What is cash flow analysis and why is it important?

Cash flow analysis refers to the evaluation of inflows and outflows of cash in an organisation
obtained from financing, operating and investing activities. In other words, we can say that it
determines the ways in which cash is earned by the company. It measures how much cash is
generated and spent on the business during a given accounting period.

What are the cash inflows and outflows in the statement?

The cash inflows and cash outflows in the cash flow statement are segmented into cash flow
from operations, investing, and financing. These details provide insight in the liquidity and
solvency, as well the entities ability to meet future needs for capital and growth.

Purpose of Cash Flow Statement Analysis

The purpose of the cash flow statement is to show where an entities cash is being generated (cash
inflows), and where its cash is being spent (cash outflows), over a specific period of time
(usually quarterly and annually). It is important for analyzing the liquidity and long term
solvency of a company.
The cash flow statement uses cash basis accounting instead of accrual basis accounting which is
used for the balance sheet and income statement by most companies. This is important because a
company may accrue accounting revenues but may not actually receive the cash. This could
produce profits and taxes payable but not provide the resources to stay solvent.

The cash flow statement components provide a detailed view of cash flow from operations,
investing, and financing:
Cash Flow from Operating Activities
The net amount of cash coming in or leaving from the day to day business operations of an entity
is called Cash Flow From Operations. Basically it is the operating income plus non-cash items
such as depreciation added. Since accounting profits are reduced by non-cash items (i.e.
depreciation and amortization) they must be added back to accounting profits to calculate cash
flow.
Cash flow from operations is an important measurement because it tells the analyst about the
viability of an entities current business plan and operations. In the long run, cash flow from
operations must be cash inflows in order for an entity to be solvent and provide for the normal
outflows from investing and finance activities.
Cash Flow From Investing Activities
Cash flow from investing activities would include the outflow of cash for long term assets such
as land, buildings, equipment, etc., and the inflows from the sale of assets, businesses, securities,
etc. Most cash flow investing activities are cash out flows because most entities make long term
investments for operations and future growth.
 Cash Flow From Finance Activities
Cash flow from finance activities is the cash out flow to the entities investors (i.e. interest to
bondholders) and shareholders (i.e. dividends and stock buybacks) and cash inflows from sales
of bonds or issuance of stock equity. Most cash flow finance activities are cash outflows since
most entities only issue bonds and stocks occasionally.

Cash flow statement (Indirect method )

Details Amount Amount

(I) Calculation of cash flow from operating activities

Net profit for the year XXX

Interim dividend xxxx
General reserve xxxx
Specific reserve xxxx
Sinking fund xxxx
Proposed dividend xxxx
Provision for tax xxxx

Add: Non- Operating and non-cash expenses:

: Depreciation for the year xxxx
: Loss on sale of fixed assets xxxx
: loss on sale of investment xxxx
: loss on sale of marketable securities xxxx
: Provision for bad debts xxxx
: Intangible assets written off xxxx
: Discount on issue of share and debenture w/o xxxx
: underwriting commission w/o xxxx
: Preliminary exp w/o xxxx
: Premium on redemption of debenture xxxx
: premium on redemption of pref. shares xxxx
: Fictitious assets written off xxxx
: Decrease in debtors/ A/R, B/R and N/R xxxx
: Decrease in inventory xxxx
: Decrease in marketable securities xxxx
: Decrease in prepaid expenses xxxx
: Decrease in government securities xxxx
: Decrease in treasury bills xxxx
: Decrease in accrued income xxxx
: Decrease in other current assets if any xxxx
: Decrease in working capital xxxx
: Increase in creditors, B/P, N/P and A/P xxxx
: Increase in advance income xxxx
: Increase in Bank overdraft xxxx
 : Increase in short- term bank loan xxxx
: Increase in outstanding exp xxxx
: Increase in other current liabilities xxxx

Less: Non-operating and non-cash income

: refund of tax (xxxx)
: other non-operating income (xxxx)
: Gain on sale of fixed assets (xxxx)
: Gain on sale of investment (xxxx)
: Gain on sale of marketable securities (xxxx)
(xxxx)
????? ????
: Tax paid
xxxxxx
(I) Cash flow from operating activities
(II) Calculations of cash flow from Financing activities
Issue of share capital Xxxxx
Add: Increase in share premium Xxxx
: Increase in preference share capital Xxxx
: Increase in long-term bank loan Xxxx
: Increase in mortgage loan Xxxx
: Increase in secured loan Xxxx
: Increase in unsecured loan Xxxx
: Increase in long-term note payable Xxxx

Less: Redemption of pref. shares with premium (xxxx)

: Redemption of debenture with premium (xxxx)
: Decrease in long- term bank loan (xxxx)
: Decrease in mortgage loan (xxxx)
: Decrease in secured loan (xxxx)
:Decrease in unsecured loan (xxxx)
: Decrease in long- term note payable (xxxx)
: Dividend Paid (xxxx)
(II) Cash flow from financing activities Xxxx

(III) Calculations of cash flow from investing activities

Fixed assets purchase (xxxx)
Investment purchase (xxx)
Increase in goodwill (xxx)
Increase in other assets if any (xxx)
Less: Sale of fixed assets Xxx
 Xxxx
Xxxx
(III) Cash flow from investing activities
Closing cash balance (cash+ cash at bank + cash instruments) Xxxx

Fixed assets a/c (NET)

To opening balance xxx BY sales (cash) xxx
To gain on sale xxx BY loss on sale xxx
By Dep. for the year xxx
To purchase (bal. fig.) xxx By closing balance xxx

Fixed assets a/c (GROSS)

To opening balance xxx By Sales (cash) a/c xxx
To gain on sale xxx BY loss on sales xxx
BY dep. On sold xxx
To Purchase(bal. fig) xxx By closing balance xxx

