CHAPTER 5: CASH FLOW STATEMENT: CASH FLOW FROM INVESTING ACTIVITY(CONTINUED)

May 17, 2020

LEARNING OUTCOMES:

AFTER THIS TOPIC YOU WILL BE ABLE TO:

PREPARE FIXED ASSET ACCOUNT, INVESTMENT ACCOUNT, ACCUMULATED DEPRECIATION ACCOUNT WITH EASE AND WILL BE ABLE TO COMPUTE CASH FLOW FROM INVESTING ACTIVITY.

Fixed Assets Account
Provision for Depreciation Account (or Accumulated Provision for Depreciation)

Introduction

We know that the activities that are related to the sale and purchase of fixed assets or long-term investments are classified as Investing Activities. Up till now, we have compared the opening and closing balances of fixed assets to ascertain the amount of sale or purchase of fixed assets.

That is, if the previous year's balance exceeds the current year's balance of fixed assets, then it is regarded as sale and is shown as Cash Inflow from Investing Activities.

On the contrary, if the current year's balance exceeds the previous year's balance, then it is regarded as purchase and is shown as Cash Outflow from Investing Activities.

However, there may be cases, where, besides the opening and the closing balances of the fixed assets, some additional information regarding depreciation and sale is also provided.

Such additional information are provided outside of the given balance sheet in form of adjustments. In such cases (where adjustments are given), we need to prepare relevant accounts such as Fixed Assets Account, Accumulated Depreciation Account, etc. to ascertained the sale and purchase of fixed assets.

Preparation of Fixed Assets Account

In the balance sheet (given in the question), fixed assets may either be mentioned at written-down value or on original cost. Therefore, there are two probable situation for preparation of Fixed Assets Account. These are presented diagrammatically below.

I- When Fixed Assets are shown on their Written-down Value (or Diminishing Value)

When the company's balance sheet does not include Provision for Depreciation or Accumulated Depreciation (for both years), it implies that the fixed assets are shown at their written-down value i.e. after providing depreciation. In such a case, we need to prepare only one account- Fixed Assets Account; on the basis of their written-down value.

Steps to Prepare Fixed Assets Account (at Written-down Values)

Step 1: The opening balance (previous year's balance) is shown on the debit side and the closing balance (current year's balance) is shown on the credit side of the Fixed Assets Account.

Step 2: Next, the amount of depreciation charged during the year is shown on the credit side of the account.

Step 3: If fixed assets is sold during the year, then it is shown on the credit side of the account as Bank (Sale of Fixed Assets).

Step 4: In case of sale, if there exists profit (or loss) on sale, then it is debited (or credited) to the account.

Step 5: Then, finally, both the sides are totalled. If the total of credit side exceeds the total of the debit side, then the balancing figure is shown as Bank- Purchase of Fixed Assets, on the contrary, if the total of debit side exceeds the total of the credit side, then the balancing figure is shown as Bank- Sale of Fixed Assets.

The below given represents the format of Fixed Assets Account.

Fixed Assets (at Written-down Values)
Dr.			Cr.
Particulars	Amount Rs	Particulars	Amount Rs
Balance b/d (Opening Balance)		Depreciation (Charged during the year) ♥
Profit and Loss A/c (Profit on Sale of Fixed Assets) ♦♦		Profit and Loss A/c (Loss on Sale of Fixed Asset)♦
		Bank- Sale of Fixed Assets ♣
Bank (Balancing Figure- Purchases of Fixed Assets)##		Balance c/d (Closing Balance)

Treatment

Investing Activity	Operating Activity
## (–) as Purchase of Fixed Assets ♣ (+) as Sale of Fixed Assets	♥ (+) as Depreciation charged during the year ♦♦ (–) as Profit on Sale of Fixed Assets ♦ (+) as Loss on Sale of Fixed Assets

II- When Fixed Assets are shown on their Original Cost

When the balance sheet of a company consists of Provision for Depreciation or Accumulated Depreciation (for both years), it implies that the fixed assets are shown on their original cost.

In such a case, two separate accounts are required to be prepared viz. Fixed Assets Account and Provision for Depreciation Account.

