cash flow statement

Q:-1 what is the cash flow statement? How will you make cash flow statement according to Accounting Standard -3 (revised)? What are the main benefits of Cash flow statement?

Ans. Definition of Cash Flow statement

Cash flow statement is a statement which showing the net inflow and outflow of cash between two period. On this statement, we can easily estimate the financial position of any company on the basis of cash inflow and cash outflow.
Explanation

Explanation with Example

Opening balance of cash book is Rs.5000 and closing balance of Cash is Rs. 7000. This balance and all receipt and payment of one year cash book never tells us about what is the real flow from one year to next year. If closing balance of 2007 is Rs. 5000 why it becomes it Rs. 7000 in closing balance in 2008. The answer will give the cash flow statement. Which gives us true cash position of our business with analysis for of two period balance sheet.

New Amendments:

According to Company law 1956, it is compulsory to publish cash flow statement with profit and loss account and balance sheet of Company.

Revision of Accounting Standard -3

Institute of charted Accountant of India has revised accounting standard -3 in 1997 and now in 2003 fully. Now new guidelines are given in AS-3. So reading and understanding is very compulsory before making of any company cash flow statement. ICAI is not given any Performa in AS-3.

But with these guidelines we can make cash flow statement in two methods
1st Method of making cash flow statement –Direct method
This first method of making cash flow statement is called direct method. Under this method we divide full cash flow statement in to three categories one is cash flow of operating activity and second is cash flow of investing activity and third is cash flow of financing activity. We are giving the Performa of this cash flow statement.

Cash flow statement of Company (based on two year balance sheet)
According to AS-3(revised – Direct method)

Particular Amount ( In RS.) ↓ Amount (In RS.)
A- category
Cash flow of operating activity
Inflow of cash
Cash receipt from customer
(Total Sale + Opening Debtor – Closing Debtors) xxxxxx

Other operating receipt xxxxx

Less Outflow of cash

1 Cash paid to supplier
(Cost of sale + Opening balance of creditors – closing
Balance of creditors) xxxxxx

2 cash paid for operating expenses xxxxxx

Expenses as per profit and loss account
+ opening stock – closing stock – outstanding expenses ( Closing )


3. Income tax paid xxxxxx
------------------ -------------
Net cash flow of operating activity xxxxxx ↓ xxxxxxx
--------------

B- Category
Cash flow of investing activity
Inflow of cash
1. Sale of fixed assets xxxxx
2. Sale of share and debentures of other company xxxx
3. Interest received xxxxx
4. Dividend received xxxxx

Less Outflow of cash
1 purchase of fixed assets
2 Invest cash in shares and debentures
----------- ---------

Net cash flow of investing activity xxxxxx ↓ xxxxx
-----------

c- Category
Cash flow of financing activity
Inflow of cash
1. issue of shares
2. Issue of debentures
3. Issue of long term borrowings
Less outflow of cash
1. Repayment of pref. shares
2. Repayment / redemption of debentures
3. Repayment of long term borrowings
4. Interest paid
5. Dividend paid

Net cash flow of financing activity xxxxxxx xxx


Calculate total cash flow from all category
(A+B+C) xxxx

Add opening balance of cash book +xxxx
____________

Balance = Closing balance of cash book xxxxxxxxx


2nd Method of making cash flow statement – Indirect method
This second method of making cash flow statement is called indirect method. Under this method we divide full cash flow statement in to three categories one is cash flow of operating activity and second is cash flow of investing activity and third is cash flow of financing activity. Calculation of cash from operating system is old and we make all adjustments do in profit and loss account’s net profit so that we calculate the net cash profit or loss from operational activity. This is also called net cash flow from operating activity. This will be the A category of cash flow statement. B and C category as same as the first method.
Cash flow statement of Company (based on two year balance sheet)
According to AS-3(revised – Indirect method)

Particular Amount ( In RS.) ↓ Amount (In RS.)
A-category
Cash flow of operating activity
1st Point
Net Profit before taxation and extraordinary
Items (+) xxxxx

2nd Point
Add for non cash and non operating expenses
And losses (+) xxxxx
1. Depreciation
2. Preliminary expenses written off
3. Discount on issue of shares and deb. w/o
4. Goodwill written off
5. Patent and trade marks written off
6. Interest on borrowing and deb.
7. Loss on sale of fixed assets
______________
Xxxxxxxx


3rd Point
Less non –cash and non operating incomes (-)xxxxx
1. Dividend income(For non financial co.)
2. Rental income
3. Profit on sale of fixed asset

_________________
4th point ( Ist point +2nd Point -3rd Point ) xxxxxxxxxx


Adjustment of working capital changes
5th point
Add Decrease in current assets and increase in
Current liabilities (+) xxxxxxxxx
1. Decrease in stock
2. Decrease in debtors
3. Decrease in accrued income
4. Decrease in prepaid expenses
5. Increase in creditors
6. Increase in bill payables
7. increase in outstanding expenses
8. Increase in advance incomes
9. Increase in provision for doubtfull debts
____________________
Xxxxxxxxxx
6th Point
Less increase in current assets and decrease in (-) xxxxxx

Current liabilities
1. Increase in stock
2. Increase in debtors
3. increase in accrued incomes
4. increase in prepaid expenses
5. decrease in creditors
6. Decrease in bill payables
7. decrease in outstanding expenses
8. decrease in advance incomes
9. Decrease in provision for d/d

____________________
7th point Total cash flow from operation xxxxxxxxx

8th point
Less Income tax paid (-) xxxxxxxxx

------------------ -------------
Net cash flow of operating activity xxxxxx ↓ xxxxxxx
--------------

C- Category
Cash flow of investing activity
Inflow of cash
5. Sale of fixed assets xxxxx
6. Sale of share and debentures of other company xxxx
7. Interest received xxxxx
8. Dividend received xxxxx

Less Outflow of cash
3 purchase of fixed assets
4 Invest cash in shares and debentures
----------- ---------

Net cash flow of investing activity xxxxxx ↓ xxxxx
-----------

c- Category
Cash flow of financing activity
Inflow of cash
4. issue of shares
5. Issue of debentures
6. Issue of long term borrowings
Less outflow of cash
6. Repayment of pref. shares
7. Repayment / redemption of debentures
8. Repayment of long term borrowings
9. Interest paid
10. Dividend paid

Net cash flow of financing activity xxxxxxx xxx


Calculate total cash flow from all category
(A+B+C) xxxx

Add opening balance of cash book +xxxx
____________

Balance = Closing balance of cash book xxxxxxxxx