Cash Flow Statement: Operating Activities (Cash Inflow and Cash Outflow)

 

Preparation of Cash Flow Statement

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.

 

 

  

Operating Activities in Cash Flow Statement

(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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(a) Cash receipt from customers, debtors and sales

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

 

 

(c) Cash payment for operating expenses

(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)

 

 

(D) Cash payment for interest and insurance

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)

 

(E) Tax paid

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)

 

(F) Short term loan borrow or repaid

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)

 

 (G) Dividend and interest received

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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