CH-18 Statement of Cash Flows – Accounting : Book Guide

Chapter 18: Statement of cash flows Questions and solutions which have a GST version: • Exercise 18.1 • Exercise 18.4 • Exercise 18.7 • Problem 18.16 • Problem 18.17 • Problem 18.22 Discussion questions 1. Discuss the purposes of the statement of cash flows. The purpose of a cash flow statement is to provide information about the historical changes to an entity’s cash and cash equivalents. It is designed to help users of GPFSs to assess the ability of the entity to generate cash and the needs of the entity to use cash. According to the standard, the cash flow statement, when used in conjunction with the other financial statements will benefit users in that it will enable them to: • Evaluate the changes in net assets of the entity. • Evaluate the entity’s financial structure, including its liquidity and solvency. • Evaluate the entity’s ability to adapt to changing circumstances and opportunities. • Assess the entity’s ability to generate cash in the future and enable predictions of future cash flows to be made. • Compare the performance of this entity with other entities because it eliminates the effects of using different accounting treatments (for example depreciation methods) for the same transactions and events. • Check the accuracy of past assessments of future cash flows. • Examine the relationship between profitability and net cash flow. The cash flow statement can also provide useful information to internal users such as managers in their planning and controlling operations. 2. Describe the concept of cash used in the preparation of the statement of cash flows. The concept of cash adopted by IAS 7/AASB 107 covers both cash and cash equivalents. Note the definitions of ‘cash’ and ‘cash equivalents’ in the standard. Note also (from paragraph 8 of the standard) that certain borrowings (e.g. bank overdrafts) may be included in the definition of cash equivalents if they are repayable on demand and form an integral part of the entity’s cash management function. The definition of ‘cash and cash equivalents’ is important as an item included in this concept cannot generate a cash flow and is therefore is not reported in the cash flow statement. That is, increasing a bank balance with funds from a short-term bank bill doesn’t generate a cash flow, whereas decreasing a bank account to purchase machinery is a cash flow. 3. Explain why cash flows from operating activities are important to users of a statement of cash flow. Cash flows from operating activities are important to users of cash flow statements because they represent cash flows generated by the entity’s business operations. A high and constant stream of these cash flows would generally indicate an entity’s capacity to generate cash to carry on as a going concern, and its flexibility to change the nature of its activities. As stated in paragraph 13 of AASB 107, the amount of cash flows from operating activities is a key indicator of the extent to which the operations of the entity have generated sufficient cash flows to repay loans, maintain the operating capability of the entity, pay dividends and make new investments without recourse to external sources of finance. 4. An accounting student asked the following question: ‘Why does the cash on hand balance as at the end of December 2020 in the statement of cash flow not concur with the cash balance shown in current assets in the statement of financial position?’ Provide the student with an explanation. The concept of cash adopted by IAS 7/AASB 107 covers both cash and cash equivalents. Note the definitions of ‘cash‘ and ‘cash equivalents‘ in the standard. Note also (from paragraph 8 of the standard) that certain borrowings (e.g. bank overdrafts) may be included in the definition of cash equivalents if they are repayable on demand and form an integral part of the entity’s cash management function. Thus, when preparing a statement of cash flows, the cash on hand balance will reflect the cash and cash equivalent assets less bank overdraft. This figure will not correspond with the cash balance shown in the statement of financial position, as the bank overdraft will be appearing in the current liabilities section. 5. Distinguish between cash flows from operating activities, investing activities and financing activities. Identify three separate cash flows where the accounting standard appears to allow classification under more than one activity. Explain why such choice of classification is allowed. Cash flows from operating activities relate to the provision of goods and services and expenses incurred in operating the business. Hence, cash flows from operating activities are those that reflected in transactions appearing in the statement of profit or loss and other comprehensive income. Examples of cash flows from operating activities are cash received from customers, cash paid to suppliers, and cash paid for wages, interest and tax. Cash flows from investing activities relate to acquisition and disposal of non-current assets and other investments that are not included in cash equivalents. Examples of cash flows from investing activities are cash from the sale of equipment, collections of loans, cash paid to purchase land, and cash loaned to another entity. Cash flows from financing activities relate to changes in non-current liabilities and equity. Examples of cash flows from financing activities are dividends paid, drawings, cash proceeds from share issues, and repayments of borrowings. The AASB 107 identifies three cash flows in which the cash flows are permitted to be classified under more than one activity. Interest received and paid: • Interest received and paid are usually classified as cash flows from operating activities as they are included in the determination of profit or loss. However, the standard also allows interest received and paid to be classified as cash flows from investing and financing activities respectively because they represent returns on investments or costs of obtaining financial resources. Dividends received: • Similar to interest, dividends received are usually classified under cash flows from operating activities as they are part of income and are included in profit/loss determination. However, the standard also allows dividends received to be classified under cash from investing activities because they are returns from investments. Taxes on income: • Although tax expense can be identifiable with investing or financing activities, taxes paid are usually classified as cash flows from operating activities as it is often impracticable to identify tax cash flows with an individual transaction that gives rise to investing or financing activities. However, the AASB 107 paragraph 36 allows taxes paid to be classified as cash flows under investing or financing activities when it is practicable to identify the tax cash flow with an individual transaction that gives rise to cash flows that are classified as investing or financing activities. • It is important to note that while choice of classification is allowed in reporting interest and dividends in the statement of cash flows, entities are required to maintain consistency in classifying such cash flows from period to period as either operating, investing or financing activities. 6. A student of accounting, after studying Illustrative Example A to AASB 107, was confused. Long-term borrowings are correctly recognised as a financing activity of an entity, yet interest paid is included in cash flow from operations. After some consideration the student concluded, ‘Interest paid should be regarded as part of the financing activities of an entity, and be classified in the cash flow statement accordingly.’ Explain if you support the conclusion reached by the student. The conclusion reached by the student may be valid. The classification of interest as a financing activity may also assist users for financial analysis purposes. However, carefully consider the definitions of operating activities, investing activities, and financing activities in paragraph 6 of the standard. Does interest paid satisfy any of these definitions? 7. Describe the direct method of preparing the cash flows from operating activities in a statement of cash flows. Contrast this with the indirect method. When preparing the cash flows from operating activities using the direct method, entities are required to show major classes of revenue as gross cash inflows from operations and major classes of expenses as cash outflows from operations. Subsequently, the net cash flows from operating activities is calculated as the difference between the cash inflows and cash outflows from operations. In order to determine the net cash flows from operating activities under the direct method, items used in determining profit (i.e. revenues and expenses) under accrual basis must be converted into cash basis. For example, accrual-basis sales and other revenues are adjusted to provide cash receipts from customers. Accrual-basis expenses (e.g. cost of sales, wages, and other expenses) are adjusted to reflect cash outflows from various classes of operating activities. The indirect method, on the contrary, does not show major classes of operating cash inflows and outflows. When using the indirect method to determine net cash flows from operating activities, non-cash items (such as gains or losses from disposal of non-current assets and depreciation) and any changes in current assets and current liabilities are added or subtracted from accrual-basis profit to make adjustment to cash-basis profit. Although entities are allowed to use either direct method or indirect method in preparing cash flows from operating activities, the AASB 107 recommends the use of direct method because it provides information not otherwise available in the other financial statements and a more reliable basis for estimating future cash flows from operations, whereas the indirect method does not provide information about cash inflows or outflows from individual items of operating activities. 