Statement of Changes in

Financial Position (SCFP)

12

Financial position refers to “the status of an enterprise as shown by its

assets, liabilities and equity as reported in its balance sheet” (Nobes
2002). In general, outside interested parties want financial statements
which include Income Statement and Balance Sheet. Both the companies
Acts (1913 and 1994) prescribed that “any member of a company shall be
entitled to be furnished with copies of the balance-sheet and the Income
Statement and the auditor’s report” free of any charge. These two
financial statements fail to show the financial position changes from year
to year. Changes in the financial position over years have become an issue
of interest to both internal and external interested parties. This unit has
been designed to explain the statements that can answer to the issue. This
unit will cover the following lessons:

Fund Flow Statement

Cash Flow Statement & [IAS # and 7]
Value-added Statement
School of Business

Lesson-1: Fund Flow Statement

After completing this lesson, you are expected to be able to:
To explain the term “Fund”;
 To explain the need of “Fund Flow Analysis”;
 To describe the methods of preparing Funds Flow Statement; and
To compare alternative formats of Funds Flow Statements.

Fund

The word “Fund” means different things to different persons. It is

therefore, necessary to be clear on the meaning of word ‘Funds’.

Christopher Nobes: The Penguin Dictionary of Accounting:

“Fund is a pool of resources set aside for particular purposes. For

example, a pension fund is a separate legal entity that contains
investments and other resources designed to provide payments to
pensioners.”

This definition is related to a separate type of accounting. Moreover,

government accounting is also known as fund accounting.

Jerry M. Rosenberg: The Essential Dictionary of Investing and Finance

Funds: a sum of money or stock convertible to money, assets.

Eric L. Kohler: Koher’s Dictionary for Accountants

(i) An asset or group of assets within any organization,

separated physically or in the accounts or both from other
assets and limited to specific use.
(ii) Cash, securities, or other assets placed in the hands of a
trustee, principal or income or both being expended in
accordance with the terms of a formal agreement.
(iii) Current assets less current liabilities (on accrual basis):
working capital; a term used in flow statements.
(iv) Cash
According to R.N. Anthony – “Funds are the economic values that change
hands in business transactions or that exist in the assets of a business.”
Thus, there are the following statements:
(a) Cash Flow Statement;
(b) Statement showing working capital changes;
(c) Funds Flow Statement.

These statements show the movement of resources or the changes

occurring in the concerned segment (cash, working capital or total

Management Accounting Page-2

 Bangladesh Open University

resources) between two time bound periods in an enterprise. Thus, a funds

flow statement shows the changes in the flow of resources into and outside
the enterprise, within a given time period. Gordon and Shillinglaw are of
the opinion that “analysis of changes in structure ..................... is the
domain of funds flow analysis. By examining the changes in the balance
sheet items between balance sheet dates, one many determine the sources
of the funds obtained and the ways in which these funds were used during
this limited time period.”
Thus, financial statements of two time-bound periods i.e. (year 1) and
(year 2) can show:
i. The sources and uses of finance for the period 1;
ii. The sources and uses of finance for the period 2; and
iii. The changes in sources and uses of finance between the
period 1 and period 2.

Funds- Flow Statement

Eric L. Kohler:
“A statement of funds received and expended; a statement of changes in
financial position or statement of sources and applications of funds in
which elements of net income and working capital contributing to an
understanding of the whole of financial operations during the reporting
period replace totals of these items.”
Yorston, Smyth and Brown:
“A funds statement is prepared in summary form to indicate changes (and
trends if prepared regularly) occurring in items of financial condition
between two different balance sheet dates.”
Significance of Funds Flow Statement
From balance sheets and income statements, one can draw inference about
the financial position of the concern on a specific date. However, an
analysis of the changes in the quantity and quality of financial affairs of a
concern over the accounting period should be more revealing. This is the
precise justification of preparing Fund Flow Statements. Fund flow
statements analyse the changes in financial management methods and
suggest to improve the quality of the economic health of an enterprise year
after year. The three groups of beneficiaries of funds flow statements are:
(a) Managers of the enterprise;
(b) Existing and potential owners of the enterprise, and
(c) Existing and potential creditors.
(a) Managers of the enterprise:

From funds flow analysis, the managers of the enterprise may have the
following benefits:
(i) Quantity and quality of resource movement can be known;

Unit-12 Page-3
School of Business

(ii) Compliance of laid-down policies regarding financing and

portfolio decisions can be known;
(iii) Success of policies laid down and signals regarding corrective
actions can also be available;
(iv) Funds flow analysis can act as a “Guide to Future actions” in
the following ways:
(1) Review of cash plans or budgets based on historic and
projected funds flow statement;
(2) Evaluation of feasible alternative sources of finance and
uses of finance for the future;
(3) Forecasting the long-range cash needs and cash
availability;
(4) Estimating the funds available for the capital expansion
programs by identifying the surplus funds.

In brief, funds flow analysis aids managers in the function of financial

planning and control.

Investors [Existing & Potential]: The funds flow analysis helps the
existing and potential investors to appraise the quality of the company’s
financial health and policies which becomes the basis of the investors’
decisions. Moreover, funds flow analysis can thought light on the
following issues:
(a) Utilization of funds contributed by investors;
(b) Utilization of different sources of funds and future fund
generating capacity of an enterprise;
(c) Implication of funds flow on profitability, dividend policy,
payout policy, earning per share, dividend per share and plunge
back policy.

Creditors: Creditors are interested in the solvency and liquidity of an

enterprise. The funds flow analysis can indicate the present and potential
liquidity of an enterprise. Creditors interest in the funds flow statement
stems from the need to assess the creditworthiness of an enterprise and its
ability to honour the periodic obligations in respect of interest payment
and principal repayment. The funds flow statement by revealing the
changes in the direction of the flow of resources serve the purpose very
well. Projected and historical funds flow statements can guide
management action and decisions.

Other Uses of Funds Flow Statement [Perry Mason]:

Funds Flow Statements try to provide useful signals relating to the
following:
(a) How were the profits used in business?
(b) What is the justification for the declared dividends?
(c) Why were the dividends not more in spite of increase in the

Management Accounting Page-4

 Bangladesh Open University

earnings per share?

(d) From where did the enterprise get funds to declare dividends?
(i) in excess of current year’s profits and
(ii) in spite of a loss in the current year?
(e) What is the justification for raising borrowed funds to support
expansion programmes, although the cash flow from within
exceeds the required amount.
(f) What are the sources of finance to support the purchase of fixed
assets?
(g) How was the proceed of the sale of fixed assets disposed?
(h) How was the proceed from the issue of debentures employed
and how was the redemption of borrowed capital financed?
(i) How was the enterprise able to meet the additional demands on
the working capital?
(j) Why is net working capital moving inversely with the profits of
an enterprise?

Fund Flow
Analysis

Short Term Long Term

Funds Flow Funds Flow

Changes in Changes in Changes in Fixed Changes in

Current Assets Current Liabilities Assets Owner’s Funds

Operational Non Operational Non Operational Non Operational Non

Operational Operational Operational Operational

 Changes in  Advance  Accounts  Provision for  Current  Purchase/  Profit  Profit/ loss
Debtors,  Tax Payable Dividend, Depreciation Sale of transferred on extra
Stock  Short term Taxes assets to Reserve ordinary
Sources items
 Balancing
Depreciation
Construction of the Funds Flow Statement
For preparing Funds Flow Statements the following information are to be
reconembered:
(i) Balance sheet at the beginning of the period for which the statement
of funds flow will be prepared;
(ii) Balance sheet at the end of the period for which the Funds Flow

Unit-12 Page-5
School of Business

Statement will be prepared;

(iii) A summarised income statement or at least material information
from that statement, and
(iv) Lastly a condensed statement of retained earnings clarifying fund
effects of ownership transactions.
Format of Funds Flow Statement
Niloy & Company Ltd.
Funds Flow Statement
For the Year Ended on December 31, 2006
Sources: Taka
(a) Issue of share capital
(b) Issue of Debentures
(c) Institutional loans
(d) Sale of investments & other fixed assets
(e) Funds from operations
(f) Non-trading items .......... dividend received total
Total
Applications:
(a) Payment of share capital (Redeemable)
(b) Repayment of institutional loans
(c) Redemption of Debentures
(d) Purchase of investments and other assets
(e) Non-trading payments .......... dividend paid
Total
Increase / Decrease in Net Working capital as per
Statement of Changes in Net Working Capital

Format of the Statement of Changes in Net Working Capital:

................... Ltd.
Statement of Changes in Working Capital
For the Year Ended on December 31, 2007
Changes in
Particulars Dec 31, Dec 31,
Working Capital
2006 2007
Increase Decrease
Taka Taka Taka Taka
Current Assets:
Stock
Debtors
Cash
Bank
Bills Receivable
Prepaid Expenses

Management Accounting Page-6

 Bangladesh Open University

Total
Current Liabilities:
Creditors
Bills Payable
Outstanding Expense
Total
Net Working Capital
Increase / Decrease in Net
Working Capital
Total

While preparing a schedule of changes in working capital it should be

noted that:

(i) (a) An increase in current assets increases working capital;

(b) A decrease in current assets decreases working capital;
(c) An increase in current liabilities decreases working capital;
and
(d) A decrease in current liabilities increases working capital

(ii) All the above changes in current assets and current liabilities are
combined together to show the change in the period end Net
Working Capital from the beginning Net Working Capital

Determination of Funds from Operation:

Among the various sources of funds, it is relatively most difficult to
determine the funds from operation. It is a problem, because the “Income
Statement” or the Profit & Loss Account is prepared on accrual basis.
Therefore, the income figure does not show the net cash inflow. Therefore,
this figure should be adjusted to find out the amount of net cash inflow
during the period.

(A) The following items charged as expenses in the Income Statement

should be added:
(i) Depreciation, Amortization of patents, goodwill;
(ii) Writing off of discount on issues of shares and debentures;
(iii) Writing off of preliminary expenses
(iv) Transfer to reserves
(v) Provision for taxation
(vi) Loss on sale of assets

“All non-funds and / or non-operating debits should be excluded while

converting the income data into fund data.”

(B) The following items added to income should be deduced to determine

Unit-12 Page-7
 School of Business

funds from operation:

(i) Income from dividend,
(ii) Transfer back of excess provision from taxation,
(iii) Refund of tax
(iv) Rental Income
(v) Profit on sale of assets

Example # 1

From the following balance sheets of Alpha Ltd. make out (i) Statement of
Changes in Working Capital and (ii) Funds Flow Statement
2006 2007 2006 2007
Capital & Liabilities Tk. Tk. Assets Tk. Tk.
Equity Share Capital 300,000 400,000 Goodwill 100,000 80,000
8% Redeemable 150,000 100,000 Land & Buildings 200,000 170,000
Preference share capital Plant 80,000 200,000
Capital Reserve -- 20,000 Investment 20,000 30,000
General Reserve 40,000 50,000 Sundry Debtors 140,000 170,000
Profit & Loss Account 30,000 48,000 Stock 77,000 109,000
Proposed Dividend 42,000 50,000 Bills Receivable 20,000 30,000
Sundry Creditors 25,000 47,000 Cash in hand 15,000 10,000
Bills Payable 20,000 16,000 Cash at bank 10,000 8,000
Liability for expenses 30,000 36,000 Preliminary 15,000 10,000
Provision for taxation 40,000 50,000 Expenses
Total 677,000 817,000 Total 677,000 817,000
Additional information:

(i) A piece of land had been sold out in 2007 and the profit on sale has
been credited to capital reserve.

(ii) A machine has been sold for Tk.10,000. The written down value of the
machine was Tk.72,000. Depreciation of Tk.10,000 is charged on plant
account in 2007.

(iii) The investments are trade investments Tk.3,000 by way of dividend

was received including Tk.1,000 pre-acquisition profit which has been
credited to Investment Account.

(iv) An interview dividend of Tk.20,000 has been paid in 2007.

Solution:
(i) Alpha Ltd.
Statement of Changes in Working Capital
During the Year 2007
Particulars 2006 2007 Changes in working

Management Accounting Page-8

 Bangladesh Open University

Tk. Tk. capital

Increase Decrease
Current Assets:
Stock 77,000 1,09,000 32,000
Sundry Debtors 140,000 1,70,000 30,000
Bills Receivable 20,000 30,000 10,000
Cash in hand 15,000 10,000 5,000
Cash at Bank 10,000 8,000 2,000
Total 262,000 327,000
Current Liabilities:
Sundry Creditors 25,000 47,000 22,000
Bills Payable 20,000 16,000 4,000
Liability for expenses 30,000 36,000 6,000
Total 75,000 99,000
Working Capital 1,87,000 2,28,000
Increase in Working Capital 41,000 41,000
228,000 228,000 76,000 76,000

Alpha Ltd.
Statement of Sources and Application of Funds
During the Year 2007
Sources Tk. Applications Tk.
Issue of Equity 100,000 Pref. Shares redeemed 50,000
Sale of Land 50,000 Interim dividend paid 20,000
Sale of a machine 10,000 Purchase of plant 142,000
Dividend Received 3,000 Investment purchased 11,000
Profit from operations 1,43,00 Payment of proposed 42,000
0 dividend of 2006
Increase in working capital 41,000
306,000 306,000
Notes:
(i) Funds from operation:
Profit & Loss A/C balance at the end of 2007: Tk.48,000
Less: Beginning balance: (30,000)
Dividend received (2,000)
Add: Proposed Dividend Tk.50,000
Provision for taxation 10,000
General Reserve 10,000
Loss on sale of a machine 2,000
Depreciation on plant 10,000

Unit-12 Page-9
School of Business

Goodwill written off 20,000

Preliminary Exp. written off 5,000
Interim Dividend 20,000
1,27,000
Funds from operation: Tk.1,43,00
0
(ii) Purchase of plant:
Beginning balance Tk.80,000
Less written down balance of plant sold 22,000
58,000
Add purchase of plant 142,000
Ending balance Tk.200,00
0
(iii) Investment purchased:
Beginning balance: 20,000
Ending balance 30,000
Tk.10,000
Add reduction by capital profit 1,000
Cost of purchase: Tk.11,000

Example # 2:

The following are the summaries of the Balance Sheet of Time and Talent
Limited as at 31st December, 2006 and 31st December 2007.
2006 (Tk.) 2007 (Tk.)
Sundry Creditors 39,500 41,135
Bills Payable 33,780 11,525
Bank Overdraft 59,510 –
Provision for taxation 40,000 50,000
Reserves 50,000 50,000
Profit & Loss Account 39,690 41,220
Share Capital 200,000 260,000
Total 462,480 453,880
Cash 2,500 2,700
Sundry Debtors 85,175 72,625
Sundry Advances 2,315 735
Stock 111,040 97,370
Land and Building 148,500 144,250
Plant & Machinery 112,950 116,200

Management Accounting Page-10

 Bangladesh Open University

Goodwill – 20,000
Total 462,480 453,880
The following additional information is obtained from the general ledger:

(i) During the year ended 31st December, 2007 an interim dividend of
Tk.26,000 was paid.

