CASE ANALYSIS

1. Peoria Corp just completed another successful year, as indicated by the following income
statement;

For the Year Ended

December 31, 2012
Sales Revenue 1,250,000
Cost of Goods Sold 700,000
Gross Profit 550,000
Operating Expenses 150,000
Income before interest and taxes 400,000
Interest Expenses 25,000
Income before taxes 375,000
Income tax expenses 150,000
Net Income 225,000

Presented here are comparative balance sheets:

31-Dec
2012 2011
Cash 52,000 90,000
Accounts Receivable 180,000 130,000
Inventory 230,000 200,000
Prepaid Advertising 15,000 25,000
Total Current Assets 477,000 445,000
Land 750,000 600,000
Plant and Equipment 700,000 500,000
Accumulated Depreciation (250,000) (200,000)
Total Long Term Assets 1,200,000 900,000
Total Assets 1,677,000 1,345,000
Accounts Payable 130,000 148,000
Other accrued liabilities 68,000 63,000
Income Tax Payable 90,000 110,000
Total Current Liabilities 288,000 321,000
Long Term Bank Loan Payable 350,000 300,000
Capital Stock 550,000 400,000
Retained Earnings 489,000 324,000
Total Stockholder's Equity 1,039,000 724,000
Total Liabilities and Stockholders' Equity 1,677,000 1,345,000
Other information is as follow;
a. Dividends of $ 60,000 were declared and paid during the year.
b. Operating expenses include $50,000 of depreciation
c. Land and Plant and equipment were acquired for cash, and additional stock was issued for
cash. Cash also was received from additional bank loans.
The president asked you some questions about the year’s results. She is very impressed with the
profit margin of 18% (net income divided by sales revenue). She is bothered, however, by the
decline in the company’s cash balance during the year. One of the conditions of the existing
bank loan is that the company maintain a minimum cash balance of
$50,000.
Required:
a. Prepare a statement of cash flows for 2012 using the direct method in the Operating
Activities Section.
b. On the basis of your statement in part (a), draft a brief memo to the president to explain
why cash decreased during such a profitable year. Include in your explanation any
recommendations for improving the company’s cash flow in future.
Solution:

Peoria Corp
Cash flow Statement
31st December 2012
Particulars Details Amount
[A] Cash Flow from Operating Activities
Cash Collection from Customer/Debtors
Sales 1,250,000
Increase in Accounts Receivable (50,000) 1,200,000
Cash payment to suppliers/creditors
Cost of Goods Sold (700,000)
Increase in Inventory (30,000)
Decrease in Accounts Payable (18,000) (748,000)
Cash Payment for Operating Expenses
Operating Expenses (100,000)
Decrease in Prepaid Advertising 10,000
Increase in Other accrued liabilities 5,000 (85,000)
Payment of Interest
Interest Expenses (25,000) (25,000)
Payment of Tax
Income Tax Expenses (150,000)
Decrease in Income Tax payable (20,000) (170,000)
Net Cash Flow from Operating Activities 172,000
[B] Cash Flow from Investing Activities
Purchase of Plant and Equipment (200,000)
Purchase of Land (150,000)
Net Cash Flow from Investing Activities (350,000)
[C] Cash Flow from Financing Activities
Issue of Capital Stock 150,000
Dividend paid (60,000)
Increase in Bank Loan 50,000
Net Cash Flow from Financing Activities 140,000
Net decrease in Cash or Cash Equivalent (38,000)
Add: Beginning balance of cash or cash equivalent 90,000
Ending balance of cash or cash equivalent 52,000
 Date : 13/03/2020
To : PRESIDENT
FROM : HEAD OF FINANCE AND ACCOUNT

Although the net income reported during the period of Rs 225,000 seems relatively healthier, the cash
position of the company has decreased from Rs 90,000 from previous year to Rs 52,000 in current year.
A closer inspection of Cash Flow Statement reveals that company is satisfactorily performing in terms of
generating cash flow from operating activities. During the year cash sales amounts to Rs 1200,000 out of
which cash paid for suppliers and operations totals Rs 833,000 (748,000+85,000). During the year net
cash flow from operating activities amounts to Rs 172,000. Hence, the company is able to produce
positive cash flow from its operating activities which is a good indication of financial performance.

