Ch.

25: Financial Statements and Cash Flow Analysis

CHAPTER 24 FINANCIAL STATEMENTS AND CASH FLOW ANALYSIS Problem 1 Sources Internal funds Net profit Add: Depreciation (90,000 - 67,500) 15% Debenture Total Uses Investment Land Machinery Dividend Increase in working capital Total (Rs) 157,500 22,500 180,000 240,000 420,000 45,000 48,000 112,500 87,000 292,500 127,500 420,000

Note: Share capital has increased due to bonus issue which does not affect funds. Bonus issue causes a notional transfer from reserve and surplus to share capital. Problem 2 19X2 Assets Cash Debtors Stock Prepaid expenses Plant and machinery Goodwill Total Equities Creditors Provision for depreciation Debentures Premium on debentures issue Share capital Share premium Reserves and surplus Total (Rs) 82,000 104,000 112,000 22,000 380,000 36,000 736,000 30,000 100,000 102,000 12,000 190,000 30,000 272,000 736,000 19X1 (Rs) 22,000 24,000 60,000 14,000 360,000 40,000 520,000 14,000 60,000 102,000 18,000 90,000 0 236,000 520,000 Change (Rs) 60,000 80,000 52,000 8,000 20,000 -4,000 216,000 16,000 40,000 0 -6,000 100,000 30,000 36,000 216,000

I. M. Pandey, Financial Management, 9th Edition, New Delhi: Vikas.

Statement of Changes in Financial Position: Working Capital Basis Sources Profit Add: Depreciation Add: Goodwill written off Less: Debenture premium written off Funds from operations Share capital Share premium Total Uses Plant & Machinery Dividend (66,000 - 36,000) Increase in working capital Total (Rs) 66,000 40,000 4,000 -6,000 104,000 100,000 30,000 234,000 20,000 30,000 50,000 184,000 234,000

Schedule for Changes in Working Capital 19X2 (Rs) 82,000 104,000 112,000 22,000 320,000 30,000 290,000 19X1 (Rs) 22,000 24,000 60,000 14,000 120,000 14,000 106,000 Change (Rs) 60,000 80,000 52,000 8,000 200,000 16,000 184,000

Cash Debtors Stock Prepaid expenses Total Creditors Increase in Working Capital

Statement of Changes in Financial Position: Cash Basis (Rs) Sources Profit 66,000 Add: Depreciation 40,000 Add: Goodwill written off 4,000 Less: Debenture premium written off -6,000 Funds from operation 104,000 Less: Increase in current assets 140,000 Add: Increase in current liabilities 16,000 Cash from operation Share capital Share premium Total Uses Plant & Machinery Dividend Increase in cash Total -20,000 100,000 30,000 110,000 20,000 30,000 50,000 60,000 110,000

Ch. 25: Financial Statements and Cash Flow Analysis

Problem 3 Statement of Changes in Financial Position Sources Net profit Add: Depreciation Add: Provision for doubtful debts Less: Gain on sale of machine Less: Gain on sale of investment Long-term investment Sale of machine Total Uses Purchase of machine Purchase of Building Cash dividend Loan adjustment Increase in working capital Total

(Rs) 27,500 5,750 500 -1,000 -2,500 30,250 12,500 3,000 45,750 10,000 7,500 13,250 2,500 33,250 12,500 45,750

Problem 4 M COMPANY Statement of changes in working capital Sources Profit before tax Less: Tax provision Add: Depreciation Internal funds Share capital Sale of other non-current assets Long-term debt Total Uses Purchase of fixed assets [165,000 - (150,000 - 15,000)] Cash dividend Increase in working capital Total

(Rs) 42,000 21,000 15,000 36,000 18,000 9,000 45,000 108,000 30,000 9,000 69,000 108,000

Statement of Changes in Cash Flow Statement of Changes in Cash Flow Sources Profit before tax Less: Tax paid (9,000 + 21,000 - 15,000) Add: Depreciation Add:

(Rs) 42,000 15,000 15,000 42,000 9,000

I. M. Pandey, Financial Management, 9th Edition, New Delhi: Vikas.

Increase in bills payable Decrease in marketable securities Less: Increase in debtors Increase in stocks Decrease in creditors Decrease in cash used from operation Sale of other non-current assets Share capital Long-term debt Total Uses Purchase of fixed assets Cash dividend Decrease in Cash Total

