Financial management

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Querist : Anonymous

Querist : Anonymous (Querist)

06 March 2012 ‘XYZ’ Ltd. has a revenue of Rs 6,00,000 and it has to provide for depreciation @
10% on straight line basis. It has cash expenses of Rs 1, 20,000. The taxes are @
50% . Show the net earnings on accounting approach basis and cash flow basis.
any body can solved it?????????????????????

Querist : Anonymous

Querist : Anonymous (Querist)

13 March 2012 sir plzzzzzzzzzz reply

Querist : Anonymous

Querist : Anonymous (Querist)

13 March 2012 plzzzzzzzzzzzzzz reply

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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24 July 2024 Sure, let's calculate the net earnings for 'XYZ' Ltd. based on both the accounting approach (accrual basis) and cash flow basis, given the provided information.

### Given Information:

- Revenue: Rs 6L
- Depreciation: 10% on straight-line basis
- Cash Expenses: Rs 1.20L
- Tax Rate: 50%

### Calculations:

#### 1. Accounting Approach (Accrual Basis):

**Step 1: Calculate Depreciation:**
Depreciation is calculated at 10% on the straight-line basis.

\[ \text{Depreciation} = \frac{10}{100} \times \text{Revenue} \]
\[ \text{Depreciation} = \frac{10}{100} \times 6L \]
\[ \text{Depreciation} = 60K \]

**Step 2: Calculate Operating Profit (EBIT - Earnings Before Interest and Taxes):**
Operating Profit is Revenue minus Depreciation minus Cash Expenses.

\[ \text{Operating Profit} = \text{Revenue} - \text{Depreciation} - \text{Cash Expenses} \]
\[ \text{Operating Profit} = 6L - 60K - 1.20L \]
\[ \text{Operating Profit} = 4.20L \]

**Step 3: Calculate Taxable Income:**
Taxable Income is Operating Profit minus Depreciation.

\[ \text{Taxable Income} = \text{Operating Profit} - \text{Depreciation} \]
\[ \text{Taxable Income} = 4.20L - 60K \]
\[ \text{Taxable Income} = 3.60L \]

**Step 4: Calculate Taxes:**
Taxes are calculated at 50% of Taxable Income.

\[ \text{Taxes} = \text{Taxable Income} \times \frac{50}{100} \]
\[ \text{Taxes} = 3.60L \times 0.50 \]
\[ \text{Taxes} = 1.80L \]

**Step 5: Calculate Net Earnings (Net Profit):**
Net Earnings is Operating Profit minus Taxes.

\[ \text{Net Earnings (Accounting Basis)} = \text{Operating Profit} - \text{Taxes} \]
\[ \text{Net Earnings (Accounting Basis)} = 4.20L - 1.80L \]
\[ \text{Net Earnings (Accounting Basis)} = 2.40L \]

#### 2. Cash Flow Basis:

**Step 1: Calculate Cash Flow from Operations:**
Cash Flow from Operations is Revenue minus Cash Expenses.

\[ \text{Cash Flow from Operations} = \text{Revenue} - \text{Cash Expenses} \]
\[ \text{Cash Flow from Operations} = 6L - 1.20L \]
\[ \text{Cash Flow from Operations} = 4.80L \]

**Step 2: Calculate Taxes Paid (Cash Flow Basis):**
Taxes Paid is calculated at 50% of Revenue (assuming taxes are paid based on revenue before depreciation).

\[ \text{Taxes Paid} = \text{Revenue} \times \frac{50}{100} \]
\[ \text{Taxes Paid} = 6L \times 0.50 \]
\[ \text{Taxes Paid} = 3L \]

**Step 3: Calculate Net Cash Flow (Cash Flow Basis):**
Net Cash Flow is Cash Flow from Operations minus Taxes Paid.

\[ \text{Net Cash Flow (Cash Flow Basis)} = \text{Cash Flow from Operations} - \text{Taxes Paid} \]
\[ \text{Net Cash Flow (Cash Flow Basis)} = 4.80L - 3L \]
\[ \text{Net Cash Flow (Cash Flow Basis)} = 1.80L \]

### Summary:

- **Net Earnings (Accounting Approach):** Rs 2.40L
- **Net Cash Flow (Cash Flow Basis):** Rs 1.80L

These calculations show how net earnings differ when calculated on an accrual basis (accounting approach) versus a cash flow basis. The accounting approach considers depreciation and taxable income, while the cash flow basis focuses on actual cash inflows and outflows during the period.

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