Question

Excess Ltd has provided the following information. You are required to calculate cash flows from operating activities using 

(i) direct method 

(ii) indirect method

Profit and Loss Account for the year ended on March 31, 2015

Particulars	Amount	Particulars	Amount
Cost of Goods Sold	1200	Sales	2200
Gross Profit	1000
	2200		2200
Salary	300	Gross Profit	1000
Insurance Premium	80
Depreciation	200
Income Tax	100
Net Profit	320
	1000		1000

Additional Information:

Particulars	April 1, 2014	March 31, 2015
Debtors	250	300
Bills Receivable	80	60
Creditors	170	150
Stock	220	270
Outstanding Salary	20	30
Prepaid Insurance	50	55
Outstanding Income Tax	30	20

Answer 1

(i) Cash Flows from Operating Activities using direct method

Working Notes 

(a) Effect of sales on cash can be computed as follows:

(b) Cash movement due to purchases can be ascertained as follows:

(c) Disbursement of cash for expenses can be calculated as follows:

(ii) Calculation of cash from operating activities using indirect method

Thus, it can be observed from the above calculations that the amount of cash flows from operating activities is the same whether we use direct method or indirect method.