CHAPTER 5 : CASH FLOW STATEMENT, ANSWERS TO THE PA 1 EXAM

21st  May, 2020

Day 4

12B 2nd & 6th &12A 3rd & 7th period  

ATTENDANCE WILL BE ON THE BASIS OF PA EXAM

LEARNING OUTCOMES:

TO BE ABLE TO UNDERSTAND:

THE COMPLETE FORMAT OF THE CASH FLOW STATEMENT.

THE OPERATING , INVESTING AND FINANCING ACTIVITIES

PUT TOGETHER IN THE CASH FLOW STATEMENT.


TASK # 1

EXAMPLES OF THE FULL FLEDGED QUESTIONS ON CASH FLOW STATEMENT 

Name of the Company

CASH FLOW STATEMENT (as per AS-3 Revised) for the year ending 31st March, 2020

Particulars	Details (`)	Amount (`)
I.    CASH FLOWS FROM OPERATING ACTIVITIES Net Profit/Loss before Tax and Extraordinary Items Add: Non-cash and non-operating expenses for which deductions already made in Statement of Profit and Loss •   Depreciation •   Intangible Assets amortised (Goodwill, Patents, etc. written-off) •   Loss on sale of fixed assets or non-current assets •   Finance cost (Interest paid on long-term borrowings) •   Preliminary expenses written off •   Discount/loss on issue of debentures written off •   Provision made for doubtful debts •   Premium on redemption of debentures Less: Non-operating incomes for which additions already made in Statement of Profit and Loss •   Interest income •   Dividend income •   Rental income •   Profit on sale of fixed assets or non-current assets •   Excess provision for depreciation written back •   Excess provision for doubtful debts written back	xxx or (xxx)
	xxx
	xxx
	xxx
	xxx
	xxx
	xxx
	xxx
	xxx
	(xxx)
	(xxx)
	(xxx)
	(xxx)
	(xxx)
	(xxx)
Operating Profit before working capital changes Add: •   Decrease in current assets (other than current investments, cash and cash equivalents and short-term loans and advances) •   Increase in current liabilities (other than short-term borrowings and short- term provisions) Less: •   Increase in current assets (other than current investments, cash and cash equivalents and short-term loans and advances) •   Decrease in current liabilities (other than short-term borrowings and short- term provisions)	xxx or (xxx)
	xxx
	xxx
	(xxx)
	(xxx)
Cash Generated from (or used in) Operating Activities before Tax and Extraordinary Items	xxx or (xxx)
Less: Income Tax paid (Tax on normal profits/operating profits)	(xxx)
Add: Income Tax Refund received	xxx
Cash Generated from (or used in) Operating Activities after Tax but before Extraordinary Items	xxx or (xxx)
+/– Effects of Extraordinary Items (e.g. insurance proceeds from earthquake disaster settlement will be added whereas loss due to theft will be subtracted	xxx or (xxx)
A. Net Cash from (or used in) Operating Activities		xxx or (xxx)

II.    CASH FLOWS FROM INVESTING ACTIVITIES (i)   Proceeds from Sale of Tangible Fixed Assets (ii) Proceeds from Sale of Non-Current Investments (iii)Interest received, Dividend received and Rent received (iv) Purchase of Fixed Tangible Assets and Intangible Assets like goodwill (v)  Purchase of Non-Current Investments (vi) Capital Gain Tax paid	xxx xxx xxx (xxx) (xxx) (xxx)
B. Net Cash from (used in) Investing Activities		xxx or (xxx)
III.    CASH FLOWS FROM FINANCING ACTIVITIES (a) Proceeds from issue of Share Capital (both equity and preference shares) (b) Proceeds from Long-term Borrowings (e.g., debentures, bonds, long-term loan from bank, x% deposits) (c) Securities Premium Reserve (Premium on issue of shares or debentures) (d) Proceeds from Bank Overdraft raised (e) Redemption of Debentures or Preference Shares (including premium on redemption) (f)  ) Repayment of Long-term Loan from Bank/x% Deposits (g) Buy Back of Equity Shares (h) Dividend Paid (both final dividend and interim dividend) (i) Interest on Long-term Borrowings Paid (e.g. interest on debentures, long- term loan from bank, x% deposits) (j) Dividend Tax paid	xxx xxx xxx xxx (xxx) (xxx) (xxx) (xxx) (xxx) (xxx)
C. Net Cash from (used in) Financing Activities		xxx or (xxx)
NET INCREASE (OR DECREASE) IN CASH & CASH EQUIVALENTS (A+B+C) Add: Cash and Cash Equivalents in the beginning Cash in hand Cash at bank Current Investments (marketable securities)	xxx xxx xxx	xxx xxx
Cash and cash Equivalents at the end of the year Cash in hand Cash at bank Current Investments (marketable securities)	xxx xxx xxx	xxx

THE ABOVE FORMAT IS OF THE CASH FLOW STATEMENT AS PER ACCOUNTING 

STANDARD -3 (REVISED)

EXAMPLE  - 1

From the following Balance Sheet of Yogeta Ltd., prepare cash flow statement. Show your workings clearly.

