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Cash Flow Statement Problems and Solutions: Direct Method

Arjun EP

Published on: April 8, 2021

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

Keep in Mind (KIM)

Only operating activities are the difference between direct methods and indirect methods.

Investing activities and financing activities are the same in both methods.

Problems and solutions of cash flow statement direct method include net cash from operating activities, net cash from investing activities and net cash from financing activities.

Here, best questions are solved from easy to difficult methods.

After studying and solving these problems, you can solve other questions related to cash flow statement.

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 4

Himstar Electronics Ltd of Nepal has following balance sheet on 31 December: [$/₹/Rs]

Liabilities	2019	2020	Assets	2019	2020
Equity shares of Rs 100	10,00,000	12,00,000	Fixed assets	12,00,000	16,00,000
Share premium	1,00,000	1,20,000	Inventories	1,00,000	2,00,000
10% Debentures	2,00,000	1,00,000	Account receivable	3,00,000	2,00,000
Account payable	1,00,000	80,000	Cash and bank	2,00,000	1,00,000
Creditors	2,00,000	3,00,000
Profit and loss	2,00,000	3,00,000
	18,00,000	21,00,000		18,00,000	21,00,000

Income Statement for the year ended 2020

Particulars		Amount	Amount
Sales revenue			12,00,000
Less:	Cost of goods sold		7,00,000
	Gross margin		5,00,000
Less:	Operating expenses:
	Office rent, rates and salaries	2,00,000
	Depreciation on fixed assets	1,60,000
	Premium on redemption of debenture	20,000	3,80,000
	Net income before other income		1,20,000
Add:	Profit on sale of fixed asset (book value $40,000)		20,000
	Net income		1,40,000
Less:	Dividend paid		40,000
Retained earning			1,80,000

Required: Cash flow statement showing cash from:

(A) Operating activities; (B) Investment activities; (C) Financing activities; (D) Net change in cash

[Answer: OA = $380,000; IA = ($540,000); FA = $60,000;

Net change = ($100,000); Assets purchase = $600,000;

SOLUTION:

Fixed Assets Account

Particulars	Amount	Particulars	Amount
To Beginning balance	12,00,000	By Bank (sold, CSV)	60,000
To Profit and loss (profit)	20,000	By Depreciation on sales	1,60,000
To Bank (purchase, b/f)	6,00,000	By Ending balance	16,00,000
	18,20,000		18,20,000

Cash Flow Statement

Himstar Electronics Ltd

Particulars		Amount	Amount
Cash from Operating Activities:
	Cash collection from sales:
	Sales revenue	12,00,000
	Add: decrease in A/R	1,00,000	13,00,000
	Cash paid to suppliers:
	Cost of goods sold (COGS)	(700,000)
	Add: Decrease in A/P	(20,000)
	Add: increase in inventory	(100,000)
	Less: increase in creditors	100,000	(7,20,000)
	Cash paid to operating expenses:
	Office rent, rates and salary		(2,00,000)
	Interest and insurance:
	Interest on debenture		Nil
	Tax paid:
	Tax		Nil
	NCOA [A]		3,80,000
Cash from Investing Activities:
Sales of fixed assets			60,000
Purchase of fixed assets			(6,00,000)
NCIA [B]			(5,40,000)
Cash from Financing Activities:
Issue of equity shares			2,00,000
Increase in share premium			20,000
Redemption of debentures			(1,00,000)
Premium on redemption of debentures			(20,000)
Dividend paid			(40,000)
NCFA [C]			60,000
Net change in cash and cash equivalent [A+B+C]			(1,00,000)
Add: Beginning cash and cash equivalent			2,00,000
Ending cash and cash equivalent			1,00,000

Alternative,

Given and working note:

(A) Operating Activities			4.	Interest and insurance	Nil
1.	Cash collection from sales		5.	Tax paid	Nil
	Sales revenue	12,00,000
	Add: decrease in A/R	1,00,000	B. Investing Activities:
		13,00,000	Sales of fixed assets		60,000
2.	Cash paid to suppliers		Purchase of fixed assets		(600,000)
	Cost of goods sold (COGS)	(7,00,000)
	Add: Decrease in A/P	(20,000)	C. Financing Activities:
	Add: increase in inventory	(1,00,000)	Issue of equity shares		200,000
	Less: increase in creditors	100,000	Increase in share premium		20,000
		(720,000)	Redemption of debentures		(100,000)
3.	Cash paid to operating exp.		Premium on debentures		(20,000)
	Office rent, rates and salary	(200,000)	Dividend paid		(40,000)

