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MTPs QUESTIONS



        Q8. (MTP - Oct 19 – 6 Marks)
        A Ltd., whose functional currency is Indian Rupee, had a balance of cash and cash equivalents of Rs. 2,00,000,

        but there are no trade receivables or trade payables balances as on 1st April, 20X1. During the year 20X1-
        20X2, the entity entered into the following foreign currency transactions:
        ❖ A Ltd. purchased goods for resale from Europe for €1,00,000 when the exchange rate was €1 = Rs. 50. This
        balance is still unpaid at 31st March, 20X2 when the exchange rate is €1 = Rs. 45. An exchange gain on
        retranslation of the trade payable of Rs. 5,00,000 is recorded in profit or loss.

        ❖ A Ltd. sold the goods to an American client for $ 1,50,000 when the exchange rate was $1 = Rs. 40. This
        amount was settled when the exchange rate was $1 = Rs. 42. A further exchange gain regarding the trade
        receivable is recorded in the statement of profit or loss.
        ❖ A Ltd. also borrowed €1,00,000 under a long-term loan agreement when the exchange rate was €1 = Rs. 50
        and immediately converted it to Rs. 50,00,000. The loan was retranslated at 31st March, 20X2 @ Rs. 45, with

        a further exchange gain recorded in the statement of profit or loss.
        ❖ A Ltd. therefore records a cumulative exchange gain of Rs. 13,00,000 (5,00,000 + 3,00,000 + 5,00,000) in
        arriving at its profit for the year.
        ❖ In addition, A Ltd. records a gross profit of Rs. 10,00,000 (Rs. 60,00,000 – Rs. 50,00,000) on the sale of
        the goods.

        ❖Ignore taxation.
        How cash flows arising from the above transactions would be reported in the statement of cash flows of A
        Ltd. under indirect method?
        SOLUTION

                                             STATEMENT OF CASH FLOWS
                                        Particulars                                           Amount (Rs.)

             Cash flows from operating activities:

             Profit before  taxation  (10,00,000 + 13,00,000)                  23,00,000
             Adjustment for unrealised exchange gains/losses:
             Foreign exchange gain on long term loan
                                                                               (5,00,000)
             [€ 1,00,000 x Rs. (50 – 45)]
             Decrease in trade payables [1,00,000  x Rs. (50 – 45)]            (5,00,000)

             Operating Cash flow before working capital changes                 13,00,000
             Changes in working  capital (Due to  increase in trade payables)   50,00,000

             Net cash inflow from operating activities                         63,00,000
             Cash inflow from financing activity                               50,00,000
             Net increase in cash and cash equivalents                         1,13,00,000
                                                                                2,00,000
             Cash  and  cash  equivalents  at  the  beginning  of  the period
                                                                               1,15,00,000
              Cash and cash equivalents  at the end of the period




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