Chapter cash-flow-statement: Cash Flow Statement Case Study Questions | accountancy Class 12 CBSE

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Chapter cash-flow-statement: Cash Flow Statement Case Study Questions | accountancy Class 12 CBSE | ByteNotes.in

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Sunrise Textiles Ltd. is a garment manufacturing company. During the financial year 2023-24, the company reported a net profit of Rs. 5,00,000 after charging depreciation of Rs. 80,000 and a loss on sale of machinery of Rs. 20,000. The company also received dividend income of Rs. 30,000 from its investments in other companies and paid interest on bank loans amounting to Rs. 40,000. Trade receivables increased by Rs. 60,000 and trade payables decreased by Rs. 25,000 during the year. Inventories decreased by Rs. 15,000. The accountant was asked to prepare the cash flow from operating activities using the indirect method as per AS-3 requirements.

Question 1: Identify any two items from the given data that need to be ADDED BACK to net profit while calculating cash flow from operating activities using the indirect method.

Depreciation of Rs. 80,000 is a non-cash item and must be added back to net profit.
Loss on sale of machinery of Rs. 20,000 is a non-operating item (investing loss) and must be added back to net profit.
Interest on bank loans of Rs. 40,000 is a financing cash outflow and must be added back to net profit.

Question 2: Explain the treatment of dividend income of Rs. 30,000 received from investments in other companies while computing cash flow from operating activities for Sunrise Textiles Ltd.

Dividend received from investments in other companies is classified as an INVESTING activity for a non-financial enterprise as per AS-3.
Therefore, dividend income of Rs. 30,000 must be DEDUCTED from net profit while computing cash flow from operating activities, as it has already been credited to the Statement of Profit and Loss.
It will then be shown as a cash inflow under the head 'Cash Flow from Investing Activities'.

Question 3: Calculate the Net Cash Flow from Operating Activities for Sunrise Textiles Ltd. for the year 2023-24 using the indirect method. Assume income tax paid was Rs. 1,20,000.

Net Profit before tax and extraordinary items = Rs. 5,00,000 + Rs. 1,20,000 (tax) = Rs. 6,20,000
Add: Depreciation Rs. 80,000; Loss on sale of machinery Rs. 20,000; Interest on bank loan Rs. 40,000
Less: Dividend income Rs. 30,000
Operating Profit before working capital changes = Rs. 7,30,000
Working Capital Adjustments: Less Increase in Trade Receivables (Rs. 60,000); Less Decrease in Trade Payables (Rs. 25,000); Add Decrease in Inventories Rs. 15,000
Cash generated from Operations = Rs. 6,60,000
Less: Income Tax Paid Rs. 1,20,000
Net Cash from Operating Activities = Rs. 5,40,000

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Horizon Ltd. is a non-financial company. During the year ended 31st March 2024, the following transactions took place: (1) Purchased machinery worth Rs. 4,00,000. (2) Sold old furniture costing Rs. 1,00,000 with accumulated depreciation of Rs. 60,000 for Rs. 50,000. (3) Purchased shares of Amco Ltd. (for investment purposes) worth Rs. 2,00,000. (4) Received interest of Rs. 25,000 on debentures held as investment. (5) Received dividend of Rs. 15,000 from Amco Ltd. (6) Gave a loan of Rs. 80,000 to an employee. The CFO has asked the accounts team to classify these transactions under investing activities.

Question 1: From the given transactions, identify any two cash OUTFLOWS under investing activities for Horizon Ltd.

Purchase of machinery worth Rs. 4,00,000 is a cash outflow under investing activities.
Purchase of shares of Amco Ltd. worth Rs. 2,00,000 (non-trading investment) is a cash outflow under investing activities.
Loan given to employee of Rs. 80,000 is also a cash outflow under investing activities.

Question 2: How would the loss on sale of furniture be treated in the Cash Flow Statement of Horizon Ltd.? What is the cash inflow from this transaction?

The furniture was sold for Rs. 50,000; hence the cash inflow from investing activities is Rs. 50,000 (actual sale proceeds).
The loss on sale = Cost Rs. 1,00,000 – Accumulated Depreciation Rs. 60,000 – Sale proceeds Rs. 50,000 = Rs. 10,000 loss.
Under the indirect method, this loss (Rs. 10,000) will be added back to net profit in operating activities since it is a non-cash/non-operating item; the actual proceeds (Rs. 50,000) appear under investing activities.

Question 3: Calculate the Net Cash Flow from Investing Activities for Horizon Ltd. for the year ended 31st March 2024, based on the transactions given.

