CASH FLOW MANAGEMENT
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1 CASH FLOW MANAGEMENT
2 AS 3 Accounting Standard 3 (AS 3), Cash Flow Statements issued by the Institute of Chartered Accounts of India (ICAI) deals with various aspects of cash flows. ICAI has recommended that AS 3 should be used by listed companies and other large concerns. Securities and Exchange Board of India (SEBI) has made it compulsory for listed companies to attach the Cash Flow Statements to their annual accounts.
3 Cash Flow Statements Step Particulars Rs. Rs. 1. CASH FLOWS FROM OPERATING ACTIVITIES 1.1 Cash generated from Operations Direct Method (Worksheet 3.2) OR Indirect Method (Worksheet 3.3) 1.2 Income Taxes paid () 1.3 Extra-ordinary Income/ (Expenses) Net cash from Operating Activities 2. CASH FLOW FROM INVESTING ACTIVITIES 2.1 Sale of Fixed Assets/ Investments 2.2 Purchase of Fixed Assets / Investments () 2.3 Interest Received 2.4 Dividend Received Net Cash from Investing Activities
4 Step Particulars Rs. Rs. 3. CASH FLOW FROM FINANCING ACTIVITIES 3.1 Issue of Shares 3.2 Issue of Debentures 3.3 Received from Fresh Loans 3.4 Shares Redeemed () 3.5 Debenture Repaid () 3.6 Loans Repaid () 3.7 Interest Paid () 3.8 Dividend + Dividend tax Paid () 3.9 Issue Expenses () Net Cash From Financing Activities 4. NET INCREASE IN CASH (1+2+3)
5 Step Particulars Rs. Rs. 5. CASH AND CASH EQUIVALENT AT BEGINNING OF PERIOD Balance b/d - Cash Xxx - Bank Xxx - Bank Overdraft () - Liquid Investment 6. CASH AND CASH EQUIVALENT AT END OF PERIOD Balance c/d -Cash -Bank Xxx Xxx - Bank Overdraft () -Liquid Investment (4 + 5 = 6)
6 Work Sheet 3.2 Cash Generated from Operations (Direct method) Step Particulars Rs. Rs. 1. Cash Receipts from Customers Xx 2. Cash Paid to Suppliers Xx 3. Cash paid to Employees xx xx 4. Cash Generated from Operations (1-2-3) xx
7 Work Sheet 3.2 Cash Generated from Operations (Indirect method) Step Particulars Rs. Rs. 1. Net Profit (P & L a/c) xx 2. Adjust Non-Cash Items 2.1 Depreciation xx 2.2 Provisions/ Reserves xx 2.3 Amortisations (goodwill w/o) xx 2.4 Taxes (shown separately) xx 2.5 Unrealised Foreign Exchange Gain (xx) xx 3. Adjust Non-operating Items (Cash Flows from Investing or Financing Activity) 3.1 Less: Interest Income (xx) 3.2 Add: Interest Expenses Xx 3.3 Less: Dividend Income (xx) 3.4 Add: Dividend Paid xx
8 Step Particulars Rs. Rs. 3.5 Add: Loss on Sale of Fixed Assets / Investments Xx 3.6 Less: Profit on Sale of Fixed Assets / Investments (xx) xx Operating Profit / (Loss) (before Working capital Changes) 4. Adjust Accruals Working Capital Changes (Except Cash/Bank) 4.1 Less: Increase in working Capital (Increase in current assets/decrease in current liabilities) 4.2 Add: Decrease in working Capital (Decrease in current assets/increase in current liabilities) (xx) xx xx xx 5. Cash Generated from Operations xx Note: Add all Expenses and Deduct all Incomes.
