8

Cash-Flow Statement
A cash-flow statenent is astatement showing inflows (receipts) and outflows
(payments) of cash
during a particular period. In other words, it is a summary of sources and applications of cash during a
particular span of time. It analy ses the reasons for changes in balance of cash between the two balance
sheet dates. The term 'cash' here stands for cash and cash equivalents, A cash-flow statement includes
only those items which affect cash.
Acash-flow statement can be for the past or can be projected for a future period.

Objectives of Cash Flow Statement

(i) To ascertain the sources (receipts) of Cash and Cash Equivalents from operating, investing and
financing activities of the enterprise.
(i) To ascertain the applications (payments) of Cash and Cash Equivalents under operating.
investing and financing activities of the enterprise.
(üi) To ascertain the net change in Cash and Cash Equivalents i.e. the difference between sources and
applications under the three activities between the dates of twoconsecutive Balance Sheets.
(iv) To highlight the major activities that have provided cash and that have used cash during a
particular period and to show their effect on the overall cash balance.

Importance or Uses of Cash Flow Statement

The main objectives behind preparing a cash-flow statement can be laid down as under :
(1) Useful for Short-Term Financial Planning :-A cash-flow statement provides information
for planning the short-term financial needs of the firm. Since it provides information regarding the
sources andutilisation of cash during a period, it becomes easier for the management to assess whether
it willhave adequate cash to meet day-to-day expenses and pay the trade payables in time, whether it
will have sufficient cash to paythe long-term loans and interest thereon and whether it has enough cash
to pay for the purchase of fixed assets or not.
(2) Useful inPreparing the Cash Budget :-A cash flow statement prepared for the future period
is helpful in preparing a cash budget. It informs the management about the surplus or deficit periods of
cash, i.e., in which months the receipts of cash will be in excess of payments and in which months the
payments will be in excess of receipts. It helps inplanning the investment of surplus cash in short-term
investments and to plan short-term credit in advance for deficit periods.
(3) Comparison with the Cash Budget iA cash budget is prepared at the commencement of the
year, whereas a cash flow statement is prepared at the end of the year. A comparison between the two
helps in ascertaining the extent to which the financial resources of the firm have been generated and
used according to the plan. Causes of variances between the figures of two statements can be analysed
and proper corrective measures may be taken.
 CASI-FLOW STNTEMENI
8.2 Payments Acash-flow
speed(4)
atStudy thethecashTrend
whichof CashReceipts
is beingof generated
and statement rreevrealn th,
fromn trade receivables, inventory and other current aSsets and
the speed at whichthc current liabilities are being paid. It enables the management to assess the true

