Cash Flow llustration 1.

Given below is Profit and Loss Account of ABC Ltd. and relevant Balance Sheet information :
Profit and Loss Statement for the year ended 31st March, 2015 (Rs in lakhs)

Particulars Note As at 31st As at 31st

No. March, 2015 March, 2014
I Revenue from Operation 4,150
II Other Income 100
III TOTAL REVENUE(I+II) 4,250
IV EXPENSES:
(a) Cost of material consumed
(b) Purchase of products for sale 2,400
(C) changes in inventories of finished goods, work-in- (20)
progress and products for sale
(d) Employees cost/ benefits expenses 800
(e) Finance cost 60
(f) Depreciation and amortization expenses 100
(g) Product development expenses/Engineering
expenses
(h) Other expenses 200
(i) Expenditure transfer to capital and other account
TOTAL EXPENSES 3,540
V PROFIT BEFORE EXCEPTIONAL AND EXTRAORDINARY ITEMS AND 710
TAX ( III-IV)
VI EXCEPTIONAL ITEMS -
VII PROFIT BEFORE EXTRAORDINARY ITEMS AND TAX (V-VI) 710
VIII EXTRAORDINARY ITEMS -
IX PROFIT BEFORE TAX FROM CONTINUING OPERATIONS (VII-VIII) 710
X Tax expenses:
(1) Current Tax 200
(2) deferred tax -
XI PROFIT AFTER TAX FOR THE YEAR FROM CONTINUING 510
OPERATION(IX-X)
XII Profit (loss) from discontinuing operations
XIII Tax expenses from discontinuing operations
XIV Profit(loss) from discontinuing operations (after tax) (XII-XIII)
XV PROFIT (LOSS) FOR THE PERIOD (XI+XIV)
Balance brought forward from previous year 50
Profit available for appropriation 560
Appropriation:
Proposed dividend 300
Transfer to General Reserve 200
Distribution Tax 30
Total 530
Balance carried forward 30
XVI Earning per equity share:
(1) Basic

(2) Diluted
 Notes on Accounts (Rs in lakhs)

1. Revenue from operation As at 31st March,2015 As at 31st March,2014

Sales ( net of Excise Duty) 4,150
Total 4,150

2. Other Income As at 31st March,2015 As at 31st March,2014

Interest and Dividend 100
Total 100

3. Employees Cost/ Benefits Expenses As at 31st March,2015 As at 31st March,2014

Wages and Salaries 800
Total 800

4. Finance Expenses As at 31st March,2015 As at 31st

March,2014
Interest 60
Total 60

Relevant Balance Sheet information 31-03-2015 (Rs in lakhs) 31-03-2014 (Rs in lakhs)
Debtors 400 250
Inventories 200 180
Creditors 250 230
Outstanding wages 50 40
Outstanding expenses 20 10
Advance tax 195 180
Tax provision 200 180
Assessed tax liability 180

Computation of cash flow from Operating Activities

(Rs in lakhs)
Indirect Method
Profit before tax 710
Add : Non-cash items : Depreciation 100
Add : Interest : Financing cash outflow 60
Less : Interest and Dividend : Investment 100
Cash inflow 770
Less : Tax paid 195
Working Capital Adjustments 575
Debtors (250 - 400) (150)
Inventories (180 - 200) (20)
Creditors (250 - 230) 20
Outstanding wages (50 - 40) 10
Outstanding expenses (20 -10) 10
Cash Flow from Operating Activities 445

Illustration 2.
Name of the Company: MZ Ltd.Profit and Loss Statement for the year ended 31st March, 2015

Particulars Note As at 31st As at 31st

No. March, 2015 March, 2014
I REVENUE FROM OPERATION 10,000
II OTHER INCOME 1,200
III TOTAL REVENUE (I+II) 11,200
IV EXPENSES:
(a) Cost of material consumed 5,500
(b) Purchase of products for sale
(c) changes in inventories of finished goods, work-in- progress (1,000)
and products for sale
(d) Employees cost/ benefits expenses 2,500

(e) Finance cost 800

(f) Depreciation and amortization expenses 500

(g) Product development expenses/Engineering expenses -

(h) Other expenses 2,000

(i) Expenditure transfer to capital and other account

TOTAL EXPENSES 10,300
V PROFIT BEFORE EXCEPTIONAL AND EXTRAORDINARY ITEMS 900
AND TAX ( III-IV)
VI EXCEPTIONAL ITEMS -
VII PROFIT BEFORE EXTRAORDINARY ITEMS AND TAX (V-VI) 900
VIII EXTRAORDINARY ITEMS -
IX PROFIT BEFORE TAX FROM CONTINUING OPERATIONS (VII-VIII) 900
X Tax expenses:
(1) Current Tax 100

(2) deferred tax -

XI PROFIT AFTER TAX FOR THE YEAR FROM CONTINUING 800
OPERATION(IX-X)
 XII Profit (loss) from discontinuing operations -
XIII Tax expenses from discontinuing operations -
XIV Profit(loss) from discontinuing operations (after tax) (XII-XIII) -
XV PROFIT (LOSS) FOR THE PERIOD (XI+XIV)

Balance brought forward from previous year 100

Profit available for appropriation 900

Appropriation:
Proposed dividend 600

Transfer to General Reserve 250

Distribution Tax -

Total 850

Balance carried forward 50

XVI Earning per equity share:

(1) Basic
(2) Diluted

Name of the Company: MZ Ltd.

