Accountancy 3 Marks Question

Working Note:
* Net Cash Flow from financing activities ₹ 4,21,000 is the balancing figure of Cash Flow Statment.

		₹
80% of ₹ 1,20,000	=	96,000
+ Profit 20%	=	19,200
		1,15,200

Uses: Non-Current Investment A/c should be prepared to find out the uses of Cash:

Therefore, Uses of Cash (purchase of Non-Current Investments)= ₹ 16,000

1. Hotel:

1. Receipts from sale of goods to customer.
2. Payment of wages and salaries, electricity, food items and other items used in accommodation.

2. Film Production House:

1. Receipts from selling film rights of a film to the distributors.
2. Payment to the staff, actors, actresses, directors, etc.

3. Financial Enterprises:

1. Receipts from repayment of loans, interest incomes from investments, etc.
2. Repayment of loans, recovery expenditure for recover of loans etc, salaries of employees.

4. Media Enterprises:

1. Receipts from advertisements.
2. Payments to staff, reporters, photographers, etc.

5. Steel Manufacturing Unit:

1. Receipts from sale of steel sheets, steel castings, steel rods, etc.
2. Payment for iron, coal, salaries to staff, etc.

6. Software Business Unit:

1. Receipts from sale of software and renewal of licenses.
2. Payment of salaries to their employees, etc.

Cash Outflow arises when the net effect of transaction is decrease in the amount of Cash and Cash Equivalents.

As per the Revised Accounting Standard 3 (AS-3), preparation of Cash Flow Statement for each period is mandatory. AS-3 also specifies the classification of all inflows and outflows basically under the following heads:

1. Cash Flow from Operating Activities.
2. Cash Flow from Investing Activities.
3. Cash Flow from Financing Activities.

	OPERATING ACTIVITY
	Financial Company	Non-Financial Company
(a)	Purchase of Shares on a Stock Exchange	-
(b)	Dividend received on shares	-
(d)	Loans given	-
(e)	Loans taken	-
(f)	Interest paid on borrowings	-

A financial company deals with securities like shares, bonds, debentures, etc on a regular basis. These securities form part of their stock and hence purchase and sale of these securities will be categorised under Operating Activity. But, Dividend paid by them will be the part of Financing Activities.
However, for a non-financial company issue of shares, debentures, etc form part of financing activities as such issue will increase the capital employed in the business.

OPERATING ACTIVITY	INVESTING ACTIVITY	FINANCING ACTIVITY	CASH AND CASH EQUIVALENTS
(a). Cash Sale of Goods	(e). Patents Purchased	(g). Bank Overdraft	(f). Marketable Securities
(b). Cash Received against Revenue from Services rendered	(i). Purchase of Shares	(h). Proceeds from Issue of Debentures
(c). Cash Purchase of Goods	(n). Interest on Investments	(j). Repayment of Long-term Loan
(d). Cash paid against Services Taken	(p). Income Tax paid on Gain on Sale of Asset	(l). Redemption of Debentures
(k). Commission Received		(m). Interest on Debentures
(o). Income Tax paid
(q). Cash Received from Debtors
(r). Cash Paid to Creditors

Note:

Profit & Loss Balance on 31st March, 2018	50,000
less: Profit & Loss Balance on 31st March, 2017	(60,000)
Operating Loss for the year	10,000

Hint: Increase in Goodwill is treated as purchase of Goodwill. Hence, it will not affect 'Cash from operating activities'.

Note: Short-term Loan will be treated as financing activity.

1. Calculation of Plant Purchased:

Calculation of Current year's depreciation:

2. Cash Flow Statement for the year ending 31st March, 2016

Indirect Method of cash flow statment: In indirect method, the net income figure from the income statement is used to calculate the amount of net cash flow from operating activities. Since income statement is prepared on accrual basis in which revenue is recognised when earned and not when received therefore net income does not represent the net cash flow from operating activities and is necessary to adjust EBIT for those items which effect net income although no actual cash has been paid or received against them.
Indirect Method: Following is the indirect method formula which is used to calculate cash flow from operating activities.