During the period under consideration, company made a capital investment in land and plant &
equipment. Company has significantly extended its property, plant and equipment base by adding Rs
350,000 worth of assets. Meanwhile, no sales of assets can be seen.

Company accumulated on total basis Rs 200,000 fund from financing activities out of which Rs 60,000
reduction can be seen due to dividend paid during the year netting Rs 140,000 cash flow from financing
activities.

Thus, from above, we can see that the company has generated positive cash flow from its operating
activities and financing activities. However, during the year company has made a capital expenditure in
excess of fund supported by fund collected from financing activities. Therefore, the cash fund generated
from operating activities is used to meet the deficit fund for capital expenditure for the year. Despite use
of cash generated during the year, it is evident that Rs 38,000 worth of cash fund is still insufficient to
support the cash expenditure, hence, the cash reserve from previous year is to be utilized which resulted
into decrease in cash position of company during the year.

Despite healthy profit of Rs 225,000 during the year, the major reason behind decrease in company’s
cash position is due to significant capital expenditure. Considering the company’s investment in
productive assets, although cash position at present has decreased, the positive return from further
investment could possible magnify the better cash position in future.

We would recommend to crop down the cash outflow in situations where company is in need of larger
capital investments. For such we recommend the residual dividend policy where investors are paid
dividend only when there is excess cash. Further, company can better handle its working capital to
increase the cash balance. Strengthening credit policy and reducing receivables and trying to increase
the payable or credit availability would also enable the company to achieve a better cash position.
2. The income statement for Astro Inc. for 2015 is as follows;

For the Year Ended

December 31, 2015
Sales Revenue 500,000
Cost of Goods Sold 400,000
Gross Profit 100,000
Operating Expenses 180,000
Loss Before interest and taxes (80,000)
Interest Expenses 20,000
Net Loss (100,000)

Presented here are comparative balance sheets;

31 December 31 December
2014 2015
Cash 80,000 95,000
Accounts Receivable 75,000 50,000
Inventory 150,000 100,000
Prepayments 45,000 55,000
Total Current Assets 350,000 300,000
Land 400,000 475,000
Plant and Equipment 800,000 870,000
Accumulated Depreciation (300,000) (370,000)
Total Long Term Assets 900,000 975,000
Total Assets 1,250,000 1,275,000
Accounts Payable 100,000 125,000
Other Accrued Liabilities 45,000 35,000
Interest Payable 10,000 15,000
Total Current Liabilities 155,000 175,000
Long Term Bank Loan Payable 250,000 340,000
Common Stock 400,000 450,000
Retained Earnings 445,000 310,000
Total Stockholder's Equity 845,000 760,000
Total Liabilities and Stockholder's Equity 1,250,000 1,275,000
Other information is as follows;
a. Dividends of Rs 35,000 were declared and paid during the year.
b. Operating expenses includes Rs 70,000 of depreciation.
c. Land and plant and equipment were acquired for cash and additional stock was issued for cash.
Cash also was received from additional bank loans.
The president has asked you some questions about the year’s results. He is disturbed with Rs
100,000 net loss for the year. He notes, however, that the cash position at the end of the year is
improved. He is confused about what appear to be conflicting signals. “How could we have
possibly added to our bank during such a terrible year of operation?”
Required:

a. Prepare a statement of cash flows for 2015 using the direct method.
b. On the basis of your statement in part (i), draft a brief memo to explain why cash increased
during such an unprofitable year. Include in your memo your recommendation for
improving the company’s bottom line.
Solution,
Astro Inc.
Cash Flow Statement as
31st December 2015
Particulars Details Amount
Cash Flow from Operating Activities
Cash Collection from Customer/Debtors
Sale 500,000
Decrease in Accounts Receivable 25,000 525,000
Cash Payment to Suppliers
Cost of Goods Sold (400,000)
Decrease in Inventory 50,000
Increase in Account Payable 25,000 (325,000)
Cash Payment for Operating Expenses
Operating Expenses (110,000)
Increase in Prepayments (10,000)
Decrease in Other Accrued Liabilities (10,000) (130,000)
Cash Payment of Interest
Interest Expenses (20,000)
Increase in Interest Payable 5,000 (15,000)
Net Cash Flow from Operating Activities 55,000
Cash Flow from Investing Activities
Purchase of Land (75,000)
Purchase of Equipment (70,000)
Net Cash Flow from Investing Activities (145,000)
Cash Flow from Financing Activities
Increase in Bank Loan 90,000
Increase in Common Stock 50,000
Dividend Paid (35,000)
Net Cash Flow from Financing Activities 105,000
Net Change in Cash or Cash Equivalent 15,000
Add: Beginning Balance of Cash or Cash Equivalent 80,000
Ending Balance of Cash or Cash Equivalent 95,000
Date : 13/03/2018
To : PRESIDENT
FROM : HEAD OF FINANCE & ACCOUNTS