Particulars	Note No.	31.3.2020 (`)	31.3.2019 (`)
I.          EQUITY AND LIABILITIES 1.       Shareholders’ Funds (a)   Share capital (b)   Reserve and surplus 2.       Non-current Liabilities Long-term borrowings (10% Bank loan) 3.       Current Liabilities (a)   Short-term borrowings (Bank overdraft) (b)   Trade payables (c)    Short-term provision (Provision for tax)		4,00,000	2,00,000
	1	2,00,000	1,00,000
		1,50,000	2,20,000
		1,00,000	–
		70,000	50,000
		50,000	30,000
Total		9,70,000	6,00,000
II.       ASSETS 1.       Non-current assets (a) Fixed assets Tangible (plant and machinery) 2.       Current assets (a)  Inventories (b)  Trade Receivables (c)  Cash and cash equivalents		7,00,000	4,00,000
		1,70,000	1,00,000
		1,00,000	50,000
		–	50,000
Total		9,70,000	6,00,000

Notes to Accounts:

Particulars	31.3.2020 (`)	31.3.2019 (`)
1.    Reserves and surplus Balance in Statement of Profit and Loss General Reserve	1,50,000 50,000	80,000 20,000
	2,00,000	1,00,000

Additional Information:

1.    Net Profit for the year after charging depreciation on plant and machinery `50,000 was `1,50,000.

2.    Tax Provision created during the year amounted to `60,000.

3.    Bank loan was repaid on 1.4.2019 and Interim dividend was also paid.

Solution: Cash Flow Statement of Yogeta Ltd. for the year ending 31 March 2020

Particulars	Details (`)	Amount (`)
I.    CASH FLOWS FROM OPERATING ACTIVITIES
Net Profit before Taxation and Extraordinary Items (Note 3)	2,10,000
Adjustments for Non-Cash and Non-Operating Items
(+) Depreciation on plant and machinery	50,000
(+) Interest on bank loan (10% of `1,50,000)	15,000
= Operating Profit before working capital changes	2,75,000
(–) Increase in Inventories	(70,000)
(–) Increase in Trade Receivables	(50,000)
(+) Increase in Trade Payables	20,000
= Cash generated from operations before tax	1,75,000
Less: Income tax paid (Note 1)	(40,000)
A.   Net Cash from Operating Activities		1,35,000

II. CASH FLOWS FROM INVESTING ACTIVITIES Purchase of plant and machinery (Note 4)	(3,50,000)
B.   Net Cash used in Investing Activities		(3,50,000)
III. CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of shares Repayment of bank loan Interest on bank loan Bank overdraft raised Interim dividend paid (Note 2)	2,00,000 (70,000) (15,000) 1,00,000 (50,000)
C. Net Cash from Financing Activities		1,65,000
NET DECREASE IN CASH AND CASH EQUIVALENTS (A+B+C) Add: Opening cash and cash equivalents		(50,000) 50,000
Closing cash and cash equivalents		0

Working Notes:

1.        Dr.                                            Provision for TAX A/c                                                                     Cr.

Particulars	Amount (`)	Particulars	Amount (`)
To Bank A/c (Tax paid) To Balance c/d	40,000 50,000	By Balance b/d By Statement of Profit & Loss (tax provision made during the current year)	30,000 60,000
	90,000		90,000

2.         Calculation of Interim Dividend paid:                                               (`)

Net Profit for the year (after tax)                                      1,50,000

Less: Transfer to General Reserve                                (30,000)

Less: Interim dividend paid (Bal. fig.)                              (50,000)

Net profit after appropriations (1,50,000  – 80,000)       70,000

3.   Calculation of Net Profit before Tax:

(`)

Net Profit after appropriations (1,50,000  – 80,000)       70,000

Add: Transfer to General Reserve (50,000 – 20,000)   30,000

Add:  Interim dividend paid                                                50,000

2,10,000

Alternately, Net profit before tax = Net profit after tax + Provision for tax

= 1,50,000 + 60,000

= `2,10,000

4.       Dr.                                           Plant and Machinery A/c                                                                 Cr.

Particulars	Amount (`)	Particulars	Amount (`)
To Balance b/d To Bank A/c (purchase) (Bal. fig.)	4,00,000 3,50,000	By Depreciation By Balance c/d	50,000 7,00,000
	7,50,000		7,50,000

EXAMPLE - 2

From the following Balance Sheet of Computer India Ltd., prepare cash flow statement.

