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To Prepare A Cash Flow Statement For ABC Limited Using The Given Profit and Loss Statement and Balance Sheet Data

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32 views4 pages

To Prepare A Cash Flow Statement For ABC Limited Using The Given Profit and Loss Statement and Balance Sheet Data

Uploaded by

varaqa6
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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To prepare a Cash Flow Statement for ABC Limited using the given Profit and Loss Statement

and Balance Sheet data, we'll follow the standard format, categorizing the cash flows into:

1. Operating Activities
2. Investing Activities
3. Financing Activities

We'll also calculate Free Cash Flow (FCF), which is defined as:

FCF=Operating Cash Flow−Capital Expenditures\text{FCF} = \text{Operating Cash Flow} -


\text{Capital Expenditures}FCF=Operating Cash Flow−Capital Expenditures

Step 1: Cash Flow from Operating Activities (CFO)

We start with the Net Profit After Tax (PAT) and adjust it for non-cash charges (like
depreciation), changes in working capital (inventory, accounts receivable, and accounts payable),
and accruals.

Net Profit After Tax (PAT)

PAT=Rs.22,000PAT = Rs. 22,000PAT=Rs.22,000

Adjust for Non-Cash Items

Depreciation=Rs.5,000\text{Depreciation} = Rs. 5,000Depreciation=Rs.5,000

Changes in Working Capital

• Increase in Accounts Receivable:


Change in Accounts Receivable=Rs.6,000−Rs.5,000=Rs.1,000 (Outflow)\text{Change in
Accounts Receivable} = Rs. 6,000 - Rs. 5,000 = Rs. 1,000 \
(\text{Outflow})Change in Accounts Receivable=Rs.6,000−Rs.5,000=Rs.1,000 (Outflow
)
• No Change in Inventory: Change in Inventory=Rs.9,000−Rs.9,000=Rs.0\text{Change
in Inventory} = Rs. 9,000 - Rs. 9,000 = Rs.
0Change in Inventory=Rs.9,000−Rs.9,000=Rs.0
• Increase in Accounts Payable:
Change in Accounts Payable=Rs.9,000−Rs.8,000=Rs.1,000 (Inflow)\text{Change in
Accounts Payable} = Rs. 9,000 - Rs. 8,000 = Rs. 1,000 \
(\text{Inflow})Change in Accounts Payable=Rs.9,000−Rs.8,000=Rs.1,000 (Inflow)
• Decrease in Accruals:
Change in Accruals=Rs.5,000−Rs.6,000=Rs.−1,000 (Outflow)\text{Change in Accruals}
= Rs. 5,000 - Rs. 6,000 = Rs. -1,000 \
(\text{Outflow})Change in Accruals=Rs.5,000−Rs.6,000=Rs.−1,000 (Outflow)

Operating Cash Flow (CFO) Calculation:


CFO=PAT+Depreciation−Increase in Accounts Receivable+Increase in Accounts Payable−Decr
ease in AccrualsCFO = \text{PAT} + \text{Depreciation} - \text{Increase in Accounts
Receivable} + \text{Increase in Accounts Payable} - \text{Decrease in
Accruals}CFO=PAT+Depreciation−Increase in Accounts Receivable+Increase in Accounts Paya
ble−Decrease in Accruals CFO=22,000+5,000−1,000+1,000−1,000=Rs.26,000CFO = 22,000 +
5,000 - 1,000 + 1,000 - 1,000 = Rs. 26,000CFO=22,000+5,000−1,000+1,000−1,000=Rs.26,000

Step 2: Cash Flow from Investing Activities (CFI)

• Increase in Gross Fixed Assets:


Change in Gross Fixed Assets=Rs.36,000−Rs.22,000=Rs.14,000 (Outflow)\text{Change
in Gross Fixed Assets} = Rs. 36,000 - Rs. 22,000 = Rs. 14,000 \
(\text{Outflow})Change in Gross Fixed Assets=Rs.36,000−Rs.22,000=Rs.14,000 (Outflo
w)
• Increase in Marketable Securities:
Change in Marketable Securities=Rs.8,000−Rs.4,000=Rs.4,000 (Outflow)\text{Change
in Marketable Securities} = Rs. 8,000 - Rs. 4,000 = Rs. 4,000 \
(\text{Outflow})Change in Marketable Securities=Rs.8,000−Rs.4,000=Rs.4,000 (Outflo
w)

Cash Flow from Investing Activities (CFI) Calculation:

CFI=−Increase in Gross Fixed Assets−Increase in Marketable SecuritiesCFI = - \text{Increase in


