CHAPTER 5 : CASH FLOW STATEMENT: CASH FLOW FROM OPERATING ACTIVITY, ASSIGNMENT # 19

LEARNING OUTCOMES:

CASH FLOW STATEMENT:

CASH FLOW FROM OPERATING ACTIVITY

EXAMPLES, 

TO UNDERSTAND THE CALCULATION AND PRESENTATION

HELLO BOYS!!

 THIS TOPIC CAN ONLY BE UNDERSTOOD WELL BY SEEING VARIED SOLVE QUESTIONS

AND THEN WORKING WITH THE SOLUTION AFTER GOING THROUGH THE STEPS OF 

PREPARING CASH FLOW FROM OPERATING ACTIVITY.


TASK # 3

DO ASSIGNMENT # 19
MUST TRY

1.From the following information Calculate Net Cash From Operations:

Operating profit after Provision for Tax of ₹ 153000                      628000 

Insurance proceeds from the famine settlement                              100000
Dividend paid during the year                                                            72000
Depreciation                                                                                      140000
Loss on sale of machinery                                                                  30,000

Profit on sale of investment                                                              20,000

Dividend received on investment                                                         6000
Decrease in current assets (other than cash and cash equivalent)      10,000
Increase in current liabilities                                                             151000

Increase in current assets other than cash and cash equivalent         600000

Decrease in current liabilities                                                              64000

Income tax paid                                                                                 118000
Refund of income tax received                                                              3000

Ans.376000

TASK # 4

GO THROUGH THE EXAMPLES VERY CAREFULLY TO UNDERSTAND THE STEPS AND METHODS TO COMPUTE.

GIVING THE STEPS TO OPERATING ACIVITIES FOR REFERENCE.

LEARN THE FORMAT

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.

EXAMPLE : 1

From the following Balance Sheet of M limited as on 31st March 2020. 

                               Balance sheet as at 31st March 2020

Particulars                              Note. No.               31.3.20 ( ₹)             31.3 19( ₹)

Equity and Liabilities
1. Shareholder's Funds
(a) Share capital                                                   500000                     400000
(b) Reserves and surplus             1                       200000                    (50000)
2. Non current liabilities
(a) Long term borrowings           2                       450000                    500000
3.Current liabilities
(a)Short term borrowings                                     150000                     50000
( b)Short term provisions           3                           70000                    90000

______________________________________________________________
Total                                                                    1370000                  990000

______________________________________________________________
II.Assets
1.Non current assets
(a)Fixed assets
(i)tangible assets                       4                       1003000                   720000
(ii)intangible assets                   5                          20000                      30000
(b)Non current investments                                100000                      75000
2. Current assets
(a)Current investments                                         50000                      60000
(b)Inventories                                                     107000                      45000
(c)Cash and cash equivalents                               90000                      60000

_______________________________________________________________
Total                                                                 1370000                    990000

_______________________________________________________________

Notes to Accounts :

Note No. Particulars                                                   31.3.20( ₹)              31.3 1( ₹)

1.             Reserves and surplus

                  (Surplus i.e.Balance in Statement of P/L)    200000                 ( 50000)

                                                                                   __________________________
2.               Long term borrowings

                  12% debentures                                            450000                  500000

                                                                                 ___________________________
3.               Short term provisions 

                  Provision for tax                                           70,000                    90000 

                                                                                  ___________________________
4.               Tangible assets
                  Machinery                                                      1203000                821000
                  Less: Accumulated Depreciation                   (200000)              (101000)

                                                                                  ____________________________
                                                                                          1003000                720000 

5               .Intangible assets
                  Goodwill                                                            20000                      30000

                                                                                  _____________________________

Additional Information :

1. 12% Debentures were redeemed on 31-3-2020
2. Tax  ₹ 70000 was paid during the year.

Calculate Cash Flow From Operating Activities.  Showing your working clearly.

SOLUTION : 1

Calculation of cash flow from operating activities:

Particulars Details ( ₹) Amount( ₹)

Net Profit before Tax and Extraordinary Items (Note 1) 300000

Add: Non cash and non operating charges

Goodwill written off ( 30,000 -20000) 10000

Depreciation on machinery (200000 - 101000) 99000

Interest on debentures (12% of  ₹ 500000) 60,000

______________________________________________________

Operating profit before working capital changes 469000

Less: Increase in stock in trade (62000)

______________________________________________________

Cash generated from operations before tax 407000

Less: Tax paid (70000)

______________________________________________________________________

Net cash from operating activities 337000

______________________________________________________________________

Working Notes:

1 Calculation of Net Profit before tax:

( ₹)