(5) ofExplains
position in futurc.
the cash the Deviationsof Cash from Earnings:-A1firm may earn huge profitssyett may
plenty of cash. ACash
when it suflered a loss it may still have flow
have paucitv of cash
(6) the
explains Helpful
or
reasons for it.
in Ascertaining Cash Flow from Various Activities Separately: A Cash flow
statement
statement aims at highlighting the Cash flow from operating, investing and financing activities
much cash has been generated or used in these activitiee
separately. Itindicates how
(7) Helpful in Making Dividend Decisions The amount of dividend must be deposited Iin a
separate Dividend Bank Ac' within 5days of the declaration of such dividend. Hence the management
from operating actwik
takes the help of cash flow statement to ascertain the position of cash generated
which can be used for pavment of dividend.
purchas.
(8)Test for the Managerial Decisions It is a general rule that fixed assets should be
long-term loans etc and thes
from funds raised from long-term sources like issue of shares, debentures,
statement shows whethes
should be repaid out of cash generated from operating activities. The cash flow
this policy has been properly followed by the management or not.
(9) Useful to Outsiders : Cash flow statement helps the investors, debentureholders, bankers
lenders, supplier's of credit etc. to analyse the financial position of the enterprise and they can take
proper decisions on the basis of such analysis.
Limitations of Cash-Flow Statement
())Not suitable for Judging the Liquidity ;-It does not present true picture of the liquidity of a
firm because the liquidity does not depend upon cash alone. Liquidity also depends upon those assets
which can be converted into cash easily. Exclusion of these assets obstructs the true reporting of the
ability of the firm to meet its liabilities when they become due for payment.
(2) Possibility of Window-dressing :-The possibility of window-dressing is higher in case of
cash position in comparison to the working capital position of a firm. The cash balance can be easily
manoeuvred by postponing purchases and other payments and by rapidly collecting cash trom trade
receivables before the balance sheet date. Hence, a fund-flow statement presents amore realistie ple
than a cash-flow statement.
(3) It ignores non-cash transactions :-Cash-flow statement ignores non-cash transactions
purchase of fixed assets by issuing shares or debentures, conversion of debentures into shares, ss
Donus shares etc. Hence, the true position of an enterprise cannot be judged by cash-flow statemel
on cash basis and hence
iginores
(4) It ignores the accrual concept of accounting:-It is prepared
one of the basic concepts of accounting, namely accrual concept.
(5) No substitute for an Income Statement: - ACash Flow Statement is not a substitutedoes
flow
Income Statement which takes into account both cash and non-cash items. Therefore, net cash
not mean net income of the business.
comparative
(6) Historical in Nature : Acash flow statement is prepared on the basis of two Information
Balance Sheets of the past years. Hence, information revealed by it is historical in nature.
revealed by it will be more useful if it is accompanied by the projected cash flow statement.
ASHFLOW
STATEMENT
8.3
Difference between Cash-Flow Statement and
Thereisnot much difference between a cash-flow statement and aCash
cash Budget
budget. The only difference
thalacash-floustatement is prepared for a past period whereas acash budget is prepared Ifor a future
Cash-flowstatement usually portray how cash was received and spent in the
limited use as far as the future
past period. Hence,
periods are concerned. Acash budget is
how much cash is likely to be received and what will be
therefore prepared
the
time? Thus, a cash budget
renodof will indicates in which months there willdisbursements
be
during a future
monthsthere
be deficiency of cash
resources, The management can thensurplus cash and in which
take suitable decision to
thesurplus cash or make
inest arrangement for the deficiency of cash at the required time.
Procedure of Preparing
Cash-Flow Statement
The Institute of Chartered Accountants of India has
preparing a cash flow statement. This issued Accounting Standard(AS)-3 Revised,
ir Accounting Standard has been made mandatory in respect of
aCOunting periods commencing on or after Ist April 2001, for
AEnterprises whose equity or debt securities are listed certain
on a
enterprises. These enterprises are:
laha, and enterprises that are in the procesS of recognised
issuing equity or debt securities inventory exchange in
Rugnised inventory exchange in India. that will be listed on a
( All other
commercial, industrial and business enterprises, whose turnover for the
period exceeds ?50 Crores. accounting
As such, the Cash flow statement has
been prepared according to AS- Revised in this
According to AS-3 Revised, the cash flow statement Chapter.
outlows and the net changes (increase or summarizes the cash inflows and cash
decrease) in cash and cash
operating, investing and financing activities ofa firm during a period. equivalents resulting from
The following terms are used for
preparing a cash flowstatement:
Cash It comprises cash in hand and demand
repayable by banks on demand. deposits with banks i.e., deposits which are
Cash Equivalents :-These are short-term, highly
nto known amounts of cash and which liquid investments that are readily convertible
an investment willbe termed as cash present insignificant risk of changes in their values. Normally,
Or less, from the date of its equivalent only if it has a short maturity period, say three months
acauisition.
papers etc. which are purchased with cashExamples of cash equivalents are treasury bills,
that is in excess of iimmediate needs. commercial
excluded from cash equivalents unless they are cash equivalent in reality. For Investment shares are
in
In preference
shares of a company if they are redeemable. within 3 months fromexample,
date of
the investment
purchase will be
included in cash equivalents, providedthere is only an insignificant risk of failure of the
paying the amount at the date of maturity. company in
Thus, Cash and Cash Equivalents include the following:
(i) Cash in Hand
(ii) Cash at Bank
(ii) Current Investments
(iv) Short-term Investments or Marketable Securities
() Cheques and Drafts on hand.
IMPORTANT NOTE

