Financial Accounting I – Statements of cash flow (direct method)
BBA | BBA-BI | BBA-TT | BCIS 1st
PU 2017 Fall Q. No. 18
Share Inc. is a fast growing company and has just completed another successful year as indicated by the following income statement.
Income Statement for the year ended
December 31, 2014
Rs. In ‘000’
| Revenue and gains | Amount (Rs.) |
| Sales revenue Interest revenue Gain on sale of machine | 670 15 5 |
| Total revenue and gains | 690 |
| Expenses and loss Cost of goods sold Salaries and wages Depreciation Insurance Interest Income tax Loss on retirement of bonds Total expenses and loss | 390 60 40 12 15 50 3 570 |
| Total | 120 |
Balance Sheet
As of December 31, 2014
| Particulars | 2001 | 2000 |
| Cash Bills receivable Inventory Prepaid expenses Total current assets Long-term investment Land Property and equipment Accumulated depreciation Total long-term assets | Rs. 35,000 63,000 84,000 12,000 194,000 120,000 150,000 320,000 (100,000) 490,000 | Rs. 46,000 57,000 92,000 18,000 213,000 90,000 100,000 280,000 (75,000) 395,000 |
| Total assets | 684,000 | 608,000 |
| Accounts payable Salaries and wages payable Income taxes payable Total current liabilities Notes payable Bonds payable Total long-term liabilities Capital stock Retained earnings Total stockholder’s equity | 38,000 7,000 8,000 53,000 85,000 200,000 285,000 100,000 246,000 346,000 | 31,000 9,000 5,000 45,000 35,000 260,000 295,000 75,000 193,000 268,000 |
| Total liabilities and stockholder’s equity | 684,000 | 608,000 |
Additional information:
a. Land was purchased by issuing Rs. 50,000 note payable.
b. A machine with an original cost of Rs. 35,000 and book value of Rs. 20,000 was sold for Rs. 25,000.
c. Bonds are retired with premium.
Required:
i. Statement of cash flows using direct method for the year ended December 31, 2014.
ii. Operating activities under indirect method.
iii. Explain how cash balance decreased in 2014 in such a profitable year. [20]
Solution:
Cash flow statement (direct method)
For the year ended December 31, 2014
| Particulars | Amount Rs. |
| 1. Cash flow from operating activities: a. Cash sales and collection from customers Sales revenue Increase in bills receivable | 6,70,000 (6,000) |
| b. Cash paid to suppliers Cost of goods sold Decrease in inventory Increase in account payable | (3,90,000) 8,000 7,000 |
| c. Cash paid to employees and operating expenses Salaries and wages Insurance Decrease in salary payable | (60,000) (12,000) 6,000 (2,000) |
| d. Payment of interest Interest expense | (15,000) |
| e. Payment of tax Income tax expense Increase in income tax payable | (50,000) 3,000 |
| f. Interest income Interest revenue Net cash flow from operating activities (a + b + c + d + e + f) | 15,000 1,74,000 |
| 2. Cash flow from investing activities: Purchase f long-term investment Sale of machine Purchase of property and equipment Net cash flow from investing activities | (30,000) 25,000 (75,000) (80,000) |
| 3. Cash flow from financing activities Redemption of bond with premium Dividend paid Net cash flow from financing activities | (63,000) 25,000 (67,000) (1,05,000) |
| Net changes in cash or cash equivalent (1+2+3) Add: Opening cash balance | (11,000) 46,000 |
| Ending cash balance | Rs. 35,000 |
Working note:
Accumulated depreciation = Beginning accumulated depreciation + Depreciation – Ending accumulated depreciation = 75,000 + 40,000 – 1,00,000 + Rs. 15,000
Plant and machinery = Ending balance – Beginning balance + Net accumulated depreciation + Book value = 3,20,000 – 2,80,000 + 15,000 + 20,000 = Rs. 75,000
Dividend paid = Beginning balance of retained earnings + Net income – Ending balance of retained earnings = 1,93,000 + 1,20,000 – 2,46,000 = Rs. 67,000
ii.
Cash flow from operating activities under indirect method
| Net income Add: Non-operating expenses Depreciation Loss on retirement of bonds | 1,20,000 40,000 3,000 |
| Less: Non-operating incomes Gain on sale of machine | 5,000 |
| Cash flow from operating activities before current asset and liabilities Increase in bills receivable Decrease in inventory Increase in accounts payable Increase in income taxes payable | 1,58,000 (6,000) 8,000 6,000 7,000 (2,000) 3,000 |
| Net cash flow from operating activities | Rs. 1,74,000 |
iii. The company’s cash balance is decreased due to more payments activities than that of its issuing and selling. Similarly, the operating cash balance is less than that of the cumulation (summation) of investing and financing activities.