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To prepare a cash flow statement using the direct method, we need to consider the operating, investing, and financing activities of the company. Here's the step-by-step solution:
### 1. Net Cash from Operating Activities
We start by calculating the net cash from operating activities, beginning with the earnings before interest, taxes, depreciation, and amortization (EBITDA).
#### a. Sales and Cost of Goods Sold
Net Sales: Rs 312,500
Cost of Goods Sold: Rs 150,000
#### b. Operating Expenses
Operating Expenses: Rs 75,000 (includes depreciation of Rs 40,000 and interest of Rs 5,000)
#### c. Calculate Earnings Before Interest and Depreciation
Earnings before interest and depreciation = Sales - Cost of Goods Sold - (Operating Expenses excluding depreciation and interest)
[tex]\[ \text{Operating Expenses excluding depreciation and interest} = \text{Operating Expenses} - \text{Depreciation} - \text{Interest} \][/tex]
[tex]\[ = 75,000 - 40,000 - 5,000 \][/tex]
[tex]\[ = 30,000 \][/tex]
[tex]\[ \text{Earnings Before Interest and Depreciation} = 312,500 - 150,000 - 30,000 \][/tex]
[tex]\[ = 132,500 \][/tex]
#### d. Add Back Depreciation
[tex]\[ \text{Net Cash from Operating Activities} = 132,500 + \text{Depreciation} \][/tex]
[tex]\[ = 132,500 + 40,000 \][/tex]
[tex]\[ = 170,000 \][/tex]
#### e. Subtract Interest Paid
[tex]\[ \text{Net Cash from Operating Activities minus Interest} = 170,000 - \text{Interest} \][/tex]
[tex]\[ = 170,000 - 5,000 \][/tex]
[tex]\[ = 165,000 \][/tex]
#### f. Changes in Working Capital
Working capital changes include changes in debtors, creditors, and cash/bank balances.
- Change in Debtors: Year I (20,000) - Year II (12,500) = 7,500 (decrease in debtors increases cash flow)
- Change in Creditors: Year II (30,000) - Year I (20,000) = 10,000 (increase in creditors increases cash flow)
- Change in Cash and Bank: Year II (75,000) - Year I (50,000) = 25,000 (increase in cash/bank is not a working capital change but a result of overall activities)
[tex]\[ \text{Net Changes in Working Capital} = 10,000 - 7,500 \][/tex]
[tex]\[ = 2,500 \][/tex]
[tex]\[ \text{Net Cash from Operating Activities Adjusted} = 165,000 + 2,500 \][/tex]
[tex]\[ = 170,000 \][/tex]
### 2. Cash Flows from Investing Activities
#### a. Sale of Machinery
Cash inflow from the sale of machinery: Rs 27,500
#### b. Purchase of Machinery
Cash outflow for the purchase of machinery: Rs 190,000
[tex]\[ \text{Net Cash from Investing Activities} = \text{Sale of Machinery} - \text{Purchase of Machinery} \][/tex]
[tex]\[ = 27,500 - 190,000 \][/tex]
[tex]\[ = -162,500 \][/tex]
### 3. Cash Flows from Financing Activities
#### a. Share Capital
Change in Share Capital: Year II (360,000) - Year I (225,000) = 135,000
#### b. Debentures
Change in Debentures: Year I (50,000) - Year II (20,000) = 30,000
#### c. Dividend Distribution
Dividend distributed: Rs 52,500
[tex]\[ \text{Net Cash from Financing Activities} = \text{Change in Share Capital} - \text{Change in Debentures} - \text{Dividend Distribution} \][/tex]
[tex]\[ = 135,000 - 30,000 - 52,500 \][/tex]
[tex]\[ = 52,500 \][/tex]
### 4. Net Increase in Cash
Finally, to find the net increase in cash, we sum up the net cash from operating activities, investing activities, and financing activities.
[tex]\[ \text{Net Increase in Cash} = \text{Net Cash from Operating Activities} + \text{Net Cash from Investing Activities} + \text{Net Cash from Financing Activities} \][/tex]
[tex]\[ = 170,000 + ( - 162,500) + 52,500 \][/tex]
[tex]\[ = 60,000 \][/tex]
### Summary of Computed Cash Flow Values
- Earnings Before Interest and Depreciation: Rs 132,500
- Net Cash from Operating Activities: Rs 170,000
- Net Cash from Investing Activities: Rs -162,500
- Net Cash from Financing Activities: Rs 52,500
- Net Increase in Cash: Rs 60,000
These are the detailed steps and results for the cash flow statement.