Balance Sheet as at 31st March, 2015

Ref No. Particulars Note As at 31st As at 31st

No. March, 2015 March, 2014
I EQUITY AND LIABILITIES
1 Shareholders’ fund
(a) Share capital 3,000 4,000
(b) Reserves and surplus- 850 1050
2 Share application money pending allotment NIL
3 Non-current liabilities
(a) Long-term borrowings 4,000 6,000
4 Current Liabilities
(a) Trade payables 4,650 4,200
(b) Short-term provisions 750 850
Total 13,250 16,100
II ASSETS
1 Non-current assets
(a) Fixed assets
(i) Tangible assets 5,000 6,500
(b) Non-current investments 1,000 1,500
(c) Long-term loans and advances 150 100
2 Current assets
(a) Inventories 5,000 5,500
(b) Trade receivables 1,500 2,000
(c) Cash and cash equivalents 600 500
Total 13,250 16,100
Note: Relevant items of Assets/ Liabilities are reflected in Balance Sheet and Schedule III. Hence sub-item
not having any value for the given illustration is not shown/ represented in Balance Sheet.
Notes on Accounts (` in lakhs)
1. Revenue from operation As at 31st March,2015 As at 31st March,2014
Sales ( net of Excise Duty) 10,000
Total 10,000

2. Other Income As at 31st March,2015 As at 31st March,2014

Income from Investments 1,200
Total 1,200

3. Raw Material Consumed As at 31st March,2015 As at 31st March,2014

Opening Stock Of Raw Material 2,000
Add: Purchase of Raw Material 5,000
7,000
Less: Closing Stock of Raw Material 1,500
Total 5,500

4. Changes in stock of Finished Goods As at 31st March, 2015 As at 31st March, 2014
Closing stock 4,000
Less: Opening Stock 3,000
Total 1,000

5. Employees Benefits As at 31st March, 2015 As at 31st March, 2014

Salaries and Contribution to Retirement Benefit Schemes 2,500
Total 2,500

6. Reserve and Surplus As at 31st March, 2015 As at 31st March, 2014

General Reserve 750 1,000
Profit & Loss A/c 100 50
Total 850 1050

7. Long Term Borrowings As at 31st March, 2015 As at 31st March, 2014

Secured Loan 4,000 6,000
Total 4,000 6,000

8. Tangible Assets As at 31st March, 2015 As at 31st March, 2014

Gross Block 6,000 8,000
Less: Accumulated Depreciation 1,000 1,500
5,000 6,500
9. Long Term Loans and Advances st st
As at 31 March, 2015 As at 31 March, 2014
Advance tax 150 100
150 100
10. Short Term Provisions st st
As at 31 March, 2015 As at 31 March, 2014
 Tax Provision 150 100
Other Provisions 150 150
Propose dividends 450 600
750 850
Consider the above Profit and Loss account and Balance Sheet and derive Cash flows from operating
activity

Computation of Operating Cash Flow using Indirect Method

` in lakh
Increase in General Reserve 250
Decrease in P & L A/c (50)
Tax provision 100
Proposed Dividend 600
Interest 800
Depreciation 500
2,200
Less : Income from Investments 1,200
1,000
Working Capital Adjustments :
Inventories (500)
Sundry Debtors (500)
Sundry Creditors (450) (1,450)
Cash from operating activities (450)
Less : Advance tax paid (100)
Cash flow from after tax operating activities (550)
Note
Working Capital Adjustments: Increase in current assets like inventories, debtors, prepayments
blocks the cash flows, whereas decrease in current assets releases cash. Although there was profit
before interest and depreciation amounting to `1,000 lakhs, such profit was not represented by
cash since it was blocked in inventories and debtors.
Similarly, any increase in current liabilities means withholding cash payments. In other words,
increase in current liabilities means increase in cash flows from opening activities. On the other
hand, decrease in current liabilities means additional cash outflows which further reduces cash
flows from operating activities.

Illustration 2 (a): Taking the data given in Illustration 2, and using the following additional information derive cash
flow from investment activities:
Take 10% of the investments given in the Balance Sheets as risk-free and readily encashable and remaining of the investments as
long term investments.

Cash flow from Investment Activities

Particulars ` In lakhs
Purchase of fixed assets
Purchase of fixed assets
Increase in gross block (2,000)
Purchase of long term investments
31-03-2014 31-03-2015
1,000 1,500
Less: cash equivalents 100 150
900 1,350 (450)
(2,450)
Income from Investments (1,250)

Thus there were net cash outflows for investing activities.

Illustration 2 (b) : Take the information given in Illustration 2. & 2.(a) and derive cash flow from financing activities :

Cash flows from financial activities ` In lakhs

Issure of share 1,000
Loans 2,000
Interest (800)
Dividend (450)
1,750
Thus there was net cash inflows from financial activities.

Illustration 2 (c): Use the data given in Illustration 2 & 2.(a) and find out change in cash and cash equivalents:
Particulars 31-03-2014 31-03-2015 Increase / (Decrease)
Cash and bank Balances 600 500 (100)
Risk-free and readily encashable
Investments 100 150 50
700 650 (50)
There was a decrease in cash and cash equivalents by `50 lakh.