Cash Flow Statement

Himstar Electronics Ltd

Particulars		Notes	Amount
1. Cash from Operating Activities:
	Cash collection from sales revenue	1	13,00,000
	Cash paid to suppliers	2	(7,20,000)
	Cash paid to employees and operating expenses	3	(2,00,000)
	Interest and insurance paid	4	Nil
	Tax paid	5	Nil
NCOA [A]			3,80,000
2. Cash from Investing Activities:
	Sales of fixed assets		60,000
	Purchase of fixed assets		(6,00,000)
NCIA [B]			(5,40,000)
3. Cash from Financing Activities:
	Issue of equity shares		2,00,000
	Increase in share premium		20,000
	Redemption of debentures		(1,00,000)
	Premium on redemption of debentures		(20,000)
	Dividend paid		(40,000)
NCFA [C]			60,000
Net change in cash and cash equivalent [A+B+C]			(1,00,000)
Add: Beginning cash and cash equivalent			2,00,000
Ending cash and cash equivalent			1,00,000

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Accounting for Share	http://tiny.cc/889jkz
Share in Nepali	http://tiny.cc/k99jkz
Debentures	http://tiny.cc/yeakkz
Final Accounts: Class 12	http://tiny.cc/e89jkz
Final Accounts in Nepali	http://tiny.cc/w89jkz
Work Sheet	http://tiny.cc/579jkz
Ratio Analysis (Accounting Ratio)	http://tiny.cc/4fakkz
Fund Flow Statement	http://tiny.cc/wiakkz
Cash Flow Statement	http://tiny.cc/8gakkz
Theory Accounting Xii	http://tiny.cc/nfakkz
Theory: Cost Accounting	http://tiny.cc/tfakkz
Cost Accounting	http://tiny.cc/p29jkz
LIFO−FIFO	http://tiny.cc/dgakkz
Cost Sheet, Unit Costing	http://tiny.cc/w49jkz
Cost Reconciliation Statement	http://tiny.cc/829jkz

#####

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PPROBLEM: 5

The balance sheets of CG Company Ltd as on 31^st December are as follows:

Liabilities	Year 1	Year 2	Assets	Year 1	Year 2
Equity shares capital	4,00,000	5,00,000	Fixed assets	5,00,000	6,00,000
Share premium	−	10,000	Investment	1,50,000	2,00,000
6% Preference shares	80,000	2,00,000	Inventory	50,000	1,00,000
Retained earning	1,10,000	1,50,000	Account receivable	1,50,000	60,000
10% Debentures	1,50,000	50,000	Prepaid expenses	20,000	50,000
Bills payable	50,000	40,000	Goodwill	–	70,000
Account payable	60,000	100,000	Cash at bank	20,000	20,000
Outstanding salary	40,000	50,000
	890,000	11,00,000		890,000	11,00,000

Additional information:

(a) Sales for year $730,000

(b) Cost of goods sold $550,000

(d) Selling and distribution expenses $20,000

(e) Insurance for the period $30,000

(f) Tax paid for the year $25,000

(g) Depreciation on fixed assets $60,000

(h) Fixed assets purchased for $250,000

(i) Dividend distributed $25,000

Required: Cash flow statement showing cash from:

(A) Operating activities; (B) Investment activities; (C) Financing activities; (D) Net change in cash

[Answer: OA = $105,000; IA = ($210,000); FA = $105,000;

*Assets purchased = $250,000;

SOLUTION:

Cash Flow Statement

CG Company Limited

Particulars	Amount	Amount
Cash from operating activities:
Cash collection from debtors:
Sales revenue	730,000
Add: Decrease in account receivable	+ 90,000	820,000
Cash paid to suppliers:
Cost of goods sold	(550,000)
Add: Decrease in bills payable	(10,000)
Add: Increase in inventory	(50,000)
Less: Increase in account payable	+ 40,000	(570,000)
Cash paid to operating expenses:
Administrative expenses	(50,000)
Selling and distribution expenses	(20,000)
Add: Increase in prepaid expenses	(30,000)
Less: Increase in outstanding expenses	+ 10,000	(90,000)
Cash paid for interest and insurance:
Interest and insurance		(30,000)
Cash paid to tax:
Tax paid		(25,000)
Net cash from operating activities (A)		105,000
Cash from investing activities:
Sales of fixed assets		90,000
Purchase of fixed assets		(250,000)
Purchase of investment		(50,000)
Net cash from investing activities (B)		(210,000)
Cash from financing activities:
Issue of equity shares		100,000
Increase in share premium		10,000
Issue of preference shares		120,000
Redemption of debentures		(100,000)
Dividend paid		(25,000)
Net cash from investing activities (C)		105,000
Change in cash and cash equivalent (A+B+C)		0
Add: beginning cash and cash equivalent		20,000
Ending cash and cash equivalent		20,000

