Financial Statements of Companies
Coal and Gas 2,160
Electric Light 1,128
General Expenses 1,710
Sales —
Wines, ` 3,870 ; Spirits, ` 4,335 ; Beer, ` 1,863 10,068
Minerals, ` 2,160 ; Cigars and Cigarettes, ` 390 2,550
Meals 23,829
Rooms 9,375
Fires in Bedrooms 582
Washing Charges 219
Repairs, Renewals, and Depreciation -
Premises, ` 348 ; Furniture and Fittings, ` 660 1,008
Glass and China, ` 609 ; Linen, ` 390 999
Cutlery and Plate 207
Cash Book - Debit Balances: `
In Bank 2,148
On hand 219
Visitors Accounts unpaid 489
Sundry Creditors 3,390
Stocks on 31st March, 2012 were valued as follows -
Wines, ` 1,197; Spirits, ` 333 ; Beer, ` 174 ;
Minerals, ` 357 ; Cigars and Cigarettes, ` 69 ;
Sundry Provisions and Stores, ` 141 ; Coal, ` 99
The Manager is entitled to a commission of 5% of the net profits after charging his
commission. The authorised share capital is 10,000 shares of ` 10 each of which 5,700
shares were issued, the whole of the amount being called up. The final call on 210 shares @ `
1.50 per share was unpaid ; the directors forfeited these shares at their meeting held on
15th March, 2012.
The tax liability is estimated at ` 4,300 and the directors propose to declare a dividend at the
rate of 6 per cent. Prepare the Final Accounts for presentation to the shareholders.
Solution:
Balance Sheet of Mount-View Hotel Ltd., as on 31st March, 2012
Rs.
Particulars Note No
Equity and Liabilities
1 Shareholders' funds
56,685
a Share capital 1
2.51
© The Institute of Chartered Accountants of India
Accounting
b Reserves and Surplus 2 2,282.6
2 Current liabilities
a Trade Payables 3 3,900
b Short-term provisions 4 7,923.4
Total 70,791
Assets
1 Non-current assets
a Fixed assets
i Tangible assets 5 55,734
2 Current assets
a Inventories 6 4,701
b Trade receivables 489
c Cash and cash equivalents 7 2,367
e Other current assets 8 7,500
Total 70,791
Profit and Loss Account of Mount-View Hotel Ltd.,
for the year ended 31st March, 2012
Particulars Notes Rs.
I. Revenue from operations (A) 9 46,623.0
II Expenses:
Cost of materials consumed 10 7,587.0
Purchases of Stock-in-Trade 11 11,733.0
Changes in inventories of finished goods work-in-progress 12 6.0
and Stock-in-Trade
Employee benefits expense 13 2,910.0
Other operating expenses 14 10,758.0
Administrative and general expenses 15 3,423.0
Total expenses (B) 36,417.0
III Profit before tax (VII- VIII) (A – B) 10,206.0
IV Provision for tax 4,300.0
V Profit (Loss) for the period 5,906.0
VI Proposed Dividend 3,294.0
Dividend Distribution tax (3,294 ×0.10) 329.4
VII Profit (Loss) carried forward to Balance Sheet 2,282.6
2.52
© The Institute of Chartered Accountants of India
Financial Statements of Companies
Notes to accounts
Rs.
1 Share Capital
Equity share capital
Authorised
100,000
10,000 Shares of Rs. 10 each
Issued & subscribed & called up
54,900
5,490 Equity Shares of Rs. 10 each
1,785 56,685
Forfeited Shares
56,685
Total
2 Reserves and Surplus
2,282.6
Surplus (Profit & Loss A/c)
2,282.6
Total
3 Trade Payables
3,390
Sundry Creditors
510
Manager's Commission Outstanding
3,900
Total
4 Short-term provisions
4,300
Provision for taxation
3,294
Proposed Dividend
329.4
Dividend Distribution tax
7,923.4
Total
5 Tangible assets
47,148
Freehold Premises
(348) 46,800
Less: Depreciation
9,594
Furniture & Fittings
(660) 8,934
Less: Depreciation
55,734
Total
2.53
© The Institute of Chartered Accountants of India
Accounting
6 Inventories
Raw Material
1,704
Wines, Spirits & Beer
426
Minerals, Cigars & Cigarettes
240 2,370
Sundry Provisions & Stores and Coal
Loose tools
1,230
Linen
(390) 840
Less: Depreciation
597
Cutlery & Plate
(207) 390
Less: Depreciation
1,710
Glass & China
(609) 1,101
Less: Depreciation
4,701
Total
7 Cash and cash equivalents
2,148
Cash at bank
219
Cash in hand
2,367
Total
8 Other current assets
7,500
Preliminary expenses
7,500
Total
9 Revenue from operations
Sale of products
Wines, Spirits, Beer 10,068
Minerals, Cigars and Cigarettes 2,550 12,618.0
Sale of services
Meals 23,829
Rooms 9,375
Fires in Bed Rooms 582
Washing Charges 219 34,005.0
Total 46,623.0
10 Cost of materials consumed
Meat, Fish and Poultry 7,587.0
Total 7,587.0
2.54
© The Institute of Chartered Accountants of India
Financial Statements of Companies
11 Purchases of Stock-in-Trade
Wines, Spirits, Beer 5,223.0
Minerals, Cigars & Cigarettes 1,290.0
Sundry Provisions & Stores 5,220.0
Total 11,733.0
Changes in inventories of finished goods
12
work-in-progress and Stock-in-Trade
Opening stock
Wines, Spirit & Beer 1,782
Minerals, Cigars & Cigarettes 261
Sundry Provisions & Stores and Coal 333 2,376.0
Less: Closing Stock
Wines, Spirit & Beer (1,704)
Minerals, Cigars & Cigarettes (426)
Sundry Provisions & Stores and Coal (240) (2,370.0)
Total 6.0
13 Employee benefits expense
Salaries 2,400.0
Manager's commission (on Rs. 10,206 @ 5%) 510.0
Total 2,910.0
14 Other operating expenses
Wages 4,305.0
Coal and Gas 2,160.0
Laundry 951.0
Electricity Light 1,128.0
Repairs, Renewals and Depreciation
Premises 348
Furniture & Fittings 660
Glass and China 609
Linen 390
Cutlery & Plate 207 2,214.0
Total 10,758.0
2.55
© The Institute of Chartered Accountants of India
Accounting
15 Administrative and general expenses
Rates, Taxes and Insurances 1,713.0
General Expenses 1,710.0
Total 3,423.0
Illustration 5
The following balances have been extracted from the books of DOW Books Limited as on
31st March, 2012.
Dr. Cr.