6,000 15,000 9,000 60,000 -27,000 9,000 18,000 45,000 45,000 30,000 9,000 39,000 6,000 45,000

Schedule for Changes in Working Capital 19X1 19X2 (Rs) (Rs) Current Assets Cash 15,000 9,000 Marketable securities 15,000 21,000 Debtors 30,000 45,000 Stock 36,000 45,000 Total Current liabilities Creditors Bills payable Accrued expenses Tax payable Total NWC 96,000 60,000 15,000 6,000 9,000 90,000 6,000 120,000 0 24,000 6,000 15,000 45,000 75,000

Change

-6,000 6,000 15,000 9,000 24,000 -60,000 9,000 0 6,000 -45,000 69,000

Problem 5 J B SONS COMPANY Statement of Sources & Uses of Funds Sources Net earnings Add: Depreciation Total Uses Payment of loan Fixed assets [65,000 - (60,000 - 10,000)] Cash dividend

(Rs) 5,000 10,000 15,000 10,000 15,000 3,000 28,000

Ch. 25: Financial Statements and Cash Flow Analysis

Decrease in working capital Total

13,000 15,000

Working Capital Changes 19X1 Current assets Current liabilities Working capital 40,000 30,000 10,000 19X2 35,000 38,000 -3,000 Change -5,000 8,000 -13,000

Problem 8 Changes in Cash flow (Rs) Sources Profit before depreciation & taxes Less: Tax Increase in stock Increase in bills receivable Add: Decrease in debtors Decrease in creditors Cash from operation Share capital: 5,000 x Rs 15 Plus: Bank balance Total cash inflow Bank overdraft Total Uses Purchase of fixed assets Cash dividend Total 240,000 -137,500 -140,000 -7,500 45,000 80,000 80,000 75,000 180,000 335,000 67,500 402,500 370,000 32,500 402,500

Note: Cash dividend includes tax on dividend which is also an outflow from the companys point of view.

I. M. Pandey, Financial Management, 9th Edition, New Delhi: Vikas.

Problem 7 PANDIT SONS LIMITED Statement of Sources & Uses of Funds Sources Net income Add: Depreciation Add: Loss on sale of machine Less: Gain on sale of investment Internal funds Share capital (150 + 60) Debenture Sale of investment Sale of machinery Total Uses Purchase of machine Purchase of building Cash dividend Increase in working capital Total

(Rs) 40 130 5 -12 163 210 250 52 15 690 175 400 29 604 86 690

Change in Working Capital 19X2 (Rs) Current assets Current liabilities Total 666 150 516 19X1 (Rs) 530 100 430 Change (Rs) 136 50 86

Notes: 1. Retained earnings have increased by Rs 11,000 while net earnings are Rs 40,000. It is implied that cash dividend of Rs 29,000 is paid. 2. The total depreciation charged during the year is Rs 130,000 (income statement). The change in accumulated depreciation is Rs 125,000. Thus the difference, Rs 5,000, is the accumulated depreciation on the machinery that was sold during the year. The proceeds from the machine were Rs 15,000 and a loss of Rs 5,000 was incurred. Thus the book value of the machine was Rs 20,000, and its original cost was Rs 25,000. 3. The balance of machinery at the end of 19X2 is Rs 500,000. The balance at the beginning was Rs 350,000. After the sale of machinery which had original cost of Rs 25,000, the balance at the end should have been Rs 325,000. Thus new machinery worth Rs 175,000 (Rs 500,000 - Rs 325,000) was acquired during the year.