Note:
 For example

Sales revenue 1,00,000

Less: cost of goods sold 60,000
Gross profit 40,000
Less: other exp
Depreciation 10,000
Salary 4,000
Adminstartive exp 6,000
Net profit before tax 20,000
Less: Tax paid 5,000
NPAT 15,000
Less: Proposed dividend 3,000
General reserve 2,000
Specific reserve 1,000
Sinking fund 1,500
Retained earnings 7,500

I II I II
Accumulated depreciation 20,000 50,000 Goodwill 60,000 50,000

Provision for dividend 1,00,000 2,00,000

Retained earnings 15,000 20,000

Additional information

A part of fixed assets costing Rs. 1, 50,000 on which accumulated dep. Was Rs. 40,000 sold at a loss of
Rs. 30,000

Depreciation for the year 70,000

Accumulated depreciation
To depreciation on sold (bal fig.) 40,000 By opening balance 20,000
To closing balance 50,000 By dep. for the year (bal. fig) 70,000

Provision for dividend

TO Dividend paid (bal. fig) 1,50,000 By opening balance 1,00,000

To closing balance 2,00,000 By Provision for dividend(P/L) 2,50,000

 For example:
The following information has been extracted….
Income statement for the year ended 31st Dec. 2019
Details Amount Amount
Sales revenue 30,00,000
Less: Cost of goods sold
Opening stock of raw materials 1,00,000
Purchase of raw materials 15,00,000
Wages 4,00,000
Less: closing stock of raw materials (2,00,000) 18,00,000
Gross profit 12,00,000
Less: other exp
Administrative exp 1,50,000
Selling and distribution exp 70,000
Other general exp 30,000
Depreciation for the year 1,20,000
Good will written off 50,000
Loss on sale of fixed assets (costing Rs. 1,00,000) 25,000
Premium on redemption of debenture 55,000 5,00,000
Profit before tax 7,00,000
Less: Tax paid 2,00,000
Net profit after tax 5,00,000
Less: Proposed dividend 1,80,000
General reserve 1,00,000
Sinking fund 50,000
Specific reserve 70,000
Retained earnings 1,00,000

Comparative balance sheet at the end of the year

Liabilities 2018 2019 Assets 2018 2019
Share capital 8,00,000 10,00,000 Fixed assets 12,00,000 14,00,000
Share premium 1,00,000 2,00,000 Furniture 2,00,000 3,00,000
10% debenture 4,00,000 2,00,000 Investment 4,00,000 6,00,000
6% Pref. share capital 3,00,000 4,00,000 Marketable securities 1,00,000 1,50,000
Long term bank loan 2,00,000 2,00,000 Debtors 2,50,000 3,50,000
Bank overdraft 1,00,000 1,50,000 Inventory 1,00,000 2,00,000
Creditors 1,50,000 1,00,000 Goodwill 2,00,000 1,50,000
Bills payable 1,00,000 50,000 Account receivable 60,000 1,00,000
Account payable 80,000 1,00,000 Preliminary expenses 1,40,000 1,40,000
Proposed dividend 1,20,000 2,00,000 Cash in hand 90,000 1,10,000
Accumulated depreciation 1,00,000 2,00,000 Cash at bank 60,000 70,000
Provision for tax 1,50,000 2,50,000
General reserve 20,000 1,20,000
 Specific reserve 30,000 1,00,000
Sinking fund 50,000 1,00,000
Retained earnings 1,00,000 2,00,000
Total 28,00,000 35,70,000 28,00,000 35,70,000

Cash flow statement (Direct method

Details Amount Amount
(I) Calculations of cash flow from operating
(A) Cash sales and collections..
Sales revenue 30,00,000

Less: Increase in debtors (1,00,000)

: Increase in account receivable (40,000)
(A)Total cash sales and collection
28,60,000
(B) Payment for purchase and suppliers
Cost of goods sold (18,00,000)
Add: Increase in inventory (1,00,000)
: Decrease in creditors (50,000)
(50,000)
: Decrease in bills payable

Less: Increase in account payable 20,000

Total payment for purchase and suppliers (19,80,000)

(C) Payment for wages and other operating exp

Administrative expenses
Selling and distribution expenses
Other general expenses (1,50,000)
Total payment wages and other operating expenses (70,000)
(30,000)
(D) Tax paid
(2,50,000)
Cash flow operating activities before extra-ordinary
(1,00,000)
item (A+B+C+D)
Add: Increase in bank overdraft 5,30,000

Less: Increase in marketable securities

(I) Cash flow from operating activities 50,000
(50,000) Nil
 5,30,000

45,000

(5,45,000)
30,000
1,50,000
(II) Cash flow from financing activities
(III) Cash flow from investing activities
(I+ II+ III) Changes in cash
Add: opening cash balance

Closing cash balance 1,80,000

Cash flow statement by using (Indirect method)

Details Amount Rs. Amount Rs.
(I)Cash flow from oper\ting activities
Net profit for the year
Provision for sinking fund
1,00,000
Provision for specific reserve
Provision for general reserve 50,000
Provision for dividend 70,000
Provision for tax 1,00,000
Add: Non- operating and non- cash expenses 1,80,000
2,00,000
Depreciation for the year
Goodwill written off
Loss on sale of fixed assets 1, 20,000
Premium on redemption of debenture 50,000
Increase in account payable 25,000
Increase in bank overdraft 55,000
20,000
50,000 9,20,000
 Non- Operating and non- cash income 10,20,000
Increase in account receivable
Increase in inventory (40,000)
Increase in debtors (1,00,000)
Increase I marketable securities (1,00,000)
Decrease in bills payable (50,000)
Decrease in creditors (50,000)
Tax paid (50,000)
(1,00,000)
(4,90,000)
(I) Cash flow from operating activities
5,30,000
(II) Calculation of cash flow from financing
Issue of share capital
Add: Increase in share premium
Increase in pref. share capital 2,00,000
1,00,000
1,00,000
Less: Redemption of debenture with premium
Dividend paid (2,55,000)
Cash flow from financing activities (1,00,000)
45,0000
(III) Calculation of cash flow from investing
Fixed assets purchase
Add: Furniture purchase (3,00,000)
: Investment purchase (1,00,000)
Less: sale of fixed assets (2,00,000) (5,45,000)
Cash flow from investing activities 55,000
(I+II+III) Changes in cash

