1. HOW TO PREPARE CASH FLOW STATEMENT by : DR. T.K. JAIN AFTERSCHO ☺ OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india www.afterschoool.tk mobile : 91+9414430763

2. What is cash flow ? Flow of cash means, where is the cash going out or where from cash is coming in

3. How to prepare cash flow ? Identify resources, where cash has been used... for example : building in the beginning of the year was 2000, now it is of 5000, it means you have spend Rs. 3000 on new building, thus cash has flown outside for purchase of building

4. How to prepare cash flow statement? Identify each asset, find its closing balance for this year and for the last year and find the difference, this will tell you about flow of cash. If the assets have increased, probably cash has flown outside (you have paid cash), if assets have decreased, probably you have sold them (cash has flown in).

5. Liability – source of cash Assets consume cash, but liabilities give cash. If equity has increased, it means, cash has increased. Loans have increased, it means, cash has increased. Whenever there is an increase in liability, there is an increase in cash.

6. Find out cash profit... All your profit is not cash profit. Some of the profit is from non-cash transactions - which has to be excluded from profit. Thus you have two options, - 1. prepared adjusted profit and loss account or 2. prepare a fresh p&l account taking into account only cash transactions.

7. How to prepare cash flow statement? Classify cash flows in three types 1. cash flow from operating activities 2. cash flow from investing activities 3. cash flow from financing activities.

8. cash flow from operating activities These include day to day business activities. Some of them will give cash, some of these will require cash. Activities can be classified into two types : 1. activities that give cash inflow 2.activities that generate cash outflow

9. Operating activities with cash inflow Cash sales (dont take credit sales ) interest received fees received other payment received.

10. Operating activities with cash outflow Cash purchase (dont include credit purchase, for which you have not paid yet) wages paid salaries paid rent paid postage paid administrative expenses paid sales exp. Paid etc.

11. Cash from operating activities... Direct method : here you list down all the activities involving cash inflow and cash outflow and find the net difference, this is called cash profit. Indirect method : here you take profit from P& L account and then adjust it for non-cash items.

12. Cash from investing activities. Those activities which require investments, they are of two types : 1. investment activities with cash inflow 2. investment activities with cash outflow

13. investment activities with cash inflow Examples : sale of building sale of machinary sale of furniture sale of investments dividend / interest received on investments

14. investment activities with cash outflow Examples : purchase of building purchase of machinary purchase of furniture purchase of investments purchase of plant purchase of other assets..

15. Cash flow from financing activities Financing refers to equity, loans, debts, etc, which give money for running business. Investing activities were related to assets of the company, financing is related to long term liabilities of the company. They are of two types: 1. financing activities with cash inflow 2.financing activities with cash inflow

16. financing activities with cash inflow Cash inflow from equity cash inflow from loans / debentures / bonds cash inflow from borrowing from relatives cash inflow from preference shares

17. financing activities with cash out-flow Here you are making payments for the sources of long term cash : 1. redemption of debentures 2. redemption of preference shares 3. payment of loans 4. payment of other long term liabilities. 5. interest payment on loans / dividend on equity

18. CASH FLOW STATEMENT It shows the total payments received or paid in three categories : operating financing investing cash flow statement helps you in identifying the flow of cash and it helps you in cash planning

19. How to classify cash flow ? Look into the nature of cash transaction and identify the cash flow and its implication. If dividend has been received : it is cash inflow from investing activities if dividend has been paid : it is cash outflow from financing activity

20. Be careful about non-cash transactions... Exclude following from your reports : depreciation, provisions, bad debts, drawings of goods, and all those transactions, which dont have cash flow ...

21. Example : Balances of a company show :the following record :

22. Analysis : Cash flow from financing : (equity : 20, debt : 20) cash flow from investing : (building : -20, plant : -20 ) cash flow form operating: (debtors :-20, creditors : 20, cash profit : 40) thus net cash flow is only Rs. 40.

23. Simple rules to remember ???? When assets increase, cash outflow takes place when current assets increase, cash outflow take place when liabilities increase, cash inflow take place when current liabilities increase, cash inflow take place exclude non-cash transactions (like exchange of building against equity)

24. Prepare cash flow from operations Information of 2008 and 2009 : BR (80,60), Stock (200,300), Debtors (400,350), Prepaid exp. (90,80), Acrued income (80,70), Creditors (200,220), Outstanding exp. (60,75), BP (70,60), Cash (100,150), Income received in advance (8,10), Overdraft (50,60), Profit of 2009: 150.

