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 current assets and current liabilities and income statement)
Those transactions which help to determine net income are known as operating activities.
All cash flows other than investing activities and financing activities are operating activities.
Profit and loss account or income statement is prepared on accrual basis.
These accruals are outstanding, prepaid, depreciation and amortization etc.
These expenses should be adjusted:
(a) Cash received from customers.
(b) Cash paid to suppliers.
(c) Cash paid to operating expenses (not depreciation, insurance, interest and tax).
(d) Interest and insurance.
(e) Tax paid to government.
(f) Dividend or interest received on investment.
(g) Short term loan borrow or repaid.
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Accounting for Share |
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Share in Nepali |
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Debentures |
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Final Accounts: Class 12 |
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Final Accounts in Nepali |
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Work Sheet |
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Ratio Analysis (Accounting Ratio) |
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Fund Flow Statement |
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Cash Flow Statement |
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Theory Accounting Xii |
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Theory: Cost Accounting |
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Cost Accounting |
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LIFO−FIFO |
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Cost Sheet, Unit Costing |
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Cost Reconciliation Statement |
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The goods can be sold either cash or credit basis.
While preparing cash flow statement, there is no change between cash and credit sales.
But debtors, account receivable and bills receivable should be adjusted.
Increase in debtors mean more credit sales. Decrease in debtors mean cash collected from debtors.
Cash flow Statement
Direct Method
CASH FROM OPERATING ACTIVITES |
Amount |
Amount |
||
|
(1) Cash collection from sales/customers: (inflow) |
|
|
|
|
Sales revenue |
xxxx |
|
|
|
Add: |
Decrease in debtors/ account receivable/bills receivable |
xxxx |
|
|
|
Increase in bad debts/ provision for bad debts/ discount |
xxxx |
|
|
|
Bad debts recovered |
xxxx |
|
|
Less: |
Increase in debtors/ account receivable/bills receivable |
(xxx) |
|
|
|
Decrease in bad debts |
(xxx) |
|
|
|
New bad debts or discount allowed |
(xxx) |
xxxx |
|
|
|
|
|
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1A
Following is the extracted information from XYZ Company:
|
Year 2019 |
Year 2020 |
|
Account receivable |
450,000 |
300,000 |
|
Debtors |
300,000 |
400,000 |
|
Provision for bad debts |
5,000 |
10,000 |
|
Bad debts written off |
– |
40,000 |
|
Sales during the year 2020 was $/₹/Rs 9,00,000
Required: Cash collection from sales
[Answer: Rs 915,000]
SOLUTION:
Cash flow Statement
Direct Method
Particulars |
Amount |
Amount |
|
CASH FROM OPERATING ACTIVITIES |
|
|
|
|
Cash collection from sales/customers: (inflow) |
|
|
|
Sales revenue |
900,000 |
|
|
Add: Decrease in account receivable |
150,000 |
|
|
Add: Increase in provision for bad debts |
5,000 |
|
|
Less: Increase in debtors |
(100,000) |
|
|
Less: New bad debts |
(40,000) |
915,000 |
|
|
|
|
(b) Cash payment for purchase or suppliers
Goods purchases from creditors are related to inventory/stock.
There are two types of inventory.
Opening inventory and closing inventory.
Cost of goods sold (COGS) is different than cash payment to suppliers.
Inventory and account payable (creditors, bills payable) are adjusted with cash payment to creditors.