` `
Cash in hand 3,800 Share Capital 90,000
Cash at Bank 12,600 9% Debentures 30,000
Bills Receivable 4,000 Sundry Creditors 29,000
Investment 1,000 Profit and Loss A/c 2,000
Security Deposit 400 Secured Loan from bank
Advances 8,500 against stock 50,000
Debtors 75,000 Gross Profit 1,75,000
Land and Buildings 1,05,000 Share Suspense 3,000
Furniture 4,500 Liabilities for expenses 12,000
Motor Car 25,000 Sale of Furniture 300
Closing Stock 95,000 Bills Payable 3,100
Establishment expenses 35,200 Miscellaneous Receipts 425
Repairs and renewals 2,600
Motor Car Expenses 4,200
Travelling and Conveyance 1,600
Printing and Stationery 900
Telephone 1,200
Debenture Interest 2,025
Commission on sales 3,200
Advertisement 3,500
Managing Director’s remuneration 3,600
Directors fees 2,000
3,94,825 3,94,825
The following further particulars are available:
(1) Amount of share capital has been arrived at as follows -
9,200 equity shares of ` 10 each, fully called up 92,000
Less : Calls-in-arrear @ ` 2 on 1,000 shares 2,000
90,000
2.56
© The Institute of Chartered Accountants of India
Financial Statements of Companies
(2) The Profit and Loss Account balance has been arrived at after charging ` 5,000 on
account of short provision of taxation for the earlier year.
(3) A Bank advice, for debit of ` 710 on account of interest on loan upto 31st March 2012,
was received on 5th April, 2012 the loan having been taken on 1st March, 2012.
(4) The Bank statement shows a wrong credit of ` 3,000 on 16th March 2012, the same
being detected and adjusted by the Bank on 30th April 2012.
(5) The 1,000 shares, on which calls were forfeited by the Board, and Share Suspense
represents the amount received on their reissue, as fully paid, by Board’s resolution.
(6) Sale of furniture represents disposals, during the year, of a few old items of furniture
having a written-down value of ` 400 on 30th September 2012, against their original cost
of ` 800.
(7) Cost of land ` 30,000 is included in the amount of land and buildings.
(8) Sundry debtors, which are all unsecured and considered goods, include ` 10,000 due for
more than six months.
(9) Advertisement charges include materials of ` 1,500.
(10) Advances include ` 3,000 paid for a new telephone installed during the year under the
OYT Scheme, of which an amount of ` 150 has been set off against the current year’s
bills.
(11) Amounts of ` 2,000 and ` 1,200 debited to purchases and wages respectively, were for
making new furniture during the year.
(12) Investment represents purchase of 200 equity shares of ` 10 each, ` 5 per share called
and paid up.
(13) Charge depreciation on the closing written down amount of -
Buildings @ 2.5%
Furniture @ 10%
Motor Car @ 20%
(14) Original costs of fixed assets were -
`
Buildings 1,00,000
Furniture 9,000
Motor Car 35,000
(15) The Managing Director is entitled to 5% of the annual net profits as his remuneration,
subject to a minimum of ` 300 per month. The net profits, for this purpose, are to be
taken without charging income-tax and his remuneration itself.
2.57
© The Institute of Chartered Accountants of India
Accounting
(16) Bills discounted not matured ` 1,500.
(17) Provision for income-tax is to be made, for the year, of ` 65,000.
(18) The following appropriations have been proposed by the Board of Directors out of the
profit for the year -
(a) Transfer of ` 20,000 to General Reserve.
(b) Dividend of 12% on the paid-up capital.
(19) Debentures were issued two years back, and are not secured.
You are required to prepare the Profit and Loss Account for the year ended 31st March,
2012 and the Balance as on that date. Ignore previous year’s figures.
Solution:
DOW Books Ltd.
Profit and Loss Account for the Year ended 31st March, 2012
Particulars Notes Amount
Gross profit from operations 1,75,000
Other income 425
Total revenue 1,75,425
Expenses:
Employee benefits expense 12 7,723
Other operating expenses 13 43,600
Selling and administrative expenses 14 4,250
Finance costs 15 3,410
Depreciation and amortization expense 16 7,605
Other expenses 17 100
Total expenses 66,688
Profit before tax 1,08,737
Provision for tax 65,000
Short Provision for Income tax in the previous year* 5,000
Profit (Loss) for the period 38,737
Balance from previous year 7,000
Less: Transfer to General Reserve (porposed) 20,000
Proposed Dividend 11,040
Dividend Distribution tax (3,294 ×0.10) 1,104
Profit (Loss) carried forward to Balance Sheet 13,593
2.58
© The Institute of Chartered Accountants of India
Financial Statements of Companies
*The excess tax liability is to be considered as change in accounting estimate and the effect of
such change should be included in the determination of net profit or loss of the affected
period, in accordance with para 23 of AS 5 (Revised).
Note on Remuneration to Managing Director: `
Profit as disclosed 43,737
Add :Provision for Taxation 65,000
Managing Director’s Remuneration 5,723
Profit before calculating the Remuneration 1,14,460
Remuneration @ 5% 5,723
Balance Sheet of DOW Books Ltd., as at 31st March, 2012
Rs.
Particulars Note No
Equity and Liabilities
1 Shareholders' funds
92,000
a Share capital 1
34,593
b Reserves and Surplus 2
2 Non-current liabilities
80,000
a Long-term borrowings 3
3 Current liabilities
46,223
a Trade Payables 4
1,385
b Other current liabilities 5
77,144
c Short-term provisions 6
3,31,345
Total
Assets
1 Non-current assets
a Fixed assets
1,29,695
i Tangible assets 7
1,000
b Non-current investments 8
2 Current assets
95,000
a Inventories
75,000
b Trade receivables 9
16,400
c Cash and cash equivalents 10
14,250
d Short-term loans and advances 11
3,31,345
Total
2.59
© The Institute of Chartered Accountants of India
Accounting
Note : There is contingent liability for calls that may be made on partly paid shares, ` 1,000
and for Bills under discount, ` 1,500.
Notes to accounts
Rs.