Fixed Assets Account

Particulars	Amount	Particulars	Amount
To Beginning balance	500,000	By Bank (sold, CSV, b/f)	90,000
To Bank (purchase; given)	250,000	By Depreciation	60,000
		By Ending balance	600,000
	750,000		750,000

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 6

The balance sheet of ALD Company Ltd as on 31^st December is as follows:

Liabilities	Year 1	Year 2	Assets	Year 1	Year 2
Equity shares capital	6,00,000	7,20,000	Fixed assets	7,20,000	9,60,000
Share premium	60,000	72,000	Inventory	60,000	1,20,000
Retained earning	1,20,000	1,80,000	Account receivable	1,80,000	1,20,000
10% Debentures	1,20,000	60,000	Cash at bank	1,20,000	60,000
Bill payable	60,000	48,000
Account payable	1,20,000	1,80,000
	10,80,000	12,60,000		10,80,000	12,60,000

Additional information:

1. Sales for year $720,000.

2. Cost of goods sold $420,000.

3. Operating expenses $70,000.

4. Interest on debentures $20,000.

5. Tax paid for the year $30,000.

6. Sales of fixed assets costing $36,000.

7. Fixed assets purchased for $360,000.

8. Dividend distributed $24,000.

9. Debentures were redeemed with $12,000 premium.

Required: Cash flow statement showing cash from:

(A) Operating activities; (B) Investment activities; (C) Financing activities; (D) Net change in cash

[Answer: OA = $288,000; IA = ($324,000); FA = $36,000;

*Assets purchased = $250,000;

SOLUTION:

Cash Flow Statement

ALD Company Limited

Particulars	Amount
Cash from operating activities:
Cash collection from debtors:	–
Sales revenue	720,000
Add: Decrease in account receivable	+ 60,000	780,000
Cash paid to suppliers:	–
Cost of goods sold	(420,000)
Add: Decrease in bill payable	(12,000)
Add: Increase in inventory	(60,000)
Less: Increase in account payable	+ 48,000	(448,000)
Cash paid to operating expenses:
Operating expenses		(70,000)
Cash paid for interest and insurance:
Interest and insurance		(20,000)
Cash paid to tax:
Tax paid		(30,000)
Net cash from operating activities (A)		228,000
Cash from investing activities:
Sales of fixed assets Purchase of fixed assets		36,000 (360,000)

Net cash from investing activities (B)		(324,000)
Cash from financing activities:

Issue of shares Increase in share premium		120,000 12,000
Redemption of debentures		(60,000)
Premium on redemption of debentures		(12,000)
Dividend paid		(24,000)
Net cash from investing activities (C)		36,000
Change in cash and cash equivalent (A+B+C)		(60,000)
Add: beginning cash and cash equivalent		120,000
Ending cash and cash equivalent		60,000

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 7

Following is the extracted information from XYZ Company Ltd as on 31^st December 2020:

Assets and Liabilities	January	December
Inventory	80,000	96,000
Account receivable	128,000	80,000
Account payable	64,000	112,000
Outstanding salary	16,000	8,000
Debentures	240,000	160,000
Provision for tax	48,000	32,000
Proposed dividend	32,000	48,000
Plant and machinery	560,000	960,000
Investment	80,000	160,000
Equity shares capital of Rs 100 each	800,000	1,120,000
Cash and bank	148,000	36,000

Additional information:

a. Sales for the year $800,000

b. Cost of goods sold $480,000

c. Salary and other expenses $96,000

d. Depreciation $80,000

e. Premium on redemption of debentures $8,000

f. Interest on debentures $16,000

g. Provision for tax $32,000

h. Profit on plant $16,000 (book value $64,000)

i. Dividend paid $32,000

Required: Cash flow statement showing: (a) Cash from operating activities; (b) Cash from investing activities

[Answer: OA = $232,000; IA = ($544,000); FA = $200,000;

* P&M purchase = $544,000]

SOLUTION:

Given and working note:

Provision for Tax Account

Particulars	Amount	Particulars	Amount
To Bank (tax paid , b/f)	48,000	By Beginning balance	48,000
To Ending balance	32,000	By P & L Account or IS (given)	32,000
	80,000		80,000

Proposed Dividend Account

Particulars	Amount	Particulars	Amount
To Bank (dividend paid, given)	32,000	By Beginning balance	32,000
To Ending balance	48,000	By P & L Account or IS (b/f)	48,000
	80,000		80,000

Plant and Machinery Account

Particulars	Amount	Particulars	Amount
To Beginning balance	560,000	By Bank (sold) Account	80,000
To Profit and loss (profit)	16,000	By Depreciation on sales	80,000
To Bank (Purchase, b/f]	544,000	By Ending balance	960,000
	1,120,000		1,120,000