(ii) The assets of another company were purchased for Tk.60,000

payable in fully paid shares of the company. These assets consisted
of stock Tk.21,640, machinery Tk.18,360 and goodwill Tk.20,000.
In addition sundry purchases of plant were made totaling Tk.5,650.

(iii) Income tax paid during the year amounted to Tk.25,000.

(iv) The net profit for the year before tax was Tk.62,530.

You are required to prepare a statement showing the sources and

applications of Funds for the year 2007 and a schedule setting out changes
in working capital.

Solution:

Time & Talent Limited

Schedule of Change in Working Capital
During 2007
Change in Working
Dec., 31, Dec. 31 Capital
Particulars 2006 Tk. 2007 Tk.
Increase Decrease
Tk. Tk.
Current Assets
Cash 2,500 2,700 200
Debtors 85,175 72,625 12,550
Advances 2,315 735 1,580
Stocks 111,040 97,370 13,670
Total 201,030 173,430
Current Liabilities
Sundry Creditors 39,500 41,135 1,635
Bills Payable 33,780 11,525 22,255
Bank Overdraft 59,510 – 59,510
Provision for taxation 40,000 50,000 10,000
Total 172,790 102,660
Net Working capital 28,240 70,770
Increase in Working capital 42,530 42,530
Total 70,770 70,770 81,965 81,965

Unit-12 Page-11
School of Business

Time & Talent Limited

Statement of Sources and Applications of Funds
For the Year Ended December 31, 2007
Sources Taka Applications Taka
Share Capital 60,000 Purchase of Goodwill 20,000
Funds from Operation: Purchase of Machinery 24,010
Net Profit Tk.62,530 Increase in current assets 42,530
Add Depreciation: Interim dividend paid 26,000
Plant: 20,760 Provision for taxes 35,000
Building 4,250 25,010 87,540
147,540 147,500

Example # 3:

The following Schedule shows the Balance sheets in condensed form of

B.C. Limited at the beginning and end of the year:

Particulars 31-12- 31-12-

2006 2007
Cash Tk.50,409 Tk.40,535
Sundry Debtors 77,180 73,150
Temporary Investments 110,500 84,000
Prepaid expenses 1,210 1,155
Inventories 92,154 105,538
Cash Surrender values of life investment 4,607 5,353
Land 25,000 25,000
Buildings, Machinery etc. 147,778 182,782
Debenture discount 4,305 2,867
Total Taka 513,143 520,380
Sundry Creditors 103,087 95,656
Outstanding Expenses 12,707 21,663
4% Mortgage Debentures 82,000 68,500
Accumulated Depreciation 96,618 81,633
Allowance for Inventory loss 2,000 8,500
Reserve for contingencies 106,731 134,178
Surplus in P/L account 10,000 10,250

Management Accounting Page-12

 Bangladesh Open University

Share Capital 100,000 100,000

Total Taka 513,143 520,380
The following information concerning the transaction is available.
(i) Net profit for 2007 as per profit and loss account was Tk.49,097.
(ii) A 10% cash dividend was paid during the year.
(iii) The premium on life insurance policies was Tk.2,773 of which
Tk.1,627 were charged to profit and loss account of the year.
(iv) New machinery was purchased for Tk.31,365 and machinery
costing Tk.32,625 was sold during the year. Depreciation on
machinery sold had accumulated to Tk.29,105 at the date of sale. It
was as scrap for Tk.1,500. The remaining increase in fixed assets
resulted from construction of a building.
(v) The mortgage debentures mature at the rate of Tk.5,000 per year. In
addition to the above the company purchased and retired Tk.8,500
of the debentures at Tk.103. Both the premium on retirement and
the applicable discount were charged to profit and loss account.
(vi) The allowance for inventory loss was created by a charge to
expense in each year to provide for obsolete items.
(vii) A debit to reserve for contingencies of Tk.11,400 was made during
the year. This was in respect of a past tax liability.
You are required to prepare a statement showing the sources and
application of funds for the year 2007.

Solution:

B.C. Limited
Statement of Changes in Working Capital
During the Year 2007
31 Dec. 31 Dec. Change in Working
Particulars 2006 2007 Capital
Increase Decrease
Current Assets: Tk. Tk. Tk. Tk.
Cash 50,409 40,535 9,874
Sundry Debtors 77,180 73,150 4,030
T. Investments 110,500 84,000 26,500
Prepaid Expenses 1,210 1,155 55
Inventories 92,154 105,538 13,384 13,670
Total 331,453 304,378
Current Liabilities
Sundry Creditors 103,087 95,656 7,431
Outstanding Expenses 12,707 21,663 8,956
115,794 117,319

Unit-12 Page-13
School of Business

Net Working Capital 215,659 187,059

Decrease in working capital 28,600 28,600
215,659 215,659 49,415 49,415

B.C. Ltd.
Statement of Sources and Applications of Funds
For the Year Ended December 31, 2006
Sources Tk.
Sale of machinery 1,500
Trading Profit:
(Tk.250+10,000+38,847+1,627+2,020+255+ 75,457
6,500+1,438+14,120+400)
Total 76,957
Applications
Purchase of new machinery 31,365
Building construction 36,264
Redemption of Debenture 13,755
Dividend paid 10,000
Premium on life policy 2,773
Tax liability 11,400
1,05,55
7
Decrease in Net working capital 28,600
76,957

Example # 4

The directors of the C Ltd. present you with the balance sheets as on June
30, 2006 and 2007 and ask you to prepare statements which will show
them what has happened to the money which has come into the business
during the year:
Liabilities 30-6-06 30-6-07 Assets 30-6-06 30-6-07
Authorized 15,00,000 15,00,000 Freehold Building 800,000 11,76,000
Caital:15,000 shares of
Tk.100 each
Paid up Capital 13,00,000 14,00,000 Plant & 144,000 3,94,000
Machinery
General Reserves 60,000 40,000 Fixture & Fittings 6,000 5,500
Profit & Loss 36,000 38,000 Cash in hand 1,560 1,280
Appropriation
Provision for purpose 78,000 72,000 Sundry debtors 125,600 1,04,400
of final dividends
Sundry Creditors 76,000 1,12,000 Bills Receivable 7,600 6,400
Bank Overdraft 69,260 1,29,780 Stock 244,000 238,000

Management Accounting Page-14

 Bangladesh Open University

Bills Payable 40,000 38,000 Pre-payments 4,500 6,200

Loans on Mortgage – 5,60,000 Shares in other 80,000 234,000
companies
Goodwill 240,000 220,000
Preliminary 6,000 4,000
expenses
16,59,260 23,89,780 16,59,260 23,89,780
You are given the following additional information for 2006-07:

(a) Depreciation has been charged.

(i) On Freehold building @ 2.5% per annum on cost of

Tk.10,00,000;

(ii) On plant and Machinery @ 8% on cost of Tk.400,000;

(iii) On Fixture and Fittings @ 5% on cost of Tk.10,000.

No depreciation has been written off newly acquired building, plant and
machinery.

(b) Shares in other companies were purchased and dividends amounting

to Tk.6,000 declared out of profits made prior to purchase has been
received and used to write down the investment (shares)

(c) Goodwill has been written down against general reserves.

(d) The proposed dividends for the year 2006 was paid and in addition,
an interim dividend Tk.52,000 was paid.

Solution:

C. Limited
Schedule of Changes in Working Capital
For the Year Ended June 30, 2007
30 June 30 June Change in Working
Particulars 2006 2007 Capital
Increase Decrease
Current Assets: Tk. Tk. Tk. Tk.
Cash in hand 1,560 1,280 280
Sundry Debtors 1,25,600 1,04,400 21,200
Bills Receivable 7,600 6,400 1,200
Stock 244,000 2,38,000 6,000
Prepayments 4,500 6,200 1,700
Total 3,83,260 3,56,280
Current Liabilities:
Sundry Creditors 76,000 1,12,000 36,000
Bank Overdraft 69,260 1,29,780 60,520

Unit-12 Page-15
School of Business

Bills Payable 40,000 38,000 2,000

Total 1,85,260 2,79,780
Net Working Capital 1,98,000 76,500
Decrease in Working Capital 1,21,500 1,21,500
Total 1,98,000 1,98,000 125,200 125,200
C. Ltd.
Statement of Sources and Applications of Funds
For the Year Ended 30th June, 2007
Sources of Funds Tk.
Share Capital 1,00,00
0
Mortgage 5,60,00
0
Dividend received 6,000
Funds from Operations:
Balance (net) Tk.2,000
Dividend paid [72,000+52,000] 124,000
Depreciation charged:
Freehold Building 25,000
Plant & Machinery 32,000
Fixture & Fittings 500 57,500
Preliminary Expenses 2,000 1,85,50
0
Total 8,51,50
0
Application of Funds:
Purchase of buildings 4,01,00
0
Purchase of plant and machinery 2,82,00
0
Purchase of new shares 1,60,00
0
Dividends [78,000 + 52,000] 1,30,00
0
9,73,00
0
Decrease in Net Working Capital 1,21,50
0

Example # 5

Management Accounting Page-16

 Bangladesh Open University

The balance sheet of Wong Ltd. as on December 31, 2006 was as follows:
Liabilities Tk. Assets Tk.
6% Redeemable preference Land and building 200,000
share capital (filly paid shares Plant & Machinery 680,000
of Tk.100 each) 200,000 Patents 100,000
Equity share capital (fully paid Trade Investments 250,000
shares of Tk.100 each) 500,000 Investments, in Govt. Securities as
Capital redemption reserve current assets 70,000
account 100,000 Stock in trade 120,000
Revenue reserve & surplus 250,000 Book Debts 170,000
7% Debentures 250,000 Less Provision
Liabilities for gods & service 170,000 for Bad Debt 10,000 160,000
Provisions for income tax 180,000 Cash 110,000
Proposed equity dividend 50,000 Preliminary expenses 10,000
Total 17,00,000 Total 17,00,000

The company has prepared the following projected profit and loss account
for 2007:
Dr. Cr.
Particulars Taka Particulars Taka
Opening Stock 1,20,000 Sales 24,00,000
Purchases 15,00,000 Closing Stock 1,80,000
Wages 2,60,000 Income from trade investments 9,000
Salaries and other expenses 2,80,000 Profit on sales of machinery 6,000
Provision for depreciation 97,000 Saving in provision for income
Provision for income tax 1,90,000 tax for 2006 15,000
Preference dividend 12,000
Proposed equity dividend 60,000
Preliminary expenses 5,000
Balance of profit 86,000
26,10,000 26,10,000

You are given the under mentioned further information:

(i) Provision for depreciation as on December 31, 2006 was 2,30,000
against plant and machinery and Tk.20,000 against land and
buildings of the amount provided against depreciation in 2007
Tk.5000 will be for land and buildings.
(ii) At the end of 2007, the redeemable preference shares are to be
redeemed.
(iii) New machinery Tk.150,000 will be installed towards the end of
2007.
(iv) The company allows one month’s credit to its customers and
receives 1.5 months credit from its suppliers. Wages, salaries and
other expenses are paid one month in arrear.

Unit-12 Page-17
School of Business

Prepare the balance sheet of the company as it is likely to be on December

31, 2007 and also a statement showing sources and applications of funds
during the year. Assume that to the extent necessary government securities
will be sold at book value and bank overdraft will not be raised.
Solution:
Wong Ltd.
Projected Balance Sheet
As on December 31, 2007
Liabilities & Capital Taka Assets Taka
Equity share: (Fully paid shares 500,000 Land & Building 195,000
of Tk.100 each) Plant & Machinery 728,000
Capital Redemption Reserve 300,000 Patents 100,000
Revenue Reserve & Surplus 136,000 Trade Investments 250,000
7% Debentures 250,000 Investment in Govt.
Securities as current assets 20,500
Liabilities for goods & service 232,500 Stock-in trade 180,000
Provision for taxation 190,000 Book Debts: 200,000
Proposed Dividends 60,000 Less Provision 10,000 190,000
Cash –
Preliminary expenses 5,000
16,68,500 16,68,500

Cash A/C
Taka Taka
Balance 1,10,000 Payment to suppliers 14,82,500
Collection from debtors 23,70,000 Salaries & Wages 4,95,000
Sale of machine 16,000 Redemption of Shares 2,00,000
Income from trade investment 9,000 Purchase of machine 1,50,000
Sale of Govt. Securities 49,500 Pref. dividend paid 12,000
Income tax paid 1,65,000
Equity divided paid 50,000
2554,500 25,54,500

Wong Ltd.
Schedule of Changes in Net Working Capital
For the Year Ended December 31, 2007
31st Dec. 31st Dec. Changes in Working
Particulars 2006 2007 Capital
Increase Decrease
Current Assets: Tk. Tk. Tk. Tk.
Cash 110,000 – 110,000
Trade Investments 250,000 250,000 –

Management Accounting Page-18

 Bangladesh Open University

Govt. Securities 70,000 20,500 49,500

Stock-in trade 120,000 180,000 60,000
Book Debt 160,000 190,000 30,000
Total 600,000 640,000
Current Liabilities
Liabilities for Goods & 170,000 232,500 62,500
Services
Provisions for income tax 180,000 190,000 10,000
Total 350,000 422,500
Net Working capital 250,000 218,000
Decrease in Net Working 32,000 142,000
Capital
Total 250,000 250,000 232,000 232,000

Wong Ltd.
Expected Sources and Applications of Funds
For the Year Ended 31st December, 2007
Sources Tk.
Sale of a machine 16,000
Flow from operation:
Profit balance Tk.86,000
Add: Proposed Equity divided 60,000
Proposed Pref. divided 12,000
Planet expenses 5,000
Depreciation 97,000
260,000
Less Profit on sale 6,000 254,000
Total 270,000
Applications:
Purchase of machines 150,000
Redemption Shares 200,000
Dividend paid (50,000 + 12,000) 62,000
412,000
Decrease in Working Capital 142,000

Example # 6
Given below are the condensed Balance Sheets, Income Statement and
Statement of reconciliation of Retained Earnings of ABC Ltd.
Balance Sheet

Unit-12 Page-19
School of Business

(000 omitted)
Dec.31, 2007 Dec. 31,2006
Assets: Tk. Tk. Tk. Tk.
Fixed Assets:
Land 1,548 1,554
Plant 65,070 57,622
Less Depreciation 36,484 28,586 34,048 23,574
Transportation Properties 11676 10858
Less Depreciation 4,778 4,560
6,898 6,298
Current Assets:
Cash 4,298 4,668
Receivables less bad debts 5,274 5,056
Inventories 8,494 7,996
Prepaid expenses 1,562 1,496
Investments 3108 12,168
Total 59,768 62,810
Liabilities & Capital:
Capital:
7% Pref. Share Capital
(Share of Tk.100 each) 7,206 7,206
Equity Capital
(Share of Tk.1 each) 17,406 17,406
Retained Earnings 20,350 19,546
Fixed Liabilities:
Long Term debt 1,220 1,098
Current Liabilities:
Accounts Payable 7,506 6,794
Unpaid Taxes 5,500 10,194
Dividend Payable 518 518
Long-term debt due within
one year: 62 48
Total 59,768 62,810

ABC Ltd.
Income Statement
For the Year End December 31, 2006
(000 omitted)
Tk.