Although the net loss reported during the period of Rs 100,000 indicates disturbing financial
performance for the period of year 2018, the cash position of the company has increased from 80,000 to
95,000 during current year of operation. A closer inspection of Cash Flow Statement reveals that
company is satisfactorily performing in terms of generating cash flow from operating activities. During
the year net cash collection from sales amounts to Rs 525,000 out of which cash paid for suppliers and
operations totals Rs 455,000 (325,000+ 130,000). During the year net cash flow from operating activities
amounts to Rs 55,000/. There are no such non-recurring items contributing to cash generated from
operation. Hence, the company is able to produce positive cash flow from its generic activities only
which is a good indication of financial performance.

During the period under consideration, company made a capital investment in land and plant &
equipment. Company has significantly extended its property, plant and equipment base by adding Rs
145,000 worth of assets. Meanwhile, no sales of assets can be seen.

Company accumulated on total basis Rs 140,000 fund from financing activities out of which Rs 35,000
reduction can be seen due to dividend paid during the year netting Rs 105,000 cash flow from financing
activities.

Thus, from above scrutiny, we can see that the company has generated positive cash flow from its
operating activities and financing activities. However, during the year company has made a capital
expenditure in excess of fund supported by fund collected from financing activities. As the inflow of cash
exceeds the outflow of assets, there is net positive cash flow of Rs 15,000 as at year end. Thus, cash
balance has increased from 80,000 to 95,000 during the year.

The major reason behind net loss during the year is due to higher amount of depreciation which
amounts to Rs 70,000. Considering this, company is able to make cash operating loss before interest and
tax of Rs 10,000 only. Thus, operating result shows the weak financial performance of the company.

However, during the year as well, company has availed additional loan of Rs 90,000 increasing the debt
to equity ratio to almost 45% of total shareholder’s equity. Higher use of debt financing increase the
possibility of financial distress. Considering current situation of financial performance, where company is
not even able to make sufficient operating profit, it is more likely that company might face financial
problem in future.
3. Glendive Corp. is in the process of preparing its statement of cash flows for the year ended June 30,
2012. An income statement for the year and comparative balance sheets are as follow;
For the Year
Ended June 31
2012
Sales Revenue 550,000
Cost of Goods Sold 350,000
Gross Profit 200,000
General and Administrative Expenses 55,000
Depreciation Expenses 75,000
Loss on Sale of Plant assets 5,000
Total Expenses and Losses 135,000
Income before interest and taxes 65,000
Interest expenses 15,000
Income before taxes 50,000
Income tax expenses 17000
Net Income 33,000
Balance sheet as of 30 June is presented below;
30-Jun
2012 2011
Cash 31,000 40,000
Accounts Receivable 90,000 75,000
Inventory 80,000 95,000
Prepaid Rent 12,000 16,000
Total Current Assets 213,000 226,000
Land 250,000 170,000
Plant and Equipment 750,000 600,000
Accumulated Depreciation (310,000) (250,000)
Total Long Term Assets 690,000 520,000
Total Assets 903,000 746,000
Accounts Payable 155,000 148,000
Other accrued liabilities 32,000 26,000
Income Tax Payable 8,000 10,000
Total Current Liabilities 195,000 184,000
Long Term Bank Loan Payable 100,000 130,000
Common Stock 350,000 200,000
Retained Earnings 258,000 232,000
Total Stockholder's Equity 608,000 432,000
Total Liabilities and Stockholders' Equity 903,000 746,000