9 Worksheet for Ascertaining Missing Figures
10 Worksheet 3.4 : Dr. Total Expenses Account Cr. Particulars Rs. Particulars Rs. To Opening Balance b/d (Prepaid expenses op.b/s) To Cash Paid during year (CFS) To Closing Balance c/d (Outstanding expenses cl. b/s) Xxx By Opening Balance b/d (Outstanding expenses op.b/s) Xxx By P & L A/c (all exp during the year) Xxx By Closing Balance c/d (Prepaid expenses cl.b/s) Xxx Xxx Xxx Xxx Note : 1)The details available from the opening balance sheet, closing balance sheet and profit and loss account are put in the proper places. 2) The balancing figure indicates the cash paid during the year towards expenses. This is added to the cash paid to the suppliers and the total is put in the Cash Flow Statements (CFS)
11 Worksheet 3.5 : Dr. Total Income Account Cr. Particulars Rs. Particulars Rs. To Opening Balance b/d (Income receivable op.b/s) To P & L a/c To Closing Balance c/d (Income received in advance cl. b/s) Xxx By Opening Balance b/d (Income received in advance op.b/s) Xxx By Cash Paid during year (CFS) Xxx By Closing Balance c/d (Income receivable cl.b/s) Xxx Xxx Xxx Xxx
12 Worksheet 3.5 : Dr. Income Tax Account Cr. Particulars Rs. Particulars Rs. To Balance b/d (Adv. Tax : Op. B/S) To Cash paid during year (CFS) To Balance c/d (Prov. Cl. B/S) By Balance b/d (Prov. Op. B/S) By P & L a/c (Charged for the year) By Balance c/d (Adv. Tax : Cl. B/S) Note : 1)The details available from the opening balance sheet, closing balance sheet and profit and loss account are put in the proper places. 2) The balancing figure indicates the tax paid during the year and put in the Cash Flow Statements (CFS)
13 Worksheet 3.6 : Dr. Fixed Asset Account Cr. Particulars Rs. Particulars Rs. To Balance b/d (Opening B/S) To Cash paid for purchases (CFS) To P & L (profit on sale) By P & L a/c (depreciation) By Cash received on sale (CFS) By P & L a/c ( Loss on sale) By Balance c/d (Cl. B/S) Xxx Note : 1) If after entering available details, the debit total of the Account is bigger, the missing item is taken as Cash received on Sale on the credit side. The balancing figure will be taken as the amount of this missing item. 2) If the Credit total is bigger, the missing item is taken as Cash paid for purchase. The balancing figure will be taken as the amount of this missing item. 3) The above format can also be used to ascertain the missing figure of purchase or sale of a long term investment.
14 Worksheet 3.7 : Dr. Share Capital Account Cr. Particulars Rs. Particulars Rs. To Cash paid on repayment (CFS) (e.g. preference share redeemed) To Balance c/d (Cl. B/S) By Balance b/d (Op. B/S) By Cash received on issue (CFS) Xxx Note : 1) If after entering available details, the debit total of the Account is bigger, the missing item is taken as Cash received on issue of shares on the credit side. The balancing figure will be taken as the amount of this missing item, to be put in Cash Flow statement (CFS) 2) If the Credit total is bigger, the missing item is taken as Cash paid for repayment of (preference shares). The balancing figure will be taken as the amount of this missing item, to be put in Cash Flow statement (CFS)
15 Worksheet 3.8 : Dr. Debentures Account Cr. Particulars Rs. Particulars Rs. To Cash paid on repayment (CFS) To balance c/d (Cl. B/S) By Balance b/d (Op. B/S) By Cash received on issue (CFS) Note : 1) If after entering available details, the debit total of the Account is bigger, the missing item is taken as Cash received on issue of Debentures. The balancing figure will be taken as the amount of this missing item, to be put in Cash Flow statement (CFS) 2) If the Credit total is bigger, the missing item is taken as Cash paid for repayment of Debentures. The balancing figure will be taken as the amount of this missing item, to be put in Cash Flow statement (CFS)
16 Worksheet 3.9 : Dr. Loans Account Cr. Particulars Rs. Particulars Rs. To Cash paid on repayment (CFS) To Balance c/d (Cl. B/S) By Balance b/d (Op. B/S) By Cash received on loan taken (CFS) Xxx Note : 1) If after entering available details, the debit total of the Account is bigger, the missing item is taken as Cash received on fresh borrowings and will be put in Cash Flow statement (CFS) 2) If the Credit total is bigger, the missing item is taken as Cash paid for repayment of borrowings and put in Cash Flow statement (CFS)
17 Problems with Solutions Q.1) Horizon Ltd. engaged in the following transactions. Identify whether it is (a) an operating (b) an investing (c ) a financing (d) none of the above. i. Dividend Paid ii. iii. iv. Interest paid Issued long term bonds Purchased long term investment v. Equipment sold vi. Dividend received on shares held vii. Purchased land viii. Received cash from customers
18 ix. Wages paid to workers x. Issued bonus shares out of general reserves. Solution: Particulars Type i. Dividend Paid Financing ii. Interest paid Financing iii. Issued long term bonds Financing iv. Purchased long term investment Investing v. Equipment sold Investing vi. Dividend received on shares held Investing vii. Purchased land viii. Received cash from customers Investing Operating ix. Wages paid to workers Operating x. Issued bonus shares out of general reserves None
19 Q.2) Following are the balance Sheets of Young India Ltd: Liabilities 2002 (Rs.) 2001 (Rs.) Assets 2002 (Rs.) 2001(Rs.) Share Capital 7,00,000 6,00,000 Fixed Assets 6,50,000 4,00,000 General Reserve 2,00,000 1,50,000 Debtors 3,50,000 2,00,000 Profit & Loss a/c 2,00,000 1,00,000 Stock 2,50,000 1,50,000 14% Debenture Issue for purchase of fixed Assets 2,00,000 NIL Proposed Dividend 80,000 70,000 Underwriting Commission Cash 1,30,000 1,00,000 NIL 70,000 13,80,000 9,20,000 13,80,000 9,20,000 Assuming the Depreciation for the year to be Rs. 50,000 and interim dividend paid during the year to be 5% on opening capital, prepare Cash Flow Statement.