Bank Overdraft and Cash Credit will be considered as financing activity as they are short term
They wil not be considered as cash and cash equivalents. borrowings.
 a cash flow
CASH-FLOWSTATEMENT
:--According to AS-3 (Revised), statement
8.4
Classification of Cash Flows
presented in a manncr
that it reports inflows and outflows
investing and financing
of cash by
classifying
activities. Classification of shoutd be
allthem into three
these
categories, namely:operating.
threc categories helps the users of cash
activities intg
flowstatement to assess the effect of these activities On the.
cnterprise. Such information
will be helpful in
cash and cash
relationship
equivalents
among these
of
three
the
activities. Thesethree activitiessare explained as below: evaluating the
Activities:
() Cash Flows from Operating activities of an enterprise. As
are the main revenue generating
Operating activities
includecash flows fromthose transactions and events which enter intothe ascertainment of net profit or such, they
from operating activities are :
loss of the enterprise. Examples of Cash flows arising
rendering of services;
(e) Cash receipts from the sale of goods and other revenue;
and
(b) Cash receipts from rovalties, fees, commissions
(c) Cash receipts from Debtors andBills Receivables;
(d) Cash pavments for purchase of goods and services;
(c) Cash pavments to Creditors and Bills Payable;
employees;
( Cash pavment of wages, salaries and other payment to
(g) Cash pavments or refunds of income taxes unless they can be specitically identifed ma.
financing and investing activities.
IMPORTANT NOTE

In case of financial enterprise such as Bank or Mutual Fund Company cash outlow and cash inlow arising
from the purchase and sale of securities willbe treated as tlows from Operating Activities. This is, because
purchaseand sale of securities is apart of main revenue generatingactivities in case of inancial enterprises. In
addition, interest paid and interest received as well as dividends received willalso be treated as cash
lows from operating activities in case of financial enterprises,
(2)Cash Flows from Investing Activities :
Investing activities include the purchase and sale of long-term assets such as land, buildings, plant
and machinery elc. not held for resale. These activities also include the purchase and sale of such
investments which are not included in cash equivalents. Cash flow from inyesting activities discloses the
expenditures incurred for resources intended to generate future income and cash flows.
Examples of cash flows arising from investing activities are :
(a) Cash payments to acquire fixed assets (including intangibles);
(b) Cash receipts from sale of fixed assets (including intangibles);
(c) Cash payments to acquire shares, warrants or debt instruments of other enterpr1ses (otherthan
payments for those instruments considered to be cash equivalents);
(d) Cash receipts from sale of shares, warrants or debt instruments of other enterprises (oune
receipts for those instruments considered to be cash equivalents).
(e) Cash advances and loans made to third parties. In case of financial enterprises these w
treated as cash flows from operating activities;
() Cash receipts from the repayment ofadvances and loans made to third parties. Incase offinancial
enterprises these will be treated as cash flows from operating activities;
(g) Cash receipts of insurance claim for property
involved in accident; and
(h) Cash receipts ofinterest and dividend. In case of financial enterprises these will be treatedascash
flows from operating activities.
CAS1-FlOSTA

Flowsfrom Financing Activities:

Financing aCtivitics are the activities that result in change in capital and borrowings of the
Examples of cash flows arising from financing ãctivities are:
Cashreceipts from issuing shares or other similar instruments;
reccipts from short-term or long-term
Cash
() (long-term as w
well as short term);
borrowings such as issuing debentures, bonds, loans
for Buy-back of Equity Shares;
Cashpayment
Cashrepayments of short term or long term borrowings including redemption of debentures,
honds. preterence shares, loanss(Short-term or long-term);
interim dividend and
Cash pavments of
ic) and previous year's proposed dividends both on Preference
Equity Shares;
(9 Cash payments for interest on long-term borrowings such as Debentures and interest on short
term borrowings such as bank overdraft and cash credit.
Changein Bank OOverdraft and Cash Credit.
(h) Payment of Preliminary Expenses (including share issue expenses).
Items:
SomeSpecial
AS3 Revised) has provided for the treatment ofsomespecial items as below:
a luterest and Dividends :-Cash inflow from interest and dividend and cash outflowon account
dfinterest and dividend should be disclosed separately.Cash inflow arising from interest and dividends
meeivedshould be shown as cash flow from investing activities whereas cash outflow on account of
interest and dividend paid should be shown as cash flow from financing activity.
(i) Taxes on Income :-Tax paid on income is a part of cash flows from operating activity. Hence,
Taxes paid are shown as a deduction under cash flows from operating activities."
(üi) Extraordinary Items Cash flows relating to extraordinary items such as bad debts
should be
recovered, claims received from insurance companies, winning of a lottery or a law suit etc.
example, the
disclosed separately as arising from operating, investing or financing activities. For floods
by fire, earthquake,
amount received from insurance company on account of loss of inventory
elc. should be reported as cash flows from operating activities.
and financing activities
(iv) Significant Non-Cash Transactions = There are some investing
non-cash activities should be excluded
Wich do not require the use of cash or cash equivalents. Such
by issue of debentures or shares,
Tom the cash flow statement. Examples are:the acquisition of assets transactions should be disclosed
COnVersion of debentures intoshares etc. Such significant non-cash
outside the cash flow statement.
Classification of Business Activities as per AS-3 showing
'Cash Inflows' and Cash Outflows'.
Operating Activities

