Class 12 Accountancy Chapter 10 Cash Flow Statement

Key Concept: Working Capital Impact

a) Increases cash flow

[Solution Description]

An increase in accrued expenses represents an increase in current liabilities. Under the indirect method of calculating cash flows, an increase in current liabilities is added to the net profit because it indicates that less cash was spent than recognized in the accrual accounting process. Thus, this increases cash flow from operating activities.

Key Concept: Cash Flow Forecasting, Strategic Decision Making

a) By analyzing past cash flows to predict future trends

[Solution Description] The firm should utilize historical cash flow data to forecast potential cash inflows and outflows associated with global expansion. This involves modeling scenarios such as increased capital expenditures, additional foreign revenues, and possible currency fluctuations. The cash flow projections will help identify funding gaps and guide strategic decisions on whether to raise capital through debt or equity.

Key Concept: Complex Scenario Analysis, Real-World Application

b) Rs. 5,50,000

[Solution Description]

To find the net cash flow from financing activities, we need to consider both inflows and outflows related to financing:

– Inflow from issuing equity shares = Rs. 8,00,000

– Inflow from obtaining a bank loan = Rs. 3,50,000

Total inflows = Rs. 8,00,000 + Rs. 3,50,000 = Rs. 11,50,000

– Outflow for dividends paid = Rs. 1,20,000

– Outflow for repaying long-term debts = Rs. 4,80,000

Total outflows = Rs. 1,20,000 + Rs. 4,80,000 = Rs. 6,00,000

Net cash flow from financing activities = Total inflows – Total outflows

$$= 11,50,000 – 6,00,000 = 5,50,000$$

Hence, the net cash flow from financing activities is Rs. 5,50,000.

Key Concept: Complex Scenario Analysis, Strategic Implications

b) Improving liquidity by conserving cash reserves

[Solution Description]

Non-cash transactions allow companies to acquire assets without immediate cash outflow, which is strategically advantageous as it preserves the company’s liquidity. Additionally, issuing shares instead of spending cash can benefit the company by preserving working capital and avoiding additional debt.

Key Concept: Understanding Tax Impact

a) It increases cash flow by reducing cash outflows.

[Solution Description]

An income tax refund increases the cash flow from operating activities because it represents cash inflow. This is added to operating cash flows since it decreases the effective taxes paid.

So, the effect is an increase by \$2,000 in the cash flow from operating activities.

Key Concept: Complex Calculation, Advanced Adjustments

b) \$188,000

[Solution Description]

Start with the net profit before tax: \$150,000.

Add back non-cash expenses such as depreciation:

$$150,000 + 25,000 = 175,000$$

Adjust for changes in working capital:

– Increase in trade payables increases cash flow: $$+10,000$$

– Decrease in inventory increases cash flow: $$+8,000$$

– Increase in accounts receivable decreases cash flow: $$-5,000$$

Calculate the total net cash from operating activities:

$$175,000 + 10,000 + 8,000 – 5,000 = 188,000$$

Therefore, the net cash from operating activities is \$188,000.

Key Concept: Complex Calculation, Real-World Problem Solving

b) Rs. 150,000

[Solution Description]

To calculate the net cash flow from operating activities, we start with the net profit and adjust for non-cash items and changes in working capital.

– Start with the net profit: $$Rs. 150,000$$

– Add back non-cash expenses like depreciation:

$$150,000 + 25,000 = 175,000$$

– Adjust for changes in working capital:

– Increase in accounts receivable is subtracted as it is an outflow:

$$175,000 – 10,000 = 165,000$$

– Decrease in inventory is added as it indicates lower cash outflow:

$$165,000 + 5,000 = 170,000$$

– Subtract income taxes paid:

$$170,000 – 20,000 = 150,000$$

Thus, the net cash flow from operating activities is Rs. 150,000.

Key Concept: Cash Flow Analysis

a) Cash flows from operating activities

[Solution Description] Operating activities reflect the core business operations and their results in generating cash inflows. This measure gives insight into how well a company can meet its immediate obligations without relying on external financing or asset sales. Marketing activities, equity issuance, and employee turnover do not directly represent this capacity.

Key Concept: Advanced Classification, Cash Flow Impact Analysis

d) Operating Activities: \$15,000, Investing Activities: \$60,000

[Solution Description] The cash flow resulting from purchasing machinery should be classified as an investing activity since it involves acquiring a long-term asset. Only the \$50,000 paid in cash will appear in the cash flow statement under investing activities because non-cash financing is not included. The payment of interest (\$5,000) is considered an operating activity under AS-3 guidelines. Receiving dividends (\$10,000) from an investment is classified as an operating activity.