Particulars	Note No.	31.3.2020 (`)	31.3.2019 (`)
I.      EQUITY AND LIABILITIES 1.    Shareholders’ Funds (a)          Share capital (b)          Reserve and surplus 2.    Non-Current Liabilities Long-term borrowings (10% Debentures) 3.    Current liabilities (a)          Short-term borrowings (bank overdraft) (b)          Trade payables (c)           Short-term provisions		50,000	40,000
	1	3,700	3,000
		6,500	6,000
		6,800	12,500
		11,000	12,000
	2	10,000	8,000
Total		88,000	81,500

II.    ASSETS 1.    Non-current assets (a)          Fixed assets -  Tangible (Machinery) 2.    Current assets (a)          Inventories (b)          Trade receivables (c)           Cash and cash equivalents–cash (d)          Short-term loans and advances	3
		25,000	30,000
		35,000	30,000
		24,000	20,000
		3,500	1,200
		500	300
Total		88,000	81,500

Notes to Accounts:

Particulars	31.3.2020 (`)	31.3.2019 (`)
1. Reserve and surplus	1,300 (100)	1,000 –
Statement of Profit and Loss Less: Discount on issue of 10% debentures
General reserve	1,200 2,500	1,000 2,000
	3,700	3,000
2. Short-term provisions
Provision for tax	8,000	5,000
Provision for doubtful debts	2,000	3,000
	10,000	8,000
3. Tangible Assets:
Machinery	40,000	41,000
Less: Accumulated Depreciation	(15,000)	(11,000)
	25,000	30,000

Additional Information:

Interest paid on Debenture `600

Solution:   

  Cash Flow Statement of Computer India Ltd. for the year ending 31 March 2020

Particulars	Details (`)	Amount (`)
I.     Cash Flows from Operating Activities:
Net Profit before Taxation and Extraordinary Items (Note 1.)	8,700
Adjustments for:
(+) Depreciation	4,000
(+) Interest paid on Debentures	600
(+) Discount on issue of 10% debentures written off	100
(–) Excess provision for doubtful debts written back	(1,000)
= Operating Profit before working capital changes	12,400
(–) Decrease in Trade Payables	(1,000)
(–) Increase in Inventories	(5,000)
(–) Increase in Trade Receivables	(4,000)
= Cash generated from Operations before tax	2,400
(–) Income tax paid	(5,000)
A.    Net Cash used in Operating Activities		(2,600)

II.    Cash Flows from Investing Activities: Sale of Machinery Short-term loans and advances given (500–300)	1,000 200
B.    Net Cash from Investing Activities		800
III. Cash Flows from Financing Activities: Interest paid on debentures Proceeds from issue of shares Issue of Proceeds from 10% Debentures at a discount of 20% (500 – 100) Repayment of Bank Overdraft	(600) 10,000 400 (5,700)
C.    Net Cash from Financing Activities		4,100
Net Increase in cash and cash equivalents (A+B+C) (+) Opening cash and cash equivalents		2,300 1,200
Closing cash and cash equivalents		3,500

Workings Notes:

Calculation of Net Profit before Tax:	(`)
Net Profit after appropriations (1,200 – 1,000)	200
Add: Transfer to General Reserve (2,500 –2,000)	500
Add: Provision for Tax	8,000
	8,700

Top Tips

1. For calculating cash flows from operating activities, short-term loans and advances given is not treated as current asset while making adjustments related to working capital changes. 

2. Discount on issue of 10% debentures `100 has been written off in the same year out of Statement of Profit and Loss. It will be added back to net profit for calculating cash flows from operating activities since it is a financing activity. While calculating cash flow from financing activities net proceeds from issue of 10% debenture, i.e. `500 – `100 = `400 will be shown as cash inflow.

3.   Provision for doubtful debts is decreasing from `3,000 to `2,000, i.e. excess provision for doubtful debts written back 1,000. It resulted in increase in net profit by `1,000. However, it is a Non-cash expense and did not result in any cash inflow. Therefore, `1,000 will be deducted from net profit while calculating cash flow from operating activities.

THE ABOVE MATTER IS TAKEN FROM THE TEXT BOOK OF SUBHASH DEY.



TASK # 2


CHECK THE ANSWERS TO PA#  1 EXAM

PA 1 class 12

Section A

MCQ' or T/ F

1.  If current ratio of a company is 2:1. Redemption of debentures for cash will 

reduce the current ratio of the company.

True False

Ans. False

2. Calculate Operating Profit Ratio if Revenue from operations is  ₹ 500000, 

Operating Profit is     ₹ 75000.

25% 12% 13.3 3% 15%

Ans. 15%

3.  Current ratio is a part of Activity ratio.

True False

Ans. False

4.  Gross profit helps in fixing selling prices and assessing efficiency of trading

 activities.