Add: Opening cash balance (90,000+60,000) 30,000

1,50,000
Closing cash balance(1,10,000+ 70,000) 1,80,000

Fixed assets a/c

To Opening balance 12,00,000 By sales (cash) 55,000
BY loss on sale 25,000
To purchase (Bal. figure) 3,00,000 By Dep. On sold 20,000
 BY closing balance 14,00,000

Costing 1,00,000 – 20,000 dep. = Book value Rs. 80,000- 25,000 l0ss = Rs.55,000 sold

Accumulated dep. a/c

To Depreciation on sold (bal. fig) 20,000 By Opening balance 1,00,000
To closing balance 2,00,000 BY Dep. For the year 1,20,000

Provision for tax

To Tax paid (bal. figure ) 1,00,000 By Opening balance 1,50,000
To closing balance 2,50,000 BY Provision for tax (P/L) a/c 2,00,000

Provision for dividend

To Dividend paid (bal. figure ) 1,00,000 By Opening balance 1,20,000
To closing balance 2,00,000 BY Provision for dividend 1,80,000
 Cash flow statement by using (Indirect method)
Details Amount Rs. Amount Rs.
(I) Cash flow from operating activities
Net profit for the year 1,00,000
Increase in specific reserve 70,000
Increase in sinking fund 50,000
Increase in general reserve 1,00,000
Provision for tax 2,00,000
Provision for dividend 1,80,000
Add: Non-operating and non- cash exp
: Depreciation for the year 1,20,000
: Premium on redemption of debenture 55,000
: Loss on sale of fixed assets 25,000
: Goodwill written off 50,000
: Increase in account payable 20,000
: Increase in bank overdraft 50,000 9,20,000
10,20,000
Less: Non-operating and non- cash income
: Decrease in bills payable (50,000)
: Decrease in creditors (50,000)
: Increase in account receivable (40,000)
: Increase in inventory (1,00,000)
: Increase in debtors (1,00,000)
: Increase in marketable securities (50,000)
(4,90,000)
(1,00,000)
 5,30,000

2,00,000
1,00,000
1,00,000

(2,55,000)
(1,00,000)
: Tax paid 45,000
(I) Cash flow from operating activities

(II) Cash flow from financing activities

: Increase in share capital
Add: Increase in share premium (3,00,000)
: Increase in pref. share capital (1,00,000)
(2,00,000)
55,000
Less: Redemption of debenture with premium (5,45,000)
: Dividend paid
(I+II+III) Changes in cash 30,000
: Opening cash balance(cash in hand + cash at bank) 1,50,000
: Closing cash balance 1,80,000

Working note
 Cash flow statement (Direct method )
Details Amount Amount
(I) Calculations of cash flow from operating activities
(A)Cash sales and collections from customers
Net total sales Xxxx
Add: Decrease in debtors, A/R., B/R and N/R Xxxx
: Increase in provision for bad debts Xxxx
: Bad debts recovered xxxx

Less: Increase in debtors, A/R, B/R and N/R (xxxx)

: Decrease in provision for bad debts (xxxx)
: Bad debts written off (xxxx)
: Discount allowed (xxxx)
(A)Total cash sales and collections Xxxxx
(B)Other revenue receipt
Other income Xxxx
Interest on investment Xxxx
Dividend received Xxxx
Rent received Xxxx
Compensation received Xxxx
Add: Decrease in accrued income Xxxx
: Increase in advance income

Less: Increase in accrued income (xxxx)

: Decrease in advance income (xxxx)
(B)total other revenue receipt Xxxxx
(C)Payment purchase and suppliers
Purchase/ Cost of goods sold (xxxx)
Add: Increase in inventory (xxxx)
: Decrease in creditors, A/p, B/P and N/P (xxxx)

Less: Decrease in inventory Xxxx

Xxxx
 Increase in creditors, A/P, B/P and N/P
(C)total payment for purchase and suppliers
(xxxx)
(xxxx)
(xxxx)
(D)Payment for wages and other operating expenses (xxxx)
Wages/ labor cost (xxxx)
Manufacturing expenses xxxx)
Operating expenses excluding depreciation (xxxx)
Administrative expenses
Selling and distribution expenses
Add: Decrease in outstanding expenses Xxxx
: Increase in advance expenses Xxxx

(Xxxx)
Less: Increase in outstanding expenses
: Decrease in advance expenses
(D)Total payment for wages and other operating exp (xxxx)
(xxxx)
Xxxxx
(E) Payment for interest
Interest expenses
Add: Decrease in outstanding interest
Less: Increase in outstanding interest
(E)Total interest paid
(F) Tax paid

(A+B+C+D+E+F) Cash flow from operating activities before

extra-ordinary item Xxxx
Add: Decrease in marketable securities Xxxx
Decrease in treasury bills Xxxx
Decrease in government securities Xxxx
Decrease in short term investment Xxxx
Decrease short term notes receivable Xxxx
Decrease in other current assets Xxxx
Increase in bank overdraft Xxxx
Increase in short bank loan Xxxx
Increase in other current liabilities Xxxx
 (xxxx)
Less: Increase in marketable securities (xxxx)
Increase in treasury bills (xxxx)
Increase in government securities (xxxx)
Increase in short term investment (xxxx)
Increase in short-term notes receivable (xxxx)
Increase in other current assets (xxxx)
Decrease in bank overdraft (xxxx)
Decrease in short term bank loan (xxxx) (xxxx)
Decrease in other current liabilities xxxx
(I ) Cash flow from operating activities xxxx

xxxx
xxxx
xxxx
(II) Calculations of cash flow from Financing activities xxxx
Issue of share capital
xxxx
Add: Increase in share premium xxxx
: Increase in preference share capital xxxx
: Increase in long-term bank loan xxxx
: Increase in mortgage loan
: Increase in secured loan (xxxx)
: Increase in unsecured loan (xxxx)
: Increase in long-term note payable (xxxx)
(xxxx)
Less: Redemption of pref. shares with premium (xxxx)
: Redemption of debenture with premium xxxx)
: Decrease in long- term bank loan (xxxx)
: Decrease in mortgage loan (xxxx)
 Xxxx