8. Laura Prebble, the owner-manager of a small business enterprise, had carefully monitored her cash position over the past financial year, and was pleased to note at the end of the year that the cash position was strong, and had shown a healthy 50% increase over the year. When presented with the income statement for the year, she was dismayed to note that the profit earned in the last year had deteriorated significantly and had become a loss for the current period. In her anger, she accuses you of having made errors in the accounting since ‘such a silly situation could not possibly exist.’ Draft a response to Laura. Possible causes of an improved cash position with a deteriorating profit in your business could be: • Receiving cash for revenue in advance. • Receiving cash from accounts receivable recorded last period. • Cash proceeds from sale of non-current asset (The sale may result in a loss) • Additional cash from issue of new capital or receipt of new loan. • Recording an accrued expense affects profit but not cash in the period. • Recording an expense that was prepaid last year. • Non-cash expenses, e.g. depreciation. Yours sincerely, Accountant 9. Wayne Deng is reviewing the statement of cash flows for his technology business. The Statement has been provided by his accountant. He is dismayed that the statement shows net cash outflows for investing activities. Discuss if Wayne should be concerned by this. Cash flows from investing activities relate to acquisition and disposal of non-current assets and other investments that are not included in cash equivalents. Businesses need to invest in assets to generate returns. As Wayne’s business involves technology (which develops rapidly), it would be expected that Wayne needs to invest regularly in non-current assets to make sure that he has up-to-date equipment for his business. For example, Wayne’s business might be involved in writing and developing applications for mobile phones. This means that he needs to purchase different types of mobile phones and gets new models from time to time to test if the applications work for various models of mobile phones. In addition, he may need to purchase developer licenses from Apple or Google in order to develop applications for them. Hence, it is most likely that Wayne’s business would result in net cash outflows from investing activities due to money spent in acquiring those non-current assets, and Wayne should not be concerned by this. Wayne should start showing concerns if the net cash flows of his business from all activities shows net cash outflows for a number of reporting periods, as this will negatively impact on his business’ liquidity. 10. ‘A statement of cash flows is of limited use as a business needs to know if it will have sufficient cash to support its planned future activities.’ Discuss the merit of this statement focusing on both the purpose and limitations of a statement of cash flows. A statement of cash flows is designed to enable users of general purpose financial statements to assess the ability of the entity to generate cash and to predict future cash requirements. The information contained therein compliments the information in the other financial statements. However, too much reliance on statement of cash flows from a single reporting period does not help users to predict the entity’s future cash flows position. It is important to consider statements of cash flows from previous reporting periods to examine the trend in the entity’s cash flows. In addition, there are a number of non-cash items which have significant impacts on the entity’s operations, but are not reported in the statement of cash flows because they do not involve cash. There is also other important information relevant to cash position and future cash flows, which are not reported in the statement of cash flows and are only disclosed in the notes to the statement. In summary, a stand-alone statement of cash flows for a single reporting may be of limited use as the statement contains only past cash flows and historical data. However, statements of cash flows from current and previous reporting periods, when used in conjunction with other financial statements, will enable users to (amongst other things) assess the entity’s ability to generate cash in the future and predict future cash flows, check the accuracy of past assessments of future cash flows, and evaluate the changes in net assets of the entity. Exercises Exercise 18.1 Non-GST version Effects of transactions on statement of cash flows Below is a list of transactions completed by Direct Fashion during 2020. Ignore GST. For each transaction, indicate (a) the section (i.e. operating, investing or financing) of the statement of cash flows (SCF) in which the cash effect is reported (if the effect is not reported in any of the sections, place NA on the line); (b) the amount; and (c) whether the effect would be an inflow (+) or outflow (–). (LO4) Transaction (a) Section of SCF (b) Amount (c) Inflow (+) Outflow (–) 1. Accounts receivable decreased by $30 000 during the year Operating 30 000 + 2. Sold for $50 000 cash equipment with a carrying amount of $25 000 Investing 50 000 + 3. The owner contributed cash of $40 000 Financing 40 000 + 4. Purchased a motor vehicle for $27 000, giving $7 000 cash and by borrowing $20 000 Investing 7 000 – 5. Borrowed $30 000 with a three-month bill (Part of cash definition) 6. Paid interest on borrowings of $2000 Operating 2 000 – 7. Purchased equity investments for $50 000 cash Investing 50 000 – 8. Repaid fixed-term loan principal of $40 000 Financing 40 000 – 9. Accounts payable decreased by $15 000 during the year Operating 15 000 – 10. Owner withdrew $18 000 in cash for personal use Financing 18 000 – Exercise 18.1 Effects of transactions on statement of cash flows GST version Below is a list of transactions completed by Direct Fashion during 2020. For each transaction, indicate (a) the section (i.e. operating, investing or financing) of the statement of cash flows (SCF) in which the cash effect is reported (if the effect is not reported in any of the sections, place NA on the line); (b) the amount; and (c) whether the effect would be an inflow (+) or outflow (–). (LO4) Transaction (a) Section of SCF (b) Amount (c) Inflow (+) Outflow (–) 1. Accounts receivable decreased by $30 000 during the year Operating 30 000 + 2. Sold for $50 000 cash equipment with a carrying amount of $25 000 Investing 50 000 + 3. The owner contributed cash of $40 000 Financing 40 000 + 4. Purchased a motor vehicle for $29 700 (including GST 10%), giving $7 700 cash and by borrowing $22 000 Investing (MV) Operating (GST) 5 000 2 700 – – 5. Borrowed $30 000 with a three-month bill (Part of cash definition) 6. Paid interest on borrowings of $2000 Operating 2 000 – 7. Purchased equity investments for $50 000 cash Investing 50 000 – 8. Repaid fixed-term loan principal of $40 000 Financing 40 000 – 9. Accounts payable decreased by $15 000 during the year Operating 15 000 – 10. Owner withdrew $18 000 in cash for personal use Financing 18 000 – Exercise 18.2 Conversion from accrual-basis items to cash basis The information below was taken from the general ledger accounts of Muhria Tran, who uses the accrual basis of accounting. Required (a) Calculate the amount of cash collected from customers during 2021. (b) Calculate the amount of cash paid to suppliers for purchases during 2021. (c) Calculate the amount of cash paid to suppliers of services (including employees) during 2021. (LO5) (a) Receipts from customers = Sales + Begin. accounts receivable – Ending accounts receivable $232 800 = $270 000 + $78 600 – $115 800 (b) Payments to suppliers of goods = Cost of sales – Begin. inventory + Ending inventory + Begin. Accounts Payable – Ending accounts payable $146 360 = $148 000 – $52 200 + $48 360 + $37 700 – $35 500 (c) Payments for services = Expenses + Begin. accrued expenses – Ending accrued expenses – Begin. Prepaid Expenses + Ending Prepaid Expenses $42 000 = *$41 000 + $4 700 – $3 200 – $2 700 + $2 200 * ($88 000 – $47 000) Exercise 18.3 Cash flow from operating activities, indirect method The simple income statement for Jack’s Blinds is shown below. Additional information 1. Accounts receivable increased by $8250 during the year. 2. Accounts payable to suppliers of inventory increased by $3250 during the year. 3. Wages payable decreased by $6250 during the year (including selling expenses). 4. Administrative expenses include depreciation expense of $31 500. Required (a) Prepare the net cash flows from operating activities for the year ended 30 June 2020 for Jack’s Blinds using the indirect method. (LO5) (a) JACK’S BLINDS Statement of Cash Flows (Extract) for the year ended 30 June 2020 Inflows (Outflows) Cash flows from operating activities: Profit for the period $98 500 Depreciation expense 31 500 Changes in assets and liabilities Increase in accounts receivable $(8 250) Decrease in inventory 10 000 Increase in accounts payable 3 250 Decrease in wages payable (6 250) (1 250) Net cash flows from operating activities $128 750 Exercise 18.4 Investing and financing activities Non-GST version The following transactions were undertaken by Porschet Ltd during the financial year ended 30 June 2020 (ignore GST): 1. Issued ordinary shares for cash, $1 000 000. 