a) cash flow from operating activity: Effect of profit

on cash,

o lncrease inP/L balance in the current year i.e. net profit

earned aftertax in the current year
o Add provision for tax debited to p/L
o Add transfer to general reserve
. Add depreciation debited to p/L A/C
o Add fictitious assets written off
o Add loss on sale of fixed assets and investments
o Less profit on sale of fixed asset and investments
o Less tax paid during the current year
o Add interest on loan including debentures
o Add interim dividend of the current year
o Add proposed dividend of the current year
\
Net operating profit before working capital (.rrruni.rilcurrent liabilities) .h;;;

c Add increasing current liabilities

o Add decreasing current assets except cash/bank
o Less decreasing current liabilities
o Less increase in current assets except cash/bank

Cash flow from operating activity ,_t1---

b) Cash flow from financing activity:

Sources: i) lssue of equity and preference share
ii) Loan taken
iii) lssue of debentures

Application: i) Application of fund .

ii) Repayment of share capital
iii) Repayment of loan
iv) Redemption of debentures
v) lnterest paid on loans and debentures
vi) lnterim dividend declared in the current year and paid in the current year
vii) Proposed dividend of the rast year paid in the current year
 c) Cash flour from investing activity:
Sources: i) ,Sale of fixed assets and investments
li)
lnterest received on long term investments
Application: i) Purchase of fixed assets and long term investments

Balance sheet of 2004 & 2005

- zo04 2005 2004 2005
Rs Rs Rs Rs

Equity share capital 5, 00,000 5, 00,000 F. A. 6, 00,000 7, 50,000

PIL 1, 00,000 l_, 50,000 Stock 2, 00,000 2, 50,000
Debentu res 2, 00,000 1, 00,000 Debtors 2, 50,000 1, 50,000
Bank loan 2, 50,000 3, 00,000 Cash & bank 75,000 1, 25,000
_-_-:--
Creditors 75,000 1, 25,000

.l
11, 25,000 L2,75,000 11,25,000 72,75,000

Depreciation provided on fixed asset 1, 00,000/-

lnterest paid on debentures 25,0001-
lnterim dividend paid during the year 75,0001-
Prepare a cash flow statement.

Ans.> Cash flow from operating activity:

Net profit for the current year : 50,000 (L, 50,000 - 1, 00,000)
Add depreciation : 1, 00,000
Add interest paid on debentures: 25,000
Add interim dividend paid during the year: 75,000
Net operating profit before working capital changes: 2, 50,000

Add increase in creditors: 50,ooo (1, 25,000 -.75,000)

Add decrease in debtors : 1, 00,000 (2, 50,000 - 1, 50,000)
Less increase in stock: 50,000( 2, 50000-2,00000)
Cash flow from operating activity: fqgod'
Cash flow from financing activity:
lssue of shares: 1, 00,000 (6, 00,000 - 5, o0,0oo)
Add bank loan taken: 50,000 (3, 00,000 - 2, 50,000)
Less debentures repaid: 1, 00,000 (2, 00,000 - 1, 00,00c)
Less interest paid on debentures: 25,000
Less interim dividend [aid: 75,000
Cash flow from financing activity:
- 50,000 oY [ *,.',
5
Cash flow from investing a ct ivity.:
Purchase of fixed asset: 50,000 + 1, 00,000 - 6, 00,000) =
- 2,50,000[outflow of cash]

Adding cash flows from all the above stated activities: i

Net increase in cash and cash equivalents: 3,50,000 + (- 50,000) + (-2, 50,000) = 50,000
Add Opening cash/cash equivalent: ' 75,000(cash & bank in
2004)
Closing cash/cash equivalent:
f-spOo
Ee
tcash & bank in
200s)
 CHAPTER: REPLACEM ENT ANALYSIS

When two assets are under the same block then the depreciation on the new asset which falls under
the same block is calculated by applying the depreciation percentage(opening balance in the block of
assets A/C + purchases - sale proceeds of one asset).

ll) lf two assets are not underthe same blockthen the profit or loss on the sold assets should be transfer
to P/Land depreciation is charged on cost price of the new asset.

lllustration

lncome generatinq proiects

Exlstine machine New machine

Rs Rs

Book value/Cost price 60,000 2,75,000

Sale price 75,000
Residual value nil
Sales/ann um: Yr I 60,000 1, 45,000
Yr ll 80,000 1, 20,000
Yr lll 1, 00,000 L, 50,000
Yr lV 1, 20,000 1, 50,000
Yr V 1, 50,000 2,'00,000

Variable cost 30% of sales.

