Example: Preparing Cash flow Statement (Direct and Indirect Method) Video Lecture | Accountancy Class 12 - Commerce

from the following information we have
to prepare a cash flow statement
according to direct method and indirect
method as per accounting standard 3
waist walking note should form part of
your answer so we have a balance sheet
as on 31 12 2013 we also have
information relating to 2012 and that is
more important for preparing cash flow
statement because only if you have two
years balance sheet you will be able to
find what is the movement in the assets
and liabilities so assets cash on hand
2012 it is 25 in 38 is 2200 so there is
an increase by 175 so that increase is
what we are going to analyze then
short-term investment from 135 moved to
670 Sundra data is moved from thousand
two hundred two thousand seven hundred
there is an increase increase so it's an
outflow interest receivable nothing in
twelve so in thirteen it is hundred
inventory is from thousand nine fifty it
has come down to nine hundred so there
is an inflow long-term investments no
moment both the years two thousand five
hundred fixed asset at cost in twelve
it is nineteen ten whereas in thirteen
it is 20 180 so there is an increase
less accumulated depreciation there is
some movement from 1060 to 1450 so you
have net value it has come down to seven
thirty from 850 so the total asserts in
2012 is triple six zero whereas in 2013
it is sixty eight double zero then
moving to liabilities in 2012 Sandra
critters is eighteen nineteen thirteen
it is 150 so there is a sizeable payment
interest payable two thousand twelve
hundred in thirteen it is 230 so a
portion of interest have not been paid
income tax payable from thousand it has
come down to four hundred long-term debt
from thousand forty it has moved to
dribble one zero so the total liability
has come down from four thousand thirty
to 1890 but a shareholder funds
Shack capital 2012 was twelve fifty
whereas the
it is 1,500 the reserves in 2012 is 1380
whereas in 13 is for 10 so that reserves
balance have come down I am sorry it's a
technical mistake reserves balance have
not come down in 2012 it is 1380 whereas
in 13 it is 34 10 so there is a
meaningful increase then total
shareholders funds in 2012 is 26 30
whereas in 13 it is 49 50 so there is an
increase because of share capital as
well as because of reserves so the total
liabilities in 12 is triple six zero
whereas in 13 it is six to eight hundred
then moving to statement of profit and
loss for the period ended 31st December
2013 sales is thirty thousand six fifty
cost of sales is twenty-six thousand
gross profit has 46 50 depreciation is
450 admin and selling expenses nine ten
interest expenses of four hundred
interest income is three hundred
division didn't come as 200 foreign
exchange loss is 40 so the net profit
before tax ation and extraordinary item
is thirty three fifty and the
extraordinary item is insurance proceeds
from earthquake disaster settlement
which is 180 so the net profit after
extraordinary item is thirty five thirty
income tax is three hundred the net
profit is thirty two thirty additional
information an amount of 250 was raised
from the issue of share capital and a
further 250 was raised from long term
borrowings interest expense was four
hundred of which 170 was paid during the
period hundred relating to interest
expense of the prior period was also
paid during the period dividends paid
worth 1,200 tax deducted at source on
dividends received included in the tax
expense of three hundred for the year
amounted to 40 during the period the
enterprise acquired fixed research for
350 the payment was made in cash plant
with original cost of 80 and accumulated
depreciation of sixty was sold for 20
foreign exchange loss of 40 represents
the reduction in carrying amount of
short term investment in foreign
currency designated bonds arising out of
a change in exchange rate between the
data of acquisition of the investment
and balance sheet date centiliters and
sandra craters includes amount relating
to credit sales and credit purchases
only so with this information we have to
prepare the cash flow statement in both
the direct method as well as indirect
method so first for preparing the cash
flow statement under direct method we
need certain information what are the
information we require number one we
should know what is the cash that is
received from the customers so how we
are going to find what is a cash receipt
from customer it is very simple you have
opening guitarist balance you have
closing guitarist balance so with sales
you make adjustment for this opening and
closing data that is opening data's plus
sales - closing guitars is going to give
what is the cash collected from
customers will do that cash visit from
customers we have sales information
which is 3650 with this let us add
openings and radiators at the beginning
of the year which is 1200 and let us
