cash flow statement - practical - icai knowledge · pdf filecash flow statement - practical...
TRANSCRIPT
Cash Flow Statement - PracticalPaper 3B: Financial Management Chapter 3 Unit II
CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA), EPBM (IIMC), MCT
Learning Objectives
Understand the intricacies in preparation of Cash Flow Statement
Understand the intricacies in preparation of Cash Flow Statement
Develop hands on skills in Cash Flow Statement preparation by solving variety of questions
Develop hands on skills in Cash Flow Statement preparation by solving variety of questions
2
1
2
Recap –Classification of Cash Flows
3
Recap - Cash Flow - Classification
1• Cash flow from Operating Activities
• Principal revenue generating activities
2• Cash flow from Investing Activities
• Acquisition and disposal of long term assets and other investments not included in cash equivalents
3• Cash flows from Financing activities
• Activities that has an impact of owner’s capital and borrowings
4
Cash Flow from Operating Activities
Cash from Operating activities can be
reported in two ways
Direct Method
Indirect Method
5
Multiple Choice QuestionsCash Flow Statement
6
MCQ – 1
7
Principal revenue generating activities of an enterprise are
called as –
A. Operating Activities
C. Financing Activities
B. Investing Activities
D. None of the above
Answer: A. Operating Activities
MCQ – 2
8
Short term highly liquid investments that are readily convertible in to known amounts of cash and which are subject to insignificant
risk of changes in value is known as –
A. Cash at Bank
C. Cash Equivalents
B. Investments in Shares
D. None of the above
Answer: C. Cash Equivalents
MCQ – 3
9
Cash Flows are –
A. Inflows and Outflows of cash
C. Inflows of Cash
B. Inflows and Outflows of cash equivalents
D. Both A & B
Answer: D. Both A & B
MCQ – 4
10
Purchase of Machinery by means of issue of shares should
be ________________ from Cash Flow Statement
A. Included
C. Included with value as zero
B. Excluded
D. None of the above
Answer: B. Excluded
MCQ – 5
11
Unrealized gains and losses arising from foreign exchange rates are –
A. Cash flows from operating activities
C. Cash flows from investing activities
B. Cash flows from financing activities
D. Not cash flows
Answer: D. Not cash flows
MCQ – 6
12
Equity dividend paid should be classified as cash outflow from –
A. Operating activities
C. Investing activities
B. Financing activities
D. Not cash flows
Answer: B. Financing activities
Practical Illustrations – Question 1IPCC – May 2011 – Paper – Accounting
Using Indirect Method
13
Question 1: Indirect method14
Balance Sheet of Lotus Ltd as on 31‐Mar‐2010 and 31‐Mar‐2011
31.03.2010 31.03.2011 31.03.2010 31.03.2011Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000
Equity Share @ Rs 10 each 1000 1250
Land & Buildings 400 380
Capital Reserve 10 Machinery 750 920Profit & Loss Account 400 480 Investments 100 50Long term loan from Bank 500 400 Inventories 300 280Sundry Creditors 500 400 Receivables 400 420
Provision for tax 50 60Cash in Hand 200 140Cash at Bank 300 410
2450 2600 2450 2600
Question 1: Indirect method15
Additional Information
1. Depreciation written off on Building ‐ Rs 20,0002. The Company sold some Investment at a profit of Rs 10, 000, which is credited to Capital Reserve
3. Income tax provided during the year Rs 55,000
4. Machinery purchased during the year for Rs 2,25, 000. They paid Rs 1,25,000 in cash and issue 10,000 equity shares of Rs 10 each at par.
