Practice Questions: Cash Flow Analysis
Chapter Fifty-Seven
Syllabus topic 2, 4, 5, "Methods of Preparing Cash Flow Statement ( Indirect Method Only)"; "Concept of cash and cash equivalents"; "Classification of cash flows"
Pages 159 to 162 of 162
Question 1 (15 marks)
The balance sheets of Ganga Textiles Ltd were as follows.
| Liabilities | 2026, Rs | 2027, Rs |
|---|---|---|
| Equity share capital | 6,00,000 | 8,00,000 |
| General reserve | 1,00,000 | 1,50,000 |
| Profit and loss account | 80,000 | 1,30,000 |
| 12 per cent debentures | 3,00,000 | 2,00,000 |
| Creditors | 1,20,000 | 1,50,000 |
| Outstanding expenses | 20,000 | 14,000 |
| Provision for taxation | 50,000 | 70,000 |
| Total | 12,70,000 | 15,14,000 |
| Assets | 2026, Rs | 2027, Rs |
|---|---|---|
| Fixed assets, net | 8,00,000 | 9,50,000 |
| Investments | 1,00,000 | 1,50,000 |
| Stock | 1,80,000 | 1,60,000 |
| Debtors | 1,40,000 | 2,00,000 |
| Cash and bank | 30,000 | 44,000 |
| Preliminary expenses | 20,000 | 10,000 |
| Total | 12,70,000 | 15,14,000 |
Additional information for the year ended 31 March 2027.
- Depreciation on fixed assets was Rs 90,000.
- A machine whose written down value was Rs 40,000 was sold for Rs 55,000.
- Interest of Rs 24,000 was paid on the debentures.
- The provision for taxation made during the year was Rs 70,000.
- A dividend of Rs 60,000 was paid during the year.
- No investments were sold.
Prepare a cash flow statement by the indirect method.
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Question 2 (8 + 7 marks)
(a) Classify each of the following as an operating, an investing or a financing cash flow, for a manufacturing company, and give a reason where the classification is not obvious. (8)
- Cash paid to employees
- Purchase of a delivery van
- Interest paid on a term loan
- Interest received on a fixed deposit of eighteen months
- Dividend received on shares held as a long-term investment
- Dividend received on shares held for trading
- Equity dividend paid
- Income tax paid
- Proceeds of a fresh issue of debentures
- Purchase of a 45-day treasury bill
- Machinery acquired by issuing equity shares
- Insurance claim received for stock destroyed by fire
(b) Explain the concept of cash and cash equivalents under AS 3, and state the treatment of a bank overdraft. (7)
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Question 3 (10 + 5 marks)
(a) State the advantages and the limitations of a cash flow statement. (10)
(b) Answer in one or two sentences each: (5)
- Which companies need not prepare a cash flow statement, and under what provision?
- Why is the operating section started from profit before tax?
- Plant is sold at a profit. What happens to the profit and to the proceeds?
- How is the tax actually paid computed?
- What check proves a cash flow statement?
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Answers
Answer 1
Working note 1: net profit before tax.
| Rs | |
|---|---|
| Closing balance of the profit and loss account | 1,30,000 |
| Less: opening balance | (80,000) |
| Increase retained | 50,000 |
| Add: transfer to general reserve, 1,50,000 less 1,00,000 | 50,000 |
| Add: dividend paid during the year | 60,000 |
| Profit after tax | 1,60,000 |
| Add: provision for taxation for the year | 70,000 |
| Net profit before tax | 2,30,000 |
Working note 2: the fixed assets account.
| Fixed assets account | Rs | Rs | |
|---|---|---|---|
| To balance b/d | 8,00,000 | By depreciation | 90,000 |
| To bank, purchases, balancing figure | 2,80,000 | By bank, sale proceeds | 55,000 |
| To profit on sale | 15,000 | By balance c/d | 9,50,000 |
| Total | 10,95,000 | Total | 10,95,000 |
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