UNIT 4 CONSOLIDATION WITH TWO OR MORE SUBSIDIARIES

  1. Consolidated balance sheet

  2.  Consolidation with foreign subsidiaries

  3. Consolidated profit and loss account

  4. Cash flow statement                                       

 1Q) CONSOLIDATED BALANCE SHEET 

                In India although holding company not required by law to prepare consolidated balance sheet, preparation of consolidated balance sheet & consolidated profit & loss account is of much help to the holding company to show the clear picture so , in addition to the legal balance sheet. The holding company may publish a consolidated balance sheet in which the assets & liabilities of all subsidiaries are given along with its own assets & liabilities as the balance sheet of head office incorporates the assets & liabilities of its branches.

                Shareholders of the holding company are interested in knowing the affairs of the subsidiary company as part of their money given to the holding company is invested in the subsidiary company. It is therefore customary on the part of the directors of holding company to prepare & present the consolidated balance sheet every year in the annual general meeting.

POINTS TO BE REMEMBERD WHILE PREPARING CONSOLIDATED BALANCE SHEET :

1. The cost to the holding company of its investment in each subsidiary company, at the date on which investment in each subsidiary company  is should be eliminated.
2. Any excess of the cost to the parent of its investment in a subsidiary should be described as goodwill to be recognised as an asset in the consolidated balance sheet.
3. Any deficit of the cost of the parent of its investments in subsidiary should be described as capital reserve & shown as liability in consolidated balance sheet .
4. Minority interest (investment of outsiders in the subsidiary) should be shown in liabilities side of consolidated balance sheet.
5. Intra group balances & intra group transactions & resulting unrealised profits should be eliminated.
6. All assets & liabilities of the holding company & subsidiary company are grouped up & shown as one in consolidated balance sheet.

 2Q)  Consolidation with foreign subsidiaries

               In the process of consolidation of foreign financial statements with domestic financial statements in a single currency there are 4 translation methods. Namely, 

1. Current rate method (single rate) 

2. Current / non current method 

3. Monetary / non monetary method

4. Temporal method

1. Current rate / single rate method :  In this method, business of the subsidiary is viewed as an investment  & not as a part of the business operation of the parent company. So,  all its assets & liabilities are translated at current exchange rate. That is the rate prevailing on the date of preparation of the balance sheet. 

2. Current / non current method :  Under the current / non current method, current assets and current liabilities are translated at current rate and non current assets and liabilities are translated at historical rate. 

(current items __ items on the balance sheet that are written off / converted into cash within a year ;   non current _  any item that remains on the balance sheet for more than one year is a non current item i.e machinery, building,  long term loans etc) 

3. Monetary / non monetary method : Under this method monetary assets i.e most liquid assets / near cash items & monetary liabilities (all liabilities except owners equity / ownership capital)  are translated at current rates & the rest i.e non monetary assets and liabilities are translated at historical rate. 

4. Temporal method : This is similar to monetary / non monetary method except in its treatment of inventory. The value of inventory is generally converted using the historical rate but if the balance sheet records inventory at market value, it is converted using the current rate of exchange. 

3Q) Consolidated profit and loss account

                                       The consolidated balance sheet is prepared to show the financial position of the group. Similarly, the object of preparing consolidated profit& loss account is to give a true & fair view of the earnings of the financial period for the group as if it were a single entity from the point of view of any holding company. The shareholders of the holding company are enabled to judge the trend of the profits which are being earned in the business in which they have invested their capital.

The following steps are involved in the preparation of consolidated profit & loss account.

1.consolidated profit & loss account is prepared in a columnar form. On each side there  is one column for each company, one column for adjustments & one for total.

2. Revenue incomes & revenue expenditure of holding company & subsidiary companies are recorded.

3. Transfer of goods within the group should be eliminated. Thus, if the subsidiary bought goods from the holding company for rupees 1 lakh( or vice versa ),rupees 1 lakh shall be deducted from the purchases of the subsidiary & sale of the holding company (or vice versa).

4.Common expenses & income are to be eliminated.

5.The reserve for unrealised profits on unsold stock is to be created.

6.Interest on debentures & dividend received from within the group companies should be excluded however no adjustment is required for tax on interest & dividends.

7.Holding company share in the profits of subsidiary company arising before the date of acquisition of shares should be debited to the consolidated profit& loss account & should be credited to capital reserve a/c or goodwill a/c.(in case of loss reverse treatment).

8.Minority shareholders shares of all the profits of subsidiary company should be credited to minority shareholders a/c & debited to consolidated profit & loss account.( reverse in case of losses).