The procedure to prepare Cash Flow Statement is described in the following steps in their chronological order.
Step 1: Ascertain the cash flows from operating activities.
Step 2: Ascertain the cash flows from investing activities.
Step 3: Ascertain the cash flows from financing activities.
Step 4: Ascertain net increase or decrease by summing up the amounts of Steps 1, 2, and 3.
Step 5: Write the opening balance of cash and cash equivalents and deduct it from the amount ascertained in Step 4. The resulting figure arrived is the Closing Balance of Cash and Cash Equivalents.
There are two methods viz. Direct Method and Indirect Method for the preparation of Cash Flow Statement.

Note: Preparation of Cash Flow Statement using Direct Method has been excluded from the prescribed syllabus. The format is given since the question has not specified the method explicitly. Students can refer to the direct method for the knowledge purpose.

1. Investing Activity: 50,000
2. Investing Activity: 2,00,000
3. Investing Activity: 60,000

Cost of Investments Sold:

	₹
Non-Current Investments at the beginning of the period (as on 1.4.2017)	50,000
Add: Purchased during the year	25,000
	75,000
Less: Non-Current Investments at the end of the period (as on 31.3.2018)	(60,000)
Cost of Investments Sold	15,000
Sources of Cash:	₹
Cost of Investments sold	15,000
Less: Loss 20%	(3,000)
Cash Inflow	12,000

Transaction	Effect on Cash or Cash Equivalents	Reason
1.	Inflow	Cash is increased.
2.	Outflow	Cash is decreased.
3.	Outflow	Cash is decreased.
4.	No effect	Cash is not affected.
5.	Inflow	Cash is increased
6.	No effect	Cash is not affected.
7.	Inflow	Cash is increased.
8.	Outflow	Cash is decreased.
9.	Outflow	Cash is decreased.
10.	Outflow	Cash is decreased.
11.	No effect	Cash is not affected.
12.	No effect	Cash is not affected.

As per Accounting Stnndard-3 (Revised) changes resulting in inflows and outflows of Cash are classified into three types of activities namely:

1. Cash Flows from Operating Activities.
2. Cash Flows from Investing Activities.
3. Cash Flows from Financing Activities.

Inflow	Outflow	No Flow
(a). Sale of Fixed Assets	(c). Purchase of Machinery for cash	(d). Purchase of Land and Building. Consideration paid by issue of Debentures.
(b). Sale of goods against cash	(g). Payment of Interim Dividend	(e). Issued fully paid bonus shares
		(f). Cash withdrawn from Bank
		(h). Proposed Dividend

The uses of cash flow statement are as follows:

1. It is useful for short term financial planning about inflows and outflow of cash.
2. It helps in analysing the reason for the change in cash and cash equivalent balances of a company.
3. It assists in determining and assessing liquidity and solvency positions of a company.
4. It enables to analyse and study the trends of receipts and payments of cash from various activities of a company and thereby helps in drafting various policy measures and short term planning.
5. It enables the segregation of cash flows from operating, investing and financing activities of the business separately.
6. It assists in making decision about distribution of profit with reference to the availability of cash.

Investing activities are those activities that are related to sales and purchases of long-term fixed assets like, land and building, plant and machinery, furniture, etc. These fixed assets are not held for resale. The activities like sale and purchase of investments that are not included in the cash equivalents are also included in Investing activities. Any income arising from such investments (assets) are regarded a part of investing activities.
As per the AS3, the major cash inflows and outflows from investing activities are as follows:

1. Cash payments to acquire fixed assets (including intangibles like, goodwill). These payments include capitalised cost of research and development and self constructed fixed assets.
2. Cash receipts from disposal of fixed assets (including intangible assets).
3. Cash payments to acquire shares, warrants, or debt instruments of other enterprises and interest in joint venture (other than payments of those instruments consider as cash equivalents and are held for the trading purposes).
4. Cash receipts from disposal of shares, warrants or debt instruments of other enterprises and interest from joint ventures (other than receipts from those held for trading purposes).
5. Cash advances and loans made to third parties (other than advances, and loans made by financial enterprises). These will be treated as cash flows from the operating activities.
6. Cash receipts from repayment of advances and loans made to third parties (other than advances and loans of financial enterprises). These will be treated as cash flows from operating activities.
7. Cash receipts from insurance company for any property involved in accident. Any income arising from fixed assets or investments like interest, dividend, rent etc. In case of financial enterprises interest and dividend is treated as operating activities.