Cash flow Statement
Direct Method
CASH FROM OPERATING ACTIVITES |
Amount |
Amount |
||
|
(1) Cash collection from sales/customers: (inflow) |
|
|
|
|
Cost of goods sold (Sales revenue – Gross profit) |
xxxx |
|
|
|
Add: |
Decrease in creditors/account payable/bills payable |
xxxx |
|
|
|
Increase in inventory/stock |
xxxx |
|
|
Less: |
Increase in creditors/account payable/bills payable |
(xxx) |
|
|
|
Decrease in inventory/stock |
(xxx) |
|
|
|
Discount received |
(xxx) |
xxxx |
|
|
|
|
|
Or
Particulars |
Amount |
Amount |
||
|
(1) Cash collection from sales/customers: (inflow) |
|
|
|
|
|
Net purchase (purchase − return) |
(xxxx) |
|
|
Add: |
Decrease in creditors/account payable/bills payable |
(xxxx) |
|
|
Less: |
Increase in creditors/account payable/bills payable |
xxxx |
xxxx |
|
|
|
|
|
Keep in Mind (KIM)
If inventory has increased, |
cost of goods sold (COGS) > net purchase |
||
If inventory has decreased, |
cost of goods sold (COGS) < net purchase |
||
If account payable has decreased, |
cash paid to suppliers > cost of goods sold (COGS) |
||
|
|||
Cost of goods sold (COGS) |
Opening stock |
xxxx |
|
= Sales – Gross profit |
Add: Purchase |
xxxx |
|
= Sales – Gross profit – Wages |
Add: Carriage inward |
xxxx |
|
|
Less: Closing stock |
(xxx) |
|
|
COGS |
|
|
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1B
Following is the extracted information from XYZ Company:
|
2019 |
2020 |
|
Account payable |
350,000 |
600,000 |
|
Creditors |
500,000 |
400,000 |
|
Inventories |
85,000 |
50,000 |
|
Discount received |
– |
3,000 |
|
Sales during the year 2020 was Rs 12,00,000 and gross profit was Rs 200,000
Required: Cash paid to suppliers
[Answer: (Rs 812,000]
SOLUTION:
Cash flow Statement
Direct Method
CASH FROM OPERATING ACTIVITES |
Amount |
Amount |
||
|
(1) Cash paid to suppliers (outflow) |
|
|
|
|
Cost of goods sold (12,00,000 – 2,00,000) |
(10,00,000) |
|
|
|
Add: |
Decrease in creditors |
(1,00,000) |
|
|
|
Increase in inventory/stock |
Nil |
|
|
Less: |
Increase in account payable |
2,50,000 |
|
|
|
Decrease in inventory/stock |
35,000 |
|
|
|
Discount received |
3,000 |
(8,12,000) |
|
|
|
|
|
Keep in Mind (KIM)
Cash goes out = cash outflow, it is added |
Cash comes in = cash inflow, it is deducted |
(Wages, salary and operating expenses etc but not interest, insurance, depreciation and tax)
Cash payment is different than expenses are shown in income statement.
Cash flow statement shows only cash basis expenses.
But income statement also shows non-cash expenses, amortization or written off etc.
Therefore, only insider payment like wages and salary, operating expenses, administrative expenses, selling and distribution expenses and their outstanding and prepaid are adjusted with cash payment for expenses.
Cash flow Statement
Direct Method
CASH FROM OPERATING ACTIVITES |
Amount |
Amount |
||
|
(3) Payment to employees and operating expenses (outflow) |
|
|
|
|
Wages, salaries, direct labour/expenses, operating expenses |
(xxx) |
|
|
|
Factory expenses or overhead |
(xxx) |
|
|
|
Office or administrative expenses |
(xxx) |
|
|
|
Selling and distribution expenses |
(xxx) |
|
|
|
Add: |
Decrease in outstanding expenses (wages, salary, operating expenses) |
(xxx) |
|
|
|
Increase in prepaid expenses (wages, salary, operating expenses) |
(xxx) |
|
|
Less: |
Increase in outstanding expenses (wages, salary, operating expenses) |
xxx |
|
|
|
Decrease in prepaid expenses (wages, salary, operating expenses) |
xxx |
(xxxx) |
|
|
|
|
|
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1C
Following is the extracted information from XYZ Company:
|
Year 2019 |
Year 2020 |
|
Wages |
|
500,000 |
|
Salary |
|
600,000 |
|
Operating expenses |
|
800,000 |
|
Outstanding wages |
80,000 |
63,000 |
|
Prepaid operating expenses |
44,000 |
30,000 |
|
Operating expenses included Rs. 50,000 as depreciation and Rs. 30,000 as interest on debentures.
Required: Cash paid for operating expenses
[Answer: (Rs 18,23,000)
SOLUTION:
Cash flow Statement
Direct Method
CASH FROM OPERATING ACTIVITES |
Amount |
Amount |
||
|
(3) Payment to employees and operating expenses (outflow) |
|
|
|
|
Wages |
(500,000) |
|
|
|
Salary |
(600,000) |
|
|
|
Operating expenses (800,000 – 50,000 – 30,000) |
(720,000) |
|
|
|
Add: |
Decrease in outstanding wages |
(17,000) |
|
|
Less: |
Decrease in prepaid operating expenses |
14,000 |
(18,23,000) |
|
|
|
|
|
These expenses are the part of operating expenses but for outsider.
Interest is paid for loan providers to the company.
Loan providers are outsider for company.
Insurance is paid for security of goods and assets.
Outstanding and prepaid interest and insurance are adjusted with interest and insurance.
