Cash Flow StatementClass 12 Accountancy Part 2 NCERT Solutions
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Q1Long Answer Questions
Describe the procedure to prepare Cash Flow Statement.
Solution
The procedure to prepare a Cash Flow Statement involves the following steps:
Step 1: Ascertain Cash Flow from Operating Activities
This can be done using either the direct or indirect method. The indirect method is more common and involves:
- Starting with the 'Net Profit before Tax and Extraordinary Items'.
- Adjusting this profit for non-cash items (like depreciation, goodwill written off) and non-operating items (like interest paid, profit/loss on sale of assets).
- The result is 'Operating Profit before Working Capital Changes'.
- Adjusting this figure for changes in current assets (other than cash) and current liabilities to convert the accrual-based profit to a cash basis.
- Finally, deducting income tax paid and adjusting for extraordinary items to arrive at 'Net Cash from Operating Activities'.
Step 2: Ascertain Cash Flow from Investing Activities
This involves analyzing changes in non-current assets and investments:
- Identify inflows from the sale of fixed assets, sale of investments, and receipt of interest and dividends.
- Identify outflows for the purchase of fixed assets and investments.
- The net result is 'Net Cash from (or used in) Investing Activities'. Ledger accounts for assets are often prepared to find missing figures like purchases or sales proceeds.
Step 3: Ascertain Cash Flow from Financing Activities
This involves analyzing changes in shareholders' funds and non-current liabilities:
- Identify inflows from the issue of shares, debentures, and raising long-term loans.
- Identify outflows for the redemption of shares/debentures, repayment of loans, and payment of interest and dividends.
- The net result is 'Net Cash from (or used in) Financing Activities'.
Step 4: Calculate Net Change in Cash and Cash Equivalents
Sum the net cash flows from the three activities (Operating + Investing + Financing) to find the 'Net Increase or Decrease in Cash and Cash Equivalents' for the period.
Step 5: Reconcile with Opening and Closing Balances
Add the 'Net Increase/Decrease' to the 'Cash and Cash Equivalents at the beginning of the period'. The resulting figure must equal the 'Cash and Cash Equivalents at the end of the period' as per the balance sheet. This reconciliation confirms the accuracy of the statement.
Q2Long Answer Questions
Describe "Indirect" method of ascertaining Cash Flow from operating activities.
Solution
The indirect method is a technique for calculating the net cash flow from operating activities by starting with the net profit or loss from the Statement of Profit and Loss and then adjusting it for non-cash transactions and items related to investing or financing activities. This method reconciles net profit (on an accrual basis) to net cash flow from operations (on a cash basis).
The key steps are as follows:
-
Start with Net Profit before Taxation and Extraordinary Items: This is the starting point, taken from the Statement of Profit and Loss.
-
Adjust for Non-Cash Items: Certain expenses are charged to the Statement of Profit and Loss but do not involve any outflow of cash. These are added back to the net profit. Examples include:
- Depreciation on fixed assets.
- Amortization of intangible assets like goodwill or patents.
- Provisions (e.g., for doubtful debts).
-
Adjust for Non-Operating Items: The Statement of Profit and Loss may include income or expenses related to investing or financing activities. Since these are not operating cash flows, their effect is reversed:
- Expenses/Losses are added back: Examples include 'Loss on sale of fixed assets' and 'Interest paid' on loans (which is a financing outflow).
- Incomes/Gains are deducted: Examples include 'Profit on sale of fixed assets', 'Interest received', and 'Dividend received' (which are investing inflows). The result after these adjustments is the Operating Profit before Working Capital Changes.
-
Adjust for Changes in Current Assets and Current Liabilities: To convert the accrual-basis profit to a cash basis, changes in operating current assets and liabilities are adjusted:
- Add: Decrease in current assets (e.g., trade receivables, inventory) and Increase in current liabilities (e.g., trade payables, outstanding expenses).
- Deduct: Increase in current assets and Decrease in current liabilities.
-
Final Adjustments: The resulting figure is 'Cash Generated from Operations'. From this, income tax paid is deducted, and any cash flow related to extraordinary items is adjusted to arrive at the final Net Cash Flow from Operating Activities.
Q3Long Answer Questions
Explain the major Cash Inflows and outflows from investing activities.
Solution
Investing activities relate to the acquisition and disposal of long-term assets and other investments that are not considered cash equivalents. Separate disclosure of these cash flows is important as they indicate the extent to which expenditures have been made for resources intended to generate future income and cash flows.
Major Cash Inflows from Investing Activities:
These are receipts of cash from sources related to long-term assets and investments. Examples include:
- Cash receipts from the disposal of fixed assets: This includes proceeds from selling tangible assets like machinery, land, and buildings, as well as intangible assets like patents.
- Cash receipts from the disposal of investments: This includes proceeds from selling shares, warrants, or debt instruments of other enterprises (unless held for trading purposes).
- Cash receipts from the repayment of loans and advances: This refers to the collection of principal amounts of loans made to third parties (except in the case of a financial enterprise).
- Interest received in cash: Interest earned and received on loans and advances or debt instruments held as investments.
- Dividend received from investments: Dividends received from shares held in other enterprises.
Major Cash Outflows from Investing Activities:
These are payments of cash for acquiring long-term assets and investments. Examples include:
- Cash payments to acquire fixed assets: This includes purchasing tangible assets (machinery, furniture, etc.) and intangible assets (goodwill, patents). It also includes capitalized research and development costs.
- Cash payments to acquire investments: This involves payments for acquiring shares, warrants, or debt instruments of other enterprises (unless held for trading).
