Cash Flow Statement - Practical

Paper 3B: Financial Management Chapter 3 Unit II

CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA),
EPBM (IIMC), MCT
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Learning Objectives

Understand the intricacies in

1 preparation of Cash Flow
Statement

Develop hands on skills in Cash

2 Flow Statement preparation by
solving variety of questions
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Recap –
Classification of Cash Flows
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Recap - Cash Flow - Classification

• Cash flow from Operating Activities

• Principal revenue generating activities
1
• Cash flow from Investing Activities
• Acquisition and disposal of long term assets and
2 other investments not included in cash equivalents

• Cash flows from Financing activities

• Activities that has an impact of owner’s capital and
3 borrowings
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Cash Flow from Operating Activities

Cash from Operating

activities can be
reported in two ways

Direct Method

Indirect Method
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Multiple Choice Questions

Cash Flow Statement
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MCQ – 1
Principal revenue generating activities of an enterprise are
called as –

A. Operating Activities B. Investing Activities

C. Financing Activities D. None of the above

Answer: A. Operating Activities

 8

MCQ – 2
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 B. Investments in Shares

C. Cash Equivalents D. None of the above

Answer: C. Cash Equivalents

 9

MCQ – 3

Cash Flows are –

A. Inflows and Outflows B. Inflows and Outflows

of cash of cash equivalents

C. Inflows of Cash D. Both A & B

Answer: D. Both A & B

 10

MCQ – 4
Purchase of Machinery by means of issue of shares should
be ________________ from Cash Flow Statement

A. Included B. Excluded

C. Included with value as zero D. None of the above

Answer: B. Excluded
 11

MCQ – 5
Unrealized gains and losses arising from foreign exchange
rates are –

A. Cash flows from B. Cash flows from

operating activities financing activities

C. Cash flows from

D. Not cash flows
investing activities

Answer: D. Not cash flows

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MCQ – 6
Equity dividend paid should be classified as cash outflow
from –

A. Operating activities B. Financing activities

C. Investing activities D. Not cash flows

Answer: B. Financing activities

 13

Practical Illustrations – Question 1

IPCC – May 2011 – Paper – Accounting

Using Indirect Method

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Question 1: Indirect method

Balance Sheet of Lotus Ltd as on 31‐Mar‐2010 and 31‐Mar‐2011

31.03.2010 31.03.2011 31.03.2010 31.03.2011

Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000
Equity Share @ Rs  Land & 
10 each 1000 1250 Buildings 400 380
Capital Reserve 10 Machinery 750 920
Profit & Loss 
Account 400 480 Investments 100 50
Long term loan 
from Bank  500 400 Inventories 300 280
Sundry Creditors 500 400 Receivables 400 420
Cash in 
Provision for tax 50 60 Hand 200 140
Cash at Bank 300 410
2450 2600 2450 2600
 15

Question 1: Indirect method

Additional Information
1. Depreciation written off on Building ‐ Rs 20,000
2. 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
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Question 1: Identification of Working Notes

Calculation of
Income Tax Sales realization Depreciation
Net Profit
Paid Investment sales on Machinery
before tax
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Question 1 : Indirect Method – Working Note 1

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
 18

Question 1 : Indirect Method – Working Note 2

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
 19

Question 1 : Indirect Method – Working Note 3

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
 20

Question 1 : Indirect Method – Working Note 4

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
 21

Question 1 : Cash Flow Statement (Indirect Method)

CASH FLOW STATEMENT
(Rs. In 000)
Cash flows from Operating activities:
Net Profit Before tax and extraordinary items: 135

Adjustments for:
Depreciation Building 20
Depreciation Machinery 55
Operating profit before working capital changes 210

Adjustments for Working Capital Changes:
Add: Decrease in Inventories 20
Less: Increase in Receivables (20)
Less: Decrease in Sundry Creditors (100)
(100)
Cash Generation from Operations 110

Less: Income Tax Paid 45
Net Cash from Operating activities 65
 22

Question 1 : Cash Flow Statement - Continued

(Rs. In 000)
Cash flows from Investing activities:
Purchase of Machinery (125)
Cash received on Sales of Investment 60
Net Cash from Investing activities (65)
Cash flows from Financing activities:
Issue of Shares 150
Repayment 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 200
Cash at Bank 300 500