Gross Fixed Assets} - \text{Increase in Marketable
Securities}CFI=−Increase in Gross Fixed Assets−Increase in Marketable Securities
CFI=−14,000−4,000=Rs.−18,000CFI = -14,000 - 4,000 = Rs. -
18,000CFI=−14,000−4,000=Rs.−18,000

Step 3: Cash Flow from Financing Activities (CFF)

• Decrease in Paid-Up Capital (Common Stock): Change in Paid-


Up Capital=Rs.18,000−Rs.20,000=Rs.−2,000 (Outflow)\text{Change in Paid-Up
Capital} = Rs. 18,000 - Rs. 20,000 = Rs. -2,000 \ (\text{Outflow})Change in Paid-
Up Capital=Rs.18,000−Rs.20,000=Rs.−2,000 (Outflow)
• Increase in Long-Term Loan: Change in Long-
Term Loan=Rs.10,000−Rs.8,000=Rs.2,000 (Inflow)\text{Change in Long-Term Loan} =
Rs. 10,000 - Rs. 8,000 = Rs. 2,000 \ (\text{Inflow})Change in Long-
Term Loan=Rs.10,000−Rs.8,000=Rs.2,000 (Inflow)
• Dividends Paid: Since retained earnings increased from Rs. 4,000 to Rs. 20,000, part of
the profit was retained. We assume the difference between PAT and the increase in
retained earnings was paid as dividends:
Dividends Paid=Rs.22,000−(Rs.20,000−Rs.4,000)=Rs.6,000 (Outflow)\text{Dividends
Paid} = Rs. 22,000 - (Rs. 20,000 - Rs. 4,000) = Rs. 6,000 \
(\text{Outflow})Dividends Paid=Rs.22,000−(Rs.20,000−Rs.4,000)=Rs.6,000 (Outflow)

Cash Flow from Financing Activities (CFF) Calculation:


CFF=Decrease in Paid-Up Capital+Increase in Long-Term Loan−Dividends PaidCFF =
\text{Decrease in Paid-Up Capital} + \text{Increase in Long-Term Loan} - \text{Dividends
Paid}CFF=Decrease in Paid-Up Capital+Increase in Long-Term Loan−Dividends Paid
CFF=−2,000+2,000−6,000=Rs.−6,000CFF = -2,000 + 2,000 - 6,000 = Rs. -
6,000CFF=−2,000+2,000−6,000=Rs.−6,000

Step 4: Net Change in Cash

Net Cash Flow=CFO+CFI+CFF\text{Net Cash Flow} = CFO + CFI +


CFFNet Cash Flow=CFO+CFI+CFF Net Cash Flow=26,000−18,000−6,000=Rs.2,000\text{Net
Cash Flow} = 26,000 - 18,000 - 6,000 = Rs.
2,000Net Cash Flow=26,000−18,000−6,000=Rs.2,000

Step 5: Reconciliation of Cash

• Opening Cash Balance (2021): Rs. 7,000


• Net Cash Flow: Rs. 2,000
• Closing Cash Balance (2022): Rs. 9,000

This matches with the balance sheet.

Free Cash Flow (FCF) Calculation

Free cash flow is calculated as:

FCF=Operating Cash Flow (CFO)−Capital Expenditure (CapEx)\text{FCF} = \text{Operating


Cash Flow (CFO)} - \text{Capital Expenditure
(CapEx)}FCF=Operating Cash Flow (CFO)−Capital Expenditure (CapEx)

Where:

• Capital Expenditure (CapEx) = Rs. 14,000 (Increase in Gross Fixed Assets)

FCF=26,000−14,000=Rs.12,000FCF = 26,000 - 14,000 = Rs.


12,000FCF=26,000−14,000=Rs.12,000

Comments on Cash Flow Statement Activities:

1. Operating Activities: Positive cash flow of Rs. 26,000 indicates efficient operations. The
company is generating sufficient cash to cover its operational needs.
2. Investing Activities: A significant outflow of Rs. 18,000 shows that the company is
investing heavily in fixed assets and marketable securities, which could signal growth
plans but reduces liquidity.
3. Financing Activities: The net outflow of Rs. 6,000 suggests that while the company
raised some financing through long-term loans, it also returned capital to shareholders
through dividends and reduced paid-up capital.

The positive free cash flow (FCF) of Rs. 12,000 indicates that the company has ample cash
after covering its capital investments, which could be used for further expansion, debt
repayment, or shareholder returns.

4o

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