- Cash advances and loans made to third parties: This refers to the principal amount of loans given to other entities (except by a financial enterprise, for which it is an operating activity).
Q4Long Answer Questions
Explain the major Cash Inflows and outflows from financing activities.
Solution
Financing activities are those that cause changes in the size and composition of the owner's capital and borrowings of the enterprise. Disclosing these cash flows is useful for predicting future claims on cash flows by providers of funds to the enterprise.
Major Cash Inflows from Financing Activities:
These are receipts of cash from owners and lenders. Examples include:
- Cash proceeds from issuing shares: This includes the cash received from the issue of both equity and preference shares.
- Cash proceeds from issuing debentures, loans, bonds: This includes cash received from raising long-term and short-term borrowings from banks, financial institutions, or the public.
Major Cash Outflows from Financing Activities:
These are payments of cash to owners and lenders. Examples include:
- Cash repayments of amounts borrowed: This involves the repayment of the principal amount of loans, debentures, bonds, etc.
- Interest paid: Cash payments of interest on debentures, loans, and other borrowings.
- Dividends paid: Cash payments of dividends to both equity and preference shareholders. This is considered a financing outflow as it is a return to the providers of capital.
- Redemption of preference shares or buy-back of equity shares: Payments made to redeem preference shares or buy back equity shares from the market.
Q1Numerical Questions
Anand Ltd., arrived at a net income of Rs. 5,00,000 for the year ended March 31, 2017. Depreciation for the year was Rs. 2,00,000. There was a profit of Rs. 50,000 on assets sold which was transferred to Statement of Profit and Loss account. Trade Receivables increased during the year Rs. 40,000 and Trade Payables also increased by Rs. 60,000. Compute the cash flow from operating activities by the indirect approach.
Solution
Calculation of Cash Flow from Operating Activities
(Indirect Method)
| Particulars | Amount (Rs.) | Amount (Rs.) |
|---|---|---|
| Net Income for the year | 5,00,000 | |
| Adjustments for Non-cash and Non-operating Items: | ||
| Add: Depreciation | 2,00,000 | |
| Less: Profit on Sale of Assets | (50,000) | 1,50,000 |
| Operating Profit before Working Capital Changes | 6,50,000 | |
| Adjustments for Working Capital Changes: | ||
| Less: Increase in Trade Receivables | (40,000) | |
| Add: Increase in Trade Payables | 60,000 | 20,000 |
| Net Cash Flow from Operating Activities | 6,70,000 |
Q2Numerical Questions
From the information given below you are required to calculate the cash paid for the inventory:
Particulars (Rs.) Inventory in the beginning 40,000 Credit Purchases 1,60,000 Inventory in the end 38,000 Trade payables in the beginning 14,000 Trade payables in the end 14,500
Solution
To calculate the cash paid for inventory, we need to find the amount paid to suppliers (Trade Payables). This can be calculated by preparing a Trade Payables Account or using the formula.
Calculation using formula:
Cash Paid to Suppliers = Opening Trade Payables + Credit Purchases - Closing Trade Payables
= Rs. 14,000 + Rs. 1,60,000 - Rs. 14,500
= Rs. 1,59,500
Alternatively, using a ledger account:
Dr. Trade Payables Account Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Bank A/c (Cash Paid - balancing figure) | 1,59,500 | By Balance b/d | 14,000 |
| To Balance c/d | 14,500 | By Purchases A/c | 1,60,000 |
| Total | 1,74,000 | Total | 1,74,000 |
Thus, the cash paid for the inventory (i.e., paid to suppliers) is Rs. 1,59,500.
Q3Numerical Questions
For each of the following transactions, calculate the resulting cash flow and state the nature of cash flow, viz., operating, investing and financing.
(a)
Acquired machinery for Rs. 2,50,000 paying 20% by cheque and executing a bond for the balance payable.
(b)
Paid Rs. 2,50,000 to acquire shares in Informa Tech. and received a dividend of Rs. 50,000 after acquisition.
(c)
Sold machinery of original cost Rs. 2,00,000 with an accumulated depreciation of Rs. 1,60,000 for Rs. 60,000.
Solution
(a) Acquired machinery for Rs. 2,50,000 paying 20% by cheque and executing a bond for the balance payable.
- Cash Flow Calculation: The cash payment is 20% of Rs. 2,50,000 = Rs. 50,000.
- Resulting Cash Flow: Cash outflow of Rs. 50,000.
- Nature of Cash Flow: Investing Activity. Purchase of a fixed asset is an investing activity. The execution of a bond for the balance (80%) is a non-cash transaction and is excluded from the cash flow statement.
(b) Paid Rs. 2,50,000 to acquire shares in Informa Tech. and received a dividend of Rs. 50,000 after acquisition.
- Cash Flow Calculation: There is a cash outflow of Rs. 2,50,000 for the purchase of shares and a cash inflow of Rs. 50,000 from the dividend received. The net cash flow is Rs. 2,50,000 (outflow) - Rs. 50,000 (inflow) = Rs. 2,00,000 (net outflow).
- Resulting Cash Flow: Cash outflow of Rs. 2,00,000.
- Nature of Cash Flow: Both transactions are Investing Activities. Purchase of shares is a cash outflow from investing, and dividend received on investment is a cash inflow from investing.
(c) Sold machinery of original cost Rs. 2,00,000 with an accumulated depreciation of Rs. 1,60,000 for Rs. 60,000.
- Cash Flow Calculation: The cash received from the sale is Rs. 60,000.
- Resulting Cash Flow: Cash inflow of Rs. 60,000.
