Question

For each of the following transactions, calculate the resulting cash flow and state the nature of cash flow, viz., operating, investing, and financing.

1. Acquired machinery for ₹ 2,50,000, paying 20% by cheque and executing a bond for the balance payable.
2. Paid ₹ 2,50,000 to acquire shares in Informa Tech., and received a dividend of ₹ 50,000 after acquisition.
3. Sold machinery of original cost ₹ 2,00,000 with an accumulated depreciation of ₹ 1,60,000 for ₹ 60,000.

Answer 1

(a)

• Total cost of machinery = ₹ 2,50,000
• Payment by cheque (cash outflow) = 20% of ₹ 2,50,000 = ₹ 50,000
• Cash flow: ₹ 50,000 outflow
• Nature of cash flow: Investing activity (purchase of fixed asset)

(b)

• Net cash flow relating to investment = Outflow ₹2,50,000 (purchase of shares) and inflow ₹50,000 (dividend receipt)
• Cash outflow: ₹ 2,50,000
• Nature of cash flow: Investing activity (purchase of shares)

(c)

• Book value of machinery = Cost − Accumulated depreciation
  = ₹ 2,00,000 − ₹ 1,60,000
  = ₹ 40,000
  Sold for ₹ 60,000 (cash inflow)
• Gain on sale = ₹ 60,000 − ₹ 40,000
  = ₹ 20,000 (non-cash gain, adjusted in operating activities)
• Cash flow: ₹ 60,000 inflow
• Nature of cash flow: Investing activity (sale of fixed asset)