Question

     The management of Rama Ltd. was unable to understand why overdraft had to be taken from the bank in spite of increase in profit during the year.

     The financial statements of the Company are given below:

BALANCE SHEET (as at 31st March)
			Nt. No.	31st March, 2023 (₹)	31st March, 2022 (₹)
I.	Equity & Liabilities
	(1)	Shareholder’s Funds:
		Share Capital		5,00,000	4,00,000
		Reserve and Surplus	(1)	2,95,000	1,90,000
	(2)	Current Liabilities:
		Short term Borrowings	(2)	1,50,000	-
		Trade Payables		3,40,000	5,20,000
		Other Current Liabilities	(3)	-	30,000
		Short term Provision	(4)	50,000	40,000
				13,35,000	11,80,000
II.	Assets
	(1)	Non-Current Assets:
		Property, Plant and Equipment (Machinery)		7,40,000	6,00,000
	(2)	Current Assets:
		Inventory		2,20,000	3,00,000
		Trade Receivables		3,60,000	2,50,000
		Cash		5,000	20,000
		Other Current Assets	(5)	10,000	10,000
				13,35,000	11,80,000

Note:

		2023 (₹)	2022 (₹)
(1)	Reserve and Surplus
	Securities Premium	30,000	10,000
	Retained Earnings	2,65,000	1,80,000
		2,95,000	1,90,000
(2)	Short term Borrowings:
	Bank Overdraft	1,50,000	-
(3)	Other Current Liabilities:
	Wages Due	-	30,000
(4)	Short term Provision:
	Provision for Tax	50,000	40,000
(5)	Other Current Assets:
	Prepaid Expenses	10,000	10,000

Additional Information:

1. Machinery costing ₹2,00,000, were sold for ₹80,000 during the year.
2. One Machinery standing in the books at ₹20,000 was discarded during the year.
3. Depreciation ₹60,000 was charged during the year.
4. Provision for Tax made during the year ₹54,000.
5. Interim Dividend paid during the year ₹20,000. 

     You are required to prepare a statement to show why the overdraft had to be taken from the bank in spite of profits earned during the year.

Answer 1

CASH FLOW STATEMENT
For the Year Ended 31st March
Particulars		Amount (₹)
A.	Cash Flow from Operating Activities:
	Net Profit before Tax	85,000
	Add: Depreciation	60,000
	Add: Loss on Sale of Machinery	1,20,000
	Add: Loss on Machinery Discarded	20,000
	Operating Profit before Working Capital Changes	2,85,000
	Less: Increase in Inventory	(80,000)
	Less: Increase in Trade Receivables	(1,10,000)
	Less: Decrease in Trade Payables	(1,80,000)
	Add: Provision for Tax (non-cash)	54,000
	Less: Income Tax Paid	(44,000)
	Net Cash Used in Operating Activities (A)	(75,000)
B.	Cash Flow from Investing Activities:
	Add: Sale of Machinery	80,000
	Less: Purchase of Machinery	(4,00,000)
	Net Cash Used in Investing Activities (B)	(3,40,000)
C.	Cash Flow from Financing Activities:
	Add: Proceeds from Bank Overdraft	1,50,000
	Add: Issue of Shares / Debentures (balancing figure)	1,20,000
	Less: Interim Dividend Paid	(20,000)
	Net Cash from Financing Activities (C)	2,50,000
Net Decrease in Cash and Cash Equivalents (A + B + C)		(1,65,000)
Add: Opening Cash and Bank Balance		20,000
Closing Cash and Bank Balance		(1,45,000)

WORKING NOTE 1:

Dr.	Machinery A/c		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance b/d (Opening)	10,00,000	By Bank A/c (Sale of machinery)	80,000
To Bank A/c (Purchase, Bal. fig.)	4,00,000	By P&L A/c (Loss on Sale)	1,20,000
		By Machinery Discarded A/c	20,000
		By Balance c/d (Closing)	12,80,000
Total	14,00,000	Total	14,00,000

WORKING NOTE 2:

Dr.	Provision for Tax A/c		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Bank A/c (Tax Paid)	44,000	By Balance b/d	40,000
To Balance c/d	50,000	By P&L A/c (Provision for current year)	54,000
Total	94,000	Total	94,000

WORKING NOTE 3: Financing Balancing Figure.

Particulars	Amount (₹)
Increase in Bank Overdraft	1,50,000
Add: Issue of Shares / Debentures (Balancing Fig.)	1,20,000
Less: Interim Dividend Paid	(20,000)
Net Cash from Financing Activities	2,50,000