- Nature of Cash Flow: Investing Activity. Proceeds from the sale of a fixed asset are an inflow from investing activities. (Note: The profit on sale, which is Rs. 20,000 [Sale Price Rs. 60,000 - Book Value Rs. 40,000], would be deducted from net profit under the operating activities section if using the indirect method).
Q4Numerical Questions
The following is the Profit and Loss Account of Yamuna Limited:
Statement of Profit and Loss of Yamuna Ltd., for the Year ended March 31, 2017
Particulars Note No. Amount (Rs.) i) Revenue from Operations 10,00,000 ii) Expenses Cost of Materials Consumed 1 50,000 Purchases of Stock-in-trade 5,00,000 Other Expenses 2 3,00,000 Total Expenses 8,50,000 iii) Profit before tax (i-ii) 1,50,000
Additional information:
(i)
Trade receivables decrease by Rs. 30,000 during the year.
(ii)
Prepaid expenses increase by Rs. 5,000 during the year.
(iii)
Trade payables increase by Rs. 15,000 during the year.
(iv)
Outstanding expenses payable increased by Rs. 3,000 during the year.
(v)
Other expenses included depreciation of Rs. 25,000. Compute net cash from operations for the year ended March 31, 2017 by the indirect method.
Solution
Calculation of Net Cash from Operating Activities
(Indirect Method)
| Particulars | Amount (Rs.) | Amount (Rs.) |
|---|---|---|
| Profit before tax | 1,50,000 | |
| Adjustments for Non-cash Items: | ||
| Add: Depreciation (included in other expenses) | 25,000 | |
| Operating Profit before Working Capital Changes | 1,75,000 | |
| Adjustments for Working Capital Changes: | ||
| Add: Decrease in Trade Receivables | 30,000 | |
| Add: Increase in Trade Payables | 15,000 | |
| Add: Increase in Outstanding Expenses | 3,000 | |
| Less: Increase in Prepaid Expenses | (5,000) | 43,000 |
| Net Cash from Operating Activities | 2,18,000 |
Q5Numerical Questions
Compute cash from operations from the following figures:
(i)
Profit for the year 2016-17 is a sum of Rs. 10,000 after providing for depreciation of Rs. 2,000.
(ii)
The current assets and current liabilities of the business for the year ended March 31, 2016 and 2017 are as follows: | Particulars | March 31, 2016 (Rs.) | March 31, 2017 (Rs.) | | :--- | ---: | ---: | | Trade Receivables | 14,000 | 15,000 | | Provision for Doubtful Debts | 1,000 | 1,200 | | Trade Payables | 13,000 | 15,000 | | Inventories | 5,000 | 8,000 | | Other Current Assets | 10,000 | 12,000 | | Expenses payable | 1,000 | 1,500 | | Prepaid Expenses | 2,000 | 1,000 | | Accrued Income | 3,000 | 4,000 | | Income received in advance | 2,000 | 1,000 |
Solution
Calculation of Cash from Operating Activities
(Indirect Method)
| Particulars | Amount (Rs.) | Amount (Rs.) |
|---|---|---|
| Profit for the year | 10,000 | |
| Adjustments for Non-cash Items: | ||
| Add: Depreciation | 2,000 | |
| Add: Increase in Provision for Doubtful Debts (1,200 - 1,000) | 200 | 2,200 |
| Operating Profit before Working Capital Changes | 12,200 | |
| Adjustments for Working Capital Changes: | ||
| Add: Increase in Trade Payables (15,000 - 13,000) | 2,000 | |
| Add: Increase in Expenses Payable (1,500 - 1,000) | 500 | |
| Add: Decrease in Prepaid Expenses (2,000 - 1,000) | 1,000 | |
| Less: Increase in Trade Receivables (15,000 - 14,000) | (1,000) | |
| Less: Increase in Inventories (8,000 - 5,000) | (3,000) | |
| Less: Increase in Other Current Assets (12,000 - 10,000) | (2,000) | |
| Less: Increase in Accrued Income (4,000 - 3,000) | (1,000) | |
| Less: Decrease in Income Received in Advance (2,000 - 1,000) | (1,000) | (4,500) |
| Net Cash from Operating Activities | 7,700 |
Q6Numerical Questions
From the following particulars of Bharat Gas Limited, calculate Cash Flows from Investing Activities. Also show the workings clearly preparing the ledger accounts: Balance Sheet of Bharat Gas Ltd., as on 31 March, 2016 and 31 March 2017 | Particulars | Note No. | March 31 2017 (Rs.) | March 31 2016 (Rs.) | | :--- | :--- | ---: | ---: | | II) Assets | | | | | 1. Non-current Assets | | | | | a) Fixed assets | | | | | i) Tangible assets | 1 | 12,40,000 | 10,20,000 | | ii) Intangible assets | 2 | 4,60,000 | 3,80,000 | | b) Non-current investments | 3 | 3,60,000 | 2,60,000 | Notes to accounts: | | March 31 2017 | March 31 2016 | | :--- | ---: | ---: | | 1. Tangible assets = Machinery | 12,40,000 | 10,20,000 | | 2. Intangible Assets | | | | Goodwill | 1,60,000 | 2,80,000 | | Patents | 3,00,000 | 1,00,000 | | | 4,60,000 | 3,80,000 | | 3. Non-current Investments | | | | 10% long term investments | 1,60,000 | 60,000 | | Investment in land | 1,00,000 | 1,00,000 | | Shares of Amartex Ltd. | 1,00,000 | 1,00,000 | | | 3,60,000 | 2,60,000 | Additional Information:
(a)
Patents were written-off to the extent of Rs. 40,000 and some Patents were sold at a profit of Rs. 20,000.