2. Purchased land to be held for future expansion for $900 000 cash. 3. Paid off a long-term $360 000 loan plus interest of $32 000. 4. Sold for $480 000 used cars with a carrying amount of $200 000. 5. Paid cash dividends of $220 000. 6. Purchased machinery factory, giving $120 000 cash and signing a mortgage loan for $400 000. 7. Purchased shares in MBW Ltd to be held as an investment for $400 000 cash. 8. Sold a long-term government bond, with a carrying amount of $100 000, for $198 000, including $12 000 accrued interest. 9. Purchased shares in Forden Ltd to be held as a long-term investment, paying $380 000 cash. 10. Issued 5% debentures for $1 400 000. Required (a) Prepare the net cash flow used in investing activities section of the statement of cash flows using the classification shown in Illustrative Example A of IAS 7/AASB 107. (b) Prepare the net cash used in financing activities section of the statement of cash flows using the classification shown in Illustrative Example A of IAS 7/AASB 107. (LO4 and LO8) (a) PORSCHET LTD Cash Flow Statement (Extract) for the year ended 30 June 2020 Cash flows from investing activities: Purchase of investments (7, 9) $ (780 000) Purchase of property, plant and equipment (2, 6) (1 020 000) Proceeds from sale of equipment (4) 480 000 Proceeds from sale of investments (8) 186 000 Interest received (8) 12 000 Net cash used in investing activities $(1 122 000) (b) Cash flows from financing activities: Proceeds from issue of share capital (1) $1 000 000 Proceeds from issue of debentures (10) 1 400 000 Repayments of long-term borrowings (3) (360 000) Dividends paid (5) (220 000) Net cash from financing activities $1 820 000 Exercise 18.4 Investing and financing activities GST version The following transactions were undertaken by Porschet Ltd during the financial year ended 30 June 2020. Where applicable, GST is 10%. 1. Issued ordinary shares for cash, $1 000 000. 2. Purchased land to be held for future expansion for $900 000 cash. GST not applicable. 3. Paid off a long-term $360 000 loan plus interest of $32 000. 4. Sold used cars with a carrying amount of $200 000 for $480 000 (plus GST). 5. Paid cash dividends of $220 000. 6. Purchased machinery factory for $500 000 (plus GST), giving $150 000 cash and signing a mortgage loan for $400 000. 7. Purchased shares in MBW Ltd to be held as an investment for $400 000 cash. 8. Sold a long-term government bond, with a carrying amount of $100 000, for $198 000, including $12 000 accrued interest. 9. Purchased shares in Forden Ltd to be held as a long-term investment, paying $380 000 cash. 10. Issued 5% debentures for $1 400 000. Required (a) Prepare the net cash flow used in investing activities section of the statement of cash flows using the classification shown in Illustrative Example A of IAS 7/AASB 107. (b) Prepare the net cash used in financing activities section of the statement of cash flows using the classification shown in Illustrative Example A of IAS 7/AASB 107. (LO4 and LO8) (a) PORSCHET LTD Cash Flow Statement (Extract) for the year ended 30 June 2020 Cash flows from investing activities: Purchase of investments (7, 9) $ (780 000) Purchase of property, plant and equipment (2, 6) *(1 000 000) Proceeds from sale of equipment (4) **480 000 Proceeds from sale of investments (8) 186 000 Interest received (8) 12 000 Net cash used in investing activities $(1 102 000) *The value of the machinery factory was $500 000 + GST of $50 000. Cash of $150 000 was paid at the time of purchase. The GST on the purchase is treated as an operating cash flow. Therefore, only $100 000 of the cash paid is treated as an investing cash flow. Another way of thinking about this is that the amount recognised in the balance sheet for the Machinery Factory will be net of GST - $500 000. The investing cash flow consists of $100 000 paid now and the remaining $400 000 to be paid as principal repayments of the mortgage loan during the loan period. **The equipment (used cars) were sold for $480 000 plus GST. The investing cash flow is net of GST. The GST receivable is treated as an operating cash flow. (b) Cash flows from financing activities: Proceeds from issue of share capital (1) $1 000 000 Proceeds from issue of debentures (10) 1 400 000 Repayments of long-term borrowings (3) (360 000) Dividends paid (5) (220 000) Net cash from financing activities $1 820 000 Exercise 18.5 Reconciling cash from operating activities to profit Following are the descriptions of changes in selected accounts and other events for Krimp Café Pty Ltd. Required (a) Indicate whether each item should be added (A) to or deducted (D) from profit when reconciling cash from operating activities. If the item should be neither added nor deducted, indicate with an (N). (LO4) (a) 1. Decrease in accounts receivable A 2. Increase in inventory D 3. Cash proceeds from sale of shares N 4. Depreciation expense A 5. Increase in accounts payable A 6. Decrease in accrued expenses D 7. Increase in trade bills receivable D 8. Cash dividends paid N 9. Increase in interest payable A Exercise 18.6 Statement of cash flows for sole trader, direct method Kim Khan has been in business as a sole trader for the past 5 years. The comparative statements of financial position for the years 2016 and 2017 and a summarised income statement for the year ended 30 June 2020 are shown below. Additional information 1. Kim had contributed capital during the year for $6000 cash and had made cash withdrawals during the year. The bank overdraft was considered to be part of the entity’s everyday cash management activities. Required (a) Prepare a statement of cash flows using the direct method for Kim Khan’s business for the year ended 30 June 2020. (LO5) (a) Note: This solution follows basically the layout of the cash flow statement in Illustrative Example A of AASB 107. Further details may be shown for internal cash flow statements, e.g. details of equipment purchased, land purchased, vehicles purchased. KIM KHAN Statement of Cash Flows for the year ended 30 June 2020 Cash flows from operating activities: Cash receipts from customers $17 940 Cash paid to suppliers and employees (10 260) Net cash from operating activities $7 680 Cash flows from investing activities: Purchase of property, plant and equipment* (10 950) Net cash used in investing activities (10 950) Cash flows from financing activities: Proceeds from owner contribution 6 000 Proceeds from long-term borrowings 4 800 Drawings paid (6 690) Net cash from financing activities 4 110 Net increase (decrease) in cash and cash equivalents 840 Cash and cash equivalents at beginning of year** (300) Cash and cash equivalents at end of year $540 * Purchase of equipment $6300 + purchase of land $3600 + purchase of vehicle $1050. ** Assumes that the bank overdraft is part of the entity’s cash management function as per paragraph 8 of AASB 107 in this question. Workings: Cash receipts from customers = Sales + Begin. accounts receivable – Ending accounts receivable $17 940 = $16 800 + $4 290 – $3 150 Cash paid to suppliers for purchases = Cost of sales – Begin. inventory + Ending inventory + Begin. accounts payable – Ending accounts payable $3 900 = $5 100 – $6 000 + $6 600 + $6 150 – $7 950 Cash paid for services = Expenses – Begin. prepaid expenses + Ending prepaid expenses $6 360 = *$6 300 – $300 + $360 * ($8610 – $1500 depreciation on equipment – $810 depreciation on vehicles). Exercise 18.7 Statement of cash flows Non-GST version The business owned by Xavier Long made the following cash transactions during the reporting period. Ignore GST. 1. Purchased equipment for $20 000. 2. Purchased inventory for $40 000. 3. Sold inventory for $100 000. 4. Purchased office supplies for $8000. 5. Sold an item of plant for $60 000. Required (a) Prepare a statement of cash flows using the direct method for the business for the period. (a) XAVIER LONG Statement of Cash Flows (Extract) for the year ended XXXX Cash flows from operating activities: Cash receipts from customers $100 000 Cash paid to suppliers* (48 000) Net cash from operating activities $52 000 Cash flows from investing activities: Purchase of property, plant and equipment (20 000) Sale of property, plant and equipment 60 000 Net cash from investing activities 40 000 * Cash paid to suppliers = $40 000 + $8 000 = $48 000 Exercise 18.7 Statement of cash flows GST version The business owned by Xavier Long made the following cash transactions during the reporting period. GST of 10% was applicable on all transactions. 1. Purchased equipment for $22 000 (including GST). 2. Purchased inventory for $44 000 (including GST). 3. Sold inventory for $110 000 (including GST). 4. Purchased office supplies for $8800 (including GST). 5. Sold an item of plant for $66 000 (including GST). 