426 Chapter 11
Principles of Accounting. I
EP-11. The trading and other activities of a company for the current year were as below:
Service revenue Rs 8,00,000
Service rendering cost including wages Rs 2,10,000. Rs 4,80,000.
iii. Administrative and selling expenses including interest. Rs 1,50,000.
iv. Bonds were redeemed at a premium of Rs 10,000
V. Plant costing Rs 1,00,000 and accumulated depreciation Rs 40,000 was sold at a profit
of Rs 20,000. Plant purchased Rs 2,50,000.
Dividend distributed Rs 40,000.
vii. Tax paid Rs 20,000.
viii. The balance sheet of the company is as below:
Balance Sheet
Liabilities
2003(Rs) 2004(Rs)
Assets
2003(Rs) 2004/Rs)
Common stock
500,000 700,000 Land and building.
450,000 550,000
Share premium
50,000 70,000 Plant and machinery
500,000 650.000
6% Bond...
200.000 150.000 Acc. Depreciation.
(200,000) (210,000)
Provision for taxation
20,000 40,000 Inventory (Supplies)
40,000 70,000
Accounts payable
30,000 60.000 Accounts receivable
20,000 10,000
Bank overdraft
30,000 Cash at bank
10,000 50,000
Retained earning
20,000 70,000
820,000 11,20,000
820.000 11,20.000
Required: Cash flow statement showing cash flows from:
(a) Operating activities
(b) Investing activities
(c) Financing activities
Ans: CFOA = Rs.190,000; CFIA = (Rs. 270,000); CFFA = Rs. 120,000​

I generally include the cash flow worksheet as part of my 13-column trial balance worksheet. I use the space in the far right side of the trial balance worksheet to analyze cash flows for all accounts. Calculate the difference between the beginning and ending balances for all accounts, and determine if the change reflects an increase or decrease in cash flow. Mark each account with and O for Operating cash flows, I for Investing cash flows and F for Financing cash flows.

Next lay out the general format of the statement on a piece of paper or spreadsheet. I generally identify the Investing and Financing activites first, and put them in the appropriate place. There should only be a few items that fall in these categories. Most of the accounts will be Operating activities. These include all Income and Expense accounts - the majority of accounts on the trial balance.

You may need to look at a few Ledger accounts. For instance, the company may have purchased Land and also sold Land in the same year. The purchases would be outflows of cash, and recorded as Debits in the Land account. Sales would be inflows of cash, and recorded as Credits in the Land account.

Analyzing cash flows is an important part of financial statement analysis. Here are some important things to look for:

1. There should be a net Increase in Cash from Operating Activities. If operations don't produce positive cash flows, the business will soon be in trouble. Without adequate operating cash flows, the company may have to dip into cash reserves or sell investments to meet regular payment of expenses.

2. If a company shows net Increase in Investing Cash Flows, it means they are selling off assets. That is generally not a good sign. I would also look to see if the company was posting losses and had negative cash flows from Operating activities. This might indicate that Management is selling off assets to pay bills. More analysis is needed in this case.