The Balance Sheet of a company for two years are as under: Liabilities Year 1(Rs.) Year 2(Rs.) Assets Year 1 (Rs.) Year 2(Rs.) : : : : : : Share capital 700,000 900,000 Fixed Assets 500,000 700,000…

Cash Flow Statement (Indirect Method) for Year 2

Step 1: Calculate Net Profit Before Tax

From the given data, we can derive the Net Profit Before Tax (PBT) using the following formula:

$$\text{Net Profit Before Tax (PBT)}=\text{Sales Revenue}-\text{Cost of Goods Sold}-\text{Administrative Expenses}$$

$$\text{PBT}=1,300,000-700,000-130,000=\text{Rs. 470,000}$$

Step 2: Adjust Net Profit for Non-Cash Items

Since no depreciation or non-cash expenses are given, we assume no adjustments are needed for non-cash items.

Step 3: Calculate Cash Flow from Operating Activities (Indirect Method)

We use the indirect method to calculate cash flow from operations by adjusting net profit for changes in working capital.

Working Capital Changes:

1. Increase in Stock (Non-Cash Asset): $150,000-100,000=+50,000$ (Deduction from cash flow)
2. Decrease in Sundry Debtors (Receivables): $310,000-420,000=-110,000$ (Addition to cash flow)
3. Increase in Creditors (Payables): $200,000-150,000=+50,000$ (Deduction from cash flow)
4. Increase in Outstanding Expenses (Accrued Expenses): $60,000-40,000=+20,000$ (Deduction from cash flow)

Net Change in Working Capital: $$50,000-110,000+50,000+20,000=\text{Rs. 10,000 (Deduction)}$$

Cash Flow from Operating Activities: $$\text{Net Profit Before Tax}-\text{Net Change in Working Capital}=470,000-10,000=\text{Rs. 460,000}$$

Step 4: Calculate Cash Flow from Investing Activities

The only investing activity given is the purchase of fixed assets for Rs. 300,000. Since this is a cash outflow, it is recorded as a negative amount.

$$\text{Cash Flow from Investing Activities}=-300,000$$

Step 5: Calculate Cash Flow from Financing Activities

We analyze changes in share capital, debentures, and retained earnings:

1. Increase in Share Capital: $900,000-700,000=+200,000$ (Cash inflow)
2. Decrease in 5% Debentures: $50,000-100,000=-50,000$ (Cash outflow)
3. Increase in Retained Earnings: $250,000-150,000=+100,000$ (Retained earnings increase due to profit, but no direct cash inflow)

Since retained earnings are not a direct cash flow, we only consider share capital and debentures:

$$\text{Cash Flow from Financing Activities}=200,000-50,000=\text{Rs. 150,000}$$

Step 6: Calculate Net Increase in Cash

We verify the opening and closing bank balances to ensure consistency:

$$\text{Closing Bank Balance}-\text{Opening Bank Balance}=300,000-120,000=\text{Rs. 180,000}$$

Step 7: Prepare the Final Cash Flow Statement

Final Answer (Cash Flow Statement)

The Cash Flow Statement for the company for Year 2 is as follows: