MEANING OF KEY TERMS USED IN THE CHAPTER

1. Cash Flow Statement It is the statement that shows flow of Cash and Cash Equivalents
during the period under report.
2. Cash Flows These are the inflows (receipts) and outflows (payments) of Cash and
Cash Equivalents.

3. Cash It comprises of Cash on Hand and demand deposits with banks.

4. Cash Equivalents These are short-term, highly liquid investments that are readily
convertible into known amount of cash and which are subject to
an insignificant risk of change in value. An investment normally
qualifies as cash equivalent only when it has short maturity period
of, say, three months or less from the date of acquisition,
i.e., purchase.

5. Operating Activities These are the principal revenue producing activities of the enterprise
and other activities that are not Investing and Financing Activities.

6. Investing Activities These are activities of acquisition and disposal of long-term assets
and other investments not included in cash equivalents.

7. Financing Activities These are the activities that result in change in the size and
composition of the owner’s capital (including Preference Share Capital
in the case of a company) and borrowings of the enterprise.

8. Extraordinary Activities These are incomes or expenses that arise from events or
transactions that are clearly distinct from the ordinary activities of the
enterprise and, therefore, are not expected to recur frequently
or regularly.

C H A P T E R S U M M A RY

• Cash Flow Statement is a statement that shows flow of Cash and Cash Equivalents during the period
under report. The statement shows net increase or decrease of Cash and Cash Equivalents under each
activity separately (operating/investing/financing) and collectively.

• Preparation of Cash Flow Statement: Cash Flow Statement is prepared following the steps as follows:

Step 1: Compute Cash Flow from Operating Activities.

Step 2: Compute Cash Flow from Investing Activities.

Step 3: Compute Cash Flow from Financing Activities.

Step 4: Cash flows under each activity, i.e., Operating Activity, Investing Activity and Financing Activity as
computed under Steps 1, 2 and 3 are added in Cash Flow Statement and the resultant amount
is Net Increase or Decrease in Cash and Cash Equivalents.

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 Step 5: Cash and Cash Equivalents balance in the beginning of the period is added to the cash flows as
arrived under Step 4. The amount so determined should be equal to Cash and Cash Equivalents
balance at the end of the year.

Proposed Dividend
Proposed Dividend, both on Equity Shares and Preference Shares are paid after being
declared (approved) by the shareholders in the Annual General Meeting. Annual General
Meeting is held after the end of the financial year, i.e., in the next financial year.
AS-4 (Revised), Contingencies and Events Occurring After the Balance Sheet Date
prescribes that Proposed Dividend is not to be provided in the books of account
but is to be disclosed (shown) in the Notes to Accounts as Contingent Liability being
payable upon being declared (approved) by the shareholders. Dividend is an appropriation
of Profit and is deducted from Surplus, i.e., Balance in Statement of Profit & Loss in
the Note to Accounts on Reserves and Surplus in the year in which dividend is paid.

FORMAT OF CASH FLOW STATEMENT (INDIRECT METHOD) for the year ended ...
[As per Accounting Standard-3 (Revised)]

Particulars `

I. Cash Flow from Operating Activities

(A) Net Profit before Tax and Extraordinary Items (as per Working Note) ...
Adjustment for Non-cash and Non-operating Items
(B) Add: Items to be Added
— Depreciation ...
— Goodwill, Patents and Trademarks Amortised ...
— Interest on Bank Overdraft/Cash Credit ...
— Interest on Borrowings (Short-term and Long-term) and Debentures ...
— Loss on Sale of Fixed Assets ...
— Increase in Provision for Doubtful Debts* ... ...
...
(C) Less: Items to be Deducted
— Interest Income ...
— Dividend Income ...
— Rental Income ...
— Gain (Profit) on Sale of Fixed Assets ...
— Decrease in Provision for Doubtful Debts* ... ...
(D) Operating Profit before Working Capital Changes (A + B – C) ...
(E) Add: Decrease in Current Assets and
Increase in Current Liabilities
— Decrease in Inventories (Stock) ...
— Decrease in Trade Receivables (Debtors/Bills Receivable) ...
— Decrease in Accrued Incomes ...
— Decrease in Prepaid Expenses ...
— Increase in Trade Payables (Creditors/Bills Payable) ...
— Increase in Outstanding Expenses ...
— Increase in Advance Incomes ... ...

