FINANCIAL ANALYSIS

13

UNITS 1 & 2 : FUND FLOW STATEMENT AND CASH FLOW STATEMENT

(A) Write short notes on: Question 1 Cash Flow Statement. Answer Cash flow statement is a statement of inflows and outflows of cash and cash equivalents. It starts with the opening balance of cash and cash equivalents at the start of the accounting period. It then gives in a summary form, the inflows and outflows relating to the following three classifications of activities : (i) Operating activities : They are the principal revenue producing activities of the enterprise. (5 marks) (IntermediateNov. 1997)

(ii) Investing activities : They deal with the acquisition and disposal of long-term assets and long term investments. (iii) Financing activities : They reflect changes in the size and composition of capital in the case of a company this would preference capital and borrowings of the enterprise. The cash flows arising from extraordinary items are disclosed separately under each of the above three classifications. Likewise where the amount of significant cash and cash equivalent balances held by an enterprise are not available for use by the enterprise, the same should be disclosed separately together with a commentary by the management. Question 2 In the case of manufacturing company : (i) List the items of inflows of cash receipts from operating activities; (4 marks) [Intermediate May 1998] (ii) List the items of outlflows of investing activities.

13.2

Accounting

Answer (i) Inflows of cash receipts from operating activities : (a) Cash receipts from the sales of goods; (b) Royalties, fees, commission and other revenue; (c) Refunds of income-tax. (ii) Outflows of investing activities : (a) Cash payments for acquisition of fixed assets; (b) Cash payments for acquisition of shares, warrants or debts instruments of other enterprises and interests in joint ventures (other than payments for instruments considered to cash equivalents and those for dealing or trading purposes); (c) Cash advances and loans to third parties. Question 3 Classification of activities (with two examples) as suggested in AS 3, to be used for preparing a cash flow statements. (5 marks) (IntermediateMay 2001) Answer AS 3 (Revised) on Cash Flow Statements requires that the cash flow statement should report cash flows by operating, investing and financing activities. (i) Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. Cash receipts from sale of goods and cash payments to suppliers of goods are two examples of operating activities.

(ii) Investing activities are acquisition and disposal of long-term assets and other investments not included in cash equivalents. Payment made to acquire machinery and cash received for sale of furniture are examples of investing activities. (iii) Financial activities are those activities that result in changes in the size and composition of the owners capital (including preference share capital in the case of a company) and borrowings of the enterprise. Cash proceeds from issue of shares and cash paid to redeem debentures are two examples of financing activities. Question 4 Explain the difference between direct and indirect methods of reporting cash flows from operating activities with reference to Accounting Standard 3, (AS 3) revised. (8 marks) (Final Nov. 2001) Answer As per para 18 of AS 3 (Revised) on Cash Flow Statements, an enterprise should report cash flows from operating activities using either :

Financial Analysis

13.3

(a) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or (b) the indirect method, whereby net profit or loss in adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows. The direct method provides information which may be useful in estimating future cash flows and which is not available under the indirect method and is, therefore, considered more appropriate than the indirect method. Under the direct method, information about major classes of gross cash receipts and gross cash payments may be obtained either : (a) from the accounting records of the enterprise; or (b) by adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial enterprise) and other items in the statment of profit and loss for : (i) changes during the period in inventories and operating receivables and payables; (ii) other non-cash items; and (iii) other items for which the cash effects are investing or financing cash flows. Under the indirect method, the net cash flow from operating activies is determined by adjusting net profit or loss for the effects of : (a) changes during the period in inventories and operating receivables and payables; (b non-cash items such as depreciation, provisions, deferred taxes and unrealised foreign exchange gains and losses; and

(c) all other items for which the cash effects are investing or financing cash flows. Alternatively, the net cash flow from operating activities may be presented under the indirect method by showing the operating revenues and expenses, excluding non-cash items disclosed in the statement of profit and loss and the changes during the period in inventories and operating receivables and payables. Question 5 What all are the differences between Cash Flow statement and Fund Flow statement? (4 Marks) (PE-II May 2006) Answer Differences between cash flow statement and fund flow statement (i) Cash flow statement deals with the change in cash position between two points of time. Fund flow statement deals with the changes in working capital position. (ii) Cash flow statement contains opening as well as closing balances of cash and cash equivalents. The fund flow statement does not contain any such opening and closing balance.

13.4

Accounting

(iii) Cash flow statement records only inflow and outflow of cash. Fund flow statement records sources and application of funds. (iv) Fund flow statement can be prepared from the cash flow statement under indirect method. However, a cash flow statement cannot be prepared from fund flow statement. (v) A statement of changes in working capital is usually prepared alongwith fund flow statement. No such statement is prepared along with the cash flow statement. (B) Practical Questions: Question 1 Given below are the condensed Balance Sheets of Lambakadi Ltd. for two years and the statement of Profit and Loss for one year : (Figures Rs. in lakhs) As at 31st March 1998 1997 Share Capital In equity shares of Rs. 100 each 150 110 10% redeemable preference shares of Rs. 100 each 10 40 Capital redemption reserve 10 General reserve 15 10 Profit and loss account balance 30 20 8% debentures with convertible option 20 40 Other term loans 15 30 250 Fixed assets less depreciation Long term investments Working capital 130 40 80 250 250 100 50 100 250

Statement of Profit and Loss for the year ended 31st March, 1998 (Figures Rs. in lakhs) Sales 600 Less : Cost of sales 400 200 Establishment charges 30 Selling and distribution expenses 60 Interest expenses 5 Loss on sale of equipment (Book value Rs. 40 lakhs) 15 110 90 Interest income 4 Dividend income 2 Foreign exchange gain 10 Damages received for loss of reputation 14 30 120

Financial Analysis

13.5

Depreciation Taxes Dividends Net profit carried to Balance Sheet

50 70 30 40 15 25

Your are informed by the accountant that ledgers relating to debtors, creditors and stock for both the years were seized by the income-tax authorities and it would take atleast two months to obtain copies of the same. However, he is able to furnish the following data : (Figures Rs. in lakhs) 1998 1997 Dividend receivable 2 4 Interest receivable 3 2 Cash on hand and with bank 7 10 Investments maturing within two months 3 2 15 18 Interest payable Taxes payable Current ratio Acid test ratio 4 6 10 1.5 1.1 5 3 8 1.4 0.8

It is also gathered that debentureholders owning 50% of the debentures outstanding as on 31.3.97 exercised the option for conversion into equity shares during the financial year and the same was put through. You are required to prepare a direct method cash flow statement for the financial year, 1998 in accordance with para 18(a) of Accounting Standard (AS) 3 revised. (20 marks) (Final May 1998) Answer Lambakadi Ltd. Direct Method Cash Flow Statement for the year ended 31st March, 1998 (Rs. in lakhs) Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Taxes paid Cash flows before extraordinary item Damages received for loss of reputation Net cash from operating activities 621 (496) 125 (27) 98 14 112

