Cash Flow Statement Analysis – AS3
Dr.M.Velavan
Faculty
School of Management
SASTRA Deemed University
Thanjavur – 613 401
Overview:
1. Introduction:
Information about the cash flows of an enterprise is useful in providing users
of financial statements with a basis to assess the ability of the enterprise to
generate cash and cash equivalents and the needs of the enterprise to
utilize those cash flows. The economic decisions that are taken by users
require an evaluation of the ability of an enterprise to generate cash and
cash equivalents and the timing and certainty of their generation.
The Standard deals with the provision of information about the historical
changes in cash and cash equivalents of an enterprise by means of a cash
flow statement which classifies cash flows during the period from operating,
investing, and financing activities.
This statement provides relevant information in assessing a company’s
liquidity, quality of earnings, and solvency.
2. Benefits:
(a) A cash flow statement provides information about the changes in cash
and cash equivalents of an enterprise.
(b) Identifies cash generated from trading operations.
(c) The operating cash surplus which can be applied for investment in fixed
assets.
(d) A portion of cash from operations is used to pay dividends and tax and
the other portion is ploughed back.
(e) Very useful tool for planning.
3. Purpose:
Cash flow statements are prepared to explain the cash movements between
two points of time.
4. Sources of Cash:
a. Issue of shares and debentures and raising long-term loans.
b. Sale of investments and other fixed assets.
c. Cash from operations (Net Operating Profit).
5. Applications of Cash:
a. Redemption of preference shares and debentures and repayment of
long-term loans.
b. Purchase of investments and other fixed assets.
c. Payment of tax.
d. Payment of dividends.
e. Loss on Operation (Net Operating Loss)
6. Classification of Cash Flow Activities:
AS 3 provides an explanation for changes in the cash position of the business
entity. As per Accounting Standard 3, cash flows during the period are
classified as Operating; Investing, and Financing activities.
a) Operating Activities:
These are the principal revenue-generating activities of the enterprise.
b) Investing activities:
These are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.
c) Financing activities:
These are the activities that result in changes in the size and composition of
the owner’s capital (including preference share capital) and borrowings of
the enterprise.
7. Cash Flow Statement - Format:
Particulars Rs.
Cash flow from Operations Activities ×××
Cash flow from Investing Activities ×××
Cash flow from Financing Activities ×××
Net Cash Generated during the year ×××
Add Cash and Cash Equivalents at the beginning of the year ×××
Cash and Cash Equivalents at the end of the year (which ×××
will also tally with the cash and cash equivalents given in
the balance sheet)
a) Operating Activities:
Cash flows from operating activities are primarily derived from the principal
revenue-producing activities of the entity i.e. from operations of the
business. Therefore, they are, in general, the result of the transactions and
events that enter into the determination of profit or loss.
Examples of cash flows from operating activities are:
Direct Method: Cash flows from operating activities:
Particulars Rs. Rs.
Cash received from sales of goods ×××
Cash received from debtors ×××
Cash received from sales of services ××× ×××
Less Payment of cash purchases ×××
Payment to creditors ×××
Payment for operating expenses ×××
Payment for administrative expenses ×××
Cash Flows from Operating Activities ×××
Less Income tax paid ×××
Less Adjustment for extraordinary items ×××
Net Cash Flows from Operating Activities ×××
Indirect Method:
Cash Flows From Operating Activities: When the Net profit is given
Particulars Rs. Rs.
Net profit before Taxation [NP after tax + Tax Paid] ×××
Add Adjustment for: ×××
Depreciation ×××
Loss on sale of assets ×××
Transfer to General Reserve ×××
Proposed Dividend ×××
Provision for Tax ×××
Preliminary expenses written off ×××
Decrease in value of fixed assets ×××
Premium on redemption of preference shares ×××
Premium on debentures ×××
Less Profit on sale of investment (×××)
Less Interest income on investment (×××)
Interest expense ×××
Cash Flow From Operating Activities before Working Capital ×××
Changes in working capital:
Less Increase in Current Assets (×××)
Add Decrease in Current Assets ×××
Add Increase in Current Liabilities ×××
Less Decrease in Current Liabilities (×××)
Cash Flow From Operating Activities after Working Capital ×××
Less Income tax paid (×××)
Adjustment for extraordinary items ×××
Net Cash Flows from Operating Activities ×××
b) Investing Activities: Examples of cash flows from investing activities are:
S.No Particulars
1. Cash payments to acquire fixed assets (including intangibles). These
payments include those relating to capitalised research and
development costs and self- constructed fixed assets;
2. Cash receipts from sales of property, plant and equipment, intangibles
and other long-term assets
3. Cash payments to acquire equity or debt instruments of other entities
and interests in joint ventures
4. Cash receipts from sales of equity or debt instruments of other entities
and interests in joint ventures
S.No Particulars
5. Cash advances and loans made to other parties (other than advances
and loans made by a financial. institution);
6. Cash receipts from the repayment of advances and loans made to
other parties.
