CASH FLOW STATEMENT: CASH FLOW FROM OPERATING ACTIVITY CONTINUED WITH FURTHER EXAMPLES
LEARNING OUTCOMES:
CASH FLOW FROM OPERATING ACTIVITY
EXAMPLES,
TO UNDERSTAND THE CALCULATION AND PRESENTATION
HELLO BOYS!
HOW ARE YOU ALL DOING?
HOW ARE YOU ALL DOING?
WE ARE LEARNING TO COMPUTE OR CALCULATE CASH FLOW FROM THE OPERATING ACTIVITY.
ITS A LONG ACTIVITY, DIVIDED INTO 4 STAGES.
THEREFORE THE STEPS ARE GIVEN FOR REFERENCE, BELOW. (THESE STEPS ARE TO BE LEARNT)
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.
- Transfer to Reserve- The increase in the balance of Reserve from Previous Year to Current Year is added to the Net Profit.
- Proposed Dividend- Proposed Dividend of the (Previous year) paid is added to the Net Profit
- Interim Dividend- Interim Dividend given in the adjustment (i.e. paid during the year) is added to the Net Profit.
- Provision for Taxation- Provision for Tax made during the Current year is also added to the Net Profit
- Extraordinary items( debited to Statement of P/L)
- Less:
- Transfer to Reserve (Decrease)
- Tax Refund (credited to Statement of P/L)
- 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
- Depreciation- Amount of depreciation charged/provided during the year.
- 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.
- Interest on Bank Overdraft/ Cash Credit
- Interest on Borrowings (Short - term/Long - term) and Debentures
- Premium on Redemption of Preference Shares/ Debentures
- Writing off Underwriting Commission/ Share Issue Expenses
- Loss on Sale of Fixed Assets/ Investments
- Increase in Provision for Doubtful Debts*
- Deduct: Non-Cash and Non-Operating Incomes and Gains from the Net Profit before Taxation
- Interest Received
- Dividend Received
- Rent Received
- Profit on Sale of Fixed Assets
- 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:
- Add: Decrease in Current Assets- (If Current Year’s Balance < Previous Year’s Balance)
- Add: Increase in Current Liabilities- (If Current Year’s Balance > Previous Year’s Balance)
- Deduct: Increase in Current Assets- (If Current Year’s Balance > Previous Year’s Balance)
- Deduct: Decrease in Current Liabilities- (If Current Year’s Balance < Previous Year’s Balance)
- Step 4: Compute Net Cash from (or used in) Operating Activities-
- Lastly, we need to consider Income Tax and Extra-ordinary Items. In order to get Net Cash from Operating Activities, we need to:
- Deduct: Income Tax paid
- Add:Income Tax Refund
- Add: Extraordinary Items that lead to cash inflows to the business due to operating items.
- Deduct: Extraordinary Items that lead to cash outflows from the business due to operating items.
NOW,
WILL TAKE SOME MORE EXAMPLES TO UNDERSTAND THE CALCULATION AND COMPUTATION OF CASH FLOW FROM OPERATING ACTIVITY.
TASK# 2
GO THROUGH THE EXAMPLES CAREFULLY TO UNDERSTAND THE TOPIC.
EXAMPLE 1
The following is a statement of profit and loss account of Yamuna
limited:
Statement of profit and loss of Yamuna limited for the year ended 31st
march 2020
PARTICULARS AMOUNT ( ₹)
I.Revenue from operations 10,00,000
II.Expenses:
* Cost of materials consumed 50000
PARTICULARS AMOUNT ( ₹)
I.Revenue from operations 10,00,000
II.Expenses:
* Cost of materials consumed 50000
*Purchase
of stock in trade 500000
* Depreciation 25000
* Other expenses 275000
* Depreciation 25000
* Other expenses 275000
________________________________________________
Total expenses 850000
Total expenses 850000
________________________________________________
III.Profit before tax 150000
III.Profit before tax 150000
________________________________________________
ADDITIONAL INFORMATION :
1. Trade receivables decrease by 30,000 during the year.
2. Prepaid expenses increased by 5,000 during the year.
3. Trade payables increase by 15,000 during the year.
4. Outstanding expenses payable increased by 3000 during the year
Compute net cash from operations
for the year ended 31st march 2020 by the indirect method.
