Page 247 - MA-12

Cash Flow Statement—Based on Accounting Standard-3 (Revised) 3.3

Since, declaration and payment of dividend is contingent upon approval of the shareholders, it becomes
a liability only after being approved by the shareholders. As a result, it will be accounted in the books of
account in the next year after it is approved by the shareholders. It means Proposed Dividend for the current
year will be approved by the shareholders in the next year and thereafter it will be paid. Whereas Proposed Dividend
for the previous year will be approved by the shareholders in the current year and will be paid in the current year.
Dividend is an appropriation of profit and not a charge. Therefore, it is debited to Surplus, i.e., Statement
of Profit and Loss by passing the following entry:
Surplus, i.e., Balance in Statement of Profit and Loss A/c ...Dr.
To Dividend Payable A/c
(Being the dividend declared)
The effect of this is as follows:
(i) Proposed Dividend for previous year is shown as outflow of cash assuming that the shareholders
have approved the proposed dividend as was recommended;
(ii) No effect is given to Proposed Dividend for the current year as it is not provided for.
Dividend paid is debited to Dividend Payable Account and balance, if any is retained in ‘Dividend Payable
Account’ or may be transferred to ‘Unpaid Dividend Account’ which is shown in the Balance Sheet as Other
Current Liabilities under Current Liabilities.
Dividend paid during the year, whether out of Dividend Payable Account or Unpaid Dividend Account,
is shown as Outflow of Cash (Cash Used) under Cash Flow from Financing Activities.
• Preparation of Cash Flow Statement: Cash Flow Statement is prepared following the steps as under:

Step 1: Compute Cash Flow from Operating Activities.
Step 2: Compute Cash Flow from Investing Activities.

Step 3: Compute Cash Flow from Financing Activities.
Step 4: The cash flows under each activity, i.e., Operating Activity, Investing Activity and
Financing Activity as computed in Steps 1, 2 and 3 are shown in Cash Flow Statement and net
flow is determined. This will be Net Increase or Decrease in Cash and Cash Equivalents.
Step 5: Add Opening Cash and Cash Equivalents balance to cash flows as arrived at in Step 4.
Step 6: The amount so determined should be equal to Cash and Cash Equivalents balance at the end
of the year.

TREATMENT OF MISCELLANEOUS EXPENDITURE
Miscellaneous Expenditure such as Loss on Issue of Debentures, Discount on
Issue of Debentures, Underwriting Commission, Preliminary Expenses are written
off in the year in which they are incurred from Securities Premium (if it exists) or
from Statement of Profit and Loss.