9.Holding company's share of the profits set aside for the redemption of preference share capital should be debited  to consolidated profit & loss a/c & credited to capital redemption reserve a/c. Holding company share will be in the proportion to the value of preference shares held by it, but not the equity shares held by it.

10.The balance left in the total column will be the current years profit. This will be taken to the consolidated balance sheet.

 4Q) Cash flow statement                                       

INTRODUCTION

Information about the cash flows of an enterprise is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilize those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation.

The Standard deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities. This statement provides relevant information in assessing a company's liquidity, quality of earnings and solvency.

USES OF CASH FLOW STATEMENT

The cash flow statement is a crucial financial tool that helps businesses, investors, and stakeholders make informed decisions. Its key uses include:

1. Assessing Liquidity – Determines whether a company has enough cash to cover short-term obligations like salaries, rent, and supplier payments.
2. Evaluating Solvency and Financial Stability – Indicates whether a company can sustain its operations and meet long-term financial commitments.
3. Analyzing Cash Inflows and Outflows – Provides insights into how a company generates and spends cash through operating, investing, and financing activities.
4. Aiding Investment Decisions – Investors use the cash flow statement to assess a company’s ability to generate consistent cash flows, which is essential for profitability and long-term growth.
5. Supporting Loan and Credit Approvals – Lenders and creditors examine cash flow statements to determine if a company can repay loans and manage debt effectively.
6. Monitoring Business Performance – Helps business owners and management track financial trends, optimize cash management, and identify potential risks.
7. Facilitating Planning and Budgeting – Assists in forecasting future cash needs, managing expenditures, and ensuring smooth business operations.
8. Detecting Financial Issues Early – Helps identify potential liquidity problems, cash shortages, or inefficient cash management before they become critical.

By analyzing the cash flow statement, businesses can make strategic decisions, ensure financial stability, and maintain operational efficiency.

 LIMITATIONS OF CASH FLOW STATEMENT

While the cash flow statement is an essential financial tool, it has some limitations:

1.      Does Not Reflect Profitability – The statement only shows cash movements and does not indicate whether a company is making a profit or incurring losses.

2.      Ignores Non-Cash Transactions – Non-cash items like depreciation, amortization, and stock-based compensation are not included, which can lead to an incomplete financial picture.

3.      Not a Substitute for Income Statement or Balance Sheet – The cash flow statement provides liquidity insights but does not show overall financial performance or position comprehensively.

4.      Historical in Nature – It presents past cash flows and does not necessarily predict future performance or solvency.

5.      Possible Misinterpretation – A positive cash flow does not always mean profitability, as a company could have borrowed heavily or sold assets.

6.      Limited Scope in Decision-Making – Since it only focuses on cash transactions, it may not provide sufficient information for strategic long-term decisions.

7.      Does Not Account for Working Capital Changes – It does not directly highlight changes in key working capital components like receivables and payables unless analyzed separately.

Despite these limitations, the cash flow statement remains an important tool for assessing a company’s liquidity and cash management efficiency.

 

 CASH FLOW STATEMENT (As per AS 3)

In June 1981, the Institute of Chartered Accountants of India issued Accounting Standard 3: Changes in Financial position. This accounting standard dealt with the financial statement that summarized, for the period covered by it, the changes in financial position showing the sources from which funds were obtained by the enterprise and the specific uses to which funds were applied. Funds were defined as cash or cash equivalents or working capital, that is, current assets minus current liabilities. But the flow statements suffered from certain limitations. A Funds Flow Statement showed flows of working capital which included items, like stock of goods and prepaid expenses which did not contribute to the short term ability of the enterprise to pay its debts. Flows were not classified under the heads of operating, financial and investing activities. There was no standard format of the statement. There was the need of a Cash Flow Statement in a standard format classifying flows from different activities. In June 1995 the Securities and Exchange Board of India (SEBI) amended clause 32 of the Listing Agreement requiring every listed company to give prescribed format, showing separately cash flows from operating activities, investing activities and financing activities. In March 1997 the Institute of Chartered Accountants of India issued AS-3 (Revised); Cash Flow Statement. The revised accounting standard supersedes AS-3: Changes in Financial Position, issued in June 1981. Cash Flow Statement has replaced Statement of Changes in Financial Position.

Meaning of Cash Flow Statement

Cash Flow Statement reports the inflows and outflows of cash and its equivalents of an organization during a particular period. It reports the cash receipts and payments classified according to the firm's major activities - Operating, Investing and Financing. It shows the net cash inflow or net cash outflow for each activity and for the overall business of the firm. It reports from where cash has come and how it has been utilised. It explains the causes for the change in the cash balance by reconciling the opening balance of the period with the closing balance.