You are required to prepare cash flow statement for the year ended 31st March 2011 as per AS‐3, by using indirect method
Question 1: Identification of Working Notes
Income Tax Paid
Sales realization Investment sales
Depreciation on Machinery
Calculation of Net Profit before tax
16
Question 1 : Indirect Method – Working Note 1
17
Working Note:1 (Rs. In 000)
Income Taxes Paid
Provision for Tax during the year 55
Add: Opening Provision for tax (31.03.2010) 50
105
Less: Closing Provision for tax (31.03.2011) 60
45
Question 1 : Indirect Method – Working Note 2
18
Working Note:2 (Rs. In 000)
Sales realisation from Investments
Opening Balance of Investment (31.03.2010) 100
Add: Profit on sale of Investment (Credited to Capital Reserve) 10
110
Less: Closing Balance of Investment (31.03.2011) 50
60
Question 1 : Indirect Method – Working Note 3
19
Working Note:3 (Rs. In 000)
Depreciation on Machinery
Opening Balance of Machinery (31.03.2010) 750
Add: Cost of Machinery Purchased 225
975
Less: Closing Balance of Machinery (31.03.2011) 920
55
Question 1 : Indirect Method – Working Note 4
20
Working Note:4 (Rs. In 000)
Net Profit before tax and extraordinary items:
Profit & Loss Account ‐ 31‐.03.2011 480
Less: Profit & Loss Account ‐ 31‐.03.2010 400
Profit for the Year after Tax provision 80
Add: Provision for Taxation 55
135
Question 1 : Cash Flow Statement (Indirect Method)
21
CASH FLOW STATEMENT(Rs. In 000)
Cash flows from Operating activities:Net Profit Before tax and extraordinary items: 135
Adjustments for:Depreciation Building 20Depreciation Machinery 55Operating profit before working capital changes 210
Adjustments for Working Capital Changes:Add: Decrease in Inventories 20Less: Increase in Receivables (20)Less: Decrease in Sundry Creditors (100)
(100)Cash Generation from Operations 110
Less: Income Tax Paid 45Net Cash from Operating activities 65
Question 1 : Cash Flow Statement - Continued
22
(Rs. In 000)Cash flows from Investing activities:Purchase of Machinery (125)Cash received on Sales of Investment 60Net Cash from Investing activities (65)Cash flows from Financing activities:Issue of Shares 150Repayment of Long Term Loan (100)Net Cash from Financing activities 50
Net increase in Cash and Cash equivalents 50
Cash and Cash equivalents at the beginning Cash in Hand 200Cash at Bank 300 500
Cash and Cash equivalents at the endCash in Hand 140Cash at Bank 410 550
Practical Illustrations – Question 2IPCC – May 2007 – Paper – Cost Accounting
Using Indirect Method
23
Question 2: Indirect method
24
Balance Sheet of JK Ltd as on 31‐Mar‐2005 and 31‐Mar‐2006
31.03.05 31.03.06 31.03.05 31.03.06Liabilities Rs in 000 Rs in 000 Assets Rs in 000Rs in 000
Share Capital 1440 1920 Fixed Assets 3840 4560
Capital Reserve 48 Less: Depreciation 1104 1392
General Reserve 816 960 2736 3168Profit & Loss Account 288 360 Investments 480 384
9% Debenture 960 672 Cash 210 312
Current Liabilities 576 624Other Current assets (including stock) 1134 1272
Proposed Dividend 144 174 Preliminary Expenses 96 48
Provision for Tax 432 408Unpaid Dividend 18
4656 5184 4656 5184
Question 2: Indirect method - Continued
25
Additional Information
1. During the year 2005 ‐ 2006, Fixed Assets with a book value of Rs 2,40,000 (accumulated depreciation Rs 84,000) was sold for Rs 1,20,0002. Provided Rs 4,20,000 as depreciation3. Some investments are sold at a profit of Rs 48,000 and the Profit was credited to Capital Reserve
4. It was decided that stocks be valued at cost, whereas previously the practice was to value stock at cost less 10 percent. The stock was Rs 2,59,200 as on 31.03.2005. The stock as at 31.03.06 was correctly valued at Rs 3,60,000