1 Share Capital
Equity share capital
Issued & subscribed & paid up
92,000
9,200 Equity Shares of Rs. 10 each fully paid
92,000
Total
2 Reserves and Surplus
1,000
Capital reserve
20,000
General reserve (proposed transfer)
13,593
Surplus (Profit & Loss A/c)
34,593
Total
3 Long-term borrowings
Secured
50,000
Loan from bank (secured against stock)
Unsecured
30,000
9% Debentures
80,000
Total
4 Trade Payables
43,123
Sundry Creditors
3,100
Bills Payable
46,223
Total
5 Other current liabilities
710
Interest due on bank loan
675
Interest accrued on debentures
1,385
Total
6 Short-term provisions
65,000
Provision for taxation
11,040
Proposed Dividend
1,104.0
Dividend Distribution tax
77,144
Total
2.60
© The Institute of Chartered Accountants of India
Financial Statements of Companies
7 Tangible assets
Land 30,000
Building 100,000
Less: Depreciation (26,875) 73,125
Furniture 9,000
Less: Disposed off (800)
Add: Addition during the year 3,200
Less: Depreciation (4,830) 6,570
Motor Car 35,000
Less: Depreciation (15,000) 20,000
Total 129,695
8 Non-current investments
Other investments
Partly paid shares 1,000
Total 1,000
9 Trade receivables
Unsecured but considered good
More than6 months 10,000
Others 65,000 75,000
Total 75,000
10 Cash and cash equivalents
Cash at bank 12,600
Cash in hand 3,800
Total 16,400
11 Short-term loans and advances
Bills Receivable 4,000
Deposits 8,350
Advertisement material on hand 1,500
Security Deposit 400
Total 14,250
12 Employee benefits expense
Managing Director’s Remuneration 5,723
Directors’ Fees 2,000
Total 7,723
2.61
© The Institute of Chartered Accountants of India
Accounting
13 Other operating expenses
Establishment Expenses 35,200
Repairs, Renewals 2,600
Motor Car Expenses 4,200
Travelling & Conveyance 1,600
Total 43,600
14 Selling and administrative expenses
Sales Commission 3,200
Advertisement 2,000
Printing & Stationery 900
Telephone 1,350
Cost of furniture (to be capitalised) (3,200)
Total 4,250
15 Finance costs
Debenture Interest 2,700
Bank Interest 710
Total 3,410
16 Depreciation and amortization expense
Buildings 1,875
Furniture & Fittings 730
Motor Car 5,000
Total 7,605
17 Other expenses
Loss on sale of furniture 100
Total 100
Working Notes :
(i) ` 710, interest due to Bank, may also be adjusted against the bank balance, specially
when the Bank is entitled to debit to company’s accounts under the Loan Agreement.
(ii) The wrong credit given by the Bank, subsequently adjusted, is only an item for the Bank
Reconciliation Statement.
(iii) The Share Suspense Account has a balance of ` 1,000 after adjustment of the amount in
arrear. It has to be credited to Capital Reserve.
(iv) ` 150 out of OYT deposit has to be treated as telephone charges.
2.62
© The Institute of Chartered Accountants of India
Financial Statements of Companies
(v) Previous year’s figures have not been given since these are not available. Stastical
information required to be disclosed under Schedule VI has also not been given for the
same reason.
Illustration 6
You are required to prepare a Profit and Loss Account and Balance Sheet from the following
Trial Balance extracted from the books of the International Hotels Ltd., on 31st March, 2012:
Dr. Cr.
` `
Authorised Capital-divided into 5,000 6% Preference Shares
of ` 100 each and 10,000 equity Shares of ` 100 each 15,00,000
Subscribed Capital -
5,000 6% Preference Shares of ` 100 each 5,00,000
Equity Capital 8,05,000
Purchases - Wines, Cigarettes, Cigars, etc. 45,800
- Foodstuffs 36,200
Wages and Salaries 28,300
Rent, Rates and Taxes 8,900
Laundry 750
Sales - Wines, Cigarettes, Cigars, etc. 68,400
- Food 57,600
Coal and Firewood 3,290
Carriage and Cooliage 810
Sundry Expenses 5,840
Advertising 8,360
Repairs 4,250
Rent of Rooms 48,000
Billiard 5,700
Miscellaneous Receipts 2,800
Discount received 3,300
Transfer fees 700
Freehold Land and Building 8,50,000
Furniture and Fittings 86,300
Stock on hand, 1st April, 2011
Wines, Cigarettes. Cigars,etc. 12,800
Foodstuffs 5,260
Cash in hand 2,200
Cash with Bankers 76,380
Preliminary and formation expenses 8,000
2.63
© The Institute of Chartered Accountants of India
Accounting
2,000 Debentures of ` 100 each (6%) 2,00,000
Profit and Loss Account 41,500
Sundry Creditors 42,000
Sundry Debtors 19,260
Investments 2,72,300
Goodwill at cost 5,00,000
General Reserve 2,00,000
19,75,000 19,75,000
Wages and Salaries Outstanding 1,280
Stock on 31st March, 2012
Wines Cigarettes and Cigars, etc. 22,500
Foodstuffs 16,400
Depreciation :
Furniture and Fittings @ 5% p.a. : Land and Building @ 2% p.a.
The Equity capital on 1st April, 2011 stood at ` 7,20,000, that is 6,000 shares fully paid and
2,000 shares ` 60 paid. The directors made a call of ` 40 per share on 1st October 2011. A
shareholder could not pay the call on 100 shares and his shares were then forfeited and
reissued @ ` 90 per share as fully paid. The Directors propose a dividend of 8% on equity
shares, transferring any amount that may be required from General Reserve. Ignore Taxation.
Solution
Profit and Loss Account of International Hotels Ltd.
for the year ended 31st March, 2012
Particulars Notes Amount
I. Revenue from operations 10 183,200
II. Other income (Discount received) 3,300
III. Total Revenue (I + II) 186,500
IV. Expenses:
Cost of materials consumed 11 25,060
Purchases of Stock-in-Trade 12 45,800
Changes in inventories of finished goods work-in-
progress and Stock-in-Trade 13 (9,700)
Employee benefits expense 14 29,580
Other operating expenses 15 18,000
Selling and administrative expenses 16 14,200
Finance costs 17 12,000
Depreciation and amortization expense 18 21,315
Total expenses 156,255
2.64
© The Institute of Chartered Accountants of India
Financial Statements of Companies
V. Profit (Loss) for the period (III - IV) 30,245
Balance from previous year 41,500
Transfer from General Reserve 22,255
Less: Proposed Dividend 94,000
Profit (Loss) carried forward to Balance Sheet 0
Balance Sheet of International Hotels Ltd. as on 31st March, 2012
Rs.
Particulars Note No
Equity and Liabilities
1 Shareholders' funds
13,00,000
a Share capital 1
1,82,745
b Reserves and Surplus 2
2 Non-current liabilities
2,00,000
a Long-term borrowings 3
Other long term liabilities (Interest on 12,000
b debentures)
3 Current liabilities
43,280
a Trade Payables 4
94,000
b Short-term provisions 5
18,32,025
Total
ASSETS
1 Non-current assets
a Fixed assets
9,14,985
i Tangible assets 6
5,00,000
ii Intangible assets (Goodwill)
2,72,300
b Non-current investments
2 Current assets
38,900
a Inventories 7
19,260
b Trade receivables
78,580
c Cash and cash equivalents 8
8,000
d Other current assets 9
18,32,025
Total
2.65
© The Institute of Chartered Accountants of India
Accounting
Notes to accounts
Rs.
1 Share Capital
Equity share capital
Authorised
10,00,000
10,000 Equity shares of Rs 100 each
Issued & subscribed
8,00,000
8,000 Equity Shares of Rs. 100 each
Preference share capital
Authorised
5,00,000
5,000 6% Preference shares of Rs 100 each
Issued & subscribed
5,00,000
5,000 6% Preference shares of Rs 100 each
13,00,000
Total
2 Reserves and Surplus
5,000
Capital reserve
2,00,000
General reserve
(22,255) 1,77,745
Less : Amount used to pay dividend
1,82,745
Total
3 Long-term borrowings
Secured
200,000
6% Debentures
200,000
Total
4 Trade Payables
42,000
Sundry Creditors
1,280
Wages and Salaries Outstanding
43,280
Total
5 Short-term provisions
Proposed dividend
30,000
Preference Dividend
64,000
Equity Dividend
94,000
Total
2.66
© The Institute of Chartered Accountants of India
Financial Statements of Companies
6 Tangible assets
8,50,000
Freehold land & Buildings
(17,000) 8,33,000
Less: Depreciation
86,300
Furniture and Fittings
(4,315) 81,985
Less: Depreciation
9,14,985
Total
7 Inventories
22,500
Wines, Cigarettes & Cigars, etc.
