A

Report on
Cash Flow Statement
Managerial Accounting

Submitted by: Group 4

September 15, 2016

MANAC Report

Abstract

September 15, 2016

MANAC Report

Acknowledgement
We have taken efforts in this report. However, it would not have been possible without the kind
support and help of many individuals. We would like to extend our sincere thanks to all of them.
We are highly indebted to Prof. Debashish Kundu for their guidance and constant supervision as well
as for providing necessary information regarding the report & also for their support in completing the
report.
We would like to express our gratitude towards our parents & PDM participants for their kind cooperation and encouragement which help us in completion of this report.
Our thanks and appreciations also go to the people who have willingly helped us out with their
abilities.

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MANAC Report

Contents
ABSTRACT ........................................................................................................................................................ 1
ACKNOWLEDGEMENT ...................................................................................................................................... 2
CONTENTS ....................................................................................................................................................... 3
INTRODUCTION ............................................................................................................................................... 4
OPERATIONS .......................................................................................................................................................... 4
INVESTING ............................................................................................................................................................. 5
FINANCING ............................................................................................................................................................ 5
QUESTION 1 AKD LIMITED ............................................................................................................................... 6
SOLUTION 1 AKD LIMITED ................................................................................................................................ 7
QUESTION 2 BABULAL GRAIN MERCHANTS ..................................................................................................... 8
SOLUTION 2 BABULAL GRAINS MERCHANT...................................................................................................... 9
BIBLIOGRAPHY ............................................................................................................................................... 10

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Introduction
In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial
statement that shows how changes in balance sheet accounts and income affect cash and cash
equivalents, and breaks the analysis down to operating, investing and financing activities. Essentially,
the cash flow statement is concerned with the flow of cash in and out of the business. The statement
captures both the current operating results and the accompanying changes in the balance sheet. As
an analytical tool, the statement of cash flows is useful in determining the short-term viability of a
company. (Helfert)
Cash flow is determined by looking at three components by which cash enters and leaves a company:
core operations, investing and financing, (Heakal, 2016)

Operations
Measuring the cash inflows and outflows caused by core business operations, the operations
component of cash flow reflects how much cash is generated from a company's products or services.
Generally, changes made in cash, accounts receivable, depreciation, inventory and accounts payable
are reflected in cash from operations.
Cash flow is calculated by making certain adjustments to net income by adding or subtracting
differences in revenue, expenses and credit transactions (appearing on the balance sheet and income
statement) resulting from transactions that occur from one period to the next. These adjustments are
made because non-cash items are calculated into net income (income statement) and total assets and
liabilities (balance sheet). So, because not all transactions involve actual cash items, many items have
to be re-evaluated when calculating cash flow from operations.
For example, depreciation is not really a cash expense; it is an amount that is deducted from the total
value of an asset that has previously been accounted for. That is why it is added back into net sales
for calculating cash flow. The only time income from an asset is accounted for in CFS calculations is
when the asset is sold.
Changes in accounts receivable on the balance sheet from one accounting period to the next must
also be reflected in cash flow. If accounts receivable decreases, this implies that more cash has entered
the company from customers paying off their credit accounts - the amount by which AR has decreased
is then added to net sales. If accounts receivable increase from one accounting period to the next, the
amount of the increase must be deducted from net sales because, although the amounts represented
in AR are revenue, they are not cash. (Heakal, 2016)
An increase in inventory, on the other hand, signals that a company has spent more money to
purchase more raw materials. If the inventory was paid with cash, the increase in the value of
inventory is deducted from net sales. A decrease in inventory would be added to net sales. If inventory
was purchased on credit, an increase in accounts payable would occur on the balance sheet, and the
amount of the increase from one year to the other would be added to net sales.
The same logic holds true for taxes payable, salaries payable and prepaid insurance. If something has
been paid off, then the difference in the value owed from one year to the next has to be subtracted

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from net income. If there is an amount that is still owed, then any differences will have to be added
to net earnings. (Heakal, 2016)

Investing
Changes in equipment, assets or investments relate to cash from investing. Usually cash changes from
investing are a "cash out" item, because cash is used to buy new equipment, buildings or short-term
assets such as marketable securities. However, when a company divests of an asset, the transaction
is considered "cash in" for calculating cash from investing. (Heakal, 2016)

Financing
Changes in debt, loans or dividends are accounted for in cash from financing. Changes in cash from
financing are "cash in" when capital is raised, and they're "cash out" when dividends are paid. Thus, if
a company issues a bond to the public, the company receives cash financing; however, when interest
is paid to bondholders, the company is reducing its cash. (Heakal, 2016)

September 15, 2016

MANAC Report

Question 1 AKD Limited

The summarized balance sheet of AKD limited as on March 2006 & 2007 are as follows:
Liabilities
Share Capital
General Reserves
Profit & Loss
account
Bank loan long
term
Sundry creditors
Provision for tax

2006 ()
90,000
20,000

2007()
1,25,000
25,000

Assets
Land & Building
Machinery

2006()
85,000
44,700

2007()
80,000
58,100

15,000

15,500

Stock

60,000

50,000

30,000
70,000
10,000

65,000
13,000

Sundry Debtors
Cash
Bank
Goodwill

45,000
300

2,35,000

2,43,500

40,000
400
7,000
8,000
2,43,500

2,35,000

Additional Information
Dividend 11,000paid to shareholders
Asset worth 40,000 payables in shares of another company is bought. The composition of
asset is stock= 12,000; Machinery= 20,000. Remaining is goodwill
Another Machinery worth 5,000 was bought
Depreciation written off on machinery 5,000
Income tax paid for the year is 18,000
Loss on sale of the machine 200 was written off to General Reserve

Required
I.
II.
III.