Note: Preparation of Cash Flow Statement using Direct Method has been excluded from the prescribed syllabus. The format is given since the question has not specified the method explicitly. Students can refer to the direct method for the knowledge purpose.

Yes, the nature or type of an enterprise can change altogether the category into which a particular activity may be classified. This can be better understood with the help of an example of two firms. One engaged in real estate and the other engaged in general business. For the firm that is engaged in real estate business purchase and sales of building will be part of the operating activity on the other hand firm that is engaged in general business purchase and sales of building will be part of the investing activity. Hence, it can be said that the classification of activities depends on the nature and type of enterprise.

Hint: Goodwill will be treated as purchase of Goodwill. Hence, it will not affect Cash from operating activities.

Financing activities are those activities that are related to capital or long term funds of an enterprise. These activities results in the change in the capital and borrowed funds.
As per the AS3, the major cash inflows from financing activities are as follows:

1. Cash proceeds from issue of shares and other similar instruments.
2. Cash proceeds from issue of debentures, loans, notes, bonds, and other short and long-term borrowings.

As per the AS3, the major cash outflows from financing activities are as follows:

1. Cash repayments of the amount borrowed in form of debentures, loans, notes bonds, and other short and long-term borrowings.
2. Buy-back of shares and debentures.
3. Interest paid on debentures, loans, and advances.
4. Dividend paid to the preference shareholders and equity shareholders.

An important point that must be noted is that the purchase and sale of securities, interest paid or received and dividend received is treated as cash flow from operating activities for an investment company. But dividend paid is treated as cash flow from financing activities.

1.	Purchase of Shares.	Investing Activities
2.	Buy-back of Equity Shares.	Financing Activities
3.	Payment of Share issue expenses.	Financing Activities
4.	Discount allowed to Customers.	Operating Activities
5.	Discount received from Suppliers.	Operating Activities
6.	Increase in balance of Cash Credit.	Financing Activities
7.	Repayment of Long-term Loan.	Financing Activities
8.	Repayment of Short-term Loan.	Financing Activities
9.	Proceeds from Short-term Borrowings.	Financing Activities
10.	Dividend paid on Preference Shares.	Financing Activities
11.	Short-term deposits in Bank.	Cash and Cash Equivalents
12.	Rent received by a Company whose main business is Real Estate Business.	Operating Activities
13.	Rent received by a Company whose main business is manufacturing.	Investing Activities

Working Notes:

1. There will be no cash flow due to issue of bonus shares.
2. Investment in Shares and dividend received on investments will not be recorded in cash flow from financing activities.

Net Profit before Tax ₹ 4,08,000; Cash Flow from Operating Activities ₹ 84,000; Cash Flow from Investing Activities ₹ 68,000; Cash used in Financing Activities ₹ 1,20,000.
Hint: Cash used in Financing Activities is the balancing figure of Cash Flow Statement.

Cash Flow Statement is a statement that shows inflows (receipts) and outflows (payments) of Cash and Cash Equivalents of an enterprise during a specified period of time.
The objectives of Cash Flow Statement are:

• To determine the sources (receipts) of Cash and Cash Equivalents under operating, investing and financing activities of the enterprise.
• To determine applications (payments) of Cash and Cash Equivalents under operating, investing and financing activities of the enterprise.
• To determine net change in Cash and Cash Equivalents being the difference between sources (receipts) and applications (payments) under operating, investing and financing activities between the dates of two Balance Sheets.