Study Material & Notes for the Chapter 12
CASH FLOW STATEMENT
II. CASH FLOW FROM OPERATING ACTIVITIES
i. Operating Activities
- Operating activities are the activities that constitute the primary or main activities of an enterprise
- These are the principal revenue generating activities (or the main activities) of the enterprise and these activities are not investing or financing activities.
- Cash flows from operating activities generally result from the transactions and other events that enter into the determination of net profit or loss
- The amount of cash from operations’ indicates the internal solvency level of the company, and is regarded as the key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to
- maintain the operating capability of the enterprise
- paying dividends
- making of new investments
repaying of loans without recourse to external source of financing.
ii. Operating Activities - Manufacturing/Trading/Service Co
iii. Operating Activities – Finance Companies
Cash Flow from Operation Activities – Four Major Steps
- Net Profit before Tax and Extraordinary Items
- Adjustments for Non Cash & Non Operating Activities
- Changes in Working Capital
- Payment of Income Tax
Presentation in the Cash Flow Statement
| SN | Particulars | Amount |
|---|---|---|
| (A) | Net Profit before Tax and Extraordinary Items (as per Working Note) | xxxxx |
| Adjustments for Non-cash and Non-operating expenses | ||
| (B) | Items to be Added | |
| Depreciation | xxxxx | |
| Interest on Bank Overdraft/Cash Credit | xxxxx | |
| Interest on Borrowings (Short-term and Long term) and Debentures | xxxxx | |
| Writing off Underwriting Commission/Share Issue Expenses | xxxxx | |
| Loss on Sale of Fixed Assets | xxxxx | |
| Increase in Provision for Doubtful Debts* | xxxxx | |
| (C) | Items to be Deducted | |
| Interest Income | xxxxx | |
| Dividend Income | xxxxx | |
| Rental Income | xxxxx | |
| (D) | Operating Profit before Working Capital Changes (A+B-C) | xxxxx |
| (E) | Add: Decrease in Current Assets and Increase in Current Liabilities | |
| Decrease in Inventories (Stock) | xxxxx | |
| Decrease in Trade Receivables (Debtors and Bills Receivable) | xxxxx | |
| Decrease in Accrued Incomes | xxxxx | |
| Decrease in Prepaid Expenses | xxxxx | |
| Increase in Trade Payables (Creditors and Bills Payable) | xxxxx | |
| Increase in Outstanding Expenses | xxxxx | |
| Increase in Advance Incomes | xxxxx | |
| (F) | Less: Increase in Current Assets and Decrease in Current Liabilities | |
| Increase in Inventories (Stock) | xxxxx | |
| Increase in Trade Receivables (Debtors and Bills Receivable) | xxxxx | |
| Increase in Accrued Incomes | xxxxx | |
| Increase in Prepaid Expenses | xxxxx | |
| Decrease in Trade Payables (Creditors and Bills Payable) | xxxxx | |
| Decrease in Outstanding Expenses | xxxxx | |
| Decrease in Advance Incomes | xxxxx | |
| (G) | Cash Generated from Operations (D+E-F) | xxxxx |
| (H) | Less: Income Tax Paid (Net of Tax Refund) | xxxxx |
| (I) | Cash Flow before Extraordinary Items | xxxxx |
| Extraordinary Items (+/-) | xxxxx | |
| (J) | Cash Flow from (or Used in) Operating Activities | xxxxx |
Working Note
| SN | Particulars | Amount |
|---|---|---|
| Net Profit as per Profit & Loss Account or Closing – Opening P&L | xxxxx | |
| Add: | ||
| Proposed Dividend (Previous year) paid during the year | xxxxx | |
| Interim/Final Dividend paid on Equity/Preference Shares | xxxxx | |
| Provision for Taxation (Current Year’s only) – Net of refund | xxxxx | |
| Transfer from P&L A/c to Reserves | xxxxx | |
| Loss/Expenses due to extraordinary items debited to P&L | xxxxx | |
| Less: | ||
| Refund of Tax credited to P&L A/c | xxxxx | |
| Gain/Income due to extraordinary items | xxxxx | |
| Net Profit before Tax and Extraordinary Items | xxxxx |
TREATMENT OF CERTAIN SPECIFIC ITEMS
i. Dividend
ii. Cash Flow from fixed Assets Movement
- Increase in Fixed Assets vs previous year balance means more Fixed Assets have been acquired by the Organization leading to Cash Outflow
- Decrease in Fixed Assets vs previous year balance means certain Fixed Assets have been disposed off by the Organization leading to Cash Inflow
- Increase in Accumulated Depreciation/Provision for Deprecation means depreciation has been provided during the year
iii. Cash Flow from Income Tax Provision and Payment
- AS-3 requires that 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.
- If there is no mention of Income tax paid in the Additional Information, it is assumed that opening balance of Provision for Taxation is paid during the year and closing balance of provision is created during the year
- If Income tax paid during the year is provided in the Additional Information, Provision for Taxation General Ledger is prepared plotting Opening balance, Closing balance and Income Tax Paid. The balancing figure on the credit side is the Provision created during the year.