20 Solution: Cash Flow Statement for 2002 Step Particulars Rs. Rs. 1. CASH FLOWS FROM OPERATING ACTIVITIES 1.1 Net Profit (2,00,000 1,00,000) 1,00, Adjust Non- Cash Items Depreciation Transfer to Reserves Amortisation (underwriting commission w/o) 1.3 Adjust Cash Flows from Investing or Financing Activity Add: Interim Dividend 30,000 50,000 50,000 70,000 1,70,000 Add: Proposed Dividend 80,000 1,10,000 Operating Profit Before Working Capital Changes 3,80,000
21 Step Particulars Rs. Rs. 1.4 Adjust Working Capital Changes (Except Cash/Bank) Less: Increase in Working Capital - Increase in Current Assets (Debtors) (1,50,000) - Increase in Current Assets (Stock) (1,00,000) (2,50,000) Cash Generated From Operations 1,30, CASH FLOW FROM INVESTING ACTIVITIES Purchase of Fixed Assets (W.N.1) 3. CASH FLOW FROM FINANCING ACTIVITIES Issue of Equity Shares 1,00,000 Interim Dividend Paid (30,000) Final dividend Paid (70,000) Net Cash from Financing Activities 4. NET INCREASE IN CASH 30, CASH AT BEGINNING OF PERIOD 1,00, CASH AT END OF PERIOD 1,30,000 NIL
22 Working Note: (1) Dr. Fixed Asset Account Cr. Particulars Rs. Particulars Rs. To Balance b/d 4,00,000 By Depreciation (given) 50,000 To 14% Debentures 2,00,000 By Balance c/d 6,50,000 To cash/bank (Bal. Fig) 1,00,000 7,00,000 7,00,000
23 Q.3) Telestar Ltd. gives you the following balance Sheets for the year ended 31 st march,2006 and Prepare a Cash Flow statement for the year ended 31 st March,2007 as per AS-3 by indirect method. Liabilities (Rs.) Equity Share Capital 5% Preference Share capital General Reserve Profit & Loss a/c Provision for Tax (Rs.) Assets (Rs.) (Rs.) 1,20,000 1,20,000 Land 2,10,000 2,70,000 90,000 60,000 Building 2,85,000 2,70,000 30,000 42,330 Stock 27,000 36,300 15,240 28,080 Debtors 40,440 38,460 17,000 8,000 Prepaid Expenses 25,880 17,000 Creditors 3,37,920 3,81,990 Bank Balance 15,480 3,240 Misc.Expenditure 6,000 5,400 Total 6,10,160 6,40,400 Total 6,10,160 6,40,400
24 Provision for Tax 17,000 8,000 Prepaid Expenses 25,880 17,000 Creditors 3,37,920 3,81,990 Bank Balance 15,480 3,240 Misc.Expenditure 6,000 5,400 Total 6,10,160 6,40,400 Total 6,10,160 6,40,400 Other information for the year ended 31 st march,2007: i. The Company has paid Interim dividend of 5% on Equity shares. ii. Preference shares were redeemed during the year at 10% premium. iii. Income Tax paid during the year Rs. 15,000
25 Solution: TELESTAR LTD. Cash Flow Statement for the year ended 31 st March 2007 Step Particulars Rs. Rs. Rs. 1. CASH FLOWS FROM OPERTAING ACTIVITIES 1.1 Net profit for the year Closing balance 28,080 Less: Opening Balance (15,240) 12, Adjust Non-Cash/Non-operating Items Transfer to General Reserve (42,330-30,000) 12,330 Interim Dividend 6,000 Provision for Tax( WN.1) 6,000 Depreciation on Building (WN.2) 15,000 Misc.Expenditure w/o 600 Premium on Redemption of Pref. Shares 3,000 42,930 Operating profit before working capital changes 55,770
26 Step Particulars Rs. Rs. Rs. 1.3 Adjust Working Capital Changes (except cash/bank) Increase in Stock (9,300) Decrease in Debtors 1,980 Decrease in Pre-Paid Expenses 8,880 Increase in Creditors 44,070 1,01, Income Tax Paid (15,000) Cash from operations 86, CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Land (60,000) Cash used for investing (60,000)