5. It was decided to write off Fixed Assets costing Rs 60,000 on which depreciation amounting to Rs 48,000 has been provided.6. Debentures are redeemed at Rs 105
Required: Prepare Cash Flow Statement
Question 2: Identification of Working Notes
Purchase of Fixed
Assets, Sales of
Fixed Assets,
Fixed Assets Written Off,
Depreciation Account
(Optional)
Sales Realization from
Investment
Opening Stock
Revaluation and
Opening Profit and
Loss (Adjustment for stock revaluation
)
Payment towards
Redemption of 9%
Debenture
Calculation of Net Profit before tax
and Extraordinar
y Items
26
Question 2 : Indirect Method – Working Note 1
27
Working Note:1 (Rs. In 000)
Fixed Assets Account
Particulars Rs Particulars Rs
To Balance b/d 3840.00 By Sale of Assets 240.00
To Purchases (Balancing amount) 1020.00
By Fixed Assets Written Off A/c 60.00
By Balance c/d 4560.00
4860.00 4860.00
Question 2 : Indirect Method – Working Note 2
28
Working Note:2 (Rs. In 000)
Depreciation Account
Particulars Rs Particulars Rs
To Sales of Assets 84.00 By Balance b/d 1104.00
To Fixed Assets Written off A/c 48.00
By Profit & Loss a/c (Depreciation Provision) 420.00
To Balance c/d 1392.00
1524.00 1524.00
Question 2 : Indirect Method – Working Note 3
29
Working Note:3(Rs. In 000)
Sale of Fixed Assets Account
Particulars Rs Particulars Rs
To Fixed Assets a/c 240.00 By Depreciation a/c 84.00
By Cash 120.00By Profit and Loss A/c ‐Loss on Sales (Balancing Amount) 36.00
240.00 240.00
Question 2 : Indirect Method – Working Note 4
30
Working Note:4 (Rs. In 000)
Fixed Assets Written Off Account
Particulars Rs Particulars Rs
To Fixed Assets a/c 60.00 By Depreciation a/c 48.00
By Profit and Loss A/c (Balancing Amount) 12.00
60.00 60.00
Question 2 : Indirect Method – Working Note 5
31
Working Note:5 (Rs. In 000)
Investment Account
Particulars Rs Particulars Rs
To Balance b/d 480.00By Cash (Balancing Amount) 144.00
To Capital Reserve A/c (Profit on sale) 48.00 By Balance c/d 384.00
528.00 528.00
Question 2 : Indirect Method – Working Note 6
32
Working Note:6 (Rs. In 000)
Opening Stock Revaluation Account
Particulars Rs Particulars Rs
To Balance b/d 259.20
To Profit & Loss A/c (31.03.2005) 28.80 By Balance c/d 288.00
288.00 288.00
Question 2 : Indirect Method – Working Note 7
33
Working Note:7 (Rs. In 000)
9% Debentures a/c
Particulars Rs Particulars RsTo Cash (Balancing Amount) 302.40 By Balance b/d 960.00
To Balance c/d 672.00
By Profit and Loss A/c ‐Premium on Redemption (Rs 288000*5%) 14.40
974.40 974.40
Question 2 : Indirect Method – Working Note 8
34
Working Note:8 (Rs. In 000)Profit and Loss A/c
Particulars Rs Particulars RsTo Proposed Dividend 174.00 By Balance b/d 288.00
To Transfer to General Reserve 144.00 By Opening Stock Revaluation a/c 28.80
To Provision for Tax 408.00 By Profit Before Tax and Extraordinary Items 879.60
To 9% Debentures (Premium on Redemption) 14.40 To Loss on Sales of Assets 36.00
To Preliminary Expenses (Written off) 48.00 To Fixed Assets Written Off A/c 12.00 To Balance c/d 360.00
1,196.40 1,196.40
Question 2 : Cash Flow Statement (Indirect Method)
35
CASH FLOW STATEMENT(Rs. In 000)
Cash flows from Operating activities:Net Profit Before tax and extradinary items: 879.60
Adjustments for:Depreciation 420.00Operating profit before working capital changes 1299.60
Adjustments for Working Capital Changes:Less: Increase in Other Current Assets (109.20)Add: Increase Current Liabilities 48.00
(61.20)Cash Generation from Operations 1238.40