### 1. Net Cash from Operating Activities
We start by calculating the net cash from operating activities, beginning with the earnings before interest, taxes, depreciation, and amortization (EBITDA).
#### a. Sales and Cost of Goods Sold
Net Sales: Rs 312,500
Cost of Goods Sold: Rs 150,000
#### b. Operating Expenses
Operating Expenses: Rs 75,000 (includes depreciation of Rs 40,000 and interest of Rs 5,000)
#### c. Calculate Earnings Before Interest and Depreciation
Earnings before interest and depreciation = Sales - Cost of Goods Sold - (Operating Expenses excluding depreciation and interest)
[tex]\[ \text{Operating Expenses excluding depreciation and interest} = \text{Operating Expenses} - \text{Depreciation} - \text{Interest} \][/tex]
[tex]\[ = 75,000 - 40,000 - 5,000 \][/tex]
[tex]\[ = 30,000 \][/tex]
[tex]\[ \text{Earnings Before Interest and Depreciation} = 312,500 - 150,000 - 30,000 \][/tex]
[tex]\[ = 132,500 \][/tex]
#### d. Add Back Depreciation
[tex]\[ \text{Net Cash from Operating Activities} = 132,500 + \text{Depreciation} \][/tex]
[tex]\[ = 132,500 + 40,000 \][/tex]
[tex]\[ = 170,000 \][/tex]
#### e. Subtract Interest Paid
[tex]\[ \text{Net Cash from Operating Activities minus Interest} = 170,000 - \text{Interest} \][/tex]
[tex]\[ = 170,000 - 5,000 \][/tex]
[tex]\[ = 165,000 \][/tex]
#### f. Changes in Working Capital
Working capital changes include changes in debtors, creditors, and cash/bank balances.
- Change in Debtors: Year I (20,000) - Year II (12,500) = 7,500 (decrease in debtors increases cash flow)
- Change in Creditors: Year II (30,000) - Year I (20,000) = 10,000 (increase in creditors increases cash flow)
- Change in Cash and Bank: Year II (75,000) - Year I (50,000) = 25,000 (increase in cash/bank is not a working capital change but a result of overall activities)
[tex]\[ \text{Net Changes in Working Capital} = 10,000 - 7,500 \][/tex]
[tex]\[ = 2,500 \][/tex]
[tex]\[ \text{Net Cash from Operating Activities Adjusted} = 165,000 + 2,500 \][/tex]
[tex]\[ = 170,000 \][/tex]
### 2. Cash Flows from Investing Activities
#### a. Sale of Machinery
Cash inflow from the sale of machinery: Rs 27,500
#### b. Purchase of Machinery
Cash outflow for the purchase of machinery: Rs 190,000
[tex]\[ \text{Net Cash from Investing Activities} = \text{Sale of Machinery} - \text{Purchase of Machinery} \][/tex]
[tex]\[ = 27,500 - 190,000 \][/tex]
[tex]\[ = -162,500 \][/tex]
### 3. Cash Flows from Financing Activities
#### a. Share Capital
Change in Share Capital: Year II (360,000) - Year I (225,000) = 135,000
#### b. Debentures
Change in Debentures: Year I (50,000) - Year II (20,000) = 30,000
#### c. Dividend Distribution
Dividend distributed: Rs 52,500
[tex]\[ \text{Net Cash from Financing Activities} = \text{Change in Share Capital} - \text{Change in Debentures} - \text{Dividend Distribution} \][/tex]
[tex]\[ = 135,000 - 30,000 - 52,500 \][/tex]
[tex]\[ = 52,500 \][/tex]
### 4. Net Increase in Cash
Finally, to find the net increase in cash, we sum up the net cash from operating activities, investing activities, and financing activities.
[tex]\[ \text{Net Increase in Cash} = \text{Net Cash from Operating Activities} + \text{Net Cash from Investing Activities} + \text{Net Cash from Financing Activities} \][/tex]
[tex]\[ = 170,000 + ( - 162,500) + 52,500 \][/tex]
[tex]\[ = 60,000 \][/tex]
### Summary of Computed Cash Flow Values
- Earnings Before Interest and Depreciation: Rs 132,500
- Net Cash from Operating Activities: Rs 170,000
- Net Cash from Investing Activities: Rs -162,500
- Net Cash from Financing Activities: Rs 52,500
- Net Increase in Cash: Rs 60,000
These are the detailed steps and results for the cash flow statement.
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