7. Cash payments for futures contracts, forward contracts, option
contracts and swap contracts.
8. Cash receipts from futures contracts, forward contracts, option
contracts and swap contracts.
Cash Flows From Investing Activities:
Particulars Rs. Rs.
Sale of fixed assets ×××
Sale of investments ×××
Interest income on investments ×××
Purchase of fixed assets (×××)
Investment in securities (×××)
Expenditure on construction work in progress (×××)
Net Cash Flows From Investing Activities ×××
c) Financing Activities: Examples of cash flows from financing activities are:
S.No Particulars
1. Cash proceeds from issuing shares or other equity instruments;
2. Cash payments to owners to acquire or redeem the entity’s shares;
3. Cash proceeds from issuing debentures, loans, notes, bonds,
mortgages and other short-term or long-term borrowings;
4. Cash repayments of amounts borrowed;
5. Cash payments by a lessee for the reduction of the outstanding
liability relating to a finance lease.
Cash Flows from Financing Activities:
Particulars Rs. Rs.
Issue of Equity Share Capital ×××
Issue of Preference Share Capital ×××
Issue of Debentures ×××
Loan from financial intermediators ×××
Redemption of Preference Shares (×××)
Redemption of Debentures (×××)
Repayment of loans (×××)
Dividend paid (×××)
Net Cash Flows From Financing Activities ×××
AS3-Consolidated Format of Cash Flow Statement for the year ended…
[Using Direct Method]
Particulars Rs. Rs.
A Cash flows from operating activities:
Cash received from sales of goods ×××
Cash received from debtors ×××
Cash received from sales of services ××× ×××
Less Payment of cash purchases ×××
Payment to creditors ×××
Payment for operating expenses ×××
Payment for administrative expenses ×××
Cash Flows From Operating Activities ×××
Less Income tax paid ×××
Less Adjustment for extraordinary items ×××
Net Cash Flows from Operating Activities [A] ×××
B Cash Flows From Investing Activities:
Sales of fixed assists ×××
Sales of investments ×××
Interest income on investments ×××
Purchase of fixed assets (×××)
Investment in securities (×××)
Expenditure on construction work in progress (×××)
Cash Flows From Investing Activities [B] ×××
C Cash Flows from Financing Activities:
Issue of Equity Share Capital ×××
Issue of Preference Share Capital ×××
Issue of Debentures ×××
Loan from financial intermediators ×××
Redemption of Preference Shares (×××)
Redemption of Debentures (×××)
Repayment of loans (×××)
Dividend paid (×××)
Net Cash Flows From Financing Activities [C] ×××
Net cash and cash equivalent during the year [A+B+C] ×××
Cash and cash equivalent in the beginning of the year ×××
Cash and cash equivalent in the end of the year ×××
AS3-Consolidated Format of Cash Flow Statement for the year ended…[Indirect Method]
Particulars Rs. Rs.