Dividends of $7,000 were declared and paid during the year. New plant assets were purchased during
the year for $195,000 in cash. Also, land was purchased for cash. Plant assets were sold during the
year for $25,000 in cash. The original cost of the assets sold was $45,000, and their book value was
$30,000. Additional stock was issued for cash and a portion of the bank loan was repaid.
Required:
a. Prepare a statement of cash flows for 2012 using the direct method in the Operating Activities
Section.
b. The president of the company has asked you some questions about the result. He is a bit
impressed with a profit margin but he is bothered however, by the not increased enough
balance of cash during the year. In this regards, write a paragraph to the president to explain
why cash balance is not increased as much as net profit earned during the year.
 Solution,
Glendive Corp
Cash Flow Statement
As on 30 June 2012
Particulars Details Amount
[A] Cash Flow from Operating Activities
Cash Collection from Customer/Debtors
Sales 550,000
Increase in Accounts Receivable (15,000) 535,000
Cash payment to suppliers/creditors
Cost of Goods Sold (350,000)
Decrease in Inventory 15,000
Increase in Accounts Payable 7,000 (328,000)
Cash Payment for Operating Expenses
General and Administrative Expenses (55,000)
Decrease in Prepaid Rent 4,000
Increase in other accrued liabilities 6,000 (45,000)
Payment of Interest
Interest Expenses (15,000) (15,000)
Payment of Tax
Income Tax Expenses (17,000)
Decrease in Income Tax payable (2,000) (19,000)
Net Cash Flow from Operating Activities 128,000
[B] Cash Flow from Investing Activities
Purchase of Plant and Equipment (195,000)
Purchase of Land (80,000)
Sales of Plant 25,000
Net Cash Flow from Investing Activities (250,000)
[C] Cash Flow from Financing Activities
Issue of Capital Stock 150,000
Dividend paid (7,000)
Repayment of Long Term Bank Loan Payable (30,000)
Net Cash Flow from Financing Activities 113,000
Net Change in Cash or Cash Equivalent (9,000)
Add: Beginning balance of cash or cash equivalent 40,000
Ending balance of cash or cash equivalent 31,000

4. Comprehensive Answer Questions:

The comparative balance sheets and income statement of Sunrise Trading Company are as follows:
Particulars 2011 2012
Cash 100,000 200,000
Accounts receivable 50,000 35,000
Inventory 60,000 11000
Prepaid rent 40,000 50,000
Total current assets 250,000 296,000
Plant and equipment 800,000 1,000,000
Accumulated depreciation (100,000) (125,000)
Land 425,000 510,000
Total long-term assets 1,125,000 1,385,000
Total assets 1,375,000 1,684,000
Accounts payable 155,000 148,000
Bank overdraft 270,000 230,000
Income tax payable 8,000 10,000
Total current liabilities 433,000 388,000
Bonds payable 200,000 150,000
Common stock 400,000 600,000
Retained earning 342,000 543,000
Total shareholder's equity 942,000 1,293,000
Total liabilities and shareholder's equity 1,375,000 1,681,000
Income Statement
For the year ending 2012
Particulars Amount
Sales revenue 1,200,000
Less: Cost of goods sold 700,000
Gross profit 500,000
Less: Office expenses and selling expenses 40,000
Depreciation expenses 75,000
Premium on redemption of bonds 5,000
Net profit before other incomes 380,000
Add: Gain on sale of plant (Cost Rs. 100,000, accumulated depreciation 50,000) 10,000
Interest revenue 5,000
Net income before tax 395,000
Less: Tax 150,000
Net income after tax 245,000
Required:
a. Prepare cash flow statement for the year 2012 using direct method for cash how for operating
activities section.
b. The president of the company has asked you some questions about the year’s result. He is a bit
impressed with the profit margin but he is bothered however, by the not increase enough
balance of cash during the year. In this regards, write a paragraph to the president to explain why
cash balance is not increase as much as net profit earned during the year.
Cash Flow Statement
 Particular Amount Amount
+1,200,00
1) Cash collected from customers: 0
+1,215,00
Sales +15,000 0
Decrease in AR
2) Cash paid to Suppliers:
COGS -700,000
Decrease in inventory +49,000
Decrease in AP -7,000 -658,000
3) Cash paid to employees / operating expenses:
Office expenses -40,000
Increase in prepaid rent -10,000 -50,000
4) Cash paid for interest: X
5) Cash paid for tax
Income tax expenses -150,000
Increase in income tax payable +2,000 -148,000
6) Interest revenue +5,000
7) Extra ordinary items:
Decrease in bank overdraft -40,000
A. Net cash from operating activities 324,000
B. Net cash from investing activities
Purchase of Land -85,000
Sale of plant +60,000
Purchase of plant -300,000 -325,000
C. Net cash from financing activities:
Redemption of Bonds -50,000
Premium on redemption -5,000
Issues of Share +200,000
Dividend paid -44,000 +101,000
Net Increase in Cash +100,000
Add: Opening Cash 100,000
Closing Cash 200,000
5. Wabash Corp. just completed another successful year, as indicated by the following income
statement:
For the year Ended
December 31, 2012
Sale revenue $2,460,000
Cost of goods sold 1,400,000
Gross profit $1,060,000
Operating expense including dep.25000 460,000
Income before interest and taxes $600,000
Interest expense 100,000
Income before taxes $500,000
Income tax expense 150,000
Net income $350,000
Presented here is comparative balance sheet:
December 31
2012 2011
Cash $140,000 $210,000
Accounts receivable 60,000 145,000
Inventory 200,000 180,000
Prepayments 15,000 25,000
Total current assets $415,000 $560,000
Land 600,000 700,000
Plant and equipments 850,000 600,000
Accumulated depreciation (225,000) (200,000)
Total long-term assets 1,225,000 1,100,000
Total assets 1,640,000 1,660,000
Accounts payable 140,000 120,000
Other accrued liabilities 50,000 55,000
Income taxes payable 80,000 115,000
Total current liabilities 270,000 290,000
Long-term bank loan payable 200,000 250,000
Common stock 450,000 400,000
Retained earnings 720,000 720,000
Total stockholders' equity 1,170,000 1,120,000
Total liabilities and stockholders' equity 1,640,000 1,660,000

