ACCOUNTANCY CASH FLOW STATEMENT
Extraordinary Items:
o All the incomes and expenses that arise from events or transactions that are clearly distinct
from the ordinary course of business of the enterprise are termed as extraordinary items.
o All such items are not expected to recur frequently or regularly.
o It includes items such as payment to shareholders in the event of buy back of shares, claim
for damages received, etc.
Cash Flow from Operating Activities
Cash Flow from Operating Activities: Following are the steps to be followed under indirect
method:
o Indirect Method: In this method, Cash Flow from Operating Activity is calculated from
statement of Profit and Loss and Balance Sheet with the help of following steps:
o Step 1: Calculate the Net Profit before Tax and Extraordinary Items.
o Step 2: Calculate the Operating Profit before Working Capital Changes.
o Step 3: Compute the Cash generated from Operating Activities.
o Step 4: Compute the Cash flow from Operating Activities before Extraordinary Items.
o Step 5: Compute the Cash flow from (or used in) Operating Activity.
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ACCOUNTANCY CASH FLOW STATEMENT
Steps to Ascertain Net Profit before Tax and Extraordinary Items
Steps to Ascertain Operating Profit Before Working Capital Changes
Ascertaining Cash Generated from Operations
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ACCOUNTANCY CASH FLOW STATEMENT
Cash Flow from Investing Activities
Cash Flow from Investing Activities:
o These include all activities related to the acquisition and disposal of Long-term Assets and
other investments which are not classified as cash equivalents.
o All cash inflows and outflows relating to the fixed assets, shares and related instruments of
other enterprise including loans and advances to third parties and their repayments are
classified under Investing Activities.
o It shows the extent to which investments have been made for resources that generate
revenue and cash flows in future.
o It is determined by analysing the changes in fixed assets, long-term investments in the
beginning and at the end of the year for which specific accounts can be prepared using the
values that are available.
Cash Flow from Financing Activities
Cash Flow from Financing Activities:
o These are those activities that change the size and composition of the owner’s capital (i.e., Equity
and Preference Share Capital in case of a company) and borrowings of the enterprise.
o It is useful in estimating claims on cash flows by lenders of funds in future and therefore, are
shown separately.
o It is computed by analysing change in Equity and Preference Share Capital, Debentures and other
borrowings. It also takes into consideration the amounts paid on account of interest (only in case of
non-financing companies) and dividend (all types of companies).
o If shares or debentures are issued at a premium, Cash Flow Statement shows total cash received
from the issue that includes both nominal value and the premium.
o Any amount of share issue expenses and underwriting commission is a cash outflow from
financing activities.
o It does not take into consideration bonus issue as it is just a capitalisation of reserves for which the
company does not receive any cash for it. Similarly, conversion of debentures into new debentures
or shares involves no cash flow and therefore not considered in a cash flow statement.
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ACCOUNTANCY CASH FLOW STATEMENT
Treatment of Special Adjustments
Bank Overdraft: Treated as short-term borrowings shown under Financing Activities
Proposed Dividend:
Interim Dividend: The dividend declared and paid by the Board of Directors before its Annual
General Meeting during the current year. (Always given as adjustment and is not affected by
Proposed Dividend).
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ACCOUNTANCY CASH FLOW STATEMENT
Income Tax Refund: Deducted from Profits in Operating Activities and Deducted from Income Tax
Paid.
Discount Written-off: Added back to Current Year’s Profits in Operating Activities
Discount Allowed During the Year: Net Proceeds (after discount) shown as Cash from Financing
Activities
Provision for Tax:
Fixed Asset Account:
(i) If assets are shown at their Written Down Value i.e. after providing depreciation:
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ACCOUNTANCY CASH FLOW STATEMENT
(ii) If assets are shown at their Original Value:
Preparation of Cash Flow Statement
Steps for Preparing Cash Flow Statement:
o Step 1: Compute cash flow from Operating Activities.
o Step 2: Compute cash flow from Investing Activities.
o Step 3: Compute cash flow from Financing Activities.
o Step 4: Adding Step 1, Step 2 and Step 3 above, compute the net increase or decrease in
Cash and Cash Equivalents.
o Step 5: Amount computed in Step 4 is to be added to the balance of Cash and Cash
Equivalents in the beginning of the year.
o Step 6: Adding Step 4 and Step 5 will give the balance of Cash and Cash Equivalents at the
end of the year which will match the balance as per Balance Sheet.
Precautions to be taken for preparing Cash Flow Statement:
o Balance in Statement of Profit and Loss: Identify whether the balance in the Statement of
Profit and Loss is positive or negative. When the opening balance is negative, it is to be
added to the closing balance and when the opening balance is positive, it is to be deducted
from the closing balance.
o Balance of Other Reserves: Identify whether the balances of other reserves have increased
or decreased. When the increase is due to appropriation from Surplus, i.e., Balance in
Statement of Profit and Loss, it is to be added to compute Net Profit before tax and
Extraordinary Items.
o Interest on borrowings: Identify if the percentage of interest on borrowings is given and add
the amount of interest paid to compute Net Profit before Working Capital Changes and show
it as an ‘Outflow’ under Cash Flow from Financing Activities.
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ACCOUNTANCY CASH FLOW STATEMENT
o Interest on Investment: Identify if the percentage of interest on Investment is given and
deduct the amount of interest received to compute Net Profit before Working Capital Changes
and show it as an ‘Inflow’ under cash Flow from Investing Activities
o Non-cash Expenses: Identify if non-cash expenses are given and add them to compute Net
Profit before Working Capital Changes.
o Non-operating Expenses: Identify if non-operating expenses are given and add them to
compute Net Profit before Working Capital Changes. It will be shown as an outflow under
appropriate head.
o Non-operating Incomes: Identify if non-operating incomes are given and deduct them to
compute Net Profit before Working Capital Changes.
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