13.6

Accounting

Cash flows from investing activities Purchase of fixed assets Proceeds from sale of equipment Proceeds from sale of long term investments Interest received Dividend received Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of share capital Redemption of preference share capital Repayments of term loans Interest paid Dividend paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period (See Note 1 to the Cash Flow Statement) Cash and cash equivalents at end of the period (See Note 1 to the Cash Flow Statement) Notes to the Cash Flow Statement (Rs. in lakhs) 1. Cash and Cash Equivalents Cash on hand and with bank Short-term investments Effect of exchange rate changes Cash and cash equivalents Rs.20 lakhs. Working Notes : 1. Calculation of debtors, creditors and stock (a) Current Ratio 31.3.98 1.5:1 (Rs. in lakhs) 31.3.97 1.4:1 31.3.1998 7 3 10 (10) Nil 31.3.1997 10 2 12 12 NIL 20 (30) (15) (6) (15) (46) (12) 12 (120) 25 10 3 4 (78)

2. Conversion of debentures into equity shares, a non-cash transaction, amounted to

Financial Analysis

13.7

Working Capital to Current Liabilities Ratio Working Capital (Rs.in lakhs) Current Assets (Rs.in lakhs) Current Liabilities (Rs.in lakhs) (b) Current Ratio Less : Acid Test Ratio Stock : Current Liabilities Stock (Rs.in lakhs) (c) Break-up of Current Assets Stock Debtors (Balancing figures) Other Current Assets (d) Break-up of Current Liabilities Creditors (Balancing figures) Others 2. Cash receipts from customers Sales Add: Debtors at the beginning of the year Less : Debtors at the end of the year 3. Cash paid to suppliers and employees Cost of sales Establishment charges Selling and distribution expenses Add: Creditors at the beginning of the year Stock at the end of the year Less : Creditors at the end of year Stock at the beginning of the year

0.5:1 80
80 1.5 240 0.5

0.4:1 100
10 1.4 350 0.4

240 80 = 160 1.5 1.1 0.4 0.4:1 160 0.4 = 64

350 100 = 250 1.4 0.8 0.6 0.6:1 250 0.6 = 150 (Rs. in lakhs) 150 182 18 350 242 8 250 600 182 782 161 621 400 30 60 490 306 796 300 496

64 161 15 240 150 10 160

242 64 150 150

13.8

Accounting

4. Taxes paid Tax expense for the year Add : Tax liability at the beginning of the year Less : Tax liability at the end of year

30 3 33 6 27

5. Fixed assets acquisitions W.D.V. at 31.3.1998 Add back : Depreciation for the year Disposals Less : W.D.V. at 31.3.1997 Purchase of fixed assets 6. Interest received Interest income for the year Add : Amount receivable at the beginning of the year Less : Amount receivable at the end of the year 7. Dividend received Dividend income for the year Add : Amount receivable at the beginning of the year Less : Amount receivable at the end of the year

130 50 40 220 100 120 4 2 6 3 3

2 4 6 2 4

8. Issue of shares Equity share capital at the end of the year Less : Equity share capital at the beginning of the year Less : Conversion of debentures into equity shares during the year (non-cash transaction) Cash flow from issue of equity shares 9. Interest paid Interest expense for the year Add : Interest payable at the beginning of the year

150 110 40 20 20

5 5

Financial Analysis

13.9

Less : Interest payable at the end of the year Notes : 1. It has been assumed that dividends for the year, Rs. 15 lakhs have been paid off.

10 4 6

2. It has been assumed that foreign exchange gain represents the effect of changes in exchange rates on cash and cash equivalents held in a foreign currency. Question 2 The following are the changes in the account balances taken from the Balance Sheets of PQ Ltd. as at the beginning and end of the year. : Changes in Rupees in debt or [credit] Equity share capital 30,000 shares of Rs. 10 each issued and fully paid Capital reserve 8% debentures Debenture discount Freehold property at cost/revaluation Plant and machinery at cost Depreciation on plant and machinery Debtors Stock and work-in-progress Creditors Net profit for the year Dividend paid in respect of earlier year Provision for doubtful debts Trade investments at cost Bank You are informed that. (a) Capital reserve as at the end of the year represented realised profits on sale of one freehold property together with surplus arising on the revaluation of balance of freehold properties. (b) During the year plant costing Rs. 18,000 against which depreciation provision of Rs. 13,500 was lying, was sold for Rs. 7,000. 0 ]49,200] [50,000] 1,000 43,000 60,000 [14,400] 50,000 38,500 [11,800] [76,500] 30,000 [3,300] 47,000 [64,300] 0

13.10 Accounting

(c) During the middle of the year Rs. 50,000 debentures were issued for cash at a discount of Rs. 1,000. (d) The net profit for the year was after crediting the profit on sale of plant and charging debenture interest. You are required to prepare a statement which will explain, why bank borrowing has increased by Rs. 64,300 during the year end. Ignore taxation. (15 marks)(Final Nov. 1998) Answer PQ Ltd. Cash Flow Statement for the year ended...

Cash flows from operating activities Net profit 76,500 Adjustments for : Depreciation 27,900 Profit on sale of plant (2,500) Interest expense 2,000 Operating profit before working capital changes 1,03,900 Increase in debtors (less provision) (46,700) Increase in stock and work-in-progress (38,500) Increase in creditors 11,800 Net cash operating activities Cash flows from investing activities Purchase of plant and machinery (78,000) Proceeds from sale of plant 7,000 Proceeds from sale of freehold property 6,200 Increase in trade investments (47,000) Net cash used in investing activities Cash flows from financing activities Proceeds from issuance od debentures at discount 49,000 Debenture interest paid (2,000) Dividend paid in financing activities (30,000) Net cash from financing activities Excess of outflows over inflows Thus the shortfall of Rs. 64,300 was made up through borrowing from bank. Working Notes : (1) Plant and Machinery Amount of increase (at cost) Add : Disposal (at cost) Acquisition during the year

Rs.

30,500

(1,11,800)

17,000 64,300

Rs 60,000 18,000 78,000

Financial Analysis 13.11

Disposal of plant : proceeds from sale Net book value (18,000 13,500) Profit on sale (2) Freehold property Capital Reserve Less : Increase in freehold property (closing balance minus opening balance) Proceeds from sale of freehold property Memorandum Accounts (a) To Balance b/d To Profit and Loss A/c (Profit on sale) To Bank (Balancing figure) 78,000 80,500 (b) Provision for Depreciation (Plant and Machinery) Account 13,500 14,400 27,900 (c) To Balance b/d To Capital reserve Freehold Property Account 49,200 49,200 By Bank A/c (Balancing figure) By Balance c/d By Balance b/d By Profit and Loss A/c (Balancing figure) 2,500 Plant and Machinery Account Rs. By Bank (Sale proceeds) By Provision for Depreciation By Balance c/d

7,000 4,500 2,500 49,200 43,000 6,200

Rs. 7,000 13,500 60,000 80,500

To Plant and Machinery A/c To Balance c/d

27,900 27,900

6,200 43,000 49,200

In the absence of information about the opening balances, the entire amount of change has been considered under the closing balances for the purpose of calculation of missing figures. Notes : (1) Investment income and dividend pertaining to the current year have not been considered in the absence of any related information. (2) Debenture interest has been calculated for 6 months @ 8% on Rs. 50,000.