16,400
Foodstuffs
38,900
Total
8 Cash and cash equivalents
76,380
Cash at bank
2,200
Cash in hand
78,580
Total
9 Other current assets
8,000
Preliminary Expenses
8,000
Total
10 Revenue from operations
Sale of products
68,400
Wines, Cigaretters, Cigars etc.
57,600 1,26,000
Food
Sale of services
48,000
Room Rent
5,700
Billiards
2,800
Miscellaneous Receipts
700 57,200
Transfer fees
1,83,200
Total
11 Cost of materials consumed
5,260
Opening Stock
36,200
Add: Purchases during the year
(16,400) 25,060
Less: Closing stock
25,060
Total
2.67
© The Institute of Chartered Accountants of India
Accounting
12 Purchases of Stock-in-Trade
Wines, Cigarettes etc. 45,800
Total 45,800
13 Changes in inventories of finished goods work-in-
progress and Stock-in-Trade
Wines, Cigarettes etc.
Opening stock 12,800
Less: Closing Stock (22,500) (9,700)
Total (9,700)
14 Employee benefits expense
Wages and Salaries 28,300
Add: Wages and Salaries Outstanding 1,280 29,580
Total 29,580
15 Other operating expenses
Rent, Rates and Taxes 8,900
Coal and Firewood 3,290
Laundry 750
Carriage and Cooliage 810
Repairs 4,250
Total 18,000
16 Selling and administrative expenses
Advertising 8,360
Sundry Expenses 5,840
Total 14,200
17 Finance costs
Interest on Debentures 12,000
Total 12,000
18 Depreciation and amortization expense
Land and Buildings 17,000
Furniture & Fittings 4,315 21,315
Total 21,315
2.68
© The Institute of Chartered Accountants of India
Financial Statements of Companies
Illustration 7
From the following particulars furnished by Pioneer Ltd., prepare the Balance Sheet as at
31st March, 2012 as required by Part I, Schedule VI of the Companies Act. Give notes at the
foot of the Balance Sheet as may be found necessary -
Debit Credit
` `
Equity Capital (Face value of ` 100) 10,00,000
Calls in Arrears 1,000
Land 2,00,000
Building 3,50,000
Plant and Machinery 5,25,000
Furniture 50,000
General Reserve 2,10,000
Loan from State Financial Corporation 1,50,000
Stock :
Finished Goods 2,00,000
Raw Materials 50,000 2,50,000
Provision for Taxation 68,000
Sundry Debtors 2,00,000
Advances 42,700
Proposed Dividend 60,000
Profit and Loss Account 1,00,000
Cash Balance 30,000
Cash at Bank 2,47,000
Preliminary Expenses 13,300
Loans (Unsecured) 1,21,000
Sundry Creditors (For Goods and Expenses) 2,00,000
19,09,000 19,09,000
The following additional information is also provided :
(1) Miscellaneous expenses included ` 5,000 audit fees and ` 700 for out of pocket
expenses paid to the auditors.
(2) 2,000 equity shares were issued for consideration other than cash.
(3) Debtors of ` 52,000 are due for more than six months.
(4) The cost of assets:
Building ` 4,00,000
Plant and Machinery ` 7,00,000
Furniture ` 62,500
2.69
© The Institute of Chartered Accountants of India
Accounting
(5) The balance of ` 1,50,000 in the loan account with State Finance Corporation is
inclusive of ` 7,500 for interest accrued but not due. The loan is secured by
hypothecation of the Plant and Machinery.
(6) Balance at Bank includes ` 2,000 with Perfect Bank Ltd., which is not a Scheduled Bank.
(7) Bills receivable for ` 2,75,000 maturing on 30th June, 2012 have been discounted.
(8) The company had contract for the erection of machinery at ` 1,50,000 which is still
incomplete.
Solution :
Pioneer Ltd.
Balance Sheet as on 31st March, 2012
Rs.
Particulars Notes
Equity and Liabilities
1 Shareholders' funds
9,99,000
a Share capital 1
3,10,000
b Reserves and Surplus 2
2 Non-current liabilities
2,63,500
a Long-term borrowings 3
3 Current liabilities
2,00,000
a Trade Payables
7,500
b Other current liabilities 4
1,28,000
c Short-term provisions 5
19,08,000
Total
Assets
1 Non-current assets
a Fixed assets
11,25,000
Tangible assets 6
2 Current assets
2,50,000
a Inventories 7
2,00,000
b Trade receivables 8
2,77,000
c Cash and cash equivalents 9
42,700
d Short-term loans and advances
13,300
e Other current assets 10
19,08,000
Total
2.70
© The Institute of Chartered Accountants of India
Financial Statements of Companies
Notes to accounts
Rs.
1 Share Capital
Equity share capital
Issued & subscribed & called up
10,000 Equity Shares of Rs. 100 each 10,00,000
(Of the above 2,000 shares have been issued for
consideration other than cash)
(1,000) 9,99,000
Less: Calls in arrears
9,99,000
Total
2 Reserves and Surplus
2,10,000
General Reserve
1,00,000
Surplus (Profit & Loss A/c)
3,10,000
Total
3 Long-term borrowings
Secured
Term Loans
Financial Corporation 1,42,500
(Secured by hypothecation of Plant and Machinery)
1,21,000
Unsecured
2,63,500
Total
4 Other current liabilities
7,500
Interest accrued but not due on loans (SFC)
7,500
Total
5 Short-term provisions
68,000
Provision for taxation
60,000
Proposed Dividend
1,28,000
Total
6 Tangible assets
2,00,000
Land
4,00,000
Buildings
(50,000) 3,50,000
Less: Depreciation
7,00,000
Plant & Machinery
(1,75,000) 5,25,000
Less: Depreciation
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62,500
Furniture & Fittings
(12,500) 50,000
Less: Depreciation
11,25,000
Total
7 Inventories
50,000
Raw Material
2,00,000
Finished goods
2,50,000
Total
8 Trade receivables
52,000
Debts outstanding for a period exceeding six months
1,48,000
Other Debts
2,00,000
Total
9 Cash and cash equivalents
Cash at bank
2,45,000
with Scheduled Banks
2,000 2,47,000
with others (Perfect Bank Ltd.)
30,000
Cash in hand
2,77,000
Total
10 Other current assets
13,300
Preliminary expenses
13,300
Total
Notes:
(a) Estimated amount of contract remaining to be executed on capital account and not
provided for ` 1,50,000.*
(b) Bills receivable discounted maturing on 31st June, 2012 amount to ` 2,75,000.