Ch. 25: Financial Statements and Cash Flow Analysis

Problem 8 ALPHA CO. Funds Flow Statement (Rs) Sources Funds from operation Sale of land Sale of machine Equity share capital Total Uses Purchase of investment Purchase of machinery Pref. share capital Interim dividend Increase in working capital Total 86,000 50,000 10,000 100,000 246,000 11,000 142,000 50,000 20,000 223,000 23,000 246,000

Funds from operations: General reserve Pre-acquisition profit P&L Depreciation Loss on sale of machine Goodwill written off Preliminary exp. written off Interim dividend

10,000 1,000 18,000 10,000 2,000 20,000 5,000 20,000 86,000

Statement of Changes in Working Capital 19X1 19X2 (Rs) (Rs) Current assets Sundry debtors 140,000 170,000 Stock 77,000 109,000 Bills receivable 20,000 30,000 Cash in hand 15,000 10,000 Cash at bank 10,000 8,000 Total Current liabilities Proposed dividend Sundry creditors Bills payable Liabilities for expenses Provision for taxation Total Working capital 262,000 42,000 25,000 20,000 30,000 40,000 157,000 105,000 327,000 50,000 47,000 16,000 36,000 50,000 199,000 128,000

Change (Rs) 30,000 32,000 10,000 -5,000 -2,000 65,000 8,000 22,000 -4,000 6,000 10,000 42,000 23,000

I. M. Pandey, Financial Management, 9th Edition, New Delhi: Vikas.

Problem 9 C VICTORY LTD Statement of Sources & Application of Funds Sources Net profit Add: Depreciation Less: Tax Funds from operation Uses Purchase of machine Interim dividend Final dividend Increase in working capital Total (Rs) 65,530 24,600 -25,000 65,130 5,600 26,000 13,000 44,600 20,530 65,130

Schedule of Changes in Working Capital 19X1 (Rs) Current assets Cash at bank 2,500 Sundry debtors 87,490 Stock 111,040 Acquired stock 201,030 Total (A) Current liabilities Sundry creditors Bills payable Bank overdraft Provision for taxation Total (B) Working capital (A - B) 39,500 33,780 59,510 40,000 172,790 28,240

19X2 (Rs) 2,700 73,360 97,370 173,430 41,135 11,525 0 50,000 102,660 70,770

Change (Rs) 200 -14,130 -13,670 -22,000 -49,600 1,635 -22,255 -59,510 10,000 -70,130 20,530

Problem 10 BOMBAY INDUSTRIES Statement of Sources & Application of Funds Sources Income Add: Depreciation Funds from operations Share capital Profit from sale of land Total

57.80 8.40 66.20 40.00 15.60 121.80

Ch. 25: Financial Statements and Cash Flow Analysis

Uses Plant etc. Loan repaid Dividend paid Loss on marketable securities Increase in working capital Total

84.60 1.00 25.60 2.80 114.00 7.80 121.80

Schedule of Changes in Working Capital 19X1 Cash at bank Debtors Stock-in-trade Miscellaneous Total current assets Sundry creditors Provision for taxation Liabilities for expenses Total Working capital 44.60 10.80 44.00 30.20 129.60 40.40 10.80 2.60 53.80 75.80

19X2 47.80 17.00 67.20 8.00 140.00 43.20 12.20 1.00 56.40 83.60

Change 3.20 6.20 23.20 -22.20 10.40 2.80 1.40 -1.60 2.60 7.80

Notes: 1. The total proceeds from the purchase and sale of land are not known. Therefore, only profit made on these deals is taken as source of funds. 2. Loss on sale of marketable securities has been taken as use of funds since the proceeds from the sale are not known. Problem 11 PQ LMITED Statement of Sources & Uses of Cash Sources Net profit Add: Depreciation Debenture interest Increase in creditors Increase in doubtful debts Less: Gain on sale of machine Increase in debtors Increase in stock Cash from operations Sale of machine Profit on sale of property Debenture (net realisation) Increase in bank borrowings Total

(Rs) 76,500 27,900 7,000 11,800 3,300 -2,500 -50,000 -38,500 35,500 7,000 6,200 49,000 97,700 64,300 162,000