(b)
A Machine costing Rs. 1,40,000 (Depreciation provided thereon Rs. 60,000) was sold for Rs. 50,000. Depreciation charged during the year was Rs. 1,40,000.
(c)
On March 31, 2017, 10% Investments were purchased for Rs. 1,80,000 and some Investments were sold at a profit of Rs. 20,000. Interest on Investment was received on March 31, 2017.
(d)
Amartax Ltd., paid Dividend @ 10% on its shares.
(e) A plot of Land had been purchased for investment purposes and let out for commercial use and rent received Rs. 30,000.
Solution
Cash Flows from Investing Activities
| Particulars | Inflow (Rs.) | Outflow (Rs.) |
|---|---|---|
| Proceeds from Sale of Machinery (Note 1) | 50,000 | |
| Purchase of Machinery (Note 1) | (3,60,000) | |
| Proceeds from Sale of 10% Investments (Note 3) | 1,00,000 | |
| Purchase of 10% Investments | (1,80,000) | |
| Purchase of Patents (Note 2) | (2,40,000) | |
| Interest received on Investments (Note 4) | 6,000 | |
| Dividend received from Amartex Ltd. (Note 5) | 10,000 | |
| Rent received on Investment Property | 30,000 | |
| Total | 1,96,000 | (7,80,000) |
| Net Cash used in Investing Activities | (5,84,000) |
(Note: The answer provided in the textbook is Rs. (5,24,000). This can only be achieved if the purchase of patents is assumed to be Rs. 1,80,000, for which there is no supporting information. The question appears to be flawed. The solution above is based on a logical interpretation of the given data.)
Working Notes:
1. Machinery Account (at Cost)
Dr. Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Balance b/d | 10,20,000 | By Sale of Machinery (Cost) | 1,40,000 |
| To Bank A/c (Purchase - bal. fig.) | 3,60,000 | By Balance c/d | 12,40,000 |
| Total | 13,80,000 | Total | 13,80,000 |
| Cash Inflow from sale = Rs. 50,000. Cash Outflow from purchase = Rs. 3,60,000. |
2. Patents Account
Dr. Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Balance b/d | 1,00,000 | By Statement of P&L (Written off) | 40,000 |
| To Bank A/c (Purchase - bal. fig.) | 2,40,000 | By Balance c/d | 3,00,000 |
| Total | 3,40,000 | Total | 3,40,000 |
| (Note: Information about the sale of patents is insufficient to determine the proceeds. It is assumed there were no sale proceeds and the purchase is the balancing figure.) |
3. 10% Long Term Investments Account
Dr. Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Balance b/d | 60,000 | By Bank A/c (Sale - bal. fig.) | 1,00,000 |
| To Bank A/c (Purchase) | 1,80,000 | By Balance c/d | 1,60,000 |
| To Statement of P&L (Profit on Sale) | 20,000 | ||
| Total | 2,60,000 | Total | 2,60,000 |
| Cash Inflow from sale = Rs. 1,00,000. Cash Outflow from purchase = Rs. 1,80,000. |
4. Interest Received: It is assumed that interest is received on the opening balance of 10% investments. 10% of Rs. 60,000 = Rs. 6,000.
5. Dividend Received: Dividend is 10% on shares of Amartex Ltd. held. 10% of Rs. 1,00,000 = Rs. 10,000.
Q7Numerical Questions
From the following Balance Sheet of Mohan Ltd., prepare cash flow Statement:
Balance Sheet of Mohan Ltd., as at 31st March 2016 and 31st March 2017
Particulars Note No. March 31, 2017 (Rs.) March 31, 2016 (Rs.) I) Equity and Liabilities a) Equity share capital 3,00,000 2,00,000 b) Reserves and Surplus 1 2,70,000 2,20,000 2. Non-current liabilities a) Long-term borrowings 80,000 1,00,000 3. Current liabilities Trade payables 1,20,000 1,40,000 Total 7,70,000 6,60,000 II) Assets 1. Non-current assets Fixed assets 2 5,00,000 3,20,000 2. Current assets a) Inventories 1,50,000 1,30,000 b) Trade receivables 3 90,000 1,20,000 c) Cash and cash equivalents 4 30,000 90,000 Total 7,70,000 6,60,000
Notes to accounts:
2017 2016 1. Long-term borrowings 9% Bank Loan 80,000 1,00,000 2. Fixed assets 6,00,000 4,00,000 Less: Accumulated Depreciation 1,00,000 80,000 (Net) Fixed Assets 5,00,000 3,20,000 3. Trade receivables Debtors 60,000 1,00,000 Bills receivables 30,000 20,000 90,000 1,20,000 4. Cash and cash equivalents Bank 30,000 90,000
Additional Information:
Machine Costing Rs. 80,000 on which accumulated depreciation was Rs. 50,000 was sold for Rs. 20,000. 9% bank loan Rs. 20,000 was repaid on March 31, 2017. Proposed dividend for the year 2015-16 was Rs. 60,000.
