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Financial Accounting I – Statements of cash flow (direct–indirect method)
BBA | BBA-BI | BBA-TT | BCIS 1st
PU 2018 Fall Q. No. 18
A Trading Concern had the following financial statements prepared as of Dec. 31, 2017.
Income statement
For the period ended December 31, 2017
| Sales revenues Cost of goods sold Gross margin Depreciation Advertising expenses Salaries expenses Total operating expenses Operating income Loss on sale of land Income before tax Income tax Net income | Rs. 89,000 57,000 32,000 6,500 3,200 12,000 21,700 10,300 2,500 7,800 2,600 5,200 |
Balance Sheet
As of December 31, 2017
| 2017 | 2016 | |
| Cash Accounts receivable Inventory Prepaid | Rs. 12,000 22,000 25,400 10,000 | Rs. 9,500 18,400 20,500 8,600 |
| Total current assets | 69,400 | 57,000 |
| Land Equipment 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 |
| Notes payable Capital stock Retained earnings | 70,000 130,000 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:
a. Land was purchased by issuing notes during the year.
b. A piece of land was sold during the year for Rs. 27,500.
c. Capital stock was issued for cash.
You are required to prepare Statement of Cash Flows and also calculate cash flow from operating activity under indirect method. [ 20 ]
Solution:
A Trading Concern
Cash flow statement (direct method)
For the year ended Dec. 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 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 equipment Sale of land Net cash flow from investing activities | (60,000) 27,500 (32,500) |
| 3. Cash flow from financing activities Issue of capital stock Dividend paid Net cash flow from financing activities | 30,000 (600) 29,400 |
| 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:
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)
Dividend paid = Beginning retained earnings + Net income – Ending retained earnings = 74,300 + 5,200 – 78,900 = Rs. 600
ii.
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 Decrease in salary 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 |