Cash and Cash equivalents at the end
Cash in Hand 140
Cash at Bank 410 550
 23

Practical Illustrations – Question 2

IPCC – May 2007 – Paper – Cost Accounting

Using Indirect Method

 24

Question 2: Indirect method

Balance Sheet of JK Ltd as on 31‐Mar‐2005 and 31‐Mar‐2006
31.03.05 31.03.06 31.03.05 31.03.06
Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000
Share Capital 1440 1920 Fixed Assets 3840 4560
Capital Reserve 48 Less: Depreciation 1104 1392
General Reserve 816 960 2736 3168
Profit & Loss Account 288 360 Investments 480 384
9% Debenture 960 672 Cash 210 312
Other Current assets 
Current Liabilities 576 624 (including stock) 1134 1272
Proposed Dividend 144 174 Preliminary Expenses 96 48
Provision for Tax 432 408
Unpaid Dividend 18
4656 5184 4656 5184
 25

Question 2: Indirect method - Continued

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 1,20,000
2. Provided Rs 4,20,000 as depreciation
3. 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
 26

Question 2: Identification of Working Notes

Purchase of
Fixed Opening
Assets, Stock
Sales of Revaluatio Calculation
Sales Payment
Fixed n and of Net Profit
Realizati towards
Assets, Opening before tax
on from Redempti
Fixed Assets Profit and and
Investme on of 9%
Written Off, Loss Extraordinar
nt Debenture
Depreciation (Adjustmen y Items
Account t for stock
revaluation
(Optional) )
 27

Question 2 : Indirect Method – Working Note 1

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  By Fixed Assets Written Off 
amount) 1020.00 A/c 60.00

By Balance c/d 4560.00

4860.00 4860.00
 28

Question 2 : Indirect Method – Working Note 2

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  By Profit & Loss a/c 
A/c 48.00 (Depreciation Provision) 420.00

To Balance c/d 1392.00

1524.00 1524.00
 29

Question 2 : Indirect Method – Working Note 3

(Rs. In 
Working Note:3 000)
Sale of Fixed Assets Account
Particulars Rs Particulars Rs
To Fixed Assets a/c 240.00 By Depreciation a/c 84.00
By Cash  120.00
By Profit and Loss A/c ‐
Loss on Sales (Balancing 
Amount) 36.00
240.00 240.00
 30

Question 2 : Indirect Method – Working Note 4

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
 31

Question 2 : Indirect Method – Working Note 5

Working Note:5 (Rs. In 000)

Investment Account

Particulars Rs Particulars Rs
By Cash (Balancing 
To Balance b/d 480.00 Amount) 144.00

To Capital Reserve A/c 
(Profit on sale) 48.00 By Balance c/d 384.00

528.00 528.00
 32

Question 2 : Indirect Method – Working Note 6

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 
 33

Question 2 : Indirect Method – Working Note 7

Working Note:7 (Rs. In 000)

9% Debentures a/c

Particulars Rs Particulars Rs
To Cash (Balancing 
Amount) 302.40  By Balance b/d 960.00 
By Profit and Loss A/c ‐
Premium on 
Redemption (Rs 
To Balance c/d 672.00  288000*5%) 14.40 

974.40  974.40 
 34

Question 2 : Indirect Method – Working Note 8

Working Note:8 (Rs. In 000)
Profit and Loss A/c
Particulars Rs Particulars Rs
To Proposed Dividend 174.00  By Balance b/d 288.00 
By Opening Stock Revaluation 
To Transfer to General Reserve 144.00  a/c 28.80 
By Profit Before Tax and 
To Provision for Tax 408.00  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 
 35

Question 2 : Cash Flow Statement (Indirect Method)

CASH FLOW STATEMENT
(Rs. In 000)
Cash flows from Operating activities:
Net Profit Before tax and extradinary items: 879.60

Adjustments for:
Depreciation 420.00
Operating 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 432.00
Net Cash from Operating activities 806.40
 36

Question 2 : Cash Flow Statement - Continued

(Rs. In 000)
Cash flows from Investing activities:
Purchase of Fixed Assets (1020.00)
Cash received on Sales of Fixed Assets 120.00
Cash received on Sale of Investment 144.00
Net Cash from Investing activities (756.00)