Other information is as follows:

a. Dividends of $350,000 were declared and paid during the year.
b. Operating expenses include $25,000 of depreciation.
c. Land was sold for its book value, and new plant and equipments were acquired for cash.
d. Part of the bank loan was repaid, and additional common stock was issued for cash.
 The president has asked you some questions about the year’s results. She is very impressed with the
profit margin of 14% (net income dividend by sales revenue). She is bothered, however, by the
decline in the company’s cash balance during the year. One of the conditions of the existing bank loan
is that the company maintains a minimum cash balance of $100,000.
Required:
1. Prepare a statement of cash flows for 2012 using the direct method in the operating activities
section.
2. On the basis of your statement in part (a), draft a brief memo to the president to explain why
cash decreased during such a profitable year. Include in your explanation nay recommendations
for improving the company’s cash flow in future years.
[Ans: CFOA = $430,000; CFIA = ($150,000); CFFA = ($350,000)]
6. Pashupati Computers Suppliers has just completed another very successful year, as indicted by the
following income statement:
For the Year Ended Chaitra 31, 2067
Sales revenue Rs. 246,000
Cost of goods sold 140,000
Gross profit 106,000
Operating expenses 46,000
Income before interest and taxes 60,000
Interest expense 10,000
Income before taxes 50,000
Income tax expenses 15,000
Net Income 35,000
Presented below are comparative balance sheets:
Chaitra 31
Assets 2067 (Rs.) 2066 (Rs.)
Cash 14,000 21,000
Accounts receivable 6,000 14,500
Inventory 20,000 18,000
Prepayments 1,500 2,500
Total current assets 41,500 56,000
Land 60,000 70,000
Plant and equipment 85,000 60,000
Accumulated depreciation (22,500) (20,000)
Total loan-term assets 122,500 110,000
Total assets 164,000 166,000
Liabilities
Accounts payable 14,000 12,000
Other accrued liabilities 5,000 5,500
Income taxes payable 8,000 11,500
Total current liabilities 27,000 29,000
Long-term bank loan payable 20,000 25,000
Common stock 45,000 40,000
Retained earnings 72,000 72,000
Total stockholders’ equity 117,000 112,000
Total liabilities and stockholders’ equity 164,000 166,000
Other information follows:
 1. Dividends of Rs. 35,000 were declared and paid during the year.
2. Operating expenses include Rs. 2,500 of depreciation.
3. Land was sold for its book value, and new plant and equipment was acquired for cash.
4. Part of the bank loan was repaid, and additional common stock was issued for cash.
Required:
a. Statement of cash flows for 2067 under direct method
b. Prepare operating section under indirect method
c. In the above income statement, the net income of the company for 2067 was Rs. 35,000 but
cash balance was decreased. Explain why the cash balance decreased in such a profitable year.
[Ans: CFOA = 43,000; CFIA (Rs. 15,000); CFFA = Rs. (35,000)]
7. An Income Statement and comparative balance sheets for Dexter Company follow;
Dexter Company
Income Statement
for the year ended December 31, 2012
Sales Revenue 89,000
Cost of Goods Sold 57,000
Gross Profit 32,000
Depreciation Expenses 6,500
Advertising Expenses 3,200
Salaries Expenses 12,000
Total Operating Expenses 21,700
Operating Income 10,300
Loss on Sale of Land 2,500
Income Before Tax 7,800
Income Tax Expenses 2,600
Net Income 5,200
Dexter Company
Comparative Balance Sheet
as on 31st December 2012
2012 2011
Cash 12,000 9,500
Accounts Receivable 22,000 18,400
Inventory 25,400 20,500
Prepaid Advertising 10,000 8,600
Total Current Assets 69,400 57,000
Land 120,000 80,000
Equipment 190,000 130,000
Accumulated Depreciation (70,000) (63,500)
Total Long Term Assets 240,000 146,500
Total Assets 309,400 203,500
Accounts Payable 15,300 12,100
Salaries Payable 14,000 16,400
Income Tax Payable 1,20 700
0
Total Current Liabilities 30,500 29,200
Capital Stock 200,000 100,000
Retained Earnings 78,900 74,300
Total Stockholder's Equity 278,900 174,300
Total Liabilities and Stockholders' Equity 309,400 203,500
Additional Information
a. Land was acquired during the year for $ 70,000
b. An unimproved parcel of land was sold during the year for $27,500. Its original cost to Dexter
 was $ 30,000.
c. A specialized piece of equipment was acquired in exchange for capital stock in the company. The
value of capital stock was $60,000.
d. In addition to the capital stock issued in exchange for specialized equipment, some stocks were
also sold for cash $ 40,000.
e. Dividend of $600 were paid
Required:
1. Prepare cash flow statement for the year 2015 using direct method for cash flow for operating
activity.
2. Re-compute cash flow under operating activity using indirect method.
3. The president of the company asked you a question about the year end result. He is curious to
know that the Rs. 5,200 net profit for the year is satisfactory. Write a memo to president to
explain why or why not year end result satisfactory.