Cash flow Statement
Direct Method
CASH FROM OPERATING ACTIVITES |
Amount |
Amount |
||
|
(4) Interest and insurance expenses (outflow) |
|
|
|
|
Interest and insurance |
(xxxx) |
|
|
|
Add: |
Decrease in outstanding interest/ insurance |
(xxxx) |
|
|
|
Increase in prepaid interest/ insurance |
(xxxx) |
|
|
Less: |
Increase in outstanding interest/ insurance |
xxxx |
|
|
|
Decrease in prepaid interest/ insurance |
xxxx |
(xxxx) |
|
|
|
|
|
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1D
Following is the extracted information from XYZ Company:
|
Year 2018 |
Year 2019 |
|
Insurance premium paid |
– |
30,000 |
|
Interest paid |
– |
150,000 |
|
Accrual interest |
30,000 |
18,000 |
|
Prepaid insurance |
15,000 |
8,000 |
|
Required: Cash paid for interest and insurance
[Answer: (Rs 185,000)
SOLUTION:
Cash flow Statement
Direct Method
CASH FROM OPERATING ACTIVITES |
Amount |
Amount |
||
|
(4) Interest and insurance expenses (outflow) |
|
|
|
|
Insurance premium |
(30,000) |
|
|
|
Interest paid |
(150,000) |
|
|
|
Add: |
Decrease in outstanding interest |
(12,000) |
|
|
Less: |
Decrease in prepaid insurance |
7,000 |
(185,000) |
|
|
|
|
Tax and value added tax (VAT) are paid to the government.
In every accounting year, company is to pay large amount of tax to the government.
Outstanding and prepaid taxes are adjusted with tax.
Cash flow Statement
Direct Method
CASH FROM OPERATING ACTIVITES |
Amount |
Amount |
||
|
(5) Tax paid (outflow) |
|
|
|
|
Tax expenses |
(xxxx) |
|
|
|
Add: |
Decrease in provision tax |
(xxxx) |
|
|
|
Increase in prepaid tax |
(xxxx) |
|
|
Less: |
Increase in provision tax |
xxxx |
|
|
|
Decrease in prepaid tax |
xxxx |
(xxxx) |
|
|
|
|
Or
Provision for Tax Account
Particulars |
Amount |
Particulars |
Amount |
To Bank [tax paid, b/f] |
xxxx |
By Beginning balance |
xxxx |
To Ending balance |
xxxx |
By Income statement (P&L account) |
xxxx |
|
xxxx |
|
xxxx |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1E
Following is the extracted information from XYZ Company:
|
Year 2019 |
Year 2020 |
|
Tax expenses |
– |
140,000 |
|
Provision for tax |
45,000 |
40,000 |
|
Advance tax |
42,000 |
40,000 |
|
Required: Cash paid for tax
[Answer: (Rs 142,000)
SOLUTION:
Cash flow Statement
Direct Method
CASH FROM OPERATING ACTIVITES |
Amount |
Amount |
||
|
(5) Tax paid (outflow) |
|
|
|
|
Tax expenses |
(140,000) |
|
|
|
Add: |
Decrease in provision tax |
(5,000) |
|
|
Less: |
Decrease in prepaid tax |
2,000 |
(143,000) |
|
|
|
|
|
Sometime company can borrow or repayment short-term loan like bank overdraft.
If loan taken, it is inflow.
If loan paid, it is outflow.
Cash flow Statement
Direct Method
CASH FROM OPERATING ACTIVITES |
Amount |
Amount |
||
|
(6) Short term loan, bank overdraft (inflow or outflow) |
|
|
|
|
Short term borrowing, bank overdraft |
xxxx |
|
|
|
Add: |
Increase in bank overdraft/ short term loan |
xxxx |
|
|
Less: |
Decrease in bank overdraft/ short term loan |
(xxx) |
± xxx |
|
|
|
|
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1F
Following is the extracted information from XYZ Company:
|
Year 2019 |
Year 2020 |
|
Short term loan |
300,000 |
100,000 |
|
Bank overdraft |
− |
40,000 |
|
Required: Short term cash inflow or outflow
[Answer: (Rs 160,000)
Cash flow Statement
Direct Method
CASH FROM OPERATING ACTIVITES |
Amount |
Amount |
||
|
(6) Short term loan, bank overdraft (inflow or outflow) |
|
|
|
|
Short term loan paid |
(200,000) |
|
|
|
Add: |
Increase in bank overdraft |
40,000 |
|
|
Less: |
Decrease in bank overdraft/ short term loan |
Nil |
(160,000) |
|
|
|
|
Sometime company receives dividend on investment in shares and interest on investment.
It is inflow for the company.
