Operating Activities’ portion of cash flow statement

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Financial Statement Analysis-FIN621

Lesson-16

FINANCIAL STATEMENTS

(Continued)

Cash payment for Merchandise = Cost of Goods Sold + increase in Inventory + Decrease in Accounts

Payable, or Cost of Goods sold Decrease in Inventory Increase in Accounts Payable.

Keeping in view, A1 No.3; cash payment for merchandise= 500,000 + 10,000 - 15000 = Rs.495, 000

A1 No.4, 5 & 6

Pre Paid expenses increased by Rs.3, 000, therefore cash payment exceeded the actual

expense. Accrued expenses (Payable) decreased by Rs.6000, therefore cash payment exceeded the

actual expense (includes employees' expenses). Depreciation of Rs.40, 000 requires no cash payment

but it does increase total expenses. It is therefore deducted from operating expenses.

Cash payment for operating expenses = expenses + increase in Pre Paid expenses + decrease in Accrued

Expenses Depreciation=

300,000 + 3,000 + 6000 - 40,000 = Rs.269, 000

Cash paid for merchandise and operating expenses= 495,000+269,000 = Rs.764, 000

Cash payment for interest: (A17) accrued interest liability (interest payable) increased by Rs.7, 000. It

means that not all of the interest expense shown in Income Statement was paid in cash. Interest expenses

in Income Statement 35,000. From this, reduce the increase in related accrued liability i.e. 7,000. That

means interest paid in cash was Rs. 28,000.

Cash payment for Income Tax (A1 8) Tax liability reduced by Rs.2, 000/-. It means that cash payment

is greater than expense shown in Income Statement. Tax expenses in Income Statement are Rs.36, 000.

Add to this the reduction in tax liability, i.e. Rs. 2,000/-. Therefore Income tax paid in cash comes to

Rs.38, 000/-.

Operating Activities' portion of cash flow statement

Rs.____

Cash received from customers

870,000

Interest & dividend received

10,000

Cash inflow

880,000

Cash paid to suppliers

(Merchandise) & operating

(764,000)

Expenses (including employees)

Interest paid

(28,000)

Income tax paid

(38,000)

Cash (out flow)

(830,000)

Net cash flow from Operating Activities

50,000

Note that net income reported on Income Statement Rs.65, 000 and net cash flow from

Operating Activities Rs.50, 000. What are the reasons for difference of Rs.15, 000? Reasons are:

depreciation expense (reduces net income but not cash) and adjustments made to net sales, cost of goods

sold and expenses, and non operating gains & losses (these affect cash flow relating to Investing &

Financing Activities)

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