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Cash Flow Statement (CFS)

Anjali Y.
01 Apr 0 0

CASH FLOW STATEMENT

Marks: 8 (Eight)

 

As prescribed by the Accounting standard-3 (AS-3), there are two methods which can be used to prepare cash flow statements:

  1. Indirect method
  2. Direct method (Not applicable for CBSE class XII)

Whichever method be used, the end result under all three activities i.e. operating, investing and financing will be the same.

THUMB RULE: CASH FLOW IS PREPARED FOR CASH TRANSACTIONS ONLY. ALL NON-CASH TRANSACTIONS ARE IGNORED AND REMOVED IF INCLUDED IN ANY ITEM.

 

Preparation of CFS under Indirect method:  

 

Particulars

Amount

Learning Efforts allocation

Operating Activities (a)

25000

60%

Investing Activities (b)

50000

30%

Financing Activities (c)

75000

10%

Net increase in cash and cash equivalents (d=a+b+c)

150000

100%

Cash and cash equivalents and the beginning of the period (e)

30000

 

Cash and cash equivalents and the end of the period (f=d+e)

180000

 

 

 

A.   Operating Activities

The cash flow from operating activities are derived under two stages;

  1. Calculating the operating profit before changes in working capital
  2. The effect of changes in working capital

 Stage 1: Operating profit before changes in working capital can be calculated as  

follows:

Net profit before Tax and extra ordinary Items

xxx

 

Add: Non-cash and non-operating Items which have already been debited to profit  

and Loss Account like;

   

Depreciation

xxx

 

Amortisation of intangible assets

xxx

 

Loss on the sale of Fixed assets

xxx

 

Loss on the sale of Long-term Investments

xxx

 

Provision for tax

xxx

 

Dividend paid

xxx

xxx

Less: Non-cash and Non-operating Items which have already been credited to     

Profit and Loss Account like

   

Profit on sale of fixed assets

xxx

 

Profit on sale of Long term investment

xxx

xxx

Operating profit before working Capital changes

 

xxx

 

Stage 2: Effect of changes in Working Capital is to be taken into as follows:

Current Assets

  1. An increase in an item of current assets causes a decrease in cash inflow because cash is blocked in current assets
  2. A decrease in an item of current assets causes an increase in cash inflow because cash is released from the sale of current assets

Current Liabilities

  1. An increase in an item of current liability causes a decrease in cash outflow because cash is saved
  2. A decrease in an item of current liability causes an increase in cash outflow because of payment of the liability

 

Thus, in a nutshell

 

Cash from operating activities =

  Operating profit before working capital changes

+ Net decrease in current assets

+ Net Increase in current liabilities

 – Net increase in current assets

– Net decrease in current liabilities

 B. Investing Activities

The cash flow from investing activities is derived by adding all the cash inflows from the sale or maturity of assets and subtracting all the cash outflows from the purchase or payment for new fixed assets or investments.

Cash flow arising from Investing activities typically are:

  1. Cash payments to acquire Fixed Asset
  2. Cash receipts from disposal of fixed asset
  3. Cash payments to acquire shares or debenture investment
  4. Cash receipts from the repayment of advances and loans made to third parties

 Examples of Cash inflow from investing activities are:

  1. Cash sale of plant and machinery, land and Building, furniture, goodwill etc
  2. Cash sale of investments made in the shares and debentures of other companies
  3. Cash receipts from collecting the Principal amount of loans made to third parties

Examples of Cash outflow from investing activities are:

  1. Purchase of fixed assets i.e. land, Building, furniture, machinery etc
  2. Purchase of Intangible assets i.e. goodwill, trademark etc
  3. Purchase of shares and debentures
  4. Purchase of Government Bonds
  5. Loan made to third parties   

C. Financing activities

Cash flows from financing activities are the cash paid and received from activities with non-current or long-term liabilities and shareholder’s capital.

Cash flow arising from Financing activities typically are:

  1. Cash proceeds from the issue of shares or other similar instruments
  2. Cash proceeds from the issue of debentures, loans, notes, bonds, and other short-term borrowings
  3. Repayment of the amount borrowed

Examples of cash inflow from financing activities are:

  1. Issue of Equity and preference share capital for cash only
  2. Issue of Debentures, Bonds and long-term note for cash only

Examples of cash outflow from financing activities are:

  1. Payment of dividends to shareholders
  2. Redemption or repayment of loans i.e. debentures and bonds
  3. Redemption of preference share capital
  4. Buyback of equity shares

 

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