Cash flow Statement
Direct Method
CASH FROM OPERATING ACTIVITES |
Amount |
Amount |
|
|
(7) Dividend and interest received (inflow) |
|
|
|
Dividend received |
xxxx |
|
|
Interest received |
xxxx |
xxxx |
|
|
|
|
Keep in Mind (KIM)
Interest paid can be recorded with financing activities. |
Dividend and interest received can be recorded with investing activities |
#####
PROBLEMS AND ANSWERS |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1A
Following is the extracted information from XYZ Company:
|
Year 2019 |
Year 2020 |
Sales for the year |
|
600,000 |
Account receivable |
90,000 |
60,000 |
Debtors |
15,000 |
20,000 |
Bills receivable |
– |
10,000 |
Required: Cash collection from sales
[Answer: Rs 615,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1B
Following is the extracted information from XYZ Company:
|
Year 2019 |
Year 2020 |
Sales for the year |
– |
800,000 |
Account receivable |
90,000 |
120,000 |
Provision for bad debts |
9,000 |
12,000 |
Bad debts for the year |
– |
13,000 |
Required: Cash collection from sales
[Answer: Rs 760,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1C
Following is the extracted information from XYZ Company:
|
Year 2019 |
Year 2020 |
Cost of goods sold |
– |
800,000 |
Account payable |
90,000 |
60,000 |
Inventory |
100,000 |
150,000 |
Creditors |
85,000 |
50,000 |
Bills payable |
20,000 |
35,000 |
Required: Cash paid to suppliers
[Answer: (Rs 900,000)]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1D
Following is the extracted information from XYZ Company:
|
Year 2019 |
Year 2020 |
Sales |
– |
950,000 |
Gross profit |
– |
50,000 |
Account payable |
500,000 |
600,000 |
Inventory |
100,000 |
150,000 |
Discount received |
– |
1,000 |
Required: Cash paid to suppliers
[Answer: (Rs 849,000)]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1E
Following is the extracted information from XYZ Company:
|
Year 1 |
Year 2 |
Wages and salary |
– |
150,000 |
Operating expenses |
– |
170,000 |
Selling and distribution expenses |
– |
30,000 |
Outstanding wages |
25,000 |
20,000 |
Prepaid operating expenses |
14,000 |
10,000 |
Required: Cash paid for operating expenses
[Answer: (Rs 351,000)]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1F
Following is the extracted information from AZ Company:
|
Year 2019 |
Year 2020 |
Salary and wages |
– |
150,000 |
Administrative expenses |
– |
350,000 |
Outstanding wages |
20,000 |
15,000 |
Prepaid operating expenses |
14,000 |
5,000 |
Administrative expenses included Rs 27,000 as depreciation and Rs 13,000 as insurance premium.
Required: Cash paid for operating expenses
[Answer: (Rs 456,000)]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1G
Following is the extracted information from ART Company:
|
Year 2019 |
Year 2020 |
Insurance premium paid |
– |
100,000 |
Interest paid |
– |
150,000 |
Outstanding interest |
100,000 |
80,000 |
Prepaid insurance |
150,000 |
120,000 |
Required: Cash paid for interest and insurance
[Answer: (Rs 240,000)]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1H
Following is the extracted information from BT Company:
|
Year 2019 |
Year 2020 |
Insurance premium |
– |
50,000 |
Interest on debentures |
– |
70,000 |
Outstanding interest |
40,000 |
90,000 |
Prepaid insurance |
60,000 |
80,000 |
Required: Cash paid for interest and insurance
[Answer: (Rs 90,000)]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1I
Following is the extracted information from JK Company:
Liabilities |
2019 |
2020 |
Assets |
2019 |
2020 |
Provision for tax |
90,000 |
120,000 |
|
|
|
Additional information:
Provision for tax for the year 2020 is Rs 50,000
Required: Tax paid for the year
[Answer: (Rs 20,000)]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1J
Following is the extracted information from BG Company:
|
Year 2019 |
Year 2020 |
Tax |
– |
400,000 |
Provision for tax |
520,000 |
500,000 |
Advance tax |
350,000 |
380,000 |
Required: Cash paid for tax
[Answer: (Rs 450,000)]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1K
Following is the extracted information from XYZ Company:
|
Year 2019 |
Year 2020 |
Bank overdraft |
– |
600,000 |
Short term loan |
300,000 |
100,000 |
Required: Short term cash inflow or outflow
[Answer: Cash inflow Rs 400,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 1L
Following is the extracted information from AB Company:
|
Year 2019 |
Year 2020 |
Bank overdraft |
150,000 |
Nil |
Short term loan from Manju |
50,000 |
80,000 |
Required: Short term cash inflow or outflow
[Answer: Cash outflow (Rs 120,000)]
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