I. M. Pandey, Financial Management, 9th Edition, New Delhi: Vikas.

Uses Dividend Purchase of plant Trade investment Debenture interest

30,000 78,000 47,000 7,000 162,000

Notes: 1. The difference between the freehold property at cost and at valuation is: 165,000 - 122,000 = Rs 43,000; it is a non-cash item. This amount is included in capital reserve. The balance: 49,200 - 43,000 = Rs 6,200 represent profit on sale of property. The total proceeds from the sale of property are not known. The profit, Rs 6,200 has been shown as the source of cash. 2. The accumulated depreciation after the sale of plant with accumulated depreciation of Rs 13,500 should have been: 107,600 - 13,500 = Rs 94,100. Since it is Rs 122,000, depreciation during the year is: 122,000 - 94,100 = Rs 27,900. 3. The value (gross) of plant after the sale of plant costing Rs 18,000 should have been: 223,000 - 18,000= Rs 205,000. Since it is Rs 283,000, plant worth Rs 78,000 would have been bought during the year. Problem 12 CD LIMITED Statement of Source & Disposition of Funds Sources Profit Add: Depreciation Loss on sale of fixture Debenture redemption premium Less: Profit on sale of machine tool Share capital Sale of machine tool Sale of fixture Uses Debenture redemption Freehold property Plant & machinery Fixtures Increase in working capital

(Rs) 42,000 19,000 1,000 1,000 1,000 62,000 70,000 3,000 2,000 137,000 42,000 20,000 39,000 10,000 111,000 26,000 137,000

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Ch. 25: Financial Statements and Cash Flow Analysis

Current assets Stocks Debtors Bank balance Total Current liabilities Bank overdraft Creditors Proposed dividends Total Working capital

19X1 (Rs) 37,000 43,000 80,000 14,000 34,000 15,000 63,000 17,000 80,000

19X2 (Rs) 51,000 44,000 16,000 111,000 0 48,000 20,000 68,000 43,000 111,000

Change (Rs) 14,000 1,000 16,000 31,000 -14,000 14,000 5,000 5,000 26,000 31,000

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I. M. Pandey, Financial Management, 9th Edition, New Delhi: Vikas.

CASES Case 24.1: Continental Equipment Company (CEC) The working capital position of the company shows increase during the year. The students are required to prepare Cash Flow and Funds Flow Statements for the company. The students must answer the following questions through their analysis: How has the company financed its working capital requirements? Which component significantly contributed to the increase in working capital requirements? What are its implications?

Statement of Changes in Financial Position Sources Net profit Add: Depreciation Add: Provision for tax Less: Tax paid Internal funds Share capital Share premium Total Uses Investment Fixed assets Redemption of debentures Cash dividend Decrease in working capital Total

(Rs) 347,000 140,000 293,000 173,000 607,000 580,000 120,000 1,307,000 120,000 1,140,000 150,000 100,000 1,510,000 -203,000 1,307,000

Notes: 1. Net profit is Rs 347,000. Reserve and surplus increase by Rs 247,000. Thus it is implied that Rs 100,000 cash dividend is distributed. 2. Tax paid is: Rs 180,000 + Rs 293,000 - Rs 300,000 = Rs 173,000. 3. Fixed assets acquired: Rs 18,00,000 - (Rs 8,00,000 - Rs 140,000) = Rs 11,40,000

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Ch. 25: Financial Statements and Cash Flow Analysis

Case 24.2: Bharat Chemicals Ltd. The cash position of the company has increased in spite of increased inventory and decreased collections which show a discouraging trend. How has cash balance increased? The objective of this case is to strengthen the concepts cash flow and funds flow. The case requires preparation of Cash Flow and Funds Flow Statements for CEC. It shows the way the company has financed its working capital requirements, and the component which have significantly contributed to the increase in working capital requirements. The students must understand the implication of these changes. Statement of changes in cash position Sources & Uses Net loss Add: Depreciation Add: Amortisation of goodwill Add: Decrease in insurance Increase in bills payable Increase in interest payable Increase in accrued wages Less: Increase in debtors Increase in stock Decrease in creditors Cash used in operations Sale of plant Increase in cash

(Rs) -75,000 60,000 25,000 10,000 2,000 5,000 1,000 2,000 -25,000 -20,000 -30,000 -55,000 100,000 45,000

Notes: 1. The book value of plant after depreciation should have been Rs 600,000 - Rs 60,000 = Rs 540,000. Since it is actually Rs 440,000, it is inferred that plant worth Rs 100,000 has been sold.

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I. M. Pandey, Financial Management, 9th Edition, New Delhi: Vikas.

