Cash Flow Statement (Without Adjustment)

  • Cash Flow statement is a statement prepared as per Accounting Standard 3. It shows the flow of cash and cash equivalents of business during a particular period.
  • Cash comprises of cash in hand and demand deposits with banks whereas cash equivalents are short term highly liquid investments that can be readily converted into cash.
  • Cash flow statement helps in short term financial planning, understanding liquidity and solvency of a business, better cash management, etc.
  • Limitations of cash flow statement are that it cannot work as substitute for income statement and ignores accrual basis of accounting.
  • Three heads of the cash flow statement are cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.
  • Operating activities are principal revenue producing activities. Investing activity include the purchase and sale of long term assets. Financing activities results in the change in size and composition of owner’s capital. Bank overdraft and cash credit are part of financing activities.
  • The two methods of preparing Cash flow Statement are direct and indirect method.
  • Cash comprises cash in hand and demand deposits with bank i.e. deposites which are repayable by banks on demand.
  • Cash Equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and which present insignificant risk of changes in their values. It includes Cash in Hand, Cash at Bank, Short-term Investments or Marketable Securities and Cheques and Drafts on hand.
  • Current liabilities and assets as shown in Balance Sheet form part of operating activities, non-current assets form part of cash flow from investing activities whereas shareholders funds show the cash flow from financing activity.

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  • Q1

    Following information is given in the beginning of an accounting year:

    Amount of cash is ₹ 20,000; Bank overdraft ₹ 50,000; Marketable securities are ₹ 40,000. The amount of cash and cash equivalents in the beginning of the period are

    Marks:1
    Answer:

    ₹ 60,000 positive.

    Explanation:

    cash and cash equivalents in the beginning of the period will be =

    20,000 + 40,000 = ₹ 60,000

    Bank overdraft is a part of short term borrowings and not cash and cash equivalents.

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  • Q2

    Following information at the beginning of the financial year is given

    Cash in hand ₹ 25,000

    Bank overdraft ₹ 40,000

    Cash credit ₹ 5,000

    Marketable securities ₹ 30,000

    cash and cash equivalents in the beginning of the period will be

    Marks:1
    Answer:

    ₹ 55,000

    Explanation:

    Bank overdraft and cash credit are part of short term borrowings and not the part of cash and cash equivalents.

    Hence cash and cash equivalents in the beginning of the period will be computed as follows:

    25,000 + 30,000=55,000.

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  • Q3

    List out the transactions which results in cash inflow and cash outflow from investing activities.

    Marks:3
    Answer:

    Transactions related to cash inflows from investing activities:-

    • Cash receipt from disposal of fixed assets including intangibles.
    • Cash receipts from the repayment of advances or loans made to third parties
    • Cash receipts from disposal of shares, warrants of debt instruments of other enterprises other than receipts from those instruments considered to be cash .
    • Interest received in cash from loans and advances.
    • Dividend received from investments in other enterprises.

    Transactions related to cash Outflows from investing activities:-

    • Cash payment to acquire fixed assets including intangibles and capitalised research and development
    • Cash payment to acquire shares warrants or debt instruments of other enterprises other than the instruments considered to be cash and cash equivalents or held for trading purposes.
    • Cash advances and loans made to third party.

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  • Q4

    Distinguish between net profits and cash from operations.

    Marks:3
    Answer:

    Net profit is calculated by preparing Statement of Profit and Loss. It is prepared on accrual bases. It depicts the result of all operating and non-operating activities carried out during an accounting year. On the other hand cash flow from operating activities is calculated by preparing Cash Flow Statement on cash basis. Cash from operating activities depicts only cash flow as a result of operating activities.

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  • Q5

    Classify the following into operating, investing and financing activities in case of a financial company:


    1. Issue of shares

    2. Receipt of interest on investment

    3. Interest paid

    4. Dividend paid

    5. Devidend received

    Marks:3
    Answer:

    Financing activity: 1,4

    Operating activity: 2,3,5

    Note: In case of a Financial company interest received or paid or dividend received is considered an operating activity as it is the main business of the company. Issue of shares and dividend paid thireon is financing activity as it is the financing concern of a business to arrange capital and to pay compensation to the shareholders as dividends.

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