(xxxx)
(xxxx)
(xxxx)
(xxxx)
xxxx
: Decrease in secured loan (xxxx)
:Decrease in unsecured loan
: Decrease in long- term note payable
: Dividend Paid
Cash flow from financing activities
Purchase (Rs. 5,00,0000)
(III) Calculations of cash flow from investing activities
CostFixed
of goods soldpurchase
assets Rs. 7,00,000
Add: Increase in inventory 1,00,000
##Consider the following information ( CW )
Liabilities Increase Assets Increase
Share capital 5,00,000 Plant and machinery 4,00,000
Share premium 50,000 Acc. Depreciation (40,000)
General reserve 50,000 Investment in debenture 3,00,000
Reserve fund 40,000 Investment in share 2,00,000
Capital reserve 60,000 Debtors 50,000
Provision for dividend 1,00,000 A /R 50,000
6% debenture 2,00,000 B/R 40,000
Bonds payable 1,00,000 Preliminary exp 50,000
Provision for A/R 5,000 Debenture discount (5,000)
Discount on bonds payable (10,000)
Profit and loss a/c (10,000)
Cash in hand 80,000
Total 11,05,000 Total 11,05,000
Required: prepare cash flow statement Ans: OP 1,80,000 IA ( 9,50,000) FA 8,50,000

Cash flow statement (Indirect method)

Details Amount Amount
I. Calculations of Cash flow from operation
Net profit/(loss) for the year 10,000

Add: Non-operating and non- cash expenses

:Discount on bonds payable written off 10,000
: Discount on debenture written off 5,000
: depreciation for the year 40,000
: Increase in provision for A/R 5,000
Provision for dividend 1,00,000
Increase in capital reserve 60,000
Increase in reserve fund 40,000
: Increase in general reserve 50,000 3,10,000
 3,20,000

Less: Non- operating and non-cash income

: Increase in debtors (50,000)
: Increase in A/R (50,000)
: Increase in B/R (40,000) (1,40,000)
(I) Cash flow from operation 1,80,000

II.Calculation of cash flow from investing

Plant and machinery purchase (4,00,000)
: Investment in debentures (3,00,000)
: Investment in shares (2,00,000)
: increase in preliminary expenses (50,000)
(II) Cash flow from investing (9,50,000)

III.Cal. Of cash flow from financing

Issue of share 5,00,000
Increase in share premium 50,000
Issue of debenture 2,00,000
: Increase in bonds payable 1,00,000
(III) Cash flow from financing 8,50,000

(I+ II+ III) Changes in cash 80,000

Plant and machinery a/c

To Opening balance 2,00,0000 By depreciation on sold nil

To Purchase 4,00,000 BY closing 6,00,0000

Accumulated depreciation
To Dep on sold (bal. figure ) By Opening balance 100,000
To closing balance 1,40,000 BY depreciation for the year 40,000

Provision for dividend

To dividend [paid] By Opening balance 20,000
To closing balance 1,20,000 BY Provision P/L a/c 1,00,000

Balance sheet
I II I II III
Capital 1,00,000 Bank balance 1,00,000 90,000
Loss - 10,000 4,000
 27. The cash flow statement of the company for the year 2070 and 2071 are given below.
Details 2070 2071
Sales revenue 11,00,000 16,00,000
Purchas of raw materials 5,00,000 12,00,000
Wages 1,00,000 2,50,000
Operating expenses 1,50,000 1,50,000
Depreciation 60,000 60,000
Administrative expenses 30,000 30,000
Selling expenses 20,000 40,000
Tax expenses 40,000 60,000
Other overhead 25,000 40,000
Increase/(decrease) in inventory (40,000) 2,50,000
Increase/ (decrease) in debtors 50,000 1,50,000
Increase/ (decrease) in creditors 60,000 (1,00,000)
Increase/(decrease) in other liabilities 30,000 40,000
Cash flow from operation ---------? --------?
Cash flow from financing activities
Issue of share capital ------- 2,00,000
Redemption of debenture (2,00,000) (3,00,000)
Dividend paid (50,000) (50,000)
Debenture issued --- 6,00,000
Net cash flow from financing activities (2,50,000) 4,50,000
Cash flow from investing activities
Purchase of plant (2,00,000) (2,00,000)
Purchase of investment ----- ----
Sale of investment 2,50,000 1,00,000
Sale of fixed assets ----- ----
Net cash flow from investing activities 50,000 (1,00,000)
Required:
I. Explain the difference between net income and cash flow from operation.
II. Comment on cash flow from operating, investing and financing activities of 2070 and
2071.
III. What do you conclude the cash flow statement of the firm of two subsequent years?
IV. Why preparation of cash flow statement is essential along with balance sheet
preparation?