13.12 Accounting

Question 3 Examine the following schedule prepared by K Ltd. K Ltd. Schedule of funds provided by operations for the year ended 31st July, 1999 (Rs.000) Sales Add : Decrease in bills receivable. Less : Increase in accounts receivable Inflow from operating revenues Cost of goods sold Less : Decrease in inventories Add : Decrease in trades payable Wages and Salaries Less : Increase in wages payable Administrative Expenses Add : Increase in prepaid expenses Property taxes Interest expenses Add : Amortisation of premium on bonds payable Outflow from operating expenses From operations Rent Income Add : Increase in unearned rent Income tax Less : Increase in deferred tax Funds from operations Required : (i) What is the definition of funds shown in the schedule? (ii) What amount was reported as gross margin in the income statement? (iii) How much cash was collected from the customers? (iv) How much cash was paid for the purchases made? 207 3 1,330 50 1,280 4,278 210 5,558 532 20 552 27,786 5,348 18,588 (212) 81 5,284 (12) 3,066 11 3,077 428 5,272 18,457 32,760 1,000 (626) 33,134 (Rs.000)

Financial Analysis 13.13

(v) As a result of change in inventories, did the working capital increase or decrease and by what amount? (vi) How much rent was actually earned during the year? (vii) What was the amount of tax expenses reported on the income statement? Can you reconcile the profit after tax-with the funds provided by the operations? (16 marks)(Final May 2000) Answer (i) Funds shown in the schedule refer to the cash and cash equivalents [as defined in AS 3 (Revised) on Cash Flow Statements]. Rs. (000) Sales Cost of goods sold (iii) Cash collected from the customers (iv) Cash paid for purchases made (v) Change in inventories would reduce the working capital by (vi) Rental income earned during the year (vii) Tax expenses reported in the income statement (Viii) Reconciliation Statement Profit after tax (See W.N.) Decrease in bills receivable Increase in accounts receivable Decrease in inventories Decrease in trades payable Increase in wages payable Increase in prepaid expenses Increase in unearned rent Increase in deferred tax Funds from operations as shown in the schedule (i.e. cash and cash equivalents) 32,760 18,588 14,172 33,134 18,457 212 207 1330 Rs.(000) 3,719 1,000 (626) 212 (81) 12 (11) 3 50 4,278

(ii) Gross margin in the income statement :

13.14 Accounting

Working Note : Calculation of Profit after Tax Sales Less : Cost of goods sold Gross margin Add : Rental income Less : Wages and salaries Administrative expenses Property taxes Interest expenses Amortisation of premium on bonds payable Profit before tax Less : Income tax Profit after tax Question 4 Ms. Joyti of Star Oils Limited has collected the following information for the preparation of cash flow statement for the year 2000 : (Rs. in Lakhs) Net Profit Dividend (including dividend tax) paid Provision for Income tax Income tax paid during the year Loss on sale of assets (net) Book value of the assets sold Depreciation charged to Profit & Loss Account Amortisation of Capital grant Profit on sale of Investments Carrying amount of Investment sold Interest income on investments Increase expenses Interest paid during the year 25,000 8,535 5,000 4,248 40 185 20,000 6 100 27,765 2,506 10,000 10,520 5,284 3,066 428 532 20 9,330 5,049 1,330 3,719 Rs. (000) 32,760 18,588 14,172 207 14,379

Financial Analysis 13.15

Increase in Working Capital (excluding Cash & Bank Balance) 56,075 Purchase of fixed assets 14,560 Investment in joint venture 3,850 Expenditure on construction work in progress 34,740 Proceeds from calls in arrear 2 Receipt of grant for capital projects 12 Proceeds from long-term borrowings 25,980 Proceeds from short-term borrowings 20,575 Opening cash and Bank balance 5,003 Closing cash and Bank balance 6,988 Required : Prepare the Cash Flow Statement for the year 2000 in accordance with AS 3, Cash Flow Statements issued by the Institute of Chartered Accounants of India. (make necessary assumptions). (16 marks)(Final May 2001) Answer Star Oils Limited Cash Flow Statement for the year ended 31st December, 2000 (Rs. in lakhs) Cash flows from operating activities Net profit before taxation (25,000 + 5,000) Adjustments for : Depreciation Loss on sale of assets (Net) Amortisation of capital grant Profit on sale of investments Interest income on investments Interest expenses Operating profit before working capital changes Changes in working capital (Excluding cash and bank balance) Cash generated from operations Income taxes paid Net cash used in operating activities Cash flows from investing activities Sale of assets Sale of investments (27,765 + 100) 30,000 20,000 40 (6) (100) (2,506) 10,000 57,428 (56,075) 1,353 (4,248) (2,895) 145 (27,865)

13.16 Accounting

Interest income on investments Purchase of fixed assets Investment in joint venture Expenditure on construction work-in progress Net cash used in investing activities Cash flows from financing activities Proceeds from calls in arrear Receipts of grant for capital projects Proceeds from long-term borrowings Proceed from short-term borrowings Interest paid Dividend (including dividend tax) paid Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period Working note : Book value of the assets sold Less : Loss on sale of assets Proceeds on sale Assumption : Interest income on investments Rs. 2,506 has been received during the year. Question 5

2,506 (14,560) (3,850) (34,740) (22,634) 2 12 25,980 20,575 (10,520) (8,535) 27,514 1,985 5,003 6,988 185 40 145

From the following Summary Cash Account of X Ltd. prepare Cash Flow Statement for the year ended 31st March, 2001 in accordance with AS 3 (Revised) using the direct method. The company does not have any cash equivalents. Summary Cash Account for the year ended 31.3.2001 Rs. 000 Balance on 1.4.2000 Issue of Equity Shares Receipts from Customers Sale of Fixed Assets 50 300 2,800 100 Payment to Suppliers Purchase of Fixed Assets Overhead expense Wages and Salaries Taxation Rs. 000 2,000 200 200 100 250

