MEET OUR TEAM
PALAK RAINA HARSHIT YUKTA HARIT
1555 1479 1375
2ND SEMESTER
2021-22
CORPORATE ACCOUNTING
CASH FLOW
STATEMENT
PREPARATION OF CASH FLOW STATEMENT AS PER
ACCOUNTING STANDARD:3
Introduction
Cash basis financial statements were very common before accrual basis financial
statements. In 1863, the Dowlais Iron Company had recovered from a business slump but
had no cash to invest for a new blast furnace, despite having made a profit. To explain
why there were no funds to invest in, the manager made a new financial statement that
was called a comparison balance sheet, which showed that the company was holding too
much inventory. This new financial statement was the genesis of the cash flow statement
that is used today. The "flow of funds" statements of the past were cash flow statements.
IN 1987, FASB STATEMENT NO. 95 (FAS 95) MANDATED THAT FIRMS PROVIDE CASH
FLOW STATEMENTS. IN 1992, THE INTERNATIONAL ACCOUNTING STANDARDS BOARD
ISSUED INTERNATIONAL ACCOUNTING STANDARD 7 (IAS 7), CASH FLOW STATEMENT,
WHICH BECAME EFFECTIVE IN 1994, MANDATING THAT FIRMS PROVIDE CASH FLOW
STATEMENTS.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are included in the balance
sheet items, indicating that the company's assets are
cash or the value of assets that can be converted into
cash immediately. Cash equivalents include bank
accounts and marketable securities such as
commercial paper and short-term government bonds.
The period of cash equivalents shall not exceed three
months.
Cash Flow Statement
A Cash Flow Statement is a fiscal The Cash Flow Statement estimates how
report that sums up the measure of well an organization deals with its money
money and money reciprocals entering position, which means how well the
and leaving an organization. organization produces money to pay its
obligation commitments and asset its
working costs.
The Cash Flow Statement supplements the The principal parts of the Cash Flow
monetary record and pay articulation and Statement are cash from operating
is an obligatory piece of an organization's activities, cash from investing activities,
monetary reports since 1987. and cash from financing activities.
There are 2 ways to monitor cash flow statement one of which is a direct way and
the other is an indirect way, which will be discussed in later part.
THE APPLICABILITY OF THE CASH FLOW STATEMENT HAS BEEN DEFINED UNDER THE
COMPANIES ACT, 2013. AS PER THE DEFINITION IN THE ACT, A FINANCIAL
STATEMENT INCLUDES THE FOLLOWING:
BALANCE PROFIT AND CASH FLOW EXPLANATORY STATEMENT OF
SHEET LOSS ACCOUNT / STATEMENT NOTES CHANGES IN
INCOME AND EQUITY
EXPENDITURE
ACCOUNT
Thus, cash flow statements are to be prepared by all companies but the act also specifies a certain category
of companies that are exempted from preparing the same. Such companies are One Person Company (OPC),
Small Company and Dormant Company.
OBJECTIVES OF CASH FLOW STATEMENT
THE PRIMARY OBJECTIVE OF THE CASH FLOW STATEMENT IS TO HELP MANAGEMENT IN
MAKING A DECISION AND MAKING A PLAN BY PROVIDING CURRENT INFORMATION ON
CASH INFLOW AND OUTFLOW OF ANY ACCOUNTING PERIOD.
MEASUREMENT GENERATING PREDICTION OF ASSESSING LIQUIDITY
OF CASH INFLOW OF CASH FUTURE AND SOLVENCY POSITION
Both the inflows and surges of money
Inflows of money and Timing and assurance of A Cash Flow Statement,
and money identical can be referred
outpourings of money producing the inflow of most likely, gauges the
to, and, thusly, liquidity and
can be estimated every money can be realized future incomes which
dissolvability position of a firm can
year which emerge from which straightforwardly assists the administration
likewise be kept up as timing and
working exercises, assists the administration with taking different
assurance of money age is known, for
contributing exercises with taking financing financing choices since
example it assists with evaluating the
and monetary choices in future. synchronization of money capacity of a firm to produce cash.
exercises. is conceivable.
Advantages of Cash Flow
Statement
Helps to make Cash Income Statement, almost certainly, assists the administration with making
Forecast a money figure for the not-so-distant future. A projected Cash Flow
Statement helps the administration about the money position which is the
reason for all tasks and, in this manner, the administration sees light
identifying with cash position, viz. how much money is required for a
particular reason, wellsprings of interior and outside issues, and so forth
Reveals the after How far and how much the money arranging becomes fruitful is uncovered
effect of Cash Planning by the examination of Cash Flow Statement. The equivalent is conceivable
by making an examination between the projected Cash Flow
Statement/Cash Budget and the real one—and the actions to be taken as
needs be.
Helps the Internal It assists the interior administration with deciding the monetary strategy to
Management be embraced in future since it supplies data identifying with reserves, for
example taking choice about the substitution of fixed resources or
reimbursement of long-haul liabilities, and so forth
Performance Appraisal By contrasting the real Cash Flow Statement and the projected Cash Flow
Statements, the administration can assess or evaluate the exhibitions with
respect to cash. On the off chance that any negative difference is
discovered, the justification such variety is found and redressed likewise
Reveals the Cash It is a huge pointer about the development of money, for example
Position regardless of whether there is any increment in real money or lessening in
real money and the reasons thereof which helps the administration.