* It has been assumed that the company had given this contract for purchase of machinery.
Summary
1. Meaning of Company has been defined in section 3 of companies act 1956
2. Books of accounts should be maintained at Registered office of company unless
BOD otherwise decide.
3. In case of Branch office proper books should be kept at intervals of not more
than 3 months.
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4. Proper books are not deemed to be kept if they do not provide a true and fair
view of state of affairs of company.
5. A number of Statutory Books have been prescribed under Companies’ Act which
is to be maintained along with statistical books to keep a record of all
transactions.
6. Annual Return is to be filed by every company having a share capital within 60
days of holding AGM.
7. Final accounts include balance sheet and profit and loss account in case of
entity carrying on business for profit and income and expenditure instead of
profit and loss account in case of business not carrying on for profit.
8. They should give a true and fair view of state of affairs of company.
9. Balance sheet may be prepared either in horizontal form or vertical form where
as no format is prescribed for profit and loss account.
10. Off lately presentation of final accounts is being done in a summarized form as per
which figures of income and expenditure, assets and liabilities grouped under main
heads are shown in the profit and loss account and the balance sheet and their details
and other information requiring disclosure are also disclosed in summarized form.
11. Managerial Remuneration calculated as a percentage on profit and is governed
by various sections of the Companies Act, 1956 and also Schedule XIII of the
Companies Act, 1956.
12. Following things have been dealt with under various sections :
(a) Overall maximum managerial remuneration payable
(b) Managerial remuneration in case of absence or inadequacy of profits
(c) Remuneration payable to whole-time directors and part-time directors
(d) Ascertaining net profit of company
(e) Remuneration of manager
13. Determining amount of profits available for distribution is an important function and
depends on a number of factors, like their composition, the amount of provisions and
appropriations that must be made out of them in priority, etc.
14. Capital cannot be returned to shareholders by way of dividend.
15. Appropriating a part of profits may be done as a result of decision of BOD or as per law.
Though percentages have been prescribed but voluntary transfer in excess of that is
permitted.
16. Dividend may be declared out of reserves subject to certain conditions.
17. Interest on capital may be paid in certain cases subject to approval of government
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specially in projects involving long gestation period.
18. Part II of Schedule VI of the Companies Act prescribe the appropriations to be shown In
the Profit and Loss Account of the year: which includes amounts provided for:
(i) Repayment of share capital; and
(ii) Repayment of loans [clause (vii)].
19. Capital reserves include reserves which are not intended for distribution and include
profit prior to incorporation, on sale of fixed assets profit on reissue of forfeited shares,
credit balance in capital reduction account. In short only profits or a surplus of a capital
nature can be credited to such a reserve.
20. Dividend implies distribution of divisible profit of a company among the members
according to the number of shares held by each of them in the capital of the company
and the rights attaching thereto.
21. Declaration is done in the annual general meeting on the basis of the recommendation
of the Board of Directors.
22. Payment of interim dividend is done on basis of decision of BOD.
23. Holders of preference shares are entitled to receive a dividend at a fixed rate before
any dividend is declared on equity shares.
24. Dividend on partly paid shares is done as per articles of company and in its absence as
per table A
25. Payment must be done with within 30 days of declaration and separate provisions are
applicable in case of non payment including penalty for non compliance with the given
provisions
26. Dividend Distribution Tax is the amount charged on amount declared as dividend
distributed or paid by such company by way of dividends (whether interim or otherwise)
27. It shall be treated as the final payment of tax on the dividends and no further credit
therefore shall be claimed by the company or by any person in respect of the tax so
paid.
28. As far as disclosure is concerned income tax and other taxation shall be separately
shown
29. Dividend Distribution Tax liability is generally shown as below the line item should be
recognized in the accounts of the same financial year in which the dividend concerned
is recognized
30. Dividends cannot be declared except out of profits
31. Capital cannot be returned to the shareholders by way of dividend
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Unit – 2 : Cash Flow Statement
Learning Objectives
After studying this unit, you will be able to:
♦ Define cash low statement as per AS 3
♦ Differentiate operating, investing and financing activities
♦ Learn the various elements of cash and cash equivalents
♦ Prepare cash flow statement both by direct method and indirect method.
2.1 Introduction
Accounting Standard 3, Cash Flow Statements, was issued in March, 2004. It is based on
cash concept of profit
Benefits:
(a) Cash flow statement provides information about the changes in cash and cash
equivalents of an enterprise.
(b) identifies cash generated from trading operations
(c) The operating cash surplus which can be applied for investment in fixed assets.
(d) Portion of cash from operations is used to pay dividend and tax and the other portion is
ploughed back.
(e) Very useful tool of planning.
Purpose:
Cash flow statements are prepared to explain the cash movements between two points of
time.
Sources of Cash:
1. Issue of shares and debentures and raising long-term loan.
2. Sale of investments and other fixed assets.
3. Cash from operations.
4. Decrease in Cash.
Applications of Cash
1. Redemption of preference shares and debentures and repayment of long-term loan.
2. Purchase of investments and other fixed assets.
3. Payment of tax.
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4. Payment of dividend.
5. Increase in cash.
Increase in cash or decrease in cash is put in the applications and the sources respectively
just to balance the cash flow statement.
At this juncture students may note that in cash flow statement changes in all balance sheet
items are to be taken into consideration separately for explaining movement of cash.
2.2 Elements of Cash Fund
As per AS 3, issued by the Council of the ICAI, ‘Cash Funds’ include:
(i) Cash in hand,
(ii) Demand deposits with banks, and
(iii) Cash equivalents.
(a) Components
(cid:190) Short term highly liquid investments that are readily convertible into known
amounts of cash and which are subject to an insignificant risk of changes in value
(cid:190) Securities with short maturity period of, say, three months or less from the
date of acquisition
(b) Objective
(cid:190) Deploy, for a short period, idle cash required to meet short-term cash-
commitments.
(c) Examples
(cid:190) Acquisition of preference shares, shortly before their specified redemption
date, bank deposits with short maturity period, etc.
Conclusion: Thus, cash flow statement deals with flow of cash funds but does not
consider the movements among cash, bank balance payable on demand and investment
of excess cash in cash equivalents. Examples are cash withdrawn from current account,
cash deposited in bank for 60 days, etc.
2.3 Classification of Cash Flow Activities
1. Inflow of Activities
Which increase cash
2. Outfow of Activities
Decrease cash
3. In Short: provides explanation for changes in cash position of the business entity.
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4. As Per Accounting Standard 3 cash flows during the period are classified as
(a) Operating Activities
(b) Investing activities
(c) Financing activities
2.3.1 Operating Activities
1. Definition
These are the principal revenue generating activities of the enterprise.
2. Net Impact
Net impact of operating activities on flow of cash is reported as ‘Cash flows from
operating activities’ or ‘cash from operation’.