 

Objectives

Information about the cash flows of an enterprise is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilize these cash flows. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation.The statement deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financial activities.

 

Scope

An enterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented.Users of an enterprise's financial statements are interested in how the enterprise generates and uses and cash and cash equivalents. This is the case regardless of the nature of the enterprise's activities and irrespective of whether cash can be viewed as the product of the enterprise, as may be the case with a financial enterprise. Enterprises need cash for essentially the same reasons, however, different from their principal revenue - producing activities might be. They need cash to conduct their operations, to pay their obligations, and to provide returns to their investors.

 

Benefits of CFS

Cash Flow Statement has the following benefits, in brief:

I. It is an indicator for the cash flows in the future period. It helps the management in forecasting the future needs and plans.

2. It is an important tool as it helps in efficient management of cash.

3. The cash flow analysis on the basis of major activities i.e. Operating, Investing and Financial, facilitate the management to assess the effectiveness of management's financial policies.

4. It reveals the liquidity position of the firm.

5. It provides a better measure for inter period and inter firm comparison.

6. It is very useful in evaluating financial policies and cash position.

7. It highlights the trend of the movement of cash.

8. It enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events.

9. Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enable the users to develop models to assess and compare the present value of the future cash flows of different enterprises.

 

Definition

Cash Flow Statement is a statement which shows inflows and outflows of cash and its equivalent in an enterprise during a specified period of time. An enterprise prepares Cash Flow Statement, according to the Revised Accounting Standard-3, and present it for each period for which financial statements are presented.

The following terms are used in this Statement with the meanings specified:

(a) CASH comprises on hand and demand deposits with banks.

(b) CASH EQUIVALENTS are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

(c) CASH FLOWS are inflows and outflows of cash and cash equivalents.

 

 CLASSIFICATION OF CASH FLOW STATEMENT

AS 3 provides explanation for changes in cash position of the business entity. As per Accounting Standard 3, cash flows during the period are classified as Operating; Investing and Financing activities.

1. OPERATING ACTIVITIES

a) Definition: These are the principal revenue generating activities of the enterprise.

b) Net Impact: Net impact of operating activities on flow of cash is reported as 'Cash flows from operating activities' or 'cash from operation'.

c) Key Indicator: The amount of cash flows from operating activities is a key indicator of the extent to which the operations of the enterprises have generated sufficient cash flows to:

(a) Maintain the operating capability of the enterprise,

(b) Pay dividends, repay loans, and

(c) Make new investments without recourse to external sources of financing.

d) Information Provided: It provides useful information about financing through working capital.

e) Benefits: Information about the specific components of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows.

2. INVESTING ACTIVITIES

a) Definition: These are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

b) Separate Disclosure: Separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which the expenditures have been made for resources intended to generate future incomes and cash flows.

 

3. FINANCING ACTIVITIES

a) Definition: These are the activities that result in changes in the size and composition of the owner's capital (including preference share capital) and borrowings of the enterprise.

b) Separate Disclosure: The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.

 

9.7 CALCULATION OF CASH FLOWS FROM OPERATING ACTIVITIES

a) Components: Cash flows from operating activities result from the transactions and other events that enter into the determination of net profit or loss.

 Examples:

(a) cash receipts from the sale of goods and the rendering of services;

(b) cash receipt from fees, commission and other revenue;

(c) cash payments to suppliers for goods; cash payments to employees and so on.

b) Methods: An enterprise can determine cash flows from operating activities using either:

1.      Direct Method

2.      Indirect Method

1. Direct Method: The direct method, whereby major classes of gross cash receipts and gross cash payments are considered; or

2. Indirect Method: The indirect method, whereby net profit or loss is adjusted for the effects of transactions of a non-cash nature, deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing activities.

DIRECT METHOD

1. Information Required

(a) Gross receipts and gross cash payments may be obtained from the accounting records to ascertain cash flows from operating activities.

(b) For example,

i) Information about cash received from trade receivables,

(i) Payment to trade payables, cash expenses etc., which may be obtained by an analysis of cash book.

(c) In actual practice, the relevant information is obtained by adjusting sales, cost of sales and other items in the profit and loss accounts for:

Ø  Changes during the period in inventories and operating receivables and payables;

Ø  Other non-cash items such as depreciation on fixed assets, goodwill written off, preliminary expenses written off, loss or gain on sale of fixed assets etc.; and

Ø   Other items for which the cash effects are investing or financing cash flows. Examples are interest received and paid, dividend received and paid etc., which are related to financing or investing activities and are shown separately in the cash flow statement.