Solution Income statement

 Details 2070 2071
Sales 11,00,000 16,00 ,000
Less: cost of goods sold
Opening stock of raw materials 1,40,000 1,00,0000
Purchase of raw maxterials 5,00,000 12,00,000
Wages 1,00,000 2,50,000
Less: closing stock of raw materials (1,00,000) (3,50,000)
Gross profit 4,60,000 4,00,000
Less: Other expenses
Operating expenses 1,50,000 1,50,000
Depreciation 60,000 60,000
Administrative expenses 30,000 30,000
Selling expenses 20,000 40,000
Other overhead 25,000 40,000
Tax expenses 40,000 60,000
Net profit after tax 1,35,000 20,000

Calculations of cash flow from operating activities (Indirect method)

Details 2070 2071
Net profit for the year 1,35,000 20,000
Provision for tax 40,000 60,000
Add: Non- operating and non- cash expenses
Depreciation 60,000 60,000
Decrease in inventory 40,000 -
Increase in creditors 60,000 -
Increase in other liabilities 30,000 40,000
3,65,000 1,80,000

Less: Non- operating and non- cash income (2,50,000)

-
Increase in inventory (1,50,000)
Increase in debtors (50,000)
Decrease in creditors - (1,00,000)
Tax paid (40,000) (60,000)

2,75,000 (3,80,000)
Cash flow from operating activities
 Provision for tax 2070
To Tax paid (bal. figure ) 40,000 By Opening balance nil
To closing balance nil BY Provision for tax (P/L) a/c 40,000

Cash flow statement

Problem No.1 1 year 2 year

Proposed dividend 20,000 30,000

Dividend Paid during the second year Rs.25,000

Required: accounting treatment for proposed dividend Ans: 35,000

Problem No.2 1 year 2 year

Provision for dividend 50,000 30,000

Dividend Paid during the second year Rs.35,000

Required: accounting treatment for dividend Ans: 15,000

Problem No.3 1 year 2 year

Proposed dividend 10,000 30,000

Provision during the second year Rs.25,000

Required: accounting treatment for proposed dividend Ans: 25,000

Problem No.4 1year 2 year

Provision for tax 10,000 20,000

Tax paid during second year Rs.30,000

Required: accounting treatment for tax Ans: 40,000

Problem No. 5 1year 2 year

 Provision for tax 30,000 20,000

Tax paid during second year Rs.40,000

Required: accounting treatment for ta x Ans: 30,000

Problem No.6 1year 2 year

Provision for tax 50,000 90,000

Provision for tax during second year Rs.30,000

Required: accounting treatment for tax Ans: not possible

Problem No.7 1year 2 year

Provision for tax 50,000 30,000

Provision for tax during second year Rs.30,000

Required: accounting treatment for tax Ans:50,000

Problem No8: 1 year 2 year

Fixed assets 3,00,000 3,50,000

Accumulated depreciation 70,000 80,000

A part of fixed assets costing 70,000 was sold for Rs.60, 000; the accumulated depreciation
on sold machine was Rs.15,000

Required: accounting treatment Ans: gain on sale 5,000 purchase 1,20,000

Problem No.9 1 year 2 year

Fixed assets 2,00,000 3,50,000

Accumulated depreciation 70,000 50,000

A part of fixed assets costing 70,000 was sold for Rs.60,000.

Required: accounting treatment for above transaction Ans: gain on sale 10,000 purchase 1,20,000

Problem no.10 1 year 2 year

Fixed assets (gross) 2,00,000 2,50,000

Accumulated depreciation 30,000 50,000

 Apart of fixed assets having book value Rs.70,000 was sold for Rs.60,000. Depreciation for
the year was Rs.25,000

Required: accounting treatment for above transaction Ans: loss on sale 10,000 purchase 1,25,000

Problem No.11 1 year 2year

Fixed assets (net ) 2,00,000 2,50,000

Accumulated depreciation 30,000 50,000

A part of fixed assets having book value Rs.70,000 was sold for Rs.60,000.
Accumulated depreciation on sold machine was Rs.5,000

Required: accounting treatment for above transaction Ans: loss on sale 10,000 purchase 1,45,000

Problem No.12

Details / year I II
Sundry debtors 50,000 1,00,000
Bills receivable 20,000 15,000
Provision for bad debt 15,000 10,000
Provision for discount 3,000 1,000
Bad debts written off -- 2,000
The net sales during the period was Rs.10,00,000

Required: cash collection from customers and cash sales Ans:-. 9, 46,000

Problem No.13 Following information is given to you

Details / yea r 2062 2063

Sales return -- 10,000
Sales -- 6,00,000
Account receivable 50,000 25,000
Sundry debtors 70,000 80,000
Provision for bad debt 18,000 20,000
Bad debts recovered -- 15,000
Bad debts written off -- 6,000
Required: cash collection from customers and cash sales Ans:-. 5,98,000

Problem No.14 Following information is given to you

Details / year 2063 2064

Purchase -- 2,05,000
Sundry creditors 20,000 30,000
Bills payable 25,000 20,000
Discount received -- 5,000
 Inventory 25,000 30,000
Required: Amount paid to the supplier Ans: 1,95,000

Problem No.15 Following information is given to you

Particular 2063 2064

Wages Exp during the year 3,00,000
Outstanding wages 15,000 25,000

Required: wages paid during the year Ans: 2,90,000

Problem No.16 Following information is given to you

Particular 2064 2063

Operating exp 2,00,000
Administrative exp 1,00,000
Selling and distribution exp 50,000
Out standing operating exp 20,000 10,000
Prepaid selling and distribution exp 10,000 5,000
Required: Payment for operating other exp Ans. 3,45,000

Problem No.17 Following information is given to you

Details /year 2063 2064

Interest exp 70,000
Outstanding interest 1,25,000 10,000
Required: Interest paid during the year Ans. 1,85,000

Problem No.18 Following information is given to you

Particular 2063 2064

Interest exp 50,000
Outstanding interest 5,000 10,000
Required: Interest paid during the year Ans. 45,000

Problem No.19 Following information is given to you

Details /year 2063 2064

Share capital 2,00,000 5,00,000
Preference share capital 1,00,000 50,000
6%Debenture 3,00,000 2,50,000
Bonds payable 5,00,000 4,00,000
Long term loan 10,00,000 10,00,000
Provision for dividend 50,000 30,000
Required: Cash flow from financing activities Ans. 80,000
Problem No.20 Following information is given to you