Cash Outflows
Cash Inflows () Cash Purchases
(i) Cash Sales
(ü) Cash received from Royalty, (ii) Cash paid to Creditors/ Trade
Fees and Commission
Payables
(üi) Cash received from Debtors/ (üi) Payment of Operating Expenses
like Wages, Salary, Office and
Trade Receivables Selling Expenses etc.
 8.6
(iv) Payment of Income Tax
CASH-FLOW STATEMENT
Cash Outflows
Cash Inflows in Case of Financial
in Case of FinancialCompanies
in Cash
received (v) Interest paid in Cash Companies
(i) Interest and Dividend Securities (v) Payment for Purchase of Securities
(v) Proceeds from Sale of (vi) Loans and Advances to third
repaid
(v) Loans and Advances parties
by third parties
Investing Activities
I.

Cash Inflows Cash Outflows

(i) Proceeds from Sale of Fixed Assets
(i) Purchase of Fixed Assets
(i) Proceeds from Sale of Non (ii) Purchase of Non-Current
Current Investments Investmnents
(ii) Interest received on Debentures
(i) Dividend received on Shares
III. Financing Activities

Cash Inflows Cash Outflows

(i) Proceeds from Issue of Shares () Payment for Buy-back of Equity
in Cash Shares
(üi) Proceeds from Issue of (i) Payment for Redemption of
Debentures in Cash Preference Shares
(i) Loans raised (Long-term (iii) Payment for Redemption of
or Short-term) Debentures
(iv) Increase in Balance of Bank (iv) Repayment of Loans (long-term or Short-term)
Overdraft or Cash Credit (v) Payment of Interim Dividend and Previous
year's proposed Dividend
(vi) Payment of Interest on long-term and
short-term loans.
(vii) Payment of Interest on Bank Overdraft/Cash
Credit
(viii) Payment of Preliminary Exp. (including share
issue exp.) Cash
Overdraft or
(ix) Decrease in Balance of Bank
Credit

FORMAT OF CASH FLOW STATEMENT

A cash flow statement may be prepared either by direct or indirect method, Format
under nalo
method is given below :
XYZ Ltd.
CASH FLOW STATEMENT for the year ended
(Indirect Method)

A. Cash Flows from Operating Activities:

Net Profit before Tax
Adjustments for non cash and non operating items :
Add : Depreciation
 8.7
Preliminary Expenses/ Discount on issue of
Sharesand Debentures written off
Gioodwill,Patents and Tradenarks Amortised
on short term and
Interestpaid long-term
Bank OverdraftVCash CreditBorrowings
Interest paidIoon
Losson Sale fFixed Assets
lss:InterestIncone
DividendIncome
Rental Income (....
Protiton Sale of
Fixed Assets (....
......) ......... )
OnNrating Profit before Working C
Capital Changes
Add: Decrease
in Current Assets
Increase in Current Liabilities
Assets
less:Increase in CuIrent (...
Decreasc in Current Liabilities
(...) (.....
Cashgenerated fYrom operations
Less:Income Tax paid(Net off Tax Refund received)
(....
Net cash from (or used in) operating activities
RCash flows from Investing Activities :
Proceds from Sale of Tangible Fixed Assets
Proceeds from Sale of Intangible Fixed Assets like goodwill . . .

Pnceeds from Sale of Non-Current Investments

interest and Dividend Received
Rent Received
Purchase of Tangible Fixed Assets (.......
Purchase of Intangible Fixed Assets like goodwill (.....
Purchase of Non-Current Investments (......)
Net cash from (or used in) Investing Activities
C.Cash flows from Financing Activities :
Proceeds from issue of Shares and Debentures .........

roceeds from Other Long-term and short term Borrowings

Proceeds from Short-term Borrowings
) increase in the Balance of Bank Overdraft and Cash Credit
) Decrease in the Balance of Bank Overdraft and Cash Credit (.....
Payment of 1Interim Dividend (....
rayment of Proposed Dividend of Previous year (...
Interest paid on Short-term and Long-term Borrowings (....
Interest paid on Bank Overdraf/CCash Credit (.......
Repayment of Loans (Whether short-term or long-term) (......).
Redempion of Debentures (........)

