## Special Adjustments in Cash Flow Statements
Certain adjustments in CFS problems do not fit neatly into the standard framework. These require additional working notes.
---
### 1. Undervalued Opening Inventory
Situation: Opening inventory in the Balance Sheet is found to be understated.
Adjusting Journal Entry:
```
Inventory A/c Dr X
To Opening P&L Reserve X
```
Effect on CFS:
- Opening inventory is restated upward.
- This increases the apparent decrease in inventory (or reduces the increase), affecting working capital changes in Operating Activities.
- Opening P&L Reserve is also restated, which feeds into PBT derivation.
Rule: If nothing is mentioned about tax on this adjustment, treat it as having no tax impact — simply include the adjusted inventory figure in working capital.
---
### 2. Premium on Redemption of Debentures / Preference Shares
Two possible accounting treatments:
| Treatment | Effect on PBT | CFS Adjustment in Operating |
|---|---|---|
| Charged to P&L | Reduces PBT | Add back (it is a financing cost) |
| Charged to Securities Premium | No P&L impact | No Operating adjustment needed |
In both cases: Premium paid is a cash outflow in Financing Activities — show it separately from the face value redemption.
---
### 3. Asset Purchased Partly on Credit (Hidden Creditor)
Situation: A fixed asset is purchased for total ₹X, of which ₹Y is paid in cash and ₹Z is on credit (creditors for equipment/capital goods).
CFS Treatment:
- Investing Activities: Show only ₹Y (cash paid)
- Creditors for Equipment: ₹Z increase is NOT a working capital item — it is a non-cash investing transaction
- Disclosure: Non-cash portion ₹Z should be disclosed as a supplementary note per AS 3
How to detect: Creditors for Equipment T-account:
```
Creditors for Equipment
Dr Cr
Cash paid (CIB) Y | Opening 0
Closing Z | Asset purchased Z (Cr side)
```
This reveals total asset purchase = Y + Z; only Y flows through CFS.
---
### 4. Interest on Debentures — The Hidden Adjustment
When interest is not separately given, compute it:
- From the Debenture Interest Payable T-account, or
- As: Average debenture balance × Rate%
Then apply the two-step rule:
1. Add back in Operating Activities (it reduced PBT but is a financing cost)
2. Deduct as paid in Financing Activities
This ensures PBT is purged of financing costs, and the cash payment is shown in the right section.
---
### 5. Tax Treatment on Special Items
> "If nothing is mentioned about tax — to jo operation hai usko pay kardo, to CCS hai usko PIL mein book karlo."
In plain terms: If a prior period item or adjustment has no explicit tax consequence mentioned, treat it as tax-neutral. Adjust the relevant reserve/inventory account and move on.