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Preparation of Cash Flow Statement - Part II

RaGHuRaM  
on 08 June 2012

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Hi, friends!

In continuation to my first part Preparation of Cash Flow Statement; I’m writing this article to make it easier to prepare the cash flow statement. The second part explains the preparation of working notes.

First we are going to start with Net Profit before Taxes which opens up 3 different accounts.

As you know to arrive at Net Profit before Taxes:

Difference between P&L a/c balances of two years in the B/S

Add:

Transfer to reserves

Provision for dividend

Provision for tax

Transfer to Reserves: Any transfer of profit from P & L a/c to reserves will be added directly. But sometimes you will be given the amount of transfer which you have to find using other info.

General Reserve a/c

Particulars

   Amount

Particulars

   Amount

To Any Transfer (E.g.:Capital Redemption Reserve)

To Balance c/d (Closing Balance)

By Balance b/d (Opening Balance)

By P & L a/c (Balancing Figure)

As you notice in the above a/c, P & L a/c is the balancing figure i.e. the amount of profit transferred from P & L a/c to General Reserve.

Proposed Dividend a/c

Particulars

    Amount

Particulars

    Amount

To Cash or Bank a/c       (Dividend Paid during the year)

To Balance c/d (Closing Balance, if any)

By Balance b/d (Opening Balance, if any)

By P & L a/c (Amount of dividend proposed for the year)

Now in the above a/c the balancing figure can be Cash or Bank a/c or P & L a/c based on the information given. If amount of dividend paid during the year is given then the balancing figure is P & L a/c or vice-versa. Sometimes neither of them will be given. Then you will assume that the Opening balance as the amount of Dividend paid (Cash or Bank a/c) and Closing balance as the amount of dividend proposed (P & L a/c).

Provision for Taxes a/c

Particulars

   Amount

Particulars

   Amount

To Cash or Bank a/c  (Taxes Paid during the year)                                                                           (Or)

To Advance Tax a/c (If there is advance payment)

To Balance c/d (Closing Balance, if any)

By Balance b/d (Opening Balance, if any)

By P & L a/c (Amount of provision created for taxes during the year)

It is same as the Proposed Dividend a/c. The balancing figure can be Cash or Bank a/c or P & L a/c based on the information given. If amount of taxes paid during the year is given then the balancing figure is P & L a/c or vice-versa. Sometimes neither of them will be given. Then you will assume that the Opening balance as the amount of taxes  paid (Cash or Bank a/c) and Closing balance as the amount of provision created for taxes (P & L a/c).

Advance Tax a/c

Particulars

  Amount

Particulars

   Amount

To Balance b/d (Opening Balance, if any)

To Cash or Bank a/c    (Advance Taxes Paid during the year)                                                                  

By Provision for Taxes a/c

By Bank a/c (If there is any refund of Tax)

By Balance c/d (Closing Balance, if any)

If there is Provision for Taxes a/c and Advance Taxes a/c then the balancing figure will be find out after adjusting the advance tax against the provision created.

Fixed Assets a/c (At Cost)

Particulars

  Amount

Particulars

  Amount

To Balance b/d

To Cash or Bank a/c (purchase of assets)

To Equity Share Capital a/c (Capital issued for the purchase)

By Depreciation a/c

By Asset Disposal a/c (Cost of the machinery sold)

By Balance c/d

In the above a/c, the balancing figure can be Depreciation or Cash a/c.  The above a/c can be prepared when the cost of asset sold and depreciated accumulated on such asset are given.

Accumulated Depreciation a/c

Particulars

   Amount

Particulars

  Amount

To Asset Disposal (Total Amount of depreciation on asset sold)

To Balance c/d

By Balance b/d

By Depreciation a/c (For the year)

By Asset Disposal a/c (Cost of the machinery sold)

Asset Disposal a/c

Particulars

  Amount

Particulars

  Amount

To Fixed Assets a/c

To P & L a/c (Profit on sale of asset)

By Accumulated Depreciation a/c (Total Depreciation provided on the asset sold from purchase to date of sale)

By Bank a/c

By P & L a/c (Loss on sale of asset)

If only depreciated values are given then the following a/c will be prepared.

Fixed Assets a/c

Particulars

  Amount

Particulars

  Amount

To Balance b/d

To Cash or Bank a/c (purchase of assets)

To Equity Share Capital a/c (Capital issued for the purchase)

To P & L a/c (If there is profit on sale)

 

By Depreciation a/c

By Bank a/c (Amount realized on asset sold)

By P & L a/c (If there is loss on sale)

By Balance c/d

While preparing the Cash Flow Statement, you will take only cash purchase of fixed assets and ignore the assets purchased by issuing shares.

Investments (Long Term) a/c

Particulars

   Amount

Particulars

  Amount

To Balance b/d

To Cash or Bank a/c (purchase of investment)

To P & L a/c (If there is profit on sale)

By Bank a/c (Amount realized on investment sold)

By P & L a/c (If there is loss on sale)

By Balance c/d

Investments a/c is same as the Fixed Assets a/c except it doesn’t have depreciation...

Preference Share Capital or Debentures a/c

Particulars

  Amount

Particulars

   Amount

To Bank or Cash a/c (Redemption of Debentures (or) Preference)

To Balance c/d (If any)

By Balance b/d

By Bank or Cash a/c (New Issue)

By Premium on Redemption of Debentures  (or) Preference Share Capital

Interest Payable (Expenses Payable) a/c

Particulars

  Amount

Particulars

   Amount

To Bank or Cash a/c (Interest paid during the year)

To Balance c/d (If any)

By Balance b/d

By P & L a/c (Interest Expenses for the year)

Remember while solving a question, don't search for the missing information. First prepare all the accounts possible and enter given information in the accounts. Then you will be able to find those required information to prepare the statement easilysmiley

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Thanks and Best Regards

Raghuram




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