Page 132 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 6: Cash Flow Statement

(g) Equity shares of ` 162000 were issued for cash at par. Notes

(h) Income tax paid during the year amounted to ` 117000.

Prepare the cash flow statement with both the methods.
7. Determine which of the following are added back to [or subtracted from, as appropriate]
the net income figure (which is found on the Income Statement) to arrive at cash fl ows from

operations.
(a) Depreciation
(b) Deferred tax

(c) Amortization
(d) Any gains or losses associated with the sale of a non-current asset.
Support your answers with elaborative reasoning.
8. Assume that you are thinking of purchasing a new machine that will allow you to offer a
new product to your customers. The machine will cost ` 100,000 to purchase and install,

and after five years (when you plan to sell it) the machine will be worth about ` 10,000.
Your facility has plenty of room, so you won’t have any additional rental costs for space,
and you can piggyback advertising for the new product on to your existing advertising
budget. You will, however, have to pay for insurance, personal property taxes, and a part-
time employee to operate the machinery (these items are included in your fixed costs which

will total ` 12,000 in the first year). Also, there will be costs for materials, supplies, and

electricity that will vary depending on the volume of production. These variable costs will
amount to about 60 percent of the sales revenues. Develop a projected cash fl ow statement
for the project.
9. Think of the possible errors that might be committed while developing the cash fl ow
statements and suggest ways to prevent such mistakes beforehand.

10. Show by example how to prepare a cash flow statement using a balance sheet.

11. Unlike the balance sheet and the income statement, the cash flow statement is not based on

accruals accounting, why?
12. For each of the following items, indicate which part (out of Operating, Investing, Financing
and Supplemental) will be affected and why.
(a) Depreciation Expense
(b) Proceeds from the sale of equipment used in the business.

(c) The Loss on the Sale of Equipment
(d) Declaration and payment of dividends on company’s stock
(e) Gain on the Sale of Automobile formerly used in the business

Answers: Self Assessment

1. historical records 2. cash resources
3. cash at bank 4. operating

5. Investing 6. fi nancing
7. non-cash transactions 8. extra-ordinary item
9. (c) 10. (b)

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