CASH FLOW STATEMENT: CASH FLOW FROM OPERATING ACTIVITY: EXAMPLES TO UNDERSTAND THE CALCULATION AND PRESENTATION

LEARNING OUTCOMES:

CASH FLOW STATEMENT:

CASH FLOW FROM OPERATING ACTIVITY

EXAMPLES, 

TO UNDERSTAND THE CALCULATION AND PRESENTATION

HELLO!
DEAR ANALYSTS,

HOW ARE YOU ALL TODAY?

LET"S REVISE THE STEPS TO PREPARE THE CASH FLOW FROM THE OPERATING ACTIVITY.
THESE STEPS ARE DIVIDED INTO 4 STAGES:

CALCULATION/ COMPUTATION OF  OF CASH FLOW FROM OPERATING ACTIVITY

Step 1: Compute Net Profit before Taxation and Extraordinary items:

For this we begin with Net Profit or Net Loss. If the balance of Profit and Loss Account increases, then it is shown as Net Profit, else in case of decrease it is shown as negative figure (in brackets) as Net Loss. Next, we need to Add the following items to the Net Profit.

1. Transfer to Reserve- The increase in the balance of Reserve from Previous Year to Current Year is added to the Net Profit.
2. Proposed Dividend- Proposed Dividend of the (Previous year) paid is added to the Net Profit
3. Interim Dividend- Interim Dividend given in the adjustment (i.e. paid during the year) is added to the Net Profit.
4. Provision for Taxation- Provision for Tax made during the Current year is also added to the Net Profit
5. Extraordinary items( debited to Statement of P/L)

1. Less:
2. Transfer to Reserve (Decrease)
3. Tax Refund (credited to Statement of P/L)
4. Extraordinary items (credited to Statement of  P/L)

Step 2: Compute Net Profit before Working Capital Changes- 

Add: Non-Cash and Non-Operating Losses and Expenses

1. 1. Depreciation- Amount of depreciation charged/provided during the year.
   2. Goodwill, Patents and Trade Marks Amortised (written-off)- The decrease in the value of Goodwill, Patents and Trade Marks from previous year to current year is added.
   3. Interest on Bank Overdraft/ Cash Credit
   4. Interest on Borrowings (Short - term/Long - term) and Debentures
   5. Premium on Redemption of Preference Shares/ Debentures
   6. Writing off Underwriting Commission/ Share Issue Expenses
   7. Loss on Sale of Fixed Assets/ Investments
   8. Increase in Provision for Doubtful Debts*

2. Deduct: Non-Cash and Non-Operating Incomes and Gains from the Net Profit before Taxation
1. Interest Received­
2. Dividend Received
3. Rent Received
4. Profit on Sale of Fixed Assets
5. Decrease in Provision for Doubtful Debts*

Step 3: Compute Cash Generated From Operations-

 Now, to the Net Profit before Working Capital Changes (ascertained in Step: 2), we need to:

1. Add: Decrease in Current Assets- (If Current Year’s Balance < Previous Year’s Balance)
2. Add: Increase in Current Liabilities- (If Current Year’s Balance > Previous Year’s Balance)
3. Deduct: Increase in Current Assets- (If Current Year’s Balance > Previous Year’s Balance)
4. Deduct: Decrease in Current Liabilities- (If Current Year’s Balance < Previous Year’s Balance)

1. Step 4: Compute Net Cash from (or used in) Operating Activities-
2.  Lastly, we need to consider Income Tax and Extra-ordinary Items. In order to get Net Cash from Operating Activities, we need to:
   1. Deduct: Income Tax paid
   2. Add:Income Tax Refund
   3. Add: Extraordinary Items that lead to cash inflows to the business due to operating items.
   4. Deduct: Extraordinary Items that lead to cash outflows from the business due to operating items.

NOW,

LET US TAKE FEW EXAMPLES TO UNDERSTAND THE CALCULATION AND COMPUTATION OF  CASH FLOW FROM OPERATING ACTIVITY

EXAMPLE 1.

1. Raj limited had a profit of ₹ 1750000 for the year ended 31st March, 2020 before writing of goodwill.
Depreciation on building                        ₹ 130000

Depreciation on plant and machinery    ₹ 40000 

Goodwill written off                                 ₹ 25000
Loss on sale of machinery                          ₹ 9000

Additional information:
                                     31st march 2019( ₹)             31st march 2020 (₹)

 Inventory                             70000                                  87000
Trade receivables                 67000                                  58000
Cash and cash equivalent    60000                                  75000
Trade payables                    111000                                106000

Outstanding salary                7000                                    4000

Calculate cash flow from operating activities.

ANS.

CALCULATION OF CASH FLOW FROM OPERATING ACTIVITIES :

PARTICULARS                                                  DETAILS ₹                 AMOUNT  (₹)

Net profit before tax and extraordinary items               17,50000 

Add:

Depreciation on building                                                   130000

Depreciation on plant and machinery                               40,000  

Loss on sale of machinery                                                    9000 
_____________________________________________________________

Operating profit before working capital changes          1929000 

Less: Increase in inventories                                            (17000) 

Add: Decrease in trade receivables                                     9000 

Less: Decrease in trade payables                                      (5000)

Less: Decrease in outstanding salary                               (3000) 
_____________________________________________________________

Net Cash generated from operating activities                 1913000

EXAMPLE  2

X limited made a profit of  ₹ 100000 after considering the following items:

Depreciation on fixed assets                       ₹ 20,000
Writing of preliminary expenses               ₹  10000
Loss on sale of furniture                             ₹    1000
Provision for taxation                                 ₹ 160000
Transfer to general reserve                        ₹   14000
Profit on sale of machinery                        ₹    6,000

Additional information:

Items                                                31st march 2019 ( ₹)     31st march 2020  (₹)

Debtors                                             24000                        30,000
Creditors                                           20000                        30000
Bills receivable                                 20000                         17000
Bills payable                                     16000                         12000
Prepaid expenses                                  400                            600

Calculate cash flow from operating activities, if tax paid during the year was    ₹ 120000

ANS.

Calculation of cash flow from operating activities 

Particulars                                                          Detail (₹)                         Amount  (₹)

Net profit before tax and extraordinary item (Note 1)        274000

Add: Depreciation on fixed assets                                            20000 
Add: Preliminary expenses written off                                    10000 
Add: Loss on sale of furniture                                                    1000 

Less: profit on sale of machinery                                             (6,000)  
_______________________________________________________________

Operating profit before working capital changes                   299000

Add: Increase in creditors                                                           10000 

Add: Decrease in bills receivable                                                  3000 

Less: Increase in debtors                                                              (6000)

Less Decrease in bills payable                                                      (4000) 

Less: Increase in prepaid expenses                                                (200) 
_______________________________________________________________

Cash generated from operations before tax                               301800 

Less: Tax paid                                                                              (120000)
_______________________________________________________________

Net cash from operating activities                                               181800

Working Notes:
 1. Net profit before tax = Net profit after appropriations + provision for tax + transfer to general reserve 

100000 + 160000 + 14000 = 274000