Preparation of Cash Flow Statement
There are two methods to prepare cash flow statement; they are:
(1) Direct method
(2) Indirect method
Both methods have three activities; they are:
(a) Operating activities
(b) Investing activities
(c) Financing activities
Keep in Mind (KIM)
Only operating activities are the difference between direct methods and indirect methods. |
Investing activities and financing activities are the same in both methods. |
Problems and solutions of cash flow statement direct method include net cash from operating activities, net cash from investing activities and net cash from financing activities.
Here, best questions are solved from easy to difficult methods.
After studying and solving these problems, you can solve other questions related to cash flow statement.
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 4
Himstar Electronics Ltd of Nepal has following balance sheet on 31 December: [$/₹/Rs]
Liabilities | 2019 | 2020 | Assets | 2019 | 2020 |
Equity shares of Rs 100 | 10,00,000 | 12,00,000 | Fixed assets | 12,00,000 | 16,00,000 |
Share premium | 1,00,000 | 1,20,000 | Inventories | 1,00,000 | 2,00,000 |
10% Debentures | 2,00,000 | 1,00,000 | Account receivable | 3,00,000 | 2,00,000 |
Account payable | 1,00,000 | 80,000 | Cash and bank | 2,00,000 | 1,00,000 |
Creditors | 2,00,000 | 3,00,000 | |||
Profit and loss | 2,00,000 | 3,00,000 | |||
18,00,000 | 21,00,000 | 18,00,000 | 21,00,000 |
Income Statement for the year ended 2020
Particulars | Amount | Amount | |
Sales revenue | 12,00,000 | ||
Less: | Cost of goods sold | 7,00,000 | |
Gross margin | 5,00,000 | ||
Less: | Operating expenses: | ||
Office rent, rates and salaries | 2,00,000 | ||
Depreciation on fixed assets | 1,60,000 | ||
Premium on redemption of debenture | 20,000 | 3,80,000 | |
Net income before other income | 1,20,000 | ||
Add: | Profit on sale of fixed asset (book value $40,000) | 20,000 | |
Net income | 1,40,000 | ||
Less: | Dividend paid | 40,000 | |
Retained earning | 1,80,000 | ||
Required: Cash flow statement showing cash from:
(A) Operating activities; (B) Investment activities; (C) Financing activities; (D) Net change in cash
[Answer: OA = $380,000; IA = ($540,000); FA = $60,000;
Net change = ($100,000); Assets purchase = $600,000;
SOLUTION:
Fixed Assets Account
Particulars | Amount | Particulars | Amount |
To Beginning balance | 12,00,000 | By Bank (sold, CSV) | 60,000 |
To Profit and loss (profit) | 20,000 | By Depreciation on sales | 1,60,000 |
To Bank (purchase, b/f) | 6,00,000 | By Ending balance | 16,00,000 |
18,20,000 | 18,20,000 |
Cash Flow Statement
Himstar Electronics Ltd
Particulars | Amount | Amount | |
Cash from Operating Activities: | |||
Cash collection from sales: | |||
Sales revenue | 12,00,000 | ||
Add: decrease in A/R | 1,00,000 | 13,00,000 | |
Cash paid to suppliers: | |||
Cost of goods sold (COGS) | (700,000) | ||
Add: Decrease in A/P | (20,000) | ||
Add: increase in inventory | (100,000) | ||
Less: increase in creditors | 100,000 | (7,20,000) | |
Cash paid to operating expenses: | |||
Office rent, rates and salary | (2,00,000) | ||
Interest and insurance: | |||
Interest on debenture | Nil | ||
Tax paid: | |||
Tax | Nil | ||
NCOA [A] | 3,80,000 | ||
Cash from Investing Activities: | |||
Sales of fixed assets | 60,000 | ||
Purchase of fixed assets | (6,00,000) | ||
NCIA [B] | (5,40,000) | ||
Cash from Financing Activities: | |||
Issue of equity shares | 2,00,000 | ||
Increase in share premium | 20,000 | ||
Redemption of debentures | (1,00,000) | ||
Premium on redemption of debentures | (20,000) | ||
Dividend paid | (40,000) | ||
NCFA [C] | 60,000 | ||
Net change in cash and cash equivalent [A+B+C] | (1,00,000) | ||
Add: Beginning cash and cash equivalent | 2,00,000 | ||
Ending cash and cash equivalent | 1,00,000 | ||
Alternative,
Given and working note:
(A) Operating Activities | 4. | Interest and insurance | Nil | |||
1. | Cash collection from sales | 5. | Tax paid | Nil | ||
Sales revenue | 12,00,000 | |||||
Add: decrease in A/R | 1,00,000 | B. Investing Activities: | ||||
13,00,000 | Sales of fixed assets | 60,000 | ||||
2. | Cash paid to suppliers | Purchase of fixed assets | (600,000) | |||
