Notes for Cash Flow Statement : For the students studying Accounting for Managers at

Flame University

Direct Method

Cash Flow from Operating Activities

Debtors / Trade Receivables

Opening Balance + Credit Sales - Cash Received from customers - Write o s = Closing Balance

Cash Received from customers = Opening Balance + Credit Sales - Closing Balance

Suppliers / Employees / Expenses

Cash paid to suppliers and employees =

COGS
+ Selling and Administration Expenses - Depreciation Expense (if included in COGS) - Bad Debt
Expense (if included in COGS)
+ Increase (- Decrease) in inventories
+ Increase (- Decrease) in prepaid expenses
+ Decrease (-Increase) in trade payables

Indirect Method

Three adjustments to convert net pro t into net cash ow

Non-cash items: Depreciation and bad debt expense do not require cash out ows. Hence, we
add them back.

Non-operating items: We move non-operating items, such as (a) gains and losses on disposal of
property, plant and equipment, intangible assets and investments, (b) interest income, (c) dividend
income and (d) interest expense from the operating activities section to the investing or the
nancing activities section

Non-cash items: Depreciation and bad debt expense do not require cash out ows. Hence, we
add them back. Non-operating items: We move non-operating items, such as (a) gains and
losses on disposal of property, plant and equipment, intangible assets and investments, (b)
interest income, (c) dividend income and (d) interest expense from the operating activities section
to the investing or the nancing activities section, as appropriate

Changes in working capital items: We adjust net pro t for changes in working capital items,
such as inventories, trade receivables, prepaid expenses, and trade payables.

Summarised format

Non Cash Items Non -Operating Items Working Capital Items

+ Depreciation + Interest Expense + Decrease in inventories

+ Amortisation + Loss on Sale of PPE + Decrease in trade receivables

+ Depletion + Loss on disposal of + Decrease in prepaid expenses

investments

+ Bad Debt Expense - Interest Income + Increase in trade payables

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 Non Cash Items Non -Operating Items Working Capital Items

- Excess Provision Written Back - Gain on disposal of PPE - Increase in inventories

- Gain on disposal of investments - Increase in trade receivables

- Increase in prepaid expenses

- Decrease in trade payables

Source : NARAYANASWAMY, R.. FINANCIAL ACCOUNTING (p. 869). PHI LEARNING.

Problems :

1. Abhijit Company : Income Statement for the year ended 20X5

Amount in Rs.

Sales 72,900

COGS 48,500

Depreciation expense 3,100

Selling and Administrative Expense 5,600

Interest Expense 2,700

Pro t before Income Tax 13,000

Income Tax 6,700

Pro t After Tax 6,300

Relevant Balance Sheet accounts on December 31 , 20X4 and 20X5

31/12/20X5 31/12/20X4

Inventories 7400 4500

Debtors (net of Provision for 8300 8900

doubtful debts Rs.1,400 and
Rs.300)

Prepaid expenses 2100 2900

Creditors 5700 6800

Bills Payable 4100 8100

Income Tax Payable 4800 3300

Selling and Administrative Expenses include provision for doubtful debts Rs.1,500. During the
year ended December 31 , 20X5 , debtors totalling Rs.400 were written o against the Provision
for doubtful debts.
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 Required :
Prepare net cash ow from operating activities using the direct method

2. Dutt Company :Income Statement for the year ended December 20X2

Amount in Rs.

Sales 75,800

Gain on Sale of investments 1,200

Interest Income 900

Dividend from Subsidiaries 300

COGS 43900

Depreciation expense 6700

Selling and Administrative Expense 8500

Interest Expense 1100

Loss on Sale of Plant and Machinery 800

Pro t Before Tax 17200

Income Tax 8300

Pro t After Tax 8900

Relevant Balance Sheet accounts on December 31 , 20X2 and 20X1

31/12/20X2 31/12/20X1

Inventories 9300 7900

Debtors (net of Provision for 6600 5300

doubtful debts Rs.1,400 and
Rs.300)

Prepaid expenses 1100 800

Creditors 8400 6300

Bills Payable 2100 6500

Income Tax Payable 2100 2800

Selling and Administrative Expenses include provision for doubtful debts of Rs.1,500. During the
year ended Dec 20X2 , debtors totalling Rs.700 were written o against the provision for doubtful
debts.

Required :
Prepare net cash ow from operating activities using the indirect method
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3. Haveli Company had the following investing activities during the year ended March 31, 20X7
a. Purchased investments for cash Rs.6,500
b. Sold investments for cash : cost Rs.3,800 ; loss Rs.400
c. Purchased a plant for cash Rs.15,800
d. Constructed a building for own use , Rs.7,800 (excluding capitalised interest , Rs.150)
e. Sold a plant for cash Rs.5,200 (cost Rs.9,500 ; carrying amount Rs.4,300)

Compute net cash ow from investing activities.

4. Supra Corporation had the following nancing activities during the year ended Nov 30 , 20X9

a. Paid dividends Rs.1,200

b. Redeemed debentures Rs.4,700
c. Repaid bank overdraft Rs.2,100
d. Converted debentures into equity shares Rs.11,000
e. Issued convertible debentures Rs.17,000

Compute net cash ow from nancing activities.

5. Hospet Company entered into the following transactions:

(a) Deposited cash in the current account. (b) Paid bonus to employees.(c) Acquired equipment
on credit. (d) Paid cash on maturity of bills payable for purchases of goods. (e) Paid income
tax. (f) Paid cash to settle a suit for trademark infringement. (g) Purchased a 60-day certi cate
of deposit. (h) Issued equity shares on conversion of debentures. (i) Acquired a machine on
hire purchase. (j) Issued equity shares at par. (k) Wrote o a receivable when a customer
became insolvent. (l) Issued equity shares in exchange for preference shares. (m) Received
cash on the maturity of bills receivable.

Required : Classify each as an operating activity, investing activity, nancing activity, non-cash
activity, or cash management activity.
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