Details /year 2063 2064

Share capital 2,00,000 5,00,000
Preference share capital 1,00,000 50,000
6%Debenture 3,00,000 2,50,000
Bonds payable 5,00,000 4,00,000
Long term loan 10,00,00 10,00,000
Provision for dividend 0 30,000
50,000
preference share and debenture were redeemed at 5% premium . Last year dividend paid this
year

Required: Cash flow from financing activities Ans. 45,000

Problem No.21 Consider the following information

Cash collected from sales and debtors Rs,2,00,000

Cash paid to supplier Rs.50,000
Cash paid to employee Rs.20,000
Interest paid Rs.10,000
Tax paid Rs.5,000
Required: Cash flow from operating activities Ans 15,000

Problem No.22 Consider the following information

Cash collected from sales and debtors Rs,5,00,000

Cash paid to supplier Rs.1,50,000
Cash paid to employee Rs1,.20,000
Other operating exp Rs.60,000
Depreciation for the year Rs,50,000
Goodwill written off Rs,15,000
Loss on sale of fixed assts Rs.5,000
Preliminary exp written off Rs.10,000
Interest paid Rs.10,000
Tax paid Rs25,000
Required: Cash flow from operating activities by using Direct and indirect method

Ans: 1,35,000

Problem No.23 Consider the following information

Cash collected from sales and debtors Rs,5,00,000

Cash paid to supplier Rs.1,50,000
Cash paid to employee Rs1,.20,000
Other operating exp Rs.60,000
Depreciation for the year Rs,50,000
Goodwill written off Rs.15,000
 Loss on sale of fixed assts Rs.5,000
Preliminary exp written off Rs.10,000
Interest paid Rs.10,000
Tax paid Rs. 25,000
Detail /year 2064 2063
Debtors 20,000 40,000
Bills receivable 15,000 5,000
Account receivable 25,000 40,000
Notes receivable 50,000 30,000
Creditors 50,000 30,000
Bills payable 45,000 60,000
Notes payable 30,000 30,000
Required: Cash flow from operating activities by using Direct and indirect method
Ans:1,45,000

Problem No.24 Consider the following information

Particular 2061 2062

Sundry creditors 20,000 30,000
Bills payable 25,000 15,000
Outstanding exp 10,000 10,000
Advance income 5,000 2,000
Sundry debtors 60,000 80,000
Bills receivable 50,000 45,000
Stock 25,000 75,000
Prepaid exp 10,000 2,000
Net profit 80,000 depreciation for the year 80,000

Required: Cash flow from operating activities Ans. 20,000

Problem No.25 Consider the following information

Particular 2061 2062

Sundry creditors 20,000 30,000
Bills payable 25,000 15,000
Outstanding exp 10,000 10,000
Advance income 5,000 2,000
Sundry debtors 60,000 80,000
Bills receivable 50,000 45,000
Stock 25,000 75,000
Prepaid exp 10,000 2,000
 Profit and loss account for the current year

Particulars Amount Particulars Amount

To salaries 14,000 By gross profit 78,000
To rent 26,000 By gain sale of furniture 2,000
To depreciation 10,000
To loss on sale of plant 5,000
To net profit 25,000
Total 80,000 Total 80,000
Required: Cash flow from operating activities Ans. Op 22,000

Problem No.26 The following information is given to you

Items Increase
/( decrease)
Increase in gross value of plant 2,00,000
machinery 1,50,000
Increase in investment 2,00,000
Increase in investment ( debenture) 50,000
Increase in acc. Depreciation 50,000
Increase in goodwill 50,0000
Increase in advertisement exp
Depreciation for the year Rs.60,000

Required: cash flow from investing activities Ans. IA (6,60,000)

Problem No.27 Consider the following information

Liabilities Increase Assets Increase

/(Decrease) /(Decrease)
Share capital 5,00,000 Plant and machinery 4,00,000
Share premium 50,000 Acc. Depreciation (40,000)
General reserve 50,000 Investment in debenture 3,00,000
Reserve fund 40,000 Investment in share 2,00,000
Capital reserve 60,000 Debtors 50,000
Provision for dividend 1,00,000 A /R 50,000
6% debenture 2,00,000 B/R 40,000
Bonds payable 1,00,000 Preliminary exp 50,000
Provision for A/R 5,000 Debenture discount (5,000)
Discount on bonds payable (10,000)
Profit and loss a/c (10,000)
Cash in hand 80,000
Total 11,05,000 Total 11,05,000
Required: prepare cash flow statement Ans: OP 1,80,000 IA ( 9,50,000) FA 8,50,000

roblem NO.23 From the following information’s prepares cash flow statement.
 Capital 1 year 2nd year Assets 1 year 2nd year
Share capital 7,00,000 7,00,000 Cash at bank 17,35,000 19,30,000
6%Preference share 3,50,000 3,50,000 Calls in arrears 60,000 60,000
8%Debenture 2,00,000 2,00,000 Share forfeiture 20,000 20,000
Long term bank loan 3,00,000 3,00,000 Discount on issue of share 20,000 10,000
Bonds 2,00,000 2,00,000 Discount on issue of debt. 15,000 10,000
Capital reserve 10,000 10,000 Under writing commission 10,000 --
Profit & loss a/c 10,000 1,10,000
Provision for tax 20.000 50.000
Provision for dividend 30,000 60,000
Reserve 15,000 25,000
Sinking fund 25,000 25,000
Total 18,60,000 20,30,000 Total 18,60,000 20,30,000
Income statement for the year

Details Amount Amount

Sales 5,00,000
Less: material uses 2,00,000
Direct labour cost 50,000
Direct exp. 50,000 3,00,000
Gross profit 2,00,000
Less: other exp.
Operating exp. 30,000

EBT 1,70,000
Provision for tax 30,000
Provision for dividend 30,000
Transfer to reserve 10,000
Transfer to sinking fund -- 70,000
1,00,000
Ans: OP 1,95,000 changes 1,95,000

Problem NO.24 From the following information’s prepares cash flow statement.

