Question

Question No: 02 This is a subjective question, hence you have to write your answer in the Text-Field given below. SEAT Manufacturing company Ltd reported a net income of Rs 80,000, and depreciation expense and amortization expense of Rs 1500 and Rs 500, respectively for the period 2016. The company also reported the following details during the year: Increase in inventory Rs 2000; Paid cash dividend Rs 2000; Decrease in account receivable Rs 1000; Increase in account payable Rs 1000; Paid long-term debt principal Rs 6000 and paid short-term debt principal Rs 4000; Cash receipt of loan repayments Rs 5000; Increase in income tax payable Rs 3000. (a) Find out what is the net cash flows from operating activities? (b) What is the net cash flows from investing activities?

Answer 1

	Amount (Rs)	Explanation
Depreciation expense	1,500	It is a non-cash expense. Hence it should be added back to net income in the operating activities section.
Amortization expense	500
Increase in inventory	2,000	Inventory is a current asset. Therefore it should be reduced from the net income in the operating activities section.
Cash dividend paid	2,000	It is a cash outflow in the financing activities section.
Decrease in account receivable	1,000	Account receivable is a current asset. Therefore it should be added to the net income in the operating activities section.
Increase in account payable	1,000	Account payable is a current liability. Therefore it should be added to the net income in the operating activities section.
Long-term debt principal paid	6,000	Raising and repayment of long-term debt are financing activities. When long-term debt principal is paid it results in a cash outflow in the financing activities section. (except in case of finance companies)
Short-term debt principal paid	4,000	Raising and repayment of short-term debt are financing activities. When short-term debt principal is paid it results in a cash outflow in the financing activities section.
Cash receipt of loan repayments	5,000	This is a cash receipt on repayment of loan given by the company to 3rd parties. Cash advances and loans made to 3rd parties form part of investing activities.
Increase in income tax payable	3,000	Income tax payable is a current liability. Therefore it should be added to the net income in the operating activities section.

Adjustments in the operating activities section of the cash flow statement for change in current assets and current liabilities:

Change	Current assets	Current liabilities
Increase	(-)	+
Decrease	+	(-)

	Rs	Rs
Cash Flows from Operating Activities
Net income		80,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	1,500
Amortization expense	500
(Increase) decrease in current assets:
Accounts receivable	1,000
Inventory	(2,000)
Increase (decrease) in current liabilities:
Accounts payable	1,000
Income tax payable	3,000	5,000
Net cash provided by operating activities		85,000
Cash Flows from Investing Activities
Cash receipt of loan repayments	5,000
Net cash provided by investing activities		5,000
Cash Flows from Financing Activities
Payment of long-term debt	(6,000)
Payment of short-term debt	(4,000)
Payment of dividends	(2,000)
Net cash used by financing activities		(12,000)