Management Accounting Page-20

 Bangladesh Open University

Sales 62,746
Less cost of sales 45,782
Gross Profit 16,964
Less Expenses:
Selling, General & Administration* 10,440
Interest 38
Taxes 1,364 11,842
Net Operating profit before income tax 5,122
Add: Profit from sale of fixed assets 92
Net profit before income tax 5,214
Less Estimated income tax 2,340
Net income 2,874
* Includes depreciation for the year Tk.3,630
Statement of Reconciliation of Retained Earnings
For the Year Ending 31st December, 2007
(000 omitted)
Tk.
Retained Earnings (1-1-2007) 19,546
Net Income for the year 2,874
Total 22,420
Less Dividends paid: Tk.
Preference 504
Equity 1,566 2,070
Retained Earnings (31-12-07) Tk.20,350
Further information:
(i) Assets with the gross book values (i.e. before deduction for
depreciation shown below were disposed of during 2007.)
Land Tk.24; plant Tk.924; Transportation properties Tk.176.
Depreciation on these assets had been accumulated as given below:
Plant Tk.820; Transportation Properties Tk.156.
The land was sold for its book value of Tk.24. The sale of other fixed
assets resulted in additional proceeds of Tk.216, this was Tk.92 more than
their book value.
(2) Fixed assets totaling Tk.9,384 were acquired during the year but the
break up of this figure among the three categories of fixed assets is not
known.
You are required to prepare a statement of changes in working capital and
a statement of sources and applications of funds.

Unit-12 Page-21
School of Business

Solution:
ABC Ltd.
Statement of Changes in Working Capital
[Tk.’000]
31st Dec. 31st Dec. Change in Working
Particulars 2006 2007 Capital
Increase Decrease
Current Assets: Tk. Tk. Tk. Tk.
Cash 4,668 4,298 – 370
Receivables 5,056 5,274 218 –
Inventories 7,996 8,494 498 –
Prepaid expenses 1,496 1,562 66 –
Investments 12,168 3,108 9060
Total 31,384 22,736
Current Liabilities:
Accounts payable 6,794 7,506 712
Unpaid taxes 10,194 5,500 4694 –
Dividend payable 518 518 – –
Long-term debt: Current 48 62 14
liabilities
Total 17,558 13,586
Net Working Capital 13,830 9,150
Decrease in Net working 4,680 4680
capital
Total 13,830 13,830 10,156 10,156
ABC Ltd.
Statement of Sources and Applications of Funds
For the Year Ended on December 31, 2007
[‘000]
Sources: Tk.
Long-term Loans: 122
Sale of land 24
Sale of other assets 216
Funds from operation: 6,412
Net Profit: 2,874
Less Profit on sale 92
2,782
Plus Depreciation 3,630

Management Accounting Page-22

 Bangladesh Open University

6,412
6,774
Applications:
Purchase of land 18
Purchase of fixed assets 9,366
Dividend paid:
Preference 504
Equity 1,566 2,070
11,454
Decrease in Net Working Capital 4,680

Unit-12 Page-23
School of Business

Lesson-2: Cash Flow Statement

After completing this lesson, you are expected to be able to:

Describe the limitations of Funds Flow Statement.

 Explain the concept of Cash Flow Statement.
 Explain the objectives & benefits of Cash Flow Statement.
 Differentiate between Funds Flow Statement and Cash Flow
Statement.
 Illustrate provisions of IAS # 7 relating to Cash Flow Statement.
 Present the Cash Flow Statement in different methods.

Introduction

An analysis of the history of corporate financial reporting in Bangladesh

shows that at the beginning of the corporate external reporting culture
under the Companies Act 1913, companies were required to publish
“Profit and Loss Account” and “Balance Sheet”. Later on, during sixties
companies started publishing agencies required companies to publish
“Cash Flow Statement”. Naturally, it will be of interest to “Cash Flow
Statement.” This might have happened owing to: (i) changes in the
international scene and (ii) limitations of the Fund Flow Statement.

In 1977 the International Accounting Standards Committee issued IAS # 7

which required enterprises to prepare the statement of changes in financial
position, commonly referred to as the Funds Flow Statement, as an
integral part of financial reporting process. But in 1992, the IASC issued
a revised IAS 7, Cash Flow Statements and made it effective for financial
statements of period beginning on or after January 1, 1994. This
particular change in IAS # 7, might have caused the change in this respect
in Bangladesh. At this point, it is natural to raise questions about the
causes of transmission from “Funds Flow Statement” to “Cash Flow
Statement”. The answer is simple that Funds Flow Statements failed to
serve the needs of users of financial statements. It is claimed that Funds
Flow Statements can help the users in the following ways:
(a) Evaluating the uses of funds by the enterprise;
(b) Determining how these uses are financed;
(c) Providing an insight into the financial operations of a business
enterprise;
(d) Evaluating the financing pattern of the enterprise; and
(e) Serving as a control device.
Although a Funds Flow Statement has many advantage as mentioned
above yet it has some limitations also. These are:

Management Accounting Page-24

 Bangladesh Open University

(i) Funds Flow Statements are not easily understandtable to external

users, because the term “Fund” has various .............
(ii) As a Funds Flow Statement is prepared based on the balance sheets
of two different dates; it has very limited explanation of the
operating activities of an enterprise.
(iii) It fails to measure the ability to generate future positive cash flows;
(iv) It fails to measure the ability to meet obligations and pay dividends;
(v) It fails to identify reasons for differences between income and cash
receipts and payments; and
(vi) It fails to segregate properly cash and non-cash aspects of
enterprises “Investing”; “Financing” and “Operating” transactions.

Cash Flow Statement: [E. L. Kohler]

“A statement of cash (inflow) income and outgo between two given dates,
its components often identified with items operating in balance sheets and
intervening income statements ................. Cash-flow statements are often
regarded by security and credit analysts as providing a better basis for
judgments concerning profits, financial conditions and financial
management than the basis supplied by traditional but now often
compromised income statements, one common derivatives from cash flow
statements often cited by analysts has been growth trends.”

Differences between a Cash Flow Statement and a Funds Flow

Statement”: [S. K. Chakrobarty]

(i) Cash flow statement considers the cash inflows and outflows
only. Funds flow statement shows net changes in current assets
and current liabilities. Thus one ends with changes in cash
balance and the other ends with changes in net working capital.

(ii) A Cash Flow Statement is prepared on the basis of balance sheet

and profit & loss account, whereas a Funds Flow Statement is
prepared on the basis of balance sheet only.

(iii) Cash Flow Statement indicates increase in gross fixed assets

whereas funds flow statement indicates the net increase after
deducting depreciation.

(iv) Cash Flow Statement prepared on the basis of forecast is a

forerunner of a cash budget.

Objectives of a Cash Flow Statement:

Information relating to objectives of cash flow statements is available in

GAAP (U.S); FASB (U. S) and IAS. A comparison of all these sources is
given below:

Unit-12 Page-25
School of Business

GAAP (U.S) FASB (U.S.) IAS

To provide To provide relevant To provide
information about information about information about
cash receipts and the cash receipts cash receipts and
cash payments of an and cash payments cash payments of
entity during a of an enterprise an entity during a
period during a period period

To provide To provide
information about insight into the
the investing and investing and
financing activities financing
during the period activities of the
enterprise

Showed help Help investors, Help investors

investors and creditors and others and creditors
creditors assess: to assess: assess:

(i) The ability to (i) The enterprises (i) The ability to

generate future ability to generate
positive cash generate future
flow. positive future positive cash
net cash flow. flows.
(ii) The ability to
meet obligations (ii) The enterprises (ii) The ability to
and pay ability to meet meet
dividends. its obligation, obligations
its ability to pay and pay
(iii) Reason for the divided and its dividends.
difference need for
between net external (iii) Reasons for
income and financing. differences
cash receipts between
and payments. (iii) The reasons for income and
differences cash receipts
(iv) Both cash and between net and
no-cash aspects income and payments.
of entities associated cash
investing and receipts and (iv) Both cash and
financing payments. non-cash
transactions. aspects of
(iv) The effects on entities
an entity investing and
financial financing
position of both transactions.
its cash and
non-cash invest.

Uses of the Statement of Changes in Financial Position

Commonly used statements of changes in financial position are (i) Funds

Flow Statement (already covered in lesson 1) and the Statement of Cash

Management Accounting Page-26

 Bangladesh Open University

Flow. The Cash Flow Statement is now regarded as an important part of

financial reporting by companies. In Bangladesh it is now mandatory for
listed companies to include cash flow statement in their annual reports.

Cash Flow Statement has an analytical value as well as it is an important

planning tool. It gives a clear picture of the causes of changes in the
company’s cash position. It indicates the financing and investment policies
followed by the company in the past. The statement reveals the non-
current assets acquired by the company and the manner in which they
have been financed from the internal and external sources. Woelfel, C. J.
in his book- Accounting: An Introduction claims that this statement help
answering the following questions:

(i) What is the liquidity position of the firm?

(ii) What are the causes of changes in the firm’s working capital or
cash position?

(iii) What fixed assets are acquired by the firm?

(iv) Did the firm pay dividends or not? If not, was it due to shortage of
funds?

(v) How much of the firms’ working capital needs were met by the
funds generated from current operations?

(vi) Did the firm use external sources of finance to meet its needs of
funds?

(vii) If the external financing was used, what ratios of debt and equity
were maintained?

(viii) Did the company sell any of its non-current assets? If so, what were
the proceeds from such

(ix) Could the firm pay its long term debt as per schedule?

(x) What were the significant investment and financing activities of the
firm that did not involve working capital?

Benefits of Cash Flow Statements [Epstein & Mirza]

Today, the clear consensus of national and international accordingly

standard setters is that the statement of cash flows is a necessary
component of complete financial reporting. The perceived benefits of
presenting the statement of cash flows in conjunction with the statement of
financial position (balance sheet) and the statement of income (or
operations) have been highlighted by IAS 7 to be as follows:

(1) It provides an insight into the financial structure of the enterprise

(including its liquidity and solvency) and its ability to affect the
amounts and timing of cash flows in order to adopt to changing
circumstances and opportunities.

Unit-12 Page-27
School of Business

(2) It provides additional information to the users of financial

statements for evaluating changes in assets, liabilities and equity of
an enterprise.

(3) It enhances the comparability of reporting of operating performance

by different enterprises because it eliminates the effects of using
different accounting treatments for the same transactions and
events.

(4) It serves an indicator of the amount timing and certainty of future

cash flows. Furthermore, if an enterprise has a system in place to
project its future cash flows, the statement of cash flows could be
used as a touchstone to evaluate the accuracy of past projections of
those future cash flows. This benefit is elucidated by the IAS 7 as
follows:

(a) The statement of cash flows is useful in comparing past

assessments of future cash flows against current years
cash flow information.

(b) It is of value in appraising the relationship between

profitability and net cash flows and in assessing the
impact of changing prices.

Definition of Terms

Cash:

Kohler: Money, negotiable money orders and cheques and

balances or deposits with banks after deducting
outstanding cheques.

IAS#7: Cash comprises cash on hand and demand deposits.

Cash Equivalent:

Kohler: Money’s worth, the immediately realizable value of a

good or service received in an exchange.

IAS#7 : Cash equivalents are short term, highly liquid

investments that are readily convertible to known
amounts of cash and which are subject to an
insignificant risk of changes in value.

Cash Flow:

Kohler: The net cash generated by a firm’s operations for a

given time period, that is, cash inflows from collections
of revenue minus cash outflows for payments of
expenses. In security analysis, a popular but some what
cruder, concept of “cash flow” is net income with non-
fund charges, such as depreciation, added back.

Management Accounting Page-28

 Bangladesh Open University

IAS#7: Cash flows are inflows and outflows of cash and cash
equivalents.

Operating Activities:

GAAP (U.S.A) : The transactions not classified as financing or

investing activities, generally involving producing and
delivering goods or providing services.

IAS # 7: Operating activities are the principle revenue producing

activities of the enterprise and other activities that are
not investing or financing activities.

Investing Activities:

GAAP (U.S.A): The transactions the firm engages in which affect

their investment in non-current assets (e.g. purchase or
sale of plant, property and equipment).

IAS # 7: Investing activities are the acquisition and disposal of

long term assets and investment not included in cash
equivalents.