3. Key Indicator
The amount of cash flows from operating activities is a key indicator of the extent to
which the operations of the enterprises have generated sufficient cash flows to :
(a) Maintain the operating capability of the enterprise,
(b) Pay dividends, repay loans, and
(c) Make new investments without recourse to external sources of financing.
4. Information Provided
It provides useful information about internal financing.
5. Benefits
Information about the specific components of historical operating cash flows is useful,
in conjunction with other information, in forecasting future operating cash flows.
2.3.2 Investing activities
1. Definition
These are the acquisition and disposal of long-term assets and other investments not
included in cash equivalents.
2. Separate Disclosure
The separate disclosure of cash flows arising from investing activities is important
because the cash flows represent the :
(a) Extent to which the expenditures have been made for resources intended to
generate future incomes and cash flows.
2.3.3 Financing activities
1. Definition
These are the activities that result in changes in the size and composition of the
owner’s capital (including preference share capital) and borrowings of the enterprise.
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2. Separate Disclosure
The separate disclosure of cash flows arising from financing activities is important
because it is useful in predicting claims on future cash flows by providers of funds (both
capital and borrowings) to the enterprise.
2.4 Calculation of Cash Flows from operating Activities
1. Components:
Cash flows from operating activities result from the transactions and other events that
enter into the determination of net profit or loss.
2. Examples
(a) cash receipts from the sale of goods and the rendering of services;
(b) cash receipt from fees, commission and other revenue;
(c) cash payments to suppliers for goods; cash payments to employees and so on.
3. Methods
An enterprise can determine cash flows from operating activities using either:
(a) Direct Method
The direct method, whereby major classes of gross cash receipts and gross cash
payments are considered; or
(b) Indirect Method
the indirect method, whereby net profit or loss is adjusted for the effects of
transactions of a non-cash nature, deferrals or accruals of past or future
operating cash receipts or payments, and items of income or expense associated
with investing or financing activities.
2.4.1 Direct Method
1. Information Required
(a) Gross receipts and gross cash payments may be obtained from the accounting
records to ascertain cash flows from operating activities.
(b) For example,
(i) information about cash received from debtors,
(ii) payment to creditors, cash expenses etc., which may be obtained by an
analysis of cash book.
(c) In actual practice, the relevant information is obtained by adjusting sales, cost of
sales and other items in the profit and loss accounts for:
(cid:190) Changes during the period in inventories and operating receivables and
payables;
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(cid:190) Other non-cash items such as depreciation on fixed assets, goodwill
written off, preliminary expenses written off, loss or gain on sale of fixed
assets etc.; and
(cid:190) Other items for which the cash effects are investing or financing cash
flows. Examples are interest received and paid, dividend received and paid
etc., which are related to financing or investing activities and are shown
separately in the cash flow statement.
(cid:190) This procedure of computation of cash flows from operating activities is
also known as income statement method.
2. The direct method provides information which may be useful in estimating future cash
flows and which is not available under the indirect method and is, therefore, considered
more appropriate than the indirect method.
3. However, indirect method of determining the cash from operating activities is more
popular in actual practice.
2.4.2 Indirect Method
1. Method of Determination
Under the indirect method, the net cash from operating activities is determined by
adjusting net profit or loss instead of individual items appearing in the profit and loss
account. Net profit or loss is also adjusted for the effect of:
(a) changes during the period in inventories and operating receivables and
payables;
(b) non-cash items such as depreciation; and
(c) all other items for which the cash effects are financing or investing cash flows.
(d) The indirect method is also known as ‘reconciliation method’.
2.4.3 Conclusion
1. It is worth noting that both direct and indirect methods adjust current assets and current
liabilities related to operating activities to determine cash from operating activities.
2. But direct method adjust individual items of profit and loss account and indirect method
adjusts overall net profit (or loss) to determine cash from operation.
3. Therefore, indirect method fails to provide break-up of cash from operations.
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Proforma of ‘Cash Flow from Operating Activities’ by indirect method
`
Net Profit for the year -
Add: Non-Cash Expenses: -
Depreciation -
Share Discount Written off -
Loss on Sale of Assets -
Provision for taxation, etc. -
Less: Non-Cash Incomes:
Profit on Sale of Assets -
Net Profit after Adjustment for Non-Cash Items (-)
Cash from operation = Net Profit (after adjustment for Non-cash
Items)
- Increase in Current Assets
+ Decrease in Current Asset
+ Increase in Current Liabilities
- Decrease in Current Liability
2.5 Calculation of Cash Flows from Investing Activities
1. These activities are related to the acquisition and disposal of long-term assets, non-
operating current assets and investments which results in outflow of cash.
2. Disposal of the aforesaid assets results in inflow of cash.
3. Thus, inflows and outflows related to acquisition and disposal of assets, other than those
related to operating activities, are shown under this category
2.6 Calculation of Cash Flows from Financing Activities
1. These activities are basically related to the changes in capital and borrowing of the
enterprise which affect flow of cash.
2. Redemption of shares and repayment of borrowings results in outflow of cash.
3. Thus inflows and outflows related to the amount of capital and borrowings of the
enterprise are shown under this head.
Students are advised to refer full text of revised Accounting Standard on Cash Flow
Statements (AS 3) for the better understanding of the chapter.
Illustration 1
The following summary cash account has been extracted from the company’s accounting
records:
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Summary Cash Account
(` ’000)
Balance at l.1.2010 35
Receipts from customers 2,783
Issue of shares 300
Sale of fixed assets 128
3,246
Payments to suppliers 2,047
Payments for fixed assets 230
Payments for overheads 115
Wages and salaries 69
Taxation 243
Dividends 80
Repayments of bank loan 250 (3,034)
Balance at 31.12.2010 212
Prepare Cash Flow Statement of this company Hills Ltd. for the year ended 31st December
2010 in accordance with AS-3 (Revised).
The company does not have any cash equivalents.
Solution
Hills Ltd.
Cash Flow Statement for the year ended 31st December 2010
(Using direct method)
(` ’000)
Cash flows from operating activities
Cash receipts from customers 2,783
Cash payments to suppliers (2,047)
Cash paid to employees (69)
Other cash payments (for overheads) (115)
Cash generated from operations 552
Income taxes paid (243)
Net cash from operating activities 309
Cash flows from investing activities
Payments for purchase of fixed assets (230)
Proceeds from sale of fixed assets 128
Net cash used in investing activities (102)
Cash flows from financing activities
Proceeds from issuance of share capital 300
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Bank loan repaid (250)
Dividend paid (80)
Net cash used in financing activities (30)
Net increase in cash and cash equivalents 177
Cash and cash equivalents at beginning of period 35
Cash and cash equivalents at end of period 212
The solution given in above illustration has been prepared using simply the summarised cash
account. To team the technique of preparing Cash Flow Statement from comparative balance
sheets and profit and loss account, the above illustration has been expanded by giving
following further detailed information extracted from the records of Hills Ltd.
