There are two methods to prepare cash flow statement; they are:
(1) Direct method
(2) Indirect method
Both methods have three activities; they are:
(a) Operating activities
(b) Investing activities
(c) Financing activities
Keep in Mind (KIM)
Only operating activities are difference between direct methods and indirect method. |
Investing activities and financing activities are same in both methods. |
It is based on non-current assets or fixed assets (assets side of balance sheet)
Purchase and sales of non-current assets (fixed assets and long-term assets) are calculated in investing activities.
Any increase in assets mean purchase of assets, it is outflow for the company.
Any decrease in assets mean sales or depreciation of assets.
It is inflow for the company.
If there is depreciation, loss, profit, purchase and sales fixed assets in income statement or profit and loss account, working notes should be prepared.
Plant and machinery
Land and building
Furniture and fitting
Equipment
Investment
Cash flow Statement
Direct Method
CASH FROM INVESTING ACTIVITES |
Amount |
Amount |
|
|
Cash inflow: |
|
xxxx |
|
Sales of plant and machinery |
|
xxxx |
|
Sales of land and building |
|
xxxx |
|
Sales of equipment |
|
xxxx |
|
Sales of investment |
|
xxxx |
|
Loan from subsidiary company |
|
xxxx |
|
Cash outflow: |
|
|
|
Purchase of plant and machinery |
|
(xxx) |
|
Purchase of land and building |
|
(xxx) |
|
Purchase of equipment |
|
(xxx) |
|
Purchase of investment |
|
(xxx) |
|
Drawings |
|
(xxx) |
|
Net cash from investing activities (B) |
|
± xxxx |
Keep in Mind (KIM)
Sales of plant and machinery mean cash inflow. |
Purchase of plant and machinery mean cash outflow. |
Sales of land and building mean cash inflow. |
Purchase of land and building mean cash outflow. |
Sales of furniture mean cash inflow. |
Purchase of furniture mean cash outflow. |
Sales of investment mean cash inflow. |
Purchase of investment means cash outflow. |
Never charge depreciation on investment. |
|
|
|
Under direct method, no entry for profit or loss of assets. |
|
Under direct method, no entry for depreciation of assets. |
|
|
|
Drawings = beginning capital + net income – ending capital |
|
Dividends and interest received may be inflow of operative activity |
|
If purchase and sales of particular fixed asset is given, no need to prepare ledger of working note. |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2A
The following extracted balances are taken from ABC Company Ltd:
Particulars |
1 January |
31 December |
|
Plant and machinery |
7,50,000 |
10,50,000 |
|
Investment |
1,56,000 |
56,000 |
|
Land |
10,00,000 |
8,00,000 |
|
Equipment |
1,50,000 |
1,50,000 |
|
Furniture |
1,10,000 |
60,000 |
|
Required: Net cash from investing activities
[Answer: (50,000)
SOLUTION
Explain,
Plant and machinery has increased; asset increased means purchase of asset; it is cash outflow.
Investment has decreased; asset decreased means sales of asset; it is cash inflow.
Land has decreased; asset decreased means sales of asset; it is cash inflow.
Equipment has equal value in both years; neither inflow nor outflow (no entry)
Furniture has decreased; asset decreased means sales of asset; it is cash inflow.
Cash flow Statement
Direct Method
CASH FROM INVESTING ACTIVITES |
Amount |
Amount |
|
|
Cash inflow: |
|
|
|
Sales of investment |
|
100,000 |
|
Sales of land |
|
200,000 |
|
Sales of furniture |
|
50,000 |
|
Cash outflow: |
|
|
|
Purchase of plant and machinery |
|
(300,000) |
Net cash from investing activities (B) |
|
(50,000) |
Keep in Mind
There are two options of decrease in asset: |
First, decrease in asset may be depreciation; no entry of depreciation in direct method of cash flow statement. |
Second, decrease in asset may be sales of asset; it increases cash viz cash inflow. |
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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2B
The following extracted balances are taken from ABC Company Ltd:
Particulars |
1 January |
31 December |
|
Plant and machinery |
7,50,000 |
10,50,000 |
|
Land and building |
10,00,000 |
8,00,000 |
|
Furniture |
1,10,000 |
60,000 |
|
Additional information:
(a) Machine value Rs. 70,000 with accumulated depreciation Rs 30,000 was sold for Rs. 50,000.