Cash flows from Financing activities:
Issue of Shares 480.00
Redemption 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
 37

Practical Illustrations – Question 3

IPCC – May 2008 – Paper – Cost Accounting and
Financial Management

Projected Cash flow Statement and Estimated Bank

Balance
 38

Question 3
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
 39

Question 3 – Continued

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
 40

Question 3: Identification of Working Notes

Profit on sale of Dividend payment and

Machine Dividend Tax
 41

Question 3 : Working Note 1

Working Note:1 (Rs. In 000)

Profit on Sale of Fixed Assets:

Cost of sold Equipment 95.0

Accumulated Depreciation on Equipments sold 66.5
Written Down Value of Equipment 
sold 28.5

Less: Sale value  38.0

9.5
 42

Question 3 : Working Note 2

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
 43

Question 3 : Cash Flow Statement

CASH FLOW STATEMENT
(Rs. In 000)
Cash flows from Operating activities:
Net Profit Before tax and extradinary items:
Profit for the year 104.5
Less: Profit on sale of assets 9.5 95.0
Adjustments for:
Depreciation 114.0
Operating profit before working capital changes 209.0

Adjustments for Working Capital Changes:
Less: Increase in Stocks and Debtors (85.5)
Add: Increase Creditors 34.2
Add: Increase Bills payable 22.8
(28.5)
Net Cash from Operating activities 180.5
 44

Question 3 : Cash Flow Statement (Continued)

(Rs. In 000)
Cash flows from Investing activities:
Purchase of Fixed Assets (190.0)
Cash received on Sales of Fixed Assets 38.0
Net 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
 45

Practical Illustrations – Question 4

IPCC – May 2011 – Paper – Cost Accounting and
Financial Management

Under Indirect Method

 46

Question 4 : Cash Flow Statement

Summarised Balance Sheet of XYZ Ltd as on 31‐Mar‐2010 and 31‐Mar‐2011
31.03.10 31.03.11 31.03.10 31.03.11

Liabilities Rs in 000 Rs in 000 Assets Rs in 000 Rs in 000

Preference Share Capital 400 200 Plant & Machinery 700 820

Equity Share Capital 400 660 Long Term investment 320 400

Share Premium  40 30 Goodwill 30
Capital redemption reserve 100 Current Assets 910 1141
Short term investment 
General Reserve 200 120 (Less than 2 months) 50 84
P & L A/c 130 175 Cash and Bank 100 80
Current Liabilities 640 900 Preliminary Exps 40 20
Proposed Dividend 160 210
Provision for Tax 150 180
2120 2575 2120 2575
 47

Question 4 : Cash Flow Statement

Additional Information
1. 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 dividend
2. 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 
acquisition
3. 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
 48

Question 4: Identification of Working Notes

Calculati
Net
Depreciati Transfer on of
Provision increas
on on to Net
for e in
Plant and General Profit
Taxation Current
Machinery reserve before
Assets
tax
 49

Question 4 : Working Note 1

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 95.00
To Acquired from other 
company 105.00 By Balance c/d 820.00

900.00 900.00
 50

Question 4 : Working Note 2

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
 51

Question 4 : Working Note 3

Working Note:3 (Rs. In 000)

General Reserve Account

Particulars Rs Particulars Rs
To 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
 52

Question 4 : Working Note 4

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 

By Profit Before Tax 
To Transfer to General  and Extraordinary 
Reserve 20.00  Items 445.00 

To Proposed Dividend 210.00 

To Balance c/d 175.00 

575.00  575.00 
 53

Question 4 : Working Note 5

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
 54

Question 4 : Cash Flow Statement

CASH FLOW STATEMENT
(Rs. In 000)
Cash flows from Operating activities:
Net Profit Before tax and extradinary items: 445.00
Adjustments for:
Depreciation on Plant and Machinery 80.00
Foreign Exchange Loss 1.60
Preliminary expenses written off 20.00 101.60
Operating 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 54.00
Cash Generation from Operations 600.60

Less: Tax Paid 140.00
Net Cash from Operating activities 460.60
 55

Question 4 : Cash Flow Statement..Continued

(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 110.00
Redemption 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 150.00
Cash and Cash equivalents as on 31‐Mar‐2011 165.60
 56

Thank You