Fixed cost excluding depreciation: Rs.20,000/annum for existing machine and Rs.30,000/annum for
new machine.
Tax Rate: 40%
Discou nti ng f actor : !O%o
Decide whether to purchase the new machine or not.
Ans.> To derive NPV of existing machine and new machine:

Existing machine:

Yrl Yr ll Yr lll Yr lV
Sales/an nu m 60,000 80,000 1, 00,000 1, 20,000 l-, 50,000

Less variable cost 18,000 24,OO0 30,000 36,000 45,000

(30% of sales)

Less fixed cost excluding 20,000 20,000 20,000 20,000 20,000

Depreciation (given)

Less Depreciation 12,000 12,000 12,O00 12,000 12,000

(60,000/5)

Net profit before tax l_0,000 24,000 38,000 52,000 73,000

( N PBr/PBr)

Less tax @ 40% 4,000 9,500 15,200 20, 800 29,200

Profit after tax 6,000 14,400 22,800 3L,200 43,800

Add back depreciation 12,000 12,000 12,000 1_2,000 l-2,000

(since deprn. is a non
cash item)

Operating cash inflows 18,000 26,400 3+,soo 43,200 55,800

after tax (OCIAT)

Discounting factors .909 .826 .151 .683 .621,

(as fcund in the table)

PV of OCIAT (rounded.) L6,352 21,806 26,135 29,506 34,652

(OCIAT x Disc factors)

Adding the PV of OCIAT of all the 5 years as calculated above: Rs. 1.,28,467/-
Less initial outlay: 0

NPV: Rs. L,28,46L/-

 Statement of cash flows for the new machine:

Yrl Yrll Yrlll YrlV YrV

tt

Sales 1, 45,000 l-, 2O,0OO 1, 50,000 1, 5O,OOO 2, OO,O00

Less variable cost 43,500 36,000 45,000 - 45,OOO 60,000

(30% of sales)

Less fixed cost excluding 3O,OO0 30,000 30,000 30,000 30,000

Depreciation (given)

Less Depreciation !
52,000 52,000 52,000 52,000 52,000
(2,60,000/5)**

Net profit before tax 19,500 2,000 23,000 23,000 58,000

(NPBT/PBT) )

Less tax @ 40o/o 7,800 800 9,200 9,200 23,200

Profit after tax 11,700 L200 13,800 13,800 34,800

Add back depreciation 52,000 52,000 52,000 52,000 52,000

(since deprn. ls a non
cash item)

Operating cash inflows 63,700 53,200 65,800 65,800 86,800

after tax (OCIAT)

Discounting factors .909 .826 .757 .683 .621

(as found in the table)

PV of OCIAT (rounded) 57,903 43,943 49,4L6 44,947 53,903

(OCIAT x Disc. factors)

Assets A/C (under the same block)

, To balanceb/d 60,000 by bank (sales) 75,000

To bank (purchase) 2,75,OO0 by balance c/d 2, 60,000
3, 35,000 -3, 35,000
Adding the PV of OCIAT of allthe 5 years as calculated above: Rs. 2,50,106/-
a'
Less net iniiial outlay: Rs 2,0o,ooof - **"'

NPV: Rs. 50,106/-

'+rF+ lnitial outlay: 2,75,0001-

Less sale proceeds

of existing machine: 7s,000/-
Net initial outlay: 2, OO,000l-

Decision: Since there is a declining NPV i.e 7,28,467 - 50,106

=
78,355 so the new machine should not
be purchased.