STATEMENT OF CASH FLOW (INDIRECT METHOD)

Cash flows from operating activities

Rs
Net profit 12,400
Adjustment for depreciation 10,000
Operating profit before working capital changes 22,400
Decrease in trade receivable 4,550
Decrease in inventories 4,000
Decrease in trade payable (4,800)
Net profit from operating activities 26,150

Cash flows from investing activities Rs

Purchase of furniture (31,950)

Net cash used in investing activities (31,950)

Cash flows from financing activities
Redemption of debentures (20,000)
Issuance of shares 24,000
Net cash from financing activities 4,000
Net decrease in cash and cash equivalents (1,800)
Cash and cash equivalents at beginning of year 9,700
Cash and cash equivalents at end of year 7,900
INDIRECT METHOD CASH FLOW FORMAT Rs
Cash flows from operating activities X
Cash generated from operation (note 1) (X)
Interest paid (X)
Income taxes paid (X)
Mark up paid on running finance (X)
Defferred costs paid (X)

Net cash from operating activities (X)

Cash flows from investing activities (X)

Purchase of fixed assets (X)
Proceed from sale of fixed assets (X)
Dividends received (X)
Long term investments (X)
Proceeds from redeemable capital (X)
Long term loans to employees (X)
Payment for goodwill (X)
Investment in associated companies (X)
Net cash from investing activities (X)

Cash flows from financing activities Rs

Rights shares subscripting including share premium (X)
Proceeds from long term borrowings (X)
Dividends paid (X)
Repayment of redeemable capital (X)
Tax paid on bonus shares issued (X)
Repayment of liability under finance lease (X)
Redemption of debentures (X)

Net cash from financing activities (X)

Net increase in cash and cash equivalents (X)

Cash and cash equivalents beginning of period (X)
(X)
Cash and cash equivalents end of period (X)

Note 1.Cash generated from operations (X)

Net profit before taxation (X)
Adjustment for Depreciation (X)
Administration of good will (X)
Amortization of deferred costs (X)
Amortization of discount and issuance cost of debts (X)
Loss on disposal of fixed benefits (X)
Loss on sale of shares (X)
Provision for staff retirement benefits (X)
Loss on sale of Share (X)
Provision for diminution in the value long term investments (X)
Loss on disposal of long term investment (X)
Investments income (X)
Interest expense (X)
Markup on running finance (X)
Staff retirement benefits paid (X)
Provision for diminution in the value long term
Investment written back
(X)
Increase in long term deposits (X)

Rs
Operating profit before working capital changes X
Increase in trade and other receivable (X)
Increase in inventories (X)
Increase in stores, spares and loose tools (X)
Increase in loans, advances deposits and prepayments (X)
Increase in trade payable and accrued expenses X

Cash generated from operations X

Note 2. Cash and cash equivalents Rs

Cash and cash equivalents X
Running finance under mark up arrangement (X)
DIRECT METHOD CASH FLOWS FORMAT Rs
Cash flows from operating activities X
Cash receipt from suppliers and employees (X)

Cash generated from operations X

Interest paid (X)
Income taxes paid (X)
Markup paid on running finance (X)
Defrred costs paid (X)
Net cash from operating activities X

Cash flows from investing activities

Purchase of fixed assets X
Proceeds from sale of fixed assets X
Dividends received X
Long term investments (X)
Proceeds from redeemable capital X
Long term loans to employees (X)
Payment for goodwill (X)
Investment in associated companies (X)

Net cash from investing activities X

Cash flows from financing activities Rs

Rights shares subscription including share premium X
Proceeds from long term borrowings X
Dividends paid (X)
Repayment of redeemable capital (X)
Tax paid on bonus shares issued (X)
Repayment of liability under finance lease (X)
Redemption of debentures (X)

Net cash from financing activities X

Net increase in cash and cash equivalents X

Cash and cash equivalents beginning of period X

Cash and cash equivalents end of period X

Exercise- 3.4
Given Dec. 31 Dec. 31
GOOD DEALERS LIMITED 20X7 20X6
BALANCE SHEET Rs Rs
Cash 125,000 150,000
Trade receivable 1,500,000 1,550,000
Inventories 950,000 700,000
Equipment 1,800,000 1,300,000
Deferred costs 150,000 150,000
4,525,000 3,850,000

Trade Payable 450,000 500,000

Accured expenses 25,000 100,000
Provision for taxation 600,000 500,000
Term finance certificate - 750,000
1,075,000 1,850,000

Share capital 2,000,000 1,000,000

Ratained earnings 500,000 200,000
General reserve 950,000 800,000
4,525,000 3,850,000
Additional information

1. Tax provision of Rs. 500,000 was made for 20x7

2. The company paid 20% dividend on ordinary shared fof the year ended
Dec. 31 20x6, on March, 20x7
3. Depreciation charge during 20x7 amounted to Rs. 200,000
4. Equipment with a book value of Rs. 200,000 was sold for Rs. 180,000
5. During the year Rs. 50,000 were incurred on issue of shares. The amount was charged
to deferred costs.

Required
Statement of cash flows for 20x7 under the indirect method
Solution
GOOD DEALERS LIMITED
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 20x7

Cash flows from operating activities Rs

Net profit before tax (N-1) (650,000+500,000) 1,150,000

Adjustment for:
Depreciation (N-2) 200,000
Loss on sale of equipment 20,000
Amortization of deferred cost (N3) 50,000

Operating profit before working capital changes 1,420,000

Decrease in trade receivable 50,000
Increase in trade payable (250,000)
Decrease in trade payable (50,000)
Decrease in accrued expenses (75,000)

Cash generated from operations 1,095,000

Income tax paid (400,000)
695,000
Cash flows from investing activities
Purchase of equipment (N-2) (900,000)
Proceeds from sale of equipment 180,000
Deferred costs incurred (50,000)
Net cash used in investing activities (770,000)

Cash flows from financing activities

Dividends paid (200,000)
Issuance of shares 1,000,000
Redemption of Term Finance Certificates (750,000)

Net increase in cash equivalents (25,000)

Cash and cash equivalents at beg. of period 150,000
Cash and cash equivalents at end of period 125,000

WORKING
Retained earning (N-1)

Rs Rs
Dividend paid 200,000 Balance b/d 200,000
Transfer to Net profit for year
General reserve 150,000 (balancing figure) 650,000
Bal. c/d 500,000 -
850,000 850,000

Equipment, NBV (N-2)

Rs Rs
Balance b/d 1,300,000 Disposal 200,000
Purchase Depreciation 200,000
(balancing figure) 900,000 Balance c/d 1,800,000
2,200,000 2,200,000

Deferred costs (N-3)

Rs Rs
Balance b/d 150,000 Amortization (bal. fig.) 50,000
Cash 50,000 Bal. c/d 150,000
200,000 200,000