Less: Tax Paid 432.00Net Cash from Operating activities 806.40
Question 2 : Cash Flow Statement - Continued
36
(Rs. In 000)Cash flows from Investing activities:Purchase of Fixed Assets (1020.00)Cash received on Sales of Fixed Assets 120.00Cash received on Sale of Investment 144.00Net Cash from Investing activities (756.00)
Cash flows from Financing activities:Issue of Shares 480.00Redemption of 9% Debentures (302.40)Dividend Paid (126.00)Net Cash from Financing activities 51.60
Net increase / (Decrease) in Cash and Cash equivalents 102.00
Cash and Cash equivalents at the beginning 210.00
Cash and Cash equivalents at the end 312.00
Practical Illustrations – Question 3IPCC – May 2008 – Paper – Cost Accounting and Financial Management
Projected Cash flow Statement and Estimated Bank Balance
37
Question 3
38
X Ltd has the following balances as on 01 April 2007
Rs in 000
Fixed Assets 1140
Less: Depreciation 399
741
Stocks and Debtors 475
Bank Balance 66.5
Creditors 114
Bills Payable 76
Capital (Shares of Rs 100 each) 570
Question 3 – Continued
39
The Company made the following estimates for the financial year 2007 ‐ 08
1. The company will pay a free of tax dividend of 10% and the rate of tax being 25%
2. The company will acquire fixed assets costing Rs 1,90,000 after selling one machine for Rs 38,000 costing Rs 95,000 and on which depreciation provided amounted to Rs 66,500
3. Stocks and Debtors, Creditors and Bills payables at the end of financial year are expected to be Rs. 5,60,500, Rs 1,48,200 and Rs 98,800 respectively
4. Profit would be Rs 1,04,500 after depreciation of Rs 1,14,000
Prepare the projected cash from operations and ascertain the bank balances of X Ltd at the end of the Financial year 2007 ‐ 08
Question 3: Identification of Working Notes
Profit on sale of Machine
Dividend payment and Dividend Tax
40
Question 3 : Working Note 1
41
Working Note:1 (Rs. In 000)
Profit on Sale of Fixed Assets:
Cost of sold Equipment 95.0
Accumulated Depreciation on Equipments sold 66.5Written Down Value of Equipment sold 28.5
Less: Sale value 38.0
9.5
Question 3 : Working Note 2
42
Working Note:2 (Rs. In 000)
Dividend and Dividend Tax:
Net Dividend : 10% on Rs 570,000 57.0
Gross Dividend (57 / 75%) x 100% 76.0
Dividend Tax 19.0
Question 3 : Cash Flow Statement
43
CASH FLOW STATEMENT(Rs. In 000)
Cash flows from Operating activities:Net Profit Before tax and extradinary items:Profit for the year 104.5Less: Profit on sale of assets 9.5 95.0Adjustments for:Depreciation 114.0Operating profit before working capital changes 209.0
Adjustments for Working Capital Changes:Less: Increase in Stocks and Debtors (85.5)Add: Increase Creditors 34.2Add: Increase Bills payable 22.8
(28.5)Net Cash from Operating activities 180.5
Question 3 : Cash Flow Statement (Continued)
44
(Rs. In 000)Cash flows from Investing activities:Purchase of Fixed Assets (190.0)Cash received on Sales of Fixed Assets 38.0Net Cash from Investing activities (152.0)
Cash flows from Financing activities:Dividend Paid (57.00)Dividend Tax Paid (19.00)Net Cash from Financing activities (76.0)
Net increase / (decrease)in Cash and Cash equivalents (47.5)
Bank Balance at the beginning 66.5
Bank Balance on 31.03.2008 19.0
Practical Illustrations – Question 4IPCC – May 2011 – Paper – Cost Accounting and Financial Management
Under Indirect Method
45
Question 4 : Cash Flow Statement
46
Summarised Balance Sheet of XYZ Ltd as on 31‐Mar‐2010 and 31‐Mar‐201131.03.10 31.03.11 31.03.10 31.03.11
Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000Preference Share Capital 400 200 Plant & Machinery 700 820