Financing Activities:

GAAP (U.S.A): The transactions of a firm engages in to acquire

and repay capital (e. g., borrowings, sale of capital
stock, repayment etc.)

IAS # 7: Financing activities are activities that result in changes

in the size and composition of the equity capital and
borrowings of the enterprise.

Direct Method:

GAAP: A method which derives the net cash provided by

operating activities from the components of operating
cash receipts and payments as opposed to adjusting net
income for items not affecting cash.

Indirect Method:

GAAP: A method which derives the net cash provided by

operating activities by adjusting net income for revenue
and expenses items not resulting from cash
transactions.

Cash Focus:

The statement of cash flows includes only inflows and outflows of cash
and cash equivalents. On the other hand, it excludes all transactions that
do not directly affect cash receipts and payments. However, IAS # 7

Unit-12 Page-29
School of Business

requires that the effects of transactions not resulting in receipts or

payments of cash be disclosed elsewhere in the financial statement. The
reason for this is that it preserves the statements primary focus on cash
flows from operating, investing and financing activities. Thus, if a
transaction is part cash and part non-cash, only the cash portion is
reported in the statement of cash flows.

Gross vs. Net basis:

On the issue of reporting cash receipts and payments on “Gross” or “net”

basis IAS # 7 conforms with FASB and U.S. GAAP.

IAS # 7

An enterprise should report separately major classes of cash receipts and

gross cash payments arising from investing and financing activities.

Cash flows from the following operating investing or financing activities

may be reported on a net basis:

(a) Cash receipts and payments on behalf of customers when the cash
flow reflect the activities of customers rather than those of the
enterprise; and

(b) Cash receipts and payments for items in which the turnover is
quick, the amounts are large and the maturities are short.

FASB:

Generally, information about the gross amounts of cash receipts and cash
payments during a period is more relevant than information about the net
amount of cash receipts and payments. But net amounts may be used in
cases where (i) net amounts provide sufficient information and (ii) the
turnover is quick, the amounts are large and maturities are short.

GAAP (U.S):

The emphasis in the statement of cash flows is on gross cash receipts and
cash payments. In a few circumstances netting of cash flows is allowed.
Items having quick turnovers, large amounts and short maturities may be
presented as net cash flows if cash receipts and payments pertain to (i)
investments other than cash equivalents (ii) loans receivable and (iii) debts
(original

Classification of Cash Receipts and Cash Payments

IAS # 7 requires that the cash flow statement should report cash flows
during the period classified by operating investing and financing activities.
An enterprise presents its cash flows from operating, investment and
financing activities in a manner which is most appropriate to its business.
Classification by activity provides information that allows users:

(a) to assess the impact of those activities on the financial position of

Management Accounting Page-30

 Bangladesh Open University

the enterprise and the amount of its cash and cash equivalent;

(b) to evaluate the relationship among those activities.

U. S. GAAP differs form the IAS and U. S. GAAP on the issue of

classification of cash flows. IAS and U. S. GAAP are in favor of three
classes, whereas, U.K. GAAP started with 5 classes. The revised U. K.
standard on cash flow reporting requires classification in eight categories.

(i) Operating activities (ii) Returns on investments and servicing of

finance (iii) Taxation (iv) Capital expenditure and financial investment (v)
Acquisition and disposal (vi) Equity dividend paid (vii) Management of
liquid assets and (viii) Financing.

Companies operating in Bangladesh should follow the cash flow

classification by the IAS # 7. There are controversies about the items
included in each category of cash flows.

Cash Flows form Investing Activities:

According to FAS 95 (FASB) investing activities include making and

collecting loans and acquiring and disposing of debt or equity investments
and properly, plant and held for or used in the production of goods or
services by the enterprise (other than materials that are part of the
enterprises inventory). Items to be included under the head investing
activities are given in the chart below suggestions of IAS # 7 must be
followed in Bangladesh.

FASB (U.S.A) GAAP (U.S.A) IAS # 7

Cash inflows Cash inflows Cash inflows

a) Cash receipts from
a. Receipts form a. Principles collections
sale of equity or debt
collection or sale of from loans and sale of
instruments of other
loans made by the other entity’s debt
enterprises and
enterprises and of other instruments.
interest in joint
enterprises debt
ventures (other than
instruments other than
receipts from those
cash equivalents and
instruments considered
certain debt
to be cash equivalents
instruments that are
and those held for
acquired specifically
dealing or trading
for resale that were
purposes)
purchased by the
enterprise. b) Cash receipts from the
b. Sale of equity repayment of advances
b. Receipts from sales of instruments of other and loan made to other
equity instruments of enterprises and from parties other than
other enterprise other returns of investment in advances and loans of
than certain equity those instrument. a financial
instruments carried in a instruments.
grading account and
from returns of c) Cash receipts form
investment in those sales of properties,
instruments. plant and equipment,
c. Sale of plant & intangibles and other

Unit-12 Page-31
School of Business

c. Receipts from sales of equipment. long term assets.

property, plant and d) Cash receipts from
equipment and other future contracts,
productive assets. forward contract,
option contracts and
swap contracts, expert
when the contracts are
held for dealing or
trading purposes or
the receipts are
classified as financing
activities.

Cash outflows Cash outflows Cash flows

a. Disbursements for a. Loans made and a) Cash payments to

loans made by the acquisition of other acquire equity or debt
enterprise and entities debt instruments other
payments to acquire instruments. enterprises and
debt instruments of instrument in joint
other entities other than venture other than
cash equivalents and payments for those
certain debt instruments
instruments that are considered to be cash
acquired specifically equivalents or those
for resale. b. Purchase of equity held for dealing or
instruments of other trading purpose.
b. Payments to acquire enterprises.
equity instruments of b) Cash advances and
other enterprises loans made to other
instruments carried in a parties other than
grading account. c. Purchase of plant and advances and loan
equipment. made by a financial
c. Payments at the time of institution.
purchase soon before or
after purchase acquire c) Cash payments to
properly, plant and acquire property,
equipment and other plant and equipment
productive assets intangibles and other
long term assets.
These payment
includes those
relating to capitalized
development cost and
self constructed
property, plant and
equipment

d. Cash payments for

futures contracts,
forward contract,
option contracts
except when the
contracts are held for
dealing or trading
purposes or the
payments are
classified as
financing activities.

Management Accounting Page-32

 Bangladesh Open University

Compared to requirement of U.S. GAAP, the requirements of IAS # 7 are

more elaborate and inclusive.

Cash flow from Financing Activities:

Financing activities include obtaining resources from owners and

providing them with a return on and a return of their investment [FASB],
receiving restricted resources that by donor stipulation must be used for
long-term purposes; borrowing money and repaying amount borrowed or
otherwise settling obligations and obtaining and paying for other resources
obtained from creditors on long term credit. Items to be included in this
category is shown in the following chart.
FASB (U.S.A) GAAP (U.S.A) IAS # 7

Cash inflows Cash inflows Cash inflows

a. Proceeds from issuing a) Proceeds from issue of a) Cash proceeds from

equity instruments. stock. issuing shares or other
equity instruments.
b. Proceeds from issuing b) Proceeds from issue of
bonds, mortgage, notes debt (short-term or b) Cash proceeds from
and from other short long-term). issuing debentures,
and long term loans, notes, bonds,
borrowings. mortgage and other
c) Not for profit donor short-term and long-
c. Receipts from restricted cash gift that term borrowings.
contribution and are limited to long term
instrument income at purpose. c)
by the donor stipulation
are restricted for the
purpose of acquiring,
constructing or
improving property,
plant, equipment or
their long-lived asset or
establishing or
improving a permanent
endowment or term
endowment.

Cash outflows Cash outflows Cash outflows

a. Payments of dividend a. Payment of dividends a) Cash payments to

or other distributions to owners to acquire or
owners, including redeem the enterprises
outlays reacquire the shares.
enterprises amity
instruments.
b. Repurchase of entity’s b) Cash payments of
b. Repayments of amounts stock amounts borrowed.
borrowed.
c. Repayment of debt c) Cash payments by a
c. Other principal principal, including lease for the reduction
payments to creditors capital lease obligations. of the outstanding
who have extended liability relating to a
long term credit. finance lease.

IAS # 7 advocates the separate disclosure of cash flows arising from

Unit-12 Page-33
School of Business

financing activities because it is useful in predicting claims on future cash

flows by providers of capital to the enterprise. IAS#7 specifies alternative
treatments for interest paid and interest and dividends received.

Cash flows from interest and dividends received and paid should each be
disclosed separately. Each should be classified in a consistent manner
from period to period as operating, investing or financing activities.

Interest paid and ‘Interest & Dividend’ received:

Financial Institutions: As cash flow from operating activities

Other enterprises:

Alternative # 1: As cash flow from operating activities.

Alternative # 2: Interest paid: As cash flow from financing activities.

Interest & dividend received: As cash flow from investing activities.

Cash Flow from operating activities:

Both FASB and U.S. GAAP gave an exclusive definition of operating
activities. According to these two operating activities include all Operating activities
transactions and other events that are not defined as investing or financing include all
activities. But IAS # 7 is more definite in explaining the term “Operating transactions and
Activities”. As already mentioned, operating activities are the principal other events that are
not defined as
revenue producing activities of the enterprise and other activities that are
investing or financin
not investing or financing activities. According to E. L. Kohler “Operating
pertains” to any usual type of activity in which an organization engages”.
Transactions that should be normally included as operating activities are
shown in the table given below.

FASB U. S. GAAP IAS # 7

Cash inflows Cash inflows Cash inflows

a. Cash receipts from sale a. Receipts from sale of a. Cash receipts from the
of goods or services goods and services. sale of goods and the
including receipts from rendering of services.
collection or sale of b. Sale of loans, debt or
accounts and both equity instruments b. Cash receipts from
short-and long-term carried in trading royalties, fees,
notes receivable from portfolio. commissions and other
customers arising from revenues.
those sales. c. Returns on loans.
(interest) c. Cash receipts of an
b. Cash receipts from insurance enterprise for
return on loans, other d. Returns on equity premiums.
debt instruments of securities (dividends).
other entities and d. Cash receipts from
equity securities- contract held for dealing
interest and dividends. or trading purposes.

c. All other cash receipts e. Refund of income taxes.

that do not stem from

Management Accounting Page-34

 Bangladesh Open University

transactions defined as d)
investing or financing
activities such as:

(i) amounts received to

settle law suits.

(ii) Proceeds of insurance

settlement except those
that are directly related
to investing or
financing activities.

Cash outflows Cash outflows Cash outflows

a. Cash payments to a. Payments for inventory. a. Cash payment to

acquire materials for suppliers for goods
manufacture or goods b. Payments to employees and services.
for resale. and other suppliers.
b. Cash payments to and
b. Cash payments to other c. Payment of taxes. on behalf of
suppliers and employees.
employees for other d. Payments of interest
goods and services. c. Cash payments of
e. Purchase of loans, debt taxes unless they can
c. Cash payments to or equity instruments be specifically
government for taxes, carried in trading identified with
duties, fines and other portfolio. financing and
fees or penalties. investing activities.
f. Payment of asset
d. Cash payment to retirement obligation.
lenders and other
creditors for interest.

e. All other cash

payments that do not
stem from transactions
defined as investing or
financing activities.

Content and Form of Statement of Cash Flows

FASB demands that a statement of cash flows for a period shall report net
cash provided or used by operating, investing, and financing activities and
the net effect of those flows on cash and cash equivalents during the
period in a manner that reconciles beginning and ending cash and cash
equivalents. A pro-forma of a statement of Cash Flows is given below:
Liquid Corporation
Statement of Cash Flows
For the Year Ended December 31, 2007
Net cash flows from operating activities $××××××
Cash flows from investing activities:
Purchase of property, plant and equipment $(××××)
Sale of equipment ×××
Collection of notes receivable ×××

Unit-12 Page-35
School of Business

Net cash used in investing activities (××××)

Cash flows from financing activities:
Sale of ordinary shares ××××
Repayment of long-term debt (××××)
Reduction of notes payable (××××)
Net cash provided by financing activities ××××
Net cash increase $××××
Cash and cash equivalent at beginning of year ××××
Cash and cash equivalent at end of year $××××

Non-cash investing and financing activities should according to IAS # 7,

be disclosed in the footnotes to financial statements, but apparently are
not intended to be included in the cash flow statement itself. Non-cash
financing and investing activities might include:
(a) Acquiring an asset through a finance lease;
(b) Conversion of debt to equity,
(c) Exchange of non-cash assets or liabilities for other non-cash assets or
liabilities;
(d) Issuance of ordinary shares to acquire assets.

Methods of Determining Net Cash Flow from Operating Activities

IAS # 7 allows an enterprise to report cash flows from operating activities
using either the direct method or the indirect method.
Direct Method:
Under the direct method, the income statement is reconstructed on a cash
basis from top to bottom. Under the direct method, the cash receipts and Under the direct
cash disbursements that are related to operations are reconstructed. The method, the cash
receipts and cash
difference between the cash receipts and cash disbursements is the net disbursements that
cash provided by operating activities for the period. In this respect, IASC, are related to
FASB and UK GAAP encourage the determination of net cash flows from operations are
operating activities by using the direct method. reconstructed.