Cost of goods sold (COGS) | (7,00,000) | |||||
Add: Decrease in A/P | (20,000) | C. Financing Activities: | ||||
Add: increase in inventory | (1,00,000) | Issue of equity shares | 200,000 | |||
Less: increase in creditors | 100,000 | Increase in share premium | 20,000 | |||
(720,000) | Redemption of debentures | (100,000) | ||||
3. | Cash paid to operating exp. | Premium on debentures | (20,000) | |||
Office rent, rates and salary | (200,000) | Dividend paid | (40,000) | |||
Cash Flow Statement
Himstar Electronics Ltd
Particulars | Notes | Amount | |
1. Cash from Operating Activities: | |||
Cash collection from sales revenue | 1 | 13,00,000 | |
Cash paid to suppliers | 2 | (7,20,000) | |
Cash paid to employees and operating expenses | 3 | (2,00,000) | |
Interest and insurance paid | 4 | Nil | |
Tax paid | 5 | Nil | |
NCOA [A] | 3,80,000 | ||
2. Cash from Investing Activities: | |||
Sales of fixed assets | 60,000 | ||
Purchase of fixed assets | (6,00,000) | ||
NCIA [B] | (5,40,000) | ||
3. Cash from Financing Activities: | |||
Issue of equity shares | 2,00,000 | ||
Increase in share premium | 20,000 | ||
Redemption of debentures | (1,00,000) | ||
Premium on redemption of debentures | (20,000) | ||
Dividend paid | (40,000) | ||
NCFA [C] | 60,000 | ||
Net change in cash and cash equivalent [A+B+C] | (1,00,000) | ||
Add: Beginning cash and cash equivalent | 2,00,000 | ||
Ending cash and cash equivalent | 1,00,000 | ||
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Click on link for YouTube videos | |
Accounting for Share | |
Share in Nepali | |
Debentures | |
Final Accounts: Class 12 | |
Final Accounts in Nepali | |
Work Sheet | |
Ratio Analysis (Accounting Ratio) | |
Fund Flow Statement | |
Cash Flow Statement | |
Theory Accounting Xii | |
Theory: Cost Accounting | |
Cost Accounting | |
LIFO−FIFO | |
Cost Sheet, Unit Costing | |
Cost Reconciliation Statement | |
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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PPROBLEM: 5
The balance sheets of CG Company Ltd as on 31st December are as follows:
Liabilities | Year 1 | Year 2 | Assets | Year 1 | Year 2 |
Equity shares capital | 4,00,000 | 5,00,000 | Fixed assets | 5,00,000 | 6,00,000 |
Share premium | − | 10,000 | Investment | 1,50,000 | 2,00,000 |
6% Preference shares | 80,000 | 2,00,000 | Inventory | 50,000 | 1,00,000 |
Retained earning | 1,10,000 | 1,50,000 | Account receivable | 1,50,000 | 60,000 |
10% Debentures | 1,50,000 | 50,000 | Prepaid expenses | 20,000 | 50,000 |
Bills payable | 50,000 | 40,000 | Goodwill | – | 70,000 |
Account payable | 60,000 | 100,000 | Cash at bank | 20,000 | 20,000 |
Outstanding salary | 40,000 | 50,000 | |||
890,000 | 11,00,000 | 890,000 | 11,00,000 |
Additional information:
(a) Sales for year $730,000
(b) Cost of goods sold $550,000
(c) Administrative expenses $50,000
(d) Selling and distribution expenses $20,000
(e) Insurance for the period $30,000
(f) Tax paid for the year $25,000
(g) Depreciation on fixed assets $60,000
(h) Fixed assets purchased for $250,000
(i) Dividend distributed $25,000
Required: Cash flow statement showing cash from:
(A) Operating activities; (B) Investment activities; (C) Financing activities; (D) Net change in cash
[Answer: OA = $105,000; IA = ($210,000); FA = $105,000;
*Assets purchased = $250,000;
SOLUTION:
Cash Flow Statement
CG Company Limited
Particulars | Amount | Amount |
Cash from operating activities: | ||
Cash collection from debtors: | ||
Sales revenue | 730,000 | |
Add: Decrease in account receivable | + 90,000 | 820,000 |
Cash paid to suppliers: | ||
Cost of goods sold | (550,000) | |
Add: Decrease in bills payable | (10,000) | |
Add: Increase in inventory | (50,000) | |
Less: Increase in account payable | + 40,000 | (570,000) |
Cash paid to operating expenses: | ||
Administrative expenses | (50,000) | |
Selling and distribution expenses | (20,000) | |
Add: Increase in prepaid expenses | (30,000) | |
Less: Increase in outstanding expenses | + 10,000 | (90,000) |
Cash paid for interest and insurance: | ||
Interest and insurance | (30,000) | |
Cash paid to tax: | ||
Tax paid | (25,000) | |
