Q50500a From the following Balance Sheet and income statement of ABC Ltd. as at March 2011 and 2012, you are required to prepare cash flow statement using direct method:

Balance Sheet

Liabilities 2011 2012 Assets 2011 2012
Share Capital 5,76,000 7,10,400 Land & Building 76,800 1,53,600
Profit & Loss a/c 2,42,880 2,62,000 Machinery 5,76,000 9,21,600
Creditors 3,84,000 3,74,400 Cash 96,000 1,15,200
Outstanding Expenses 38,400 76,800 Debtors 2,68,800 2,97,600
Provision for Tax 19,200 21,200 Stocks 4,22,400 1,53,600
Acc. Dep. on     Advance 12,480 14,400
Building & Machinery 1,92,000 2,11,200      
  14,52,480 16,56,000   14,52,480 16,56,000

Income Statement

For the year ended 31st March, 2012

Particular Detail Amount
Net Sales   40,32,000
Less: Cost of goods sold 31,68,000
Depreciation 96,000
Salaries and wages 3,84,000
Operating expenses 1,28,000
Provision for tax 1,40,800 39,16,800
Net operating profit   1,15,200
Add: Non operating incomes:  
Profit on sale of machinery 19,200
Profit for the year 1,34,400
Profit & Loss a/c as on 31st March, 2011 2,42,880
  3,77,280
Dividend declared and paid 1,15,280
Profit & Loss a/c as on 31st March, 2012 2,62,000

Additional Information: Cost of machinery sold Rs. 1,15,200.

Question based on Annamalai University Assignment Solution and other course

Solution:

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  1. Indirect Method

The indirect method uses net-income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts for all cash-based transactions. An increase in an asset account is subtracted from net income, and an increase in a liability account is added back to net income. This method converts accrual- basis net income (loss) into cash flow by using a series of additions and deductions.

The following rules are used to make adjustments for changes in current assets and liabilities, operating items not providing or using cash and non operating items:

  1. Decrease in non cash current assets are added to net income
  2. Increase in non cash current asset are subtracted from net income
  3. Increase in current liabilities are added to net income
  4. Decrease in current liabilities are subtracted from net income
  5. Expenses with no cash outflows are added back to net income
  6. Revenues with no cash inflows are subtracted from net income (depreciation expense is the only operating item that has no effect on cash flows in the period)
  7. Non operating losses are added back to net income
  8. Non operating gains are subtracted from net income
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