8. The following financial statements are extracted from the books of Jyoti Spinning Mills Ltd. For the
year ended 31st December 2006.
Sales Revenue Rs. 938,000
Less: Cost of goods sold 546,000
Gross Profit 392,000
Selling general and administrative expenses:
Salaries and wages Rs. 84,000
Depreciation 56,000
Insurance 16,800 156,800
Operating profit 235,200
Other Incomes and Gains/losses:
Interest revenue 21,000
Gain on sale of machine 7,000
Loss on retirement of bonds (4,200) 23,800
Net Income before interest 259,000
Interest expenses 71,400
Net Income Before Tax 187,600
Income Taxes 46,900
Net Income 140,700
Jyoti Spinning Mills Ltd.
Balance Sheet
As on December 31, 2006
Assets 2006 2005
Cash and cash equivalents Rs. 49,000 Rs. 64,400
Accounts receivable 88,200 79,800
Inventory 117,600 128,800
Prepaid insurance 16,800 25,200
Total current assets 271,600 298,200
Investment in subsidiary company 168,000 126,000
Land and building 210,000 140,000
Property, plant and equipment 448,000 392,000
Accumulated depreciation (140,000) (105,000)
Total long-term assets 686,000 553,000
Total Assets 957,000 851,200
 Accounts payable 53,200 43,400
Salaries and wages payable 9,800 12,600
Income taxes payable 11,200 7,000
Total current liabilities 74,200 63,000
Notes payable 119,000 49,000
Bonds payable 280,000 364,000
Total long-term liabilities 399,000 413,000
Capital stock 140,000 105,000
Retained earning 344,400 270,200
Total shareholders’ equity 484,400 375,200
Total liabilities and stockholders’ equity 957,600 851,200
Additional information:
(a) Additional investment in the subsidiary company was made to the extent of Rs. 42,000.
(b) A piece of land was purchased by issuing a Rs. 70,000 note payable.
(c) A machine with an original cost of Rs. 49,000 having an accumulated depreciation of Rs. 21,000
was sold for Rs. 35,000
(d) Machinery worth Rs. 105,000 was purchased during the year by paying cash.
(e) Bonds were retired at a premium by paying Rs. 88,200 in cash.
(f) Dividend of Rs. 66,500 were paid during the year.
(g) Capital stocks were issued for cash.
Required:
i. Prepare a statement of cash flows using the direct method.
ii. Prepare operating section under indirect method.
iii. In the above income statement, the net income of the company for the year was Rs. 140,700
but cash balance was decreased. On the basis of your statement, draft a brief memo to the
president to explain why cash decreased during such a profitable year. Include in your
explanation May recommendations for improving the company’s cash flow in future years.
[Ans: CFOA Rs. 216,300; CFIA Rs. -112,000; CFFA Rs. -119,700]