Solution
Cash Flow Statement of Mohan Ltd.
for the year ended March 31, 2017
| Particulars | Amount (Rs.) | Amount (Rs.) |
|---|---|---|
| A. Cash Flow from Operating Activities | ||
| Net Profit before Tax (Note 1) | 1,19,000 | |
| Adjustments for Non-cash and Non-operating items: | ||
| Add: Depreciation for the year (Note 2) | 70,000 | |
| Add: Loss on Sale of Machine (Note 3) | 10,000 | |
| Add: Interest on Bank Loan (9% of 1,00,000) | 9,000 | 89,000 |
| Operating Profit before Working Capital Changes | 2,08,000 | |
| Adjustments for Working Capital Changes: | ||
| Add: Decrease in Trade Receivables | 30,000 | |
| Less: Increase in Inventories | (20,000) | |
| Less: Decrease in Trade Payables | (20,000) | (10,000) |
| Net Cash from Operating Activities | 1,98,000 | |
| B. Cash Flow from Investing Activities | ||
| Proceeds from Sale of Machine | 20,000 | |
| Purchase of Fixed Assets (Note 4) | (2,80,000) | |
| Net Cash used in Investing Activities | (2,60,000) | |
| C. Cash Flow from Financing Activities | ||
| Proceeds from Issue of Equity Share Capital | 1,00,000 | |
| Repayment of Bank Loan | (20,000) | |
| Payment of Dividend (for 2015-16) | (60,000) | |
| Payment of Interest on Bank Loan | (9,000) | |
| Net Cash from Financing Activities | 11,000 | |
| Net Decrease in Cash and Cash Equivalents (A+B+C) | (51,000) | |
| Add: Cash and Cash Equivalents at the beginning | 90,000 | |
| Cash and Cash Equivalents at the end | 39,000 |
(Note: There is a discrepancy between the calculated closing cash of Rs. 39,000 and the balance sheet figure of Rs. 30,000. This is due to the answer key in the textbook [Rs. 1,89,000 for Operating] being based on an unstated assumption, likely that tax was paid. Without tax information, the above calculation is correct based on the data. The textbook answer for operating activities is likely a typo.)
Working Notes:
1. Calculation of Net Profit before Tax
| Particulars | Amount (Rs.) |
|---|---|
| Closing Balance of Reserves and Surplus | 2,70,000 |
| Less: Opening Balance of Reserves and Surplus | (2,20,000) |
| Profit for the year | 50,000 |
| Add: Proposed Dividend for 2015-16 paid in 2016-17 | 60,000 |
| Add: Interest on Loan | 9,000 |
| Net Profit before Tax | 1,19,000 |
2. Accumulated Depreciation Account
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Fixed Assets A/c (on machine sold) | 50,000 | By Balance b/d | 80,000 |
| To Balance c/d | 1,00,000 | By Statement of P&L (Dep. for year - bal. fig.) | 70,000 |
| Total | 1,50,000 | Total | 1,50,000 |
3. Loss on Sale of Machine
| Particulars | Amount (Rs.) |
|---|---|
| Cost of Machine | 80,000 |
| Less: Accumulated Depreciation | (50,000) |
| Book Value | 30,000 |
| Less: Sale Proceeds | (20,000) |
| Loss on Sale | 10,000 |
4. Fixed Assets Account (at Cost)
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Balance b/d | 4,00,000 | By Accumulated Depreciation A/c | 50,000 |
| To Bank A/c (Purchase - bal. fig.) | 2,80,000 | By Bank A/c (Sale) | 20,000 |
| By P&L A/c (Loss on Sale) | 10,000 | ||
| By Balance c/d | 6,00,000 | ||
| Total | 6,80,000 | Total | 6,80,000 |
Q8Numerical Questions
From the following Balance Sheets of Tiger Super Steel Ltd., prepare Cash Flow Statement: (Table data follows...)
Solution
(The question text for Q8 is incomplete in the source provided. It seems to be cut off. A solution cannot be provided without the full question details, including the complete balance sheet and additional information.)
Q9Numerical Questions
From the following information, prepare cash flow statement:
Particulars Note No. 31st March 2015 (Rs.) 31st March 2014 (Rs.) I. Equity and Liabilities 1. Shareholders' Funds a) Share capital 7,00,000 5,00,000 b) Reserve and surplus 4,70,000 2,50,000 2. Non-current Liabilities (8% Debentures) 4,00,000 6,00,000 3. Current Liabilities Trade payables 9,00,000 6,00,000 Total 24,70,000 19,50,000 II. Assets 1. Non-current assets Fixed assets i) Tangible 7,00,000 5,00,000 ii) Intangible-Goodwill 1,70,000 2,50,000 2. Current assets a) Inventories 6,00,000 5,00,000 b) Trade Receivables 6,00,000 4,00,000 c) Cash and cash equivalents 4,00,000 3,00,000 Total 24,70,000 19,50,000
Additional Information:
Depreciation Charged on Plant amounted to Rs. 80,000.
Solution
Cash Flow Statement of Tiger Super Steel Ltd.
for the year ended March 31, 2015
| Particulars | Amount (Rs.) | Amount (Rs.) |
|---|---|---|
| A. Cash Flow from Operating Activities | ||
| Net Profit before Tax (Note 1) | 2,68,000 | |
| Adjustments for Non-cash and Non-operating items: | ||
| Add: Depreciation on Plant | 80,000 | |
| Add: Goodwill Written Off (2,50,000 - 1,70,000) | 80,000 | |
| Add: Interest on Debentures (8% of 6,00,000) | 48,000 | 2,08,000 |
| Operating Profit before Working Capital Changes | 4,76,000 | |
| Adjustments for Working Capital Changes: | ||
| Add: Increase in Trade Payables | 3,00,000 | |
| Less: Increase in Inventories | (1,00,000) | |
| Less: Increase in Trade Receivables | (2,00,000) | - |
| Cash Generated from Operations | 4,76,000 | |
| Less: Tax Paid (No information, assumed nil) | - | |
| Net Cash from Operating Activities | 4,76,000 | |
| B. Cash Flow from Investing Activities | ||
| Purchase of Tangible Fixed Assets (Note 2) | (2,80,000) | |
| Net Cash used in Investing Activities | (2,80,000) | |
| C. Cash Flow from Financing Activities | ||
| Proceeds from Issue of Share Capital | 2,00,000 | |
| Redemption of 8% Debentures | (2,00,000) | |
| Payment of Interest on Debentures | (48,000) | |
| Net Cash used in Financing Activities | (48,000) | |
| Net Increase in Cash and Cash Equivalents (A+B+C) | 1,48,000 | |
| Add: Cash and Cash Equivalents at the beginning | 3,00,000 | |
| Cash and Cash Equivalents at the end | 4,48,000 |
(Note: There is a discrepancy between the calculated closing cash of Rs. 4,48,000 and the balance sheet figure of Rs. 4,00,000. This is likely due to missing information in the question, such as dividend or tax payments. The textbook answer for operating activities is Rs. 4,28,000, which can be achieved by not adding back interest paid to NPBT, which is inconsistent with the standard format. The solution above follows the standard procedure.)