Net cash from (or

usedlin)financing activities
Net
Increase
Add : Cash (or Decrease) in Cash & Cash Equivalents (A +B+C)
and Cash Equivalents in the beginning of the year
Cash and
Cash Equivalents at the endof the year
 Activitie
Calculation of (ash Flow from Operating
transactions
The term Operating activitics
hasic
mean normal business pertaining to purchase
information nceded for the calculation of cash flow
servces The
of goods and
activities Is obtained from comparative halance sheets, statement of profit and loss
dditional information. Tigure of net profitdisclosed hy
from peratiy
accounting period and the
and loss Cannot he taken as Cash low
Irom operating activities because there are some softatement of prot
in the statement of rofit and loss
Such items do not
orde: to ascertan the cash flow from opcraing
resultinthe inflow or
activities, these non-cash
and loss.
outlfow cash. non-cash iMem
items are eliminated
net profit disclosei h statement of profit from h
Step Determination of Net Profit before Tan:
Net Profit betore Tax s the starting pont for the calculation of Cash Flow from
Aetiite IiN caleulatcd as follows
Operalimg
Diference between Opening Balance and Closing Balance
of Statement of Profit &Loss
Add: Proposed Dividend (of Previous year)
Interim Dividend paid during the year
Transfer to Reserves
Provision for Tax (tor current year)

Less . Refund of Tax Credited to Statement of Profit & Loss

Net Profit before Tax

It mav b noted that Net Profit before Tax' must be

calculated in Notes' below the Cash Flo
Stalement

PROPOSED DIVIDEND
AS4,Contingencies and Events Occurring After the
Dividend, both on Equity Shares and Preference SharesBalance should
Sheet Date (Revised) prescribes that proposed
Balance Sheet but should be disclosed in 'Notes to Accounts' as not be shown as Short term Provision in the
upon being declared (approved) by the shareholders in the AnnualContingent Liability because it will be payable
held afier the end of the financial year i.e., in General Meeting. Annual General Meeting is
The effect of this on Cash Flow the next financial year.
Statement will be as follows :
0 Proposed Dividend for Previous Year is
(approved) at the AGM in the Current year andshownhas
as outflow of cash assuming it has been deciaku
also been paid
Profit to determine the Net Profitduring the Current
It will also be added to Net year. have been
appropriated (paid) from the net profit. before tax since it must
(iD Proposed Dividend for Current Year : It is
shown in Notes to
no effect is to be given to
Proposed Dividend of the Current YearAccounts as Contingent Liability.
while preparing Cash Flow Statement.
Reasons for Addition or Deduction of various
() Interim Dividend paid during the yearitems : It isforpaid
determining Net Profit
during current before
year but it isen
an itemof
financing activity and not operating activity. Hence, it is added back to Net Profittofindoul
Cash generated from operating activities. It will be later shown as outflow under financing
activity.
 4S/1FlO
VSTATEMENT 8.9
Transferto Beserves : Transter to General Reserve and ()ther Reserves is added back to Net
Protit.because it is an appropriation of profit and does not result in cash outflow.
Provisionfor Tax for the Current Year : Provision for Tax is added back to Net
profit because
Mi) crealonof provision for
tax does not result in outflow of Cash.
Refund of Tax: It must have been credited to current year's Statement of Profit & Loss. It IS
n)deductedfrom Net Profit because it is not current year's income.

Adjustmentfor Non-Cash items :