9. Given below are the financial statements of Share Inc.:

Share Inc.
 Income Statement
For the year ended December 31, 2001
Sales revenue Rs. 670,000
Interest revenue 15,000
Gain on sale of machine 5,000
Total revenue and gains 690,000
Less: Expenses and losses:
Cost of goods sold 390,000
Salaries and wages 60,000
Depreciation 40,000
Insurance 12,000
Interest 15,000
Income taxes 50,000
Loss on retirement of bonds 3,000
Total expenses and loss 570,000
Net Income Rs. 120,000
Share Inc.
Balance Sheet
Ass on December 31, 2001
Assets: 2001 2000
Cash Rs. 35,000 Rs. 46,000
Accounts receivable 63,000 57,000
Inventory 84,000 92,000
Prepaid insurance 12,000 18,000
Total current assets 194,000 213,000
Long term investment 120,000 90,000
Land 150,000 100,000
Property and equipment 320,000 280,000
Accumulated depreciation (100,000) (75,000)
Total long-term assets 490,000) 395,000
Total assets 684,000 608,000
Liabilities
Accounts payable 38,000 31,000
Salaries and wages payable 7,000 9,000
Income taxes payable 8,000 5,000
Total current liabilities 53,000 45,000
Notes payable 85,000 35,000
Bonds payable 200,000 260,000
Total long-term liabilities 285,000 295,000
Capital stock 100,000 75,000
Retained earnings 246,000 193,000
Total stockholders’ equity 346,000 268,000
Total liabilities and stockholders’ equity 684,000 608,000

Additional information:
a. Land was purchased by issuing a Rs. 50,000 note payable.
 b. A machine with an original cost of Rs. 35,000 and a book value of Rs. 20,000 was sold for Rs.
25,000.
c. Bonds with a face value of Rs. 60,000 were retired by paying Rs. 63,000 in cash.
d. Dividends of Rs. 67,000 were paid, and capital stock was issued for cash.
Required:
i. Statement of Cash Flow using direct method.
ii. Prepare operating activity under indirect method.
iii. Explain how cash balance decreased in such a profitable year.
[Ans: Rs. 174,000; Rs. -80,000; Rs. -105,000]

10. Butwal Trading Company has recently completed its fiscal year of 2012 and prepared income
statement and balance sheet as given below:
Assets 2012 2011
Cash 80,800 48,400
Account receivable 87,800 33,000
Inventories 112,500 102,850
Prepaid expenses 28,400 26,000
Investments 138,000 114,000
Plants assets 285,000 242,500
Accumulated depreciation (50,000) (52,000)
Total 682,500 514,750
Liabilities and stockholders’ equity
Account payable 102,000 67,300
Accrued expenses payable 16,500 7,000
Bonds payable 110,000 160,000
Common stock 220,000 175,000
Retained earnings 234,000 105,450
Total 682,500 514,750
Butwal Trading Company
Income Statement
for the Year Ended December 31, 2012
Sales revenue Rs. 392,780
Less: Expenses and Losses:
Cost of goods sold Rs. 135,460
Operating expenses 12,410
Depreciation expenses 46,500
Loss on sale of plant 7,500
Interest expenses 4,730
Income tax 27,280
Total expenses and losses: 233,880
Net Income 158,900
Additional information:
a. New plant costing Rs. 100,000 was purchased during the year in cash.
b. Old plant assets having an original cost of Rs. 57,500 with accumulated depreciation of Rs. 48,500
sold for this.
c. Part of the bond payable were paid off at fair value. And additional common stocks were issued for
cash.
d. A cash dividend of Rs. 30,350 were declared and paid.
 Required:
i. Cash flow statement using direct method for computing cash flows under operating activities.
ii. Briefly explain the significance of cash flow statement as a tool of financial reporting.
[Ans: Rs. 190,250; Rs. -122,500; Rs. -35,350]