2. The direct method provides information which may be useful in estimating future cash flows and which is not available under the indirect method and is, therefore, considered more appropriate than the indirect method.

3. However, indirect method of determining the cash from operating activities is more popular in actual practice.

 

 INDIRECT METHOD

Under the indirect method, the net cash from operating activities is determined by adjusting net profit or loss instead of individual items appearing in the profit and loss account. Net profit or loss is also adjusted for the effect of:

(a) Changes during the period in inventories and operating receivables and payables;

(b) Non-cash items such as depreciation; and

(c) All other items for which the cash effects are financing or investing cash flows.

 

 CALCULATION OF CASH FLOWS FROM INVESTING ACTIVITIES

1. These activities are related to the acquisition and disposal of long-term assets, non-operating current assets and investments which results in outflow of cash.

2. Disposal of the aforesaid assets results in inflow of cash.

3. Thus, inflows and outflows related to acquisition and disposal of assets, other than those related to operating activities, are shown under this category

 

 CALCULATION OF CASH FLOWS FROM FINANCING ACTIVITIES

1. These activities are basically related to the changes in capital and borrowing of the enterprise which affect flow of cash.

2. Redemption of shares and repayment of borrowings results in outflow of cash.

3. Thus inflows and outflows related to the amount of capital and borrowings of the enterprise are shown under this head.

 

 

 

9.10 CASH FLOW STATEMENT FORMAT:

The two methods which are used for the preparation of a cash flow statement are listed below:

1. Direct Method

2. Indirect Method

 

Indirect method

	particulars	Amount Rs.	Amount Rs.
A                                                                                   B                       C	Cash Flow from Operating Activities:   Net Profit before tax and extraordinary items   Add: Non-Cash Expenses and non operating expenses.   Depreciation   Goodwill   Interest paid   Loss on sale of fixed assets   Less:  Non-Operating Incomes.   Dividend received   Profit on sale of fixed assets   Interest received   Operating Profit before Working Capital Changes   Add: Decrease in Current Assets   Increase in Current Liabilities   Less: Increase in Current Assets   Decrease in Current Liabilities   Cash generated from Operating Activities   Less: Income tax paid   Cash flow before Extra ordinary items   Add/Less: Extra ordinary items   Net Cash Flow from Operating Activities   Cash Flow from Investing Activities   Sale of Fixed Assets Sale of Long-term Investments Interest Received Dividend Received Rent Received Less: Purchase of Fixed Assets Less: Purchase of long term Investment   Net Cash Flow from Investing Activities   Cash Flow from Financing Activities Proceeds from Issue of shares Proceeds from Issue of Debentures and other Long-term Borrowings Less: Repayment of Debentures and other Long-term Borrowings Less: Redemption of preference Share Less :Interest paid Less: Dividend paid   Net Cash Flow from Financing Activities   Net Increase (or Decrease in Cash and Cash Equivalents (A+B+C)   Cash and Cash Equivalents at the beginning of the year     Cash and Cash Equivalents at the end of the year	XXX   XXX   XXX   XXX     XXX   XXX   XXX         XXX   XXX   XXX                               XXX XXX XXX XXX XXX XXX XXX         XXX XXX XXX XXX XXX XXX XXX	XXX                           XXX                 XXX                            XXX            XXX           XXX           XXX           XXX                         XXX                     XXX     XXX   XXX     XXX

 

9.11 ILLUSTRATIONS: Prepare cash flow statement of M/s MNT Ltd. for the year ended 31st March, 20X1 with the help of the following information:

(1) Company sold goods for cash only.

(2 Gross Profit Ratio was 30% for the year, gross profit amounts to 3,82,500.

(3) Opening inventory was lesser than closing inventory by 35,000.

(4) Wages paid during the year 4,92,500.

(5) Office and selling expenses paid during the year 75,000.

(6) Dividend paid during the year 30,000 (including dividend distribution tax.)

(7) Bank loan repaid during the year 2,15,000 (included interest 15,000)

(8) Trade payables on 31st March, 20X0 exceed the balance on 31st March, 20X1 by 25,000.

(9) Amount paid to trade payables during the year 4,60,000.

(10) Taxpaid during the year amounts to 65,000 (Provision for taxation as on 31.03.20X1 45,000).

(11) Investments of 7,00,000 sold during the year at a profit of 20,000.

(12) Depreciation on fixed assets amounts to 85,000.

(13) Plant and machinery purchased on 15th November, 20X0 for 2,50,000.

(14) Cash and Cash Equivalents on 31st March, 20X0 2,00,000.

(15) Cash and Cash Equivalents on 31st March, 20X1 6,07,500.