Case 24.3: Bajaj Auto Ltd. Funds flow: The company has used substantial amount of funds to finance decrease in shareholders and increase in fixed assets. These huge needs are met by liquidating investments. (Rs crore) Sources Borrowings 18.04 Sale of investment 767.78 Release of working capital 45.42 Total 831.24 Uses Decrease in shareholders' funds 567.55 Increase in fixed assets 248.1 Increase in other assets 15.59 Total 831.24 The following comparative balance sheet, given below, provides a more details about the changes in various sources and applications of funds during the year. Comparative Balance Sheet (Rs crore) (Rs crore) I. SOURCES OF FUNDS 1. Shareholders' Funds Share Capital Reserves & Surplus Total 2. Loan Funds Secured Loans Unsecured Loans Total Total Funds II. APPLICATION OF FUNDS 1. Fixed assets Gross Block Less: Accumulated Depreciation Net Block Capital Work in Progress Net Fixed assets 2. Investments Total non-current assets 3. Current Assets, Loans & Advances Inventories Sundry Debtors Cash and Bank Balance Loans and Advances Total Current Assets Less: Current Liabilities & Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets 4. Misc. Exp. not w/o Total Assets Contingent Liabilities

2000

2001

Difference

119.39 3084.69 3204.08 101.58 394.09 495.67 3699.75

101.18 2535.35 2636.53 55.97 457.74 513.71 3150.24

-18.21 -549.34 -567.55 -45.61 63.65 18.04 -549.51

2041.15 1007.34 1033.81 80.44 1114.25 1952.36 3066.61 261.13 185.8 35.98 1890.46 2373.37 540.35 1200.32 1740.67 632.7 0.44 3699.75 451.8

2467.82 1127.89 1339.93 22.42 1362.35 1184.58 2546.93 253.44 120.72 21.34 1666.12 2061.62 467.55 1006.79 1474.34 587.28 16.03 3150.24 359.56

426.67 120.55 306.12 -58.02 248.1 -767.78 -519.68 -7.69 -65.08 -14.64 -224.34 -311.75 -72.8 -193.53 -266.33 -45.42 15.59 -549.51

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Ch. 25: Financial Statements and Cash Flow Analysis

Cash flow: The given detailed cash flow statement is summarised below. (Rs crore) I. Cash Flow From Operating Activities (A) Net Profit before Tax & Extraord. Items (B) Adjustment For Depreciation Interest (Net) Dividend Received P/L on Sales of Assets P/L on Sales of Invest Prov. & W/O (Net) P/L in Forex Fin. Lease & Rental Chrgs Others Operating Profit before Working Capital Changes (C) Change in Working Capital Trade & 0th receivables Inventories Trade Payables Loans & Advances Change in Deposits Others Cash Generated from/(used in) Operations Less: Extraordinary items Net Cash From Operating Activities II. Cash Flow from Investing Activities Investment in Assets: Sale of Fixed Assets Capital WIP Sale of Investments Interest Received Dividend Received Others Net Cash Used in Investing Activities III. Cash Flow From Financing Activities Proceeds: Proceed from Short Term Borrowing Payments: Dividend Paid Others Net Cash Flow from Financing activities 2000 289.56 177.29 -108.12 -34.18 1.53 -24.96 6.57 0 -42.83 -63.32 -88.02 201.54 2001 825.23 145.31 -133.18 -37.84 -2.63 -143.34 13.38 0 -46.51 -289.24 -494.05 331.18

65.09 7.69 0 4.96 0 -73.26 4.48 206.02 0 206.02

28.66 -83.63 0 -105.1 0 118.55 -41.52 289.66 0 289.66

7.16 -397.93 786.08 113.25 34.18 70.9 613.64

7.63 -335.53 -358.13 133.96 37.84 156.2 -358.03

65.29

86.7

-118.92 -780.67 -834.3

-94.92 58.49 50.27

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I. M. Pandey, Financial Management, 9th Edition, New Delhi: Vikas.

Cash Flow Summary Cash at Beginning of the year Net Cash from Operating Activities Net Cash Used in Investing Activities Net Cash Used in Financing Activities Net Inc/(Dec) in Cash Cash at End of the year

35.98 206.02 613.64 -834.3 -14.64 21.34

54.08 289.66 -358.03 50.27 -18.1 35.98

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