Theoretical Questions

Theoretical Questions 1. What is cash equivalents? 2. Distinguish between cash and profit. 3. Classify the cash flows. 4. What is cash from operating activities (CFO)? 5. What is the treatment of dividend and interest received and paid? 6. Distinguish between cash from operating activities and operating profit. 7. Examine the relationship between profit and cash from operating activities. 8. Why is cash generated during the year generally not equal to profit for the year? 9. Briefly explain the provisions of the Accounting Standard (AS)-3 10. Examine the impact of the changes in the working capital on the cash from operating activities. 11. When will the cash from investing activities (CFI) be negative? 12. Explain with example the impact of depreciation on the cash from operating activities. 13. Examine the implications of having positive CFF, negative CFI, and negative CFO. 14. Can a company have positive profit and huge negative CFO? 15. Examine the implications of having negative CFF, negative CFI, and positive CFO. 16. A company having profit will always have positive cash from operating activities (CFO). Comment. 17. Changes in working capital will no effect on CFO. Comment. 18. Buy back of shares will increase the cash from financing activities (CFI). 19. Dividend paid and dividend received will affect the cash from financing activities (CFF). Comment. 20. Examine the impact of the following transaction of CFO: a. Paid salaries b. Purchased goods on credit c. Interest received d. Interest paid e. Profit on the sale of fixed assets f. Issued capital at a premium g. Collections from old debtors. h. Buy back of shares Numericals 1. Following are the transactions of XYZ ltd for the year ending March 2006: Started business with capital = 200,000 Issues shares to the public = 10000 shares of Rs. 10 at a premium of 50% Took 10% loan = 100,000 Purchased plant on credit = Purchased stock of goods for cash = Purchased shares of MN ltd. = Sold 50% of shares of MN ltd for Rs. 40,000 Interest due but not paid = 10,0000 Sold 50% of stock of goods for cash = Expenses for the period = 20,000 Expenses paid = 15,000 23

Required: Cash flow statement. 2. Following are the transactions of XYZ ltd for the year ending March 2006: Issues shares to the public = 20000 shares of Rs. 10 at a premium of 50% Took 10% loan = 200,000 Purchased plant for cash = Purchased stock of goods on credit = Purchased shares of XY ltd. = 1 Sold 50% of shares of MN ltd at a profit of 50% on cost Interest paid = 10,0000 Sold 50% of stock of goods for cash = Expenses for the period = 20,000 Expenses paid = 15,000 Depreciation = 10% Required: Cash from investing activities, cash from financing activites, and cash from operating activities. 3. Following transactions are entered into by A & Co. during January 2006. Prepare the necessary financial statements. Show the CFO, CFF, CFI. (i) Started business with furniture valued at Rs. 12,000 (ii) Owners introduced Rs. 100,000 in cash (iii) Issued 10000 shares of Rs.10 at a premium of Rs.50. (iv) Purchased goods for sale for Rs. from B & Co. on credit (v) Purchased goods for cash: Rs. (vi) Sold goods costing Rs. 20,000, at Rs. 30,000 on cash basis (vii) Sold goods costing Rs. 40,000, to C & Co. for Rs. 75,000 on credit (viii) Paid Rs. 1,000 towards freight and paid Rs. 5,000 towards salary. (ix) Lost goods for sale for Rs. 10,000 due to fire. (x) Interest accrued but not due on 10% IDBI Loan: Rs. 1,000 (xi) Paid Rs. 12,000 towards annual insurance premium. (xii) Realized Rs. 47,000 from C & Co. in full and final settlement. (xiii) Charged depreciation on furniture Rs. 100 (xiv) Paid the money due to B&Co and received discount of Rs. 5,000 (xv) Conveyance charges paid to the staff Rs. 500 4. Following are the transactions of XYZ ltd. for the year ending March 2006: Started business with Capital 50000 Took 12% loan 50000 Purchased stock on credit 50000 Sold 50% of stock for cash 50000 Purchased furniture for cash 20000 Purchased shares for cash 20000 Depreciation on furniture 2000 Expenses for the year 10000 Expenses paid 6000 Dividend received 10000 Dividend distributed 5000 Required: Cash from investing activities, cash from financing activites, and cash from operating activities. 24