Financial Analysis 13.17

Dividend Repayment of Bank Loan Balance on 31.3.2001 3,250 Answer X Ltd. Cash Flow Statement for the year ended 31st March, 2001 (Using the direct method) Rs. 000 Cash flows from operating activities Cash receipts from customers Cash payments to suppliers Cash paid to employees Cash payments for overheads Cash generated from operations Income tax paid Net cash from operating activities Cash flows from investing activities Payments for purchase of fixed assets Proceeds from sale of fixed assets Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of equity shares Bank loan repaid Dividend paid Net cash used in financing activities Net increase in cash Cash at beginning of the period Cash at end of the period 300 (300) (50) (200) 100 2,800 (2,000) (100) (200) 500 (250)

50 300 150 3,250 (8 marks)(Final Nov. 2001)

Rs.000

250

(100)

(50) 100 50 150

13.18 Accounting

Question 6 From the following details relating to the Accounts of Grow More Ltd. prepare Cash Flow Statement: Liabilities Share Capital Reserve Profit and Loss Account Debentures Provision for taxation Proposed dividend Sundry Creditors Assets Plant and Machinery Land and Building Investments Sundry Debtors Stock Cash on hand/Bank 7,00,000 6,00,000 1,00,000 5,00,000 4,00,000 2,00,000 25,00,000 5,00,000 4,00,000 7,00,000 2,00,000 2,00,000 20,00,000 31.03.2002 (Rs.) 10,00,000 2,00,000 1,00,000 2,00,000 1,00,000 2,00,000 7,00,000 25,00,000 70,000 1,00,000 8,20,000 20,00,000 31.03.2001 (Rs.) 8,00,000 1,50,000 60,000

(i) Depreciation @ 25% was charged on the opening value of Plant and Machinery. (ii) During the year one old machine costing 50,000 (WDV 20,000) was sold for Rs. 35,000. (iii) Rs. 50,000 was paid towards Income tax during the year. (iv) Building under construction was not subject to any depreciation. Prepare Cash flow Statement. (16 marks) (PE-IINov. 2002) Answer Grow More Ltd Cash Flow Statement for the year ended 31st March, 2002 Cash Flow from Operating Activities Net Profit Proposed Dividend 40,000 2,00,000

Financial Analysis 13.19

Provision for taxation Transfer to General Reserve Depreciation Profit on sale of Plant and Machinery Operating Profit before Working Capital changes Increase in Stock Decrease in debtors Decrease in creditors Cash generated from operations Income tax paid Net Cash from operating activities Cash Flow from Inventing Activities Purchase of fixed assets Expenses on building Increase in investments Sale of old machine Net Cash used ininvesting activities Cash Flow from financing activities: Proceeds from issue of shares Proceeds from issue of debentures Dividend paid Net cash used in financing activities Net increase in cash or cash equivalents Cash and Cash equivalents at the beginning of the year Cash and Cash equivalents at the end of the year Working Notes: Provision for taxation account Rs. To To Cash (Paid) Balance c/d 50,000 By 1,00,000 By 1,50,000 (3,45,000) (2,00,000) (1,00,000) 35,000

80,000 50,000 1,25,000 (15,000) 4,80,000 (2,00,000) 2,00,000 (1,20,000) 3,60,000 (50,000) 3,10,000

(6,10,000) 2,00,000 2,00,000 (1,00,000) 3,00,000 NIL 2,00,000 2,00,000

Rs. Balance b/d Profit and Loss A/c (Balancing figure) 1,50,000 70,000 80,000

13.20 Accounting

Plant and Machinery account Rs. To To Balance b/d Cash (Balancing figure) 5,00,000 By 3,45,000 By _______ By 8,45,000 Question 7 From the following Balance Sheet and information, prepare Cash Flow Statement of Ryan Ltd. for the year ended 31st March, 2003: Balance Sheet 31st March, 2003 Rs. Liabilities Equity Share Capital 10% Redeemable Preference Capital Capital Redemption Reserve Capital Reserve General Reserve Profit and Loss Account 9% Debentures Sundry Creditors Bills Payable Liabilities for Expenses Provision for Taxation Proposed Dividend 6,00,000 1,00,000 1,00,000 1,00,000 70,000 2,00,000 95,000 20,000 30,000 95,000 90,000 15,00,000 31st March, 2003 Rs. Assets Land and Building Plant and Machinery 1,50,000 7,65,000 31st March, 2002 Rs. 5,00,000 2,00,000 2,50,000 50,000 80,000 30,000 20,000 60,000 60,000 12,50,000 31st March, 2002 Rs. 2,00,000 5,00,000 Depreciation Cash (sale of machine) Balance c/d Rs. 1,25,000 20,000 7,00,000 8,45,000

Financial Analysis 13.21

Investments Inventory Bills Receivable Sundry Debtors Cash and Bank Preliminary Expenses Voluntary Separation Payments Additional Information: (i)

50,000 95,000 65,000 1,75,000 65,000 10,000 1,25,000 15,00,000

80,000 90,000 70,000 1,30,000 90,000 25,000 65,000 12,50,000

A piece of land has been sold out for Rs. 1,50,000 (Cost Rs. 1,20,000) and the balance land was revalued. Capital Reserve consisted of profit on sale and profit on revaluation.

(ii) On 1st April, 2002 a plant was sold for Rs. 90,000 (Original Cost Rs. 70,000 and W.D.V. Rs. 50,000) and Debentures worth Rs. 1 lakh was issued at par as part consideration for plant of Rs. 4.5 lakhs acquired. (iii) Part of the investments (Cost Rs. 50,000) was sold for Rs. 70,000. (iv) Pre-acquisition dividend received Rs. 5,000 was adjusted against cost of investment. (v) Directors have proposed 15% dividend for the current year. (vi) Voluntary separation cost of Rs. 50,000 was adjusted against General Reserve. (vii) Income-tax liability for the current year was estimated at Rs. 1,35,000. (viii) Depreciation @ 15% has been written off from Plant account but no depreciation has been charged on Land and Building. (20 marks) (PE-IIMay 2003) Answer Cash Flow Statement of Ryan Limited For the year ended 31st March, 2003 Cash flow from operating activities Net Profit before taxation Adjustment for Depreciation Preliminary expenses Profit on sale of plant Profit on sale of investments Interest on debentures Operating profit before working capital changes Increase in inventory 1,35,000 15,000 (40,000) (20,000) 18,000 3,53,000 (5,000) Rs. 2,45,000 Rs.

