In good question of making cash flow statement , the examiner must give you two year balance sheet of company , a profit and loss account and some additional information for making cash flow statement . With above three basic information you can easily make cash flow statement with direct or indirect method .
Here we are taking one practical question , then we solve it both direct method and indirect method. This question can be asked in CA , ICWA , MCA ,MCOM and MBA exams
The following is the abstract of balance sheet of Software securities ltd for the year 2005 and 2006
Liabities
Provision for depreciation 2005 –Rs. 108000 and 2006 –RS. 396000
Retained earning 244800 370800
9% debenture 270000 198000
Account payable 72000 41400
Expense payable 0 18000
Assets
Land 2005 - Rs. 126000 and 2006 - Rs. 81000
building 360000 360000
Accumulated depreciation
on building 19800 37800
Equipment 122400 347400
Accumulated depreciation on
equipement 18000 50400
stock in hand 10800 97200
Account receivable 36000 122400
cash in hand 66600 97200
Preliminary expenses 10800 7200
Question gives you also income statememtn of software securities ltd
Sales 1602000
less cost of sale 837000
less operating exp. 397800
less interest exp. 21600
loss on sale of equipments 3600
126000
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Net income before tax 342000
provision of tax 117000
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Net Income after tax 225000
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Additional information
1. Operating expenses include depreciation of rs. 59400 and charges from preliminary expenses of rs. 3600
2. Land was sold at its book value
3. cash dividend paid for the year 2006 amounted to rs. 27000 and fully paid bonus shares were given in the ratio of 2 shares for every 3shares held.
4. Interest expenses was paid in cash.
5. Equipment with a cost of rs .298800 was purchased for cash .Equipment with a cost of rs . 73800 ( book value rs. 64800) was sold for rs. 61200
6. Debenture for rs. 18000 were redeemed for cash and for rs.54000 were redeemed by converting into equity shares at par value.
7.Equity shares of rs. 162000 were issued for cash at par.
8. Income tax paid during the year amounted to rs. 117000
Prepare cash flow statement with
direct method
indirect method
Cash flow statement with direct method
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Particularv Amount Amount
--------------------------------------------------------------------------------------------------
A- catagory
Cash flow from operating
activity
Inflow of cash
Cash sale & amount from debtors
calculation
= sale + opening bal. of debtors -
closing balance of debtors
= 1602000+36000-122400= (+) 1515600
Any other operating income (+) nil
Less
Cash outflow
1. Cash purchase and amount paid to creditors
Calculation
= Cost of goods sold +opening creditors
-closing creditors =
= 837000+72000-41400= (-) 867600
2. Cash operating Expenses
Operating expenses as per profit and
Loss account -depreciation - preliminary exp.
- Outstanding expense closing
= 397800 - 59400 -3600 -18000 = (-) 316800
Out flow of stock
+ opening stock (-) 86400
-closing stock =10800-97200
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244800
Less income tax paid (-) 117000
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127800 127800
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B- Category
Cash flow from investing activity
Inflow of cash
1. sale of equipment (+) 298800
2.sale of land (+)45000
Less Cash outflow
1 cash paid for purchase of equipment (-) 298800
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192600 192600
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C- catagory
Cash flow of financing activity
Cash inflow
1. Issue of new shares (+) 162000
Less Cash outflow
1. Cash paid for redemption of deb. (-) 18000
2. Dividend paid (-) 27000
3. Interest Paid (-) 21600
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95400 95400
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Add opening cash balance + 66600
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Closing balance of cash 97200
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Cash flow statement with Indirect method
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Particularv Amount Amount
--------------------------------------------------------------------------------------------------
A-category
Cash flow of operating activity
1st Point
Net Profit before taxation and extraordinary
Items 342000
2nd Point
Add for non cash and non operating expenses
And losses
1. Depreciation 59400
2. Preliminary expenses written off 3600
3. Discount on issue of shares and deb. w/o nil
4. Goodwill written off nil
5. Patent and trade marks written off nil
6. Interest on borrowing and deb. 3600
7. Loss on sale of fixed assets 21600
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430200
3rd Point
Less non –cash and non operating incomes (-) nil
1. Dividend income(For non financial co.)
2. Rental income
3. Profit on sale of fixed asset
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4th point ( Ist point +2nd Point -3rd Point ) 430200
Adjustment of working capital changes
5th point
Add Decrease in current assets and increase in
Current liabilities (+) nil
1. Decrease in stock
2. Decrease in debtors
3. Decrease in accrued income
4. Decrease in prepaid expenses
5. Increase in creditors
6. Increase in bill payables
7. increase in outstanding expenses (+) 18000
8. Increase in advance incomes
9. Increase in provision for doubtfull debts
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448200
6th Point
Less increase in current assets and decrease in (-)
Current liabilities
1. Increase in stock 86400
2. Increase in debtors 86400
3. increase in accrued incomes nil
4. increase in prepaid expenses nil
5. decrease in creditors 30600
6. Decrease in bill payables nil
7. decrease in outstanding expenses nil
8. decrease in advance incomes nil
9. Decrease in provision for d/d nil
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244800
Less income tax paid (-) 117000
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127800 127800
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B- Category
Cash flow from investing activity
Inflow of cash
1. sale of equipment (+) 298800
2.sale of land (+)45000
Less Cash outflow
1 cash paid for purchase of equipment (-) 298800
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192600 192600
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C- catagory
Cash flow of financing activity
Cash inflow
1. Issue of new shares (+) 162000
Less Cash outflow
1. Cash paid for redemption of deb. (-) 18000
2. Dividend paid (-) 27000
3. Interest Paid (-) 21600
_____________________________________________________________________
95400 95400
________________________________________________
Add opening cash balance + 66600
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Closing balance of cash 97200
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