6. A net amount of $9000, representing GST payable and receivable, excluding the above transactions, was paid to the Australian Taxation Office. Required (a) Prepare a statement of cash flows using the direct method for the business for the period. Treat all GST items as part of operating activities. (LO5) (a) XAVIER LONG Statement of Cash Flows (Extract) for the year ended XXXX Cash flows from operating activities: Cash receipts from customers $110 000 Cash paid to suppliers*** (69 800) Net cash from operating activities $40 200 Cash flows from investing activities: Purchase of property, plant and equipment* (20 000) Sale of property, plant and equipment** 60 000 Net cash from investing activities 40 000 Note: As required by Interpretation 1031, cash receipts from customers is shown at a gross figure, whereas cash flows from investing activities is shown at net of GST. The GST on investing activities is included in operating activities. Workings: * Purchase of equipment is shown net of GST. Purchase price before GST = $22 000 – ($22 000 / 11) = $20 000 (GST = $2 000). ** Selling price before GST = $66 000 – ($66 000 / 11) = $60 000 (GST = $6 000). *** Cash paid to suppliers = cash purchases of current assets including GST + additions to GST Receivable account in the current period (from investing activities) + GST paid to the ATO: = $44 000 + $8 800 + ($2 000 + $6 000) + $9 000 = $69 800 Exercise 18.8 Direct and indirect methods The comparative statements of financial position of Hutt Electrical as at 30 June 2019 and 2020 and the income statement for the year ended 30 June 2020 are shown overleaf. Additional information 1. Other expenses include $52 500 depreciation expense. 2. All sales and purchases of inventory are on credit. Required (a) Prepare a statement of cash flows from operating activities only for Hutt Electrical for the year ended 30 June 2020 using the direct method. (b) Repeat requirement A using the indirect method. (LO8) (a) HUTT ELECTRICAL Statement of Cash Flows (Extract) for the year ended 30 June 2020 Cash flows from operating activities: Cash receipts from customers $1 059 000 Cash paid to suppliers and employees (988 500) Cash generated from operations 73 500 Interest paid (37 500) Net cash from operating activities $33 000 Workings: Cash receipts from customers: Accounts Receivable Balance b/d 82 500 Cash from customers 1 059 000 Sales 1 047 000 Balance c/d 70 500 1 129 500 1 129 500 Cash payments for purchases: Inventory Balance b/d 165 000 Cost of Goods sold 780 000 Purchases 831 000 Balance c/d 216 000 996 000 996 000 Accounts Payable Cash 820 500 Balance b/d 64 500 Balance c/d 75 000 Purchases 831 000 895 500 895 500 Other Accrued Expenses Cash 168 000 Balance b/d 13 500 Balance c/d 18 000 Other expenses* 172 500 186 000 186 000 *Other expenses = $231 000 – $52 500 (depreciation) – $6000 (prepaid insurance) = $172 500 Cash paid to suppliers and employees = $820 500 (creditors) + $168 000 (expenses) = $988 500 Interest paid: Interest Payable Cash paid 37 500 Balance b/d 7 500 Balance c/d 4 500 Expense 34 500 42 000 42 000 Note: Rental income is excluded from operating activities in the statement of cash flows as it is argued that it is earned as a result of an investing activity. Nevertheless there is an argument for including it as an operating activity. See AASB 107 paras. 14 and 33. It is argued here that rent received (on investments) is similar to interest received (on investments). (b) HUTT ELECTRICAL Statement of Cash Flows (Extract) for the year ended 30 June 2020 Inflows (Outflows) Cash flows from operating activities: Profit for the period $24 000 Depreciation expense 52 500 Gain on sale of property (20 000) Loss on sale of plant 6 500 Rent income* (9 000) Changes in assets and liabilities Decrease in accounts receivable $12 000 Increase in inventory (51 000) Decrease in prepaid expenses 6 000 Increase in accounts payable 10 500 Decrease in interest payable (3 000) Increase in accrued expenses 4 500 (21 000) Net cash flows from operating activities $33 000 * As noted in part A above, rental income is included under investing activities, not operating activities. Exercise 18.9 Cash flow statement for sole trader and analysis The financial statements for the business of Trinh’s Nail Supplies for the past two years are presented below. Additional information 1. All purchases and sales of inventories are on credit. All purchases of office supplies are for cash. 2. The bank overdraft is considered to be part of the entity’s cash management function. 3. During the year ended 30 June 2017, the owner, Trinh, withdrew $12 800 in cash for personal use. 4. The entity sold some fixtures for $1200 cash during the current year. These fixtures initially cost $4200 and had been written down to a carrying amount at the date of sale of $2000. 5. Depreciation of fixtures has been included in ‘other expenses’ for the year ended 30 June 2020. All remaining other expenses were paid in cash. Required (a) Prepare the statement of cash flows for Trinh’s Nail Supplies for the year ended 30 June 2020, using the direct method. (b) Comment on the cash flow position of the entity as shown in the statement of cash flows. (LO5) (a) TRINH’S NAIL SUPPLIES Statement of Cash Flows for the year ended 30 June 2020 Cash flows from operating activities: Cash receipts from customers $482 000 Cash paid to suppliers and employees (440 600) Cash generated from operations 41400 Net cash from operating activities $41400 Cash flows from investing activities: Proceeds from sale of property and equipment 1 200 Purchase of property and equipment (30 200) Purchase of investments (10 000) Interest received** 2 000 Net cash used in investing activities (37000) Cash flows from financing activities: Drawings (12 800) Net cash used in financing activities (12 800) Net increase (decrease) in cash and cash equivalents (8 400) Cash and cash equivalents at beginning of year 4 400 Cash and cash equivalents at end of year*** $(4 000) **Interest income is included under investing activities as it is argued that it is earned as a result of an investing activity. ***Bank overdraft is part of the entity’s cash management function. Workings: Cash receipts from customers: Accounts Receivable Balance b/d 42 000 Cash from customers 482 000 Sales 500 000 Balance c/d 60 000 542 000 542 000 Cash paid to suppliers Cash payments for purchases: Inventory Balance b/d 80 000 Cost of Goods sold 458 000 Purchases 418 000 Balance c/d 40 000 498 000 498 000 Accounts Payable Cash paid 404 000 Balance b/d 26 000 Balance c/d 40 000 Purchases 418 000 444 000 444 000 Office Supplies Balance b/d 2 000 Office supplies used 11 000 Cash 14 000 Balance c/d 5 000 16 000 16 000 Accumulated Depreciation – Fixtures Depreciation of fixtures sold 2200 Balance b/d 16 000 Balance c/d 20 200 Depreciation for current period 6400 22 400 22 400 Cash paid to suppliers and employees = $404 000 (inventory) + $14 000 (office supplies) + $22 600 (other expenses)* = $440 600 *Other expenses = $29 000 – $6400 (fixture depreciation) = $22 600. Purchase of property and equipment: Fixtures Balance b/d 40 000 Write-down 2 200 Purchase 10 200 Carrying amount of fixtures sold 2 000 Balance c/d 46 000 50 200 50 200 Purchase of property and equipment = $10 200 (fixtures) + $20 000 (freehold property) = $30 200 (b) The statement of cash flows for Trinh’s Nail Supplies for the period ending 30 June 2020 shows that the entity’s balance of cash and cash equivalents has decreased by $8400. Trinh’s Nail Supplies started the period with a cash balance of $4400. At the end of the period, there is a negative cash balance of $4000, as Trinh’s Nails Supplies is relying on a bank overdraft (which is a part of the entity’s cash management function). Trinh’s operating activities generate a positive cash flows of $41400, as cash received from sales of inventory ($482 000) exceeds cash paid to suppliers and employees ($440 600), indicating a satisfactory cash position and that the business has sustainable operating activities. Investing activities, however, generate a negative cash flows as the entity acquires more property, equipment and investments during the period with a total value of $40 200. Cash received from sale of equipment (fixtures) and interest income does not cover the purchase price of property, equipment and investments, resulting in a cash outflows of $37 000. Cash flows from investing activities is often negative as businesses require new investment to grow and generate returns. Financing activities also generate a negative cash flows of $12 800 as a result of cash withdrawals by the owner for personal use and no additional capital is contributed during the period. Overall, Trinh’s Nail Supplies’ cash position for the period is unsatisfactory, as demonstrated by the lack of cash from operating activities in funding the entity’s investing and financing activities. If the trend continues, it is most likely that Trinh’s Nail Supplies will encounter liquidity problems in the future. Exercise 18.10 Proprietary company, with direct and indirect methods The following comparative statements of financial position and income statement are for the business of Bargains Galore Pty Ltd. Additional information 1. All sales and purchases of inventory are on credit. 2. Income tax is paid in one instalment during the year. 3. A dividend had been paid to shareholders. 