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Financial Accounting I – Statements of cash flow (indirect & direct method)
BBA | BBA-BI | BBA-TT | BCIS 1st
PU 2015 Spring Q. No. 18
World Wide Corp. is in the process of preparing its statement of cash flow for the year ended June 30, 2007. An income statement for the year and comparative balance sheets as follows:
Income statement
For the year ended June 30, 2007
| Particulars | Amount |
| Sales revenue Cost of goods sold | Rs. 4,00,000 2,40,000 |
| Gross profit General and administrative expenses Depreciation expenses Losss on sales of plant assets | 1,60,000 40,000 80,000 10,000 |
| Total expenses and losses Income before interest and taxes | 1,30,000 30,000 |
| Interest expenses | 15,000 |
| Income before taxes Income tax expenses | 15,000 5,000 |
| Net income | 10,000 |
Balance Sheet
On June 30
| 2007 | 2006 | |
| Cash Account receivable Inventory Prepaid rent | Rs. 25,000 80,000 75,000 2,000 | 40,000 69,000 50,000 18,000 |
| Total current assets | 182,000 | 177,000 |
| Land Plant and equipment Accumulated depreciation Total long-term assets | 60,000 5,75,000 (3,10,000) 3,25,000 | 1,50,000 5,00,000 (2,50,000) 4,00,000 |
| Total Assets | 5,07,000 | 5,77,000 |
| Account payable Other accrued liabilities Income tax payable Total current liabilities | 1,45,000 50,000 5,000 2,00,000 | 1,40,000 45,000 15,000 2,00,000 |
| Long-term loan | 75,000 | 1,50,000 |
| Common stock Retained earnings Total stockholder’s equity | 1,00,000 1,32,000 2,32,000 | 1,00,000 1,27,000 2,27,000 |
| Total liabilities and stockholder’s equity | Rs. 5,07,000 | 5,77,000 |
Dividend of Rs. 5,000 were declared and paid during the year, New plant assets were purchased for Rs. 1,25,000 in cash during the year. Also, the land was sold for cash at its book value. Plant assets were sold during 2007 for Rs. 20,000 in cash. The original cost of the assets sold was Rs. 50,000, and their book value was, Rs. 30,000. A portion of the bank loan was repaid.
Required:
i. A Statement of Cash Flow for 2007, using the direct method in the operating activities section. [10]
ii. Indirect method of operating activities. [5]
iii. Explain why cash balance has been decreased in the balance sheet in such a profitable year showing in the income statement. [5]
Solution:
i.
World Wide Corporation
Cash flow statement (direct method)
For the year ended June 30, 2007
| Particulars | Amount Rs. |
| 1. Cash flow from operating activities:- a. Cash sales and collection from customers Sales revenue Increase in account receivable | 4,00,000 (11,000) |
| b. Cash paid to suppliers Cost of goods sold Increase in inventory Increase in account payable | (2,40,000) (25,000) 5,000 |
| c. Cash paid to employees and operating expenses General and administrative expenses Decrease in prepaid rent Increase in other accrued liabilities | (40,000) 16,000 5,000 |
| d. Payment of interest Interest expenses | (15,000) |
| e. Payment of tax Income tax expenses Decrease in income tax payable Net cash flow from operating activities (a + b + c + d + e) | (5,000) (10,000) 80,000 |
| 2. Cash flow from investing activities Purchase of plant Sale of land Sale of plant Net cash flow from investing activities | (1,25,000) 90,000 20,000 (15,000) |
| 3. Cash flow from financing activities Repayment of bank loan Dividend paid Net cash flow from financing activities | (75,000) (5,000) (80,000) |
| Net changes in cash or cash equivalent (1+2+3) Add: Opening cash balance | (15,000) 40,000 |
| Ending cash balance | Rs. 25,000 |
ii.
Cash flow from operating activities (indirect method)
| Particulars | Amount Rs. |
| Net income Add: Non-operating expenses Depreciation expenses Loss on sale of plants | 10,000 80,000 10,000 |
| Less: Non-operating incomes | |
| Operating cash flow before current assets and liabilities Increase in account receivable Increase in inventory Increase in account payable Increase in accrued liabilities Decrease in income tax payable | 1,00,000 (11,000) (25,000) 16,000 5,000 5,000 (10,000) |
| Net cash flow from operating activities | Rs. 80,000 |
iii. The corporation’s net income in the income statement is Rs. 10,000. And, in balance sheet operating or ending cash balance is Rs. 40,000 in 2006 but in 2007 it reached 25,000. It is due to the more purchase made by the corporation on assets during the period.