The movement of cash & cash equivalents or inflow and outflow of cash is known as Cash Flow. Cash inflows are the transactions that result in an increase in cash & cash equivalents; whereas, cash outflows are the transactions that result in a reduction in cash & cash equivalents. Hence, a statement showing flows of cash & cash equivalent during a specified time period is known as a Cash Flow Statement. One can prepare a cash flow statement if the two comparative balance sheets of a company are given. The transactions of a cash flow statement are categorised into three activities; namely, Cash flow from Operating Activities, Cash flow from Investing Activities, and Cash flow from Financing Activities. The Institute of Chartered Accountants in India has issued Accounting Standard AS – 3 revised for the preparation of cash flow statements. Besides, with the introduction of the Companies Act 2013, the preparation of a Cash Flow Statement is now mandatory for every type of company except OPC (One Person Company) [Section 2(40)].
Cash Flow from Operating Activities:
The principal revenue-producing activities of a company are categorised under Operating Activities. Simply put, it includes those activities which help an organisation in ascertaining the net profit or net loss of an enterprise. Some of the cash flows arising from operating activities are as follows:
- Cash receipts from the sale of goods and rendering services.
- Cash receipts from fees, royalties, commissions, and other revenue.
- Cash payments to and on behalf of employees.
- Cash payments to suppliers for goods and services.
- Cash payments or refunds on income taxes unless they can be identified specifically with financing and investing activities.
- Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities, and other policy benefits.
- Cash receipt and payments that relates to future contracts, option contracts, forward contracts, and swap contracts when the contracts are held for dealing or trading purposes.
Illustration 1:
Calculate Cash Flow from Operating Activities from the following information:
Notes:
1. Other Income:
2. Other Expenses:
Additional Information:
Solution:
Note 1: Calculation of Net Profit before Tax:
Illustration 2:
The following is the Statement of Profit & Loss of Yuvraj Ltd. for the year ended March 31, 2021:
Additional Information:
i) Trade receivables decreased by ₹40,000 during the year.
ii) Prepaid expenses increased by ₹6,000 during the year.
iii) Trade payables decreased by ₹16,000 during the year.
iv) Outstanding expenses increased by ₹1,000 during the year.
v) Operating expenses included depreciation of ₹30,000
Compute Cash Flow from Operating Activities for the year ended March 31, 2021, by indirect method.
Solution:
Illustration 3:
Calculate the Cash Flow from Operating Activities from the Balance Sheet of Satyam Ltd.
Notes:
Additional Information:
1. Debentures were issued on March 31, 2021
2. Investments were made on March 31, 2021
Solution:
Note 1: Calculation of Net Profit before Tax:
It should be noted that the negative balance of ₹6,000 of the Profit & Loss Statement appearing in the Balance Sheet on March 31, 2020, represents the loss amount. In the current year, Satyam Ltd. has made a profit of ₹3,000 after covering the loss of the previous year. Therefore, the net profit during the current year will be 3,000 + 6,000 = 9,000.