Method And Preparing Cash Flow Statement Part 2

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Operating Activities:

Determination of cash flow from operating activities: It is done in two stages

Stage I:

Calculate operating profit before working capital changes

Stage II:

  • After getting operating profit before working capital changes as per stage I, adjust increase or decrease in the current assets and current liabilities.

    Adjustments

  • Current Assets:

    • An increase in an item of current assets causes a decrease in cash inflow because cash is blocked in current assets.

    • A decrease in an item of current assets causes an increase in cash inflow because cash is released from the sale of current assets.

  • Current Liabilities:

    • An increase in an item of current liability causes a decrease in cash outflow because cash is saved.

    • A decrease in an item of current liability causes increase in cash out flow because of payment of liability.

    Table of Cash from Operations
    Title: Table of Cash from operations

    Cash from operations = operating profit before working capital changes +

    Net decrease in current assets + Net Increase in current liabilities –

    Net increase in current assets – Net decrease in current liabilities

Example:

The net Income reported in the Income Statement for the year as Rs. 110,000 and depreciation of fixed assets for the year was Rs. 44000. The balances of the current assets and current liabilities at the beginning and end of the year are as follows. Calculate cash from operating activities.

Table of the Balances of the Current Items
Title: Table of The balances of the current Items

Current Items

Rs.

Rs.

Cash

Debtors

Inventories

Prepaid expenses

Account payables

Solution:

Table of the Balances of the Details.
Title: Table of The balances of the Details.

Details

Amount (Rs.)

Net Income

1,10,000

Adjustment for non cash and Non-operating items

Add Depreciation

44,000

Operating Profit before

154,000

working capital changes

Current Assets :

Add : (a) Decrease in inventories 10,000

(b) Decrease in prepaid expenses 1000

11000

165,000

Deduct : (a) Increase in Debtors (20,000)

Current liabilities

(b) Decrease in Account payables (14,000)

34,000

Net Cash flow from

operating Activities

131,000

Investing Activities:

Cash inflows from investing activities:

  • Cash sale of plant and machinery, land and Building, furniture, goodwill etc.

  • Cash sale of investments made in the shares and debentures of other Companies

  • Cash receipts from collecting the Principal amount of loans made to third parties.

Cash outflow from investing activities are:

  • Purchase of fixed assets i.e. land, Building, furniture, machinery etc

  • Purchase of Intangible assets i.e. goodwill, trade mark etc.

  • Purchase of shares and debentures

  • Purchase of Government Bonds

  • Loan made to third parties

Financial Activities:

Cash Inflow from financing activities are

– Issue of Equity and preference share capital for cash only.

– Issue of Debentures, Bonds and long-term note for cash only

Cash outflow from financing activities are :

– Payment of dividends to shareholders

– Redemption or repayment of loans i.e. debentures and bonds

– Redemption of preference share capital

– Buy back of equity shares.

Example:

From the following information. Calculate the Cash from financing activities:

Table of Calculate the Cash from Financing Activities
Title: Table of Calculate the Cash from financing activities

31.12.2006

31.12.2007

Particulars

Rs

Rs

Equity share capital

400,000

500,000

10% debentures

150,000

100,000

Securities premium

40000

50000

Additional Information: Interest paid on debentures Rs10000.

Solution. Calculation of Cash from financing activities

Table of Calculation of Cash from Financing Activities
Title: Table of Calculation of Cash from financing activities

Particulars

Cash proceeds from the issue of shares (Including premium)

Interest paid on debenture Redemption of debenture

Rs

10000

50000

110000

60,000

50,000