Net cash from operating activities (A) | 105,000 | |
Cash from investing activities: | ||
Sales of fixed assets | 90,000 | |
Purchase of fixed assets | (250,000) | |
Purchase of investment | (50,000) | |
Net cash from investing activities (B) | (210,000) | |
Cash from financing activities: | ||
Issue of equity shares | 100,000 | |
Increase in share premium | 10,000 | |
Issue of preference shares | 120,000 | |
Redemption of debentures | (100,000) | |
Dividend paid | (25,000) | |
Net cash from investing activities (C) | 105,000 | |
Change in cash and cash equivalent (A+B+C) | ||
Add: beginning cash and cash equivalent | 20,000 | |
Ending cash and cash equivalent | 20,000 |
Fixed Assets Account
Particulars | Amount | Particulars | Amount |
To Beginning balance | 500,000 | By Bank (sold, CSV, b/f) | 90,000 |
To Bank (purchase; given) | 250,000 | By Depreciation | 60,000 |
By Ending balance | 600,000 | ||
750,000 | 750,000 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 6
The balance sheet of ALD Company Ltd as on 31st December is as follows:
Liabilities | Year 1 | Year 2 | Assets | Year 1 | Year 2 |
Equity shares capital | 6,00,000 | 7,20,000 | Fixed assets | 7,20,000 | 9,60,000 |
Share premium | 60,000 | 72,000 | Inventory | 60,000 | 1,20,000 |
Retained earning | 1,20,000 | 1,80,000 | Account receivable | 1,80,000 | 1,20,000 |
10% Debentures | 1,20,000 | 60,000 | Cash at bank | 1,20,000 | 60,000 |
Bill payable | 60,000 | 48,000 | |||
Account payable | 1,20,000 | 1,80,000 | |||
10,80,000 | 12,60,000 | 10,80,000 | 12,60,000 |
Additional information:
1. Sales for year $720,000.
2. Cost of goods sold $420,000.
3. Operating expenses $70,000.
4. Interest on debentures $20,000.
5. Tax paid for the year $30,000.
6. Sales of fixed assets costing $36,000.
7. Fixed assets purchased for $360,000.
8. Dividend distributed $24,000.
9. Debentures were redeemed with $12,000 premium.
Required: Cash flow statement showing cash from:
(A) Operating activities; (B) Investment activities; (C) Financing activities; (D) Net change in cash
[Answer: OA = $288,000; IA = ($324,000); FA = $36,000;
*Assets purchased = $250,000;
SOLUTION:
Cash Flow Statement
ALD Company Limited
Particulars | Amount | |
Cash from operating activities: | ||
Cash collection from debtors: | – | |
Sales revenue | 720,000 | |
Add: Decrease in account receivable | + 60,000 | 780,000 |
Cash paid to suppliers: | – | |
Cost of goods sold | (420,000) | |
Add: Decrease in bill payable | (12,000) | |
Add: Increase in inventory | (60,000) | |
Less: Increase in account payable | + 48,000 | (448,000) |
Cash paid to operating expenses: | ||
Operating expenses | (70,000) | |
Cash paid for interest and insurance: | ||
Interest and insurance | (20,000) | |
Cash paid to tax: | ||
Tax paid | (30,000) | |
Net cash from operating activities (A) | 228,000 | |
Cash from investing activities: | ||
Sales of fixed assets Purchase of fixed assets | 36,000 (360,000) | |
Net cash from investing activities (B) | (324,000) | |
Cash from financing activities: | ||
Issue of shares Increase in share premium | 120,000 12,000 | |
Redemption of debentures | (60,000) | |
Premium on redemption of debentures | (12,000) | |
Dividend paid | (24,000) | |
Net cash from investing activities (C) | 36,000 | |
Change in cash and cash equivalent (A+B+C) | (60,000) | |
Add: beginning cash and cash equivalent | 120,000 | |
Ending cash and cash equivalent | 60,000 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 7
Following is the extracted information from XYZ Company Ltd as on 31st December 2020:
Assets and Liabilities | January | December |
Inventory | 80,000 | 96,000 |
Account receivable | 128,000 | 80,000 |
Account payable | 64,000 | 112,000 |
Outstanding salary | 16,000 | 8,000 |
Debentures | 240,000 | 160,000 |
Provision for tax | 48,000 | 32,000 |
Proposed dividend | 32,000 | 48,000 |
Plant and machinery | 560,000 | 960,000 |
Investment | 80,000 | 160,000 |
Equity shares capital of Rs 100 each | 800,000 | 1,120,000 |
Cash and bank | 148,000 | 36,000 |
Additional information:
a. Sales for the year $800,000
b. Cost of goods sold $480,000
c. Salary and other expenses $96,000
d. Depreciation $80,000
