Cash Flow Statement - Illustrations

Illustration I

Cash Flow Statement for an Enterprise other than a Financial

Enterprise

This  illustration  does  not  form  part  of the accounting  standard.  Its purpose  is to illustrate  the application  of the accounting  standard.

1.    The illustration shows only current period amounts.

2.   Information from the statement of profit and loss and balance sheet is provided to show how the statements of cash flows under the direct method and the indirect method have been derived. Neither the statement of profit and loss nor the balance sheet is presented in conformity with the disclosure and presentation requirements of applicable laws and accounting standards. The working notes given towards the end of this illustration are intended to assist in understanding the manner in which the various figures appearing in the cash  flow statement  have  been  derived.  These  working  notes  do not  form part of the cash flow statement  and, accordingly,  need not be

3.  The following additional information is also relevant for the preparation of the statement of cash flows (figures are in Rs.’000).

(a)  An amount of 250 was raised from the issue of share capital and a further 250 was raised from long term borrowings.

(b)  Interest expense was 400 of which 170 was paid during the period.

100 relating to interest expense of the prior period was also paid during the period.

(c)  Dividends paid were 1,200.

(d)  Tax deducted at source on dividends received (included in the tax expense of 300 for the year) amounted to 40.

(e)  During the period, the enterprise acquired fixed assets for 350.

The payment was made in cash.

(f)  Plant with original cost of 80 and accumulated depreciation of 60 was sold for 20.

(g)  Foreign exchange loss of 40 represents the reduction in the carrying amount of a short-term investment in foreign-currency designated bonds arising out of a change in exchange rate between the date of acquisition of the investment and the balance sheet date.

(h)  Sundry debtors and sundry creditors include amounts relating to credit sales and credit purchases only.

Balance  Sheet  as at 31.12.1996

			199 6		(Rs. ’000) 199 5
Assets
Cash on hand and balances with banks			200		25
Short-term investments			670		135
Sundry debtors			1,700		1,200
Interest receivable			100		–
Inventories			900		1,950
Long-term investments			2,500		2,500
Fixed assets at cost	2,180				1,910
Accumulated depreciation	(1,450)				(1,060)
Fixed assets (net)			730		850
Total assets			6,800		6,660
Liabilities
Sundry creditors			150		1,890
Interest payable			230		100
Income taxes payable			400		1,000
Long-term debt			1,110		1,040
Total liabilities			1,890		4,030
Shareholders’  Funds
Share capital			1,500		1,250
Reserves			3,410		1,380
Total shareholders’ funds			4,910		2,630
Total liabilities and shareholders’ funds			6,800		6,660

Statement  of Profit and Loss for the period ended 31.12.1996
                                                                                                                         (Rs. ’000)

Sales	30,650
Cost of sales	(26,000)
Gross profit	4,650
Depreciation	(450)
Administrative and selling expenses	(910)
Interest expense	(400)
Interest income	300
Dividend income	200
Foreign exchange loss	(40)
Net profit before taxation and extraordinary item	3,350
Extraordinary item – Insurance proceeds from
earthquake disaster settlement	180
Net profit after extraordinary item	3,530
Income-tax	(300)
Net profit	3,230

Direct Method Cash Flow Statement  [Paragraph  18(a)]

Cash flows from operating  activities

Cash receipts from customers	30,150
Cash paid to suppliers and employees	(27,600)
Cash generated from operations	2,550
Income taxes paid	(860)
Cash flow before extraordinary item	1,690
Proceeds from earthquake disaster settlement	180
Net cash from operating  activities		1,870
Cash flows from investing  activities
Purchase of fixed assets	(350)
Proceeds from sale of equipment	20
Interest received	200
Dividends received	160
Net cash from investing  activities		30

Cash flows from financing activities Proceeds from issuance of share capital	250
Proceeds from long-term borrowings	250
Repayment of long-term borrowings	(180)
Interest paid	(270)
Dividends paid	(1,200)
Net cash used in financing  activities		(1,150)
Net increase  in cash and cash equivalents		750
Cash and cash equivalents  at beginning  of period (see  Note  1)		160
Cash and cash equivalents  at end of period (see  Note  1)		910

Net profit before taxation, and extraordinary item	3,350
Adjustments for :
Depreciation	450
Foreign exchange loss	40
Interest income	(300)
Dividend income	(200)
Interest expense	400
Operating profit before working capital changes	3,740
Increase in sundry debtors	(500)
Decrease in inventories	1,050
Decrease in sundry creditors	(1,740)
Cash generated from operations	2,550
Income taxes paid	(860)
Cash flow before extraordinary item	1,690
Proceeds from earthquake disaster settlement Net cash from operating  activities	180	1,870

Indirect Method Cash Flow Statement  [Paragraph  18(b)]

