Himagiri Ltd: Three Errors in the Draft Cash Flow Statement
Himagiri Ltd reported profit after tax of ₹4,80,000 for the year ended 31 March 2024; provision for tax for the year was ₹1,20,000, of which ₹1,05,000 was paid. From the books: depreciation ₹90,000; loss on sale of a machine ₹15,000 (book value ₹60,000, sold for ₹45,000); interest of ₹40,000 on 9% borrowings, paid during the year; trade receivables rose ₹60,000; inventory fell ₹30,000; trade payables fell ₹25,000; a machine costing ₹1,50,000 was acquired by issuing equity shares of the same amount; the bank overdraft rose from ₹60,000 to ₹1,00,000; dividend of ₹50,000 was paid; investments were purchased for ₹80,000. The accountant's draft shows the ₹1,50,000 machine as an investing outflow, adds the ₹1,00,000 overdraft balance to cash and cash equivalents, and classifies the ₹40,000 interest as an operating outflow.
1. Compute net cash from operating activities by the indirect method, justifying each adjustment.
Read the worked answer
Start from profit before tax, not profit after tax: 4,80,000 + 1,20,000 = ₹6,00,000.
| Adjustment | ₹ | Reason |
|---|---|---|
| Profit before tax | 6,00,000 | Base figure |
| Add depreciation | 90,000 | Non-cash expense charged to P&L |
| Add loss on sale of machine | 15,000 | Non-operating; the ₹45,000 proceeds go to investing |
| Add interest on borrowings | 40,000 | A financing cost, shown under financing |
| Operating profit before working capital changes | 7,45,000 | |
| Less increase in trade receivables | (60,000) | Sales not yet collected |
| Add decrease in inventory | 30,000 | Stock consumed, no cash outlay |
| Less decrease in trade payables | (25,000) | Suppliers paid more than purchased |
| Cash generated from operations | 6,90,000 | |
| Less tax paid | (1,05,000) | Only tax actually paid, not the provision |
| Net cash from operating activities | 5,85,000 |
Only ₹1,05,000 is deducted; the unpaid ₹15,000 of the provision is a current liability, not a cash outflow. Starting from PAT and then adding back interest is a classic mismatch, because the tax figure embedded in PAT is not the tax paid.
2. Identify and correct the accountant's three treatments.
Read the worked answer
(a) Machine of ₹1,50,000 acquired by issue of shares. Wrong. No cash moves, so it is excluded from the cash flow statement altogether and disclosed separately as a non-cash transaction. Showing it as an investing outflow would understate the cash position by ₹1,50,000 and would leave the statement unreconciled against the movement in cash.
(b) Bank overdraft of ₹1,00,000 added to cash and cash equivalents. Wrong on two counts. It is a borrowing, not a cash balance, so the closing balance is not ₹1,00,000 cash. The correct treatment is the movement: an increase of ₹40,000 (60,000 → 1,00,000) as a financing inflow. (Ind AS 7 permits overdrafts repayable on demand to be treated as cash equivalents where they are integral to cash management, but for this paper the financing classification is the expected answer and should be stated.)
(c) Interest of ₹40,000 as an operating outflow. Wrong for a non-financing company. Interest paid on borrowings is a financing outflow and must be added back to operating profit, then shown under financing. Treating it as operating would understate cash from operations by ₹40,000 and overstate the financing outflow.
3. Using the corrected treatment, compute the investing and financing sections and the net increase in cash.
Read the worked answer
Investing activities
Proceeds from sale of machine +45,000
Purchase of investments −80,000
Machine acquired by issue of shares - nil (non-cash)
Net cash used in investing = ₹(35,000)
Financing activities
Interest on borrowings paid −40,000
Dividend paid −50,000
Increase in bank overdraft +40,000
Net cash used in financing = ₹(50,000)
Net increase in cash and cash equivalents
= 5,85,000 − 35,000 − 50,000 = ₹5,00,000
The three sections together explain the entire movement in cash. If the draft had been left uncorrected, the investing outflow would have been inflated by ₹1,50,000 and the overdraft balance wrongly treated as opening cash, so the reconciliation would never close - which is the practical test of whether the classification was right.