CASH FLOW ANALYSIS

Meaning of cash Flow Statement

A statement of sources and application of cash in a period is called Cash
Flow Statement. Sources are otherwise called as inflow and application or otherwise
called as outflow of cash.
Sources of Cash:
1.Cash from Operation
2.Issue of Share Capital
3.Issue of Debenture
4.Raising of long-term Loan
5.Sale of Fixed Assets and Investments
Application of Cash:
1.Cash lost in operation
2.Redemption of Preference Share Capital
3.Redemption of Debenture
4.Purchase of Fixed Assets
5.Payment of Tax
6.Payment of Dividend


1.
2.
3.
4.
5.

i.
ii.
iii.
iv.
v.

Objectives of Cash Flow Statement

The Objectives of Cash Flow Statement are as follows:
To Measure the movement of cash over a period of time.
To find out whether the cash is utilised properly.
To take corrective action if there is any default in the utilisation of cash.
To assess the requirement of cash for the smoothful functioning of a
concern.
To take various managerial decisions of a company.
Advantages of Cash Flow Statement
The following are the advantages of Cash Flow Statement
It helps to find out the movement of cash over a period of time.
It is possible to assess the requirement of cash for a period.
The cash performance of a company at present when compared to the previous
periods can be ascertained.
It helps for allocating cash for various requirements in a company.
It is an important tool for the management for managerial decision making.

3.
4.

Limitations of Cash Flow Statement

The limitations of Cash Flow Statement are stated as follows:
Cash flow statement analyses only the historical facts. There is no projection of
cash in future in this method.
The manipulation done in Balance Sheets will affect the accuracy of the movement
of cash for a period.
It analyses the movement of cash only for two periods.
It wont be a substitute for the Income Statement.

Procedures in the preparation of Cash Flow Statement

1.
2.

1. Calculation of Cash from Operating activities

2. Preparation of Cash Flow Statement.

Net profit is ;the basis for calculating Cash from Operation in this method. The
following is the procedure for calculating Cash from Operation.
Statement of Cash from Operation

Particulars

Rs.

Rs.

Net Profit before tax

Add:

Non cash and non-trading items

xxxx

(Debited in Profit & Loss Account)

xxxx

xxxx

xxxx

xxxx

iv.Provision for Bad and Doubtful Debts

xxxx

v.Loss on sale of Fixed Assets and Investment

xxxx

xxxx

i.Depreciation on Fixed Assets

ii.Goodwill, Patent or Trade mark written of (Intangible assets)
iii.Preliminary expenses, Underwriting commission, Discount on
issue of Shares or Debentures written off (Fictitious assets)

vi.Provision for Taxation

xxxx xxxx
xxxx

Vii

Provision for General Reserve

Viii

Proposed Dividend

Less:

Non-cash and non-trading items

(Credited in Profit & Loss Account)

i.Profit on sale of Fixed Assets

ii.Interest, Commission, Dividend received
iii.Income Tax refund
Net Cash flow before adjusting
Working Capital items
Add: Increase in Current Liabilities
Decrease in Current Assets

Less: Increase in Current Assets

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx
xxxx

xxxx

xxxx

xxxx
xxxx

Decrease in Current Liabilities

Net cash flow from Operating Activities

A.

Statement Form of preparing Cash Flow Statement

A Model of the Cash Flow Statement form is stated as follows:
Statement of Cash Flow

Cash balance in the beginning

Add: Sources
Cash from Operation
Issue of Share Capital
Issue of Debentures
Raising of Loan
Sale of Investments
Sales of Fixed Assets

Less: Applications
Purchase of Fixed Assets
Purchase of Investment
Redemption of Share Capital
Redemption of Debenture
Repayment of Loan
Payment of Tax
Payment of Dividend
Payment of Tax

Cash balance at the end

Rs.

Rs.

xxxx
xxxx
xxxx
xxxx
xxxx
xxxx

xxxx

xxxx

xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx

xxxx

xxxx

xxxx

Illustration: 1
Calculate Cash from Operation from the following.
Trading and Profit & Loss Account
Particulars
To Opening Stock
To Purchase
To Manufacturing expenses
To Gross Profit
To Depreciation
To Administrative Expenses
To Provision for Taxation
To Net Profit

Rs.

