSIFICATION OF CASH FLOWS
OPERATING ACTIVITIES INVESTING ACTIVITIES FINANCING ACTIVITIES

Are the principal revenue Are the acquisition and disposal Are the activities which result in
producing activities of the of the long term asset and other change in size and composition
enterprise and other activities that investments, not included in cash of owners capital and
are not investing or financing equivalent. borrowings of the enterprises
activities. from other sources.

Cash flow arising from operating Cash flow arising from investing Cash flow arising from financing
activities is a key indicator of the activities shows the extent to activities is useful in assessing
extent to which the business which expenditure has been claims on future cash flows by
operations of the enterprise have incurred for purchase contributors of funds to the
generated cash. It indicates (acquisition) of fixed assets and enterprise
whether adequate cash is long-term Investments to
generated to maintain business generate future income and cash
operations, pay dividends, repay flows
loans, and make new investments.
It is also helpful in forecasting
future cash flows from operations

Transactions not regarded as cash flows- transaction being movement between the components of cash and cash
equivalents
Non-cash transaction- which don’t involve cash
EXTRAORDINARY ITEMS- incomes and expenses that arise from events or transaction that are clearly distinct from
the ordinary business activities of the enterprise and therefore, are not expected to recur frequently or regularly
OPERATING ACTIVITIES INVESTING ACTIVITIES FINANCING ACTIVITIES

Preliminary expenses, Claim received against damage Payment for buy back of
compensation paid to employees of fixed asset say because of shares
under voluntary retirement earthquake
scheme

CASH FLOW FROM OPERATING ACTIVITIES

STEP 1: DETERMINE NET PROFIT BEFORE TAX AND EXTRAORDINARY ITEMS.
a. If the starting point is profit as per the statement of profit and loss:
Profit as per statement of profit and loss
(+) provision for income tax made during the year
Extraordinary item debited as expenses to statement of profit and loss
(-) refund of income tax credited as income to statement of profit and loss
Extraordinary item credited as income to statement of profit and loss
Net profit before tax and extraordinary items
b. If the starting point is surplus, i.e. balance of statement of profit & loss:
Difference between closing and opening balance of surplus, i.e. balance of statement of profit & loss
(+) dividend (final or proposed) paid during the year
 Interim dividend paid during the year
Transfer to reserve
Provision for income tax made during the year
Extraordinary item debited as expenses to statement of profit and loss
(-) refund of income tax credited as income to statement of profit and loss
Extraordinary item credited as income to statement of profit and loss
Net profit before tax and extraordinary items
STEP 2: DETERMINE OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES
For this, net profit before tax and extraordinary items is adjusted for non-cash and non-operating items
Net profit before tax and extraordinary items
(+) non-cash expenses
Non-operating expenses and losses
(-) non cash income
Non-operating income and gains
Operating profit before working capital changes
STEP 3: CALCULATE CASH GENERATED FROM OPERATING ACTIVITIES
Operating profit before working capital changes
(+)decrease in current asset
Increase in current liabilities
(-)increase in current asset
decrease in current liabilities
cash generated from operation
STEP 4: CALCULATE CASH FLOW FROM OPERATING ACTIVITIES BEFORE EXTRAORDINARY ITEMS
Cash generated from operation
(-)income tax paid if it is not related to investing or financing activities
STEP 5: CALCULATE CASH FLOW FROM OPERATING ACTIVITIES
Add or deduct extraordinary items
DETERMINING DEPRICIATION BY PREPARING FIXED ASSET ACCOUNT
i. Fixed asset account on written down value basis
When B/S doesn’t have an item of provision for depreciation or accumulated depreciation, it means fixed
asset are shown at their written down value. The amt. of current year depreciation is credited to fixed asset
account.
ii. Fixed asset account on original cost basis
If B/S have an entry for provision for depreciation or accumulated depreciation, it means fixed asset account
are shown at their original cost. In this case fixed asset account and provision for depreciation account is
prepared.
Treatment of depreciation
Added to net profit before tax and extraordinary items
Treatment of gain/loss on sale of fixed asset Treatment of depreciation
Loss- added to net profit before tax and extraordinary items
Gain- deducted from net profit before tax and extraordinary items
PROVISION FOR TAX AND PAYMENT OF TAX
Provision for tax made during the year – added to surplus
Tax paid- deducted from cash generated from operations (step4)
Dr. PROVISION FOR TAX ACCOUNT Cr.

