Maintaining Cash Flow Statement

The following points highlight the top two methods for maintaining cash flow statement. The methods are: 1. Direct Method 2. Indirect Method.

Cash Flow Statement: Method # 1. Direct Method:

Under the direct method, cash receipts from operating revenues and cash payments for operating expenses are calculated and shown in the cash flow statement in a summarised form. The difference between the total cash receipts and the total cash payments is shown as the net cash provided by (or used in) operating activities.

The following are some examples of usual cash receipts and cash payments resulting from operating activities:

(i) Cash sales of goods and services,

(ii) Cash collected from credit customers,  

(iii) Cash receipts on account of royalties, fees, commissions and other revenues,

(iv) Cash payments for purchase of inventories,

(v) Cash payments for various operating expenses like rent, power, electricity etc.,

(vi) Cash payments of wages and salaries to employees,

(vii) Cash payment of income tax to Government.

Amounts which appear in the income statement are accrual based. Various adjustments have to be made to them to convert them into cash-based items.

The necessary information required to make these adjustments may be available from balance sheet in the beginning of the accounting period, the balance sheet at the end of the accounting period or some other source. Some calculations with imaginary figures are given below to illustrate the point.

Illustration 1:

From the following particulars, prepare a cash flow statement for the year ended 31st March, 2012, using direct method:

Cash Flow Statement: Method # 2. Indirect Method:

Under the indirect method, the necessary adjustments are made to the figure of net profit (loss) as disclosed by the profit and loss account to arrive at the figure of net cash flow from operating activities: It involves a reconciliation of the net profit with net cash flow from operating activities, and hence this method may as well be called reconciliation method.

The process of reconciliation (making adjustments) may be undertaken as outlined below:

(a) Take net profit before tax and extra-ordinary items.

(b) Make adjustments for non-cash and non-operating items.

(i) Add depreciation on fixed assets

(ii) Add amount of goodwill written off

(iii) Add amount of preliminary expenses, discount on issue of shares, discount on issue of debentures, underwriting commission and brokerage on issue of shares and debenture, cost of issue of shares and debentures and such similar accounts, written off

(iv) Add or deduct, as the case may require, other non-operating items.

(c) Make adjustments for gains and losses on sale of fixed assets and investments.

(i) Deduct gains on sale of fixed assets

(ii) Deduct gains on sale of investments

(iii) Add losses on sale of fixed assets

(iv) Add losses on sale of investments

(d) Make adjustments for changes in current operating assets (except cash and cash equivalents) and current operating liabilities (except bank overdraft).

(i) Add decrease in the accounts of current operating assets (except cash and cash equivalents) like Trade Debtors, Bills Receivable, Stock-in-trade and Prepaid Expenses.

(ii) Deduct increases in the abovementioned accounts.

(iii) Add increases in the accounts of currents operating liabilities (except Bank Overdraft) like Creditors, Bill Payable and Outstanding Expenses.

(iv) Deduct decreases in the abovementioned accounts.

(e) Deduct income-tax paid

(f) Make adjustments for extraordinary items, if any.

The result will be the figure of net cash provided by (used in) operating activities.

Illustration 2:

From the following particulars, prepare cash flow statement for the year ended 31st March, 2012 using the indirect method:

The following additional information is provided to you:

(i) During the year, furniture of the book value of Rs 150 thousand was sold for Rs 110 thousand and new machinery costing Rs 1,000 thousand was purchased and put into operation.

(ii) New equity shares were allotted at par for Rs 500 thousand.

(iii) Taxation liability for the accounting year 2010-2011 was settled at Rs 800 thousand, the amount having already been paid. For the year 2011 -2012 an advance tax of Rs 950 thousand was paid.

(iv) During the year, dividend with the dividend distribution tax thereon for the year 2010-11, Rs 690 thousand was paid.

Illustration 3:

The following particulars pertain Cee Ltd.:

Illustration 4:

Zed Ltd. presents to you the following balance sheet and income statement:

 

Illustration 5:

Moon Ltd. gives you the following information for the year ended 31st March, 2012:

Illustration 6:

Ms. Jyothi of Star Oils Limited has collected the following information for the preparation of cash flow statement for the year ended 31st March, 2012:

Illustration 7:

The following are the changes in the account balances taken from the Balance Sheets of PQ Ltd. as at the beginning and end of the year:

Illustration 8:

Given below are the condensed balance sheet and the statement of profit and loss of Lambakadi Ltd. for one year.

(x) It has been assumed that foreign exchange gain represents the effect of charges in exchange rates on cash and cash equivalents held in a foreign currency.