5. Following are the transactions of XYZ ltd. for the year ending March 2006: Started business with Capital 1 Took 12% loan 1 Purchased stock on credit 1 Sold 50% of stock for cash 1 Purchased furniture for cash 20,000 Purchased shares for cash 20,000 Depreciation on furniture 2000 Expenses for the year 10,000 Expenses paid 20000 Dividend received 10000 Dividend distributed 5000 Required: a) Cash from investing activities (CFI), cash from financing activites (CFF), and cash from operating activities (CFO). b) Reconcile profit with cash from operating activities (CFO) 6. Following is the balance sheet of XYZ limited as on 31 st March 2006: Balance Sheet Capital 100,000 12% loan 1 2 Stock 70,000 Debtors 80,000 Furniture 40,000 Plant Cash 10,000 2 Transactions during the first quarter of 2006 are given below: Purchased stock on credit 30,000 Sold 50% of the stock for cash 80,000 Paid rent 3,000 Collection from the debtors 20,000 Salaries for a month 2,000 Salaries paid 24,000 Insurance premium for the year paid 6,000 Required: All Financial statements CFO using indirect method 7. Share capital on 1.1. 99 = 200,000, Share capital on 1.1.2000 = 500,000 Bonus shares issued during the year = 50000 Debentures converted into share = 100,000 25

Buy back of share = Rs. 200,000 Find Cash from financing activities 8. ABC ltd. issued 10,000 shares of Rs. 10 at 25. Took 12% loan of Rs. 200,000. Money raised was used as follows: 20% to buy stock of goods; 30% to buy plant 40% to shares of XYZ ltd. Balance was retained as cash During the first quarter, sold the entire stock on credit for Rs. 80,000 and sold the shares of XYZ ltd. at a profit of 50% for cash. Depreciation for the year =10,000; Required: Cash flow statement 9. Net profit after depreciation and tax is Rs. 35000. Depreciation is 15000. A total sale was Rs. Rs. 1,00,000 of which 60% was on credit. Cost of the goods was 25% of the sales. Entire purchase was on credit. Find Cash from Operation. 10. Following are some of the financial statements of ABC ltd. Table Balance Sheet as on30th June 02 Sources Assets Share capital 500,000 5 Fixed assets 600,000 540,000 Reserves and surplus 2 127,500 Bonds 0 12% Long term borrowings 1 100,000 Stock 200,000 1 Outstanding Salary 20,000 Debtors 200,000 145,000 Accrued Interest 4,500 Advance Rent 0 12,000 Creditors 200,000 200,000 CIH 155,000 TOTAL 1,100,000 1,002,000 1,100,000 1,002,000 Cash Flow Statement for Apr- June 02 Receipts Amount Payments Amount Opening Cash 12% Long term borrowings Cash Sales 2 Creditors 100,000 Collections from customers 1 Salaries 60,000 Dividend Received 2,000 Rent 36,000 Fixed Assets Fixed Assets 100,000 Interest on Bonds 5,000 Electricity Charges 6,000 Investments 60,000 Dividend Paid 10,000 CIH 155,000 517,000 517,000 The CEO of the company, Ms. K, is very happy as the cash position improved considerably. We have increased our cash by 3 times, whereas our competitor 1 has lost cash. That's a big jump, she thought. She had big plans for expansion and is planning to approach her friends to sell the shares of the company. However, for further clarity she consulted Ms. J, the financial controller of her 26

company. J gave her an enigmatic smile and said the devil is in the income statement, K. Bad Debts during the quarter were Rs.5000. Prepare the Income Statement and check whether you would be interested to buy the shares. You are also required to prepare CFS as per the AS-3. 11. ABC is a sports equipment sales company. During 1999, the company replaced Rs. 18000 of its fully depreciated equipment with new equipment costing Rs. 23000. Although a mid year dividend of Rs. 5000 was paid, the company found it necessary to borrow Rs.5000 from its bank. Further borrowing may be needed since cash account is dangerously low at the yearend. The president of the company, Ms. Saha was not happy with the financial position. To get a clear picture of the business, she collected the following Income Statement and a rough statement of cash flows. Income Statement (1999-2000) Items Amount Sales 1,95,000 Cost of Goods Sold 1,40,000 Operating Expenses and taxes 49,700 Net Profit 5,300 Cash Flow (1999-2000) : Rough Statement Items Amount Cash Received : a) Net Income: 5,300 b) Depreciation: 5,000 Cash from Operation: 10,300 c) Loan from Bank 5,000 d) Debentures Raised 16,000 TOTAL CASH GENERATED 31,300 Cash Paid a) New Equipment 23,000 b) Dividends 5,000 TOTAL PAYMENT 28,000 INCREASE IN CASH 3,300 Ms. Saha seeks your help. Specifically, she wants to know why the cash flow statement shows net cash generated during the year as Rs. 3,300, when the cash balance decreased from Rs. 15,000 to Rs.500 during the year. Also, why is depreciation shown as cash received? She asked you to see the company s balance sheet if required. 27