detect the closings and radiators at the
end of year which is 1700 so we have
cashed receive from customers the next
information what we require is what is
the cash that has been paid to the
suppliers and employees we have
information about we have information
about the cost of sales in the question
which is 26,000 and we also information
we also have information about admin and
selling expenses which is 910 so this is
the expense that has been accounted for
the year which is 26 thousand nine
hundred and ten but when we are talking
about cash paid to suppliers we should
know what has been purchased the
information what we have in cost of
sales is consumption so if you want to
know what has been purchased you should
add back closing stock and detect the
opening stock so that should be done
as far as the inventory is concerned but
if you are interested in knowing what is
the payment you should add opening
sundry craters and did a closing Sandra
craters so you will get to know payment
for knowing payment you should know
purchases for knowing purchases you
should add the closing inventory and
deduct opening inventory and for knowing
payment you should add opening sundry
craters and deduct closing sundry crater
so we will do that we are going to add
opening sundry craters that is Sandra
craters at the beginning of the year
which is 1890 and we are adding
inventories at the end of the year which
is 900 so we are taking the total 27 90
and we have to direct Sandra craters at
the end of the year which is 150 and
inventories at the beginning of the year
which is 1950s which 2100 so now we get
to know what is the cash that has been
paid to supplies and employees which is
27 600 our next working note is for
finding what is the income tax that has
been paid including the tax deducted at
source on dividend we have information
on income tax expense for the year
including the tax deducted which is 300
we know what is the income tax liability
in the beginning of the year this
information we can take from balance
sheet which is thousand and the income
tax liability at the end of the year is
400 so the net income tax that has been
paid during the year is 900 now this can
be divided into two because out of 940
is paid by the way of TDA's on dividend
so it can be classified under investment
activity and remaining age 60 relates to
profit so this has to be shown under
operating activity the next working note
is for finding what is the long term
loans that have been repaid yes in
balance sheet we noticed the long term
loan position has come down but there
was some additional information with
regard to the funds that have been
mobilized so the long term debt at the
beginning of the year as 1040 and there
was additional information that long
term borrowings made during
your is 250 so 1290 was a total
long-term funds whereas the position at
the end of the year is treble 1 0 it
means there is a repayment to the extent
of 180 our next working is for computing
what is the interest paid we had
information on interest expense for the
year in the question which is 400 we
also had information on the opening
interest payable n closing interest
payable so let's add the opening
interest payable which was 100 so it is
500 and we'll dig the closing interest
payable which is 230
it means the interest that has been paid
is only 270 so now let us prepare the
cash flow statement under direct method
we should start with cash flow from
operating activity we should know what
are the cash flows that had come in cash
receipts from customers we have
calculated in working node 1 which is
30,000 150 then we should know what are
the cash outflows cash paid to supplies
and employees working node 2 we computed
which is 27 600 then the difference
between these two would give what is the
cash generated from operations from this
we have to pay the income tax and we
have computed in working node 3 which is
860 so this is going to give us cash
flow before extraordinary item which is
1690 with this we have to make
adjustment for extraordinary items which
is proceeds from earthquake disaster
settlement which is 180 and now this is
giving us the net cash from operating
activities which is 1870 then we move on
to cash flow from investing activity
there are some purchases of fixed assets
right yeah the purchase of fixed assets
is 350 this is available in additional
information then there are some proceeds
from sale of equipment which is 20 then
interest received is 200 dividend
received is 160 so this is going to give
us the net cash from investing
activities which is only 30
then let's move on to cash flows from
financing activity sure capital has
increased so there are proceeds from
issuance of shy capital which is 250
then some long term borrowings were also
raised that is 250 and there was also
some repayment which we have calculated
which is 180 and interest is also paid
