Cash Flow Statement

A company may report a healthy profit and still run short of cash, because profit is measured on the accrual basis while bills are paid in cash. The Cash Flow Statement, prepared according to Accounting Standard 3 (Revised), explains how cash and cash equivalents changed during a period. In this chapter you will learn the meaning of cash and cash equivalents, such as short-term investments maturing within three months, and the classification of cash flows into operating, investing and financing activities, with special rules for interest and dividends in financial and non-financial enterprises. You will then prepare a Cash Flow Statement by the indirect method, beginning with net profit before tax and extraordinary items, adjusting for non-cash and non-operating items such as depreciation, goodwill written off and profit or loss on sale of assets, and for changes in working capital. You will also learn to prepare working notes for fixed assets, provision for tax and dividends, and to calculate cash from investing and financing activities so that the statement reconciles with the opening and closing cash balances.

Detailed Worksheet: Cash Flow Statement Section A - Definitions (10 marks) 1. What is a Cash Flow Statement? Which Accounting Standard governs its preparation? (2 marks) 2. Define cash equivalents and give two examples. Why is a bank overdraft sometimes treated as part of cash and cash equivalents? (2 marks) 3. Distinguish between operating activities and investing activities with two examples of each. (2 marks) 4. How are interest paid, interest received and dividend received classified in (i) a financial enterprise and (ii) a non-financial enterprise? (2 marks) 5. State any two objectives and any two limitations of a Cash Flow Statement. (2 marks) Section B - Calculations and Applications (15 marks) 6. The surplus in the Statement of Profit and Loss increased from Rs 1,00,000 to Rs 1,80,000 during the year. During the year Rs 20,000 was transferred to General Reserve and a provision for tax of Rs 30,000 was made. Calculate the net profit before tax and extraordinary items. (3 marks) 7. Calculate cash flows from operating activities: net profit before tax Rs 2,00,000; depreciation Rs 40,000; loss on sale of machinery Rs 10,000; increase in trade receivables Rs 30,000; decrease in inventories Rs 20,000; increase in trade payables Rs 15,000; income tax paid Rs 50,000. (3 marks) 8. Machinery (at book value) was Rs 5,00,000 at the beginning and Rs 6,00,000 at the end of the year. Depreciation for the year was Rs 50,000. Machinery with a book value of Rs 40,000 was sold for Rs 30,000. Calculate the machinery purchased and the cash flow from investing activities relating to machinery. (3 marks) 9. Classify the following into operating, investing or financing activities for a manufacturing company: (i) purchase of patents (ii) payment of interim dividend (iii) cash received from customers (iv) redemption of debentures (v) interest received on investments (vi) payment of income tax. (3 marks) 10. A company issued equity shares of Rs 2,00,000 at a premium of 10%, redeemed 10% debentures of Rs 1,00,000 at par on 1 April, paid a dividend of Rs 40,000 and raised a long-term bank loan of Rs 50,000. Debentures were outstanding only for the first day of the year (ignore interest on them). Calculate cash flows from financing activities. (3 marks) Section C - Diagrams (10 marks) 11. Draw the format of a Cash Flow Statement by the indirect method as a labelled vertical chart showing the three activity heads, net increase or decrease in cash, opening and closing cash and cash equivalents. (4 marks) 12. Draw a chart classifying ten common transactions into operating, investing and financing activities for a non-financial company. (3 marks) 13. Draw a flowchart showing the steps from net profit as per the Statement of Profit and Loss to cash generated from operations under the indirect method. (3 marks) Section D - Analysis and Higher-order Thinking (15 marks) 14. Provision for tax was Rs 60,000 at the beginning and Rs 80,000 at the end of the year. Tax paid during the year was Rs 50,000. Calculate the provision for tax made during the year, explain how it is treated while calculating net profit before tax, and show where tax paid appears in the Cash Flow Statement. (5 marks) 15. Mehta Ltd reported a net profit of Rs 5,00,000 but its cash balance fell by Rs 1,20,000. The Cash Flow Statement shows heavy purchase of fixed assets and a large increase in trade receivables. Analyse why profit and cash moved in opposite directions, and suggest two steps management should take. (5 marks) 16. Explain, with reasons, how each of the following is treated in the Cash Flow Statement of a non-financial company: (i) goodwill written off (ii) profit on sale of investments (iii) purchase of a building by issuing equity shares to the vendor (iv) dividend received on investments (v) increase in outstanding expenses. (5 marks) Instructions: Time allowed 2 hours. Attempt all sections. Prepare the Cash Flow Statement by the indirect method as per AS 3 (Revised) and show all working notes.