Balance Sheet Items Amount Amount Cash 500 15,000 Debtors 17,800 13,200 Stock 28,500 17,500 Prepaid Expenses 700 300 Equipment 40,000 35,000 Less Depreciation -11,000-24,000 TOTAL ASSETS 76,500 57,000 Creditors 8,700 10,000 Outstanding Expenses 600 1,100 Bank Loan 5,000 - Debentures 16,000 - Share Capital 40,000 40,000 Retained Earnings 6,200 5,900 TOTAL LIABILITIES 76,500 57,000 Required: (a) Correct Cash Flow Statement showing why the company is having such a difficult time keeping sufficient cash on hand. (b) Answer the president s questions. 12. Transactions of XYZ ltd for the year ending March 06: Started business with capital 100,000 Took 12% loan on 1st July 200,000 Purchased plant on credit Purchased stock for cash Purchased furniture for cash 10,000 Purchased stock on credit from X 100,000 Sold 50% stock for cash 200,000 Rent per month 2,000 Purchased 12% Bonds of Z ltd 25,000 Rent paid 24,000 Interest on bonds received 3000 Dividend Paid 20000 Interest on loan paid 24000 Required: Cash flow statement using the AS-3 28

13. On 1 st April 2006 A, B, and C floated a company Buy N Sell with own funds of Rs. each and immediately issued 10,000 shares of Rs.100 issued at premium of 10% to their friends. The company purchased 100 shares of Microsys (@ Rs.2500) on 20th April and deposited the balance money in a Short Term (9 months) Deposit Scheme of Zltd. The rate of interest on the deposit is 18% per annum. Sold the shares on 15 th June 01 @ Rs. 3650. Declared and distributed dividend of 10% Transactions for the first quarter of 2006 were as follows: Purchased 10% bonds of XY ltd. for Rs. 1 lakhs and 10000 shares of SAIL @ Rs.4 Purchased the right to buy a building by paying Rs. 100000 and sold the right within a week a hefty premium of 85%. Gave short-term advance to another company: Rs. 50000. Collected Rs. 60000 after 15 days. Bought two old maruti cars @ Rs. 2.5 lakhs from Delhi and sold one of them at profit of 25%. Gave Rs. 20,000 to the MD of a company. MD became insolvent. Only 10% of the money given could be collected. Commission paid to the agents: Rs.25000. Rent and other expense per month Rs.10000 Purchased a piece of land at Rs.5 lakhs and sold the same to a housing company at a profit of 20% on the sales. Tax paid: 2% on the sales proceed. Purchased 100 shares of Satyam at Rs. 250. Sold all shares of SAIL @ Rs.6.50. Purchased a car for office use: Rs.5 lakhs A visited Singapore to explore new business avenues: Expenses incurred Rs.50000. Sponsored the local cricket match: Rs.25000 Purchased the right to sell tickets for the match for Rs. 100000. Expenses incurred for selling the tickets Rs.30000. Sale proceeds from the tickets Rs. 220000. Paid Rs. 20 000 to an accountant to prepare the necessary financial statements. Required: Cash flow statement and Income statement 29

1. You are given : The Balance Sheets of a company as on 31 st Mar 01/ 31 st Mar 02 and the Income Statement of the company for the year 2001-2002. Depreciation : Plant and Machinery 20%, Furniture 5%, Computer 20% Balance Sheet as on 31 st March, 2001 Liabilities In Rs. Assets In Rs. Capital A Capital B Share Capital Loan from ICICI at 10% Creditor X ltd. Interest Accrued Outstanding Expenses Profit 1, 60,000 20,000 6,000 4,000 20,000 Plant & Machinery Furniture Computer for office use Debtor C ltd. Investment SAIL at 25% Rent paid in advance Stock Cash in hand 5,000 30,000 19,000 12,000 1, 44,000 Total 3,60,000 Total 3,60,000 Income Statement for 2001-2002 Expenses In Rs. Incomes In Rs. Cost of Goods sold Depreciation : Plant & Machinery 100,000 10,000 Sales Interest (SAIL) Loss 1,25,000 12,500 1,750 Furniture Computer Bad debts Rent Interest (ICICI) 250 6,000 5,000 12,000 6,000 Total 1,39,250 Total 1,39,250 Balance Sheet as on 31 st March, 2002 Liabilties In Rs. Assets In Rs. Capital A Capital B Share Capital Share Premium Loan from ICICI at 10% Creditor X ltd. Outstanding Expenses Profit - Loss 2,00,000 60,000 60,000 20,000 4,000 20,000 1,750 Plant & Machinery (-Depr.) Furniture Computer for office use Investment SAIL at 25% Stock Cash in hand 40,000 4,750 24,000 2,93,500 Total 4,62,250 Total 4,62,250 Required: Cash Flow Statement for the year 2001-2002 30

