These problems will help students clarify key concepts about cash flow statements and to ready themselves for their exams and interviews.

## Problem 1

From the summarized cash book of Zenith Ltd. shown below, calculate net cash flow from operating activities.

Zenith Ltd.
Summarized Cash Book

 Particulars \$ Particulars \$ To balance b/d 150,000 By repayment of bank loan 450,000 To sale of machinery 1,350,000 By purchase of Machinery 1,200,000 To receipts from debtors 9,000,000 By payment to creditors 7,800,000 To issue of shares 3,000,000 By dividends 300,000 By wages and salaries 600,000 By rent, rates, and tax 300,000 By income tax 150,000 By balance c/d 2,700,000 Total 13,500,000 Total 13,500,000

### Solution

Zenith Ltd.
Calculation of Net Cash Flow from Operating Activities (Direct Method)

 Particulars \$ \$ Cash received from debtors 9,000,000 Other cash receipts – 9,000,000 Less: Cash paid to creditors 7,800,000 Cash paid to employees (wages and salaries) 600,000 Other cash expenses (rent, rates and tax) 300,000 8,700,000 Cash generated from operation 300,000 Less: Income tax paid 150,000 Net cash flow from operating activities 150,000

## Problem 2

From the following profit and loss account of Samarth Ltd., calculate net cash flows from operating activities.

 Particulars \$ Particulars \$ To depreciation 40,800 By gross profit 394,400 To rent 72,000 By profit on sale of building 53,600 To administrative expenses 48,000 By profit on sale of furniture 50,400 To salaries 64,000 By income tax refund 18,400 To loss on sale of plant 12,800 To provision for bad debts 64,000 To goodwill written off 34,400 To loss on sale of machinery 19,600 To provision for tax 24,000 To proposed dividend 48,000 To net profit 89,200 Total 516,800 Total 516,800

### Solution

Samarth Ltd.
Calculation of Net Cash Flow from Operating Activities

## Problem 3

From the following information extracted from the book of Max Ltd. for the year 2019-20, calculate net cash flow from investing activities.

Additional information is given as follows:

• Depreciation charged on furniture during the year was \$10,000
• Depreciation on machinery charged during the year was \$25,000
• Machinery, the book value of which was \$80,000, sold for \$75,000
• Land was sold at a profit of \$90,000

### Solution

Note: \$190,000 indicates cash outflows are more than inflows.

Working Notes

Furniture Account

Machinery Account

Building Account

Land Account

## Problem 4

You received the following information from Hema Enterprises Pvt. Ltd. Calculate the net cash flow from investing activities.

Information relating to assets sold during the year 2020 is given as follows:

• Furniture costing \$100,000 (accumulated depreciation \$20,000) was sold for \$70,000
• Machinery costing \$100,000 (accumulated depreciation \$30,000) was sold for \$80,000

## Solution

Calculation of Net Cash Flow From Investing Activities

Note: Cash outflows are more than cash inflows (\$410,000).

Working Notes

Accumulated Depreciation Account (Furniture)

Furniture Account

Accumulated Depreciation (Machinery)

Machinery Account

## Problem 5

From the following information acquired from Tarapoore Ltd., calculate net cash flows from financing activities for the year 2019-20.

Note: Interest on debentures paid during the year was \$30,000 and on bank loan \$40,000.

### Solution

Calculation of Net Cash Flows from Financing Activities

## Problem 6

Base Ltd. provides the following information to you. Calculate net cash flows from financing activities for the year 2019-20.
Further information is given as follows:

• The company issued 5,000 bonus shares during 2019-20 to shareholders at face value
• Interest on debentures paid, in total, during the year was \$60,000
• Interest on bank loan paid during the year was \$25,000
• Dividends paid during the year amounted to \$120,000

### Solution

Base Ltd.
Cash Flows from Financing Activities

You can also check:

### What is a Cash Flow statement?

The Cash Flow statement is an integral part of the Financial Statements. It shows the amount and timing of money in and outflows, i.E., Cash received and paid to suppliers, employees, investors, etc. It also shows changes in the balance sheet (other than equity). The Cash Flow statement reports how much cash was generated or used by the firm, not how much profit was made.

### What are the three types of Cash Flows?

There are three Cash Flow types that companies should track and analyze to determine the liquidity and solvency of the business: Cash Flow from operating activities, Cash Flow from investing activities, and Cash Flow from financing activities.

### What is the purpose of the Cash Flow statement?

The Cash Flow statement tells you how your company got its cash balance at the beginning of the period compared to the end.

### What are the two ways to prepare Cash Flow statements?

There are two ways to prepare a Cash Flow statement: the direct method and the indirect method.

### What is the most important part of the Cash Flow statement?

The most important part of a Cash Flow statement is net incom, because it shows how much money a company earned during a given period.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.