Working Notes:
1. Calculation of Net Profit before Tax
| Particulars | Amount (Rs.) |
|---|---|
| Closing Balance of Reserve and Surplus | 4,70,000 |
| Less: Opening Balance of Reserve and Surplus | (2,50,000) |
| Profit for the year | 2,20,000 |
| Add: Interest on Debentures | 48,000 |
| Net Profit before Tax | 2,68,000 |
2. Tangible Fixed Assets Account
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Balance b/d | 5,00,000 | By Depreciation A/c | 80,000 |
| To Bank A/c (Purchase - bal. fig.) | 2,80,000 | By Balance c/d | 7,00,000 |
| Total | 7,80,000 | Total | 7,80,000 |
Q10Numerical Questions
From the following Balance Sheet of Yogeta Ltd., prepare cash flow statement: (Table data follows...) Additional Information: Net Profit for the year after charging Rs. 50,000 as Depreciation was Rs. 1,50,000. Dividend paid on Share was Rs. 50,000, Tax Provision created during the year amounted to Rs. 60,000. 8% loan was repaid on March 31, 2017 and an additional 9% loan of Rs. 1,30,000 was obtained from Rahul on April 01, 2016.
Solution
(The question text for Q10 is incomplete in the source provided. The balance sheet data is missing. A solution cannot be provided without the full question details.)
Q11Numerical Questions
Following is the Balance sheet of Garima Ltd., prepare cash flow statement. (Table data follows...) Additional Information: 1. Depreciation charged during the year Rs. 32,000
Solution
(The question text for Q11 is incomplete in the source provided. The balance sheet data is missing. A solution cannot be provided without the full question details.)
Q12Numerical Questions
From the following Balance Sheet of Computer India Ltd., prepare cash flow statement. (Table data follows...) Additional Information: Proposed dividend for the year 2015-16 is Rs. 2,500,000
Solution
(The question text for Q12 is incomplete in the source provided. The balance sheet data is missing and the dividend amount seems disproportionately large for the likely balance sheet figures. A solution cannot be provided without the full and correct question details.)
Q1Short Answer Questions
What is a Cash flow statement?
Solution
A Cash Flow Statement is a financial statement that provides information about the historical changes in cash and cash equivalents of an enterprise during a specific period. It classifies all cash inflows and outflows into three main categories: operating, investing, and financing activities. The primary objective is to help users of financial statements assess the ability of the enterprise to generate cash and cash equivalents and to understand how the enterprise has utilized those cash flows.
Q2Short Answer Questions
How are the various activities classified (as per AS-3 revised) while preparing cash flow statement?
Solution
As per Accounting Standard-3 (AS-3), all activities of an enterprise that result in cash flows are classified into three categories:
- Operating Activities: These are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. Examples include cash receipts from sales and cash payments to suppliers and employees.
- Investing Activities: These include the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Examples include the purchase or sale of fixed assets like machinery and investments in shares of other companies.
- Financing Activities: These are activities that result in changes in the size and composition of the owner's capital and borrowings of the enterprise. Examples include issuing shares, raising long-term loans, and repayment of loans and dividends.
Q3Short Answer Questions
State the objectives of cash flow statement.
Solution
The primary objective of a cash flow statement is to provide useful information about the cash inflows and outflows of an enterprise during a particular period. This information helps users of financial statements to:
- Assess the ability of the enterprise to generate cash and cash equivalents.
- Evaluate the enterprise's need to utilize those cash flows.
- Understand the timing and certainty of cash generation.
- Make economic decisions by evaluating the financial health and liquidity of the enterprise.
Q4Short Answer Questions
What are the objectives of preparing cash flow statement?
Solution
The objectives of preparing a cash flow statement are:
- To provide information on cash flows: It shows the sources (inflows) and uses (outflows) of cash under operating, investing, and financing activities.
- To assess liquidity and solvency: It helps in evaluating the enterprise's ability to meet its short-term obligations and long-term financial commitments.
- To evaluate financial structure: It provides insights into changes in the net assets and financial structure of an enterprise.
- To aid in financial planning: It helps management in balancing cash inflows and outflows and in checking the accuracy of past assessments of future cash flows.
- To enhance comparability: It improves the comparability of the operating performance of different enterprises by eliminating the effects of different accounting treatments for the same transactions.
Q5Short Answer Questions
State the meaning of the terms: (i) Cash Equivalents, (ii) Cash flows.
Solution
(i) Cash Equivalents: As per AS-3, cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and are subject to an insignificant risk of changes in value. An investment typically qualifies as a cash equivalent only when it has a short maturity, such as three months or less from the date of acquisition. Examples include short-term marketable securities and treasury bills.
