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Financial Accounting I – Statements of cash flow
BBA | BBA-BI | BBA-TT | BCIS 1st
PU 2012 Fall Q. No. 5
Sound and Vision Company has prepared income statement and balance sheet on 31st December 2010 as follows:
Sound and Vision Company
Income statement
For the year ended 31 December, 2010
| Particulars | Amount in Rs. |
| Sales revenue Cost of goods sold | 89,000 57,000 |
| Gross margin (A) | 32,000 |
| Depreciation expenses Advertising expenses Salary expenses | 6,500 3,200 12,000 |
| Total operating expenses (B) | 21,700 |
| Operating income (A-B) Loss on sale of land | Rs. 10,300 2,500 |
| Earnings before tax ( Income tax expenses | 7,800 2,600 |
| Earnings after tax (EAT) | 5,200 |
Sound and Vision Company
Comparative Balance Sheet
| Particulars | December 31, 2010 | December 31, 2009 |
| 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 (A) | 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 (B) | 2,40,000 | 1,46,500 |
| Total assets (C) = A + B | 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 (D) | 30,500 | 29,200 |
| Capital stock Retained earnings | 2,00,000 78,900 | 1,00,000 74,300 |
| Total stockholder’s equity (E) | 2,78,900 | 1,74,300 |
| Total liabilities and equity (F) = D + E | 3,09,000 | 2,03,500 |
Additional information:
a. Land was acquired during the year for Rs. 70,000.
b. 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.
c. A specialized piece of equipment costing Rs. 60,000 was acquired in exchange for capital stock in the company.
d. In addition to the capital stock issued in exchange for specialized equipment, some stocks were also sold for cash Rs. 40,000.
e. Dividend of Rs. 600 were paid.
Required: A statements of cash flows using direct method in operating activities section. You are required to show the working notes in details. [15]
Solution:
Sound and Vision Company
Cash flow statement (direct method)
For the year ended Dec. 31st, 2010
| 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 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.