From the following Balance Sheets And Income Statement of XYZ Ltd., prepare a Cash Flow Statement: Balance Sheet as on 31st March 2001 Sources Rs. Applications Rs. Share capital 239000 Fixed Assets 180000 Reserves and Surplus 32800 Investments 45900 Loan from IDBI 51300 Inventories 24000 Short term loans 8300 Debtors 62000 Creditors 6000 Cash and Bank 25500 337400 337400 Balance Sheet as on 31st March 2002 Sources Rs. Applications Rs. Share Capital 251000 Fixed Assets 210000 Reserves and Surplus 48450 Investments 64400 Loan from IDBI 56000 Inventories 24000 Short term loans 7750 Debtors 57500 Creditors 6500 Cash and Bank 16800 Salaries due but not paid 3000 372700 372700 Income Statement Expenses Rs. Incomes Rs. Opening Stock 24000 Sales: Purchases: Cash 148700 Cash 48000 Credit 32000 Credit 30400 Depreciation 24000 Income From Investments 5800 Interest 7500 Salary 35000 Rent 15500 Advertising Expenses 8500 Telephone Charges 1950 Profit 15650 186500 186500 31

1. Following are the balance sheet and income statement of Altd. Balance Sheet Sources Assets 2001 2002 2001 2002 Share Capital 100000 200000 Plant and Machinery 100000 120000 Debentures 70000 30000 Investments 30000 80000 Creditors 28000 82000 Debtors 10000 40000 Tax Payable 0 6000 Cash 40000 10000 Profit and Loss A/c 16000 20000 Prepaid Expenses 4000 8000 Stock 30000 80000 214000 338000 214000 338000 During the year debentures were converted into share Income Statement Sales 200000 Less COGS Other Expenses Opening Stock 30000 General Expenses 22000 Purchase 196000 Depreciation 16000 Closing Stock 80000 Taxes 8000 146000 Total Expenses 46000 Profit after Tax 8000 Dividend 4000 Required: Cash flow statement as per Accounting Standard-3 Real Life Questions 1. Satyam Computer Services Ltd. of Hyderabad was incorporated in 1987 as a private limited company. The company was set up with the objective of providing software development and consultancy services to large corporations. In 1991, it was converted into a public limited company. To become an end-to-end IT solutions player in the areas of consulting, systems integration, products, application development and maintenance services, Satyam Computers merged its three subsidiary companies. The merger was with effect from April 1, 1999. As on that date the assets and liabilities are as follows (Rs. Crore): a) Gross Fixed Asset = Rs. 338.17, Accumulated Depreciation = 93.30, b) Investments = Rs. 39.02, Debtors = 132.24 c) Share Capital = 166.92, Reserves and Surplus = 140.90 d) Borrowings = 248.27, Creditors = 28.79 Following is the abstract of Income Statement and Cash Flow Statements of Satyam Computer Services Ltd. 32

Income Statement 1 st April 99 to 31 st 2000 Cash Flow Statement 1 st April 99 to 31 st 2000 Items Amt. (Rs. crores) Sales 677.07 Other Incomes 1.94 Salaries 269.82 Repairs Expenses 9.59 Items Amt. (Rs.crores) Advertising 33.53 Opening Cash 168.75 524.49 Other Expenses 117.58 Collection from Customers Excise Duty 0.61 Raised Capital 58.24 Interest 40.88 Raised Loans 46.60 Depreciation 71.02 Purchase of F. Assets 94.82 Tax 6.00 Purchase of 53.18 Investments Profit After Tax 129.98 Interest paid 39.78 Tax paid 5.9 Dividends 12.78 Dividend paid 12.24 Dividend Tax 1.41 Closing Cash 592.16 Retained Profit 115.79 Required: Balance sheet of Satyam Computer Services Ltd. as on 31 st March 2000. 2. Following are the cash transactions and other relevant information of Nalco for year ended 31 st March 2005: Source: http://www.nalcoindia.com a. Opening cash in hand: 98.34 crores b. Cash purchase of fixed assets = 126.72 c. Cash sale of investments = 200 d. Cash redemption of debentures= 214 e. Repayment of loans = 440 f. Interest income for the period: 12 g. Interest received = 21 h. Interest for the period = 60 i. Interest paid = 69 j. Increase in inventories = 61 k. Increase in debtors = 69 l. Decrease in creditors = 88 m. Dividend paid = 437 n. Tax paid = 636 o. Profit before tax (PBT) = 1870 p. Depreciation = 459 q. Non- cash expenses = 13 r. Loss on sale of assets = 1.0 Required : Cash Flow Statement 33

3. Cash Flows of some Indian companies: India Cements ACC Madras Cements Cash from Operation 85.74 84.22 66.77 Cash from Financing 419.17-83.04-64.54 Cash from Investing -584.13-15.61-44.09 Give your comments. 34