A) What are the various cash flow activities in a business?
Why cash flow analysis is
important?
Answer: Cash flows are classified as operating, investing, or financing activities on the
statement of cash flows, depending on the nature of the transaction. Each of these three
classifications is defined as follows.
Operating activities include cash activities related to net income. For example,
cash generated from the sale of goods (revenue) and cash paid for merchandise
(expense) are operating activities because revenues and expenses are included in
net income.
Investing activities include cash activities related to noncurrent assets. Noncurrent
assets include (1) long-term investments; (2) property, plant, and equipment; and
(3) the principal amount of loans made to other entities. For example, cash
generated from the sale of land and cash paid for an investment in another
company are included in this category. (Note that interest received from loans is
included in operating activities.)
Financing activities include cash activities related to noncurrent liabilities and
owners’ equity. Noncurrent liabilities and owners’ equity items include (1) the
principal amount of long-term debt, (2) stock sales and repurchases, and (3)
dividend payments. (Note that interest paid on long-term debt is included in
operating activities.)
B) Find out the information about cash flows under direct method from the following data:
1. Beginning cash (01.01.2019) ---------------------------------------------- TK=13,000
2. Received for credit sale from AB& co------------------------------------ TK=70,000
3. Payment for purchase of goods ------------------------------------------ TK=19,000
4. Receipts from sale of old furniture --------------------------------------TK=2,000
5. Receipts term loan from bank -------------------------------------------- TK=15,000
6. Payment for interest-------------------------------------------------------- TK=2,000
7. Payment for machineries --------------------------------------------------- TK=10,000
8. Payment of bank’s loan with interest-------------------------------------TK=16,000
9. Payment for dividend -------------------------------------------------------- TK=3,000
10. Closing cash balance (31.12.2019)-------------------------------------- TK=50,000
Answer:
Cashflows from Operating Activities
Received for credit sale from AB& co. 70,000
Payment for purchase of goods (19,000)
Payment for machineries (10,000)
Payment for interest* (2,000)
Net Operating Cash flow 39,000
Cashflows from Investing Activities
Receipts from sale of old furniture 2,000
Net Investing Cash flow 2,000
Cashflows from Financing Activities
Receipts term loan from bank 15,000
Payment of bank’s loan with interest (16,000)
Payment for dividend** (3,000)
Net Investing Cash flow (4,000)
Net increase in Cash 37,000
Opening Balance (01.01.2019) 13,000
Cash Balance on (31.12.2019) 50,000