4. Additional plant had been acquired for a cash outlay. Required (a) Prepare the statement of cash flows for the company for the year ended 30 June 2020. Use the direct method. (b) Repeat requirement A using the indirect method. (LO8) (a) BARGAINS GALORE PTY LTD Statement of Cash Flows for the year ended 30 June 2020 Cash flows from operating activities: Cash receipts from customers $822 000 Cash paid to suppliers and employees (684 000) Cash generated from operations 138 000 Income taxes paid (50 000) Net cash from operating activities $88 000 Cash flows from investing activities: Purchase of plant and equipment (48 000) Net cash used in investing activities (48 000) Cash flows from financing activities: Dividends paid (30 000) Net cash used in financing activities (30 000) Net increase (decrease) in cash and cash equivalents 10 000 Cash and cash equivalents at beginning of year 20 000 Cash and cash equivalents at end of year $30 000 Workings: Cash receipts from customers: Accounts Receivable Balance b/d 74 000 Cash from customers 822 000 Sales 800 000 Balance c/d 52 000 874 000 874 000 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 60 000 Cost of Goods sold 408 000 Purchases 436 000 Balance c/d 88 000 496 000 496 000 Accounts Payable Cash paid 472 000 Balance b/d 96 000 Balance c/d 60 000 Purchases 436 000 532 000 532 000 Expenses Payable Cash 212 000 Balance b/d 22 000 Balance c/d 40 000 Other expenses* 230 000 252 000 252 000 *Other expenses = $160 000 (wages) + $78 000 (other expenses) – $8000 (prepaid expenses expired) * = $230 000 Cash paid to suppliers and employees = $472 000 (inventory) + $212 000 (expenses) = $684 000 Income tax paid: Current Tax Liability Cash paid 50 000 Balance b/d 50 000 Balance c/d 44 000 Income tax expense 44 000 94 000 94 000 Dividends paid: Retained Earnings Dividends paid 30 000 Balance b/d 150 000 Balance c/d 180 000 Profit for the period 60 000 210 000 210 0 (b) BARGAINS GALORE PTY LTD Statement of Cash Flows for the year ended 30 June 2020 Inflows (Outflows) Cash flows from operating activities Profit for the period $60 000 Depreciation expense 50 000 Changes in assets and liabilities Decrease in accounts receivable 22 000 Increase in inventory (28 000) Decrease in prepaid expenses 8 000 Decrease in accounts payable (36 000) Increase in expenses payable 18 000 Decrease in current tax liability (6 000) (22 000) Net cash flows from operating activities 88 000 Cash flows from investing activities Purchase of plant and equipment (48 000) Net cash flows from investing activities (48 000) Cash flows from financing activities Dividends paid (30 000) Net cash flows from financing activities (30 000) Net increase (decrease) in cash and cash equivalents 10 000 Cash and cash equivalents at beginning of year 20 000 Cash and cash equivalents at end of year $30 000 Exercise 18.11 Statement of cash flows for sole trader and analysis The financial statements for the business of Jet’s Ski Equipment are shown below. Additional information 1. All purchases and sales of inventories are on credit. 2. On 1 July 2019, J. Waters injected a further capital contribution of $21 000 cash into the business. 3. During the year, store equipment costing $18 000 with a carrying amount of $15 000 was sold for $6000 cash. 4. Half the land on hand at the beginning of the year was sold for $48 000 cash. 5. During the year, the owner withdrew $6000 from the business bank account in order to pay his personal income tax bill and $300 per week for 50 weeks for private consumption. Required (a) Prepare the statement of cash flows for Jet’s Ski Equipment for the year ended 30 June 2020, using the direct method. (b) Comment on the cash flow position as shown in the entity’s statement of cash flows. (LO5) (a) JET’S SKI EQUIPMENT Statement of Cash Flows for the year ended 30 June 2020 Cash flows from operating activities: Cash receipts from customers $261 000 Cash paid to suppliers and employees (222 000) Cash generated from operations 39 000 Net cash from operating activities $39 000 Cash flows from investing activities: Purchase of property, plant and equipment (36 000) Sale of property, plant and equipment** 54 000 Net cash from investing activities 18 000 Cash flows from financing activities: Capital contribution 21 000 Drawings (21 000) Net cash from financing activities 0 Net increase (decrease) in cash and cash equivalents 57 000 Cash and cash equivalents at beginning of year*** (30 000) Cash and cash equivalents at end of year $27 000 **Sale of property, plant and equipment = $6 000 (store equipment) + $48 000 (land) = $54 000 *** Bank overdraft is part of the entity’s cash management function. Workings: Cash receipts from customers: Accounts Receivable Balance b/d 42 000 Cash from customers 261 000 Sales 270 000 Balance c/d 51 000 312 000 312 000 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 144 000 Cost of Goods sold 144 000 Purchases 168 000 Balance c/d 168 000 312 000 312 000 Accounts Payable Cash paid 162 000 Balance b/d 72 000 Balance c/d 78 000 Purchases 168 000 240 000 240 000 Cash paid to suppliers and employees = $162 000 (inventory) + $60 000 (other expenses) = $222 000 Purchase of property and equipment: Store Equipment Balance b/d 90 000 Cost of equipment sold 18 000 Purchase 36 000 Balance c/d 108 000 126 000 126 000 (b) Jet’s Ski Equipment’s cash balance for the period ending 30 June 2020 has increased from a negative $30 000 (due to bank overdraft) to a positive $27 000, which is a satisfactory result. This $57 000 cash increase is contributed by $39 000 of net cash from operating activities and $18 000 of net cash from investing activities. Jet’s Ski Equipment’s operating activities generate a positive net cash flow, as cash received from customers from the sale of inventory ($261 000) well exceeds cash paid to suppliers and employees ($222 000). Similarly, the entity’s investing activities also generated a positive net cash flows. Despite $36 000 cash spent on purchasing new equipment, the proceeds from sale of the entity’s store equipment and half of the land owned (totalling $54 000) exceed the cash paid for the new equipment. It would be concerning if net cash flows from investing activities continues to be positive as it suggests that assets are being sold with limited reinvestment in new assets. Zero net cash flows is generated during the current period under financing activities, as the $21 000 additional capital contributed by the owner in the beginning of the period is offset by the same amount of cash withdrawals made by the owner during the period. Exercise 18.12 Statement of cash flows for sole trader Comparative statements of financial position as at 31 December 2020 and 2019 and the income statement for 2020 for W. Yu are set out below. No plant and equipment was sold during the year. W. Yu withdrew $30 000 in cash during the year. Required (a) Prepare a statement of cash flows for the year ended 31 December 2020 in accordance with the direct method. (LO5) (a) W. YU Statement of Cash Flows for the year ended 31 December 2020 Cash flows from operating activities: Cash receipts from customers $582 000 Cash paid to suppliers and employees (526 800) Cash generated from operations Net cash from operating activities $55 200 Cash flows from investing activities: Purchase of property, plant and equipment (108 000) Net cash used in investing activities (108 000) Cash flows from financing activities: Long-term borrowings 60 000 Drawings (30 000) Net cash from financing activities 30 000 Net increase (decrease) in cash and cash equivalents (22 800) Cash and cash equivalents at beginning of year 134 400 Cash and cash equivalents at end of year $111 600 Workings: Cash receipts from customers: Accounts Receivable Balance b/d 151 200 Cash from customers 582 000 Sales 592 200 Balance c/d 161 400 743 400 743 400 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 208 800 Cost of Goods sold 350 000 Purchases 337 400 Balance c/d 196 200 546 200 546 200 Accounts Payable Cash paid 329 600 Balance b/d 132 600 Balance c/d 140 400 Purchases 337 400 470 000 470 000 Expenses Payable Cash paid 197 200 Balance b/d 83 400 Balance c/d 77 400 Expenses* 191 200 274 600 274 600 *Expenses = $209 200 – $18 000 (depreciation) = $191 200 Cash paid to suppliers and employees = $329 600 (inventory) + $197 200 (expenses) = $526 800 Exercise 18.13 Cash flows from operating activities Opposite are the comparative statements of financial position of Cresta Ltd as at 30 June 2019 and 2020, and the income statement and statement of changes in equity for the year ended 30 June 2020. Additional information 1. Other expenses include $66 000 depreciation expense on machinery and insurance expense of $10 500. 2. All sales and purchases are on credit. 3. Rental income is earned as a result of renting part of the property that is in excess of the company’s needs. Required (a) Prepare the cash flows from operating activities only for Cresta Ltd for the year ended 30 June 2020, using the direct method. Ignore taxes. (LO8) (a) CRESTA LTD Statement of Cash Flows (Extract) for the year ended 30 June 2020 Cash flows from operating activities: Cash receipts from customers $1 272 000 Cash paid to suppliers and employees (1 126 500) Cash generated from operations 145 500 Lease income 22 500 Interest paid (35 700) Net cash from operating activities $132 300 Workings: Cash receipts from customers: Accounts Receivable Balance b/d 112 500 Cash from customers 1 272 000 Sales 1 260 000 Balance c/d 100 500 1 372 500 1 372 500 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 198 000 Cost of Goods sold 843 000 Purchases 891 000 Balance c/d 246 000 1089 000 1089 000 Accounts Payable Cash paid 882 000 Balance b/d 66 000 Balance c/d 75 000 Purchases 891 000 957 000 957 000 Other Accrued Expenses Cash paid 237 000 Balance b/d 13 500 Balance c/d 21 000 Other expenses* 244 500 258 000 258 000 *Other expenses = $321 000 – $66 000 (depreciation) – $10 500 (insurance) = $244 500 Prepaid Insurance Balance b/d 10 500 Insurance expense 10 500 Cash paid 7 500 Balance c/d 7 500 18 000 18 000 Cash paid to suppliers and employees = $882 000 (inventory) + $237 000 (other expenses) + $7500 (prepaid insurance) = $1 126 500 Interest Payable Cash paid 35 700 Balance b/d 10 200 Balance c/d 9 000 Interest expense 34 500 44 700 44 700 Exercise 18.14 Statement of cash flows for a company Some of the most recent financial statements for Hyland Pty Ltd are shown below. Additional information 1. All purchases and sales of inventories are on credit. 2. On 1 July 2020, the shareholders injected a further capital contribution of $28 000 cash into the business. 