Entities using the direct method are required by IAS # 7 to report the
following major classes of gross cash receipts and cash payments.
(i) Cash collected from customers
(ii) Interest and dividend received
(iii) Cash paid to employees and other suppliers
(iv) Interest paid
(v) Income taxes paid
(vi) Other operating cash receipts and payments.
Formulas for conversion of various income statement amounts for the
direct method presentation from the accrual basis to the cash basis are

Management Accounting Page-36

 Bangladesh Open University

summarized below:
Accrual Basis Additions Deductions Cash Basis
Net Sales + Beginning accounts – Ending accounts receivable = Cash received
receivable – Accounts written off from customers

Cost of Goods sold + Ending inventory – Manufacturing depreciation = Cash paid to

+ Beginning accounts payable and amortization suppliers
– Beginning inventory
– Ending accounts payable
Operating + Ending prepaid expense – Sales and administrative = Cash paid for
expenses + Beginning accrued depreciation and operating
expenses amortization expenses
– Beginning prepaid expenses
– Ending accrued expenses
payable
– Bad debt expenses

The direct method permits the users to better comprehend the relationships
between the company’s net income (less) and its cash flows.
Indirect Method: [Reconciliation Method]
Because of its simplicity, it is the most widely used presentation of cash
flow from operating activities. It focuses on the differences between net
s method income and cash flows. To find out the net cash flow from operating
phasizes changes activities under this method, net income is adjusted for items of income
he component of statement not affecting cash flows. Moreover, this method emphasizes
st current assets changes in the component of most current assets and current liability
d current liability
accounts. The following diagram may facilitate understanding of
ounts.
adjustments to net income necessary for converting accrued-based net
income when using indirect method. [US. GAAP]
Current Non-current Current Long-term Accrual income adjustment
Assets + Assets = Liabilities + Liabilities + Income
to convert to cash flow
Increase Increase Decrease
Decrease Decrease Increase
Increase Decrease
Decrease Increase

Shortcomings of this method:

(i) Users face difficulty in comprehending the information presented.
(ii) This method does not show where the cash came from and where cash
went to.
Cash flows from operating activities calculated by the above two methods
will be the same.
Modified Indirect Method
IAS # 7 suggests an alternative indirect method of calculating cash flow
from operating activities. Under this method, the net cash flow from
operating activities may be presented by showing the revenues and

Unit-12 Page-37
School of Business

expenses disclosed in the income statement and the changes during the
period in inventories and operating receivables and payables.

Performa for Calculating Cash Flows from Operating Activities:

(i) Direct Method

Cash Flow from Operating activities:

Cash received from sale of goods ××××
Cash interest received ××××
Cash dividend received ××××
Cash provided by operating activities ××××
Cash paid to suppliers ××××
Cash paid for operating expenses ××××
Cash interest paid ××××
Cash paid for taxes ××××
Cash disbursed for operating activities (××××)
Net Cash Flow from operating activities Tk.××××

(ii) Indirect Method

Net Income Tk.××××
Adjustments needed to convert net income to a cash basis +
Depreciation, depletion, and amortization charge
Add: (Deduct) changes in current assets accounts affecting
revenue and/or expenses
Increase in the account –
Decease in the account +
Add: (Deduct) Changes in current liabilities affecting
revenue or expense
Increase in the account +
Decrease in the account` –
Add: (Deduct) loss or gain on sales of assets
Gain on sale of assets –
Loss on sale of assets +
Add: (Deduct) Changes in the Deferred Income taxes A/C
Increase in the account +
Decrease in the account –

Management Accounting Page-38

 Bangladesh Open University

Net cash provided by operating activities Tk.××××

Example [Garrison] # 1
Rockford Company’s comparative balance sheet for 2007 and the
company’s income statement for the year follow:
Rockford Company
Comparative Balance Sheet
December 31, 2007 and 2006
[dollars in millions]
2007 2006
Assets $ $
Cash 26 10
Accounts receivable 180 270
Inventory 205 160
Prepaid expenses 17 20
Plant & Equipment 430 309
Less: Accumulated Dep. (218) (194)
Long-term investments 60 75
Total Assets $700 $650
Liabilities & Stockholders’ Equity
Accounts Payable $230 $310
Accrued Liabilities 70 60
Bonds Payable 135 40
Deferred income taxes 15 8
Common Stock 140 140
Retained Earnings $700 $650

Rockford Company
Income Statement
For the Year Ended December 31, 2007
[dollars in millions]
Net Sales $1,000
Less: Cost of Sales 580
Gross Margin 470
Less: Operating expenses 352
Net Operating income 118
Non-operating items:
Loss on sale of equipment (4)

Unit-12 Page-39
School of Business

Income before taxes 114

Less: Income taxes 48
Net Income $66
Note:
Dividends of $48 million were paid in 2007. The loss on sale of equipment
of $4 million reflects a transaction in which equipment with an original
cost of $12 million and accumulated depreciation of $5 million was sold
for $3 million in cash.
Required:
Using the indirect method determine the net cash provided by operating
activities and construct a statement of cash flow for the year 2007.

Solution:
Rockford Company
Statement of Cash Flow Worksheet
For the Year Ended December 31, 2007
[dollars in millions]
Assets (except cash or cash (1) (2) (3) (4) (5) (6)
equivalent) Change Source or Cash Adjustmen Adjuste Classificatio
Use Flow t d Effect n
Effec
t
Current Assets: $ $ $
Accounts receivable – 90 Source + 90 + 90 Operating
Inventory + 45 Use – 45 – 45 Operating
Prepaid expenses –3 Source +3 +3 Operating
Non-Current Assets:
Property, building & + 121 Use – 121 – 12 – 133 Investing
equipment
Long Term investment – 15 Source + 15 + 15 Investing
Contra Assets, Liabilities &
Stockholders Equity
Contra Assets:
Accumulated Depreciation + 24 Source + 24 +5 29 Operating
Current Liabilities:
Accounts payable – 80 Use – 80 – 80 Operating
Accrued liabilities + 10 Source + 10 + 10 Operating
Non-current Liabilities
Bonds payable + 95 Source + 95 + 95 Financing
Deferred income taxes +7 Source +7 +7 Operating
Stockholder’s Equity
Common Stock –
Retained Earnings
Net Income + 66 Source + 66 + 66 Operating
Dividend – 48 Use – 48 – 48 Financing

Management Accounting Page-40

 Bangladesh Open University

Additional Entries:
Proceeds from sale of assets +3 +3 Investing
Loss on sale of equity +4 +4 Operating

Unit-12 Page-41
School of Business

Rockford Company
Cash Flow Statement
For the Year Ended December 31, 2007
[Indirect Method]
($ million)
Net Income: $ $
Adjustments to convert net income to a cash basis: 66
Depreciation charges 29
Decrease in receivables 90
Increase in inventory – 45
Decrease in prepaid expenses 3
Decrease in accounts payable – 80
Increase in accrued liabilities 10
Increase in deferred income taxes 7
Loss on sale of equipment 4
Net Cash Flow provided by operating activities 84
Investment Activities:
Additions to property, building and equipment – 133
Decrease in Long-term Investment 15
Proceeds from sale of equipment 3
Net Cash Flow from investing activities – 115
Financing Activities:
Increase in bonds payable 95
Cash Dividend paid – 48
Net Cash Flow from financing activities 47
Net Increase in cash & cash equivalents: 16
Cash balance at the beginning 10
Cash balance at the end of 2007 26
Calculation of Net Cash Flow
from Operating Activities by
[Direct Method: [dollars in million]
Cash received from sales:
Sales 1000
Add: Beginning Accounts receivable 270
Less: Ending Accounts receivable (180) $1090
Cash paid to suppliers:
Cost of sales +530
Add: Beginning Accounts payable +310
Less: Ending Accounts payable –230
Add: Ending Inventory +205
Less: Beginning Inventory –160 (655)
Cash paid for expenses:
Operating Expenses 352
Less: Depreciation (29)
Add: Income taxes paid 41
Add: Beginning Accrued Liabilities 60
Less: Ending Accrued Liabilities (70)
Less: Decrease in prepaid expenses (3) (351)
Net Cash Flow from operating activities: 84

Management Accounting Page-42

 Bangladesh Open University

Example [Khan & Jain] # 2

The following are the summarised balance sheets of Sound Ltd. as on
March 31 for two consecutive year 1 and year 2:
[Tk. ‘000]
Particulars Year 2 Year 1
Assets: Tk. Tk.
Plant and machinery 1,980 1,010
Land and buildings 1,000 1,000
Long term investments 550 550
Short term investments 470 85
Sundry debtors 2,195 2,500
Investaries 1,400 1,300
Interest receivables 100 65
Cash in hand 300 500
Cash at bank 405 300
Total 8,400 7,310
Liabilities
Share Capital 2,600 2,150
Reserve and surplus 1,460 900
15% Debentures 2,000 1,800
Sundry Creditors 440 650
Wages outstanding 40 20
Income Tax payable 400 450
Accumulated Depreciation:
Plant and machinery 910 840
Land and buildings 550 500
Total 8,400 7,310
Income Statement for the period ending March 31, year 2
(Tk.’00)
Sales revenue 45,300
Less: Cost of Goods sold 39,000
Gross Profit 6,300
Less: Depreciation (540)
Selling and administrative expenses (2,960)
Interest paid (300)
Add: Interest income 65
Dividend income (gross) 95
Net Income before extra-ordinary item 2660
Add: insurance settlement received 10
2,670

Unit-12 Page-43
 School of Business

Less: Provision for income taxes 550

2,120
Additional Information: (Tk.’000)
(i) 15% Debenture of Tk.300 was redecmed during year 2.
(ii) Tax deducted at source on dividends received (included in provision
for taxes) amounts to Tk.15.
(iii) A plant costing Tk.500, having accumulated depreciation of Tk.420
was sold for Tk.80.
(iv) During year 2, interim dividend of Tk.760 was paid, final dividend
paid was Tk.800.
(v) All sales and purchases are made on credit basis.
You are required to prepare a cash flow statement.

Solution:
Sound Ltd.
Statement of Cash Flow Worksheet
For the Period Ended December 31, year 2
Assets (except cash or cash (1) (2) (3) (4) (5) (6)
equivalent) Change Source or Cash Flow Adjustmen Adjusted Classificatio
Use Effect t Effect n

Current Assets:
Short-term investments +385 Use –385 –385
Sundry Debtors –305 Source +305 +305 Operating
Inventories +100 Use –100 –100 Operating
Interest receivable +35 Use
Fixed Assets:
Plant & Machinery +1470 Use –1470 –1470 Investing
Land & Building
Long-term investment – – – – – –
Liabilities:
Share Capital +450 Source +450 +450 Financing
Reserve & Surplus
15% Debenture +200 Source +200 +200 Financing
Current Liabilities:
Sundry Creditors –210 Use –210 –210 Operating
Wages outstanding +20 Source +20 +20 Operating
Income tax payable –50 Use –50 –50 Operating
Contra Account:
Accumulated Dept. Plant & +490 Source +490 +490 Operating
Machinery
Land & Building +50 Source +50 +50 Operating
–700

Management Accounting Page-44

 Bangladesh Open University

Sound Limited
Statement of Cash Flow
For the Period Ended December 31, year 2
[Indirect Method]
(Tk.’000)
Tk. Tk.
Cash Flow from operating activities:
Net Income before extra-ordinary item 2,660
Add: Depreciation 540
Interest paid 300
Less: Interest income (65)
Dividend income (95)
Operating profit before working capital change 3,340
Decrease in Sundry debtor 305
Increase in outstanding wage 20
Increase in inventory –100
Decrease in sundry creditors –210
Increase in short-term investment –385
Income taxe paid –585
Cash flow before extra-ordinary item 2,385
Add: Insurance settlement 10
Net Cash flow from operating activities 2,395
Cash flow from investing activities
Purchase of plant and machinery –1,470
Interest received 30
Dividend received 80
Sale of plant 80
Net Cash flow from investing (1,280)
Cash flow financing activities:
Issuance of share capital +450
Issuance of 15% Debenture +500
Redemption of Debenture –300
Interest paid –300
Dividend paid –1,560
Net Cash flow from financing activities (1,210)
Net decrease in cash (95)
Beginning cash balance 800
Ending cash balance 705

Unit-12 Page-45
School of Business

Example # 3
From the following data of P. & Sons Ltd., prepare a Cash Flow
Statement for the year 2007:
P & Sons Ltd.
Balance Sheet
As on 31st December
[Tk.’000]
Liabilities 2007 2006 Assets 2007 2006
Accumulated Depreciation 275 150 Cash 315 285
Creditors 100 75 Marketable Securities 106 50
Bills Payable 50 25 debtors 150 125
Debentures 500 250 Inventories 95 70
Equity Capital 550 400 Investments 70 110
Premium on Shares 60 – Machinery 500 350
Retained Earnings 336 325 Building 600 200
Land 35 35
Total 1871 1225 Total 1871 1225

P & Sons Ltd.

Income Statement
For the Year Ended December 31, 2007
[Tk.’000]
Sales 600
Less: Cost of Goods sold 337
Gross margin on sales 263
Less: Operating expenses:
Depreciation:
Machinery 50
Building 80
Other expenses 100
230
Net margin from operation 33
Gain on sales of long term investments 12
Total 45
Loss on sales of machinery 5
[proceeds from sales Tk.15,000]
Net Income 40

Management Accounting Page-46

 Bangladesh Open University

Solution:
P & Sons Ltd.
Statement of Cash Flow
For the Year Ended December 31, 2007
[Tk.’000]
Cash flow from operating activities: Tk. Tk.
Net Income 40
Less: Gain on sales of Long-term Investments –12
Add: Loss on sale of machinery +5
Add: Depreciation : Machinery +50
Building +80
Less: Increase in Debtors –25
Less: Increase in Inventories –25
Add: Increase in Creditors +25
Payables +25
Net Cash Flow from operating activates 163
Cash Flow from investing activities:
Sales of machinery +15
Sales of Long term investment +52
Purchase of Building –400
Purchase of Machinery –175
Net Cash Flow from investing activities (508)
Cash Flow from financing activities:
Sales of Debentures 250
Equity 210
Dividend paid –29
Net Cash Flow financing activities 431
Net Increase in Cash & Cash equivalents 86
Cash & Cash Equivalent at the beginning 335
Cash & Cash Equivalent at the end 421

Unit-12 Page-47
School of Business

Example # 4
The financial statements of Louis Zimmer Company appear below:
Louis Zimmer Company
Comparative Balance Sheets
December 31, 2007
Assets 2007 2006
Cash Tk.31,000 Tk.13,000
Accounts Receivable 28,000 14,000
Merchandise Inventory 25,000 35,000
Preperty, Plant, Equipment 60,000 78,000
Accumulated Depreciation (22,000) (24,000)
Total Tk.122,000 Tk.116,000
Liabilities and Stockholder’s Equity
Accounts Payable Tk.27,000 Tk.23,000
Income taxes Payable 5,000 8,000
Bonds Payable 27,000 35,000
Common Stock 18,000 14,000
Retained Earnings 45,000 36,000
Total Tk.122,000 Tk.116,000

Louis Zimmer Company

Income Statement
For the Year Ended December 31, 2007
Sales Tk.220,000
Less: Cost of Goods sold 180,000
Gross Profit 40,000
Less: Operating Expenses:
Selling Expense Tk.14,000
Administrative Expense 8,000 22,000
Income from operations: 18,000
Interest Expense 1,000
Income before income taxes 17,000
Income taxes 4,000
Net Income Tk.13,000

Additional Information:
(i) Dividend declared and paid were Tk.4,000.
(ii) During the year equipment was sold for Tk.8,500 cash. This
equipment cost Tk.18,000 originally and had a book value of
Tk.8,500 at the time of sale.