Particulars

Rs.

74,000 By Sales
9,14,000 By Closing stock
82,000
2,50,000
13,20,000
40,000 By Gross Profit
70,000
50,000
90,000
2,50,000

12,33,000
87,000
13,20,000
2,50,000

2,50,000

Additional Information:
i. Net Profit
Dividend

Rs. 90,000
Rs. 35,000
Rs. 55,000

ii. Opening and Closing balances of Debtors are Rs. 54,000 and Rs. 74,000 respectively.
iii. Opening and Closing balances of Sundry Creditors are Rs. 32,000 and Rs. 17,000
respectively.
iv. Opening and closing balances of Provision for Tax are Rs. 47,000 and Rs. 52,000
Respectively.
Solution:
Calculation of Cash from Operating Activities
Particulars

Rs.

Cash receipts from customers

Cash paid to suppliers and employees
Cash generated from operation
Income tax paid
Cash from Operating Activities

12,53,000
10,81,000
1,72,000
45,000
1,27,000

Workings i. Cash receipts from customers

Sales
Add: Closing Debtors
Less: Opening Debtors

Rs.
12,33,000
74,000
13,07,000
54,000
12,53,000

ii. Cash paid to suppliers and employees

Purchase
Add : Opening Sundry Creditors
Less : Closing Sundry Creditors
Add : Manufacturing expenses
Administration expenses
iii. Tax Paid
Opening balance of Provision for Tax
Add : Provision of the year
Less : Closing Balance of provision for Tax

9,14,000
32,000
9,46,000
17,000
9,29,000
82,000
70,000
10,81,000
47,000
50,000
97,000
52,000
45,000

Note : Payment of Dividend should be treated as the cash flow from Financing Activities.

Illustration : 2
Calculate Cash from Operating Activities from the following
Particulars
To Operating Stock
To Purchase
To Wages
To Gross Profit
To Salary
To Telephone
To Electricity
To Rent
To Depreciation
To Loss on sale of Furniture
To Goodwill written off
To Provision for Taxation
To Net profit

Rs.
53,000
1,80,000
20,000
3,67,000
6,20,000
59,000
14,000
19,000
24,000
30,000
7,000
14,000
90,000
1,38,000
3,95,000

Particulars

Rs.

By Sales
By Closing Stock

5,50,000
70,000

By Gross Profit
By Profit on sale of plant
By Refund of Income Tax

6,20,000
3,67,000
13,000
15,000

3,95,000

Solution:
Calculation of Cash From Operating Activities

Particulars
Net profit after tax
Add : Appropriation and non cash expenses
Provision for Taxation
Goodwill written off
Depreciation
Loss on sale of furniture
Less : Non cash income & adjustments
Profit on sale of Plant
Refund of Income Tax
Increase in Stock
Cash from Operating Activities

Rs.

Rs.
1,38,000
90,000
14,000
30,000
7,000
13,000
15,000
17,000

1,41,000
2,79,000

45,000
2,34,000

Illustration : 3
Calculate Cash from Operating Activities from the following
Rs.
Net profit transferred to Balance sheet
Depreciation for Fixed Assets
Provision for Taxation
Goodwill written off
Preliminary expenses written off
Profit on sale of Fixed Assets
Refund of Income tax
Provision for General Reserve
Proposed Dividend

3,50,000
55,000
79,000
20,000
15,000
19,000
10,000
30,000
40,000

The details of current items are as follows.

Opening Balance
Rs.
Stock
Debtors
Sundry creditors

35,000
20,000
10,000

Closing Balance
Rs.
50,000
15,000
17,000

Solution :
Calculation of Cash from Operating Activities
Particulars

Rs.

