Lecture Notes: Cash Flow Statement Problems

Introduction

• Speaker: Hashem Ali Khan
• Focus: Problems on cash flow statement
• Previous three videos cover theory and format
• Cash flows are divided into three categories:
  • Operating activity
  • Investing activity
  • Financing activity
• Advice: Watch previous videos for a better understanding

Preparation

• Preparation Required:
  • Print out problems provided in the video description
  • Keep a notebook, calculator, and pen handy
  • Take screenshots of points shown on screen

Problem 1: Cash Flow Statement from Balance Sheets

• Given Data: Balance sheets for 2017 and 2018
• Objective: Prepare a cash flow statement for the year ended 2018
• Categories:
  • Operating Activity
    • Increase in profit and loss account: 30,000
    • Adjustments for non-cash items: Depreciation increase by 15,000
    • Operating profit before working capital changes: 45,000
    • Working Capital Changes:
      • Increase in creditors: 5,000
      • Decrease in bills payable: -15,000
      • Increase in other current liabilities: 5,000
      • Increase in stock (current asset): -40,000
      • Increase in debtors (current asset): -10,000
      • Decrease in bills receivable: 10,000
    • Net effect: No cash generated/loss in operating activity
  • Investing Activity
    • Increase in fixed assets (purchase): -40,000
  • Financing Activity
    • Issued debentures: 30,000
  • Net Effect: Decrease in cash by 10,000
  • Cash flow reconciliation: Previous cash balance (20,000) - Decrease (10,000) = Ending cash balance (10,000)
• Verification: Ending cash balance matches the given balance sheet

Problem 2: Cash Flow Statement with Additional Adjustments

• Given Data: Summarized balance sheets for 2015 and 2016
• Additional Information: Investment and tax transactions
• Required Accounts:
  • Investment Account
    • Opening balance: 50,000
    • Closing balance: 60,000
    • Sale of investment generating profit: 500
    • Purchase of investment: 18,000
    • Transaction net: 8,500
  • Provision for Taxation Account
    • Opening balance: 75,000
    • Closing balance: 10,000
    • Tax provision: 9,000
    • Tax paid: 74,000 (derived)
  • Fixed Asset Account
    • Opening balance: 4,00,000
    • Closing balance: 3,20,000
    • Sale of fixed assets generating profit: 2,000
    • Depreciation: 70,000
• Categories:
  • Operating Activity
    • Increase in profit and loss account: 12,000
    • Adjustments for non-cash items
      • Depreciation: 70,000
      • Transfer to General Reserve: 10,000
      • Provision for taxation: 9,000
      • Profit on sale items: -2,500
    • Working Capital Changes
      • Decrease in creditors: -34,000
      • Decrease in stock: 30,000
      • Increase in debtors: -2,45,000
    • Operating loss: -1,50,500
    • Tax paid: -74,000
    • Net cash used: -2,24,500
  • Investing Activity
    • Sold investments: 8,500
    • Purchased investments: -18,000
    • Sold fixed assets: 12,000
    • Net cash generated: 2,500
  • Financing Activity
    • Mortgage loan taken: 2,70,000
    • Net cash generated: 2,70,000
  • Net Effect: Increase in cash by 48,000
  • Reconciliation: Beginning cash (1,49,000) + Net Increase (48,000) = Ending cash (1,97,000)
• Verification: Ending cash balance matches the given balance sheet

Conclusion

• Recommendations:
  • Watch the video multiple times for better understanding
  • Practice more problems for mastery
• Next Steps: Continue in the next video with more problems