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Accounting: Cash Flow Statement: Method and Preparing Cash Flow Statement
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.
Cash from operations = operating profit before working capital changes + Net decrease in current assets + Net Increase in current liabilities β Net increase in current assets β Net decrease in current liabilities |
Example:
The net Income reported in the Income Statement for the year as βΉ 110,000 and depreciation of fixed assets for the year was βΉ 44000. The balances of the current assets and current liabilities at the beginning and end of the year are as follows. Calculate cash from operatingactivities.
Current Items | βΉ | βΉ |
---|---|---|
Cash | ||
Debtors | ||
Inventories | ||
Prepaidexpenses | ||
Accountpayables |
Solution:
Details | Amount (βΉ) |
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 ininventories10,000 | |
(b) Decrease inprepaidexpenses1000 | 11000 |
165,000 | |
Deduct: (a) Increase inDebtors (20,000) | |
Current liabilities | |
(b) Decrease in Accountpayables (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:
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
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 |