SOME DETAILS ON CASH FLOW

The figures required for calculation are obtained from the information supplied by the profit
and loss account and the balance sheet. The starting point for calculation will be net profit
before taxation. As the net profit ascertained might have been influenced by cash flow
activities of all the three categories and also non-cash activities, it needs certain
adjustments to be considered for calculating cash flow operating activities. The common
items of adjustments are as follows:

(a) Prepaid expenses

Cash inflow from operating activities will increase when there is a decrease in prepaid
expenses. In contrast cash flow from operating activities will decrease when there is an
increase in prepaid expenses.

(b) Outstanding expenses

There will be a decrease in cash when there is a decrease in outstanding expenses.
Similarly, there will be an increase in outstanding expenses.

(c) Interest paid or interest received

Interest paid or received will find a place in the profit and loss account and cause movement
of cash. The items need to be adjusted while calculating cash flow from operating activities
as they are considered elsewhere in the cash flow statement (say, investing activities or
financing activities).

(d) Depreciation
Depreciation on assets is debited to profit and loss account. As it is only a book entry,
depreciation does not cause any cash movement and, hence, it should be added back to
net profit while calculating cash flow from operating activities.
(e) Profit or loss on sale of fixed assets
Even though the profit or loss on sale of fixed assets is either credited (profit) or debited
(loss) to profit and loss account, they do not cause any cash movement. They are only book
entries. Therefore, loss on sale of fixed assets should be added back and profit on sale of
fixed assets should be deducted from net profit to arrive at cash flow from operating
activities.

(f) Stock debtors and bill receivable

A decrease in stock, debtors or B/R will increase the cash inflow from operating activites
and an increase in stock, debtors or B/R will decrease the cash inflow from operating
activites.

(g) Creditors and bills payable

 A decrease in creditors or bills payable will reduce cash and increase in creditors and bills
payable will increase cash.

Questions on cash flow statement

Q1. From the summarized cashbook of Zenith Ltd. calculate net cash flow from operations.

Particulars $ Particulars $

By Repayment of bank
To Balance b/d 150,000 450,000
loan

By Purchase of
To Sale of Machinery 1,350,000 1,200,000
Machinery

To Receipts from
9,000,000 By Payment to creditors 7,800,000
debtors

To Issue of shares 3,000,000 By Dividends 300,000

By Wages and Salaries 600,000

By Rent, rates and tax 300,000

By Income tax 150,000

By Balance c/d 2,700,000

Total 13,500,000 Total 13,500,000

Zenith Ltd. 
Summarized Cash Book
Q2.From the following balance sheets you are required to prepared a cash flow statement.

1998 1999 1998 1999

LIABILITIES Rs Rs Assets Rs Rs
Share capital 200000 250000 Cash 30000 47000
Trade 70000 45000 Debtors 120000 115000
creditors
P&L A/c 10000 23000 Stock in 80000 90000
trade
land 50000 66000

Total 280000 318000 280000 318000

Q3. From the following balance sheets of X Ltd as on Decemeber 31 1998and 1999, you are
required to prepare a statement of cash flow and cash from operations.

1998 1999 1998 1999

LIABILITIES Rs Rs Assets Rs Rs
Share capital 80000 85000 Land and 50000 50000
building
Profit & Loss 14500 24500 Plant 24000 34000
A/c
Creditors 9000 5000 Stock in 9000 2000
trade
Mortgage - 5000 Debtors 16500 19500
Cash at bank 4000 9000
Total 103500 119500 103500 119500

Q4. Statements of the financial position of Mr.Latif are given below.

1.1.98 31.12.198 1.1.98 31.12.98

LIABILITIES Rs. Rs ASSETS Rs Rs
Accounts 2900 2500 cash 4000 3000
payable
Capital 73900 61500 debtors 2000 1700
Stock 800 1300
building 10000 8000
Other fixed 60000 50000
assets

Total 76800 64000 76800 64000

Additional information:
a) There were no drawings
b) There were no purchases or sales of either building or other fixed assets.
Prepare a statement of cash flow.
Q5. From the following information, calculate cash from operations.
Rs.
Net profit for the year 60000
Total sales 140000
Debtors outstanding at the end of the year 20000
Debtors outstanding at the beginning of the year 10000
Q6. Following are the comparative balance sheets of Western System Ltd.

1999 1998 1999 1998

Liabilities Rs Rs Assets Rs Rs
Share capital 19000 18000 Cash 4000 6000
Bills payable 7600 6400 Trade 19000 15500
Debtors
Profit & loss 3500 2900 Land & 6200 5000
A/c Builiding
Patent Rights 900 800

30100 27300 30100 27300

Required : Prepare a cash flow statement.

Q7. From the following calculate net cash flow from operating activities.