13.22 Accounting

Decrease in bills receivable Increase in debtors Increase in creditors Decrease in bills payable Increase in accrued liabilities Cash generated from operations Income taxes paid Voluntary separation payments Net cash from operating activities Cash flow from investing activities Proceeds from sale of land Proceeds from sale of plant Proceeds from sale of investments Purchase of plant Purchase of investments Pre-acquisition dividend received Net cash used in investing activities Cash flow from financing activities Proceeds from issue of equity shares Proceeds from issue of debentures Redemption of preference shares Dividends paid Interest paid on debentures Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and Cash equivalents at the end of the year Working Notes: 1. Net profit before taxation Retained profit Less: Balance as on 31.3.2002 Rs. 70,000 (50,000)

5,000 (45,000) 15,000 (10,000) 10,000 3,23,000 (1,00,000) 2,23,000 (1,10,000) 1,13,000 1,50,000 90,000 70,000 (3,50,000) (25,000) 5,000 (60,000) 1,00,000 1,00,000 (2,00,000) (60,000) (18,000) (78,000) (25,000) 90,000 65,000

Financial Analysis 13.23

Provision for taxation Proposed dividend

20,000 1,35,000 90,000 2,45,000 Land and Building Account

2. To To To

Balance b/d Capital reserve (Profit on sale) Capital reserve (Revaluation profit)

Rs. 2,00,000 By 30,000 By 70,000 3,00,000

Cash (Sale) Balance c/d

Rs. 1,50,000 1,50,000 _______ 3,00,000

3. To To To To Balance b/d Profit and loss account Debentures Bank

Plant and Machinery Account Rs. 5,00,000 By Cash (Sale) 40,000 By Depreciation 1,00,000 By Balance c/d 3,50,000 9,90,000 Investments Account Rs. 80,000 By Cash (Sale) 20,000 By Dividend 25,000 (Pre-acquisition) _______ By Balance c/d 1,25,000 Capital Reserve Account Rs.

Rs. 90,000 1,35,000 7,65,000 9,90,000

4. To To To Balance b/d Profit and loss account Bank (Balancing figure)

Rs. 70,000 5,000 50,000 1,25,000

5. To Balance c/d

Rs. 30,000 70,000 1,00,000

1,00,000 By By _______ 1,00,000

Profit on sale of land Profit on revaluation of land

13.24 Accounting

6. To To To Voluntary separation cost Capital redemption reserve Balance c/d

General Reserve Account Rs. 50,000 By 1,00,000 1,00,000 2,50,000 Balance b/d Rs. 2,50,000 _______ 2,50,000

7. To To Bank (Balancing figure) Balance c/d

Proposed Dividend Account Rs. 60,000 By 90,000 By 1,50,000 Balance b/d Profit and loss account Rs. 60,000 90,000 1,50,000

8. To To Bank (Balancing figure) Balance c/d

Provision for Taxation Account Rs. 1,00,000 By 95,000 By 1,95,000 Balance b/d Profit and loss account Rs. 60,000 1,35,000 1,95,000

9.

Voluntary Separation Payments Account Rs. 50,000 1,25,000 1,75,000

Rs. To Balance b/d 65,000 By General reserve To Bank (Balancing figure) 1,10,000 By Balance c/d 1,75,000 Note: Cash Flow statement has been prepared using indirect method. Question 8

The Balance Sheet of New Light Ltd. for the years ended 31st March, 2001 and 2002 are as follows: Liabilities 31st 31st Assets March March 2001 2002 (Rs.) (Rs.) 12,00,000 16,00,000 Fixed Assets Less: Depreciation 4,00,000 2,80,000 40,000 Investment 31st March 2001 (Rs.) 32,00,000 9,20,000 22,80,000 4,00,000 31st March 2002 (Rs.) 38,00,000 11,60,000 26,40,000 3,20,000

Equity share capital 10% Preference share capital Capital Reserve

Financial Analysis 13.25

General Reserve Profit and Loss A/c 9% Debentures Current liabilities Proposed dividend Provision for Tax Unpaid dividend

6,80,000 2,40,000 4,00,000 4,80,000 1,20,000 3,60,000 38,80,000

8,00,000 Cash 3,00,000 Other current assets 2,80,000 Preliminary expenses 5,20,000 1,44,000 3,40,000 16,000 43,20,000

10,000 11,10,000 80,000

10,000 13,10,000 40,000

________ 38,80,000

________ 43,20,000

Additional information: (i) The company sold one fixed asset for Rs. 1,00,000, the cost of which was Rs. 2,00,000 and the depreciation provided on it was Rs. 80,000.

(ii) The company also decided to write off another fixed asset costing Rs. 56,000 on which depreciation amounting to Rs. 40,000 has been provided. (iii) Depreciation on fixed assets provided Rs. 3,60,000. (iv) Company sold some investment at a profit of Rs. 40,000, which was credited to capital reserve. (v) Debentures and preference share capital redeemed at 5% premium. (vi) Company decided to value stock at cost, whereas previously the practice was to value stock at cost less 10%. The stock according to books on 31.3.2001 was Rs. 2,16,000. The stock on 31.3.2002 was correctly valued at Rs. 3,00,000. Prepare Cash Flow Statement as per revised Accounting Standard 3 by indirect method. (16 marks) (PE-IINov. 2003) Answer New Light Ltd. Cash Flow Statement for the year ended 31st March, 2002 Cash Flow from operating activities Profit after appropriation Increase in profit and loss A/c after inventory adjustment [Rs.3,00,000 (Rs.2,40,000 + Rs.24,000)] Transfer to general reserve Proposed dividend Provision for tax Net profit before taxation and extraordinary item Adjustments for: Rs. Rs.

A.

36,000 1,20,000 1,44,000 3,40,000 6,40,000

13.26 Accounting

Preliminary expenses written off Depreciation Loss on sale of fixed assets Decrease in value of fixed assets Premium on redemption of preference share capital Premium on redemption of debentures Operating profit before working capital changes Increase in current liabilities (Rs.5,20,000 Rs.4,80,000) Increase in other current assets [Rs.13,10,000 (Rs.11,10,000 + Rs.24,000)] Cash generated from operations Income taxes paid Net Cash from operating activities B. Cash Flow from investing activities Purchase of fixed assets Proceeds from sale of fixed assets Proceeds from sale of investments Net Cash from investing activities Cash Flow from financing activities Proceeds from issuance of share capital Redemption of preference share capital (Rs.1,20,000 + Rs.6,000) Redemption of debentures (Rs. 1,20,000 + Rs. 6,000) Dividend paid Net Cash from financing activities Net increase/decrease in cash and cash equivalent during the year Cash and cash equivalent at the beginning of the year Cash and cash equivalent at the end of the year

40,000 3,60,000 20,000 16,000 6,000 6,000 10,88,000 40,000 (1,76,000) 9,52,000 (3,60,000) 5,92,000

(8,56,000) 1,00,000 1,20,000 (6,36,000) 4,00,000 (1,26,000) (1,26,000) (1,04,000)

C.