A Cash flows from operating activities:
Net profit before Taxation [NP after tax + Tax Paid] ×××
Add Adjustment for: ×××
Depreciation ×××
Loss on sale of assets ×××
Transfer to General Reserve ×××
Proposed Dividend ×××
Provision for Tax ×××
Preliminary expenses written off ×××
Decrease in value of fixed assets ×××
Premium on redemption of preference shares ×××
Premium on debentures ×××
Less Profit on sale of investment (×××)
Less Interest income on investment (×××)
Interest expense ×××
Cash Flow From Operating Activities before Working Capital ×××
Changes in working capital:
Less Increase in Current Assets (×××)
Add Decrease in Current Assets ×××
Add Increase in Current Liabilities ×××
Less Decrease in Current Liabilities (×××)
Cash Flow From Operating Activities after Working Capital ×××
Less Income tax paid (×××)
Adjustment for extraordinary items ×××
Net Cash Flows from Operating Activities [A] ×××
B Cash Flows From Investing Activities:
Sales of fixed assists ×××
Sales of investments ×××
Interest income on investments ×××
Purchase of fixed assets (×××)
Investment in securities (×××)
Expenditure on construction work in progress (×××)
Cash Flows From Investing Activities [B] ×××
C Cash Flows from Financing Activities:
Issue of Equity Share Capital ×××
Issue of Preference Share Capital ×××
Issue of Debentures ×××
Loan from financial intermediators ×××
Redemption of Preference Shares (×××)
Redemption of Debentures (×××)
Repayment of loans (×××)
Dividend paid (×××)
Net Cash Flows From Financing Activities [C] ×××
Net cash and cash equivalent during the year [A+B+C] ×××
Cash and cash equivalent in the beginning of the year ×××
Cash and cash equivalent in the end of the year ×××
Solved Problem:
P1. Prepare the cash flow statement of M/s MNT Ltd. for the year ended 31st
March, 20X1 with the help of the following information:
a) The company sold goods for cash only.
b) Gross Profit Ratio was 30% for the year, gross profit amounts to Rs. 3,
82,500.
c) Opening inventory was less than closing inventory by Rs. 35,000.
d) Wages paid during the year Rs. 4, 92,500.
e) Office and selling expenses paid during the year Rs. 75,000.
f) Dividend paid during the year Rs. 30,000.
g) Bank loan repaid during the year Rs. 2, 15,000 (including interest Rs.
15,000).
h) Trade payables on 31st March, 20X0 exceed the balance on 31st March,
20X1 by Rs. 25,000.
i) Amount paid to trade payables during the year Rs. 4, 60,000.
j) Tax paid during the year amounts to Rs. 65,000 (Provision for taxation as
on 31.03.20X1 Rs. 45,000).
k) Investments of Rs. 7, 00,000 sold during the year at a profit of Rs. 20,000.
l) Depreciation on fixed assets amounts to Rs. 85,000.
m) Plant and machinery purchased on 15th November, 20X0 for Rs. 2, 50,000.
n) Cash and Cash Equivalents on 31st March, 20X0 Rs. 2, 00,000.
o) Cash and Cash Equivalents on 31st March, 20X1 Rs. 6, 07,500.
Solution: M/s MNT Ltd.
Cash Flow Statement for the year ended 31st March, 20X1
(Using the direct method
Particulars Rs. Rs.
A Cash flows from Operating Activities:
Cash sales (Rs. 3,82,500/0.30) 12,75,000
Less Cash payments for trade payables 4,60,000
Wages Paid 4,92,500
Office and selling expenses 75,000 10,27,500
Cash generated from operations before taxes 2,47,500
Income tax paid (65,000)
Net cash generated from operating activities (A) 1,82,500
B Cash flows from investing activities:
Sale of investments (7,00,000 + 20,000) 7,20,000
Payments for purchase of Plant & machinery (2,50,000)
Net cash used in investing activities (B) 4,70,000
C Cash flows from financing activities:
Bank loan repayment (including interest) (2,15,000)
Dividend paid (30,000)
Net cash used in financing activities (C) (2,45,000)
Net increase in cash (A+B+C) 4,07,500
Cash and cash equivalents at beginning of the period 2,00,000
Cash and cash equivalents at end of the period 6,07,500
P2. M/s Ginger & Co. provides you with the following information. The
directors are interested in tracking down the activities that generated cash
inflows during the year ending March 31, 2022. Help them prepare the cash
flow statement.
Balance Sheet as of 31/3/2022 [Rs. In Million]
2021 2022 2021 2022
Equity share capital 250 500 Fixed assets 400 500
Preference share capital 50 20 Investments 200 -
Debentures 100 40 Machinery 150 300
Reserves and Surplus 291 291 Cash in hand 41 200
Long term borrowing - 30
Net Profit 100 119
Total 791 1,000 Total 791 1,000
Profit and Loss Account for the year ending 31/3/2022
(Rs. In Million)
Particulars Rs. Particulars Rs.