25. Funds from operations : Profit : 150 Adjust : Outstanding exp + 15, Prepaid exp. + 10, Acrued income +10, Creditors +20 income recd. In advance +2 BP – 10 Debtors + 50 Stock -100 BR + 20 =167

26. Prepare cash from operations : Information (2009) : Profit : 1500, Loss on sale of fixed assets : 100, Depreciation : 90, Preliminary Exp. Written off : 50, Provision for tax : 100, Transfer to reserve : 100, Intangible assets written off : 50, Discount on issue of shares written off : 10, Gain on sale of fixed assets : 200,

27. Solution.... Profit : 1500 : adjust : Loss on sale of fixed assets : + 100, Depreciation + 90, Preliminary exp. + 50, Prov. For tax : + 100, Profit transfer to reserve + 100, Intangible assets written off : + 50, Discount on issue of shares written off :: + 10, Gain on sale of fixed assets : - 200 = 1500+300 = 1800 answer

28. Prepare cash flow statement Information in (2008,2009) : Share (200, 300) Premium (0,10), Preference share (100,50), 15% debenture (150, 250), Reserve (100,250), current liabilites (50,80), fixed assets (400,650), Investment(30,50), Cash (30,42.5), Current assets (120,160), Discount on Debentures (20,15) Preference share premium paid in 2009@ 5%, Interim dividend paid 30, Machine of book value 50 was sold for 30 in 2009. Dep. Charged 50. debentures issued at 10% discount

29. Cash from operations : Profit : 150 Adjust : Depreciation : +50, Loss of sale of assets : + 20, current liabilities : + 30, current assets – 40 , dividend + 30 Premium preference share paid : +2.5, discount on debenture +15 =257.5

30. Cash flow statement Cash flow from Investment purchase of fixed assets -350, investment – 20, sale of machine : + 30 total : - 340 Cash flow from Financing capital : +110, Debentures +90, Preference share : -52.5, Dividend : - 30, Interest on debentures : -22.5 total = 95

31. Fixed assets account Closing balance : 650 add depreciation +50, add sale + loss 50, less opening balance 400 purchase = 350

32. Cash Account Opening cash : 30 add cash from financing : 95 less cash for investing : 340 add cash from operations + 257.5 closing balance = 42.5

33. Prepare cash from operations : Opening stock: 80, Cash purchase : 240, Credit purchase : 160, Wages paid: 30, Outstanding wage : 6, gross profit 84, cash sales 250, Credit sales : 250, Closing stock : 100, Salaries paid 33, Outstanding salary 3, Loss on sale of machinary 4, Commission recd. 10, Net profit 54.

34. Cash from operation : (indirect method) Profit : 54 add :credit purchase 160, wages outstanding : 6, outstanding salaries 3, loss on sale of machinary :4 less : credit sales : 250, increase in current assets (stock ) 20 net cash from operations : -43

35. Cash from operations (direct method) Cash receipts etc. : cash sales : 250, commission received : 10, Cash payments : cash purchase : 240, wages paid : 30, salaries paid : 33, net cash from operations : - 4 3

36. Assumptions Commission received is related to business of the organisation.

37. Prepare cash flow from financing activities Furniture (20,36), depreciation on furniture (6,9), capital (50,75), loan (25,15), furniture costing 4 was sold for a profit of 3. Depreciation on furniture during the year 5,

38. Cash from financing : Capital : +25 Loan : - 10, net cash flow from financing : +15

39. Cash from investing Cash inflow : Sale of furniture : 7, cash outflow : purchase of furniture : 20 net cash flow from investing : - 13

40. Furniture account Credit total : closing stock : 36, sale : 7 less debit total : p& l (profit on furniture) : 3, opening stock : 20 difference is purchase of furniture : 20

41. Prepare cash flow from operations... Data of (2008,2009) debtors (10,12), provision for doubtful debt (1,1.2), BR (4,3), BP (5,6) creditors (8,9), Inventory (5,8), short term investment (10,12), outstanding exp (1,1.5), prepaid expenses (2,1), acrued income (3,4), income received in advance (2,1) profit in 2009 was 10 after depreciation of 2

42. Cash flow from operations Profit : 10 adjustments : depreciation +2, debtors -2, creditors +1, BR + 1, BP +1, inventory -3, outstanding exp +.5, prepaid exp + 1, acrued income – 1, income received in advance – 1, short term investment - -2, net cash flow from operations : 7.5 answer

43. Prepare Cash flow statement Income statement for 2009 : sales 4000, cost of sales 3100, depreciation 96, salaries 380, operating expenses : 120, provision for tax 120, Profit on sale of machinary 20, dividend paid 115, profit 204 balance sheet (2008,2009) land (77,153), building (576, 920), cash (96,69), debtors (268,290), stock (420,150), advanances (12, 14), capital (576, 710), P&L (242, 204), creditors ( 382,374 ), outstanding expenses (38,76), income tax payable (19,21), depreciation (192, 211) cost of equipment sold : 115

44. CASH FROM OPERATIONS PROFIT : 204 ADJUSTMENTS : Stock + 270, debtors -22, Advances -2, creditors – 8, outstanding exp + 38, income tax payable +2, depreciation +96, sale of equipment -20, Provision for tax + 120, net cash flow = 678

45. Cash flow from investing Land : - 76, sale of equipment +58, purchase of equipment - 555 net : - 573

46. Cash flow from financing Capital +134, divident paid :- 115, net cash flow : 19

47. Net impact : Opening balance 96 Cash from operating 678 cash from financing 19 cash from investing -573 closing balance 115

48. Building and equipment .... Difference in opening and closing balance :344 depreciation added : 96 total : 440 add equipment sold : 115 = 555 thus building & equipment purchased must be 555.

49. Depreciation account Difference of opening and closing balance : 19 depreciation charged during the year 96 difference : 77 , which is due to the sale of equipment

50. Sale price of equipment Cost : 115 less depreciation 77 = 38 profit = 20 thus sale price of equipment must have been 58

51. Balance sheet

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