Besides, it clarifies the purposes behind little money balance despite the
fact that there is adequate benefit, or the other way around. Also, the
administration can contrast the first gauge and the real one to comprehend
the pattern of development of money and the variety along these lines.
The distinction of assessment identifying Disadvantages
with the word – 'Cash'
The word 'cash' is effectively justifiable by ordinary citizens of Cash Flow
Statement
yet hard to clarify or characterize. In a more prominent
sense, stamp, check postal request, and so on ought to be
incorporated under cash title. In any case, there win
incredible contrasts of assessment in this matter. The
acknowledged guideline isn't yet settled in such a manner. Albeit the Cash Flow Statement is a
significant component of money the
board, it has got a few limits. The
impediments of the Cash Flow
It is not a substitute for income
Statement are talked about
statement
underneath:
Cash flow Statement is not a substitute for
statement of profit and loss
A clear picture of cash positions not
accessible The wellsprings of inflow and out the
progression of money can be known from the Cash Flow
Statement. Yet, an unmistakable money picture can't be referred
Disadvantages
to from the income articulation as some money comparable things
are prohibited.
of Cash Flow Fund flow statement more significant
Since the functioning capital is considered as a bigger
Statement idea of the asset, the Fund flow statement is a higher
priority than the Cash Flow Statement. Since the
Fund flow statement displays a reasonable image of
the asset.
Incapable of ascertaining the amount to be
spent on fixed assets and long-term
investment:The Cash Flow Statement can't find out the
sum to be spent on fixed resources and long haul ventures
Cash budget
Difference b/w cash flow It shows how much cash is expected to come and
how much cash is expected to go out.
statement and cash budget The cash budget is quite simple.
Cash budget consists the firm must have cash on a
current basis to pay its employees and suppliers
A budget is normally shown for a full year (or and to meet its others cash needs.
specified period) and shows all the relevant Cash Budget is usually prepared for a short period,
income and expenditure for the period; it viz., daily, weekly, fortnightly, monthly, half-yearly
etc.
does not show the bank or cash movement
separately. However, a cash flow statement Cash flow statement
does show the anticipated cash in and out (or
receipts and payments) and is usually splits ·An external financial statement that describes
the transactions into monthly columns. A changes in cash between two balance sheet dates.
budget is used to plan for the organization or ·A cash flow statement is a primary external
statement.
a project, whereas the cash flow statement is
·It includes the source of cash during the year and
used to manage cash tightly e.g., to ensure
shows how it was used.
the bank account is not overdrawn.
·A Cash Flow Statement is prepared for a long
period, usually yearly.
Direct vs
Direct and indirect are the two unique strategies utilized
for the arrangement of the cash flow statement of the
organizations with the primary contrast identifies with the
Indirect Cash incomes from the operating activities where in the event
of direct income strategy changes in the money receipts
and the money instalments are accounted for in incomes
Flow Methods from the operating activities area while if there should
arise an occurrence of circuitous income technique
changes in resources and liabilities accounts is changed in
the overall gain to show up incomes from the operating
activities.
The format of both the methods are as follows:
DIRECT METHOD
CASH FLOW STATEMENT
DIRECT METHOD
IN CASE OF DIRECT
METHOD ,MAJOR
CLASSES OF GROSS
CASH RECEIPTS AND
GROSS CASH
PAYMENTS ARE
DISCLOSED
INDIRECT METHOD
CASH FLOW STATEMENT
INDIRECT METHOD
THE INDIRECT METHOD OF
PRESENTATION OF CASH
FLOWS FROM OPERATING
ACTIVITIES STARTS FROM
NET PROFIT BEFORE
INCOME TAX AND
EXTRAORDINARY ITEMS.
Operating Activities
CASH INFLOWS CASH INFLOWS IN CASH OUTFLOWS CASH OUTFLOWS
CASE OF IN CASE OF
Cash Sales FINANCIAL FINANCIAL Cash Purchases
Cash paid to
Cash received COMPANIES COMPANIES
Creditors / Trade
from Royalty,
Payables
Fees and
Interest and Dividend Interest paid in Cash
Payment of
Commission
received in Cash Payment for
Operating Expenses
Cash received
Proceeds from Sale Purchase of
like Wages, Salary,
from Debtors /
of Securities Securities
Office and Selling
Trade Loans and Advances Loans and Advances
Expenses etc.
Receivables repaid by third to third parties
Payment of Income
parties
TaxVV
Investing
Cash Inflows
Activities Cash Outflows
PROCEEDS FROM SALE OF PURCHASE OF NON-CURRENT
1 1 INVESTMENTS
FIXED ASSETS
PROCEEDS FROM SALE OF PURCHASE OF FIXED ASSETS
NON-CURRENT INVESTMENTS
2 2
INTEREST RECEIVED ON PURCHASES OF MARKETABLE
3 3 SECURITIES (I.E., STOCKS, BONDS, ETC.)