Cash flows from operating  activities

Cash flows from investing  activities Purchase of fixed assets	(350)
Proceeds from sale of equipment	20
Interest received	200
Dividends received	160
Net cash from investing  activities		30
Cash flows from financing activities
Proceeds from issuance of share capital	250
Proceeds from long-term borrowings	250
Repayment of long-term borrowings	(180)
Interest paid	(270)
Dividends paid	(1,200)
Net cash used in financing  activities		(1,150)
Net increase  in cash and cash equivalents		750
Cash and cash equivalents  at beginning  of period (see  Note  1)		160

Cash and cash equivalents  at end of period (see Note 1)                   910

Notes to the cash flow statement

(direct method and indirect method)

1.    Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and balances with banks, and investments in money-market instruments. Cash and cash equivalents included in the cash flow statement comprise the following balance sheet amounts.

                                                                 1996       199 5

Cash on hand and balances with banks         200            25

Short-term Investments                                670         135

Cash and cash equivalents                           870          160

Effect of exchange rate changes                     40             –                     Cash and cash equivalents as restated         910          160

Cash and cash equivalents at the end of the period include deposits with banks of 100 held by a branch which are not freely remissible to the company because of currency exchange restrictions.

The company has undrawn borrowing facilities of 2,000 of which 700 may be used only for future expansion.

2.    Total tax paid during the year (including  tax deducted  at source on dividends received) amounted to 900.

Alternative Presentation (indirect method)

As an alternative, in an indirect method cash flow statement, operating profit before working capital changes is sometimes presented as follows:

Revenues excluding investment income	30,650
Operating expense excluding depreciation	(26,910)
Operating profit before working capital changes		3,740

Working Notes

The working notes given below do not form part of the cash flow statement and,   accordingly,   need   not   be   published.   The   purpose   of   these working  notes   is  merely   to  assist   in  understanding   the  manner   in which  various figures  in  the  cash  flow  statement  have  been  derived. (Figures  are in Rs. ’000.)

1.    Cash receipts  from customers

Sales	30,650
Add: Sundry debtors at the beginning of the year	1,200
	31,850
Less : Sundry debtors at the end of the year	1,700
	30,150

2.    Cash paid to suppliers  and employees

Cost of sales                                                                  26,000

Administrative and selling expenses                                     910

                                                                                   26,910                                

      Add:  Sundry creditors at the beginning of the    1890

             Year

Inventories at the end of the year	900	2,790
		29,700
Less: Sundry creditors at the end of the year	150
Inventories at the beginning of the year	1,950	2,100
		27,600

3.    Income  taxes  paid  (including  tax  deducted  at  source  from dividends  received)

Income tax expense for the year (including tax deducted at source from dividends received) Add : Income tax liability at the beginning of the year	300 1,000
	1,300
Less: Income tax liability at the end of the year	400
	900

Out of 900, tax deducted at source on dividends received (amounting to 40) is included in cash flows from investing activities and the balance of 860 is included in cash flows from operating activities (see paragraph 34).

4.    Repayment  of long-term  borrowings

Long-term debt at the beginning of the year	1,040
Add : Long-term borrowings made during the year	250
	1,290
Less : Long-term borrowings at the end of the year	1,110
	180
5.    Interest  paid
Interest expense for the year	400
Add: Interest payable at the beginning of the year	100
	500
Less: Interest payable at the end of the year	230
	270

Illustration II

Cash Flow Statement for a Financial Enterprise

This  illustration  does  not  form  part  of the accounting  standard.  Its purpose  is to illustrate  the application  of the accounting  standard.

1.    The illustration shows only current period amounts.

2.    The illustration is presented using the direct method.

Cash flows from operating  activities

Interest and commission receipts	28,447
Interest payments	(23,463)
Recoveries on loans previously written off	237
Cash payments to employees and suppliers	(997)
Operating profit before changes in operating assets	4,224
(Increase)  decrease  in operating  assets:
Short-term funds	(650)
Deposits held for regulatory or monetary control purposes          234
Funds advanced to customers	(288)
Net increase in credit card receivables	(360)
Other short-term securities	(120)
Increase  (decrease)  in operating  liabilities:
Deposits from customers	600
Certificates of deposit	(200)
Net cash from operating activities before income tax	3,440
Income taxes paid	(100)
Net cash from operating  activities		3,340
Cash flows from investing  activities
Dividends received	250
Interest received	300
Proceeds from sales of permanent investments	1,200
Purchase of permanent investments	(600)
Purchase of fixed assets	(500)
Net cash from investing  activities		650
Cash flows from financing activities Issue of shares	1,800
Repayment of long-term borrowings	(200)
Net decrease in other borrowings	(1,000)
Dividends paid	(400)
Net cash from financing  activities		200
Net increase  in cash and cash equivalents		4,190
Cash and cash equivalents  at beginning  of period		4,650
Cash and cash equivalents  at end of period		8,840