A)ltems to be added back to net profit - There are some items shown as expenses in the
datementof profit and loss which do not result in the outflow of cash. Such items are called non-cash
These items should be added back to net profit to calculate the cash profit. These items are
generallhastfollows
) Depreciation -Depreciation is shown as expenses in the statement of profit and loss. This
ratuesthe profit made during the year without reducing the cash balance as it is a non-cash item.
Hencc.itisadded back to profits in order to find out the operating profit.
Amortisation of Fictitious or Intangible Assets :-When these assets are written off, these are
expenses or losses in the statement of profit &loss. But the writing off of these assets does not
adle any cash payment. Hence they are added back to the profit for calculating the operating profit.
following
Thes assets include the
) GoodwillWritten off;
(U) Preliminary Expenses Written off;
(I) Discount on issue of debentures Written off; and
(IV) Trade Marks and Patent Rights Written off.
(3)Bad Debts written off.
(4) Loss on Sale of Fixed Assets :-Loss on sale of fixed assets is generally taken to the statement
oprofit and loss. It should be added back to profits so that operating profit can be ascertained. Net
pMOceeds from the sale of fixed assets will be shown as inflow of cash from investing activities while
preparing cash flow statement.
()Interest on Long-term and Short-term Borrowings Interest on long-term borrowings
un as debenture interest' and interest on short-term borrowings such as interest on Bank Overdraft
u Lash Credit is added back to Net Profit because it is an expense relating to Financing Activity. It is
MioWn as Outflowof Cash under Financing Activity.
(6) Creation of Provisions ;-If any provision has been created out of profits such provision is

tbak
cduces the toprofits
the profit
made earned
during during
the yearthewithout
year forreducing
calculating operating
the cash balanceprofit
of thebecause such provisions
firm. Such provision
nay include the
) following:
Provision for Doubtful Debts;
(1)
Provision for Discount on Trade
() Provision
Receivables.
for Expenses.
(B) Items to be deducted from Net Profits:-There are some incomes which are shown in the
Sdiement of profit and loss, but they are non-operating incomes. These items should be deductedfrom
sto find out the operating profit. These items are as follows :-
 CASH-FLOW STATEMENT
amount of cash received from sale of
8.10
:-Total
() Profit on sale of
fixed assets
cash flow statement as inflow of cash. fxed assets is
on sale of fixed assets
shonin
Activity in the
shown separately under Investingstatement of profit and loss must be deducted fromthe
Dividend etc. : Receipt of interest and dividend
from
Theretore proft
amount of profit.
(2)Receipt of Interest and activities. Hence, they
are receipts from non-opcrating
inflow of Cash under Investing Activities.
are deducted from Net

non-operating activities. Hence, it is

invesshtownmentsas
Profits and are
(3) Rent Reccived: l is also a reccipt from also deducted
Profit and is shown as inflow of Cash under Investing Activities.
from Net
When provisions for depreciation, doubtful
(4)Re-transfer of Excess Provisions :
business nceds, they are again transferred to the statement of profit &loss
as
debts
etc. are
made in cxcess of
They should also be deducted from profits because they do not affect the flow of cash in the current year incomes,.
in any way
assets and current liahili:
In addition to the above, the increase or decrease in Current
influence the flow of cash from operating activities. Therefore, in Step 3, further adjustments in respect
of increase or decrease in current assets and current liabilities except
cash and cash equivalents ovs
below
made to arrive at the cash flow from operating activities. This has been explained as
Step 3: = Adjustment in respect of Changes in Current Assets and Current Liabilities :
Current assets and current liabilities go on changing frequently. Alhough these changes do not
affect the amount of net profit, hey affect the amount of cash generated from operating activities.
Hence. in order to arrive at the figure of cash from operating activities, there is need for adjustments in
respect of these changes. These adjustments will be made in the following manner :
() Effect of decrease in current assets such as Trade Receivables, Inventories, Prepaid
Expenses.Accrued incomes etc. :For example, Trade Receivables at thebeginning of the year were
?1,00.000 and trade receivables at the end of the year were 780,000. Decrease in trade receivables
indicatesthat collections from trade receivables are more than the amount of credit sales during the year,
hence 20,000should be added to operating profit for arriving at the figure of net cash generated from
operating activities.
The sametreatment is made for the decrease in other current assets.
Thus. Decrease in current assets should be added to the figure of operating profit.
(2) Effect of increase in current assets such as Trade Receivables, Inventories, Prepatd
Expenses, Acerued ineomes etc. - For example, trade receivables at the beginning of the year were
1,00,000 and trade receivables at the end of the year were 1.50.000, Increase in trade receivave
indicates that collections from trade receivables are less than the amount of credit sales during the year:
hence ? 50,000should be deducted from operating profit for arriving at the figure of net cash generated
from operating activities.
The same treatment is made for the increase in other current
assets.
Thus, Increase in current assets should be deducted from the figure of operating profit.
(3) Effect of decrease in current liabilities such as Trade Payables, Outstanding Expenses,
Incomes received in advance ete. : For example, trade payables at the beginning of the year were
60,000 and trade payables at the end of the year were ?50,000. Decrease in trade payablesindicates
thal pay ments to the rade payables were 10,000 more than the amount of credit purchases during the
year. Hence, decrease in rade payables indicates that they are being paid more amount, which decreases
the cash generated tromoperations. Therefore, the decrease in trade payables should be deducted trom
operating prolt tor arriving at the figure of net cash generated from operating activities.
The sane trcatmcnt is made for the decrease in other current liabilities.
Thus, Decrease in current liabilities should be deducted from the figure of operating profit.
(4) Effect of increase in current liabilities such as trade payables, Outstanding Expenses,
Incomes received in advance ete. ;- For example, trade payables at the beginning of the year were
R60,000 and trade payables at the end of the year were 75,000. Increase in trade payables indicates
that payments totrade payables were 1S,000 less than the amount of credit purchases during the year.
Hence, increase in trade payables indicates that they are being paid less amount, which increases the
cash generated from operations. Therefore, the increase in trade payables should be added to operating
profit for arriving at the figure of net cash generated from operating activities.
The same treatment is made for the increase in other current liabilities.
Thus. Increase incurrent liabilities should be added to the figure of operating profit.
After considering the net effect of increase or decrease in current assets and current liabilities cash
from operating activities can be calculated with the help of the following formula :
(+) Decrease in Trade Receivables
(+) Decrease in Inventories
(+) Decrease in Prepaid Current Assets
Expenses
(+) Decrease in Accrued
Income

