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INDIRECT METHOD OF CALCULATION OF CASH FLOW FROM OPERATING ACTIVITIES

CASH FLOW FROM OPERATING ACTIVITIES ARE TO BE CALCULATED IN FOUR STEPS

Particulars	₹	₹
Net Profit of the current year (after appropriations) Add: Transfer to Reserves (all transfers to Reserves from balance of the Statement of Profit & Loss) Proposed Dividend of Previous Year Interim Dividend paid during the year Provision for Tax made during the current year Less: Refund of Tax Net Profit before Tax		.………………….. …………………. ……………………………………………………………..... (……………………) ______________ …………………….. _____________

Note : Amounts in brackets denote negative items, i.e, amounts that are to be deducted

STEP 1: DETERMINATION OF NET PROFIT BEFORE TAX

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STEP 2: ADJUSTMENT FOR NON CASH AND NON OPERATING ITEMS

ITEMS TO BE ADDED BACK TO NET PROFIT

1. Depreciation

2. Amortization of fictitious or intangible assets

3. Bad debts written off

4. Loss on sale of fixed assets

5. Interest on long term and short term borrowings

6. Creation of provisions

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STEP 2: ADJUSTMENT FOR NON CASH AND NON OPERATING ITEMS

(B) ITEMS TO BE DEDUCTED FROM NET PROFITS

1. Profit on sale of fixed assets

2. Receipt of interest and dividend

3. Rent received

4. Retransfer of excess provisions

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STEP 3: ADJUSTMENTS IN RESPECT OF CHANGES IN CURRENT ASSETS AND CURRENT LIABILITIES

a. Increase in current assets should be deducted from operating profit

b. Decrease in current assets should be added to operating profit

d. Increase in current liabilities should be added to operating profit

e. Decrease in current liabilities should be deduced from operating profit

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STEP 4 : DEDUCT INCOME TAX PAID

Income tax paid is deducted from cash generated from operating activities

THE AMOUNT AFTER ABOVE ADJUSTMENT IS CASH FLOW FROM OPERATING ACTIVITIES.

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From the following information, calculate cash from operating activities:

EXERCISES

1. QUESTION

	₹
Profit and Loss Balance on 1st April, 2017	25,000
Profit and Loss Balance on 31st March, 2018	80,000
Depreciation on Fixed Assets	12,500
Amortisation of Goodwill	8,000
Loss on Sale of Machine	20,000
Provision for Taxation	15,000
Transfer to General Reserve	30,000
Decrease in Trade Receivables	22,800
Decrease in Trade Payables	4,700
Outstanding Expenses on 1st April, 2017	5,000
Outstanding Expenses on 31st March, 2018	6,500
Prepaid Expenses on 1st April, 2017	2,000

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For the year ended 31^st March, 2018

CALCULATION OF CASH FROM OPERAITNG ACTIVITIES

	₹	₹
Profit before tax (Note 1)		1,00,000
Adjustments for non-cash and non-operating items :
Add: Depreciation Goodwill Loss on Sale of Machine	12,500 8,000 20,000	40,500
Add : Decrease in Current Assets: Decrease in Trade Receivables Decrease in Prepaid Expenses	22,800 2,000	1,40,500
Add: Increase in Current Liabilities: Increase in Outstanding Expenses	1,500	26,300
		1,66,800
Less : Decrease in Current Liabilities: Decrease in Trade Payables		4,700
Cash generated from operating activities Tax paid Net Cash Flow from Operating Activities		1,62,100 15,000 ____________ 1,47,100 ____________

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Notes: (2) It is assumed that tax paid during the year is equivalent to provision for taxation made during the year.

Notes: (1) Calculation Profit and Loss before tax:	₹
Profit and Loss Balance on 31st March, 2018	80,000
Less : Profit and Loss Balance on 31st March, 2017	25,000
	55,000
Add: Transfer to General Reserve Provision for tax made during the Current year	30,000 15,000
Net Profit before Tax	1,00,000

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The profit of Philips Ltd. after appropriations was ₹2,50,000. This profit was arrived at after taking into consideration the following items :

EXERCISES

2. QUESTION

S. No.	Particulars	Amount ₹
1.	Depreciation on Fixed Tangible Assets (Machinery)	20,000
2.	Loss on Sale of Fixed Tangible Assets (Furniture)	2,000
3.	Goodwill written off	9,000
4.	Provision for Taxation	35,000
5.	Transfer to General Reserve	17,500
6.	Gain on Sale of Fixed Tangible Assets (Machinery)	8,000

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Additional Information :

Particulars	Amount ₹	Amount ₹
Trade Receivables (all good)	50,000	62,000
Trade Payables	45,000	55,000
Inventory	12,000	8,000
Income Received in Advance	8,000	___
Outstanding Expenses	6,000	3,000
Prepaid Expenses	____	5,000

You are requires to calculate cash from operating activities.

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For the year ended 31^st March, 2019

CALCULATION OF CASH FROM OPERAITNG ACTIVITIES:

Particulars		Amount ₹
Net Profit before tax (Note 1)		3,02,5000
Adjustments for non-cash and non-operating items :
Add: Depreciation on Fixed Tangible Assets Loss on Sale of Fixed Tangible Assets Goodwill written off	20,000 2,000 9,000	31,000
Less : Gain on Sale Machinery		3,33,500 (8,000)
Net Profit before Working Capital Changes		3,25,000
Add : Decrease in Current Assets: Inventory Increase in Current Liabilities: Trade Payables	4,000 10,000	14,000
		3,39,500

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