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Home /  Cash Flow Statement
  • 1273 Views
  • Estimated reading time : 85 Minutes
  • Cash Flow Statement | Financing Activities | Shares and Debentures

  • Arjun EP
  • Published on: June 20, 2021

  •  

     

    Preparation of Cash Flow Statement

    There are two methods to prepare cash flow statement; they are:

    (1) Direct method

    (2) Indirect method

     

    Both methods have three activities; they are:

    (a) Operating activities

    (b) Investing activities

    (c) Financing activities

     

    Keep in Mind (KIM)

    Only operating activities are the difference between direct methods and indirect methods.

    Investing activities and financing activities are the same in both methods.

     

     

    Financing Activities in Cash Flow Statement | Cash Flow Statement

    It is based on non-current liabilities or long-term liabilities (liabilities side of balance sheet)

    Issue of equity shares, preference shares and debentures; redemption of preference share and debentures; repayment of secured loan and unsecured loan; dividend paid etc are part of investing activities.

    An increase in shares and debentures means the issue of shares and debentures.

    It is a cash inflow.

    Decrease in preference share and debentures mean the redemption of preference shares and debentures.

    It is a cash outflow.

    Issue of equity shares and premium (common stocks and additional paid in capital)

    Issue of preference shares and premium (preferred stocks and additional paid in capital)

    Issue of debentures and premium (bonds and additional paid in capital)

    Discount on redemption of debentures

    A secured and unsecured loan

    Bank loan

    Dividend paid

     

     

    Cash flow Statement

    Direct Method

    CASH FROM FINANCING ACTIVITIES

    Amount

    Amount

     

    Cash inflow:

     

     

     

    Issue of equity shares (common stocks)

     

    xxxx

     

    Issue of preference shares (preferred stocks)

     

    xxxx

     

    Issue of debentures (bonds)

     

    xxxx

     

    Long term loan taken

     

    xxxx

     

    Increase in share premium (additional paid in capital)

     

    xxxx

     

    Cash outflow:

     

     

     

    Redemption of preference shares

     

    (xxx)

     

    Redemption of debentures or bonds with premium

     

    (xxx)

     

    Long term loan repaid

     

    (xxx)

     

    Dividend paid

     

     (xxx)

    Net cash from financing activities (C)

     

    ± xxxx

     

     

     

    ###########

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    ###########

      

     

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 3A

    The following extracted balances are taken from ABC Company Ltd

    Particulars

    31 Dec 2020

    31 Dec 2021

     

    Equity shares capital (common stocks)

    9,00,000

    12,00,000

     

    Share premium (additional paid in capital)

    90,000

    1,20,000

     

    9% Debentures (9% Bonds)

    3,00,000

    1,50,000

     

    10% Preference shares capital (preferred stocks)

    4,00,000

    3,00,000

     

    Dividend paid  

     

    1,20,000

     

    Required: Cash from financing activities                                                 

    [Answer: ($40,000)

    SOLUTION:

    Cash flow Statement

    Direct Method

    Particulars

    Amount

    Amount

    CASH FROM FINANCING ACTIVITIES

     

     

     

    Cash inflow:

     

     

     

    Issue of equity shares (common stocks)

     

    3,00,000

     

    Increase in share premium (additional paid in capital)

     

    30,000

     

    Cash outflow:

     

     

     

    Redemption of debentures (bonds)

     

    (1,50,000)

     

    Redemption of preference shares (preferred stocks)

     

    (1,00,000)

     

    Dividend paid

     

    (1,20,000)

    Net cash from financing activities (C)

     

    (40,000)

     

    Keep in Mind (KIM)

    Equity shares never decrease viz cannot redeem.

    Increased equity shares mean the issue of shares viz cash inflow.

    Increased in share premium means cash inflow.

    Increase preference shares mean the issue of shares viz cash inflow.

    Increase debentures mean the issue of shares viz cash inflow.

     

    Decreased in preference shares means the redemption of share viz cash outflow.

    Decreased in debentures means the redemption of debentures viz cash outflow.

    Premium on redemption of debentures means capital loss viz cash outflow.

    Dividend paid is always cash outflow.

    Debentures are issued by a limited company; bonds are issued by the government.

     

     

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    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 3B

    The following extracted balances are taken from ABC Company Ltd

    Particulars

    31 Dec 2020

    31 Dec 2021

     

    Equity shares capital (common stocks)

    9,00,000

    12,00,000

     

    Share premium (additional paid in capital)

    90,000

    1,20,000

     

    9% Debentures (bonds)

    3,00,000

    1,50,000

     

    10% Preference shares capital (preferred stocks)

    4,00,000

    3,00,000

     

    Retained earnings

    6,00,000

    7,80,000

     

    Additional information:

        (a) Net profit for the year was $300,000. (b) Debentures redeemed at 10% premium.

    Required: Cash from financing activities                                                 

    [Answer: ($55,000)

    SOLUTION:

    Given and working note:

    Retained Earnings Account

    Particulars

    Amount

    Particulars

    Amount

    To Bank (dividend  paid, b/f)

    120,000

    By Beginning balance

    600,000

    To Ending balance

    780,000

    By P&L or IS (NIAT)

    300,000

     

    900,000

     

    900,000

    Now,

    Cash flow Statement

    Direct Method

    Particulars

    Amount

    Amount

    CASH FROM FINANCING ACTIVITIES

     

     

     

    Cash inflow:

     

     

     

    Issue of equity shares (common stocks)

     

    3,00,000

     

    Increase in share premium (additional paid in capital)

     

    30,000

     

    Cash outflow:

     

     

     

    Redemption of debentures (bonds)

     

    (1,50,000)

     

    Premium on redemption of debentures

     

    (15,000)

     

    Redemption of preference shares (preferred stocks)

     

    (1,00,000)

     

    Dividend paid

     

    (1,20,000)

    Net cash from financing activities (C)

     

    (55,000)

     

    #####

    PROBLEMS   AND   ANSWERS  OF  CASH  FLOW  STATEMENT

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 3A

    Following is the extracted information from MN Company Ltd:

    Details

    Year 2020

    Year 2021

    Equity shares capital (common stocks)

    500,000

    800,000

    Share premium (additional paid in capital)

    60,000

    90,000

    5% Preference shares (preferred stocks)

    300,000

    500,000

    6% Debentures (bonds)

    300,000

    200,000

    Long-term loan

    150,000

    70,000

    Dividend paid during the year

    –

    50,000

    Required:  Net cash from financing activities

    [Answer: Inflow = $300,000]

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 3B

    Following is the extracted information from ASD Company Ltd:

    Details

    Year 2020

    Year 2021

    Equity shares capital (common stocks)

    600,000

    800,000

    8% Preference shares (preferred stocks)

    200,000

    200,000

    5% Debentures (bonds)

    300,000

    150,000

    Retained earnings

    70,000

    90,000

    Net profit during the year

    –

    50,000

    Additional information:

    Equity shares are issued at 10% premium

    Debentures are redeemed at 5% premium

    Required:  Net cash from financing activities

    [Answer: Inflow = $32,500]*Dividend paid = $30,000]

     

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