(+) Increase in Trade Payables

(+) Increase in Outstanding Current Liabilities
Expenses
Cash from Operating (+) Increase in Unearned
Profit Income
Operating
Activities

( Increase in Trade Receivables

() Increase in Inventory
() Increase in Prepaid Expenses Current Assets
( Increase in Accrued Income
(- Decrease in Trade Payables
(-) Decrease in Outstanding
Expenses Current Liabilities
() Decrease in Unearnedl
Income

Itis clear from the above discussion that :

activities.
Decrease in Current Assets increases the cash from operating
activities.
Increase in Current Assets decreases the cash from operating
Decrease in Current Liabilities decreases the cash from operating activities.
Increase in Current Liabilities increases the cash from operating activities.
8.1

As such,
(+) Decrcase in Current
TEMENT
Assets These result in increase of cash.
Cash from
Operating =Opcrating Profit () Increase in Current therefore, these should be added.
Activities Liabilities

() Increase in Current These result in decrease of

Assets cash, therefore, these should
(-) Decrease in Current be deducted.
Liabilities
It should be rememberedthat the balance of cash and cash equivalents or changes in cash and cash
calculating cash from
equivalents from one period to another are not considered while operating
activities.
Step 4 :Deduct Income Tax Paid :
Activities.
Income Tax paid is deducted from Cash Generated from Operating
Operating Activities.
The amount afier above adjustments is Cash Flow from
Distinction between Net Profit and Cash from 0perations
Basis Net Profit Cash from Operations
No.
of
1. Meaning It indicates the net result of activities It indicates the cashflow as a result
carried out during an accounting year. |operating activities.

2. Non-Cash is calculated after excluding the effect of

It is calculated after taking into account the Itnon-cash operating items since these items
Operating items effect of non-cash operating items such as
depreciation. represent merely the book entries.

3.Non-Operating It is calculated after taking into açcount the It is calculated after excluding the efiect ot
items effect of non- operating items such asnon-operating items since these items do
goodwill written off. not relate to operating activities.

Basis of It is calculated on accrual basis. It is calculated on cash basis.

Calculation
calculating cash from operations
5 Working For calculatíng net profit changes in For considered.
Capital working capital are not considered. changesin working capital are
Changes
PLEASE REMEMBER
calculating net profit beforetax
While solving a question, 'Net Profit before Tax' is written first of all. For
usually the following items are added to the net profit given in the question:
(i) Provision for Income Tax made during the year;
(i)) Proposed Dividend of Previous year
(ii) Interim Dividend paid to Shareholders;
Statement.
(iv) Transfer to General Reserve or any other Reserve during the year. Flow
It may be noted that 'Net Profit before Tax' must be calculated in Notes below the Cash
 DEFERRED TAX