3. During the year, sales equipment costing $24 000 and written down to a carrying amount of $20 000 was sold for $8000 cash. 4. Half of the land on hand at the beginning of the year was sold for $64 000 cash. 5. During the year, the company withdrew cash from the business bank account in order to pay cash dividends to its shareholders. 6. The bank overdraft in the company is considered to be an integral part of the company’s cash management arrangements. 7. Ignore income tax. Required (a) Prepare the statement of cash flows for Hyland Pty Ltd for the year ended 30 June 2021, using the direct method. (LO8) (a) HYLAND PTY LTD Statement of Cash Flows for the year ended 30 June 2021 Cash flows from operating activities: Cash receipts from customers $348 000 Cash paid to suppliers and employees (296 000) Cash generated from operations 52 000 Net cash from operating activities $52 000 Cash flows from investing activities: Purchase of property, plant and equipment (48 000) Sale of property, plant and equipment* 72 000 Net cash from investing activities 24 000 Cash flows from financing activities: Capital contribution 28 000 Dividends paid (28 000) Net cash from financing activities 0 Net increase (decrease) in cash and cash equivalents 76 000 Cash and cash equivalents at beginning of year** (40 000) Cash and cash equivalents at end of year $36 000 *Sale of property, plant and equipment = $8 000 (sales equipment) + $64 000 (land) = $72 000 **Bank overdraft is part of the entity’s cash management function. Workings: Cash receipts from customers: Accounts Receivable Balance b/d 56 000 Cash from customers 348 000 Sales 360 000 Balance c/d 68 000 416 000 416 000 Cash paid to suppliers: Accounts Payable Cash paid 216 000 Balance b/d 96 000 Balance c/d 104 000 Purchases 224 000 320 000 320 000 Cash paid to suppliers and employees = $216 000 (inventory) + $80 000 (other expenses) = $296 000 Purchase of property and equipment: Sales Equipment Balance b/d 120 000 Write-down 4 000 Purchase 48 000 Carrying amount of equipment sold 20 000 Balance c/d 144 000 168 000 168 000 Dividends paid: Equity Dividends paid 28 000 Balance b/d 584 000 Balance c/d 608 000 Capital contribution 28 000 Profit for the period 24 000 636 000 636 000 Exercise 18.15 Statement of cash flows for a company Below are the comparative statements of financial position of Lithium Ltd. Additional information 1. Income statement details were: sales revenue $750 000; cost of sales $603 000; expenses $116 360 (excludes depreciation and carrying amount of vehicle sold); bad debts expense $14 440; and tax expense $4200. 2. A dividend was paid during the year. 3. A vehicle that cost $5600 originally was sold during the year for $3000. The vehicle had been depreciated by $3200 at date of sale. 4. The company pays tax in one instalment. The single instalment of $3200 due by 21 October 2020 was paid. Required (a) Prepare a statement of cash flows for the year ended 30 June 2021 in accordance with the direct method. Include any appropriate notes. (LO8) (a) LITHIUM LTD Statement of Cash Flows for the year ended 30 June 2021 Cash flows from operating activities: Cash receipts from customers $715 560 Cash paid to suppliers and employees (713 360) Cash generated from operations 2 200 Income taxes paid (3 200) Net cash used in operating activities (Note 2) $(1 000) Cash flows from investing activities: Purchase of property, plant and equipment (16 400) Sale of property, plant and equipment 3 000 Net cash used in investing activities (13 400) Cash flows from financing activities: Capital contribution 31 000 Dividends paid (8 000) Net cash from financing activities 23 000 Net increase (decrease) in cash and cash equivalents 8 600 Cash and cash equivalents at beginning of year 34 400 Cash and cash equivalents at end of year (Note 1) $43 000 Notes to the Statement of Cash Flows: 1. Reconciliation of cash: Cash and cash equivalents consist of petty cash, cash at bank, and bank bills. Cash and cash equivalents included in the statement of cash flows comprise the following statement of financial position amounts. 2020 2021 Petty cash $ 200 $ 400 Cash at bank 24 200 30 600 Bank bills 10 000 12 000 Cash and cash equivalents $34 400 $43 000 2. Reconciliation of net cash from operating activities to profit: Profit for the period $5 800 Depreciation – motor vehicles 6 000 Depreciation – office furniture 800 Gain on sale of vehicle (600) Changes in current assets and current liabilities: Increase in accounts receivable (24 440) Increase in allowance for doubtful debts 4 440 Decrease in inventory 3 800 Increase in accounts payable 2 200 Increase in current tax liability 1 000 (13 000) Net cash used in operating activities $(1 000) 3. Non-cash financing and investing activities: There are no transactions under financing and investing activities during the period that resulted in a cash flow. Workings: Cash receipts from customers: Accounts Receivable Balance b/d 102 960 Cash from customers 715 560 Sales 750 000 Bad debts written off 10 000 Balance c/d 127 400 852 960 852 960 Allowance for Doubtful Debts Bad debts written off 10 000 Balance b/d 6 960 Balance c/d 11 400 Bad debt expense 14 440 21 400 21 400 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 74 600 Cost of Goods sold 603 000 Purchases 599 200 Balance c/d 70 800 673 800 673 800 Accounts Payable Cash paid 597 000 Balance b/d 45 000 Balance c/d 47 200 Purchases 599 200 644 200 644 200 Cash paid to suppliers and employees = $597 000 (inventory) + $116 360 (other expenses) = $713 360 Purchase of property and equipment: Motor Vehicles Balance b/d 42 000 Cost of vehicles sold 5 600 Purchase 14 000 Balance c/d 50 400 56 000 56 000 Purchase of property, plant and equipment = $14 000 (motor vehicles) + $2 400 (office furniture) = $16 400 Accumulated Depreciation – Motor Vehicles Depreciation of vehicles sold 3 200 Balance b/d 10 000 Balance c/d 12 800 Depreciation for current period 6 000 16 000 16 000 LITHIUM LTD Income Statement (Reconstructed) for the year ending 30 June 2021 Sales revenue $750 000 Less: Cost of sales 603 000 Gross profit $147 000 Gain on sale of vehicle* 600 147 600 Less: Expenses: Depreciation of motor vehicles 6 000 Depreciation of office furniture 800 Other expenses 116 360 Bad debts expense 14 440 Income tax expense 4 200 141 800 Profit $ 5 800 *Carrying amount of vehicle sold = $5600 (cost) – $3200 (depreciation) = $2400 Gain on sale of vehicle = $3000 (selling price) – $2400 (carrying amount) = $600 Dividends paid: Retained Earnings Dividends paid 8 000 Balance b/d 32 200 Balance c/d 30 000 Profit for the period 5 800 38 000 38 000 Problems Problem 18.16 Statement of cash flows for a company Non-GST version The statement of cash flows for Cars4Cash Ltd follows. Required (a) Explain the information that would be presented in Note 29 of Cars4Cash Ltd’s financial statements. (b) Explain the information that would be presented in Note 9 of Cars4Cash Ltd’s financial statements. (c) Discuss how it would be possible to research whether the direct or indirect method of presenting cash flows from operating activities is more useful to investors. (LO3 and LO6) (a) Note 29 of Cars4Cash Ltd’s financial statements would present a reconciliation of profit after income tax to net cash flows from operating activities. This is done by adjusting the profit earned for the period by removing the effects of depreciation of non-current assets, other items affecting non-current assets (e.g. gain or loss on sale of non-current assets), and by adjusting the changes in the balances of current assets and current liabilities. (b) Note 9 of Cars4Cash Ltd’s financial statements would present a reconciliation of cash and cash equivalents balance as at the beginning and the end of financial year. That is, it would provide information about the components of the cash and cash equivalents, as well as the individual balances of each component. Note 9 of Cars4Cash Ltd’s financial statements shows that the entity’s cash and cash equivalents balance comprise of cash in hand and cash at bank. (c) The objective of financial reporting (including preparing the statement of cash flows) is to provide information that is useful for users in making economic decisions. Hence, in order to find out which method (the direct or indirect method) of presenting cash flows from operating activities is more useful to inventors, the predictive ability and capital market evidence for each method ought to be examined (see Bradbury, 2011). Predictive ability refers to the ability of cash flow information provided in predicting the entity’s future performance in operating cash flows. This information is crucial for investors, as they are more willing to invest in entities with strong cash position. Capital market evidence refers to whether the cash flow information provided using either direct or indirect method is associated with movement in share prices. Information is deemed to be more useful if it has a stronger association with share prices. A number of studies have been undertaken to examine the usefulness of direct versus indirect method in reporting cash flows from operating activities. Most studies report that the direct method is more useful compared to the indirect method, as it leads to a better prediction of future operating cash flows and provides incremental information compared to that provided using indirect method. For example, Krishnan and Largay (2000) found that the direct method has more superior ability in predicting firm’s one-year ahead operating cash flows than the indirect methods. Using share price return, Clinch et al. (2002) found that direct cash flow components and reconciliation items have additional ability to explain share price