Cash Flow Statement Page 10

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MODULE - 6A
Cash Flow Statement
Analysis of Financial Statements
Less : Non-cash and Non-operating Items which have already been credited
to Profit and Loss Account i.e.
Profit on sale of fixed assets
xxx
Profit on sale of Long term investment
xxx
xxx
Notes
Operating profit before working Capital changes.
xxx
Stage-II
After getting operating profit before working capital changes as per
stage I, adjust increase or decrease in the current assets and current
liabilities.
The following general rules may be applied at the time of adjusting current
assets and current liabilities.
A. Current assets
(i) An increase in an item of current assets causes a decrease in cash inflow
because cash is blocked in current assets.
(ii) A decrease in an item of current assets causes an increase in cash inflow
because cash is released from the sale of current assets.
B. Current liabilities
(i) An increase in an item of current liability causes a decrease in cash
outflow because cash is saved.
(ii) A decrease in an item of current liability causes increase in cash out
flow because of payment of liability.
Thus,
Cash from operations = operating profit before working capital
changes + Net decrease in current assets + Net Increase in current
liabilities – Net increase in current assets – Net decrease in current
liabilities.
Illustration 1
The net Income reported in the Income Statement for the year was
Rs. 110,000 and depreciation of fixed assets for the year was Rs. 44000.
The balances of the current assets and current liabilities at the beginning
and end of the year are as follows. Calculate cash from operating activities.
71
ACCOUNTANCY

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