DEBENTURES
DIVIDEND RECEIVED ON 4 4
ACQUISITIONS OF OTHER
SHARES BUSINESSES OR COMPANIES
Cash Inflows Cash Outflows
Financing Proceeds from Issue of Share
Proceeds from Issue of
Payment for Buy-back of Equity
Shares
Activities
Debentures in Cash Payment for Redemption of
Loans raised (Long-term or Preference Shares
Short-term) Payment for Redemption of
Increase in Balance of Bank Debentures
Overdraft or Cash Credit Repayment of Loans (long-term
or Short-term)
Payment of Interim Dividend and
Previous Year's Proposed
Dividend
Payment of Interest on Long-
term and short-term Loans
Payment of Interest on Bank
Overdraft/Cash Credit
Payment of Preliminary Exp.
(including share issue exp.)
Decrease in Balance of Bank
Overdraft or Cash Credit
INTEREST AND DIVIDENDS
SOME SPECIAL Cash inflows from interest and
dividends, as well as cash outflows
ITEMS : from interest and dividends, should be
recorded separately. Cash inflows from
interest and dividends should be
indicated as cash flow from investing
activities, whilst cash outflows from
interest and dividend payments should
be reported as cash flow from
financing operations.’
EARNINGS TAXES
AS-3 (REVISED) HAS Income tax is a component of cash
PROVIDED FOR THE flows from operating activities. As a
TREATMENT OF SOME result, taxes paid are deducted under
SPECIAL ITEMS AS FOLLOW:
'cash flows from operational
operations.'
EXTRAORDINARY ITEMS
Cash flows linked to unusual items, such as bad debts recovered, insurance claims
received, lottery or court action winnings, and so on, should be declared individually as
deriving from operating, investing, or financing operations. For example, the amount
collected from an insurance provider in the event of inventory loss due to fire,
earthquake, floods, or other natural disasters should be reported as cash flows.
SIGNIFICANT NON-CASH TRANSACTIONS
Some investing and financing operations may not necessitate the use of cash or
financial equivalents. Non-monetary activities like these should be removed from the
cash flow statement. Examples include the acquisition of assets through the issuance
of debentures or shares, the conversion of debentures into shares, and so on.
Significant noncash transactions should be declared separately from the cash flow
statement.
SPECIAL ITEMS
OPERATING QUESTION 1
ACTIVITIES
ACCORDING TO PARA 12 OF AS-3
- CASH FLOWS FROM
OPERATING ACTIVITIES ARE
PRIMARILY DERIVED FROM THE
PRINCIPAL REVENUE-
PRODUCING ACTIVITIES OF THE
ENTERPRISE. THEREFORE, THEY
GENERALLY RESULT FROM THE
TRANSACTIONS AND OTHER
EVENTS THAT ENTER INTO THE
DETERMINATION OF NET PROFIT
OR LOSS.
WORKING NOTE
SOLUTION 1
INVESTING ACTIVITIES
Investing activities of an enterprise are acquisition
and disposal of the long term assets and other
investments not included in cash equivalents.
QUESTION 2
Global Ltd. has Machinery written down value of which on 1st April, 2018
was 8,60,000 and on 31st March, 2019 was 9,50,000. Depreciation for
the year was *40,000. In the beginning of the year, an item of machinery
was sold for 25,000 which had a written down value of 20,000. Calculate
Cash Flow from Investing Activities
SOLUTION 2
Machinery A/C
April 1
FINANCING QUESTION 3
ACTIVITIES
AS-3 (REVISED), CASH FLOW
STATEMENT DEFINES FINANCING
ACTIVITY AS FOLLOWS:
FINANCING ACTIVITIES OF AN
ENTERPRISE ARE THOSE
ACTIVITIES THAT RESULT IN
CHANGE IN THE SIZE AND
COMPOSITION OF OWNERS'
CAPITAL (INCLUDING EQUITY
AND PREFERENCE SHARE
ADDITIONAL INFORMATION: INTEREST PAID ON DEBENTURES Rs.10,000
CAPITAL IN THE CASE OF
COMPANIES) AND BORROWINGS
OF THE ENTERPRISE
SOLUTION 3
QUESTION 4
FULL FLEDGED
SOLUTION 4
1,32,000
24,000
1,08,000
48,000
1,56,000
(83,000)
(22,500) (1,05,500)
50,500 50,500
SOLUTION 4 (42,000)
(30,000)
(72,000) (72,000)
30,000
30,000 30,000
8,500
69,500
78,000
Cash and cash equivalents = current investments + cash and cash equivalents
Opening = 60,000 + 9,500 = 69,500;closing = 54,000+24,000 = 78,000
QUESTION 5
FULL FLEDGED
SOLUTION 5
40,000
73,600
83,600
83,600
SOLUTION 5
QUESTION 6
MISSING FIGURE
MISSING FIGURE
WORKING NOTE
SOLUTION 6
3,76,000
SOLUTION 6
QUESTION 7
MISSING FIGURE
MISSING FIGURE
WORKING NOTE
SOLUTION 7
SOLUTION 7
Thank you!
CORPORATE ACCOUNTING