(b) Land and building sold at a profit Rs 80,000 where depreciation was Rs 50,000
(c) Furniture sold at a loss Rs 4,000
Required: cash from investing activities
[Answer: (Rs 44,000)]
SOLUTION:
Given and working note:
Accumulated Depn |
= |
Original cost – Book salvage value |
30,000 |
= |
70,000 – BSV |
BSV |
= |
70,000 – 30,000 |
|
= |
40,000 |
Profit = Cash salvage value – Book salvage value = 50,000 – 40,000 = 10,0001
Plant and Machinery Account
Particulars |
Amount |
Particulars |
Amount |
To Beginning Balance |
7,50,000 |
By Bank/Sold/CSV |
50,000 |
To Profit and Loss (Profit) |
10,000 |
By Depreciation on sold |
30,000 |
To Bank/Purchase (b/f) |
3,70,000 |
By Profit and Loss |
– |
|
|
By Ending Balance |
10,50,000 |
|
11,30,000 |
|
11,30,000 |
Land and Building Account
Particulars |
Amount |
Particulars |
Amount |
To Beginning balance |
10,00,000 |
By Bank/Sold/CSV (b/f) |
230,000 |
To Profit and Loss (Profit) |
80,000 |
By Depreciation (for the year) |
50,000 |
To Bank/Purchase |
Nil |
By Ending balance |
8,00,000 |
|
10,80,000 |
|
10,80,000 |
Furniture Account
Particulars |
Amount |
Particulars |
Amount |
To Beginning balance |
110,000 |
By Bank/Sold/CSV (b/f) |
46,000 |
To Bank/Purchase |
Nil |
By Depreciation (for the year) |
Nil |
|
|
By Profit and Loss (Loss) |
4,000 |
|
|
By Ending balance |
60,000 |
|
110,000 |
|
110,000 |
Now,
Cash flow Statement
Direct Method
CASH FROM INVESTING ACTIVITES |
Amount |
Amount |
|
|
Cash inflow: |
|
|
|
Sales of plant and machinery |
|
50,000 |
|
Sales of land and building |
|
230,000 |
|
Sales of furniture |
|
46,000 |
|
Cash outflow: |
|
|
|
Purchase of plant and machinery |
|
(370,000) |
Net cash from investing activities (B) |
|
(44,000) |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2C
Following information is available:
Asset |
Year 2019 |
Year 2020 |
Fixed assets |
6,00,000 |
800,000 |
Accumulated depreciation |
90,000 |
120,000 |
8% Investment |
1,56,000 |
56,000 |
Additional information:
(a) Fixed assets costing of Rs 100,000 with accumulated depreciation Rs 15,000 was sold for Rs 60,000.
(b) Investment was sold for Rs 102,000
Required: (a) Accumulated depreciation account; (b) Fixed assets account; (c) Net cash from investing activities
[Answer: Depn for the year = Rs 45,000; Purchased = Rs 300,000;
NCFIA = (Rs 174,000) ]
SOLUTION
Accumulated Depreciation Account
Particulars |
Amount |
Particulars |
Amount |
To Depreciation on sales |
15,000 |
By Opening balance |
90,000 |
To Closing balance |
120,000 |
By Depreciation for the year (b/f) |
45,000 |
|
135,000 |
|
135,000 |
Fixed Assets Account
Particulars |
Amount |
Particulars |
Amount |
To Beginning Balance |
600,000 |
By Bank/Sold/CSV |
60,000 |
To Profit and Loss (Profit) |
Nil |
By Depreciation on sold |
15,000 |
To Bank/Purchase (b/f) |
300,000 |
By Profit and Loss |
25,000 |
|
|
By Ending Balance |
800,000 |
|
900,000 |
|
900,000 |
Investment Account
Particulars |
Amount |
Particulars |
Amount |
To Opening balance |
156,000 |
By Bank/Sold/CSV (b/f) |
102,000 |
To Profit and Loss (Profit) |
2,000 |
By Closing balance |
56,000 |
To Bank/Purchase |
Nil |
|
|
|
158,000 |
|
158,000 |
Cash flow Statement
Direct Method
CASH FROM INVESTING ACTIVITES |
Amount |
Amount |
|
|
Cash inflow: |
|
|
|
Sales of fixed assets |
|
60,000 |
|
Sales of investment |
|
102,000 |
|
Cash outflow: |
|
|
|
Purchase of fixed assets |
|
(300,000) |
Net cash from investing activities (B) |
|
(174,000) |
#####
PROBLEMS AND ANSWERS |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2A
Following information is available related to plant and machinery:
Opening balance on plant and machinery Rs 600,000
Closing balance of plant and machinery Rs 900,000
Depreciation on plant and machinery Rs 100,000
Required: Plant and machinery account
[Answer: Purchased = Rs 400,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2B
Following information is available:
Asset |
Year 2019 |
Year 2020 |
Vehicle |
16,00,000 |
14,00,000 |
Accumulated depreciation |
2,40,000 |
3,60,000 |
Additional information:
A vehicle of Rs 600,000 with accumulated depreciation Rs 320,000 was sold for Rs 200,000.
Required: (a) Accumulated depreciation account; (b) Vehicle account
[Answer: Depreciation for the year = Rs 440,000; Purchased = Rs 400,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2C
Following information is available:
Details |
Year 2019 |
Year 2020 |
Plant and machinery |
500,000 |
600,000 |
Land and building |
200,000 |
300,000 |
Investment |
150,000 |
90,000 |
Additional information:
Depreciation on fixed assets for the year is Rs 90,000 and a part of machinery sold for Rs 65,000.
Investment is sold at profit of Rs 4,000
Required: (a) Fixed assets account; (b) Investment account
[Answer: Fixed assets purchased = Rs 355,000; Investment sold = Rs 64,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2D
Following extracted information is given to you:
Assets |
Year I |
Year II |
Machinery |
4,50,000 |
6,00,000 |
8% Investment |
1,50,000 |
2,50,000 |
Land |
4,00,000 |
2,50,000 |
Furniture |
80,000 |
30,000 |
Additional information:
a. Depreciation charged Rs 30,000 on machinery.
b. Land sold at a profit of Rs 25,000 but furniture sold at a loss of Rs 5,000.
Required: Net cash from investing activities
Answer: (Rs 60,000)
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2E
Following extracted information is given to you:
Assets |
Year I |
Year II |
Machinery |
5,00,000 |
6,50,000 |
Accumulated depreciation on machinery |
(50,000) |
(70,000) |
8% Investment |
80,000 |
60,000 |
Land and building |
2,50,000 |
4,50,000 |
Furniture |
30,000 |
15,000 |
Additional information:
a. A part of machinery costing Rs 100,000 with accumulated of Rs 15,000 was sold for Rs 90,000.
b. Investment sold at a profit of Rs 5,000.
c. Furniture sold at a loss of Rs 4,000.
Required: Net cash from investing activities
Answer: (Rs 324,000)
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