Cash Flow Statement Notes Class 12 Accountancy.

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CBSE Quick Revision Notes and Chapter Summary
Class-12 Accountancy
Part - B - Cash Flow Statement

Introduction

Cash flow statement was previously known as the flow of Cash statement. Cash Flow Statement is prepared according to Accounting Standard - 3 (Revised). Cash flow statement provides information on a firm's liquidity and solvency. It is concerned with the inflow and outflow of cash in the business. The cash flow statement is partitioned into three segments, namely:

  •  Cash flow resulting from operating activities;

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     Cash flow resulting from investing activities; and

  •  Cash flow resulting from financing activities.

The cash coming into the business is known as cash inflow, and cash going out from the business is known as cash outflow.

Meaning and Definition of Cash Flow Statement

It is a statement that shows flow (inflow or outflow) of cash and cash equivalents during a given period of time. As per Accounting Standard-3 (Revised) the changes resulting in the flow of cash & cash equivalents arises on account of three types of activities i.e.

  •  Cash flow from Operating Activities.

  •  Cash flow from Investing Activities.

  •  Cash flow from Financing Activities

Cash flows exclude movements between items that constitute cash or cash equivalents because these components are part of the cash management of an enterprise rather than part of its operating, investing and financing activities. Cash management includes the investment of excess cash in cash Equivalents.  Accounting Standard - 3 (Revised) issued by ICAI

Operating activities: - Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities.

Investing activities: - Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Financing activities: - Financing activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in the case of a company) and borrowings of the enterprise.

 

 

OBJECTIVES OF CASH FLOW STATMEMENT

  •  To ascertain how much cash or cash equivalents have been generated or used in different activities i.e. operating/investing/financing activity.

  •  To ascertain the net changes in cash and cash equivalents.

  •  To assesss the causes of difference between actual cash & cash equivalent and related net earning/income.

  •  To help in formulation of financial policies such as dividend policy, fixed assests policy, capitalstructure related policy.

  •  To help in short-term financial planing.

  •  To ascertain the liquidity of enterprises LIMITATIONS OF CASH FLOW STATEMENT

  •  Non cash transaction are not taken into consideration like sahres or debentures issued to vendores, deprecaition charged during the year.

  •  It is a statement related with past data.

  •  It is not used for judging the profitability of enterprises.

  •  Accrual accounting concept is ignored in this statement e.g. credi sales, credit purchases, outstanding expesnes, accrued income are not included.

How to Calculate Cash From Operating Activities

Step 1. Profit before tax and extraordinary items

Profit as per statement of Profit & Loss (closing balance - opening balance)

Add : Transfer to Reserve (closing balance - opening balance)

Add : Proposed dividend for the current year Add : Interim dividend paid during the year Add : Provision for tax made during the year

Add : Net Deferred Tax Liabilities (opening balance - closing balance)

Less : Net Deferred Tax Asset (opening balance - closing balance)

Less : Refund of tax credited to the Statement of Profit & Loss

Add : Extraordinary item (loss), if any, debited to Statement of Profit & Loss (earthquake, disaster etc.) Less : Extraordinary item (insurance claim), if any, credited to Statement of Profit & Loss

Net Profit before Taxation and Extraordinary Items

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

(xxxx)

(xxxx)

xxxx

(xxxx)

Calculation of Inflows and outflows from various activities

xxxx

 

Step 2. Treatment of Non-cash and Non-operating items

 

xxxx

Add :

 

xxxx

> Depreciation on fixed tangible assets

 

xxxx

> Amortised Goodwill/Patents/Trademarks/ Copyright and other intangible fixed assets

xxxx

> Unamortised expenses and losses (fictitious assets) written off

 

xxxx

> Interest on loans or interest on borrowings

 

xxxx

> Interest on debentures

 

xxxx

> Premium payable on redemption of debentures or preference shares

 

xxxx

> Loss on sale of fixed assets

 

 

> Loss on sale of investments (whether short term or long term)

 

 

Less :

 

 

> Rental Income

 

(xxxx)

> Interest on investment

 