Prepare the cash flow statement at the end of fiscal year 2007?
Company wants a bank loan of 10,00,000 for its business activities. Should such loan be given
after assessing the liquidity position of the company?
Should the company be given further days of credit by the creditors? Elaborate.

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Solution 1 AKD Limited

I.

Profit & Loss Account

Expense
To General Reserve
To Provision for Taxation
To Dividend
To Bal C/D

Amount
5,200
21,000
11,000
15,500
52,700

Revenue
To Bal B/D

Amount
15,000

To P&L A/C
(Profit before Tax)

37,700
52,700

AKD LIMITED CASH FLOW STATEMENT

CASH FLOW FROM OPERATING ACTIVITY
NET PROFIT,FROM P&L A/C
37,700
DEPRICIATION ON MACHINE
5,000
INVENTORY
22,000
CREDITORS (Less)
(5,000)
INCOME TAX PAID (Less)
(18,000)
DEBTOR
5,000
DEPRICIATION ON LAND % BUILDING
5,000
51,700
CASH FLOW FROM INVESTING ACTIVITY
PURCHASE MACHINERY (Less)
(5,000)
SALE OF MACHINERY
6,400
1,400
CASH FLOW FROM FINANCING ACTIVITY
DIVIDEND PAID TO SHARE HOLDER (Less)
(11,000)
BANK LOAN REPAYMENT (Less)
(30,000)
EQUITY SHARE BUY BACK (Less)
(5,000)
(46,000)
CASH AND CASH EQUIVALENT
OPENING CASH
CLOSING CASH AND BANK

II.

III.

7,100
300
7,400

By assessing the liquidity position of the company, current ratio = 1.24:1 and acid test ratio =
0.60:1. It is evident that the liquidity position of cash is less than the standard. Hence, the
bank would not give the loan as it would be very risky.
Yes, the company should be given further days of credit by creditors because the current ratio
is 1.24 which is greater than 1. Company have more current asset than current liability and it
is good for creditors also that they can recover their money in future.

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MANAC Report

Question 2 Babulal Grain Merchants

The comparative Balance sheet and profit & loss statement for Babulal Grain Merchants are given
below:

Babulal Grains Merchant

Liabilities & Capital

Bank Borrowings
Creditors
Outstanding expenses
Total Current Liabilities
Owner's capital
Total
Assets
Cash
Debtor
Stock
Expenses paid in advance
Total current assets
Building, furnitures etc.
Total

Comparative balance sheet Dec 31

1983
1982

12300
8610
103006
64427
5843
3797
121149
76834
228220
214019
349369
290853
54485
33638
120725
4311
213159
136210
349369

16218
60495
90526
2269
169508
121345
290853

1981

2460
63622
1921
68003
214339
282342
29179
54364
83454
1299
168296
114046
282342

Summarized Profit & Loss statement

1983

1982

1981

Sales

538211

458618

428253

Cost of Goods sold

318133

276174

258703

Gross profit

220078

182444

169550

Expenses

199982

166029

147802

Net profit

20096

16415

21748

Comment on the overall performance and indicate the areas which require investigation. Analyze the
ratios as applicable in grain merchants business.

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MANAC Report

Solution 2 Babulal Grains Merchant

For Year 1983
Return on Assets

(20096/349369)*100

5.7%

Return on Investments capital

20096/(20096+228220)*100

Return on equity

(20096/248316)*100

40.80%

Gross Margin %

(220078/538211)*100

40.80%

Profit Margin

(20096/538211)*100

3.70%

Assets Turnover

538211/349369

Debt Equity

349369/(20096+228220)

Investment Capital Turnover

538211/248316

Days Inventory

(120725/318133)*365

Inventory turnover

318133/120725

2.6

Current Ratio

213159/121149

1.75:1

Working Capital Turnover

538211/(213159-121149)

Quicks Ratio

(54485+33688)/121149

Financial Leverage Ratio

349369/248316

1.4:1

Capital intensity

538211/136210
For Year 1982

3.95

Return on Assets

(16415/290853)*100

5.60%

Return on s.t Equity

16415/(214019+16415)*100

7.10%

Gross Margin %

(182444/458618)*100

Profit Margin %

(16415/458618)*100

3.5%

Asset Turnover

458618/290853

1.576

Debt Equity

290853/(16415+214019)

12.6%

Investment Capital Turnover

458618/(214019+16415)

1.99

Days inventories

(90526/276174)*365

Inventory turnover

276174/90526

3.05

Working Capital Turnover

458618/92674

4.94

Current Ratio

169508/76834

2.2:1

Quicks Ratio

76713/76834

0.99:1

Financial Leverage Ratio

290853/230434

1.25:1

Capital intensity

458618/121345

3.76

8%

1.34
14.06%
2.16
138.5 Days

5.84
4.09:1

39.70%

119.6 Days

The overall performance of a company is better than previous year except the current ratio which is
declining. So, the company needs to investigate the area of current ratio because current liabilities are
higher than current assets, which means company will not able to pay the creditors easily.

September 15, 2016

MANAC Report

Bibliography
Heakal, R. (2016, September 11). What Is A Cash Flow Statement? Retrieved from Investopedia:
http://www.investopedia.com/articles/04/033104.asp
Helfert, E. A. (n.d.). The Nature of Financial Statements: The Cash Flow Statement. Financial Analysis
- Tools and Techniques - A Guide for Managers.

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