Key Concept: Impact on Cash Flow

b) Net decrease of \$40,000 in cash flow

[Solution Description] Repaying a bank loan is a financing activity, which decreases cash by \$100,000. Selling marketable securities represents an investing activity that increases cash by \$60,000. Thus, there is a net decrease of \$40,000 in cash flow when considering both activities.

Key Concept: Adjustment Identification

a) Add Rs. 5,000

[Solution Description]

When a piece of equipment is sold at a loss, the loss is deducted from the book value of the asset to arrive at the cash received from the sale. This loss needs to be added back because it does not involve actual cash:

Loss on sale of equipment is a non-cash expense:

$$\text{Adjustment Needed} = +5,000 \text{ (adding back to calculate true cash from sale)}$$

Hence, the adjustment required is to add the loss back in calculating the net cash from investing activities.

Key Concept: Complex Scenario Analysis, Analytical Reasoning

a) Both as cash equivalents

[Solution Description] To determine the classification of these investments in the cash flow statement, we need to assess whether they meet the criteria for cash equivalents as per AS-3.

– Treasury bills are considered cash equivalents because their maturity is less than three months, making them highly liquid and readily convertible to cash.

– Marketable securities are also considered cash equivalents due to their ability to be quickly converted into cash within two days.

– According to AS-3, both types of investments qualify as cash equivalents since they have insignificant risk of changes in value due to their high liquidity and short maturity.

Key Concept: Advanced Real-World Application, Critical Thinking

b) Rs. 40,000 outflow

[Solution Description]

Assess each transaction’s contribution to the cash flow:

– Cash inflow of Rs. 40,000 from selling machinery.

– Cash outflow of Rs. 90,000 for buying new technology.

– Cash inflow of Rs. 10,000 from dividends received.

Find the net cash flow:

$$\text{Net Cash Flow} = (\text{Sale of Machinery} + \text{Dividends}) – \text{Purchase of Technology}$$

Insert the provided figures:

$$\text{Net Cash Flow} = (40,000 + 10,000) – 90,000 = 50,000 – 90,000 = -40,000$$

Therefore, there is a net cash outflow of Rs. 40,000 from investing activities.

Key Concept: Scenario Analysis, Indirect Method Adjustments

b) Increase by \$50,000

[Solution Description] In the indirect method, a decrease in inventory implies that less cash was used to purchase inventory, so it increases cash flow by \$40,000. An increase in accrued liabilities implies that more expenses have been incurred but not yet paid, thus increasing cash flow by \$10,000.

Calculation:

$$\text{Effect on cash flow} = (+40,000) + (+10,000) = +50,000$$

Therefore, the cash flow from operating activities will increase by \$50,000.

Key Concept: Cash Flow Statement Utility

c) By eliminating effects of different accounting treatments

[Solution Description] A cash flow statement enhances financial analysis by eliminating the effects of different accounting treatments, thereby providing clearer insights into a company’s liquidity and financial health.

Key Concept: Complex Transactions, Advanced Calculation

b) \$200,000 under investing and \$300,000 under financing activities

[Solution Description] The acquisition of machinery involves two components: an outflow of \$200,000 from investing activities for the cash payment, and \$300,000 inflow under financing activities due to the bank loan obtained.

Key Concept: Equipment Account Changes

c) \$55,000

[Solution Description]

To find the closing balance of the equipment account, follow these steps:

1. Start with the opening balance: \$50,000.

2. Add purchases made during the year: \$50,000 + \$10,000 = \$60,000.

3. Subtract the book value of the equipment sold: \$60,000 – \$5,000 = \$55,000.

The closing balance of the equipment account is therefore \$55,000.

Key Concept: Indirect Method Nuances, AS-3 and AS-4 Integration

a) Added to net profit

[Solution Description]

In an indirect method cash flow preparation:

1. Start with Net Profit Before Tax: Rs. 10,000.

2. Add back non-operating incomes such as dividends received, which adjusts from net profit to arrive at cash flows from operations. This adjustment reflects that although dividends are received, they aren’t part of operational cash flow generation.

3. The dividend received, being an inflow, is thus added back to the net profit as per AS-3 guidelines.

Therefore, in the cash flow statement, the dividend received will be:

– Shown under Investing Activities as an addition, reflecting its receipt.

– Added to net profit to adjust for non-operational cash flows.

Thus, the correct classification aligns with option a).

Key Concept: Complex Classification, Real-world Application

c) Investing Activities

[Solution Description]

In this scenario, we have two separate transactions: selling an office building and investing in government securities. When a non-financial enterprise sells an asset like an office building, the proceeds from the sale are considered as part of investing activities due to the nature of acquiring or disposing long-term assets. Simultaneously, investing in government securities is also an investing activity because it involves making investments that generate returns. Therefore, both actions should be classified under investing activities.