e. Premium on redemption of debentures $8,000
f. Interest on debentures $16,000
g. Provision for tax $32,000
h. Profit on plant $16,000 (book value $64,000)
i. Dividend paid $32,000
Required: Cash flow statement showing: (a) Cash from operating activities; (b) Cash from investing activities
(c) Cash from financing activities; (d) Net change in cash and cash equivalent
[Answer: OA = $232,000; IA = ($544,000); FA = $200,000;
* P&M purchase = $544,000]
SOLUTION:
Given and working note:
Provision for Tax Account
Particulars | Amount | Particulars | Amount |
To Bank (tax paid , b/f) | 48,000 | By Beginning balance | 48,000 |
To Ending balance | 32,000 | By P & L Account or IS (given) | 32,000 |
80,000 | 80,000 |
Proposed Dividend Account
Particulars | Amount | Particulars | Amount |
To Bank (dividend paid, given) | 32,000 | By Beginning balance | 32,000 |
To Ending balance | 48,000 | By P & L Account or IS (b/f) | 48,000 |
80,000 | 80,000 |
Plant and Machinery Account
Particulars | Amount | Particulars | Amount |
To Beginning balance | 560,000 | By Bank (sold) Account | 80,000 |
To Profit and loss (profit) | 16,000 | By Depreciation on sales | 80,000 |
To Bank (Purchase, b/f] | 544,000 | By Ending balance | 960,000 |
1,120,000 | 1,120,000 |
Cash Flow Statement
XYZ Company Limited
Particulars | Amount | Amount |
Cash from operating activities: | ||
Cash collection from debtors: | ||
Sales revenue | 800,000 | |
Add: Decrease in account receivable | + 48,000 | 848,000 |
Cash paid to suppliers: | ||
Cost of goods sold | (480,000) | |
Add: Increase in inventory | (16,000) | |
Less: Increase in account payable | 48,000 | (448,000) |
Cash paid to operating expenses: | ||
Salary and other expenses Add: Decrease in outstanding salary | (96,000) (8,000) | (104,000) |
Cash paid for interest and insurance: | ||
Interest and insurance | (16,000) | |
Cash paid to tax: | ||
Tax paid | (48,000) | |
Net cash from operating activities (A) | 232,000 | |
Cash from investing activities: | ||
Sales of plant and machinery | 80,000 | |
Purchase of plant and machinery | (544,000) | |
Purchase of investment | (80,000) | |
Net cash from investing activities (B) | (544,000) | |
Cash from financing activities: | ||
Issue of shares | 320,000 | |
Increase in share premium | Nil | |
Redemption of debentures | (80,000) | |
Premium on redemption of debentures | (8,000) | |
Dividend paid | (32,000) | |
Net cash from investing activities (C) | 200,000 | |
Change in cash and cash equivalent (A+B+C) | (112,000) | |
Add: beginning cash and cash equivalent | 148,000 | |
Ending cash and cash equivalent | 36,000 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 8
Comparative balance sheet and other information have been provided below by Max Company Ltd:
Balance Sheet
Liabilities | Last year | This year | Assets | Last year | This year |
Account payable | 40,000 | 70,000 | Inventories | 50,000 | 60,000 |
Outstanding salaries | 10,000 | 5,000 | Account receivable | 80,000 | 50,000 |
Debentures | 1,50,000 | 1,00,000 | Plant and machinery | 3,50,000 | 6,00,000 |
Provision for taxation | 30,000 | 20,000 | Investment | 50,000 | 1,00,000 |
Provision for dividend | 20,000 | 30,000 | Cash and bank | 30,000 | 50,000 |
Equity shares capital | 5,00,000 | 7,00,000 | Goodwill | 1,90,000 | 1,55,000 |
Suspense account | − | 90,000 | |||
7,50,000 | 10,15,000 | 7,50,000 | 10,15,000 |
Additional information:
a. Sales revenue $500,000
b. Cost of goods sold $300,000
c. Office rent and salaries $60,000
d. Depreciation written off on machinery $50,000
e. Premium on redemption of debenture $5,000
f. Interest on debenture $10,000
g. Provision for taxation $20,000
h. Profit on sale of plat $10,000 (book value $40,000)
i. Provision for dividend $30,000
Required: Cash flow statement net cash available from operating, investing and financing activities
[Answer: OA = $145,000; IA = ($340,000); FA = $125,000;
P&M purchased = $340,000; investment purchased = $50,000]
Dividend paid = $20,000; *Add suspense with opening cash = $90,000;
SOLUTION:
Given and working note:
Provision for Tax Account
Particulars | Amount | Particulars | Amount |