44,000 Nil 10,000 10,000

Working Notes: 1. Revaluation of stock will increase opening stock by Rs. 24,000.
2,16,000 10 Rs. 24,000 90

Therefore, opening balance of other current assets would be as follows:

Financial Analysis 13.27

Rs. 11,10,000 + Rs. 24,000 = Rs. 11,34,000 Due to under valuation of stock, the opening balance of profit and loss account be increased by Rs. 24,000. The opening balance of profit and loss account after revaluation of stock will be Rs. 2,40,000 + Rs. 24,000 = Rs. 2,64,000 2. To To Balance b/d Capital reserve A/c (Profit on sale of investment) Investment Account Rs. 4,00,000 By Bank A/c (balancing figure being investment sold) Balance c/d Rs. 1,20,000 3,20,000 4,40,000 Rs.

3. To To Balance b/d Bank A/c (balancing figure being assets purchased)

40,000 By 4,40,000 Fixed Assets Account Rs. 32,00,000 8,56,000 By By By By By By

4. To To To Fixed assets A/c Fixed assets A/c Balance c/d

40,56,000 Accumulated Depreciation Account Rs. 80,000 By Balance b/d 40,000 By Profit and loss A/c 11,60,000 (depreciation for the period) 12,80,000

Bank A/c (sale of assets) Accumulated depreciation A/c Profit and loss A/c(loss on sale of assets) Accumulated depreciation A/c Profit and loss A/c (assets written off) Balance c/d

Rs. 1,00,000 80,000 20,000 40,000 16,000

2,00,000

56,000 38,00,000 40,56,000 Rs. 9,20,000 3,60,000 12,80,000

5.

Unpaid dividend is taken as non-current item and dividend paid is shown at Rs. 1,04,000 (Rs.1,20,000 Rs.16,000).

Note: Alternatively, unpaid dividend can be assumed as current liability and hence, dividend paid can be shown at Rs. 1,20,000. Due to this assumption cash flow from operating activities would be affected. The cash flow from operating activities will increase by Rs. 16,000 to Rs. 6,08,000 and cash flow from financing activities will get reduced by Rs. 16,000 to Rs. 28,000.

13.28 Accounting

Question 9 ABC Ltd. gives you the following informations. You are required to prepare Cash Flow Statement by using indirect methods as per AS 3 for the year ended 31.03.2004: Liabilities 31st March 2003 Rs. 50,00,000 26,50,000 8,80,000 1,50,000 3,30,000 1,50,000 Balance Sheet as on 31st March Assets 2004 Rs. 50,00,000 Plant & Machinery 36,90,000 Less: Depreciation 9,00,000 Current Assets 8,20,000 Debtors 3,00,000 Less: Provision 2,70,000 3,00,000 Cash Marketable 31st March 2003 Rs. 27,30,000 6,10,000 21,20,000 23,90,000 1,50,000 22,40,000 15,20,000 11,80,000 20,10,000 90,000 31st March 2004 Rs. 40,70,000 7,90,000 32,80,000 28,30,000 1,90,000 26,40,000 18,20,000 15,00,000 19,20,000 1,20,000

Capital Retained Earnings Debentures Current Liabilities Creditors Bank Loan Liability for expenses Dividend payable

securities

Inventories Prepaid Expenses 91,60,000 1,12,80,000 Additional Information: (i) (ii) (ii)

91,60,000 1,12,80,000

Net profit for the year ended 31st March, 2004, after charging depreciation Rs. 1,80,000 is Rs. 22,40,000. Debtors of Rs. 2,30,000 were determined to be worthless and were written off against the provisions for doubtful debts account during the year. ABC Ltd. declared dividend of Rs. 12,00,000 for the year 2003-2004. (16 marks) (PE-IIMay 2004)

Answer Cash flow Statement of ABC Ltd. for the year ended 31.3.2004 Cash flows from Operating activities Net Profit Add: Adjustment for Depreciation (Rs.7,90,000 Rs.6,10,000) Operating profit before working capital changes Rs. 22,40,000 1,80,000 24,20,000 Rs.

Financial Analysis 13.29

Add: Decrease in Inventories (Rs.20,10,000 Rs.19,20,000) Increase in provision for doubtful debts (Rs. 4,20,000 Rs.1,50,000) Less: Increase in Current Assets: Debtors (Rs. 30,60,000 Rs.23,90,000) Prepaid expenses (Rs. 1,20,000 Rs.90,000)

90,000 2,70,000 27,80,000 6,70,000 30,000

Decrease in current liabilities: Creditors (Rs. 8,80,000 Rs. 8,20,000) Expenses outstanding (Rs. 3,30,000 Rs.2,70,000) Net cash from operating activities Cash flows from Investing activities Purchase of Plant & Equipment (Rs. 40,70,000 Rs.27,30,000) Net cash used in investing activities Cash flows from Financing Activities Bank loan raised (Rs. 3,00,000 Rs. 1,50,000) Issue of debentures Payment of Dividend (Rs. 12,00,000 Rs. 1,50,000) Net cash used in financing activities Net increase in cash during the year Add: Cash and cash equivalents as on 1.4.2003 (Rs. 15,20,000 + Rs.11,80,000) Cash and cash equivalents as on 31.3.2004 (Rs. 18,20,000 + Rs.15,00,000) 1,50,000 9,00,000 (10,50,000) NIL 6,20,000 27,00,000 33,20,000 60,000 60,000 8,20,000 19,60,000

13,40,000 (13,40,000)

Note: Bad debts amounting Rs. 2,30,000 were written off against provision for doubtful debts account during the year. In the above solution, Bad debts have been added back in the balances of provision for doubtful debts and debtors as on 31.3.2004. Alternatively, the adjustment of writing off bad debts may be ignored and the solution can be given on the basis of figures of debtors and provision for doubtful debts as appearing in the balance sheet on 31.3.2004.

13.30 Accounting

Question 10 From the following balance sheets of Sneha Ltd. as on 31.3.2003 and 31.3.2004 prepare a statement of sources and applications of fund and a schedule of changes in working capital for the year ending 31.3.2004:
Liabilities Equity share capital Profit and loss account 10% Debentures Creditors Bills payable Provision for tax Dividend payable 31.3.2003 Rs. 13,00,000 4,90,100 16,25,000 9,00,000 42,500 2,60,000 31.3.2004 Rs. 16,90,000 8,77,500 13,00,000 10,00,000 1,70,000 9,75,000 42,250

Balance Sheets
Assets

Goodwill Building Machinery Non-trade investments Debtors Stock Cash Prepaid expenses Debenture discount

31.3.2003 Rs. 65,000 11,70,000 16,18,500 5,07,000 4,16,000 5,07,000 2,60,000 42,250 31,850 46,17,600

31.3.2004 Rs. 42,500 11,37,500 21,38,500 3,93,250 11,70,000 7,99,500 2,92,500 52,000 29,000 60,54,750

46,17,600

60,54,750

The following additional information is given: (i) Accumulated depreciation 31.3.2003 Accumulated depreciation 31.3.2004 Depreciation for 2003-2004 Building Rs. 4,87,500 5,20,000 32,500 Machinery Rs. 15,92,500 15,66,500 1,36,500

(ii)

Profit and loss account for 2003-2004 is as follows: Balance as on 31.3.2003 Add: Profit for 2003-2004 Less: Dividend Rs. 4,90,100 4,71,900 9,62,000 84,500 8,77,500

(iii)

During 2003-2004 machinery costing Rs. 2,92,500 was sold for Rs. 97,500.