PARTICULARS ₹ PARTICULARS ₹
To bank A/c (b/f) By balance b/d
To balance c/d(closing balance) By statement of profit and loss (provision for tax
made during the year)

CASH FLOW FROM INVESTNG ACTIVITIES

CALCULATION OF CASH FLOW FROM INVESTING ACTIVITIES
Particulars ₹
A. Cash Flow from Investing Activities
 Proceeds from Sale of Tangible or Intangible Fixed Assets
 Proceeds from Sale of Investment (Other than Marketable Securities)
  Loans and Advances (Short-term or Long-term) repayment received
 Receipt of Income from Investments (Non-Current and Current Investments other than
Marketable Securities)
 Rent received from Property held as Investment
 Dividend Received on Shares
 Interest Received on Debentures

B. Cash Used in Investing Activities

 Payment for Purchase of Tangible or Intangible Fixed Asset
 Payment for Purchase of Investment (Non-Current and Current Investments other than
Marketable Securities)
 Loans and Advances (Given)

C. Cash Flow from (if 'A' is more than 'B') or Used in (if 'B' is more than 'A') Investing Activities
DETERMINING MISSING VALUES OF FIXED ASSET
CASE 1 when fixed asset is shown at written down value
FIXED ASSET ACCOUNT
PARTICULARS ₹ PARTICULARS ₹
To balance b/d By bank a/c
To gain on sale of fixed asset By loss on sale of fixed asset a/c
To bank a/c By depreciation a/c
By balance c/d
CASE 2 when fixed asset is shown at original cost
FIXED ASSET ACCOUNT
PARTICULARS ₹ PARTICULARS ₹
To balance b/d By bank a/c
To gain on sale of fixed asset By accumulated depreciation
To bank a/c By loss on sale of fixed asset a/c
By balance c/d
ACCUMULATED DEPRECIATION ACCOUNT
PARTICULARS ₹ PARTICULARS ₹
To fixed asset a/c By balance b/d
To balance c/d By depreciation a/c
DETERMINING MISSING VALUE OF INVESTMENT
INVENSTMENT ACCOUNT
PARTICULARS ₹ PARTICULARS ₹
To balance b/d By bank a/c
To bank a/c By loss on sale of investment
To gain on sale of investment By balance c/d

CASH FLOW FROM FINANCING ACTIVITIES

CALCULATION OF CASH FLOW FROM FINANCING ACTIVITIES
Particulars ₹
A. Cash Flow from Financing Activities
 Proceeds from Issue of Shares (including premium)
 Proceeds from Issue of Debentures (including Premium but excluding Discount)
 Loans Received [Short-term (Bank Overdraft and Cash Credit) and Long-term]

B. Cash Used in Financing Activities

 Payment for Redemption of Preference Shares
 Payment for Redemption of Debentures
 Payment for buy-back of Equity Shares (Including Premium)
 Repayment of Loans [Short-term (Bank Overdraft and Cash Credit) and Long-term]
 Interim Dividend paid during the year
 Final Dividend paid during the year
 Interest paid on Debentures
  Interest on Loans (Short-term and Long-term)

C. Cash Flow from (if 'A' is more than 'B') or Used in (if 'B' is more than 'A') Financing Activities
SHARE ISSUE EXPENSES AND UNDERWRITING COMMISSION PAID
Share issue expenses
Are shown as outflow under financing activity
Underwriting commission
Is shown as outflow
 Share issue expenses and underwriting commission are written off in the financial statement from securities
premium, capital reserve, or from statement of profit and loss in that order