Capital 1 year 2nd year Assets 1 year 2nd year

Share capital 7,00,000 7,00,000 Cash at bank 17,35,000 19,30,000
6%Preference share 3,50,000 3,50,000 Calls in arrears 60,000 60,000
8%Debenture 2,00,000 2,00,000 Share forfeiture 20,000 20,000
Long term bank loan 3,00,000 3,00,000 Discount on issue of share 20,000 10,000
Bonds 2,00,000 2,00,000 Discount on issue of debt. 15,000 10,000
Capital reserve 10,000 10,000 Under writing commission 10,000 --
Profit & loss a/c 10,000 1,00,000
Provision for tax 20.000 50.000
Provision for dividend 30,000 60,000
Reserve 15,000 25,000
Sinking fund 25,000 25,000
Total 18,60,000 20,20,000 Total 18,60,000 20,20,000
Income statement for the year
Details Amount Amount
Sales 5,00,000
Less: material uses 2,00,000
Direct labour cost 50,000
Direct exp. 50,000 3,00,000
Gross profit 2,00,000
Less: other exp.
Operating exp. 30,000
EBT 1,70,000
Provision for tax 30,000
Provision for dividend 30,000
Transfer to reserve 10,000
Transfer to sinking fund -- 70,000
Profit and (loss )a/c 1,00,000
Ans:- Op 1,95,000 changes 1,95,000
Problem No.73 Consider the following balance sheet

Capital and liabilities 2063 2064 Assets 2063 2064

Share capital 200,000 240,000 Land and building 1,05,000 1,50,000
8%Debentures 50,000 -- Plant and equipment 2,90,000 3,20,000
share premium -- 10,000 Furniture 9,000 10,000
general reserve 30,000 50,000 Inventories 1,30,000 1,05,000
profit and loss a/c 48,000 68,000 Sundry debtors 75,000 85,000
sundry creditors 1,30,000 1,50,000 Cash 15,000 26,000
Prov. for dividend 20,000 24,000
Acc. depreciation
On plant 140,000 1,50,000
On furniture 6,000 4,000
Total 6,24,000 6,96,000 Total 624,000 6,96,000
Additional information:
during the year furniture which cost Rs.5,000,written down value Rs.1,000 was sold for Rs.2,000
plant and machinery which cost Rs.20,000and in respect of which Rs.13,000had been provided
as depreciation was sold during the year for Rs.3,000
the dividend of last year was paid in the current year
Interest received Rs.2,000 and dividend received Rs.7,000 have been included in net profit
Required: Cash flow statement showing cash flows from
a) Operating activities b) Investing activities
c) Financing activities
d) Net changes in cash and bank balance
Ans. 1) 1,18,000 2) (87,000) 3) ( 20,000) 4) 11,000
Q.2 The information is extracted from the trading company Income statement of 2 nd year

Amount Amount
Sales revenue 60,00,000
Less: cost of good s sold
Beginning inventory 1,00,000
Purchase 20,00,000
Ending inventory (2,00,000)
Wages paid 4,00,000 23,00,000
Gross margin 37,00,000
Less : operating exp
Operating exp excluding depreciation 10,00,000
Depreciation on plant 2,00,000
Administrative exp. 5,00,000
Selling and distribution exp. 4,00,000
Goodwill written off 30,000
Patent right written off 20,000
 Premium on redemption of debenture 50,000
Loss on sale of plant (sale Rs.1,20,000) 25,000
Provision for tax 2,00,000
Provision for dividend 2,50,000 26,75,000
Net operating profit 10,25,000

Balance sheet as on 31st Dec.

Liabilities 1st year 2nd year Assets 1st year 2nd year
Share capital 10,00,000 12,00,000 Plant and equipment 10,00,000 14,00,000
Retained earning 1,75,000 12,00,000 Prepaid exp 50,000 40,000
Debenture 2,00,000 --- Marketable securities 3,00,000 5,00,000
Sundry creditors 2,25,000 1,00,000 Inventories 1,00,000 2,00,000
Bank loan 4,00,000 3,00,000 Sundry debtors 4,00,000 6,00,000
Bills payable 2,00,000 2,00,000 Goodwill 1,00,000 70,000
Provision for tax 1,00,000 2,00,000 Patent right 50,000 30,000
Cash 3,00,000 3,60,000
Total 23,00,000 32,00,000 Total 23,00,000 32,00,000
Required cash flow statement
1. The cash flow statement of the company for the year 2070 and 2071 are given below.
Details 2070 2071
Sales revenue 11,00,000 16,00,000
Purchas of raw materials 5,00,000 12,00,000
Wages 1,00,000 2,50,000
Operating expenses 1,50,000 1,50,000
Depreciation 60,000 60,000
Administrative expenses 30,000 30,000
Selling expenses 20,000 40,000
Tax expenses 40,000 60,000
Other overhead 25,000 40,000
Increase/(decrease) in inventory (40,000) 2,50,000
Increase/ (decrease) in debtors 50,000 1,50,000
Increase/ (decrease) in creditors 60,000 (1,00,000)
Increase/(decrease) in other liabilities 30,000 40,000
Cash flow from operation ---------? --------?
Cash flow from financing activities
Issue of share capital ------- 2,00,000
Redemption of debenture (2,00,000) (3,00,000)
Dividend paid (50,000) (50,000)
Debenture issued --- 6,00,000
Net cash flow from financing activities (2,50,000) 4,50,000
Cash flow from investing activities
Purchase of plant (2,00,000) (2,00,000)
Purchase of investment ----- ----
Sale of investment 2,50,000 1,00,000
Sale of fixed assets ----- ----
Net cash flow from investing activities 50,000 (1,00,000)
Required:
V. Explain the difference between net income and cash flow from operation.
VI. Comment on cash flow from operating, investing and financing activities of 2070 and
2071.
VII. What do you conclude the cash flow statement of the firm of two subsequent years?
VIII. Why preparation of cash flow statement is essential along with balance sheet
preparation?
*The given financial information is extracted from the Belta and Delta trading for the year ended
2071.
Details Belta Trading Delta Trading
Sales revenue 20,00,000 20,00,000
Cost of goods sold 60% 50%
Administrative expenses 1,65,000 65,000
Selling expenses 3,00,000 2,40,000
Premium on redemption of debenture 50,000 --
Loss on sale F.A. (cost 60,000 accumulated dep. 40,000) 15,000 --
Loss on sale of investment -- 10,000
Premium on redemption of preference share -- 15,000
Other overhead 80,000 35,000
Tax expenses 40% 40%
Increase/(decrease) in inventory (50,000) 2,60,000
Increase/ (decrease) in debtors 50,000 1,50,000
Increase/ (decrease) in creditors 60,000 (1,50,000)
Increase/(decrease) in other liabilities 30,000 40,000
Increase/(decrease) in provision for tax 80,000 30,000
Increase/(decrease) in accumulated depreciation 20,000 40,000
Increase/(decrease) in short-term borrowings 1,00,000 (80,000)
Increase/(decrease) in debenture (3,00,000) 2,00,000
Increase/(decrease) in share capital 2,50,000 4,00,000
Increase /(decrease) in preference share capital (2,00,000) (1,50,000)
Increase /(decrease) fixed assets 3,00,000 3,50,000
Increase /(decrease) in investment 80,000 (1,00,000)
Beginning cash balance 1,00,000 2,50,000
Required:
IX. Compute and compare Net income and Cash flow from operation of Belta and Delta
trading of the year 2071. (12)
X. What would be the amount of ending cash balance of Belta and Delta trading at the
end of the year 2071. (8)
XI. Analyze the Cash flow statement you prepared and comment on the financial
performance of the Belta and Delta trading company. Use appropriate ratio for
supporting calculations. (8)
XII. Why preparation of cash flow statement is essential along with balance sheet
preparation?