(iv) Investments which were sold for Rs. 1,17,000 had cost Rs. 97,500. (v) Provision for Taxation and Dividend are to be taken as Non-current liabilities. (20 marks) (PE-IINov. 2004)

Financial Analysis 13.31

Answer (a)

Sneha Ltd. Fund Flow Statement for the year ended 31st March, 2004 Sources of funds Share capital (Rs. 16,90,000 Rs. 13,00,000) Sale of machinery Sale of investments Funds from operation (W.N. 1) Applications of funds Debentures redeemed (Rs. 16,25,000 Rs. 13,00,000) Machinery purchased (W.N. 4) Tax paid Dividend (Rs. 84,500 Rs. 42,250) Increase in working capital

Amount (Rs.) 3,90,000 97,500 1,17,000 16,70,500 22,75,000 3,25,000 7,86,500 2,60,000 42,250 8,61,250 22,75,000

Schedule of Changes in Working Capital for the year ended 31st March, 2004 Balance as on Changes in working capital 1.4.2003 Rs. Current Assets: Debtors Stock Cash Prepaid expenses A Current Liabilities: Creditors 9,00,000 10,00,000 1,00,000 4,16,000 5,07,000 2,60,000 42,250 12,25,250 31.3.2004 Rs. 11,70,000 7,99,500 2,92,500 52,000 23,14,000 Increase Rs. 7,54,000 2,92,500 32,500 9,750 Decrease Rs.

The provision for taxation has been treated as a non-current liability as per the requirement of the question. Last years provision for taxation amounting Rs. 2,60,000 has been assumed to be paid in the current year ended 31st March, 2004.

13.32 Accounting

Bills payable B Working capital (A B) Increase in working capital Working Notes: 1.

42,500 9,42,500 2,82,750

1,70,000 11,70,000 11,44,000 10,88,750

1,27,500 2,27,500

________ 10,88,750

8,61,250 10,88,750

Statement showing funds generated from operations

(Rs.) 3,87,400

Increase in profit and loss account during the year (Rs. 8,77,500 Rs. 4,90,100) Add: Non-cash expenditures (1) Loss on sale of machinery (W.N. 4) (2) (3) (4) Investments written off (W.N. 2) Provision for tax Depreciation on building (Rs. 11,70,000 Rs. 11,37,500) 32,500 on machinery (W.N. 3) 1,36,500 Goodwill written off (Rs. 65,000 Rs. 42,500) Debenture discount written off (Rs. 31,850 Rs. 29,000) Dividend 32,500 16,250 9,75,000

1,69,000 22,500 2,850 84,500 13,02,600 16,90,000 19,500 16,70,500 Cr. Rs. 1,17,000 16,250 3,93,250 5,26,500

(5) (6) (7)

Less: Non-cash incomes (1) Profit on sale of investments (Rs. 1,17,000 Rs. 97,500) Funds from operations 2. Dr. To To Balance b/d Profit on sale (Rs. 1,17,000 Non Trade Investment Account Rs. 5,07,000 By 19,500 By Rs. 97,500) _______ By 5,26,500 Bank -Sale Profit and loss account written off (balancing figure) Balance c/d

Financial Analysis 13.33

3. Dr. To To 4. Dr. To Balance b/d Add: Provision for depreciation To Bank -purchase (balancing figure) Machinery -sale (balancing figure) Balance c/d

Provision for Depreciation on Machinery Account Rs. 1,62,500 By By 15,66,500 17,29,000 Balance b/d Depreciation

Cr. Rs. 15,92,500 1,36,500 17,29,000 Cr. Rs. 97,500 1,62,500 32,500

Machinery Account 16,18,500 By By 15,92,500 32,11,000 By By 7,86,500 ________ 39,97,500 Rs. Bank (sale) Depreciation Loss on sale Balance c/d W.D.V. Add: Provision for depreciation

21,38,500 15,66,500 37,05,000 39,97,500

Question 11 The following figures have been extracted from the Books of X Limited for the year ended on 31.3.2004. You are required to prepare a cash flow statement. (i) Net profit before taking into account income tax and income from law suits but after taking into account the following items was Rs. 20 lakhs: (a) Depreciation on Fixed Assets Rs. 5 lakhs. (b) Discount on issue of Debentures written off Rs. 30,000. (c) Interest on Debentures paid Rs. 3,50,000. (d) Book value of investments Rs. 3 lakhs (Sale of Investments for Rs. 3,20,000). (e) Interest received on investments Rs. 60,000. (f) Compensation received Rs. 90,000 by the company in a suit filed. (ii) Income tax paid during the year Rs. 10,50,000. (iii) 15,000, 10% preference shares of Rs. 100 each were redeemed on 31.3.2004 at a premium of 5%. Further the company issued 50,000 equity shares of Rs. 10 each at a premium of 20% on 2.4.2003. Dividend on preference shares were paid at the time of redemption.

13.34 Accounting

(iv) Dividends paid for the year 2002-2003 Rs. 5 lakhs and interim dividend paid Rs. 3 lakhs for the year 2003-2004. (v) Land was purchased on 2.4.2003 for Rs. 2,40,000 for which the company issued 20,000 equity shares of Rs. 10 each at a premium of 20% to the land owner as consideration. (vi) Current assets and current liabilities in the beginning and at the end of the years were as detailed below: As on 31.3.2003 Rs. 12,00,000 2,08,000 1,96,300 50,000 45,000 1,66,000 75,000 As on 31.3.2004 Rs. 13,18,000 2,13,100 35,300 40,000 40,000 1,71,300 81,800 (20 marks) (PE-II May 2005)

Stock Sundry Debtors Cash in hand Bills receivable Bills payable Sundry Creditors Outstanding expenses Answer

X Ltd. Cash Flow Statement for the year ended 31st March, 2004 Rs. Cash flow from Operating Activities Net profit before income tax and extraordinary items: Adjustments for: Depreciation on fixed assets Discount on issue of debentures Interest on debentures paid Interest on investments received Profit on sale of investments Operating profit before working capital changes Adjustments for: Increase in stock Increase in sundry debtors Decrease in bills receivable Decrease in bills payable Increase in sundry creditors (1,18,000) (5,100) 10,000 (5,000) 5,300 5,00,000 30,000 3,50,000 (60,000) (20,000) 8,00,000 28,00,000 20,00,000 Rs.

