Cash Flow Statement - Imp. Query

Page no : 2

CA IN PRACTICE... ( CA ) (490 Points)
Replied 03 December 2009

I also agree with Kaya's clearification.

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Ansari (ca final) (444 Points)
Replied 03 December 2009

Kaya is right.

Vaibhav (CA IPCC Student) (34 Points)
Replied 13 April 2010

Dear Patricia,

The fun while preparing a Cash Flow Statement is when you can have an indepth knowledge of the Trading & P/L A/c and P/L App. a/c. The general question that people have is that why are the changes in working capital add or deducted? Whats the logic behind it?

Its very simple.

Suppose Debtors on 31.12.2005 = Rs.50,000.

If Cr. sales are made in 05-06 say for Rs.30,000 and assuming that no cash has been received during the year from debtors, the debtors balance on 31.12.2006 = Rs.50,000 + Rs.30,000 = Rs.80,000.

Now just understand the concept.The sales Cr. to the trading account must be including Cr. sales worth Rs.30,000 and therefore, the profit is inflated by Rs.30,000. But since,its a credit sale therefore there is no inflow of cash for the sale of Rs.30,000.Therefore Rs.30,000 must be deducted from the net profit which is the same as change in debtors i.e. Rs.80,000 - Rs.50,000 = Rs.30,000.

I have tried my best to explain you though its quite difficult to explain on internet.

Just try to think in the direction i want you to. You'll get all your answers on Cash Flow From Operating Activities :-)

REGARDS,

VAIBHAV ARORA.