ANOOP (student) (428 Points)
22 September 2011Somebody please tell me the logic behing each item as to why these items appear undet the head cash from operating activities
Increase in profit n loss ac
tranfer to general reserve
proposed dividend
Provision for tax
AND THEN WHAT IS THE LOGIC BEHIND ADJUSTING THESE ITEMS AND THEIR APPEARANCE
Preliminary expenses written off
depreciation
loss on sale of fixed asset
premium on redemption of debenture, pref sh, and equity share.......Pls help me out
Bhaskar Unnikrishnan CPA CMA
(Accounts / Administration)
(414 Points)
Replied 22 September 2011
The purpose of cash flow from operating activities statement is to find out net cash flow resulting from routine operation of business. Under indirect method, Net profit for the year should be adjusted with non cash transactions which affect Net profit for the period to find out actual cash flow. For example, if the reported Net profit is Rs. 1,000, many non cash expenses eg. Depreciation results in reduction of Net profit. So we cannot say that Rs. 1,000 is what company has in hand from operating activities. So if the depreciation is Rs 50, actual cash company would have Rs 1,050. Like that all non cash expenses should be deducted and non cash gains should be deducted (vice versa) to find out actual cash flow from operating activities.
Basically logic behind treatment of all items you have mentioned is same. Below are some explanations:
General Reserve: Debit balance would be transferred to P&L and results in reduction of net profit but not operation cash out flow for company. So should be added to Net profit.
Provision for tax: Ditto
Proposed Dividend: Payment of Dividend is not an operating activity but including the balance in P&L results in reduction of N/profit. so should be added to Net profit to arrive at cash flow from operating activities.
Preliminary Expenses: Usually will be debited to P&L account in the period in which incurred, thereby results in reduction of net profit. As it is not an operating expense for the period and should add to net profit in cash flow statement.
Depreciation: is a non cash expense, which when debited to P&L account, results in reduction of net profit. Same treatment as above
Loss on sale of FA: Are non cash expense, when debited to P&L results in reduction of Net profit. Treatment should be same as above.
ANOOP
(student)
(428 Points)
Replied 22 September 2011
itna acha explain Karne ke liye aapka bahut bahut dhanyawad,,,,,,,,,,,,bro....thnks
Bhaskar Unnikrishnan CPA CMA
(Accounts / Administration)
(414 Points)
Replied 22 September 2011
Its my pleasure brother..
AmRita
(Article-CA Final)
(47 Points)
Replied 08 October 2011
can u plz tell me whts shud b actul amount of TAX PAID in Cash Flow..
Challan Amt, or TDS shud b added..
its quite confusng..
ACCOUNTANT
(Student)
(559 Points)
Replied 10 October 2011
Tax paid ultimately includes only the amout paid in CASH which means the challan amout here......
If TDS is paid by the entity which is preparing the CFS then i reckon it should be included...
AmRita
(Article-CA Final)
(47 Points)
Replied 10 October 2011
@ Swetha- thank u.. but dat TDS is not our tax. i mean v pay dat on behave of our creditors. den to u ll say dat it shud b added..??
ACCOUNTANT
(Student)
(559 Points)
Replied 11 October 2011
I guess it should be added back to p&l a/c bal and shown with seperate heading where the tax paid is disclosed, ...
And as it is part of operations it should be shown before determining the cash flow from operating activities...
If the creditors are for other activities then it should be an outflow for such activity....
I hope im on par with ur ques.....
Rahul Chobdar
(Chartered Accountant (Financial Management))
(561 Points)
Replied 30 October 2011
The entry for an expense, say, Freight Inward would be:
Freight Inward A/c Dr (For me, its my expenditure)
To Cash/Bank Alc
To T.D.S. Payable A/c (Creating a liability for Tax Payable to Govt. on behalf of Transporter.)
Since T.D.S. is my actual cash outflow, there is no question of adding it back or considering it with my tax liability.
Even in case its not paid, it would be reflected as my Outstanding Liability and will be considered in "Changes in Working Capital".
I hope i have clarified your doubts :)
shakuntala chhangani
(FCA Course co-ordinator WIRC coaching centre)
(2525 Points)
Replied 30 October 2011
MY dear friends, when u take the item tax paid, it should not only be tax paid by u but also tax paid by others on ur behalf (i.e.TDS deducted from ur income). however, when u deduct tds, u pay it on behalf of some other person, hence it should be ignored.
Regards, CA Shakuntala Chhangani
CAclubindia