Financial Analysis 13.35

Increase in outstanding expenses Cash generated from operations Income tax paid Cash flow from extraordinary items: Compensation received in a suit filed Net cash flow from operating activities Cash flow from Investing Activities Sale proceeds of investments Interest received on investments Net cash flow from investing activities Cash flow from Financing Activities Proceeds by issue of equity shares at 20% premium Redemption of preference shares at 5% premium Preference dividend paid Interest on debentures paid Dividend paid (5,00,000 + 3,00,000) Net cash used in financing activities Net decrease in cash and cash equivalents during the year

6,800

(1,06,000) 26,94,000 (10,50,000) 16,44,000 90,000 17,34,000

3,20,000 60,000 3,80,000 6,00,000 (15,75,000) (1,50,000) (3,50,000) (8,00,000) (22,75,000) (1,61,000)

Add: Cash and cash equivalents as on 31.3.2003 1,96,300 Cash and cash equivalents as on 31.3.2004 35,300 Note: Purchase of land in exchange of equity shares (issued at 20% premium) has not been considered in the cash flow statement as it does not involve any cash transaction. Question 12 Raj Ltd. gives you the following information for the year ended 31st March, 2006: (i) Sales for the year Rs.48,00,000. The Company sold goods for cash only. (ii) Cost of goods sold was 75% of sales. (iii) Closing inventory was higher than opening inventory by Rs.50,000. (iv) Trade creditors on 31.3.2006 exceed the outstanding on 31.3.2005 by Rs.1,00,000.

13.36 Accounting

(v) Tax paid during the year amounts to Rs.1,50,000. (vi) Amounts paid to Trade creditors during the year Rs.35,50,000. (vii) Administrative and Selling expenses paid Rs.3,60,000. (viii) One new machinery was acquired in December, 2005 for Rs.6,00,000. (ix) Dividend paid during the year Rs.1,20,000. (x) Cash in hand and at Bank on 31.3.2006 Rs.70,000. (xi) Cash in hand and at Bank on 1.4.2005 Rs.50,000. Prepare Cash Flow Statement for the year ended 31.3.2006 as per the prescribed Accounting standard. (12 Marks) (PE-II May 2006) Answer Cash flow statement of Raj Limited for the year ended 31.3.2006 Rs. 48,00,000 39,10,000 8,90,000 1,50,000 7,40,000 (6,00,000) (6,00,000) (1,20,000) (1,20,000) 20,000 50,000 70,000 Rs.

Direct Method

Cash flow from operating activities: Cash receipt from customers (sales) Cash paid to suppliers and expenses (Rs.35,50,000 + Rs.3,60,000) Cash flow from operation Less: Tax paid Net cash from operating activities Cash flow from investing activities: Purchase of fixed assets Net cash used in investing activities Cash flow from financing activities: Dividend Paid Net cash from financing activities Add: Opening balance of Cash in Hand and at Bank Cash in Hand and at Bank on 31.3.2006

Financial Analysis 13.37

Question 13 The following are the summarized Balance Sheets of X Ltd. as on March 31, 2005 and 2006: Liabilities Equity share capital Capital Reserve General Reserve Profit and Loss A/c Long-term loan from the Bank Sundry Creditors Provision for Taxation Proposed Dividends As on 31.3.2005 (Rs.) 10,00,000 --2,50,000 1,50,000 5,00,000 5,00,000 50,000 1,00,000 25,50,000 Year 2005 (Rs.) 5,00,000 7,50,000 1,00,000 3,00,000 4,00,000 2,00,000 3,00,000 25,50,000 Additional Information: (i) Dividend of Rs.1,00,000 was paid during the year ended March 31, 2006. (ii) Machinery during the year purchased for Rs.1,25,000. (iii) Machinery of another company was purchased for a consideration of Rs.1,00,000 payable in equity shares. (iv) Income-tax provided during the year Rs.55,000. As on 31.3.2006 (Rs,.) 12,50,000 10,000 3,00,000 1,80,000 4,00,000 4,00,000 60,000 1,25,000 27,25,000 Year 2006 (Rs.) 4,80,000 9,20,000 50,000 2,80,000 4,20,000 1,65,000 4,10,000 27,25,000

Assets

Land and Building Machinery Investment Stock Sundry Debtors Cash in Hand Cash at Bank

13.38 Accounting

(v) Company sold some investment at a profit of Rs.10,000, which was credited to Capital reserve. (vi) There was no sale of machinery during the year. (vii) Depreciation written off on Land and Building Rs.20,000. From the above particulars, prepare a cash flow statement for the year ended March, 2006 as per AS 3 (Indirect method). (16 Marks) (PE-II - Nov. 2006) Answer Cash Flow Statement for the year ending on March 31, 2006 Rs. I. Cash flows from Operating Activities Net profit made during the year (W.N.1) Adjustment for depreciation on Machinery (W.N.2) Adjustment for depreciation on Land & Building Operating profit before change in Working Capital Decrease in Stock Increase in Sundry Debtors Decrease in Sundry Creditors Income-tax paid Net cash from operating activities II. Cash flows from Investing Activities Purchase on Machinery Sale of Investments III. Cash flows from Financing Activities Issue of equity shares (2,50,000-1,00,000) Repayment of Long term loan Dividend paid Net increase in cash and cash equivalent Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period 1,50,000 (1,00,000) (1,00,000) (50,000) 75,000 5,00,000 5,75,000 (1,25,000) 60,000 (65,000) 2,60,000 55,000 20,000 3,35,000 20,000 (20,000) (1,00,000) (45,000) 1,90,000 Rs.

Financial Analysis 13.39

Working Notes: (i) Add: Add: Add: (ii) To To To (iii) To To (iv) To To (v) To To Balance b/d Capital Reserve A/c (Profit on sale of investment) Bank Balance c/d Cash (Bal. Fig.) Balance c/d Balance b/d Bank Equity share capital Net Profit made during the year ended 31.3.2006 Increase in P & L (Cr.) Balance Transfer to general reserve Provision for taxation made during the year Provided for proposed dividend during the year Machinery Account Rs. 7,50,000 1,25,000 1,00,000 By By Depreciation (Bal. Fig.) Balance c/d 30,000 50,000 55,000 1,25,000 2,60,000 Rs. 55,000 9,20,000 9,75,000 Rs. By By Balance b/d P & L A/c 50,000 55,000 1,05,000 Rs. By By Balance b/d P & L A/c (Bal. Fig.) 1,00,000 1,25,000 2,25,000 Rs. By Bank A/c (Balancing figure for investment sold) By 1,10,000 Balance c/d 50,000 1,10,000 60,000

9,75,000 Provision for Taxation Account Rs. 45,000 60,000 1,05,000 Proposed Dividend Account Rs. 1,00,000 1,25,000 2,25,000 Investment Account Rs. 1,00,000 10,000