(xxxx)

> Dividend income

 

(xxxx)

> Profit on sale of fixed assets

 

(xxxx)

> Profit on sale of investment

 

(xxxx)

Operating Profit before Working Capital Changes

 

xxxx

Step 4. Treatment of Current Assets and Current Liabilities

 

 

Add :

 

 

> Decrease in Current Assets (excluding cash and cash equivalents)

 

 

• Decrease in Inventories (stock)

xxxx

 

• Decrease in Trade Receivables (Debtors and B/R)

xxxx

 

• Decrease in Prepaid Expenses and accrued incomes etc. (if any)

xxxx

 

> Increase in Current Liabilities

 

 

• Increase in Trade Payables (creditors and Bills Payable)

xxxx

 

• Increase in outstanding expenses or advance incomes (if any)

xxxx

 

• Increase in provision for doubtful debts

xxxx

xxxx

Less :

 

 

> Increase in Current Assets (excluding cash and cash equivalents)

 

 

• Increase in Inventories (stock)

xxxx

 

• Increase in Trade Receivables (Debtors and B/R)

xxxx

 

• Increase in Prepaid Expenses and accrued incomes etc. (if any)

xxxx

 

> Decrease in Current Liabilities

 

 

• Decrease in Trade Payables (creditors and Bills Payable)

xxxx

 

• Decrease in outstanding expenses or advance incomes (if any)

xxxx

 

• Decrease in provision for doubtful debts

xxxx

(xxxx)

 

 

xxxx

Cash Generated from Operation

 

 

 

 

(xxxx)

Less : Income Tax Paid (excluding Tax Refund)

 

 

Cash Flow before Extraordinary Items

 

xxxx

Add : Extraordinary Credit items

 

xxxx

Less : Extraordinary Debit items

 

(xxxx)

Net Cash Flow from (used in) Operating Activities

 

xxxx

 

 

 

How to calculate the Cash Flow from Investing Activities Add Items :

Proceeds from sale of Fixed Tangible Assets (Land, Building, Machinery, Furniture etc.) Proceeds from sale of Fixed Intangible Assets (Patents, Trademark and Copyright etc.) Proceeds from sale of Investments (short-term or long-term)

Proceeds from loans and advances (repayment by the outsiders to the firm)

Interest received on investments (short-term or long-term)

Interest received on loans and advances Interest received on debentures held as investments Dividend received Rent received

Less Items :

Purchase of Fixed Tangible Assets

Purchase of Fixed Intangible Assets

Purchase of Investments (shares, debentures, bonds etc.)

Amount advanced to outsiders as loan

Insurance claim received against the loss of fixed assets

Cash flow from (used in) Investing Activities

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

(xxxx)

(xxxx)

(xxxx)

(xxxx)

(xxxx)

xxxx

How to calculate Cash Flow from Financing Activities

Proceeds from issue of Equity Share Capital

(with premium but exclude discount and share issue expenses, if any)

Proceeds from issue of Pref. Share Capital (with premium but exclude discount, if any) (with premium but exclude discount and share issue expenses, if any)

Proceeds from issue of Debentures

(with premium but exclude discount and debenture issue expenses, if any)

Proceeds from other Long-term Borrowings (loans etc.)

Redemption of Pref. Shares (with premium paid on redemption) Redemption of Debentures (with premium paid on redemption) Dividend paid

Interest paid (on debentures or loans)

Repayment of loans

Cash flow from (used in) Financing Activities

Add

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

Less

(xxxx)

(xxxx)

(xxxx)

(xxxx)

(xxxx)

xxxx

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

How to calculate Cash and Cash Equivalents?

 

 

Cash Flow from (used in) Operating Activities

xxxx

ADD

Cash Flow from (used in) Investing Activities

xxxx

 

Cash Flow from (used in) Financing Activities

xxxx

 

Net Increase or Decrease in Cash and Cash Equivalents

xxxx

Add : Cash and Cash Equivalents in the beginning

xxxx

 

Cash and Cash Equivalents at the end

xxxx

 

 

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