Question

     The General Manager of Galaxy Foods Ltd. was surprised to find that, though the company earned a profit during the year ended 31^st March, 2023, yet the bank overdraft has increased during the period.

     The financial statements of the company are given below:

BALANCE SHEET as at 31st March, 2023
Particulars			Note No.	March 31, 2023 (₹)	March 31, 2022 (₹)
I.	Equity & Liabilities:
	(1)	Shareholder’s Funds
		Share Capital		6,00,000	5,00,000
		Reserves and Surplus	1	3,30,000	80,000
	(2)	Non-Current Liabilities
		5% Long-term Borrowings			2,40,000
	(3)	Current Liabilities
		Short-term Borrowings	2	2,80,000	1,00,000
		Trade Payables		9,40,000	10,50,000
		Other Current Liabilities	3	10,000	-
		Short-term Provision	4	40,000	30,000
				22,00,000	20,00,000
II.	Assets:
	(1)	Non Current Assets
		(a) Property, Plant and Equipment and Intangible Assets
		(i) Property, Plant and Equipment (Machinery)	5	10,50,000	9,85,000
		(ii) Intangible Assets	6	1,60,000	2,00,000
	(2)	Current Assets
		Inventory		6,60,000	5,00,000
		Trade Receivables		3,30,000	2,90,000
		Cash Balance		-	25,000
				22,00,000	20,00,000

Notes:

		2023 (₹)	2022 (₹)
1.	Reserve and Surplus:
	Profit & Loss Balance	3,20,000	80,000
	Securities Premium	10,000	-
		3,30,000	80,000
2.	Short-term Borrowings:
	Bank Overdraft	2,80,000	1,00,000
3.	Other Current Liabilities:
	Accrued Expenses	10,000	-
4.	Short-term Provision:
	Provision for Tax	40,000	30,000
5.	Property, Plant and Equipment:
	Plant & Machinery	10,50,000	9,85,000
6.	Intangible Assets:
	Goodwill	1,60,000	2,00,000

Additional Information:

1. Depreciation on machinery charged during the year was ₹85,000.
2. Machinery discarded during the year ₹50,000.
3. Interest on long-term borrowings paid during the year was ₹12,000.
4. Provision for tax made during the year was ₹42,000.
5. Interim Dividend paid during the year ₹50,000.

     You are required to prepare a statement to show as to why the bank overdraft has increased in spite of higher profits.

Answer 1

Introduction of the Project:

     The project aims to find out how the bank overdraft increased from ₹1,00,000 on 31^st March, 2022 to ₹2,80,000 on 31^st March, 2023 despite an increase in the balance of profits by ₹2,40,000.

     Necessary data in the form of Balance Sheets as of 31^st March, 2022 and 2023, is provided and utilised for the purpose of the project work.

     The project work is planned and executed by preparing a Cash Flow statement.

CASH FLOW STATEMENT
(As per AS-3 Revised)
for the year ended 31st March, 2023
Particulars		Amount (₹)	Amount (₹)	Amount (₹)
A.	Cash flows from Operating Activities:
	Net Profit before Tax (Note 1)		3,32,000
	Adjustments For Non-Cash and Non-Operating Items:
	Add: Goodwill written off		40,000
	Depreciation Charged		85,000
	Loss due to Machinery discarded		50,000
	Interest on Long-term Borrowings		12,000
	Operating Profit before Working Capital Changes		5,19,000
	Add: Increase in Accrued Expenses		10,000
			5,29,000
	Less: Decrease in Trade Payables	1,10,000
	Increase in Inventory	1,60,000
	Increase in Trade Receivables	40,000	3,10,000
			2,19,000
	Payment of Tax(2)		(32,000)
	Net cash from operating activities		1,87,000	1,87,000
B.	Cash flows from Investing Activities:
	Purchase of Plant & Machinery(3)		(2,00,000)	(2,00,000)
C.	Cash flows from Financing Activities:
	Issue of Shares		1,00,000
	Securities Premium		10,000
	Repayment of Long-term Borrowings		(2,40,000)
	Proceeds from Short-term Borrowings (Increase in Bank Overdraft)		1,80,000
	Payment of Interest		(12,000)
	Payments of Dividend		(50,000)
	Net cash from financing activities		(12,000)	(12,000)
Net decrease in cash and cash equivalents				(25,000)
Add: Cash and cash equivalents in the beginning				25,000
Add: Cash and cash equivalents at the end				-

Notes:

(1)

	Amount (₹)
Calculation of Net Profit Before Tax:
Profit & Loss Bal. on 31st March, 2023	3,20,000
Profit & Loss Bal. on 31st March, 2022	80,000
	2,40,000
Add: Provision for Tax	42,000
Add: Payment of Interim Dividend	50,000
	3,32,000

(2)

PROVISION FOR TAX A/C
Particulars	Amount (₹)	Particulars	Amount (₹)
To Bank A/c (Balancing figure, being payment made)	32,000	By Balance b/d	30,000
To Balance c/d	40,000	By Statement of P & L (Provision made in Current Year)	42,000
	70,000		72,000

(3)

PLANT AND MACHINERY A/C
Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance b/d	9,85,000	By Bank A/c (Sale)	85,000
To Bank A/c (Balancing figure, being purchase)	2,00,000	By Statement of P & L (Machinery discarded)	50,000
		By Balance c/d	10,50,000
	11,85,000		11,85,000

PRESENTATION OF INFORMATION:

CASH FLOWS ACTIVITIES IN GALAXY FOODS LTD.

Comments:

     A study of the Cash Flow Statement reveals that the leading causes of an increase in bank overdraft are:

1. Repayment Long-term Borrowings Out of Current Sources: Amount paid for repayment of Long-term Borrowings is ₹2,40,000, whereas the amount raised by issue of share capital is only ₹10,000 (₹1,00,000 Share Capital + ₹10,000 Securities Premium). Long-term sources should have raised more money to repay the long-term borrowings.
2. Purchase of Plant & Machinery Out of Current Sources: Plant and Machinery have been purchased for ₹2,00,000. The full amount of ₹2,00,000 has been paid from current sources, whereas the amount required for purchasing plant & machinery, which is a long-term asset, should have been raised by long-term sources such as the issue of shares or debentures.
3. Increase in Inventory: Inventory has increased by ₹1,60,000. Excessive funds blocked in inventory cause a shortage of liquid resources.