Illustration 2
The following data were provided by the accounting records of Ryan Ltd. at year-end, March
31, 2010:
Income Statement
`
Sales 6,98,000
Cost of Goods Sold (5,20,000)
Gross Margin 1,78,000
Operating Expenses
(including Depreciation Expense of ` 37,000) (1,47,000)
31,000
Other Income (Expenses)
Interest Expense paid (23,000)
Interest Income received 6,000
Gain on Sale of Investments 12,000
Loss on Sale of Plant (3,000)
(8,000)
23,000
Income tax (7,000)
16,000
Comparative Balance Sheets `
31st March 31st March
2010 2009
Assets 7,15,000 5,05,000
Plant Assets (1,03,000) (68,000)
Less: Accumulated Depreciation 6,12,000 4,37,000
Investments (Long term) 1,15,000 1,27,000
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Financial Statements of Companies
Current Assets: 1,44,000 1,10,000
Inventory 47,000 55,000
Accounts Receivable 46,000 15,000
Cash 1,000 5,000
Prepaid Expenses 9,65,000 7,49,000
Liabilities
Share Capital 4,65,000 3,15,000
Reserves and Surplus 1,40,000 1,32,000
Bonds 2,95,000 2,45,000
Current Liabilities:
Accounts Payable 50,000 43,000
Accrued Liabilities 12,000 9,000
income Taxes Payable 3,000 5,000
9,65,000 7,49,000
Analysis of selected accounts and transactions during 2009-2010
1. Purchased investments for ` 78,000
2. Sold investments for ` 1,02,000. These investments cost ` 90,000
3. Purchased plant assets for ` 1,20,000
4. Sold plant assets that cost ` 10,000 with accumulated depreciation of ` 2,000 for ` 5,000.
5. Issued ` 1,00,000 of bonds at face value in an exchange for plant assets on 31st March,
2010
6. Repaid ` 50,000 of bonds at face value at maturity.
7. Issued 15,000 shares of ` 10 each.
8. Paid cash dividends ` 8,000.
Prepare Cash Flow Statement as per AS-3 (Revised), using indirect method.
Solution
Ryan Ltd.
Cash Flow Statement
for the year ending 31st March, 2010
` `
Cash flows from operating activities
Net profit before taxation 23,000
Adjustments for:
Depreciation 37,000
Gain on sale of investments (12,000)
Loss on sale of plant assets 3,000
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Interest expense 23,000
Interest income (6,000)
Operating profit before working capital changes 68,000
Decrease in accounts receivable 8,000
Increase in inventory (34,000)
Decrease in prepaid expenses 4,000
Increase in accounts payable 7,000
Increase in accrued liabilities 3,000
Cash generated from operations 56,000
Income taxes paid* (9,000)
Net cash from operating activities 47,000
Cash flows from investing activities
Purchase of plant assets (1,20,000)
Sale of plant assets 5,000
Purchase of investments (78,000)
Sale of investments 1,02,000
Interest received 6,000
Net cash used in investing activities (85,000)
Cash flows from financing activities
Proceeds from issuance of share capital 1,50,000
Repayment of bonds (50,000)
Interest paid (23,000)
Dividends paid (8,000)
Net cash from financing activities 69,000
Net increase in cash (and cash equivalents) 31,000
Cash (and cash equivalents) at beginning of period 15,000
Cash (and cash equivalents) at end of period 46,000
*Working Note:
`
Income taxes paid:
Income tax expense for the year 7,000
Add: Income tax liability at the
beginning of the year 5,000
12,000
Less: Income tax liability at
the end of the year 3,000
9,000
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Financial Statements of Companies
Illustration 3
The balance sheets of Sun Ltd. for the years ended 31st March 2010 and 2009 were
summarised thus:
2010 2009
` `
Equity Share Capital 60,000 50,000
Reserves:
Profit and Loss Account 5,000 4,000
Current Liabilities:
Creditors 4,000 2,500
Taxation 1,500 1,000
Proposed dividends 2,000 1,000
72,500 58,500
Fixed Assets (at w.d.v.)
Premises 10,000 10,000
Fixtures 17,000 11,000
Vehicles 12,500 8,000
Short-term investments 2,000 1,000
Current Assets
Stock 17,000 14,000
Debtors 8,000 6,000
Bank and Cash 6,000 8,500
72,500 58,500
and the profit and loss account for the year ended 31st March, 2010 disclosed
`
Profit before tax 4,500
Taxation (1,500)
Profit after tax 3,000
Proposed dividends (2,000)
Retained profit 1,000
Further information is available:
Vehicles Fixtures
` `
Depreciation for year 1,000 2,500
Disposals:
Proceeds on disposal — 1,700
Written down value — (1,000)
Profit on disposal 700
Prepare a Cash Flow Statement for the year ended 31st March, 2010.
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Solution
Sun Ltd.
Cash Flow Statement
for the year ended 31st March, 2010
` `
Cash flows from operating activities
Net Profit before taxation 4,500
Adjustments for:
Depreciation 3,500
Profit on sale of vehicles (700)
Operating profit before working capital changes 7,300
increase in sundry debtors (2,000)
Increase in inventories (3,000)
Increase in sundry creditors 1,500
Cash generated from operations 3,800
Income taxes paid (1,000)
Net cash from operating activities 2,800
Cash flows from investing activities
Sale of vehicles 1,700
Purchase of vehicles (8,000)
Purchase of fixtures (7,000)
Net cash used in investing activities (13,300)
Cash flows from financing activities
Issue of shares for cash 10,000
Dividends paid (1,000)
Net cash from financing activities 9,000
Net decrease in cash and cash equivalents 1,500
Cash and cash equivalents at beginning of period (See Note 1) 9,500
Cash and cash equivalents at end of period (See Note 1) 8,000
Note to the Cash Flow Statement
Cash and Cash Equivalents
31.3.2010 31.3.2009
Bank and Cash 6,000 8,500
Short-term investments 2,000 1,000
Cash and cash equivalents 8,000 9,500
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Working Notes:
`
1. Income taxes paid
Income tax expense for the year 1,500
Add: Income tax liability at the
beginning of the year 1,000
2,500
Less: Income tax liability at the
end of the year 1,500
1,000
2. Dividend paid
Proposed dividend for the year 2,000
Add: Amount payable at the beginning
of the year 1,000
3,000
Less: Amount payable at the
end of the year 2,000
1,000
3. Fixed assets acquisitions
Fixtures Vehicles
` `
W.D.V. at 31.3.2010 17,000 12,500
Add back:
Depreciation for the year 1,000 2,500
Disposals — 1,000
18,000 16,000
Less: W.D.V. at 31.12.2009 11,000 8,000
Acquisitions during 2009-2010 7,000 8,000
Illustration 4
Ms. Jyoti of Star Oils Limited has collected the following information for the preparation of
cash flow statement for the year 2010 :
(` in Lakhs)
Net Profit 25,000
Dividend (including dividend tax) paid 8,535
Provision for Income tax 5,000
Income tax paid during the year 4,248
Loss on sale of assets (net) 40
Book value of the assets sold 185
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Depreciation charged to Profit & Loss Account 20,000
Amortisation of Capital grant 6
Profit on sale of Investments 100
Carrying amount of Investment sold 27,765
Interest income on investments 2,506
Interest expenses of the year 10,000
Interest paid during the year 10,520
Increase in Working Capital (excluding Cash & Bank Balance) 56,075
Purchase of fixed assets 14,560
Investment in joint venture 3,850
Expenditure on construction work in progress 34,740
Proceeds from calls in arrear 2
Receipt of grant for capital projects 12
Proceeds from long-term borrowings 25,980
Proceeds from short-term borrowings 20,575
Opening cash and Bank balance 5,003
Closing cash and Bank balance 6,988
Required :
Prepare the Cash Flow Statement for the year 2010 in accordance with AS 3, Cash Flow
Statements issued by the Institute of Chartered Accountants of India. (make necessary
assumptions).
