Important Points - Cash Flow Statement Notes | Study Crash Course of Accountancy - Class 12 - Commerce

Commerce: Important Points - Cash Flow Statement Notes | Study Crash Course of Accountancy - Class 12 - Commerce

The document Important Points - Cash Flow Statement Notes | Study Crash Course of Accountancy - Class 12 - Commerce is a part of the Commerce Course Crash Course of Accountancy - Class 12.
All you need of Commerce at this link: Commerce

1. Brackets with Amounts:
The amounts given in brackets mean negative amounts, i.e., amounts that are to be deducted.

2. Unpaid / Accrued Interest or Dividend does not affect Cash Flow From Operating Activities:
If any amount of interest or dividend remain unpaid, then it will affect cash flow from financing activities and not operating activities. Similarly, any amount not received on account of interest on investments will affect cash flow from investing activities and not operating activities.

3. Extraordinary Items:
Extraordinary items are the incomes and expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise. Cash flows relating to extraordinary items should be disclosed separately as arising from operating, investing or financing activities.

Examples of Extraordinary items:
(i) Operating Activities: Compensation paid to employees under Voluntary Retirement Scheme, bad debts recovered.
(ii) Investment Activities: Claim received against damage of fixed assets due to earthquake or floods.
(iii) Financing Activities: Buy – back of Shares.

4. Exclude movements between the items of cash or cash equivalents:
For example, cash deposited into bank, cash withdrawn from bank, sale or purchase of short – term marketable securities, etc.

5. Exclude transactions involving no Cash Flow:
For example, purchase of assets by issue of shares or debentures or on credit, conversion of debentures into shares, etc.

6. Show Multiple Impact of a single transaction Separately:
For example, in case of repayment of principal and interest in respect of a deferred credit taken for acquisition of fixed asset. interest payment is classified as a financing activity and payment of principal amount as an investing activity.

Step 1. Determine Net Profit Before tax and extraordinary items:
It is calculated as:

Surplus, i.e., Balance in Statement of Profit and Loss (Closing)


Less: Surplus, i.e., Balance in Statement of Profit and Loss (Opening)

(...)

Profit for the Year

....

Add: Transfer to Reserve (Note: 1)

....

Add: Provision for Tax (Current Year) (Note: 2)

....

Add: Proposed Dividend (Current Year) (Note: 3)

....

Add: Interim Dividend Paid during the year (Note: 4)

....

Less: Transfer from Reserve (Note: 1

(…)

Net Profit before Tax and Extraordinary Items

....

Notes:
Reasons for Adjusting these items from Profit for the Year:
1. Transfer to Reserve and 1 or Transfer from Reserve:
Increase in Reserve in comparison t the previous year indicates that a part of profits of current year are transferred to Reserve. Such transfer to reserve is added to Net Profit as it is an appropriation of Net Profit for the year. Similarly, a decrease in Reserve is deducted as it is a utilisation of past reserve.
2. Provision for Tax:
It is an estimate of tax liability for a given year. The provision for tax made during the year is a Non – Cash Expense. So, it is added back to the current year's profit.
3. Proposed Dividend:
The provision made during the year is a Non – Cash Expense. So, it is added back to the current year's profit.
4. Interim Dividend:
It is the dividend declared by the Board of Directors and also paid within the financial year. Interim dividends are first paid and then appropriated from profits. So, it is added back to the Net Profit because it is an item of Financing Activity and not Operating.

Step 2. Calculate Operating Profit before Working Capital Changes:
For this, Net Profit Before tax and extraordinary items calculated in Step 1 is adjusted for Non – Cash and Non – Operating Items: It is calculated as:

Net Profit before Tax and Extraordinary Items (As per Step 1)

....

Add: Depreciation (Note: 1)

....

Add: Goodwill / Patents /Trademark Amortised (Note: 2)

....

Add: Interest on Long - term Borrowings (Note: 3)

....

Add: Loss on Sale of Fixed Assets / Investments (Note: 4)

....

Add: Premium on Redemption of Preference Shares / Debentures (Note: 5)

....

Less: Profit on Sale of Fixed Assets / Investments (Note: 6)

(...)

Less: Interest / Dividend / Rental Income(Note: 7)

(...)

Operating Profit before Working Capital Changes

....

Notes:
Reasons for Adjusting these items:
1. Depreciation:
The depreciation charged during the year on fixed assets is a Non – Cash Expense. So, it is added back to the current year's profit.
2. Goodwill / Patents / Trademark Amortised:
The intangible assets amortised (written off) during the year is a Non – Cash Expense. So, it is added back to the current year's profit.
3. Interest on Long:
term Borrowings: It is added back because such expense is related to Financing Activity. It is shown as an outflow of cash under Financing Activity.
4. Loss on Sale of Fixed Assets I Investments:
It is shown as an expense in the Statement o Profit and Loss under the head 'Other Expenses'. It is added back to profits so that operating profit can be ascertained. Net proceeds from sale of fixed assets (i.e. book value – loss) is shown as inflow of cash under Investing Activity.
5. Premium on Redemption of Preference Shares / Debentures:
Redemption of Preference Shares or Debentures is a Financing activity. So, if Premium on such redemption was charged to the Statement of Profit and Loss at the time of calculating the profit, then it is added back to calculate Operating Profit.
6. Profit on Sale of Fixed Assets I Investments:
It is shown as an income in the Statement of Profit and Loss under the head 'Other Income'. It is subtracted from profits so that operating profit can be ascertained. Net proceeds from sale of fixed assets (i.e. book value + profit) is shown as inflow of cash under Investing Activity.
7. Interest I Dividend I Rental Income:
It is deducted because such incomes are related to Investing Activities. They are shown as an inflow of cash under Investing Activity.