The Fixed Assets Account helps in ascertaining the amount of fixed assets purchased or sold during the year, while, the Provision for Depreciation Account helps in ascertaining the amount of depreciation charged during the year.

The format of Fixed Asset Account and Provision for Depreciation Account is given below.

Fixed Assets (at Written-down Values)
Dr.			Cr.
Particulars	Amount Rs	Particulars	Amount Rs
Balance b/d (Opening Balance)		Depreciation (on part)
Profit and Loss A/c (Profit on Sale of Fixed Assets) ♦♦		Profit and Loss A/c (Loss on Sale of Fixed Asset) ♦
		Bank- Sale of Fixed Assets
Bank (Balancing Figure- Purchases of Fixed Assets)ψ		Balance c/d (Closing Balance) ♣

Accumulated Depreciation Account (Provision for Depreciation Account)
Dr.			Cr.
Particulars	Amount Rs	Particulars	Amount Rs
Fixed Assets Account- (Balancing figure- Depreciation on part)* (See Note)		Balance b/d (Opening balance)
Balance c/d (Closing Balance)		Profit and Loss A/c (Balancing figure- Depreciation charged during the year) #

Note- Any one of these items may be given in the question, i.e. either depreciation on a part of fixed assets could be given or Depreciation charged during the year could be given.

In case, the item # is given, then * have to be ascertained as balancing figure. On the contrary, if the item * is given, then # have to be ascertained as balancing figure.

* Fixed Assets Account- (Balancing figure- Depreciation on part)- The Balancing figure ascertained on the debit side of the Accumulated Depreciation Account is shown on the credit side of the Fixed Assets Account.

This figure won't be shown anywhere else.

Treatment

Investing Activity	Operating Activity
ψ (–) as Purchase of Fixed Assets ♣ (+) as Sale of Fixed Assets	# (+) as Depreciation charged during the year ♦♦ (–) as Profit on Sale of Fixed Assets ♦ (+) as Loss on Sale of Fixed Assets

II. Cash flows from investing activities

*Proceeds from Sale of Tangible Fixed
Assets

*Proceeds from Sale of Non Current Investments (other than current investments( to be included in cash and cash equivalents) and Marketable Securities)

*Interest received, Dividend received,(for Non Financial Companies only)

*Rent received

*Purchase of Fixed Tangible Assets and Intangible Assets like Goodwill

* Purchase of Non Current Investments (other than Marketable Securities)

*Extraordinary Items (e.g. Insurance claim on Machinery against Fire) (+/-)

* Capital gain tax paid

TASK# 2

WATCH THE PPT ON CASH FLOW STATEMENT GIVEN BELOW :

REFER THE PPT LINK FOR HANDY POINTS

AGAIN WE WILL USE THE SAME TECHNIQUE OF LEARNING THROUGH EXAMPLES.

EXAMPLE 1

Well limited has given you the following information:
particulars                                                                       amount
machinery as on April 1 2019                                         50,000
machinery as on march 31st 2020                                  60000
accumulated depreciation on April 1 2019                     25,000
accumulated depreciation on march 31st 2020              15000

During the year a machine costing 25000 with accumulated depreciation of 15,000 was sold for 13000.
calculate cash flow from investing activities showing your workings clearly.

Solution

Calculation of Cash Flows from Investing Activities:

Particulars Amount (₹)

Sale of machinery 13,000

Purchase of machinery (35,000)

_____________________________________________

Net cash used in Investing Activities (22,000) _____________________________________________

Working Notes:

Machinery Account

Particulars Amount(₹) Particulars Amount(₹)

To Balance b/d 50,000 By Bank A/c 13000

To Statement of P/Loss 3,000 (proceeds from sale of machine)

(profit on sale of machine) By Accumulated Depreciation 15,000

To Bank A/c 35,000 (on machinery sold)

(new machinery purchased) By Balance c/d 60000

88000 88000

Accumulated Depreciation Account

Particulars Amount(₹) Particulars Amount(₹) To Machinery A/c( accumulated 15000 By Balance b/d 25000 depreciation on machinery sold) 15000 By Statement of P/L 5,000 To Balance c/d (Depreciation charged

during the year)

_____________________________________________________________________

30,000 30,000

Tips:

1. If opening and closing balance of Accumulated Depreciation / Provision for Depreciation Account are given in the Balance Sheet and there is also additional information regarding sale of fixed tangible asset, then along with fixed tangible asset account, accumulated depreciation / provision for depreciation account will also be prepared.