returns. Frino and Jones (2005) also reported that firms using direct method for the first time experience a significantly larger decline in bid–ask spread than firms already voluntarily preparing similar information, implying lower transaction costs, higher liquidity and potentially lower cost of capital. References: Bradbury, M 2011, ‘Direct or indirect cash flows statements?’, Australian Accounting Review vol. 21, no.2, pp. 124–30. Clinch, G, Sidhu, B & Sin, S 2002, ‘The usefulness of direct and indirect cash flow disclosures’, Review of Accounting Studies, vol. 7, no. 4, pp. 383–404. Frino, A & Jones, S 2005, ‘The impact of mandated cash flow disclosure on bid–ask spreads,’ Journal of Business Finance and Accounting, vol. 32, nos.7–8, pp. 1373–96. Krishnan, GV, &. Largay III JA 2000, ‘The predictive ability of direct method cash flow information,’ Journal of Business Finance and Accounting, vol. 27, nos. 1–2, pp. 215–45. Problem 18.16 Statement of cash flows for a company GST version The statement of cash flows for Cars4Cash Ltd follows. Cars4Cash Ltd Statement of Cash Flows For the year ended 30 June 2020 Notes 2020 $000 2019 $000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest paid Income taxes paid 234 760 (110 837 1 343 (5 (34 510 ) ) ) 196 870 (94 261 1 322 (31 (29 688 ) ) ) Net cash inflow from operating activities 29 90 751 74 212 Cash flows from investing activities Payment for purchase of associates Payments for property, plant and equipment Payments for domain names Net outstanding receipts (payment) Payments for computer software Proceeds from disposal of assets Payment for investment in joint venture (104 169 (1 268 (13 2 427 (1 555 13 (250 ) ) ) ) ) — (5 349 (23 (2 500 (235 11 — ) ) ) ) Net cash (outflow) from investing activities (104 815 ) (8 096 ) Cash flows from financing activities Proceeds from issues of shares and other equity securities Proceeds from borrowings Payments for shares bought back Dividends paid to company shareholders 21 8 355 55 000 — (75 086 ) 3 013 — (9 999 (51 035 ) ) Net cash (outflow) from financing activities (11 731 ) (58 021 ) Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year (25 795 40 935 ) 8 095 32 840 Cash and cash equivalents at end of year 9 15 140 40 935 Required (a) Explain the information that would be presented in Note 29 of Cars4Cash Ltd’s financial statements. (b) Explain the information that would be presented in Note 9 of Cars4Cash Ltd’s financial statements. (c) Discuss how it would be possible to research whether the direct or indirect method of presenting cash flows from operating activities is more useful to investors. (LO3 and LO6) (a) Note 5 of Cars4Cash Ltd’s financial statements would present a reconciliation of profit after income tax to net cash flows from operating activities. This is done by adjusting the profit earned for the period by removing the effects of depreciation of non-current assets, other items affecting non-current assets (e.g. gain or loss on sale of non-current assets), and by adjusting the changes in the balances of current assets and current liabilities. (b) Note 8 of Cars4Cash Ltd’s financial statements would present a reconciliation of cash and cash equivalents balance as at the beginning and the end of financial year. That is, it would provide information about the components of the cash and cash equivalents, as well as the individual balances of each component. Note 9 of Cars4Cash Ltd’s financial statements shows that the entity’s cash and cash equivalents balance comprise of cash in hand and cash at bank. (c) The objective of financial reporting (including preparing the statement of cash flows) is to provide information that is useful for users in making economic decisions. Hence, in order to find out which method (the direct or indirect method) of presenting cash flows from operating activities is more useful to inventors, the predictive ability and capital market evidence for each method ought to be examined (see Bradbury, 2011). Predictive ability refers to the ability of cash flow information provided in predicting the entity’s future performance in operating cash flows. This information is crucial for investors, as they are more willing to invest in entities with strong cash position. Capital market evidence refers to whether the cash flow information provided using either direct or indirect method is associated with movement in share prices. Information is deemed to be more useful if it has a stronger association with share prices. A number of studies have been undertaken to examine the usefulness of direct versus indirect method in reporting cash flows from operating activities. Most studies report that the direct method is more useful compared to the indirect method, as it leads to a better prediction of future operating cash flows and provides incremental information compared to that provided using indirect method. For example, Krishnan and Largay (2000) found that the direct method has more superior ability in predicting firm’s one-year ahead operating cash flows than the indirect methods. Using share price return, Clinch et al. (2002) found that direct cash flow components and reconciliation items have additional ability to explain share price returns. Frino and Jones (2005) also reported that firms using direct method for the first time experience a significantly larger decline in bid–ask spread than firms already voluntarily preparing similar information, implying lower transaction costs, higher liquidity and potentially lower cost of capital. References: Bradbury, M 2011, ‘Direct or indirect cash flows statements?’, Australian Accounting Review vol. 21, no.2, pp. 124–30. Clinch, G, Sidhu, B & Sin, S 2002, ‘The usefulness of direct and indirect cash flow disclosures’, Review of Accounting Studies, vol. 7, no. 4, pp. 383–404. Frino, A & Jones, S 2005, ‘The impact of mandated cash flow disclosure on bid–ask spreads,’ Journal of Business Finance and Accounting, vol. 32, nos.7–8, pp. 1373–96. Krishnan, GV, &. Largay III JA 2000, ‘The predictive ability of direct method cash flow information,’ Journal of Business Finance and Accounting, vol. 27, nos. 1–2, pp. 215–45. Problem 18.17 Statement of cash flows for a sole trader Non-GST version Financial figures of the business of C. Wilson for the last 2 years are shown below. The income statement for the business for the year ended 30 June 2021 reveals the following details. Additional information 1. During the year ended 30 June 2021, Wilson withdrew $30 per week in cash for 52 weeks for private purposes. 2. Wilson also withdrew $1200 on her business bank account to pay her personal income tax. 3. Land, shown in the accounts at $6000, was sold during the year for $8400. 4. Plant costing $1800 and written down to $900 was sold for $720. 5. Ignore GST. Required (a) Prepare a statement of cash flows for the year ended 30 June 2021 using the direct method. (b) Prepare the note to the above statement reconciling cash flows from operating activities with profit. (LO5 and LO6) (a) C. WILSON Statement of Cash Flows for the year ended 30 June 2021 Cash flows from operating activities: Cash receipts from customers $17 100 Cash paid to suppliers and employees (14 040) Cash generated from operations 3 060 Net cash from operating activities $3 060 Cash flows from investing activities: Purchase of property, plant and equipment (3 600) Sale of property, plant and equipment* 9 120 Net cash from investing activities 5 520 Cash flows from financing activities: Drawings** (2 760) Net cash used in financing activities (2 760) Net increase (decrease) in cash and cash equivalents 5 820 Cash and cash equivalents at beginning of year*** (3 000) Cash and cash equivalents at end of year $2 820 *Sale of property, plant and equipment = $8 400 (land) + $720 (plant) = $9 120 **Drawings = ($30  52 weeks) + $1 200 = $2 760 ***Bank overdraft is a part of the entity’s cash management function. Workings: Cash receipts from customers: Accounts Receivable Balance b/d 4 200 Cash from customers 17 100 Sales 18 000 Balance c/d 5 100 22 200 22 200 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 14 400 Cost of Goods sold 9 600 Purchases 12 000 Balance c/d 16 800 26 400 26 400 Accounts Payable Cash paid 11 400 Balance b/d 72 00 Balance c/d 7 800 Purchases 12 000 19 200 19 200 Cash paid to suppliers and employees = $11 400 (inventory) + $2640 (other expenses) = $14 040 Purchase of property and equipment Plant and Equipment Balance b/d 9 000 Cost of plant sold 1 800 Purchase 3 600 Balance c/d 10 800 12 600 12 600 Purchase of property, plant and equipment = $3600 (plant) (b) Reconciliation of net cash from operating activities to profit: Profit for the period $6 540 Depreciation – plant and equipment 1 200 Depreciation – buildings 240 Gain on sale of land (2 400) Loss on the sale of plant 180 Changes in current assets and current liabilities: Increase in accounts receivable (900) Increase in inventory (2 400) Increase in accounts payable 600 (2 700) Net cash from operating activities $3 060 Problem 18.17 Statement of cash flows for a sole trader GST version Financial figures of the business of C. Wilson for the last 2 years are shown below. C. WILSON Comparative Statements of Financial Position as at 30 June 2021 2020 2021 ASSETS $ $ $ $ Cash at bank 0 2,820 Accounts receivable 4,200 5,100 Inventory 14,400 16,800 GST receivable 2,100 100 Plant and Equipment 9,000 10,800 Accumulated Depreciation - P&E (4,200) 4,800 (4,500) 6,300 Land 12,000 6,000 Buildings 12,000 12,000 Accumulated Depreciation - Buildings (600) 11,400 (840) 11,160 $48,900 $48,280 LIABILITIES AND EQUITY Accounts payable 5,500 5,550 GST payable 3,800 2,670 Bank overdraft 3,000 0 C. Wilson, Capital 36,600 40,060 $48,900 $48,280 The income statement for the business for the year ended 30 June 2021 reveals the following details. C. WILSON Income Statement for the year ended 30 June 2021 INCOME $ $ Sales revenue 18,000 OTHER INCOME Gain from sale of land 2,000 20,000 EXPENSES Cost of sales 9,600 Depreciation - plant & equipment 1,200 Depreciation - buildings 240 Loss on sale of plant 200 Wages 1,540 Other expenses 1,000 13,780 $6,220 Additional information 1. During the year ended 30 June 2021, Wilson withdrew $30 per week in cash for 52 weeks for private purposes. 