Step 3. Calculate Cash Generated From Operating Activities: For this, Operating Profit before Working Capital Changes calculated in Step 2 is adjusted for Working Capital:
Cash Generated From Operating Activities is calculated as:

Operating Profit before Working Capital Changes (As per Step2)


Add: Decrease in Current Assets (Trade Receivables, Inventories, Accrued Incomes, Prepaid Expenses)(Note:1)


Add: Increase in Current Liabilities (Trade Payables, Outstanding Expenses, Advance Incomes) (Note:2)


Less: Increase in Current Assets (Note:3)

(...)

Less: Decrease in Current Liabilities (Note:4)

(...)

Operating Profit after Working Capital Changes


Notes:
Reasons for Adjusting these items:
1. Decrease in Current Assets:
It indicates inflow of cash and is added to determine net cash generated from operating activities. Let us understand this with the help of following example: Suppose Inventory in the beginning of the year were Rs. 40,000 and inventory at the end of the year were Rs. 25,000. Such a decrease in inventory indicates inflow of cash due to sale of inventory. So, Rs. 15,000 will be added to the operating profit.

Similarly, Decrease in Trade Receivables (Debtors and Bills Receivable), Accrued Income and Prepaid Expenses is also added.
2. Increase in Current Liabilities:
It also indicates inflow of cash and is added to determine net cash generated from operating activities.

Suppose Creditors (Trade Payables) in the beginning of the year were Rs. 30,000 and at the end were Rs. 40,000. Increase in Creditors indicates that they were paid Rs. 10,000 less than the amount of credit purchases during the year. Hence, increase in Creditors indicates that they are being paid less amount, which increases the cash generated from operating activities.

Similarly, Increase in Bills Payables, Outstanding Expenses, Income received in Advance is also added.
3. Increase in Current Assets:
It indicates outflow of cash and is subtracted to determine net cash generated from operating activities. Let us understand this with the help of following example: Suppose Inventory in the beginning of the year were Rs. 40,000 and inventory at the end of the year were Rs. 50,000. Such an increase in inventory indicates outflow of cash due to purchase of inventory. So, Rs. 10,000 will be subtracted to the operating profit.

Similarly Increase in Trade Receivables (Debtors and Bills Receivable), Accrued Income and Prepaid Expenses is also subtracted.
4. Decrease in Current Liabilities:
It also indicates outflow of cash and is subtracted to determine net cash generated from operating activities. Let us understand this with the help of following example: Suppose Creditors (Trade Payables) in the beginning of the year were Rs. 30,000 and at the end were Rs. 25,000. Decrease in Creditors indicates that they were paid Rs. 5,000 more than the amount of credit purchases during the year. Hence, decrease in Creditors indicates that they are being paid more amount, which decreases the cash generated from operating activities.

Similarly, Decrease in Bills Payables, Outstanding Expenses, Income received in Advance is also subtracted.

Step 4. Calculate Cash Flow before Extraordinary Items: For this, Cash Generated From Operating Activities calculated in Step 3 is adjusted for Tax paid.
It is calculated as:

Cash Generated From Operating Activities (As per Step 3)



Less: Income Tax Paid (Net of Refund of Tax)

(....)


Cash Flow before Extraordinary Items



Cases for Profit & Losses (C.Y. – P.Y. )

Equity and liabilities

31.03.2012

31.03.2013

Solution

1.

P & L A/C

20,000

40,000


2.

P & L A/C

40,000

20,000


3.

P & L A/C

20,000

-


4.

P & L A/C

-

40,000


5.

P & L A/C

(20,000)

(40,000)


6.

P & L A/C

(40,000)

(20,000)


7.

P & L A/C

(20,000)

-


8.

P & L A/C

-

(40,000)


9.

P & L A/C

20,000

(40,000)


10.

P & L A/C

(40,000)

20,000




Cases for interest paid         1. Op +                2. Fin –

Equity and liabilities           31.03.2012          31.03.2013
a) 10% debentures                40,000                60,000
b) 12% debentures                -                            60,000
1. No info
2. Additional debentures were issued on 31.03.2012
3. Additional debentures were issued on 31.03.2013
4. Additional debentures were issued on 31.12.2012

Equity and liabilities            31.03.2012         31.03.2013
c) 10% debentures                40,000                 20,000
d) 12% debentures                40,000                 -
5. No info
6. Debentures were redeemed on 31.03.2012
7. Debentures were redeemed on 31.03.2013
8. Debentures were redeemed on 31.12.2012
Cases for interest received    1. OP -                2. INV +

Assets                                       31.03.2012         31.03.2013
a) 10% investments                40,000                60,000
b) 12% investments                -                           60,000
1. No info
2. Additional investments were made on 31.03.2012
3. Additional investments were made on 31.03.2013
4. Additional investments were made on 31.12.2012

Assets                                        31.03.2012        31.03.2013
a) 10% investments                 80,000               60,000
b) 12% investments                 40,000                -
1. No info
2. Investments were sold on 31.03.2012
3. Investments were sold on 31.03.2013
4. Investments were sold on 31.12.2012

The document Important Points - Cash Flow Statement Notes | Study Crash Course of Accountancy - Class 12 - Commerce is a part of the Commerce Course Crash Course of Accountancy - Class 12.
All you need of Commerce at this link: Commerce

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