Management Accounting Page-48

 Bangladesh Open University

(iii) All depreciation expenses are in the selling expense category.

(v) All sales and purchases are on credit.
Prepare a Cash Flow Statement using indirect method.
Solution:
Louis Zimmer Company
Statement of Cash Flow
For the Year Ended December 31, 2007
Cash Flow from operating activates: Tk. Tk.
Net Income 13,000
Add Depreciaton + 7,500
Interest Expense + 1,000
Decrease in Inventory + 10,000
Increase in Accounts payable + 4,000
Less Increase in Accounts receivable – 14,000
Balance of Income tax paid – 3,000
Net Cash Inflow from operating activities 18,500
Cash Flow from Investing Activities:
Sale of equipment 8,500
Cash Flow from financing activities:
Repayment of Bonds – 8,000
Sale of Common Stock + 4,000
Interest paid – 1,000
Dividend paid – 4,000
Net Cash Flow from financing activities (9,000)
Net Increase in cash 18,000
Add Beginning Cash balance 13,000
Ending Cash Balance 31,000

If interest paid is treated as cash outflow on account of operating

activities, then net cash flow from operating activities will be Tk.17,500
(Tk.18,500–1,000).

Example # 5
The financial statements of Earnest Company appear below:
Earnest Company
Comparative Balance Sheets
December 31, 2007
Assets 2007 2006
Cash Tk.23,000 Tk.13,000
Accounts Receivable 24,000 33,000

Unit-12 Page-49
School of Business

Merchandise Inventory 20,000 27,000

Prepaid Expenses 20,000 13,000
Land 40,000 40,000
Preperty, Plant & Equipment 2,00,000 2,25,000
Less: Accumulated Depreciation (50,000) (67,500)
Total Tk.2,77,000 Tk.2,83,500
Liabilities and Stockholder’s Equity
Accounts Payable Tk.9,000 Tk.18,500
Accured Expenses payable 9,500 7,500
Interest payable 1,000 1,500
Income taxes Payable 3,000 2,000
Bonds Payable 50,000 80,000
Common Stock 1,23,000 105,000
Retained Earnings 81,000 69,000
Total Tk.2,77,000 Tk.2,83,000

Earnest Company
Income Statement
For the Year Ended December 31, 2007
Taka Taka
Revenues:
Sales 600,000
Gain on sale of plant assets 2,500
6,02,500
Less Expenses:
Cost of Goods sold 500,000
Operating expenses except depreciation 60,000
Depreication expenses 7,500
Interest Expenses 5,000
Income t ax expenses 9,000
5,81,500
Net Income 21,000

Additional Information:
(i) Plant assets were sold at a sales price of Tk.62,500.
(ii) Additional equipment was purchased at a cost of Tk.60,000.
(iii) Dividends of Tk.8,500 were paid.
(iv) All sales and purchases were on account.
(v) Bonds were redeemed at face value.
(vi) Additional shares of stock were sold for cash.

Management Accounting Page-50

 Bangladesh Open University

Prepare a Statement of cash flow of the Earnest Company for the year
2007 using indirect method.
Solution:
The Earnest Company
Statement of Cash Flow
For the Year Ended December 31, 2007
Cash Flow from operating activates: Tk. Tk.
Net Income 21,000
Add Depreciaton Expense 7,500
Income Taxes 9,000
Decrease in Accounts Receivable 9,000
Accrued Expenses 2,000
Increase in Inventory 7,000
Less Increase in Prepaid Expense (7,000)
Decrease in Accounts Payable (9,000)
Decrease in Interest Payable (500)
Income tax paid (8,000)
Gain on sale of plant (2,500)
Net Cash Inflow from operating activities 28,000
Cash Flow from investing activities:
Sale of Plant assets 62,500
Purchase of equipment (60,000)
Net Cash Flow from investing activities 2,500
Net Cash Flow from financing activity:
Sale of Common shares 18,000
Bonds redeemed (30,000)
Dividend paid (8,500)
Net Cash Flow from financing activity (20,500)
Increase of Cash 10,000
Add Beginning Balance of Cash 13,000
Ending Balance of Cash 23,000

Some Special Issues Relating to Cash Flow Statement

Foreign Currency Cash Flows:
(a) Cash flows arising from transactions in a foreign currency should
be recorded in an enterprise’s reporting currency by applying the
exchange rate at the date of the cash flow.
(b) Cash flows of a foreign subsidiary should be translated at the
exchange rates at the dates of the cash flows.
Extra-ordinary items: Cash flows associated with extra-ordinary items
should be classified as arising from operating, investing or financing

Unit-12 Page-51
School of Business

activities as appropriate and separately disclosed.

Taxes on Income: Cash flows arising from taxes on income should be
separately disclosed and should be classified as cash flows from operating
activities unless they can be specifically identified with financing and
investing activities.
Acquisitions and Disposals of Subsidiaries and other business units:
The aggregate cash flows arising from acquisitions and from disposals of
subsidiaries or other business units should be presented separately as
classified as investing activities.
Non-cash Transactions: Investing and financing transactions that do not
require the use of cash or cash equivalents should be excluded from a cash
statement. Such transactions should be disclosed elsewhere in the financial
statements in a way that provides all relevant information about these
investing and financing activities.
Cash Flow per share: There is presently no requirement to disclose such
information in the financial statements of an enterprise.
Free Cash Flow: In the statement of cash flows, cash provided by
operating activities is intended to indicate the cash generation capability of
the company. Analysts have noted that cash provided by operating
activities fails to take into account that a company must invest in new
fixed assets just to maintain its current level of operations. Companies
must also at least maintain dividends at current level to satisfy investors.
A measurement to provide additional insight regarding a company’s cash
generating ability is free cash flow.
Free Cash Flow = Cash Flow from Operation – Capital expenditure +
Disposition of Property and equipment – Cash Dividends.

Management Accounting Page-52

 Bangladesh Open University

Self-Assessment Questions:
Indicate either true or false statements by using ‘T’ or ‘F’ respectively.
(i) Funds are sum of money or stock convertible to money.
(ii) There are three types of statements relating to funds flow.
(iii) Outsiders are benefited from the Funds Flow Statement but not the
internal managers.
(iv) An increase in current assets cannot always increase working
capital.
(v) Income from dividend should be added to find out the funds from
operation.
(vi) Writing off of preliminary expenses is an element of operating
expense.
(vii) Inclusive of Cash Flow Statement in the annual report is voluntary
in Bangladesh.
(viii) The Companies Act 1994 requires companies to publish their
Value-added Statement.
(ix) Funds Flow Statement can help measure the ability to meet
obligations and pay dividends.
(x) Cash Flow Statement can also be prepared on the basis of forecasts.
(xi) Funds Flow Statements are prepared on the basis of balance sheet
data.
(xii) Cash Flow Statement eliminates the effects of alternative
accounting treatments of the same transactions and events.
(xiii) Cash Flows are inflows and outflows of cash and cash equivalents.
(xiv) In the U.K. cash flows are classified into more than three
categories.
(xv) Direct and indirect methods of determining net cash flow from
operating activities will produce different results.
(xvi) Direct method is also known as “Reconciliation” method.
(xv) In financial institutions “Interest Received” and “Paid” must be
treated as an operating cash flow.
(xvi) Normally, income tax payments are treated as cash flows from
operating activities.
(xvii) Cash flows from extra-ordinary items must be shown as a separate
item.
(xviii) Cash flow per should also be shown in the Cash Flows Statement.
(xix) Free Cash Flow will always, be high than Net Cash Flow’ from
operating activities.

Unit-12 Page-53
School of Business

(xx) Sale of plant and equipment is an item of cash flow from investing
activities.
Answer:
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv) (xvi)
(xvii) (xviii) (xix) (xx)
Questions
1. What are funds? Describe the statements relating to funds
2. What is a ‘Funds Flow Statement’? What is the importance of this
statement to managers of the enterprise, investors and creditors?
3. Explain the procedure for determination of funds from operation.
4. What is a statement of changes in financial position? How does it
differ from funds flow or cash flow statement?
5. What are the uses of a statement of sources and uses of working
capital? When is it more appropriate to prepare a statement of cash
flow?
6. What is the purpose of a statement of cash flow?
7. What are cash equivalents, and why are the included with cash on a
statement of cash flow?
8. What are the three major sections on a statement of cash flows, and
what are the general rules that determine the transactions that
should be included in each section?
9. How do the direct and indirect methods differ in their approach to
computing the cash provided by operating activities?
10. A business executive once stated, ‘Depreciation is one of our
biggest sources of cash.’ Do you agree that deprecation is a source
of cash? Explain.
11. What are the limitations of a ‘Funds Flow Statement? In what
ways, a Cash Flow Statement can help the uses?
12. Differentiate between a ‘Cash Flow Statement’ and a ‘Funds Flow
Statement’.
13. What are the objectives of preparing a ‘Cash Flow Statement’?
Discuss the uses of Statement of Change in Financial position.

Management Accounting Page-54

 Bangladesh Open University

Problems [Funds Flow Statement]

1. The comparative balance sheets of Alpha Company showed the
following changes in balance sheet items from 2006 to 2007:
Taka
Working capital 127,500 increase
Long-term investments 45,000 increase
Land 48,000 increase
Machinery (less accumulated depreciation) 90,000 increase
15% Debentures 240,000 increase
Share capital 60,000 increase
Reserves and surplus 10,500 decrease
The following additional data are provided: (i) Net profit for the year was
Tk.157,500 (ii) Accumulated depreciation for 2006 was Tk.67,500 and
for 2007 Tk.90,000. (iii) A machine of Tk.112,500 was purchased during
the year; depreciation expenses for the year was Tk.22,500. (iv) A bonus
issue of shares of Tk.60,000 was made during the year. (v) A cash
dividend of Tk.87,000 was declared and paid during the year.
Instruction:
Prepare a statement of changes in financial position for Alpha Company.

2. The comparative balance sheets for Padma Pvt. Ltd. are given
below:
Padma Pvt. Ltd.
Comparative Balance Sheet
For the Year Ended on 31 December
(Taka)
2007 2006
Assets
Cash 82,000 22,000
Debtors 104,000 24,000
Stock 112,000 60,000
Prepaid expenses 22,000 14,000
Plant and machinery 380,000 360,000
Goodwill 36,000 40,000
Total 736,000 520,000
Liabilities & Equities
Creditors 30,000 14,000
Provision for depreciation 100,000 60,000
Debentures 102,000 102,000
Premium on debentures issue 12,000 18,000
Share capital 190,000 90,000

Unit-12 Page-55
School of Business

Share premium 30,000 –

Reserves and surplus 272,000 236,000
Total 736,000 520,000
The company made a net profit of Tk.66,000 during the year. Prepare a
statement of changes in financial position on (a) working capital basis, (b)
cash basis. Also prepare a schedule of working capital changes.

3. From the following data of Kohinoor Company, prepare a statement

of changes in financial position.
Kohinoor Company
Balance Sheet
For the Year Ended on 31 March
(Taka)
2007 2006
Assets
Cash 30,000 22,500
Debtors 45,000 40,000
Stock 20,000 16,000
Long-term investments 15,000 25,000
Machinery 20,000 12,500
Buildings 45,000 37,500
Land 10,000 10,000
Total 185,000 163,500
Liabilities and Equity
Provision for depreciation:
Machinery 3,750 1,500
Buildings 9,000 6,000
Provision for doubtful debts 1,500 1,000
Creditors 20,000 16,500
Outstanding expenses 2,250 1,750
Loan (adjust security of machinery) 22,500 25,000
Share capital 100,000 100,000
Reserves and surplus 26,000 11,750
Total 185,000 163,500
Additional data:
(i) Net profit for the year 2007 is Tk.27,500.
(ii) Machinery costing Tk.2,500, on which depreciation of
Tk.500 has accumulated, was sold for Tk.3,000. The gain is
included in net profit.
(iii) Investments costing Tk.10,000 were sold during the year for
Tk.12,500. The gain is included in net profit.
(iv) Cash dividends paid during the year, Tk.13,250.