SOLUTION:

M/s MNT Ltd.

Cash Flow Statement for the year ended 31st March, 20X1

(Using direct method)

Particulars	Amount Rs	Amount Rs
Cash flows from Operating Activities   Cash sales (3,82,500/.30)   Less: Cash payments for trade payables            Wages Paid        Office and selling expenses Cash generated from operations before taxes Income tax paid   Net cash generated from operating activities (A)   Cash flows from investing activities Sale of investments (7,00,000 + 20,000) Payments for purchase of Plant & machinery Net cash used in investing activities (B)   Cash flows from financing activities Bank loan repayment(including interest) Dividend paid(including dividend distribution tax) Net cash used in financing activities (C)   Net increase in cash (A+B+C)   Cash and cash equivalents at beginning of the period   Cash and cash equivalents at end of the period	(4,60,000) (4,92,500) (75,000)             7,20,000 (2,50,000)       (2,15,000) (30,000)	12,75,000         (10,27,500) 2,47,500 (65,000)       1,82,500            4,70,000         (2,45,000)   4,07,500   200000   6,07,500

Illustration 2: The following data were provided by the accounting records of Ryan Ltd. at year-end, March 31, 20X1:

Income Statement

Particulars		Rs.
Sales Cost of Goods Sold Gross Margin Operating Expenses (including Depreciation Expense of 37,000)     Other Income / (Expenses) Interest Expense paid Interest Income received Gain on Sale of Investments Loss on Sale of Plant       Income tax	(23,000)    6,000   12,000    (3,000)	6,98,000 (5,20,000) 1,78,000   (1,47,000) 31,000             (8,000) 23,000   (7,000) 16,000

 

Comparative balance sheets

Particulars	31st march 20X1	31st  march 20X0
Assets Plant Assets Less: Accumulated Depreciation   Investments (Long term) Current Assets: Inventory Accounts receivable Cash Prepaid expenses   Liabilities Share Capital Reserves and surplus Bonds Current liabilities: Accounts payable Accrued liabilities Income taxes payable	7,15,000 (1,03,000) 6,12,000 1,15,000   1,44,000 47,000 46,000 1,000 9,65,000   4,65,000 1,40,000 2,95,000   2,45,000 12,000 3,000 9,65,000	5,05,000 (68,000) 4,37,000 1,27,000   1,10,000 55,000 15,000 5,000 7,49,000   3,15,000 1,32,000 2,45,000   43,000 9,000 5,000 7,49,000

Analysis of selected accounts and transactions during 20X0-X1

1. Purchased investments for 78,000.

2. Sold investments for ₹1,02,000. These investments cost ₹90,000.

3. Purchased plant assets for ₹1,20,000.

4. Sold plant assets that cost 10,000 with accumulated depreciation of 2,000 for ₹ 5,000.

5. Issued 1,00,000 of bonds at face value in an exchange for plant assets on 31st March, 20X1.

6. Repaid 50,000 of bonds at face value at maturity.

7. Issued 15,000 shares of 10 each.

8. Paid cash dividends 8,000.

 

      Prepare Cash Flow Statement as per AS-3 (Revised), using indirect method.

 

Solution

                                                                Ryan Ltd.

                 Cash Flow Statement for the year ending 31st March, 20X1

Particulars	₹	₹
Cash flows from operating activities Net profit before taxation Adjustments for: Depreciation Gain on sale of investments Loss on sale of plant assets Interest expense Interest income Operating profit before working capital changes Decrease in accounts receivable Increase in inventory Decrease in prepaid expenses Increase in accounts payable Increase in accrued liabilities Cash generated from operations Income taxes paid* Net cash generated from operating activities   Cash flows from investing activities Purchase of plant Sale of plant Purchase of investments Sale of investments Interest received Net cash used in investing activities   Cash flows from financing activities Proceeds from issuance of share capital Repayment of bonds Interest paid Dividends paid Net cash from financing activities   Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period   Cash and cash equivalents at the end of the period	23,000   37,000 (12,000) 3,000 23,000 (6.000) 68,000 8,000 (34,000) 4,000 7,000 3,000 56,000 (9,000)       (1,20,000) 5,000 (78,000) 1,02,000   6,000       1,50,000 (50,000) (23,000) (8,000)	47,000                   (85,000)                 69,000      31,000    15,000   46,000

 

*Working notes:

                                                                                                                 ₹

Income taxes paid:                                                                         

Income tax expense for the year                                                        7,000

Add: Income tax liability at the beginning of the year                      5,000

                                                                                                           12,000

Less: Income tax liability at the end of the year                               (3,000)

                                                                                                            9,000