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Financial Statement Analysis

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Financial Statement Analysis-FIN621
Cash payment for Merchandise = Cost of Goods Sold + increase in Inventory + Decrease in Accounts
Payable, or Cost of Goods sold ­ Decrease in  Inventory ­ Increase in Accounts Payable.
Keeping in view, A1 No.3; cash payment for merchandise= 500,000 + 10,000 - 15000 = Rs.495, 000
A1 No.4, 5 & 6
Pre Paid expenses increased by Rs.3, 000, therefore cash payment exceeded the actual
expense. Accrued expenses (Payable) decreased by Rs.6000, therefore cash payment exceeded the
actual expense (includes employees' expenses). Depreciation of Rs.40, 000 requires no cash payment
but it does increase total expenses. It is therefore deducted from operating expenses.
Cash payment for operating expenses = expenses + increase in Pre Paid expenses + decrease in Accrued
Expenses ­ Depreciation=
300,000 + 3,000 + 6000 - 40,000 = Rs.269, 000
Cash paid for merchandise and operating expenses= 495,000+269,000 = Rs.764, 000
Cash payment for interest: (A17) accrued interest liability (interest payable) increased by Rs.7, 000. It
means that not all of the interest expense shown in Income Statement was paid in cash. Interest expenses
in Income Statement 35,000. From this, reduce the increase in related accrued liability i.e. 7,000. That
means interest paid in cash was Rs. 28,000.
Cash payment for Income Tax (A1 8) Tax liability reduced by Rs.2, 000/-. It means that cash payment
is greater than expense shown in Income Statement. Tax expenses in Income Statement are Rs.36, 000.
Add to this the reduction in tax liability, i.e. Rs. 2,000/-. Therefore Income tax paid in cash comes to
Rs.38, 000/-.
Operating Activities' portion of cash flow statement
Cash received from customers
Interest & dividend received
Cash inflow
Cash paid to suppliers
(Merchandise) & operating
Expenses (including employees)
Interest paid
Income tax paid
Cash (out flow)
Net cash flow from Operating Activities
Note that net income reported on Income Statement Rs.65, 000 and net cash flow from
Operating Activities Rs.50, 000. What are the reasons for difference of Rs.15, 000? Reasons are:
depreciation expense (reduces net income but not cash) and adjustments made to net sales, cost of goods
sold and expenses, and non operating gains & losses (these affect cash flow relating to Investing &
Financing Activities)