there which is 270 dividend paid is 1200
so the net cash used in financing
activity it's an outflow so it's a usage
which is double one five zero so the net
increase in cash and cash equivalents
summing the cash generated or cash used
in all the three activities we get it is
750 so the cash and cash equivalents at
the beginning of the period is 160 the
cash generated during the year is 750 so
cash and cash equivalent at the end of
the period is 910 here in this cash and
cash equivalent we have also considered
the short term investment so because of
considering the short term investment
there is some effect in the current year
because if you consider the cash and
cash cash and cash equivalent including
the short-term investment you may not
get 910 there would be a gap of 40 let's
see what it is the cash on hand and
balancers with banks in 2012 is 25
errors in 2013 it is 200 so the movement
is only 175 but we are talking about the
range of 910 that's because of short
term investments in 12 it is 135 in 13
it is 670 now this is going to cause the
problem because we are going to take the
total of cash in cash equivalent in 12
it is 160 in 13 it is 870 now why this
is 870 the short term investments is
valued at 670 because of providing
mark-to-market foreign exchange
difference of 40 so actually the balance
of short term investment is up or higher
by 40 which was reduced due to
mark-to-market so now that is being
added effects of exchange rates of 40
that is being added so now we will get
the real cash and cash equivalent for
2013 which is 910 and not 870 that is
because of the 40 which is affect of
exchange rate changes so in 2013 it is
910 whereas in 2012 it is 160 so we have
answered question 1 where and we have
prepared the cash flow statement under
direct method now let us move on to
indirect method here also we will start
with cash flow from operating activity
the first one would be net profit before
tags and extraordinary item which is
double 3 5 0 we have to do certain
adjustment number one is depreciation
which is 450 because of being a non-cash
item then we have to add back foreign
exchange loss of 40 this effect is
considered in finally the cash and cash
equivalents then we have to deduct the
interest income unit of 300 because this
has to be shown under investment
activity similarly the dividend income
should also be deducted for capturing
under investment activity then interest
expense paid by the company should be
added back for capturing under financing
activity for capturing at under
financing activity so now we get
operating profit before working capital
changes let us capture the moment in
working capital number 1 there is an
increase in salary at us so that should
be captured as an outflow which is 500
then there is a decrease in inventory
that should be captured as inflow which
is thousand 50 then there is a decrease
in Sun recruiters it's an outflow so it
is captured as an outflow which is 1740
so this is giving us cash generated from
operations which is 25 50 now from this
we have to detect what is the income tax
paid and we have calculated which is 860
because of which 40 is adjusted by way
of TDs so the cash flow before
extraordinary item is 1690 now we have
to make provision for or we have to
disclose the cash flows associated with
the extraordinary item which is proceeds
from earth
disaster settlement which is 180 and
here we have net cash from operating
activities which is 1870 now let's move
on to cash flow from investing
activities number one is purchase of
fixed assets there is a cash outflow to
the extent of 350 on purchase of fixed
assets then there are some proceeds out
of sale of equipment which is 20 then we
have information on interest received
this is the interest received which we
have deducted under operating activity
show so that is added here then the
dividend received which was deducted
under operating activities added here
which is 160 so in this way we have net
cash from investing activities which is
30 then moving on to cash flows from
financing activity there are some
profits from issue of share capital
which is 250 then some profits from long
term borrowings which is 250 there are
some repayments of long term borrowings
which is 180 and interest paid on long
term borrowing this 270 this is what we
have added back under operating activity
and dividends paid is 1200 so we have
net cash used in financing activity
which is 11 5 0 so in this way we can
find the net increase in cash and cash
equivalent by summing all the three
activities which is 750 with this let us
add the opening cash and cash equivalent
this comprised cash balance as well as
short term instruments which is 160 so
we will have closing cash and cash
equivalents at the end of the period
which is 910 how does 910 comprises no
this 910 comprises closing cash balance
then closing balance of short term
investments and of course the Forex gap
of 40