Management Accounting Page-56

 Bangladesh Open University

4. Prepare (a) a statement of changes in financial position on (i)

working capital basis, (ii) cash basis, and (b) a schedule of changes
in working capital from the following data:
M Company
Balance Sheet
For the Year Ended on 30 June
[Taka]
Assets 2006 2007 Liabilities & Equities 2006 2007
Cash 15,000 9,000 Creditors 60,000 0
Marketable Securities 21,000 15,000 Bills payable 15,000 24,000
Debtors 30,000 45,000 Accrued expenses 6,000 6,000
Stock 36,000 45,000 Tax payable 9,000 15,000
Fixed assets, net 150,000 1,65,000 Long-term debt 0 45,000
Other non- Share capital
current assets 24,000 15,000 including reserve 180,000 210,000
270,000 3,00,000 270,000 300,000

M Company
Profit and Loss Account
For the Year Ended on 30 June
(Taka)
Sale 150,000
Expenses:
Cost of goods sold 75,000
Selling, general and administrative expenses 15,000
Depreciation 15,000
Interest 3,000 108,000
Profit before tax 42,000
Less: Tax 21,000
Profit after tax 21,000
Reserve, 30 June 2006 120,000
141,000
Less: Cash dividends 9,000
Reserve, 30 June 2007 132,000

Unit-12 Page-57
School of Business

5. Balance sheet and profit and loss account of Ahmed Sons Company
Limited as on December 31, 2006 and 2007 are as follows:
JB Sons
Bangladesh Sheet
As 31 December
[Taka]
Liabilities 2006 2007 Assets 2006 2007
Accounts payable 15,000 25,000 Cash balance 5,000 2,000
Cash credit 13,000 10,000 Accounts receivable 10,000 8,000
Outstanding expenses 2,000 3,000 Loan and advances 5,000 –
Long-term loan 30,000 30,000 Inventories 20,000 25,000
Capital 30,000 30,000 Fixed assets (net) 60,000 65,000
Surplus 10,000 12,000
100,000 100,000 100,000 100,000
Ahmed Sons Company
Profit and Loss Account
For the Year Ended on 30 June
(Taka)
Sale 200,000
Less: Cost of goods sold (including
depreciation of Tk.10,000) 170,000
Gross profit 30,000
Less: Other expenses 20,000
Income before tax 10,000
Less: Income-tax provision 5,000
Income after tax 5,000
Instruction:
Prepare a statement of sources and uses of funds.
6. A company finds on 1 January, 2007, that it is short of funds with
which to implement its programme of expansion. On 1 January,
2005, it had a cash credit balance of Tk.180,000. From the
following information, prepare a statement for the board of
directors to show how the overdraft of Tk.68,750 as at the 31
December, 2006 has arisen:
2005 Tk. 2006 Tk. 2005 Tk. 2006 Tk.
Fixed assets 750,000 11,20,000 Trade creditors 270,000 350,000
Stock and stores 190,000 330,000 Share capital 250,000 300,000
Debtors 380,000 335,000 (in share of
Bank balance 180,000 –Tk.10 each)
Bank overdraft – 68,750 Bills receivables 87,500 95,000

The profit for the year ended December 31, 2006 before charging
depreciation and taxation amounted to Tk.240,000. The 5,000
shares were issued on 1 January 2006 at a premium of Tk.5 per

Management Accounting Page-58

 Bangladesh Open University

share, and Tk.137,500 was paid in March 2006 by way of income

tax. Dividend was paid as follows: on the capital on 31 December,
2005 at 10% less tax at 25%, 2006 (interim) 5 per cent free of tax.

7. From the following data of Matin Sons Limited, prepare a statement

of sources and uses of funds:
Matin Sons Limited
Bangladesh Sheet
As on 31 December
[Taka’000]
Liabilities 2007 2006 Assets 2007 2006
Accumulated depreciation 275 150 Cash 315 285
Creditors 100 75 Marketable securities 106 50
Bills payable 50 25 Debtors 150 125
Debentures 500 250 Inventories 95 70
Equity capital 550 40 Investments 70 110
Premium on shares 60 – Machinery 500 350
Retained earning 336 325 Buildings 600 200
Land 35 35
1,871 1,225 1,871 1,225

Matin Sons Limited

Income Statement
For the Year Ended December 31, 2007
[Taka’000]
Sale 600
Cost of goods sold 337
Gross margin on sales 263
Operating expenses:
Depreciation – machinery 50
– building 80
Other expenses 100 230
Net margin from operations 33
Gain on sales of long-term investments 12
Total 45
Loss on sales of machinery (proceeds 5
from sales Tk.15,000)
Net income 40

Unit-12 Page-59
School of Business

8. From the following balance sheet of Alpha Ltd. make out (1)
statement of changes in the working capital, and (2) funds flow
statement:
Alpha Co.
Balance Sheet
[Taka]
Liabilities 2007 2006 Assets 2007 2006
Equity share capital 300,000 400,000 Goodwill 100,000 80,000
8% Redeemable 150,000 100,000 Land and building 200,000 170,000
Preference capital
Capital reserve – 20,000 Plant 80,000 200,000
General reserve 40,000 50,000 Investments 20,000 30,000
Profit and loss account 30,000 48,000 Sundry debtors 140,000 170,000
Proposed dividend 42,000 50,000 Stock 77,000 109,000
Sundry creditors 25,000 47,000 Bills receivable 20,000 30,000
Bills payable 20,000 16,000 Cash in hand 15,000 10,000
Liabilities for expenses 30,000 36,000 Cash at bank 10,000 8,000
Provision for taxation 40,000 50,000 Preliminary expenses 15,000 10,000
677,000 817,000 677,000 817,000

Additional data: (i) A piece of land has been sold out in 2007 and the
profit on sale has been carried to capital reserve. (ii) A machine has been
sold for Tk.10,000. The written down value of the machine was
Tk.12,000. Depreciation of Tk.10,000 is charged on plant account in
2007. (iii) The investments are trade investments; Tk.3,000 by way of
dividend is received including Tk.1,000 from pre-acquisition profit which
has been credited to investment account. (iv) An interim dividend of
Tk.20,000 has been paid in 2007.

9. The following are the summaries of the balance sheets of Victory

Limited as on 31 December, 2006 and 31 December 2007.
Victory Ltd.
Balance Sheet
[Taka]
Liabilities 2006 2007 Assets 2006 2007
Sundry creditors 39,500 41,135 Cash at bank 2,500 2,700
Bills payable 33,780 11,525 Sundry debtors 87,490 73,360
Bank overdraft 59,510 – Stock 111,040 97,370
Provision for taxation 40,000 50,000 Land and building 148,500 144,250
Reserves 50,000 50,000 Plant and machinery 112,950 116,200
Profit and loss account 39,690 41,220 Goodwill – 20,000
Share capital 200,000 260,000
462,480 453,880 462,480 453,880

Management Accounting Page-60

 Bangladesh Open University

The following additional information is obtained from the general ledger:

(a) During the year ended December 2007 an interim dividend of
Tk.26,000 was paid. (b) The assets of another company were purchased
for Tk.60,000 payable in fully paid shares of the company. These assets
consisted of stock Tk.22,000, machinery Tk.18,000, and goodwill
Tk.20,000. In addition sundry purchases of plant were made totalling
Tk.5,600. (c) Income-tax paid during the year amounted to Tk.25,000. (d)
The net profit for the year before tax was Tk.65,530.
Instruction:
Prepare a statement showing the sources and application of funds for the
year 2007 and a schedule setting out changes in working capital.

10. The comparative balance sheets of Sonali Industries Ltd. as on 31

December, 2006 and 2007 are as under:
Sonali Industries Ltd.
Balance Sheet
[Taka in lakh]
Liabilities 2006 2007 Assets 2006 2007
Current Liabilities Current Assets
Sundry creditors 40.40 43.20 Cash at bank 44.60 47.80
Provision for taxation 10.80 12.20 Debtors 10.80 17.00
Liabilities for expenses 2.60 1.00 Stock-in-trade 44.00 67.20
Total current liabilities 53.80 46.40 Miscellaneous 30.20 8.00
Long-term Loans 22.00 21.00 Total current assets 129.60 140.00
Total liabilities 75.80 77.40 Fixed Assets
Owner’s Equity Plant, mach. & bldng. 283.40 368.00
Paid—up capital 280.00 320.00 Less: Total depreciation 25.80 34.20
257.60 333.80
Reserves and surplus 140.60 163.60 Land 50.00 50.00
Total equity 420.60 483.60 Total fixed assets 307.60 383.80
Investments 42.40 25.20
Intangible Assets 16.80 12.00
Total non-current assets 366.80 421.00
Total Liabilities & Capital 496.40 561.00 Total Assets 496.40 561.00

The income for the year amounted to Tk.57.80 lakh after charging
depreciation of Tk.8.40 lakh but before making the following adjustments:
(i) profit on land purchased and sold in 2007, Tk.15.60 lakh; (ii) loss on
sale of marketable securities Tk.2.80 lakh, included under miscellaneous
current assets; (iii) write off intangible assets Tk.4.80 lakh; (iv) write off
long-term investments Tk.17.20 lakh.
The dividend declarged and paid during the year amounted to Tk.25.60
lakh.

Unit-12 Page-61
School of Business

Instruction
From the above particulars prepare: (i) statement of sources and
application of funds, and (ii) statement of changes in working capital.

11. Following are the summarised balances of Maruf Limited on 30

June, 2006 and 2007.
Maruf Limited
Balances as on 30 June
Taka
2006 2007
Dr. Cr. Dr. Cr.
Equity Share Capital
30,000 shares of Tk.10 each issued and
fully paid – 300,000 – 300,000
Capital reserve – – – 49,200
14% Debentures – – – 50,000
Debenture discount – – 1,000 –
Freehold property at cost 122,000 – – –
Freehold property at valuation – – 165,000 –
Plant and machinery at cost 223,000 – 283,000 –
Depreciation on plant and machinery – 107,600 – 122,000
Debtors 104,600 – 154,600 –
Stock and work-in-progress 124,000 – 162,500 –
Creditors – 37,400 – 49,200
Profit and loss account – 112,000 – 112,000
Net profit for the year – – – 76,500
Dividend in respect of 19x1 – – 30,000 –
Provision for doubtful debts – 3,100 – 6,400
Trade investment at cost – – 47,000 –
Bank – 13,500 – 77,800
573,600 573,600 843,100 843,100

You are informed that; (i) The capital reserve on 30 June, 2007
represented the realised profit on the sale of one freehold property together
with the surplus arising on revaluation. (ii) During the year ended 30 June,
2007, plant costing Tk.18,000 against which a depreciation provision of
Tk.13,500 had been made, was sold for Tk.7,000. (iii) On 1 July, 2006,
Tk.50,000 debentures were issued for cash at a discount of Tk.1,000. (iv)
The net profit for the year is arrived at after crediting the profit on the sale
of machinery and charging debenture interest.
Instruction:

Management Accounting Page-62

 Bangladesh Open University

You are required to prepare a statement which will explain why bank
borrowing has increased by Tk.64,300 during the year ended 30 June
2007. Taxation is to be ignored.

12. From the information provided, you are required to prepare a

“Source and Disposition of Funds” statement explaining how
Cresent Limited has improved cash position in the year ended 31
December 2007. The summarised balance sheets of Cresent Limited
as on 31 December 2006 and 31 December 2007 were as follows:
Cresent Ltd.
Balance Sheet
[Taka]
Liabilities 2006 2007 Assets 2006 2007
Issued share capital 100,000 150,000 Freehold property 110,000 130,000
Share premium 15,000 35,000 Plant and machinery 120,000 151,000
Profit and loss 28,000 70,000 Fixtures and fittings, at 24,000 29,000
cost
Debentures 70,000 30,000 Stocks 37,000 51,000
Bank overdraft 14,000 – Debtors 43,000 44,000
Creditors 34,000 48,000 Bank balance – 16,000
Proposed dividends 15,000 20,000 Premium on redeemed – 1,000
Depreciation: debentures
Plant 45,000 54,000
Fixtures 13,000 15,000
334,000 422,000 334,000 422,000

The following additional information is relevant: (i) There had been no

disposal of freehold property in the year. (ii) A machine tool which has
cost Tk.8,000 and in respect of which Tk.6,000 depreciation has been
provided was sold for Tk.3,000 and fixtures, which had cost Tk.5,000 in
respect of which depreciation of Tk.2,000 had been provided, were sold
for Tk.1,000. The profits and losses on these transactions had been dealt
with through the profit and loss account. (iii) The actual premium on the
redemption of debentures was Tk.2,000 of which Tk.1,000 has been
written off to the profit and loss account. (iv) No interim dividend has
been paid.

Unit-12 Page-63
School of Business

Problems [Cash Flow Statement]

1. The income statement of WARID Company is shown below:
WARID Company
Income Statement
For the Year Ended December 31, 2007
Sales 7,200,000
Cost of goods sold
Beginning inventory 1,700,000
Purchases 5,430,000
Goods available for sale 7,130,000
Ending inventory 1,920,000
Cost of goods sold 5,210,000
Gross profit 1,990,000
Operating expenses
Selling expenses 380,000
Administrative expenses 525,000
Depreciation expenses 95,000
Amortization expense 30,000 1,030,000
Net income 960,000

Additional information:
1. Account receivable increased Tk.690,000 during the year.
2. Prepaid expenses increased Tk.170,000 during the year.
3. Accounts payable to merchandise suppliers increased Tk.35,000 during
the year.
4. Accrued expenses payable decreased Tk.190,000 during the year.
Instructions
Prepare the operating activities section of the statement of cash flows for
the year ended December 31, 2007, for Wayne Rogers Company using the
indirect methods.

2. Data for WARID Company are presented in P-1

Instructions
Prepare the operating activities section of the statement of cash flows
using the direct method.

Management Accounting Page-64

 Bangladesh Open University

3. The income statement of Nandan Park Co. for the year ended
December 31, 2007, reported the following condensed information.
Revenue from fees Tk.510,000
Operating expenses 280,000
Income from operations 230,000
Income tax expense 57,000
Net income Tk.173,000

Nandan Park’s balance sheet contained the following comparative data at

December 31.
2007 2006
Accounts receivable Tk.55,000 Tk.60,000
Accounts payable 32,000 41,000
Income t axes payable 2,000 4,000

Nandan Park has no depreciable assets. (Accounts payable pertains to

operating expenses.)
Instructions:
Prepare the operating activities section of the statement of cash flows
using the direct method.

4. Presented below are the comparative balance sheets for Canca

Works Company as of December, 31.
Canca Company
Comparative Balance Sheets
December 31
Assets 2007 2006
Cash Tk.38,000 Tk.45,000
Accounts receivable 49,500 52,000
Inventory 153,450 142,000
Prepaid expenses 15,780 21,000
Land 100,000 130,000
Equipment 228,000 155,000
Accumulated depreciation-equipment (45,000) (35,000)
Building 200,000 200,000
Accumulated depreciation-building (60,000) (40,000)
Tk.679,730 Tk.670,000

Unit-12 Page-65
School of Business

Liabilities and Stockholders’ Equity

Accounts payable Tk.35,730 Tk.40,000
Bonds payable 250,000 300,000
Common stock, Tk.1 par 200,000 150,000
Retained earnings 194,000 80,000
Tk.679,730 Tk.670,000
Additional information:
1. Operating expenses include depreciation expense of Tk.42,000.
2. Land was sold for cash at book value.
3. Cash dividends of Tk.24,000 were paid.
4. Net income for 2007 was Tk.38,000.
5. Equipment was purchased for Tk.95,000 cash. In addition,
equipment costing Tk.22,000 with a book value of Tk.10,000 was
sold for Tk.8,100 cash.
6. Bonds were converted at face value by issuing 50,000 shares of
Tk.1 par value common stock.
7. Net sales for 2007 totaled Tk.420,000.
Instructions
(a) Prepare a statement of cash flows for the year ended December 31,
2007, using the indirect method.
(b) Compute free cash flow for 2007.