SOLUTION:
Calculation of cash flow from operating activities:
Particulars Details(₹) Amount (₹)
_____________________________________________________________________
_____________________________________________________________________
Net Profit before Tax and Extraordinary Items 150000
Add: Depreciation 25,000
______________________________________________________
______________________________________________________
Operating Profit before working capital changes 175000
Add: Decrease in trade receivables 30,000
Less: Increase in prepaid expenses (5000)
Add: Increase in trade payables 15,000
Add: Increase in outstanding expenses 3000
_____________________________________________________________________
_____________________________________________________________________
Net cash from operating activities 218000
_____________________________________________________________________
_____________________________________________________________________
EXAMPLE 2
From the following information calculate cash flow from operating activities.
Show your working clearly.
PARTICULARS 31-3-2019 31-3-2020
Amount( ₹) Amount( ₹)
Surplus (i.e Balance in the Statement of P&L ) 71000 89000
Surplus (i.e Balance in the Statement of P&L ) 71000 89000
Inventory 12000 4000
Trade receivables 58000 45000
Outstanding expenses 14600 10000
Trade receivables 58000 45000
Outstanding expenses 14600 10000
Goodwill 57000 27000
Cash in hand 9000 12000
Machinery 82000 56000
Cash in hand 9000 12000
Machinery 82000 56000
1. A piece of machinery costing ₹ 50000 on which depreciation of ₹ 20000 had been charged was sold for ₹10000. Depreciation charged during the year was ₹ 18000.
2. Income tax ₹ 23000 was paid during the year.
3. Dividend paid during the year was ₹ 36000.
SOLUTION:
Calculation of cash flow from operating activities:
Particulars Details (₹) Amount (₹)
Net Profit before Tax and Extraordinary Items (Note 1) 77000
Add: Depreciation on machinery 18000
Add: Loss on sale of machinery 20000
Add: Goodwill written off 30000
_________________________________________________________
_________________________________________________________
Operating Profit before working capital changes 145000
Add: Decrease in inventory 8,000
Add: Decrease in trade receivables 13,000
Add: Decrease in trade receivables 13,000
Less: Decrease in outstanding expenses (4600)
_________________________________________________________
_________________________________________________________
Cash generated from operations before tax 161400
Less: Income Tax paid (23000)
_____________________________________________________________________________
_____________________________________________________________________________
Net cash from operating activities 138400
_____________________________________________________________________________
_____________________________________________________________________________
Working Notes:
1. Net profit before tax = Net profit after appropriations (difference in Balance of Statement of Profit and Loss of current year and previous year) + Provision for tax + Dividend paid
1. Net profit before tax = Net profit after appropriations (difference in Balance of Statement of Profit and Loss of current year and previous year) + Provision for tax + Dividend paid
= 18000 + 23000 + 36000 = 77000
MACHINERY ACCOUNT
Particulars Amount (₹) Particulars Amount (₹)
To balance b/d 82000 By Depreciation 18000
To Bank A/c (purchase) 1200000 By Bank A/c (sale) 10000 (balancing figure) By Loss on sale of machinery 20,000
By Balance c/d 56000
_______________________________________________________________________________
_______________________________________________________________________________
104000 104000
_______________________________________________________________________________
EXAMPLE 3
Following is a Statement of Profit and Loss for the year ending 31st March 2020
I.Revenue from operations 1 4000000
II. Other income 2 2100000
Note no. Particulars Amount ( ₹)
1. Revenue from operations
Cash revenue from operations 800000
Credit revenue from operations 3400000
Less: Returns (200000)
Trading commission 2040000
Cost of materials consumed paid in cash 400000
Cost of materials consumed bought on credit 1700000
Less: Returns (100000)
Opening inventory 200000
Less closing inventory (100000)
Administrative expenses 1000000
SOLUTION:
_______________________________________________________________________________
EXAMPLE 3
Following is a Statement of Profit and Loss for the year ending 31st March 2020
Particulars
Note No. Amount ( ₹)
I.Revenue from operations 1 4000000
II. Other income 2 2100000
_________________________________________________________
III.Total Revenue 6100000
_________________________________________________________
IV.Less Expenses:
* Cost of materials consumed 3 2000000
* Changes in inventories of finished goods 4 100000
* Depreciation and amortization expense 5. 380000
* Finance cost 6 40000
* Other expenses 7 1200000
IV.Less Expenses:
* Cost of materials consumed 3 2000000
* Changes in inventories of finished goods 4 100000
* Depreciation and amortization expense 5. 380000
* Finance cost 6 40000
* Other expenses 7 1200000
_________________________________________________________
Total expenses 3720000
_________________________________________________________
V.Profit before tax
2380000
VI.Less Tax 800000
VI.Less Tax 800000
_________________________________________________________
VII.Profit after tax 1580000
_________________________________________________________
Notes to accounts :
Notes to accounts :
Note no. Particulars Amount ( ₹)
1. Revenue from operations
Cash revenue from operations 800000
Credit revenue from operations 3400000
Less: Returns (200000)
__________
4000000
__________
2.