Deferred Tax: lt is the difference between tax on Accounting Incomeand Taxable Ino
Deferred Tax Liability: It occurs due to excesS of Accounting Income over Tavaka
Income.
Deferred Tax Asset : Itoccurs due to excess of Taxable Income over Accounting Income.
Either Deferred Tax Liability or Deferred Tax Asset will be appearing in a Balance Sheet.
Treatment of Deferred Tax Liability and Deferred Tax Asset in Cash Flow Statement
In aCash Flow Statement, adjustment in respect of deferred tax liability or deferred tax is made
while calculating profit before tax in order to find out Cash Flows fromn Operating Activities.
I. Deferred Tax Liability is created out of Balance of Statement of Profit and Loss, hence it is added
back to the profit to calculate current year's profit before tax.
 8.15
Deterredlax Asset comes into existence by increasing the
L
henceitis deducted to calculate profit before tax.
balance of Statement of Profit & OSs,
ncrease in Deterred Tax Liability reduces the current
othe profit to arrve at curent year's profit before taxyear's profit. Hence it is added back
Decrease in Deterred lax Liability will increase the current
year's profit. Hence it is
dedueted from the protit lo arrive at current year's profit hefore tax.
.aoregse in Deferred Tax Asset will increase the current year's profit.
from the profit to arrive at current year's Hence it is deducted
profit before tax.
Decrease in Deferred 1ax Asset reduces the current year's profit. Hence it is added back to
the profit to arrive at current year's profit before tax.
 Preparation of
Total of Part A. B andCwill be the net Cash-Flow Statement
increase or decrease in cash and cash equivalents
period.Ifthebalance of cash and cash equivalents at the during the
the balance of cash and cash beginning is added tothis figure, it will amount
solution stands equivalents
nds automatically verified.
at the end of the period and hence the accuracy of the
Provision for Income-Tax :
)Provision for Income-Tax' appearing on the liabilities side of
he treated as payment of tax during previous vear's balance sheet will
the year. Hence it willbe deducted while
operating activities, calculating net cash from
(ii)Provision for Income-Tax' appearing on the
he added back to profits because 'net profit before liabilities side of current vear's balance sheet will
from operating activities'. taxation' is to be shown under the heading 'Cash flow
Proposed Dividend
According to Revised AS-4, Contingencies and Events Occurring after the
Proposed Balance Sheet date,
Dividend is not provided in the books but is shown in the notes to
accounts as Contingent
Liability. In other words, it will not appear as Short Term Provision on the Liabilities
Sheet.
side of the Balance
The effect of Proposed Dividend on Cash Flow Statement will be as
follows :
(i) Proposed dividend for Previous Year : It will be shown as
Outflow of Cash in financing
activities assuming it has been declared (approved) at the Annual General Meeting of
the Current year. Shareholders in
It will also be added to Net Profit for determining the Net Profit before Tax.
(ii) Proposed Dividend for the Current Year : There will be no effect of Proposed Dividend of
Current Year on Cash Flow Statement because it will be declared (approved) at the Annual General
Meeting of Shareholders to be held after the end of financial year i.e., in the next financial year.
Preparation of Fixed Asset Account:
() Fixed Asset Account (on Original Cost Basis) : If the balance sheet contains an item of
"Provision for Depreciation' or 'Accumulated Depreciation' for both the years, it means that the fixed
assets shown in the balance sheet are shown at their original cost. In such cases, fixed assets account and
provision for depreciation account should be prepared separately. By preparing 'fixed assets account
ne amount of fixed assets purchased or sold during the year will be found out and by preparing
provision for depreciation account' the amount of depreciation charged during the year will be found
Out.

(ii) Fixed Asset Account (on Written Down Value Basis) : If the balance sheet does not contain
the item of "Provision for Depreciation' or'Accumulated Depreciation' for both the years, it
means that
the fixed assets shovwn in the balance sheet are shown at their written down value and hence fixed assete
account will beprepared on written down value basis. In such cases, it should be noted that ifthe amount
of current year's depreciation is given in adjustments, it should be shown on the credit side of asset
account.

The balance of asset account will now showa purchase or sale of asset. If the credit side is in excess
of the debit side. the amount of difference will be treated as purchase of asset and if the debit side is in
excess. the amount of difference will be treated as sale of asset.
Loss or Profit on Sale of Fixed Assets : If there is a loss on sale of fixed asset, it is
put to the credit
side of the asset account and if there is a profit on sale of fixed asset, it is
account.
put to the debit side of the asset