27 3. CASH FLOWS FROM FINACING ACTIVITIES Redemption of Pref.Shares (90,000-60,000) (30,000) Premium on Redemption of Pref.shares (3,000) Interim Dividend (6,000) Cash from Financing (39,000) 4. Net Decrease in Cash (1+2+3) (12,600) 5. Cash and cash equivalents at the beginning of the year 15, Cash and cash equivalents at end of year 3,240
28 Working Notes:1 Provision for Tax a/c Particulars Rs. Particulars Rs. To Bank 15,000 By Balance b/d 17,000 To Balance c/d 8,000 By Profit & Loss A/c (Bal. Fig.) Total 23,000 Total 23,000 6,000 Working Notes:2 Preference Share Capital a/c Particulars Rs. Particulars Rs. To Cash (CFS) (Balancing fig.) 30,000 By Balance b/d 90,000 To Balance c/d 60,000 Total 90,000 Total 90,000
29 Q.4) M/s A & Co. has entered into the following transactions: (CFS from Transactions) i. The proprietor brings in Rs. 2,50,000 as capital. ii. The proprietor withdraws Rs. 1,00,000 for personal use. iii. A & Co. obtains a loan of Rs. 3,00,000 from Bank. iv. Fixed Assets worth Rs. 1,00,000 are purchased for cash. v. Fixed Assets worth Rs.50,000 are sold for cash. vi. A & Co. sold goods worth Rs. 10,00,000 for cash and Rs. 15,00,000 on credit. vii. A & Co. purchased goods worth Rs. 3,00,000 on cash and Rs.17,00,000 on credit. viii. Paid Rs.1,00,000 cash for direct factory expenses and purchased fuel worth Rs. 10,000 on credit.
30 ix. A & Co. incurred Rs.1,50,000 cash operating expenses and Rs.50,000 as accrued operating expenses. x. Cash Rs.14,50,000 was received from debtors. xi. Cash Rs. 15,00,000 was paid to the creditors. Step Particulars Rs. Rs. 1. CASH FLOWS FROM OPERTAING ACTIVITIES Cash Receipts from Customers ( ) 24,50,000 Cash Paid to Suppliers( ) (20,50,000) Cash generated from Operating Activities 4,00, CASH FLOWS FROM INVESTING ACTIVITIES Sales of Fixed Assets 50,000 Purchase of Fixed Assets (1,00,000) Net Cash used in Investing Activities (50,000)
31 3. CASH FLOWS FROM FINANCING ACTIVITIES Capital 2,50,000 Drawings (1,00,000) Bank Loan 3,00,000 4,50, NET INCREASE IN CASH 8,00,000
32 Q.5) (CFS From Cash Summary) From the following Summary Cash Account of X Ltd. Prepare Cash Flow Statement for the year ended 31 st March, 2003 in accordance with AS-3 ( revised ) using the direct method. The company does not have any cash equivalents. Summary cash Account For the Year Ended (Rs. In 000) Receipts Rs. Particulars Rs. Balance on Issue of Equity Shares Receipts from Customers Sale of Fixed Assets 50 Payment to Suppliers 300 Purchase of Fixed Assets 2,800 Overhead Expenses 100 Wages and Salaries Taxation Dividend Repayment of Bank Loan Balance on Total 3,250 Total 3,250
33 Solution: X Ltd. Cash Flow Statement For the Year ended 31 st March,2003 Rs. In 000 No. Particulars Rs. Rs. 1. CASH FLOW FROM OPERATNG ACTIVITIES (Using the Direct Method) Cash receipts from Customers 2,800 Cash payments to Suppliers (2,000) Cash paid to Employees (100) Cash payments for overheads (200) Cash generated from operations 500 Income Tax Paid (250) Net cash from Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Payments for Purchase of Fixed Assets (200) Proceeds from Sale o Fixed Assets 100
34 No. Particulars Rs. Rs. Net Cash used in Investing Activities (100) 3. CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of Equity Shares 300 Bank Loan Repaid (300) Dividend Paid (50) Ney Cash used in Financing Activities (50) 4. NET INCREASE IN CASH CASH AT BEGINNING OF PERIOD CASH AT END OF PERIOD 150
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