Cash Outflows: Purchase of machinery (Rs. 4,00,000) + Purchase of shares of Amco Ltd. (Rs. 2,00,000) + Loan to employee (Rs. 80,000) = Rs. 6,80,000
Cash Inflows: Sale of furniture Rs. 50,000 + Interest received Rs. 25,000 + Dividend received Rs. 15,000 = Rs. 90,000
Net Cash used in Investing Activities = Rs. 90,000 – Rs. 6,80,000 = (Rs. 5,90,000)
This represents a net cash outflow of Rs. 5,90,000 from investing activities.

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Prakash Enterprises Ltd. needed funds for expansion. During the financial year 2023-24, the company undertook the following financing activities: issued 10,000 equity shares of Rs. 10 each at a premium of Rs. 5 per share; redeemed 8% preference shares worth Rs. 2,00,000; raised a new bank loan of Rs. 3,00,000; repaid an old long-term loan of Rs. 1,50,000; paid interest on debentures of Rs. 40,000; and paid a dividend of Rs. 60,000 on equity shares. The company is a non-financial enterprise and follows AS-3 strictly. The finance manager needs to prepare the 'Cash Flow from Financing Activities' section.

Question 1: From the given data, list any two cash INFLOWS under financing activities for Prakash Enterprises Ltd.

Issue of 10,000 equity shares at Rs. 15 each (Rs. 10 + Rs. 5 premium) = Rs. 1,50,000 is a cash inflow from financing activities.
New bank loan raised of Rs. 3,00,000 is a cash inflow from financing activities.

Question 2: How is interest paid on debentures and dividend paid on equity shares classified in the Cash Flow Statement of a non-financial enterprise as per AS-3?

For a non-financial enterprise, as per AS-3, interest paid on debentures is classified as a FINANCING activity cash outflow.
Dividend paid on equity shares is also classified as a FINANCING activity cash outflow for a non-financial enterprise.
Both items should be shown as cash outflows under the head 'Cash Flows from Financing Activities'.

Question 3: Prepare the 'Cash Flow from Financing Activities' section of the Cash Flow Statement for Prakash Enterprises Ltd. for the year ended 31st March 2024.

Cash Inflows: Proceeds from issue of equity shares = 10,000 × Rs. 15 = Rs. 1,50,000; Proceeds from new bank loan = Rs. 3,00,000; Total Inflows = Rs. 4,50,000
Cash Outflows: Redemption of 8% preference shares = Rs. 2,00,000; Repayment of long-term loan = Rs. 1,50,000; Interest paid on debentures = Rs. 40,000; Dividend paid = Rs. 60,000; Total Outflows = Rs. 4,50,000
Net Cash from Financing Activities = Rs. 4,50,000 – Rs. 4,50,000 = NIL
This means financing inflows and outflows are balanced during the year.

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Rajan Ltd. reported the following in its Balance Sheet as on 31st March 2024 and 31st March 2023: Machinery (cost) Rs. 9,00,000 and Rs. 7,00,000; Accumulated Depreciation Rs. 3,50,000 and Rs. 2,50,000. Additional information: A machine costing Rs. 80,000 with accumulated depreciation of Rs. 50,000 was sold for Rs. 40,000 during the year. Depreciation charged during the year was Rs. 1,50,000. The CFO wants to ascertain the amount of new machinery purchased and the net cash flow from investing activities related to machinery.

Question 1: What is the book value of the machine sold by Rajan Ltd. during the year? Did the company incur a profit or loss on sale?

Book value of machine sold = Cost Rs. 80,000 – Accumulated Depreciation Rs. 50,000 = Rs. 30,000.
Sale proceeds = Rs. 40,000; Book value = Rs. 30,000. Therefore, Profit on sale = Rs. 10,000.

Question 2: Using the Machinery Account, calculate the cost of new machinery purchased by Rajan Ltd. during the year 2023-24.

Opening balance (cost) = Rs. 7,00,000; Add: New machinery purchased (balancing figure) = ?; Less: Cost of machinery sold = Rs. 80,000; Closing balance = Rs. 9,00,000
Machinery Account: Dr side = Rs. 7,00,000 + New purchases; Cr side = Rs. 80,000 + Rs. 9,00,000 = Rs. 9,80,000
New machinery purchased = Rs. 9,80,000 – Rs. 7,00,000 = Rs. 2,80,000

Question 3: Calculate the Net Cash Flow from Investing Activities related to machinery for Rajan Ltd. for the year 2023-24. Also verify the closing accumulated depreciation balance.

Net Cash from Investing Activities (Machinery): Cash inflow from sale of machinery = Rs. 40,000; Cash outflow for purchase of new machinery = Rs. 2,80,000; Net = (Rs. 2,40,000) outflow
Verification of Accumulated Depreciation: Opening Rs. 2,50,000 + Depreciation charged Rs. 1,50,000 – Accumulated dep. on sold asset Rs. 50,000 = Rs. 3,50,000 = Closing balance (matches)
Profit on sale Rs. 10,000 will be deducted from net profit under operating activities (indirect method) as it is an investing income.