Other Income
Trading commission 2040000
Discount received
from suppliers 60000
___________
2100000
2100000
___________
3 Cost of materials consumed
3 Cost of materials consumed
Cost of materials consumed paid in cash 400000
Cost of materials consumed bought on credit 1700000
Less: Returns (100000)
____________
2000000
2000000
____________
4. Changes in inventories of finished goods
Opening inventory 200000
Less closing inventory (100000)
____________
100000
100000
____________
5. Depreciation and amortization expenses
Depreciation on fixed assets 280000
5. Depreciation and amortization expenses
Depreciation on fixed assets 280000
Goodwill written off 100000
____________
380000
380000
____________
6. Finance cost
Interest on debentures 40000
Interest on debentures 40000
___________
7. Other expenses
7. Other expenses
Administrative expenses 1000000
Discount allowed to
customers 100000
Bad debts 100000
Bad debts 100000
___________
1200000
1200000
___________
Additional information :
31st march 2019 31st march 2020
Additional information :
31st march 2019 31st march 2020
Trade receivables
2000000 4000000
Trade payables
2000000 1000000
Other expenses payable (administrative ) 10000 20000
Prepaid administrative expenses 20,000 10,000
Outstanding trading expenses 20,000 40,000
Advanced trading expenses 40,000 20,000
Provision for taxation / Income tax outstanding 1000000 1200000
Prepaid administrative expenses 20,000 10,000
Outstanding trading expenses 20,000 40,000
Advanced trading expenses 40,000 20,000
Provision for taxation / Income tax outstanding 1000000 1200000
Ascertain Cash from
operations. show your working clearly.
Calculation of cash flow from operating activities:
Particulars Details (₹) Amount (₹)
Net Profit before Tax and Extraordinary Items 2380000
Add: Depreciation on fixed assets 280000
Add: Goodwill written off 100000
Add:Finance Cost ( interest on debentures) 40000
______________________________________________________________
______________________________________________________________
Operating Profit before working capital changes 2800000
Less: Increase in trade receivables (2000000)
Less: Decrease in trade payables (1000000)
Add: Increase in administrative expenses payable 10000
Add: Decrease in prepaid administrative expenses payable 10000
Add: Increase in outstanding trading expenses 20000
Add: Decrease in advance trading expenses 20000
Add: Decrease in inventories of finished goods 100000
_______________________________________________________________
_______________________________________________________________
Cash used in Operations before Tax (40,000 )
Less: Income Tax paid (600000)
____________________________________________________________________________
____________________________________________________________________________
Net cash used in operating activities ( 640000)
____________________________________________________________________________
____________________________________________________________________________
Working Notes:
1. Provision for tax account
1. Provision for tax account
Particulars Amount ₹ Particulars Amount ₹
To Bank A/ c (Tax paid) (Bal fig.) 600000 By Balance b/d 1000000
To Balance c/d 1200000 By Statement of Profit and Loss 800000
(Tax provision of current year)
_________ _________
(Tax provision of current year)
_________ _________
1800000 1800000
__________ __________
__________ __________
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