To Bank (tax paid, b/f) | 30,000 | By Beginning balance | 30,000 |
To Ending balance | 20,000 | By P & L account or IS (given) | 20,000 |
50,000 | 50,000 |
Proposed Dividend Account
Particulars | Amount | Particulars | Amount |
To Bank (dividend paid, b/f) | 20,000 | By Beginning balance | 20,000 |
To Ending balance | 30,000 | By P & L account or IS (given) | 30,000 |
50,000 | 50,000 |
Plant and Machinery Account
Particulars | Amount | Particulars | Amount |
To Beginning balance | 350,000 | By Bank account (sold, CSV) | 50,000 |
To Profit and loss (profit) | 10,000 | By Depreciation on sales | 50,000 |
To Bank (purchase, b/f) | 340,000 | By Ending balance | 600,000 |
700,000 | 700,000 |
Cash Flow Statement
Max Company Limited
Particulars | Amount | Amount |
Cash from operating activities: | ||
Cash collection from debtors: | ||
Sales revenue | 500,000 | |
Add: Decrease in account receivable | + 30,000 | 530,000 |
Cash paid to suppliers: | ||
Cost of goods sold | (300,000) | |
Add: Increase in inventory | (10,000) | |
Less: Increase in account payable | 30,000 | (280,000) |
Cash paid to operating expenses: | ||
Office rent and salary Add: Decrease in outstanding salary | (60,000) (5,000) | (65,000) |
Cash paid for interest and insurance: | ||
Interest and insurance | (10,000) | |
Cash paid to tax: | ||
Tax paid | (30,000) | |
Net cash from operating activities (A) | 145,000 | |
Cash from investing activities: | ||
Sales of plant and machinery | 50,000 | |
Purchase of plant and machinery | (340,000) | |
Purchase of investment | (50,000) | |
Net cash from investing activities (B) | (340,000) | |
Cash from financing activities: | ||
Issue of shares | 200,000 | |
Increase in share premium | Nil | |
Redemption of debentures | (50,000) | |
Premium on redemption of debentures | (5,000) | |
Dividend paid | (20,000) | |
Net cash from investing activities (C) | 125,000 | |
Change in cash and cash equivalent (A+B+C) | (70,000) | |
Add: beginning cash and cash equivalent | 30,000 | |
Add: Suspense | 90,000 | |
Ending cash and cash equivalent | 50,000 |
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जय गूगल. जय युट्युब, जय सोशल मीडिया
As an expert in financial accounting and cash flow statement preparation, I bring a wealth of knowledge and experience in analyzing and interpreting financial statements. Throughout my career, I have successfully navigated the complexities of cash flow analysis and have demonstrated a deep understanding of both direct and indirect methods for preparing cash flow statements.
In the provided article, the author discusses the preparation of a cash flow statement using two methods: the direct method and the indirect method. Both methods involve categorizing cash flows into three main activities: operating activities, investing activities, and financing activities. The key distinction between the direct and indirect methods lies in the treatment of operating activities, with only the operating activities differing between the two methods.
The article presents a problem related to Himstar Electronics Ltd, requiring the preparation of a cash flow statement using the direct method. The balance sheet and income statement information for the year 2020 are provided, and the solution outlines the steps to calculate cash flows from operating, investing, and financing activities, as well as the net change in cash.
The subsequent problems (Problem 5 to Problem 8) cover different scenarios and companies, each with its own set of balance sheets, income statements, and additional information. The solutions to these problems involve detailed calculations of cash flows from various activities, such as operating, investing, and financing, taking into account specific details such as sales, costs, expenses, and asset transactions.
In summary, the article provides a comprehensive overview of cash flow statement preparation, covering both direct and indirect methods and addressing various scenarios to test the reader's understanding of the concepts. The solutions demonstrate the application of accounting principles to calculate cash flows and provide a clear understanding of the financial dynamics of the companies in question.