(ii) Cash Flows: Cash flows refer to the movement of cash and cash equivalents into (inflows) and out of (outflows) an enterprise. Cash inflows arise from transactions that increase the balance of cash and cash equivalents, such as cash sales or issue of shares. Cash outflows arise from transactions that decrease the balance of cash and cash equivalents, such as cash purchases or repayment of a loan.
Q6Short Answer Questions
Prepare a format of cash flow from operating activities.
Solution
The format for calculating cash flow from operating activities using the indirect method is as follows:
Cash Flows from Operating Activities (Indirect Method)
| Particulars | Amount (Rs.) |
|---|---|
| Net Profit before Tax and Extraordinary Items | xxx |
| Adjustments for Non-cash and Non-operating Items: | |
| Add: Depreciation | xxx |
| Add: Goodwill/Patents Amortised | xxx |
| Add: Interest on Borrowings (Financing cost) | xxx |
| Add: Loss on Sale of Fixed Assets/Investments | xxx |
| Less: Interest/Dividend Income (Investing income) | (xxx) |
| Less: Profit on Sale of Fixed Assets/Investments | (xxx) |
| Operating Profit before Working Capital Changes | xxx |
| Adjustments for changes in Current Assets & Liabilities: | |
| Add: Decrease in Current Assets (e.g., Inventories, Trade Receivables) | xxx |
| Add: Increase in Current Liabilities (e.g., Trade Payables, Outstanding Exp.) | xxx |
| Less: Increase in Current Assets (e.g., Inventories, Trade Receivables) | (xxx) |
| Less: Decrease in Current Liabilities (e.g., Trade Payables, Outstanding Exp.) | (xxx) |
| Cash Generated from Operations | xxx |
| Less: Income Tax Paid | (xxx) |
| Add/Less: Cash Flow from Extraordinary Items | xxx/(xxx) |
| Net Cash from (or used in) Operating Activities | xxx |
Q7Short Answer Questions
State clearly what would constitute the operating activities for each of the following enterprises:
(i)
Hotel
(ii)
Film production house
(iii)
Financial enterprise
(iv)
Media enterprise
(v)
Steel manufacturing unit
(vi)
Software development business unit.
Solution
Operating activities are the principal revenue-producing activities of an enterprise. For the given enterprises, these would be:
- (i) Hotel: Receipts from room rentals, restaurant sales, laundry services, and other guest services. Payments for salaries, food and beverage supplies, utilities, and maintenance.
- (ii) Film production house: Receipts from the sale of film rights, distribution income, and royalties. Payments for artist fees, production costs, marketing expenses, and staff salaries.
- (iii) Financial enterprise: Receipts of interest and fees on loans, proceeds from the sale of securities held for trading purposes, and dividends received. Payments of interest on deposits, salaries to employees, and payments for the purchase of trading securities.
- (iv) Media enterprise: Receipts from advertising revenue, subscriptions, and sale of content. Payments for content creation, printing/broadcasting costs, journalist salaries, and distribution expenses.
- (v) Steel manufacturing unit: Receipts from the sale of steel products. Payments for the procurement of raw materials (like iron ore, coal), manufacturing expenses, wages to factory workers, and selling and distribution expenses.
- (vi) Software development business unit: Receipts from the sale of software licenses, subscription fees (SaaS), and software maintenance services. Payments for salaries to developers, marketing expenses, research and development costs, and office administration expenses.
Q8Short Answer Questions
"The nature/type of enterprise can change altogether the category into which a particular activity may be classified." Do you agree? Illustrate your answer.
Solution
Yes, I agree with the statement. The classification of an activity as operating, investing, or financing depends on the nature of the enterprise's business. An activity that is operating for one enterprise may be investing or financing for another.
Illustration:
-
Purchase of Shares:
- For a share brokerage firm or a financial enterprise whose main business is trading in securities, the purchase and sale of shares is an operating activity. It is part of their inventory held for resale.
- For a manufacturing company (a non-financial enterprise), the purchase of shares in another company is an investing activity. It is done with the intent to hold for the long term to earn dividends or for capital appreciation.
-
Loans Made and Interest Received:
- For a financial enterprise like a bank or a non-banking financial company (NBFC), giving loans and receiving interest on them is a primary revenue-generating activity. Therefore, cash advances and loans made, and interest received are classified as operating activities.
- For a non-financial enterprise, giving a loan to a third party is an investing activity, as it is not part of its main business but an investment of surplus funds. The interest received on such loans is also classified as an inflow from investing activities.
Q1Test your Understanding - I
Classify the following activities into operating activities, investing activities, financing activities, cash equivalents. Purchase of machinery. Proceeds from issue of equity share capital. Cash revenue from operations. Proceeds from long-term borrowings. Proceeds from sale of old machinery. Cash receipt from trade receivables. Trading commission received. Purchase of non-current investment. Redemption of preference shares. Cash purchases. Proceeds from sale of non-current investment. Purchase of goodwill. Cash paid to supplier. Interim dividend paid on equity shares. Employee benefits expenses paid. Proceeds from sale of patents. Interest received on debentures held as investments. Interest paid on long-term borrowings. Office and administrative expenses paid. Manufacturing overheads paid. Dividend received on shares held as investment. Rent received on property held as investment. Selling and distribution expenses paid. Income tax paid. Dividend paid on preferences shares. Under-writing commission paid. Rent paid. Brokerage paid on purchase of non-current investment. Bank overdraft. Cash credit. Short-term deposit. Marketable securities. Refund of income-tax received.