To Purchases 15 By Cash sales 30
To Salaries and wages 5 By Interest received 10
To Income tax 1 By Dividend income 15
To Debenture interest 6
To Preference share dividend 3
To Equity share dividend 6
To Net profit 19
Total 55 Total 55
Solution: M/s Ginger & co.
Cash Flow Statement for the year ended 31st March, 2022
(Using the Direct Method) (In Million)
Particulars Rs. Rs.
A Cash flows from Operating Activities:
Cash sales 30
Less Purchases 15
Salaries and Wages 5 20
Cash Generated from Operating Activities before tax 10
Income tax paid (1)
Net cash generated from operating activities (A) 9
B Cash flows from investing activities:
Sale of investments 200
Dividend Income 15
Interest Received 10
Purchase of Fixed Assets (100)
Purchase Of Machinery (150)
Net cash used in investing activities (B) (25)
C Cash flows from financing activities:
Issue of Equity share capital 250
Long-term borrowing 30
Redemption of Preference share capital (30)
Redemption of Debentures (60)
Debenture interest (6)
Preference share dividend paid (3)
Equity share dividend paid (6)
Net cash used in financing activities (C) 175
Net increase in cash (A+B+C) 159
Cash and cash equivalents at beginning of the period 41
Cash and cash equivalents at end of the period 200
P3. Ms. Jyoti of Star Oils Limited has collected the following information for
the preparation of the cash flow statement for the year ended 31st March,
20X1:
Particulars Rs.in Lakhs
Net Profit 25,000
Dividend paid 8,535
Provision for Income tax 5,000
Income tax paid during the year 4,248
Loss on sale of assets (net) 40
Book value of the assets sold 185
Depreciation charged to the Statement of Profit and Loss 20,000
Profit on sale of Investments 100
Carrying amount of Investment sold or Sale of Investment 27,765
Interest income received on investments 2,506
Interest expenses of the year 10,000
Interest paid during the year 10,521
Increase in Working Capital (excluding Cash & Bank Balance) 56,081
Purchase of Fixed assets 14,560
Investment in joint venture 38,50
Expenditure on construction work in progress 24,740
Proceeds from calls in arrear 2
Receipt of grant for capital projects 12
Proceeds from long-term borrowings 25,980
Proceeds from short-term borrowings 20,575
Opening cash and bank balance 5,003
Closing cash and bank balance 6,988
Prepare the Cash Flow Statement for the year ended 31 March 20X1 in
accordance with AS 3. (Make necessary assumptions).
Solution: Ms. Jyoti of Star Oils Limited
Cash Flow Statement for the year ended 31st March, 2011
(Using the Indirect Method)
(Rs. in (Rs. in
lakhs) lakhs)
A Cash flows from operating activities:
Net profit before taxation (25,000 + 5,000) 30,000
Adjustments for :
Depreciation 20,000
Loss on sale of assets (Net) 40
Profit on sale of investments (100)
Interest income on investments (2,506)
Interest expenses 10,000
Operating profit before working capital changes 57,434
Changes of increase in working capital (Excluding (56,081)
cash and bank balance
Cash generated from operations 1,353
Income taxes paid (4,248)
Net cash used in operating activities (2,895)
B Cash flows from investing activities:
Sale of assets (W.N.1) 145
Sale of investments (27,765 + 100) 27,865
Receipt of grant for capital projects 12
Interest income on investments 2,506
Purchase of fixed assets (14,560)
Investment in joint venture (3,850)
Expenditure on construction work-in progress (34,740)
Net cash used in investing activities: (22,622)
C Cash flows from financing activities:
Proceeds from calls in arrear 2
Proceeds from long-term borrowings 25,980
Proceed from short-term borrowings 20,575
Interest paid (10,520)
Dividend (including dividend tax) paid (8,535)
Cash flows from financing activities 27,502
Net increase in cash and cash equivalents [A+B+C) 1,985
Add Cash and cash equivalents at the beginning of the 1,985
Period
Cash and cash equivalents at the end of the period 6,988
Working Note:
Book value of the assets sold 185
Less Loss on sale of assets (140)
Proceeds on sale 45
Thank You
