2. CHAPTER # 5 :CASH FLOW STATEMENT: CASH FLOW FROM OPERATING ACTIVITIES, ASSIGNMENT # 1

LEARNING OUTCOMES:

* SUMMARY OR THE RECAP OF THE THE MATERIAL GIVEN ON CASH FLOW STATEMENT IN THE PRIOR CLASS

* COMPUTATION OF CASH FLOW FROM OPERATING ACTIVITIES

CASH FLOW STATEMENT:

 Is a statement that shows the inflow (receipts) and outflow (payments) of cash and cash equivalents.

 Cash and cash equivalents include: cash, bank balance, marketable securities, short term deposits, current Investments, commercial papers, treasury bills, preference shares if redeemable within 3 months from the date of purchase.

 Cash Flow is shown under three heads:

 Operating Activities, Investing Activities, Financing Activities.

CASH FLOW FROM OPERATING ACTIVITIES:

 OPERATING ACTIVITIES:

 Operating Activities are principal revenue producing activities that determine Net profit or loss.

  Note:

  * Movement between cash and cash equivalents are not cash flow.

  * Non cash transactions are not considered like depreciation and amortization, issue of bonus shares, issue of debentures / shares for consideration other than cash etc.

  Operating activities (for Non Financial Firms)

   Inflow

   1. Cash Sales 

   2. Cash received from Trade Receivables 

   3. Royalty Fee, Commission received 

   4. Income Tax Refund

Outflow

 1. Cash Purchases

 2.  Payment to Trade Payables

 3.  Payment of Operating Expenses

 4.  Payment of Wages 

 5. Income Tax paid

Operating activities (for Financial Firms)

 Inflow

 1. Receipts of Interest and Dividend

 2.  Proceeds from Sale of Securities

 3. Loans and Advances repaid by third parties

Outflow

1. payment of Interest 

2. Payment for Purchase of Securities

3. Loans and Advances to third parties

Indirect Method of Calculating Cash Flow from Operating Activity:

Step 1

Determine Net Profit before Tax and Extraordinary Items.

Difference between Closing balance and Opening balance of Surplus, i.e. Balance in Statement of Profit and Loss (under Reserves and Surplus)
Add:

Dividend (proposed of previous year) paid during the year 

Interim dividend paid during the year

Transfer to Reserves (say General Reserve) 

Provision for Tax made during the year 

*Extraordinary items debited as expenses to Statement of Profit and Loss

Less:

 Refund of Income Tax credited as income to Statement of Profit and Loss 

 *Extraordinary items credited as income to Statement of PROFIT and LOSS

 Net Profit before Tax and Extraordinary items


TASK # 1

WATCH THE POWERPOINT PRESENTATION GIVEN BELOW:

CLICK BELOW ON THE LINK:

POWERPOINT PRESENTATION ON CASH FLOW FROM OPERATING ACTIVITIES LINK

EXAMPLES:

1. FOLLOWING IS THE EXTRACT OF BALANCE SHEET OF KBC LIMITED:

EQUITY AND LIABILITIES                                    31ST MARCH 2020 (₹)31ST MARCH 2019 (₹)

SURPLUS i.e. BALANCE IN STATEMENT OF P/ L           800000                                500000 

DIVIDEND PROPOSED FOR THE YEAR ENDED 31ST MARCH, 2019 AND 2020 WERE          ₹ 300000 AND ₹ 350000 RESPECTIVELY. 

PREPARE THE NOTE TO SHOW NET PROFIT BEFORE TAX AND EXTRA ORDINARY ITEMS.

Ans.

Calculation of Net Profit before Tax and Extraordinary Items:                                        ₹

Surplus,i.e. Balance in Statement of Profit and Loss (Closing)                                    800000
 Less: Surplus i.e. Balance in Statement of Profit and Loss (Opening)                        500000 
                                                                                                                                      ________

                                                                                                                                       300000 

Add  Proposed Dividend of the previous year                                                               300000
                                                                                                                                       ________

Net Profit before Tax and Extraordinary Items:                                                             600000

2. From the following information relating to your ended 31st March 2020, Calculate Net Profit before Tax and Extraordinary Items:

 Particulars                                                                                                      ₹ 

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

Surplus,i.e. Balance in Statement of Profit and Loss (Closing)                 672000 
Transfer to Debentures Redemption Reserve                                             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.

CALCULATION OF NET PROFIT BEFORE TAX AND EXTRAORDINARY ITEMS

Particulars                                                                                                                                 ₹

Net Profit as per Surplus, i.e. Balance in Statement of P/L (₹672000 - ₹ 200000)                 472000 

Add:

Transfer to Debentures Redemption Reserve                                                        200000 

Dividend paid ( Proposed Dividend for the year ended 31st March, 2019)          180000 

Interim Dividend paid during the year                                                                   144000 

Provision for tax made during the Current year                                                     200000     7,24,000 
                                                                                                                             ___________________

Net Profit before Tax and Extraordinary Items                                                                       1196000

TASK # 2

ASSIGNMENT # 1

DO IT YOURSELF:

From the following information relating to your ended 31st March 2020, Calculate Net Profit before Tax and Extraordinary Items:

 Particulars                                                                                                            ₹ 

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

Surplus,i.e. Balance in Statement of Profit and Loss (Closing)                        540000

Proposed Dividend for the Year ended 31st March 2020                                  315000

Proposed Dividend for the Year ended 31st March 2019                                  210000 

Transfer to Workers Compensation Reserve                                                     150000 

Provision for Tax made during the Current year                                               230000

Ans. Net Profit before Tax and Extraordinary Items  ₹ 1330000

ANSWER TO ASSIGNMENT # 1

ANSWER:

CALCULATION OF NET PROFIT BEFORE TAX AND EXTRAORDINARY ITEMS:

                                                                                                                                    ₹
NET PROFIT AS PER SURPLUS,i.e

BALANCE IN STATEMENT OF P/L [ ₹540000 - (- ₹200000)] 740000
ADD:
Dividend paid ( proposed dividend for the year 31st March 2019) 210000
Transfer to workmen compensation reserve 150000
Provision for tax paid during the current year 230000 590000

                                                                                                              __________________

Net Profit before Tax and Extraordinary items 13,30,000

Ans. Net Profit before Tax and Extraordinary Items  ₹ 1330000