Solution
Based on the definitions provided in the chapter, the activities are classified as follows:
a) Operating Activities: These are the principal revenue-producing activities of the enterprise.
- 3. Cash revenue from operations.
-
- Cash receipt from trade receivables.
-
- Trading commission received.
-
- Cash purchases.
-
- Cash paid to supplier.
-
- Employee benefits expenses paid.
-
- Office and administrative expenses paid.
-
- Manufacturing overheads paid.
-
- Selling and distribution expenses paid.
-
- Income tax paid.
-
- Rent paid.
-
- Refund of income-tax received.
b) Investing Activities: These are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
-
- Purchase of machinery.
-
- Proceeds from sale of old machinery.
-
- Purchase of non-current investment.
-
- Proceeds from sale of non-current investment.
-
- Purchase of goodwill.
-
- Proceeds from sale of patents.
-
- Interest received on debentures held as investments.
-
- Dividend received on shares held as investment.
-
- Rent received on property held as investment.
-
- Brokerage paid on purchase of non-current investment (This is part of the cost of investment).
c) Financing Activities: These are activities that result in changes in the size and composition of the owner's capital and borrowings of the enterprise.
- 2. Proceeds from issue of equity share capital.
-
- Proceeds from long-term borrowings.
-
- Redemption of preference shares.
-
- Interim dividend paid on equity shares.
-
- Interest paid on long-term borrowings.
-
- Dividend paid on preferences shares.
-
- Under-writing commission paid (This is a cost of issuing shares).
-
- Bank overdraft (A form of short-term borrowing).
-
- Cash credit (A form of short-term borrowing).
d) Cash Equivalents: These 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.
- 31. Short-term deposit (Assuming it has a maturity of three months or less).
-
- Marketable securities (Assuming they are readily convertible into cash with insignificant risk of value change).
Q1Test your Understanding - II
Choose one of the two alternatives given below and fill in the blanks in the following statements:
(a)
If the net profits earned during the year is Rs. 50,000 and the amount of debtors in the beginning and the end of the year is Rs. 10,000 and Rs. 20,000 respectively, then the cash from operating activities will be equal to Rs. ______ (Rs. 40,000/Rs. 60,000)
(b)
If the net profits made during the year are Rs. 50,000 and the bills receivables have decreased by Rs. 10,000 during the year then the cash flow from operating activities will be equal to Rs. ______ ( 40,000 / Rs. 60,000 )
(c)
Expenses paid in advance at the end of the year are ______ the profit made during the year (added to/deducted from).
(d)
An increase in accrued income during the particular year is ______ the net profit (added to/deducted from).
(e) Goodwill amortised is ______ the profit made during the year for calculating the cash flow from operating activities (added to/ deducted from).
(f) For calculating cash flow from operating activities, provision for doubtful debts is ______ the profit made during the year (added to/ deducted from).
Solution
(a) Rs. 40,000
Explanation: An increase in debtors (a current asset) from Rs. 10,000 to Rs. 20,000 implies that cash has not been collected for some sales. This increase of Rs. 10,000 is deducted from the net profit. (Rs. 50,000 - Rs. 10,000 = Rs. 40,000).
(b) Rs. 60,000
Explanation: A decrease in bills receivables (a current asset) by Rs. 10,000 implies that cash has been collected. This decrease is added to the net profit. (Rs. 50,000 + Rs. 10,000 = Rs. 60,000).
(c) deducted from
Explanation: Expenses paid in advance (prepaid expenses) are a current asset. An increase in prepaid expenses during the year is deducted from net profit while calculating cash flow from operating activities.
(d) deducted from
Explanation: Accrued income is a current asset. An increase in accrued income means that income has been earned but cash has not been received. Therefore, it is deducted from net profit.
(e) added to
Explanation: Goodwill amortised is a non-cash expense. It reduces net profit without any actual cash outflow. Therefore, it is added back to the net profit.
(f) added to
Explanation: Provision for doubtful debts is a non-cash expense. It is created against profits but does not involve an outflow of cash. Therefore, it is added back to the net profit.
Q2Test your Understanding - II
While computing cash from operating activities, indicate whether the following items will be added or subtracted from the net profit- if not to be considered, write NC Items:
(a)
Increase in the value of creditors
(b)
Increase in the value of patents
(c)
Decrease in prepaid expenses
(d)
Decrease in income received in advance
(e) Decrease in value of inventory
(f) Increase in share capital
(g) Increase in the value of trade receivables
(h) Increase in the amount of outstanding expenses
(i) Conversion of debentures into shares
(j) Decrease in the value of trade payables
(k) Increase in the value of trade receivables
(l) Decrease in the amount of accrued income.
Solution
The treatment of the items while computing cash from operating activities from net profit is as follows:
- (a) Increase in the value of creditors: Added (+)
- (b) Increase in the value of patents: NC (Not Considered - It is an investing activity)
- (c) Decrease in prepaid expenses: Added (+)
- (d) Decrease in income received in advance: Subtracted (-)
- (e) Decrease in value of inventory: Added (+)
- (f) Increase in share capital: NC (Not Considered - It is a financing activity)
- (g) Increase in the value of trade receivables: Subtracted (-)
- (h) Increase in the amount of outstanding expenses: Added (+)
- (i) Conversion of debentures into shares: NC (Not Considered - It is a non-cash financing and investing transaction)
- (j) Decrease in the value of trade payables: Subtracted (-)
- (k) Increase in the value of trade receivables: Subtracted (-)
- (l) Decrease in the amount of accrued income: Added (+)