  True False
 
  Ans. True

  5.  In calculating Debt to Equity Ratio, all external debts are considered.

  True False
 
  Ans. False

  6. in a Company's Balance Sheet, Debit (Negative) balance of Statement of Profit 

and Loss is shown under:

Non - current liabilities Current liabilities Non current assets Reserves and surplus

Ans Reserve and Surplus

7. Cash and Cash Equivalents' does not include:

Cheques   Balances with banks 

Bank deposits with more than 12 months maturity  Inventories

Ans. Inventories

8. Which of the following is not a limitation of Financial Statement Analysis:

Ignores the Qualitative Elements 

Not free from personal bias 

Intra - firm Comparison

 Ignores the price level changes

Ans. Intra firm Comparison

9. Which of the following transactions will not result in flow of cash:

Issue of equity shares of ₹ 100000 Purchase of machinery of ₹ 175000 

Redemption of 9% debentures ₹ 350000 Cash deposited into Bank  ₹ 15000

Ans. Cash deposited with bank

10.Which of the following transactions will result into flow of cash? 

Deposited ₹ 40000 into bank Withdrew cash from bank ₹54000

Sold marketable securities of ₹25000 at par  

Sold machinery of book value  ₹50000 at a gain of ₹ 10000

Ans. sold machinery of book value is 50000 at a gain of rupees 10000

Section B

1. The proprietary ratio of M. limited is 0.80 : 

1. State whether the following transaction will increase, decrease or not change the 

proprietary ratio:

Purchased machinery for cash ₹75000.

Ans. Not change

2.  If Revenue from operation is  ₹600000 and gross profit is 20% of cost of revenue 

from operations.

 What will be the gross profit ratio?

Ans.16.67%

3. Under what Sub-head 

'Bank Overdraft' 

will appear in the Balance sheet of a Company as per Schedule III, part 1 of the 

Companies act, 2013?

Ans. Short term borrowings

4. Common - size Balance Sheet shows the percentage relation of each asset / 

equity and liability to ______.

Ans. Total assets/ total of equity and liabilities

5. Comparison of values of two firms is called ______comparison.

Ans. Inter- firm comparison.

6. Give two examples of cash equivalents.
 
Ans. Any two

7. State 'Sale of goods against cash' would result in inflow outflow or no flow of

 cash and cash equivalents.

  

Ans. Inflow
  

8. Gross profit ratio of a company is 25%. State 'Purchase of stock in trade ₹ 50000' 

will increase, decrease or not change the Gross Profit Ratio.

Ans.No change

9. State  whether the  Proposed dividend will result in inflow, outflow or no flow of 

cash or cash equivalents

No flow

10. State  whether the Refund of tax.  will result in inflow, outflow or no flow of cash 

or cash equivalents.

Ans. Inflow

Section C

1. Non current assets of a firm are  ₹  2600000, Current assets are ₹  900000 and 

Shareholders' Funds are  ₹  2150000. Total debts of the firm will be:

Ans. 13,50000

  2. Revenue from operations    ₹ 250000, Gross profit ratio 40%, Operating 

expenses 

₹ 60,000. The Operating profit ratio will be:

Ans.16%

3. If opening inventory is     ₹  120000. Cost of revenue from operation is                    

₹ 1000000 and Inventory turnover ratio is 5 times, then Closing Inventory will be:

Ans.   ₹ 280000

4. Fixed assets of a company increased from ₹ 300000 to  ₹400000. What  is the 

percentage of change in comparative balance sheet.

Ans. 33.3%

5. Total assets of of the firm are ₹20lakh  and its fixed assets are ₹8 lakh what will 

be the percentage of current assets to total assets?

Ans. 60%

  6. What will be the Operating profit ratio, if Operating ratio is 82.59%?

Ans. 17.41%

7. A company's working capital is ₹10 lakh (negative balance) in the year 2018. It 

became ₹15 lakh( positive balance) in the year 2019. What is the percentage of 

change in comparative statements.

Ans. 250%

8.Revenue from operations i.e. Net sales ₹ 600000, Net Profit ₹ 60000. Calculate Net 

Profit Ratio.

  Ans. 10%

9. Net profit before Interest and Tax ₹ 250000, Capital Employed  ₹  10 lakh. 

Calculate Return on Investment.

 
Ans. 25%
 

 10. From the following information relating to year ended 31st March 2020, 

calculate 

Net Profit before Tax and Extraordinary items:

Surplus, i.e Balance in Statement of Profit and Loss (opening) 200000 Surplus, 

Balance in Statement of Profit and Loss (closing) 672000 Transfer to Debentures 

Redemption Reserve (DRR) ₹ 200000

Proposed Dividend for the previous year ended 31st March 2019 ₹180000

Interim Dividend paid during the year ₹ 144000

Provision for Tax made during the current year ₹200000

Income Tax paid ₹ 216000

Ans. NP before tax and extraordinary items  ₹11,96,000