5. The financial statements of James Lyman Company appear below:

James Lyman Company
Comparative Balance Sheets
December 31
Assets 2005 2004
Cash Tk.24,000 Tk.16,000
Accounts receivable 20,000 11,000
Merchandise inventory 38,000 35,000
Property, plant, and equipment Tk.70,000 Tk.78,000
Less: Accumulated depreciation (30,000) 40,000 (24,000) 54,000
Total Tk.122,000 Tk.116,000

Liabilities and Stockholders’ Equity

Accounts payable Tk.23,000 Tk.33,000
Income taxes payable 15,000 20,000
Bonds payable 20,000 10,000
Common stock 25,000 25,000
Retained earnings 39,000 28,000
Total Tk.122,000 Tk.116,000

Management Accounting Page-66

 Bangladesh Open University

Aromatic Lyman Company

Income Statement
For the Year Ended December 31, 2007
Sales Tk.240,000
Cost of goods sold 180,000
Gross profit 60,000
Operating expenses:
Selling expenses Tk.23,000
Administrative expenses 10,000 33,000
Income from operations 27,000
Interest expense 2,000
Income before income taxes 25,000
Income tax expense 7,000
Net income Tk.18,000

Additional information:
1. Dividends of Tk.7,000 were declared and paid.
2. During the year equipment was sold for Tk.11,000 cash. This
equipment cost Tk.15,000 originally and had a book value of
Tk.11,000, at the time of sale.
3. All depreciation expense, Tk.10,000, is in the selling expense
category.
4. All sales and purchases are on account.
5. Additional equipment was purchased for Tk.5,000 cash.
Instructions
(a) Prepare a statement of cash flows using the indirect method.
(b) Compute free cash flow.

6. Condensed financial data of TC Beverage Ltd. appear below:

TC Beverage Ltd.
Comparative Balance Sheets
December 31
Assets 2007 2006
Cash Tk.98,700 Tk.47,250
Accounts receivable 87,800 56,000
Inventories 121,900 103,650
Investments 81,500 87,000
Plant assets 250,000 205,000
Accumulated depreciation (49,500) (40,000)
Tk.590,400 Tk.458,900
Liabilities and Stockholders’ Equity
Accounts payable Tk.57,700 Tk.48,280
Accrued expenses payable 12,100 18,830

Unit-12 Page-67
School of Business

Bonds payable 100,000 80,000

Common stock 250,000 200,000
Retained earnings 170,600 111,790
Tk.590,400 Tk.458,900

Additional information:
1. New plant assets costing Tk.92,000 were purchased for cash during
the year.
2. Investments were sold at cost.
3. Plant assets costing Tk.47,000 were sold for Tk.15,550, resulting in
a gain of Tk.8,750.
4. A cash dividend of Tk.88,400 was declared and paid during the
year.
Instructions
Prepare a statement of cash flows using the indirect method.

7. Presented below are the comparative balance sheets for Partex

Company at December, 31:
Partex Company
Comparative Balance Sheets
December 31
Assets 2007 2006
Cash Tk.45,000 Tk.57,000
Accounts receivable 72,000 64,000
Inventory 132,000 147,000
Prepaid expenses 12,140 16,540
Land 125,000 150,000
Accumulated depreciation-equipment (60,000) (50,000)
Building 250,000 250,000
Accumulated depreciation-building (75,000) (50,000)
Tk.701,140 Tk.760,540
Liabilities and Stockholders’ Equity
Accounts payable Tk.44,000 Tk.45,000
Bonds payable 235,000 265,000
Common stock 280,000 250,000
Retained earnings 142,140 200,540
Tk.701,140 Tk.760,540

Additional information:
1. Operating expenses include depreciation expense of Tk.60,000 and
charges from prepaid expenses of Tk.4,400.
2. Land was sold for cash at cost.

Management Accounting Page-68

 Bangladesh Open University

3. Cash dividends of Tk.105,290 were paid.

4. Net income for 2007 was Tk.46,890.
5. Equipment was purchased for Tk.65,000 cash. In addition,
equipment costing Tk.40,000 with a book value of Tk.16,000 was
sold for Tk.14,000 cash.
6. Bonds were converted at face value by issuing 30,000 shares of
Tk.1 par value common stock.
7. Net sales in 2007 were Tk.36,700.
Instructions
(a) Prepare a statement of cash flows for 2007 using the indirect method.
(b) Compute free cash flow for 2007.

8. Balance sheet accounts for Prentice Company contained the

following amounts at the end of years 1 and 2.
Prentice Company
Balance Sheets
December 31
Debit Balance Accounts Year 2 Year 1
Cash Tk.11,000 Tk.19,000
Accounts Receivable 250,000 180,000
Inventory 318,000 270,000
Prepaid Expenses 7,000 16,000
Loan to Harker Company 40,000 –
Plant and Equipment 620,000 500,000
Total Debits Tk.1,246,000 Tk.985,000
Credit Balance Accounts
Accumulated Depreciation Tk.165,000 Tk.130,000
Accounts Payable 310,000 260,000
Accrued Liabilities 42,000 50,000
Bonds Payable 190,000 100,000
Deferred Income Taxes 84,000 80,000
Common Stock 335,000 275,000
Retained Earnings 120,000 90,000
Total Credits Tk.1,246,000 Tk.985,000

The company’s income statement for year 2 follows:

Sales Tk.700,000
Less: Cost of Goods sold 400,000
Gross margin 300,000
Less: Operating Expenses 216,000

Unit-12 Page-69
School of Business

Net operating income 84,000

Gain on sale of equipment 6,000
Income before taxes 90,000
Less income taxes 27,000
Net Income Tk.63,000

Instructions:
Equipment that had cost Tk.30,000 and on which there was accumulated
depreciation of Tk.10,000 was sold during year 2 for Tk.26,000. Cash
dividends totaling Tk.33,000 were declared and paid during year 2.
(i) Using the indirect method, compute the cash provided by operating
activities for year 2.
(ii) Prepare a statement of cash flows for year 2.
(v) Prepare a brief explanation as to why cash declined so sharply
during the year.

9. A comparative balance sheet and income statement for Simon Elvin

Company follow:
Simon Elvin Company
Comparative Balance Sheets
December 31, 2007, and 2006
(Tk. in thousand)
2007 2006
Assets
Cash Tk.4 Tk.11
Accounts Receivable 310 230
Inventory 160 195
Prepaid Expenses 8 6
Plant and Equipment 500 4200
Accumulated depreciation (85) (70)
Long-term investments 31 38
Total Assets Tk.928 Tk.830
Liabilities and Stockholders’ Equity
Accounts Payable Tk.300 Tk.225
Accrued Liabilities 70 80
Bonds Payable 195 170
Deferred Income Taxes 71 63
Common Stock 160 200
Retained Earnings 132 92
Total Liabilities and Stockholders’ Equity Tk.928 Tk.830

Management Accounting Page-70

 Bangladesh Open University

Simon Elvin Company

Income Statement
For the Year Ended December 31, 2007
(Tk. in thousand)
Sales Tk.750
Less: Cost of Goods sold 450
Gross margin 300
Less: Operating Expenses 223
Net operating income 77
Non-operating items:
Gain on sale of equipment Tk.5
Loss on sale of equipment 2 3
Income before taxes 80
Less income taxes 24
Net Income Tk.56
Instructions
During 19x5, the company sold some equipment for Tk.18 thousand that
had cost Tk.30 thousand and on which there was accumulated
depreciation of Tk.10 thousand. In addition, the company sold long-term
investments for Tk.12 thousand that had cost Tk.7 thousand when
purchased several years ago. Cash dividends totaling Tk.16 were paid
during 2007.
(i) Using the indirect method, determine the cash provided by operating
activities for 2007.
(ii) Use the information in (i) above, along with an analysis of the
remaining balance sheet accounts, and prepare a statement of cash
flows for 2007.

10. Sharon Feldman, president of Allied Products, considers Tk.20,000

to be a minimum cash balance for operating purposes. As can be
seen from the statements below, only Tk.15,000 in cash was
available at the end of 2007. Since the company reported a large net
income for the year, and also issued bonds and sold some long-term
investments, the sharp decline in cash is puzzling to Ms. Feldman.
Allied Products
Comparative Balance Sheets
December 31, 2007, and 2006
19x2 19x1
Assets
Current Assets:
Cash Tk.15,000 Tk.33,000
Accounts Receivable 300,000 210,000

Unit-12 Page-71
School of Business

Inventory 250,000 196,000

Prepaid Expenses 7,000 15,000
Total current assets 572,000 454,000
Long-term investments 90,000 120,000
Plant and equipment 860,000 750,000
Less accumulated depreciation 210,000 190,000
Net plant and equipment 650,000 560,000
Total Assets Tk.1,312,000 Tk.1,134,000
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts Payable Tk.275,000 Tk.230,000
Accrued Liabilities 8,000 15,000
Total Current Liabilities 283,000 245,000
Bonds Payable 200,000 100,000
Deferred Income Taxes 42,000 39,000
Total Liabilities 525,000 384,000
Stockholders’ Equity:
Common Stock 595,000 600,000
Retained Earnings 192,000 150,000
Total Stockholders’ Equity 787,000 750,000
Total liabilities and stockholders’ equity Tk.1,312,000 Tk.1,134,000

Allied Products
Income Statement
For the Year Ended December 31, 2007
Sales Tk.800,000
Less: Cost of Goods sold 500,000
Gross margin 300,000
Less: Operating Expenses 214,000
Net operating income 86,000
Non-operating items:
Gain on sale of investments Tk.20,000
Loss on sale of equipment 6,000 14,000
Income before taxes 100,000
Less income taxes 30,000
Net Income Tk.70,000

The following additional information is available for the year 2007.

(a) The company sold long-term investments with an original cost of
Tk.30,000 for Tk.50,000 during the year.
(b) Equipment that had cost Tk.90,000 and on which there was
Tk.40,000 in accumulated depreciation was sold during the year for
Tk.44,000.
(c) Cash dividends totaling Tk.28,000 were declared and paid during

Management Accounting Page-72

 Bangladesh Open University

the year.
(d) The stock of a dissident stockholder was repurchased for cash and
retired during the year. No issues of stock were made.
Instructions:
(i) Using the indirect method, compute the cash provided by operating
activities for 2007.
(ii) Using the data from (i) above and other data from the problem as
needed, prepare a statement of cash flows for 2007.
(iii) Explain to the president the major reasons for the decline in the
company’s cash position.

11. Delux Company is a manufacturer of fine swords. Below are listed

the net changes in the company’s balance sheet accounts for the
past year:
Debits Credits
Cash Tk.51,000
Accounts Receivable 170,000
Inventory Tk.63,000
Prepaid Expenses 4,000
Long-term Loans to Subsidiaries 80,000
Long-term Investments 90,000
Plant and Equipment 340,000
Accumulated Depreciation 65,000
Accounts Payable 48,000
Accrued Liabilities 5,000
Bonds Payable 200,000
Deferred Income Taxes 9,000
Preferred Stock 180,000
Common Stock 300,000
Retained Earnings 75,000
Tk.840,000 Tk.840,000

The following additional information is available about last year’s

activities:
(a) Net income for the year was Tk. _____?_____.
(b) The company sold equipment during the year for Tk.35,000. The
equipment had cost the company Tk.160,000 when purchased, and
it had Tk.1,45,000 in accumulated depreciation at the time of sale.

Unit-12 Page-73
School of Business

(c) The company declared and paid Tk.10,000 in cash dividends during
the year.
(d) Depreciation charges for the year were Tk. ____?____.
(e) The opening and closing balances in the Plant and Equipment and
Accumulated Depreciation accounts are given below:
Opening Closing
Plant and Equipment Tk.2,850,000 Tk.3,190,000
Accumulated Depreciation 975,000 1,040,000

(f) There were no stock conversions (i.e., one class of stock converted
to another class) during the year.
(g) The balance in the Cash account at the beginning of the year was
Tk.109,000; the balance at the end of the year was Tk. ___?___.
(h) If data are not given explaining the change in an account, make the
most logical assumption as to the cause of the change.
Instructions:
Using the indirect method, prepare a statement of cash flows for the year.

12. A comparative balance sheet for Alcorn Products containing data

for the last two years is given below:
Alcorn Products
Comparative Balance Sheets
December 31, 2007, and 2006
2007 2006
Current Assets:
Cash Tk.45,000 Tk.33,000
Marketable Securities 26,000 17,000
Accounts Receivable 590,000 410,000
Inventory 608,000 620,000
Prepaid Expenses 10,000 5,000
Total Current Assets 1,279,000 1,085,000
Long-term investments 80,000 130,000

The following additional information is available about the company’s

activities during 2007, the current year:
(a) Cash dividends declared and paid to the common stockholders
totaled Tk.75,000.
(b) Long-term notes with a value of Tk.380,000 were repaid during the
year.
(c) Equipment was sold during the year for Tk.70,000. The equipment
had cost Tk.130,000 and had Tk.40,000 in accumulated

Management Accounting Page-74

 Bangladesh Open University

depreciation on the date of sale.

(d) Long-term investments were sold during the year for Tk.110,000.
These investments had cost Tk.50,000 when purchased several
years ago.
The company reported net income during 2007 as follows:
Sales Tk.3,000,000
Less cost of goods sold 1,860,000
Gross margin 1,140,000
Less operating expenses 930,000
Net operating income 210,000
Non-operating items:
Gain on sale of investments Tk.60,000
Loss on sale of equipment 20,000 40,000
Income before taxes 250,000
Less income taxes 80,000
Net income Tk.170,000

Instructions:
(i) Prepare a worksheet like Exhibit 17-10 for Alcorn Products.
(ii) Using the indirect method, prepare a statement of cash flows for the
year.
(iii) What problems relating to the company’s activities are revealed by
the statement of cash flows that you have prepared?

Unit-12 Page-75