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. |
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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|
Accounting Equation |
|
Journal Entries in Nepali |
|
Journal Entries |
|
Journal Entry and Ledger |
|
Ledger |
|
Subsidiary Book |
|
Cashbook |
|
Trial Balance and Adjusted Trial Balance |
|
Bank Reconciliation Statement (BRS) |
|
Depreciation |
|
|
|
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Financial Accounting and Analysis (All videos) |
|
Accounting Process |
|
Accounting for Long Lived Assets |
|
Analysis of Financial Statement |
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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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