Equity Share Capital 400 660 Long Term investment 320 400Share Premium 40 30 Goodwill 30Capital redemption reserve 100 Current Assets 910 1141
General Reserve 200 120Short term investment (Less than 2 months) 50 84
P & L A/c 130 175 Cash and Bank 100 80Current Liabilities 640 900 Preliminary Exps 40 20Proposed Dividend 160 210Provision for Tax 150 180
2120 2575 2120 2575
Question 4 : Cash Flow Statement
47
Additional Information1. Preference Share Capital was redeemed at a premium of 10% partly out of proceeds from issue of 10000 equity shares of Rs 10 each issued at 10% premium and partly out of profits otherwise available for dividend2. The company purchased plant and machinery for Rs 95000. It also acquired another company stock Rs 25000 and plant and machinery Rs 105000 and paid Rs 160000 in equity share capital for the acquisition3. Foreign Exchange loss of Rs 1600 represents loss in value of short term investment
4. The company paid tax of Rs 140000
Required: Prepare Cash Flow Statement
Question 4: Identification of Working Notes
Depreciation on
Plant and Machinery
Provision for
Taxation
Transfer to
General reserve
Calculation of Net
Profit before
tax
Net increas
e in Current Assets
48
Question 4 : Working Note 1
49
Working Note:1 (Rs. In 000)
Plant and Machinery Account
Particulars Rs Particulars Rs
To Balance b/d 700.00 By Depreciation 80.00
To Bank 95.00To Acquired from other company 105.00 By Balance c/d 820.00
900.00 900.00
Question 4 : Working Note 2
50
Working Note:2 (Rs. In 000)
Provision for Tax Account
Particulars Rs Particulars Rs
To Bank 140.00 By Balance b/d 150.00
By Profit & Loss a/c (Tax Provision) 170.00
To Balance c/d 180.00
320.00 320.00
Question 4 : Working Note 3
51
Working Note:3 (Rs. In 000)
General Reserve Account
Particulars Rs Particulars RsTo Capital redemption reserve 100.00 By Balance b/d 200.00
By Profit & Loss a/c 20.00
To Balance c/d 120.00
220.00 220.00
Question 4 : Working Note 4
52
Working Note:4 (Rs. In 000)
Profit and Loss A/c
Particulars Rs Particulars Rs
To Provision for Tax 170.00 By Balance b/d 130.00
To Transfer to General Reserve 20.00
By Profit Before Tax and Extraordinary Items 445.00
To Proposed Dividend 210.00
To Balance c/d 175.00
575.00 575.00
Question 4 : Working Note 5
53
Working Note:5 (Rs. In 000)
Net increase in Current Assets
Current Assets as on 31.03.2011 1141.00
Less: Stock acquired by issue of shares 25.00
1116.00
Less: Current Assets as on 31.03.2010 910.00
206.00
Question 4 : Cash Flow Statement54
CASH FLOW STATEMENT(Rs. In 000)
Cash flows from Operating activities:Net Profit Before tax and extradinary items: 445.00Adjustments for:Depreciation on Plant and Machinery 80.00Foreign Exchange Loss 1.60Preliminary expenses written off 20.00 101.60Operating profit before working capital changes 546.60
Adjustments for Working Capital Changes:Less: Increase in Current Assets (206.00)Add: Increase Current Liabilities 260.00 54.00Cash Generation from Operations 600.60
Less: Tax Paid 140.00Net Cash from Operating activities 460.60
Question 4 : Cash Flow Statement..Continued
55
(Rs. In 000)Cash flows from Investing activities:Purchase of Machinery (95.00)Purchase of Investment (80.00)Net Cash from Investing activities (175.00)
Cash flows from Financing activities:Issue of Shares @ 10% premium for cash 110.00Redemption of Preference Share Capital (220.00)Dividend Paid (160.00)Net Cash from Financing activities ‐270.00
Net increase in Cash and Cash equivalents 15.60
Cash and Cash equivalents as on 31‐Mar‐2010 150.00Cash and Cash equivalents as on 31‐Mar‐2011 165.60
Thank You
56