Net Profit
Add : Depreciation
Provision for Taxation
Goodwill written off
Preliminary expenses written off
Provision for General Reserve
Proposed Dividend

55,000
79,000
20,000
15,000
30,000
40,000

Less : Profit on sale of Fixed Assets

Refund of Income tax

19,000
10,000

Add : Increase in Current Liabilities

Sundry creditors
Decrease in Current Assets : Debtors
Less : Increase in current Assets : Stock
Cash from Operating Activities

Rs.
3,50,000

7,000
5,000

2,39,000
5,89,000
29,000
5,60,000
12,000
5,72,000
15,000
5,57,000

Illustration: 4
The Balance Sheets of WD Ltd., as on 31st March 2006 and 2007 are stated as
follows.
Balance Sheets
Liabilities
Share Capital
Profit & Loss a/c
Mortgage Loan
Sundry Creditors
Bank Overdraft

2006
Rs.

2007
Rs.

7,00,000
87,000
2,00,000
34,000
29,000

9,00,000
75,000
1,20,000
53,000
12,000

10,50,000

11,60,000

Prepare a Statement of Cash Flow.

Assets
Land
Premises
Plant
Stock
Debtors
Cash

2006
Rs.
3,00,000
2,50,000
3,60,000
38,000
27,000
75,000
10,50,000

2007
Rs.
4,00,000
3,70,000
2,70,000
24,000
41,000
55,000
11,60,000

Solution:
Statement of Cash Flow
Inflow

Rs.

Cash Balance in the beginning

Issue of Share Capital
Sale of Plant

75,000
2,00,0
00
90,000

Outflow
Cash Lost in Operation
Purchase of Land
Purchase of Premises
Repayment of Loan
Cash Balance at the end

Rs.
10,000
1,00,000
1,20,000
80,000
55,000
3,65,000

3,65,0
Calculation
of Cash from Operation
00
Particulars

Rs.

Closing Balance of Profit & Loss Account

Add : Increase in Sundry Creditors
Decrease in Stock
Less : Increase in Debtors
Decrease in bank overdraft
Opening Balance of Profit & Loss Account
Cash Lost in Operation

Rs.
75,000
19,000
14,000
1,08,000

14,000
17,000
87,000

1,18,000
10,000

Illustration : 5
Calculate a Statement of Cash flow from the following Balance Sheets.
Balance Sheets.
Liabilities
Share Capital
Profit & Loss a/c
General Reserve
Debenture
Loan
Account Payable

2006
Rs.

2007
Rs.

Assets

2006
Rs.

9,00,00 10,00,0 Fixed Assets

13,50,00
0
00 Stock
0
77,000 1,12,00 Debtors
33,000
42,000
0 Cash
37,000
2,50,00 54,000
44,000
0 2,00,00
1,75,00
0
0 2,40,00
14,64,00
Adjustments :
20,000
0
0
i. Depreciation14,64,0
for Fixed Assets
Rs.75,000
42,000
00 reserve
16,48,0
ii. Provision for General
during the year Rs.12,000.
00

2007
Rs.
15,10,0
00
49,000
30,000
59,000
16,48,0
00

Solution:
Statement of Cash flow
Inflow

Rs.

Outflow

Rs.

Opening Balance of
44,000 Purchase of Fixed Assets
Cash
1,35,000 Redemption of
Cash from
1,00,000 Debentures
Operation
65,000 Closing Balance of cash
Issue of Share Capital
3,44,000
Raising of Loan
Calculation of Cash from Operation
Particulars

Rs.

Closing Balance of profit & Loss Account

Add : Provision for General Reserve
Depreciation for Fixed Assets
Increase in Account Payable
Decrease in Debtors
Less : Increase in Stock
Opening Balance of Profit & Loss Account
Cash from Operation

2,35,000
50,000
59,000
3,44,000

Rs.
1,12,000
12,000
75,000
22,000
7,000
2,28,000

16,000
77,000

93,000
1,35,000

Fixed Assets Account

Particulars
To Balance b/d
To Cash (Purchase)

Rs.

Particulars

13,50,00 By Profit & Loss Account

0
(Depreciation)
2,35,000 By Balance c/d
15,85,00
0

Rs.
75,000
15,10,00
0
15,85,00
0