Cash Flow Statement

XYZ Company Limited

Particulars	Amount	Amount
Cash from operating activities:
Cash collection from debtors:
Sales revenue	800,000
Add: Decrease in account receivable	+ 48,000	848,000
Cash paid to suppliers:
Cost of goods sold	(480,000)
Add: Increase in inventory	(16,000)
Less: Increase in account payable	48,000	(448,000)
Cash paid to operating expenses:
Salary and other expenses Add: Decrease in outstanding salary	(96,000) (8,000)	(104,000)
Cash paid for interest and insurance:
Interest and insurance		(16,000)
Cash paid to tax:
Tax paid		(48,000)
Net cash from operating activities (A)		232,000
Cash from investing activities:
Sales of plant and machinery		80,000
Purchase of plant and machinery		(544,000)
Purchase of investment		(80,000)
Net cash from investing activities (B)		(544,000)
Cash from financing activities:
Issue of shares		320,000
Increase in share premium		Nil
Redemption of debentures		(80,000)
Premium on redemption of debentures		(8,000)
Dividend paid		(32,000)
Net cash from investing activities (C)		200,000
Change in cash and cash equivalent (A+B+C)		(112,000)
Add: beginning cash and cash equivalent		148,000
Ending cash and cash equivalent		36,000

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 8

Comparative balance sheet and other information have been provided below by Max Company Ltd:

Balance Sheet

Liabilities	Last year	This year	Assets	Last year	This year
Account payable	40,000	70,000	Inventories	50,000	60,000
Outstanding salaries	10,000	5,000	Account receivable	80,000	50,000
Debentures	1,50,000	1,00,000	Plant and machinery	3,50,000	6,00,000
Provision for taxation	30,000	20,000	Investment	50,000	1,00,000
Provision for dividend	20,000	30,000	Cash and bank	30,000	50,000
Equity shares capital	5,00,000	7,00,000	Goodwill	1,90,000	1,55,000
Suspense account	−	90,000
	7,50,000	10,15,000		7,50,000	10,15,000

Additional information:

a. Sales revenue $500,000

b. Cost of goods sold $300,000

c. Office rent and salaries $60,000

d. Depreciation written off on machinery $50,000

e. Premium on redemption of debenture $5,000

f. Interest on debenture $10,000

g. Provision for taxation $20,000

h. Profit on sale of plat $10,000 (book value $40,000)

i. Provision for dividend $30,000

Required: Cash flow statement net cash available from operating, investing and financing activities

[Answer: OA = $145,000; IA = ($340,000); FA = $125,000;

P&M purchased = $340,000; investment purchased = $50,000]

Dividend paid = $20,000; *Add suspense with opening cash = $90,000;

SOLUTION:

Given and working note:

Provision for Tax Account

Particulars	Amount	Particulars	Amount
To Bank (tax paid, b/f)	30,000	By Beginning balance	30,000
To Ending balance	20,000	By P & L account or IS (given)	20,000
	50,000		50,000

Proposed Dividend Account

Particulars	Amount	Particulars	Amount
To Bank (dividend paid, b/f)	20,000	By Beginning balance	20,000
To Ending balance	30,000	By P & L account or IS (given)	30,000
	50,000		50,000

Plant and Machinery Account

Particulars	Amount	Particulars	Amount
To Beginning balance	350,000	By Bank account (sold, CSV)	50,000
To Profit and loss (profit)	10,000	By Depreciation on sales	50,000
To Bank (purchase, b/f)	340,000	By Ending balance	600,000
	700,000		700,000

Cash Flow Statement

Max Company Limited

Particulars	Amount	Amount
Cash from operating activities:
Cash collection from debtors:
Sales revenue	500,000
Add: Decrease in account receivable	+ 30,000	530,000
Cash paid to suppliers:
Cost of goods sold	(300,000)
Add: Increase in inventory	(10,000)
Less: Increase in account payable	30,000	(280,000)
Cash paid to operating expenses:
Office rent and salary Add: Decrease in outstanding salary	(60,000) (5,000)	(65,000)
Cash paid for interest and insurance:
Interest and insurance		(10,000)
Cash paid to tax:
Tax paid		(30,000)
Net cash from operating activities (A)		145,000
Cash from investing activities:
Sales of plant and machinery		50,000
Purchase of plant and machinery		(340,000)
Purchase of investment		(50,000)
Net cash from investing activities (B)		(340,000)
Cash from financing activities:
Issue of shares		200,000
Increase in share premium		Nil
Redemption of debentures		(50,000)
Premium on redemption of debentures		(5,000)
Dividend paid		(20,000)
Net cash from investing activities (C)		125,000
Change in cash and cash equivalent (A+B+C)		(70,000)
Add: beginning cash and cash equivalent		30,000
Add: Suspense		90,000
Ending cash and cash equivalent		50,000