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Meera & Sons Ltd. is preparing its Cash Flow Statement for the year ended 31st March 2024. The accountant is confused about the classification of certain transactions. The transactions are: (1) Loss due to flood Rs. 50,000. (2) Income tax paid Rs. 80,000 (includes Rs. 10,000 capital gains tax on sale of building). (3) Dividend tax (Dividend Distribution Tax) paid Rs. 15,000. (4) Acquisition of machinery worth Rs. 3,00,000 by issue of equity shares. (5) Redemption of debentures by issue of equity shares worth Rs. 2,00,000. The company follows AS-3 for preparing its Cash Flow Statement.

Question 1: How should the extraordinary item — Loss due to flood of Rs. 50,000 — be treated in the Cash Flow Statement as per AS-3?

Extraordinary items are non-recurring in nature. As per AS-3, cash flows associated with extraordinary items must be classified and disclosed SEPARATELY as arising from operating, investing, or financing activities.
The loss due to flood (Rs. 50,000) should be disclosed separately under operating activities to enable users to understand its nature and effect on present and future cash flows.

Question 2: Classify the income tax paid of Rs. 80,000 (including Rs. 10,000 capital gains tax) and Dividend Distribution Tax of Rs. 15,000 under appropriate activity heads in the Cash Flow Statement.

Capital gains tax of Rs. 10,000 on sale of building should be classified under INVESTING activities (as it specifically relates to an investing activity).
The remaining income tax of Rs. 70,000 (Rs. 80,000 – Rs. 10,000) should be classified under OPERATING activities.
Dividend Distribution Tax of Rs. 15,000 should be classified under FINANCING activities (shown along with dividend paid).

Question 3: Explain the treatment of transactions (4) and (5) — acquisition of machinery by issue of equity shares and redemption of debentures by issue of equity shares — in the Cash Flow Statement. Why is this treatment given?

Both transactions — acquisition of machinery by issue of equity shares (Rs. 3,00,000) and redemption of debentures by issue of equity shares (Rs. 2,00,000) — are NON-CASH transactions.
As per AS-3, investing and financing transactions that do NOT require the use of cash or cash equivalents must be EXCLUDED from the Cash Flow Statement.
These transactions should be DISCLOSED ELSEWHERE in the financial statements (in notes to accounts) to provide relevant information about investing and financing activities.
The rationale is that the Cash Flow Statement only captures actual cash movements; no cash changes hands in these transactions.

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Chapter cash-flow-statement: Cash Flow Statement | Case Study Questions

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Question 1: Identify any two items from the given data that need to be ADDED BACK to net profit while calculating cash flow from operating activities using the indirect method.

Question 2: Explain the treatment of dividend income of Rs. 30,000 received from investments in other companies while computing cash flow from operating activities for Sunrise Textiles Ltd.

Question 3: Calculate the Net Cash Flow from Operating Activities for Sunrise Textiles Ltd. for the year 2023-24 using the indirect method. Assume income tax paid was Rs. 1,20,000.

Passage

Question 1: From the given transactions, identify any two cash OUTFLOWS under investing activities for Horizon Ltd.

Question 2: How would the loss on sale of furniture be treated in the Cash Flow Statement of Horizon Ltd.? What is the cash inflow from this transaction?

Question 3: Calculate the Net Cash Flow from Investing Activities for Horizon Ltd. for the year ended 31st March 2024, based on the transactions given.

Passage

Question 1: From the given data, list any two cash INFLOWS under financing activities for Prakash Enterprises Ltd.

Question 2: How is interest paid on debentures and dividend paid on equity shares classified in the Cash Flow Statement of a non-financial enterprise as per AS-3?

Question 3: Prepare the 'Cash Flow from Financing Activities' section of the Cash Flow Statement for Prakash Enterprises Ltd. for the year ended 31st March 2024.

Passage

Question 1: What is the book value of the machine sold by Rajan Ltd. during the year? Did the company incur a profit or loss on sale?

Question 2: Using the Machinery Account, calculate the cost of new machinery purchased by Rajan Ltd. during the year 2023-24.

Question 3: Calculate the Net Cash Flow from Investing Activities related to machinery for Rajan Ltd. for the year 2023-24. Also verify the closing accumulated depreciation balance.

Passage

Question 1: How should the extraordinary item — Loss due to flood of Rs. 50,000 — be treated in the Cash Flow Statement as per AS-3?

Question 2: Classify the income tax paid of Rs. 80,000 (including Rs. 10,000 capital gains tax) and Dividend Distribution Tax of Rs. 15,000 under appropriate activity heads in the Cash Flow Statement.

Question 3: Explain the treatment of transactions (4) and (5) — acquisition of machinery by issue of equity shares and redemption of debentures by issue of equity shares — in the Cash Flow Statement. Why is this treatment given?

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