Question 2 a

Part i

Unsecured Loan-Rs. 201 lakh

Interest-Rs 184 lakh

Working capital finance-Rs 122 lakh

Part ii

Purchase of fixed assets- Rs. 117 lakh

Loans and advances-Rs 95 lakh

Adjustment to inventory-Rs 52 lakh

Part iii

Cash flow from operations is Rs. (84) lakhs [2001-02] and Rs. 57 lakh [2000-01] which is greater than the
net income is Rs. (599) [2001-02] and Rs. (184) [2000-01]. This company has large depreciation (Rs. 268
lakh and Rs. 175 lakh resp.) and interest amounts (Rs. 184 lakh and Rs. 369 lakh resp.) which cause the
net income to go down by a huge amount.

Depreciation 268 175

Interest 184 369
Trade receivable (3) (13)
Loans and (95) (178)
advances

Part iv

No, the firm was not able to generate enough cash from operations to pay for all of its expenditure. The
company had a net cash outflow from operations of Rs 84 lakh. Major cash outflows in operations
include changes in working capital finance (Rs 51 lacs), trade payables (Rs 52 lacs), and inventories (Rs
52 lacs). For the same year the capital expenditure for purchase of asset was Rs 117 lakh.

Part v

The company had a net cash outflow from operations of Rs 84 lakh. However for the same period, the
capital expenditure for purchase of fixed asset was Rs 117 lakh. Also, the company paid no dividends
during this year. This could not be covered by the operating cash flow (which was negative). Therefore,
the capex was primarily financed by unsecured loans of Rs 201 lakh.

Part vi

During 2001-02, change in working capital is primarily a source of cash. In this, uses of cash include
loans and advances (Rs 95 lacs) and trade and other receivables (Rs 3 lacs). The sources of cash are
inventories(Rs 52 lakh), Trade payable (Rs 52 lakh), working capital finance(Rs 51 lakh).
Part vii

Items that effect cash flow are

Depreciation-Rs 268 lakh

Interest- Rs 184 Lakh

Unsecured Loan-Rs 201 Lakh

Part viii

Sr. No. Item Year 2000-01 (lakh Rs.) Year 2001-02 (lakh Rs.) Change
1 Net Income (184) (599) Decrease
2 Cash flow 57 (84) Decrease
from
operations
3 Capital (48) (117) Decrease
Expenditure
4 Dividends - - No dividends
were paid
during the two
years
5 Net borrowing 88 201 Increase
6 Working (27) (302) Decrease
capital
accounts

Part ix

The company is a new company and is in its early growth stage. We can say so because:

Capital expenditure is increasing which can be seen from increasing costs of purchase of fixed
assets
The amount of unsecured loans are increasing
The value of inventory is increasing
Working capital finance is decreasing

The financial strength of the company is weak which is normal for a newly emerging firm. We would give
the company a 4. This is because even though the company is financially not very sound at the moment,
it has a huge growth potential.