Calculate cash flow from financing activities: During the year, the company repaid a loan of ₹1,00,000. 01.04.2016 31.03.2017 Long Term Loans ₹2,00,000 ₹2,50,000
₹50,000
Understanding Cash Flow from Financing Activities
Cash flow from financing activities relates to transactions that change the size and composition of the owner's capital (like equity) and borrowings of the enterprise. Long-term loans are a form of borrowing, so changes in long-term loans affect cash flow from financing activities.
We are given the opening and closing balances of Long Term Loans and the amount of loan repaid during the year. We need to determine the net cash flow related to these loan activities.
Analyzing the Loan Data
Let's look at the provided loan information:
| Date | Long Term Loans |
|---|---|
| 01.04.2016 (Opening) | ₹2,00,000 |
| 31.03.2017 (Closing) | ₹2,50,000 |
We are also told that a loan of ₹1,00,000 was repaid during the year.
Calculating Net Change in Long Term Loans
The net change in the balance of Long Term Loans from the beginning to the end of the year is:
\(\text{Net Change} = \text{Closing Balance} - \text{Opening Balance}\)
\(\text{Net Change} = ₹2,50,000 - ₹2,00,000 = ₹50,000\)
The loan balance increased by ₹50,000 during the year.
Determining Cash Inflow from New Loans
The change in the loan balance is the result of both new loans taken (cash inflow) and loans repaid (cash outflow). The formula for the change in loan balance can be expressed as:
\(\text{Closing Balance} = \text{Opening Balance} + \text{New Loans Taken} - \text{Loans Repaid}\)
We know the opening balance, closing balance, and the amount repaid. We can rearrange the formula to find the amount of new loans taken:
\(\text{New Loans Taken} = \text{Closing Balance} - \text{Opening Balance} + \text{Loans Repaid}\)
Let's plug in the values:
\(\text{New Loans Taken} = ₹2,50,000 - ₹2,00,000 + ₹1,00,000\)
\(\text{New Loans Taken} = ₹50,000 + ₹1,00,000\)
\(\text{New Loans Taken} = ₹1,50,000\)
This means the company took new loans amounting to ₹1,50,000 during the year.
Calculating Cash Flow from Financing Activities (Loans)
Cash flow from financing activities related to these loans includes the cash inflow from new loans taken and the cash outflow from loans repaid.
- Cash Inflow from New Loans Taken: ₹1,50,000
- Cash Outflow from Loans Repaid: ₹1,00,000
The net cash flow is the difference between the cash inflows and cash outflows:
\(\text{Net Cash Flow} = \text{Cash Inflow from New Loans} - \text{Cash Outflow from Repayments}\)
\(\text{Net Cash Flow} = ₹1,50,000 - ₹1,00,000\)
\(\text{Net Cash Flow} = ₹50,000\)
Since the result is positive, it represents a net cash inflow from financing activities related to long-term loans.
Therefore, the cash flow from financing activities related to long-term loans is ₹50,000.
Revision Table: Key Cash Flow Activities
| Activity Type | Examples | Cash Flow Impact |
|---|---|---|
| Operating Activities | Cash received from customers, cash paid to suppliers, cash paid for salaries, cash paid for expenses, income tax paid/refunded. | Generated from principal revenue-producing activities. |
| Investing Activities | Purchase/Sale of fixed assets (land, building, machinery), purchase/sale of investments. | Relates to acquisition and disposal of long-term assets and other investments not included in cash equivalents. |
| Financing Activities | Issue of shares, redemption of preference shares, issue of debentures/bonds/loans, repayment of debentures/loans, payment of dividends. | Results in changes in the size and composition of the owner's capital and borrowings. |
Additional Information: Components of Cash Flow Statement
The Cash Flow Statement is a financial statement that reports the cash generated and used by a company in a given period. It is broken down into three main parts:
- Cash Flow from Operating Activities: This section shows the cash generated or used in the normal day-to-day business operations. It starts with net profit and adjusts for non-cash items (like depreciation) and changes in working capital (like changes in inventory, receivables, and payables).
- Cash Flow from Investing Activities: This section shows the cash flows related to the purchase and sale of long-term assets and other investments. Examples include buying or selling property, plant, equipment, or investments in other companies.
- Cash Flow from Financing Activities: As discussed, this section shows the cash flows related to how the company is financed. It includes transactions involving equity (like issuing shares or paying dividends) and debt (like taking out or repaying loans, or issuing and redeeming bonds/debentures).
Understanding these three components is crucial for analyzing a company's financial health and liquidity.
Important Questions from Cash Flow Statement
Calculate the Cash Flow from investing activities from the following particulars:
1.4.2016 31.03.2017 Machine at cost ₹5,00,000 ₹9,00,000 Accumulated depreciation ₹3,00,000 ₹4,50,000 During this year, machines costing ₹2,00,000 were sold at a profit of ₹1,50,000, and depreciation charged was ₹2,50,000.
Which of the following are cash outflows from Operating Activities?
(A) Payment of Dividend
(B) Payment of employee benefit expenses
(C) Payment of taxes
(D) Purchase of inventory from suppliers
(E) Purchase of furniture for cash
Choose the correct answer from the options given below:
Arrange the following activities in correct order while preparing a Cash Flow Statement:
(A) Increase in prepaid insurance.
(B) Purchase of Copyrights.
(C) Operating profit before working capital changes.
(D) Income tax paid.
(E) Redemption of preference shares.
Choose the correct answer from the options given below:
On the admission of a partner, an increase in the value of an asset is debited to:
Match List I with List II – When the partner’s capital is fixed.
List – I List – II A. Additional capital introduced I. Credit side of current account B. Withdrawal of capital II. Debit side of current account C. Drawings III. Debit side of partner capital account D. Salary payable to partner IV. Credit side of partner capital account Choose the correct answer from the options given below:
