Financial Accounting I – Statements of cash flow (indirect & direct method)
BBA | BBA-BI | BBA-TT | BCIS 1st
PU 2018 Spring Q. No. 18
TS and VS Company has prepared income statement and balance sheet on 31st December, 2017 as follows: [20]
TS and VS Company
Income statement
For the year ended 31 December, 2017
| Particulars | Amount in Rs. |
| Sales revenue Cost of goods sold | 89,000 57,000 |
| Gross margin | 32,000 |
| Depreciation expenses Advertising expenses Salary expenses | 6,500 3,200 12,000 |
| Total operating expenses | 21,700 |
| Operating income Loss on sale of land | Rs. 10,300 2,500 |
| Earnings before tax Income tax expenses | 7,800 2,600 |
| Earnings after tax | 5,200 |
TS and VS Company
Comparative Balance Sheet
| Particulars | December 31, 2017 | December 31 2016 |
| Cash Accounts receivable Inventory Prepaid advertising | 12,000 22,000 25,400 10,000 | 9,500 18,400 20,500 8,600 |
| Total current assets | 69,400 | 57,000 |
| Land Equipment Less: Accumulated depreciation | 1,20,000 1,90,000 (70,000) | 80,000 1,30,000 (63,500) |
| Total long-term assets | 2,40,000 | 1,46,500 |
| Total assets | 3,09,400 | 2,03,000 |
| Account payable Salary payable Income tax payable | 15,300 14,000 1,200 | 12,100 16,400 700 |
| Total current liabilities | 30,500 | 29,200 |
| Capital stock Retained earnings | 2,00,000 78,900 | 1,00,000 74,300 |
| Total stockholder’s equity | 2,78,900 | 1,74,300 |
| Total liabilities and equity | 3,09,000 | 2,03,500 |
Additional information:
- Land was acquired during the year for Rs. 70,000.
- An unimproved parcel of land was sold during the year for Rs. 27,500. Its original cost to sound and vision company was Rs. 30,000.
- A specialized piece of equipment costing Rs. 60,000 was acquired in exchange for capital stock in the company.
- In addition to the capital stock issued in exchange for specialized equipment, some stocks were also sold for cash Rs. 40,000.
Dividend of Rs. 600 were paid.
Required:
a. Cash flow statement for the year 2017 using
b. Re-compute cash flow under operating activity using indirect method.
c. The president of the company asked you a question about the
Solution:
a.
TS and VS Company
Cash flow statement (direct method)
For the year ended December 31, 2017
| Particulars | Amount Rs. |
| 1. Cash flow from operating activities a. Cash sales and collection from customers Sales revenue Increase in account rececivable | 89,000 (3,600) |
| b. Cash paid to suppliers Cost of goods sold Increase in inventory Increase in account payable | (57,000) (4,900) 3,200 |
| c. Cash paid to the employee’s and other operating expenses Advertising expenses Salary expenses Increase in prepaid advertising Decrease in salary payable | (3,200) (12,000) (1,400) (2,400) |
| d. Payment of tax Income tax expenses Increase in income tax payable Net cash flow from operating activities (a + b + c + d) | (2,600) 500 5,600 |
| 2. Cash flow from investing activities Purchase of land Sale of land Net cash flow from investing activities | (70,000) 27,500 (42,500) |
| 3. Cash flow from financing activities Issue of capital stock Dividend paid Net cash flow from financing activities | 40,000 (600) 39,400 |
| Net changes in cash or cash equivalent (1+2+3) Add: Opening cash balance | 2,500 9,500 |
| Ending cash balance | Rs. 12,000 |
Working note:
Calculation of Net accumulated depreciation and equipment
Accumulated depreciation = Beginning accumulated depreciation + Depreciation for the year – Ending accumulated depreciation = 63,500 + 6,500 – 70,000 = 0
Equipment = Ending value of equipment – beginning value + Net accumulated depreciation = 1,90,000 – 1,30,000 + 0 = Rs. 60,000 (i.e. Purchase)
Issue of capital stock = Rs. 1,00,000
Here, The value of the equipment is exchanged with its equal value with the issue of capital stock (i.e 60,000 = 60,000), then the remaining value of the capital stock is Rs. 40,000.
b.
Cash flow from operating activities
Under Indirect method
| Particulars | Amount Rs. |
| Net income Add: Non-cash and non-operating expenses Depreciation expenses Loss on sale of land | 5,200 6,500 2,500 |
| Less: Non-cash and non-operating incomes | – |
| Cash flow from operating activities before current assets and liabilities Increase in account receivable Increase in inventory Increase in prepaid advertising Increase in account payable Increase in income tax payable | 14,200 (3,600) (4,900) (1,400) 3,200 (2,400) 500 |
| Net cash flow from operating activities | Rs. 5,600 |
iii. In income statement of TS and VS, company net income is Rs. 5,200. However, the company’s end cash balance is Rs. 12,000 which is more than that of net income. Similarly, it has more on operating cash flow than net income (i.e. 5,600 > 5,200). Due to these, the company position is in good condition. Hence, it is satisfactory.