(2)
1. The cash flow statement of the company for the year 2070 and 2071 are given below.
Details 2070 2071
Sales revenue 11,00,000 16,00,000
Purchas of raw materials 5,00,000 12,00,000
Wages 1,00,000 2,50,000
Operating expenses 1,50,000 1,50,000
Depreciation 60,000 60,000
Administrative expenses 30,000 30,000
Selling expenses 20,000 40,000
Tax expenses 40,000 60,000
Other overhead 25,000 40,000
Increase/(decrease) in inventory (40,000) 2,50,000
Increase/ (decrease) in debtors 50,000 1,50,000
Increase/ (decrease) in creditors 60,000 (1,00,000)
Increase/(decrease) in other liabilities 30,000 40,000
Cash flow from operation ---------? --------?
Cash flow from financing activities
Issue of share capital ------- 2,00,000
Redemption of debenture (2,00,000) (3,00,000)
Dividend paid (50,000) (50,000)
Debenture issued --- 6,00,000
Net cash flow from financing activities (2,50,000) 4,50,000
Cash flow from investing activities
Purchase of plant (2,00,000) (2,00,000)
Purchase of investment ----- ----
Sale of investment 2,50,000 1,00,000
Sale of fixed assets ----- ----
Net cash flow from investing activities 50,000 (1,00,000)
Required:
XIII. Explain the difference between net income and cash flow from operation.
XIV. Comment on cash flow from operating, investing and financing activities of 2070 and
2071.
XV. What do you conclude the cash flow statement of the firm of two subsequent years?
XVI. Why preparation of cash flow statement is essential along with balance sheet
preparation?
 Attempt all the questions: (30)
2. The given financial information is extracted from the books of Happy Company at
end of the respective years.
Particulars / Time 2074 2075 2076
Sales revenue 40,00,000 40,00,000
Cost of goods sold 60% 60%
Purchase 20,00,000 25,00,000
Administrative expenses 2,50,000 2,50,000
Selling expenses 3,00,000 2,40,000
Premium on redemption of debenture 60,000 --
Loss on sale of plant (cost 2,00,000 acc. dep. 50,000) 50,000 --
Gain on sale of marketable securities -- 50,000
Gain on sale of investment 80,000
Premium on redemption of preference share 1,00,000
Goodwill written off 30,000 30,000
Other overhead 1,80,000 1,75,000
Cash balance 7,00,000
Debtors 1,50,000 50,000 2,00,000
Bills receivable 1,00,000 30,000 1,20,000
Marketable securities 50,000 1,90,000 40,000
Inventory 4,00,000
Goodwill 2,00,000 170,000 1,40,000
Plant and machinery (Net) 3,00,000 5,00,000 6,50,000
Land and building 5,00,000 7,00,000 8,00,000
Investment ---- 4,00,000 1,20,000
Share capital 4,00,000 5,00,000 9,00,000
Share premium 40,000 50,000 50,000
6% Preference share capital 6,00,000 2,00,000 3,00,000
8% Debenture 3,00,000 1,00,000 1,00,000
Long term bank loan 5,00,000 2,00,000 4,00,000
Creditors 20,000 80,000 30,000
Bills payable 40,000 30,000 50,000
Provision for bad debts 20,000 30,000 45,000
Accumulated depreciation on plant 2,00,000 3,00,000 4,00,000
Required:
XVII. Compute and compare Net income and Cash flow from operation for the year
ended 2075 and 2076. (12)
XVIII.What would be the amount of cash balance at the end of year 2075 and 2076.

(8)
XIX. Analyze the Cash flow statement you prepared and comment on the financial
performance of the Happy Company. Use appropriate ratio for supporting
calculations. (8)
XX. Why preparation of cash flow statement is essential along with balance sheet
preparation? (2)