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 (F) Less: Increase in Current Assets and
Decrease in Current Liabilities
— Increase in Inventories (Stock) ...
— Increase in Trade Receivables (Debtors/Bills Receivable) ...
— Increase in Accrued Incomes ...
— Increase in Prepaid Expenses ...
— Decrease in Trade Payables (Creditors/Bills Payable) ...
— Decrease in Outstanding Expenses ...
— Decrease in Advance Incomes ... ...
(G) Cash Generated from Operations (D + E – F) ...
(H) Less: Income Tax Paid (Net of Tax Refund received) ...
(I) Cash Flow before Extraordinary Items ...
— Extraordinary Items (+/–) ...
(J) Cash Flow from (or Used in) Operating Activities ...
II. Cash Flow from Investing Activities
— Proceeds from Sale of Fixed Assets ...
— Proceeds from Sale of Investments (Other than Current Investments (to be
included in Cash and Cash Equivalents) and Marketable Securities) ...
— Proceeds from Sale of Intangible Assets ...
— Interest and Dividend received (For Non-financial Companies only) ...
— Rent Received ...
— Payment for Purchase of Fixed Assets (...)
— Payment for Purchase of Investments (Other than Marketable Securities) (...)
— Payment for Purchase of Intangible Assets like Goodwill (...)
— Extraordinary Items (e.g., Insurance Claim on Machinery against Fire) (+/–) ...
Cash Flow from (or Used in) Investing Activities ...
III. Cash Flow from Financing Activities
— Proceeds from Issue of Shares and Debentures ...
— Proceeds from Other Long-term Borrowings ...
— Increase/Decrease in Bank Overdraft and Cash Credit ...
— Final Dividend paid during the year (...)
— Interim Dividend paid during the year (...)
— Payment of Interest on Debentures and Loans (Short-term and Long-term) (...)
— Repayment of Loans (...)
— Redemption of Debentures/Preference Shares (...)
— Payment of Share Issue Expenses (...)
— Payment for Buy-back of Shares as Extraordinary Activity (...)
Cash Flow from (or Used in) Financing Activities ...
IV. Net Increase/Decrease in Cash and Cash Equivalents (I + II + III) ...
V. Add: Cash and Cash Equivalents in the beginning of the year
— Cash-in-Hand ...
— Cash at Bank ...
— Short-term Deposits ...
— Current Investments ...
— Marketable Securities ... ...
...
VI. Cash and Cash Equivalents at the end of the year
— Cash-in-Hand ...
— Cash at Bank ...
— Short-term Deposits ...
— Current Investments ...
— Marketable Securities ... ...
*Alternatively, increase/decrease in Provision for Doubtful Debts may be treated under increase/decrease in
Current Liabilities. In this situation, increase/decrease in Provision for Doubtful Debts is adjusted after Operating
Profit before Working Capital Changes.

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Working Note: Net Profit before Tax and Extraordinary Items: `
Net Profit as per Statement of Profit & Loss or Difference between Closing Balance and
Opening Balance of Surplus, i.e., Balance in Statement of Profit & Loss ...
Add: Transfer to Reserves ...
Dividend (Proposed Dividend of previous year) paid during the year ...
Interim Dividend paid during the year ...
Provision for Tax for the current year ...
Extraordinary Items, if any, debited to the Statement of Profit & Loss ...
...
Less: Extraordinary Items, if any, credited to the Statement of Profit & Loss ...
Refund of Tax credited to the Statement of Profit & Loss ... ...
Net Profit before Tax and Extraordinary Items ...

IMPORTANT NOTE

1. Current Investments to be taken as Marketable Securities unless otherwise specified.

2. Bank overdraft and cash credit is shown as part of Financing Activities.