Net profit as per statement of Profit and Loss)( 200000 - (- 50,000)) 250000

Add: Provision for tax made 50000

________

Net profit before tax and extraordinary items 300000

Provision for tax account

Particulars Amount( ₹) Particulars Amount( ₹)

To Bank ( paid) 70000 By Balance b/d 90000

To balance c/d 70,000 By Statement of P/L(Bal.fig 50000

________ _______

                                                140000                                                       140000

EXAMPLE: 2

From the following Balance Sheet of vishva limited, Calculate Cash Flows From Operating Activities showing your working clearly.
Particulars                                       Note No.         31 3 2020 ( ₹)        31-3-2019( ₹)

Equity and Liabilities
1. Shareholder's Funds
(a) Share capital                                                      102000                    84000
(b) Reserves and surplus                  1                       36000                    22560
2. Non current liabilities
(a) Long term borrowings                2                       60000                    48000
3.Current liabilities
(a)Short term borrowings                                         10000                     5000
(b) Trade payables                                                    28800                   36000
( c)Short term provisions                 3                       16800                   18000

________________________________________________________________
Total                                                                        253600                 213560

________________________________________________________________
II.Assets
1.Non current assets
(a)Fixed assets
(i)Tangible assets                             4                      118800                132000
2. Current assets
(a)Inventories                                                           61800                 45600
(b) Trade Receivables                    5                        33600                 27600
(c)Cash and cash equivalents                                   39400                  8360

________________________________________________________________
Total                                                                       253600              213560

________________________________________________________________

Notes to Accounts :
Note No.      Particulars                                         31.3.20 ( ₹)              31.3.19( ₹)

1.     Reserve and surplus
        Balance in statement of P/L                         15600                     5760
        General reserve                                             20400                   16800

                                                                            ______________________
                                                                              36000                    22560

                                                                            _______________________
2.     Long term borrowings
        10% debentures                                             60000                    48000

                                                                           ________________________

3.    Short term provisions
       Provision for income tax                                16800                    18000

                                                                           _________________________

4.    Tangible asset 

       Land and building                                          96000                    97200
       Plant and machinery                                      22800                    34800

                                                                         __________________________

                                                                             118800                  132000

                                                                         __________________________

 5.   Trade Receivables
        Debtors                                                         19200                          24000
        Bills Receivables                                          14400                            3630

                                                                         ____________________________
                                                                              33600                          27600 

                                                                         ____________________________

Additional Information:

1. Tax paid during the year 2019-20 Rs.14400 which includes capital gain tax 10000.
2. Depreciation on plant charged during the year 2019-20 was 14400.
3. Additional debentures were issued on August 1, 2019.

SOLUTION :2

Calculation of Cash Flow From Operating Activities:

Particulars Details( ₹) Amount( ₹)

Net Profit before Tax and Extraordinary Items (note 2) 26 640

Adjustment for Non cash and non operating expenses:

Add: Interest on debentures 5600

Add: Depreciation on land and building 1200

Add: Depreciation on plant and machinery 14400

______________________________________________________

Operating profit before working capital changes 47840

Add: Decrease in Debtors 4800

Less: Decrease in trade payables (7200)

Less Increase in inventory (16200)

Less: Increase in bills receivables (10800)

_______________________________________________________

Cash flow from Operating Activities before Tax 18 440

Less: Income Tax paid (14400 -10000)( Note 4 ) (4400)

_____________________________________________________________________

Net Cash Flow from Operating Activities 14000

______________________________________________________________________

Working Notes:

1.

Provision for income tax account

Particulars Amount( ₹ ) Particulars Amount( ₹)

To Bank( Tax paid) 14400 By balance b/d 18000

To Balance c/d 16800 By Statement of P/L 13200

___________________________________________________________________

31200 31200

2.

Calculation of Net Profit before Tax and Extraordinary Item:

Particulars Amount( ₹)

Increase in Surplus i.e.Balance in Statement of P/L(15600 - 5760) 9840

Add :Transfer to General reserve 3600

Add : Provision for tax 13200

___________________________________________________________________

Net Profit before Tax and Extraordinary Item 26640

3.

Interest on debentures paid= ( 48000 x 10 /100 x 4 /12) + ( 60000 x 10/100 x 8/12)

= 1600 + 4000

= ₹  5600

4.

Tax paid =  ₹14400 includes  ₹ 10000 capital gain tax which is, cash outflow from investing activities.

Thus, Income Tax(i.e. tax on operating profit) = 14400 -10000 =  ₹ 4400 which is cash outflow from operating activities.