Solution
Star Oils Limited
Cash Flow Statement
for the year ended 31st December, 2010
(` in lakhs)
Cash flows from operating activities
Net profit before taxation (25,000 + 5,000) 30,000
Adjustments for :
Depreciation 20,000
Loss on sale of assets (Net) 40
Amortisation of capital grant (6)
Profit on sale of investments (100)
Interest income on investments (2,506)
Interest expenses 10,000
Operating profit before working capital changes 57,428
Changes in working capital (Excluding cash and bank balance) (56,075)
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Cash generated from operations 1,353
Income taxes paid (4,248)
Net cash used in operating activities (2,895)
Cash flows from investing activities
Sale of assets 145
Sale of investments (27,765 + 100) 27,865
Interest income on investments 2,506
Purchase of fixed assets (14,560)
Investment in joint venture (3,850)
Expenditure on construction work-in progress (34,740)
Net cash used in investing activities (22,634)
Cash flows from financing activities
Proceeds from calls in arrear 2
Receipts of grant for capital projects 12
Proceeds from long-term borrowings 25,980
Proceed from short-term borrowings 20,575
Interest paid (10,520)
Dividend (including dividend tax) paid (8,535)
27,514
Net increase in cash and cash equivalents 1,985
Cash and cash equivalents at the beginning of the period 5,003
Cash and cash equivalents at the end of the period 6,988
Working note :
Book value of the assets sold 185
Less : Loss on sale of assets 40
Proceeds on sale 145
Assumption :
Interest income on investments ` 2,506 has been received during the year.
Illustration 5
From the following Summary Cash Account of X Ltd. prepare Cash Flow Statement for the
year ended 31st March, 2010 in accordance with AS 3 (Revised) using the direct method. The
company does not have any cash equivalents.
Summary Cash Account for the year ended 31.3.2010
` ’000 ` ’000
Balance on 1.4.2009 50 Payment to Suppliers 2,000
Issue of Equity Shares 300 Purchase of Fixed Assets 200
Receipts from Customers 2,800 Overhead expense 200
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Sale of Fixed Assets 100 Wages and Salaries 100
Taxation 250
Dividend 50
Repayment of Bank Loan 300
Balance on 31.3.2010 150
3,250 3,250
Solution
X Ltd.
Cash Flow Statement for the year ended 31st March, 2010
(Using direct method)
` ’000 ` ’000
Cash flows from operating activities
Cash receipts from customers 2,800
Cash payments to suppliers (2,000)
Cash paid to employees (100)
Cash payments for overheads (200)
Cash generated from operations 500
Income tax paid (250)
Net cash from operating activities 250
Cash flows from investing activities
Payments for purchase of fixed assets (200)
Proceeds from sale of fixed assets 100
Net cash used in investing activities (100)
Cash flows from financing activities
Proceeds from issuance of equity shares 300
Bank loan repaid (300)
Dividend paid (50)
Net cash used in financing activities (50)
Net increase in cash 100
Cash at beginning of the period 50
Cash at end of the period 150
Illustration 6
Given below is Profit and Loss Account of ABC Ltd. and relevant Balance Sheet information:
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Financial Statements of Companies
Profit and Loss Account of ABC Ltd.
for the year ended 31st December, 2010
` in lakhs
Revenue:
Sales 4,150
Interest and dividend 100
Stock adjustment 20
Total (A) 4,270
Expenditure:
Purchases 2,400
Wages and salaries 800
Other expenses 200
Interest 60
Depreciation 100
Total (B) 3,560
Profit before tax (A – B) 710
Tax provision 200
Profit after tax 510
Balance of Profit and Loss account brought forward 50
Profit available for distribution (C) 560
Appropriations:
Transfer to general reserve 200
Proposed dividend 300
Distribution tax 30
Total (D) 530
Balance (C – D) 30
Relevant Balance Sheet information 31.12.2010 31.12.2009
` in lakhs ` in lakhs
Debtors 400 250
Inventories 200 180
Creditors 250 230
Outstanding wages 50 40
Outstanding expenses 20 10
Advance tax 195 180
Tax provision 200 180
Assessed tax liability
Compute cash flow from operating activities using both direct and indirect method.
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Accounting
Solution
By direct method
Computation of Cash Flow from Operating Activities
` `
Cash Receipts:
Cash sales and collection from debtors
Sales + Opening debtors – Closing debtors (A) 4,150 + 250 − 400 4,000
Cash payments:
Cash purchases & payment to creditors
Purchases + Opening creditors – Closing creditors 2,400 + 230 − 250 2,380
Wages and salaries paid 800 + 40 − 50 790
Cash expenses 200 + 10 – 20 190
Taxes paid – Advance tax 195
(B) 3,555
Cash flow from operating activities (A – B) 445
By indirect method
Profit before tax 710
Add: Non-cash items : Depreciation 100
Add: Interest : Financing cash outflow 60
Less: Interest and Dividend : Investment cash inflow (100)
Less: Tax paid (195)
Working capital adjustments
Debtors 250−400 (−150)
Inventories 180−200 (−20)
Creditors 250−230 20
Outstanding wages 50−40 10
Outstanding expenses 20−10 10 (130)
Cash flow from operating activities 445
Summary
• Dealt under AS 3
• Based on cash concept of profit
• Benefits include providing information relating to changes in cash and cash
equivalents of an enterprise.
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Financial Statements of Companies
• Useful tool of planning
• Cash funds include :
(a) Cash in hand
(b) Demand deposits with banks
(c) Cash equivalents
• Cash flow activities may be classified as inflow and outflow but as per AS-3 they are
classified as Operating Activities, Investing activities, Financing activities
• Operating activities are principal revenue generating activities
• Investing Activities relate to acquisition and disposal of long-term assets and
other investments
• Financing Activities include the ones which result in changes in the size and
composition of the owner’s capital (including preference share capital) and borrowings
of the enterprise.
• Methods to calculate cash flow from operating activities include:
(a) Direct Method
(b) Indirect Method also known as reconciliation method
• In order to calculate cash flow from investing activities inflows and outflows related to
acquisition and disposal of assets, other than those related to operating activities, are
shown under this category
• In order to calculate cash flow from financing activities inflows and outflows related to
the amount of capital and borrowings of the enterprise are shown under this head
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