2. Depreciation provided during the year to be added back to net profit for calculating cash flow from operating activities will be ₹ 5,000 as calculated from Accumulated Depreciation Account, not ₹ 15000 which is accumulated depreciation on machinery sold.

EXAMPLE 2

From the following particulars of Bharat limited ,calculate cash flow from investing activities. show the workings clearly and preparing the ledger accounts.

Balance sheet as on 31st march 2019 31st march 2020 (an extract)
Particulars                       note no.                     31 march 2020         31 march 2019
II.Assets
1.Non current assets
(a)Fixed assets
(i)tangible assets                       1                               1240000                    1020000
(ii)intangible assets                  2                                460000                     380000
(b)Non current investments   3                               360000                      260000

Notes to accounts:
Note No.               Particulars                                 31 3 2020               31-3-2019
1 tangible assets
machinery                                                                 1240000                   1020000
2. intangible assets
Goodwill                                                                    300000                   100000
patents                                                                        160000                   280000
                                                                                    460000                   380000
3. Non current investments
10% long term investments                                       160000                     60000
investment in land                                                     100000                  100000

shares in Amartax limited 100000 100000

360000 260000
Additional information:
1. patents were written off to the extent of 40000 and some patents were sold at a profit of 20000.
2. a machine of book value 80000 (depreciation provided thereon 60,000) was sold for 50000. Depreciation charged during the year was 140000
3. on 1st April 2019 10% investments were purchased for 180000 and sum investment were sold at a profit of 20000. interest on investment was received on march 31st 2020.
4. Amartex ltd. paid dividend @ 10% on its shares.
5. a plot of land has been purchased for investment purposes and let out for commercial use and rent received 30000.

Solution

Calculation of Cash Flow from Investing Activities:

Particulars Amount (₹)

Proceeds from Sale of Patents 100000

Payment of purchase of New Machinery (440000)

Proceeds from Sale of New Machinery 50,000

Proceeds from Sale of 10% Long term Investments 100000

Payment for purchase of 10% Long term Investments (180000)

Interest received on 10% Long term Investments 16000

Dividend received on Shares of Amartex Ltd 10000

Rent received 30000

Payment for purchase of goodwill (200000)

Net cash used in Investing Activities (514000)

Working Notes:

Patents Account

Particulars Amount (₹) Particular Amount (₹)

To Balance b/d 280000 By Amortization 40000

To Statement of P/L 20000 By Bank (sale of patents) 100000 (profit on sale) By balance c/d 160000

300000 300000

Machinery Account

Particulars Amount (₹) Particular Amount(₹)

To Balance b/d 1020000 By Depreciation 140000

To Bank A/c ( purchase

of new machine) 440000 By Bank A/c (Sale) 50,000

By Statement of P/L (loss

on sale) 30,000

By Balance c/d 1240000

1460000 1460000

10% Long term Investments Account

Particulars Amount(₹) Particulars Amount(₹)

To Balance b/d 60000 By Bank A/c (Sale)

(80000 + 20000) 100000

To Bank A/c( purchase) 180000 By Balance c/d 160000

To Statement of P/l 20,000

(profit on sale)

____________________________________________________________________

260000 260000

_____________________________________________________________________

4. Interest on Long term Investments received = 10% of ₹ 160000 = ₹16000

5. Dividend received on shares of Amartex Ltd.= 10% of ₹ 100000 =₹ 10000

Top Tip

On 31st March 2019, long term investments were ₹ 60,000. On 1st April, 2019 new investments purchased ₹ 180000 and investments costing ₹ 80000 were sold at a profit of ₹ 20000. Therefore, value of investments throughout the year remained at ₹ 160000 (i.e. 60000 + 180000 - 80000). Thus, interest on investments received for the whole year @ 10% p.a. will be ₹ 16000.