11. Fewa Group is in the process of preparing its statement of cash flows for the year ended June 30,
2011. An income statement for the year and comparative balance sheets follow:
Sales revenue Rs. 550,000
Cost of goods sold 350,000
Gross profit 200,000
General and administrative expenses 55,000
Depreciation expense 75,000
Loss on sale of plant assets (proceeds of Rs. 25,000) 5,000
Total expenses and losses 135,000
Income before interest and taxes 65,000
Interest expense 15,000
Income before taxes 50,000
Income tax expense 17,000
Net income 33,000
Add: Opening retained earnings 232,000
265,000
Less: Dividend paid 7,000
Retained earnings 258,000
Presented below are comparative balance sheets:
June 30
Assets 2011 (Rs.) 2010 (Rs.)
Cash 31,000 40,000
Accounts receivable 90,000 75,000
Inventory 80,000 95,000
Prepaid rents 12,000 16,000
Total current assets 213,000 226,000
Land 250,000 170,000
Plant and equipment 750,000 600,000
Accumulated depreciation (310,000) (250,000)
Total long-term assets 690,000 520,000
Total assets 903,000 746,000
Liabilities
Accounts payable 155,000 148,000
Other accrued liabilities 32,000 26,000
Income taxes payable 8,000 10,000
Total current liabilities 195,000 184,000
Long-term bank loan payable 100,000 130,000
Common stock 350,000 200,000
Retained earnings 258,000 232,000
Total stockholders’ equity 608,000 432,000
Total liabilities and stockholders’ equity 903,000 746,000
Required:
1. Statement of cash flows, using the direct method
 2. Prepare operating section under indirect method
3. Explain about the cash management of this company in 2011.
[Ans: CFOA = Rs. 128,000; CFIA = (Rs. 250,000); CFFA = Rs. 113,000]

12. Mustang Agro Company has not yet prepared a formal statement of cash flows for 2010.
Comparative balance sheets as of December 31, 2010 and 2009, and a statement of income and
retained earnings for the year ended December 31, 2010 follows:
Mustang Agro Company
Balance Sheet
as on December 31
Assets 2010 (Rs.) 2009 (Rs.)
Current assets:
Accounts receivable 61,000 50,000
Cash 6,000 10,000
Short term investment - 5,000
Inventory 72,000 60,000
Total current assets 139,000 125,000
Long term assets:
Land 8,000 7,000
Buildings and equipment 71,000 60,000
Accumulated depreciation (18,000) (12,000)
Patents (less amortization) 10,500 13,000
Total long-term assets 71,500 68,000
Total assets 210,500 193,000
Liabilities and Owners Equity
Current liabilities:
Accounts payable 36,000 30,000
Taxes payable 2,500 2,000
Bills payable 40,000 40,000
Total current liabilities 78,500 72,000
Term notes payable 20,000 20,000
Total liabilities 98,500 92,000
Owners’ equity
Common stock outstanding 83,000 70,000
Retained earnings 29,000 31,000
Total Owner’s equity 112,000 101,000
Total liabilities and owners’ equity 210,500 193,000

Mustang Agro Company

Statement of Income and Retained Earnings
 for the year ended December 31, 2010
Sales Rs. 240,800
Less: Expenses and interest:
Cost of goods sold Rs. 110,000
Salaries and benefits 85,000
Heat, Light and power 7,500
Depreciation 6,000
Property taxes 1,800
Patent amortization 2,500
Miscellaneous expenses 1,000
Interest 5,500 219,300
Net income before income taxes 21,500
Income taxes 10,500
Net income 11,000
Add: Retained earnings- Opening 31,000
Income available for distribution 42,000
Less: Stock dividend distribution 13,000
Retained earnings 29,000
Required:
1. Statement of cash flows of Mustang Agro Company for the year ended 2010 under direct method.
2. Prepare operating section under indirect method.
3. In the above income statement, the net income of the company for 2067 was Rs. 11,000 but cash
balance was decreased. Explain why the cash balance decreased in such a profitable year.
[Ans: CFOA = Rs. 3,000; CFIA = Rs. (12,000); CFFA = Nil]