2. Wilson also withdrew $1200 on her business bank account to pay her personal income tax. 3. Land, shown in the accounts at $6000, was sold during the year for $8800 (including GST 10%). 4. Plant costing $1800 and written down to $900 was sold for $770 (including GST 10%). Required (a) Prepare a statement of cash flows for the year ended 30 June 2021 using the direct method. (b) Prepare the note to the above statement reconciling cash flows from operating activities with profit. (LO5 and LO6) (a) C. WILSON Statement of Cash Flows for the year ended 30 June 2021 $ $ Cash flows from operating activities: Cash receipts from customers (including GST) 19,770 Cash paid to suppliers and employees (including GST) (16,290) Net cash from operating activities 3,480 Cash flows from investing activities: Purchase of property, plant and equipment (3,600) Sale of property, plant and equipment* 8,700 Net cash from investing activities 5,100 Cash flows from financing activities: Drawings** (2,760) Net cash used in financing activities (2,760) Net increase (decrease) in cash and cash equivalents 5,820 Cash and cash equivalents at beginning of year*** (3,000) Cash and cash equivalents at end of year $2,820 *Sale of property, plant and equipment (excluding GST) = $8 000 (land) + $700 (plant) = $8 700. The GST on the sale of PPE is included in the cash flows from operating activities. **Drawings = ($30  52 weeks) + $1 200 = $2 760. ***Bank overdraft is a part of the entity’s cash management function. Workings: Cash receipts from customers: Accounts receivable Balance b/d 4,200 Cash from customers 19,770 Sales 18,000 Balance c/d 5,100 GST payable 2,670 24870 24870 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 14,400 Cost of sales 9,600 Purchases 12,000 Balance c/d 16,800 26,400 26,400 Accounts payable Cash paid 13,750 Balance b/d 5,500 Balance c/d 5,550 Purchases 12,000 Payment of GST to ATO 1,700 GST receivable 100 19,300 19,300 Cash paid to suppliers and employees = $13 750 (suppliers) + $1540 (wages) + $1000 (other expenses) = $16 290 Purchase of property and equipment: Plant and Equipment Balance b/d 9 000 Cost of plant sold 1 800 Purchase 3 600 Balance c/d 10 800 12 600 12 600 Purchase of property, plant and equipment = $3600 (plant) (b) Reconciliation of net cash from operating activities to profit: $ $ Profit for the period 6,220 Depreciation - plant & equipment 1,200 Depreciation - buildings 240 Gain on sale of land (2,000) Loss on sale of plant 200 Changes in current assets and current liabilities: Increase in accounts receivable (900) Increase in inventory (2,400) Decrease in GST receivable 2,000 Increase in accounts payable 50 Decrease in GST payable (1,130) (2,380) Net cash from operating activities $3,480 Problem 18.18 Statement of cash flows for a partnership The comparative statement of financial position of the partnership of Murray and Darling as at 30 June 2019 and 30 June 2020 were as follows. Additional information 1. Each partner’s retained earnings account has been credited with a salary of $12 000 as part of their profit distribution. 2. Drawings in cash for each partner in anticipation of profits amount to the following. 3. A motor vehicle that cost $9200 and had been written down to $3100 was sold for $3750. 4. Expenses involving a flow of cash amounted to $75 000. 5. Sales for the year were $300 000 and cost of sales was $184 050. Required (a) Prepare a statement of cash flows for the partnership for the year ended 30 June 2020 using the direct method. (LO5) (a) MURRAY AND DARLING Statement of Cash Flows for the year ended 30 June 2020 Cash flows from operating activities: Cash receipts from customers $294 800 Cash paid to suppliers and employees (265 550) Cash generated from operations 29 250 Net cash from operating activities 29 250 Cash flows from investing activities: Purchase of property, plant and equipment (5 500) Proceeds from sale of property and equipment 3 750 Net cash used in investing activities (1 750) Cash flows from financing activities: Repayment of advance – Murray (2 000) Partners’ capital contribution* 17 000 Partners’ drawings (20 300) Net cash used in financing activities (5 300) Net increase (decrease) in cash and cash equivalents 22 200 Cash and cash equivalents at beginning of year** (25 900) Cash and cash equivalents at end of year $(3 700) *Partners’ capital contribution = $12 000 (Murray) + $5 000 (Darling) = $17 000. **Assume bank overdraft is a part of the entity’s cash management function. Workings: Cash receipts from customers: Accounts Receivable Balance b/d 83 400 Cash from customers 284 400 Sales 300 000 Bills receivable 9 000 Balance c/d 90 000 383 400 383 400 Bills Receivable Balance b/d 5 200 Cash from customers 10 400 Accounts receivable 9 000 Balance c/d 3 800 14 200 14 200 Cash received from customers = $284 400 (accounts receivable) + $10 400 (bills receivable) = $294 800 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 56 300 Cost of Goods sold 184 050 Purchases 192 450 Balance c/d 64 700 248 750 248 750 Accounts Payable Cash paid 190 550 Balance b/d 23 600 Balance c/d 25 500 Purchases 192 450 216 050 216 050 Cash paid to suppliers and employees = $190 550 (inventory) + $75 000 (other expenses) = $265 550 Purchase of property and equipment: Motor Vehicles Balance b/d 36 800 Write-down 6 100 Carrying amount of vehicles sold 3 100 Purchase 0 Balance c/d 27 600 36 800 Accumulated Depreciation – Motor Vehicles Depreciation of vehicles sold 6 100 Balance b/d 8 200 Balance c/d 8 500 Depreciation for current period 6 400 14 600 14 600 Furniture and Equipment Balance b/d 42 000 Balance c/d 47 500 Purchase 5 500 47 500 47 500 Accumulated Depreciation – Furniture and Equipment Balance c/d 7 200 Balance b/d 6 400 Depreciation for current period 800 7 200 7 200 Purchase of property, plant and equipment = $0 (motor vehicles) + $5 500 (furniture and equipment) = $5 500 Drawings and profit calculation: Retained Earnings – Murray Balance c/d 14 400 Balance b/d 6 400 Drawings 9 900 Salary allocation 12 000 Residual profit 5 900 24 300 24 300 Retained Earnings – Darling Balance c/d 9 300 Balance b/d 3 200 Drawings 10 400 Salary allocation 12 000 Residual profit 4 500 19 700 19 700 Profit Distribution Salary allocation – Murray 12 000 Profit for the period 34 400 Salary allocation – Darling 12 000 Residual profit – Murray 5 900 Residual profit – Darling 4 500 34 400 34 400 Profit or Loss Summary Cost of sales 184 050 Sales revenue 300 000 Depreciation expense – motor vehicles 6 400 Gain on sale of motor vehicle 650 Depreciation expense – furniture and equipment 800 Other expenses 75 000 Profit for the period 34 400 300 650 300 650 Problem 18.19 Statement of cash flows for a partnership A & L Mechanics is operated by Adrian and Len in partnership. Financial data for the partnership follow. Additional information 1. All profits/losses are shared equally by Adrian and Len who also withdrew cash during the year. The vehicle that was sold had originally cost $20 000 (second-hand) and had been depreciated down to $4000. Required (a) Prepare a statement of cash flows for the year ended 30 June 2020 using the direct method. (b) Comment on the statement of cash flows with respect to the operating, investing and financing activities of A & L Mechanics. (LO5) (a) A & L MECHANICS Statement of Cash Flows for the year ended 30 June 2020 Cash flows from operating activities: Cash receipts from customers $902 800 Cash paid to suppliers and employees (776 350) Cash generated from operations 126 450 Net cash from operating activities $126 450 Cash flows from investing activities: Purchase of long-term investments (12 000) Purchase of motor vehicle (32 000) Proceeds on sale of motor vehicles* 6 000 Net cash used in investing activities (38 000) Cash flows from financing activities: Proceeds from capital contribution** 20 000 Repayment of long-term borrowings (20 000) Drawings by partners (83 250) Net cash used in financing activities (83 250) Net increase (decrease) in cash and cash equivalents 5 200 Cash and cash equivalents at beginning of year 32 800 Cash and cash equivalents at end of year $38 000 *Selling price of motor vehicle = $4000 (carrying amount) + $2000 (gain) = $6000 **Proceeds from capital contribution = $20 000 (Adrian) Workings: Cash receipts from customers: Accounts Receivable Balance b/d 32 800 Cash from customers 902 800 Sales 900 000 Balance c/d 30 000 932 800 932 800 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 80 000 Cost of Goods sold 640 000 Purchases 664 000 Balance c/d 104 000 744 000 744 000 Accounts Payable Cash paid 676 000 Balance b/d 40 000 Balance c/d 28 000 Purchases 664 000 704 000 704 000 Prepaid Insurance Balance b/d 12 00 Insurance expense 1 200 Cash paid 1 400 Balance c/d 1 400 2 600 2 600 Accrued Sundry Expenses Cash paid 98 950 Balance b/d 700 Balance c/d 550 Other expenses* 98 800 99 500 99 500 *Other expenses = $136 000 – $36 000 (depreciation) – $1200 (insurance) = $98 800 Cash paid to suppliers and employees = $676 000 (inventory) + $1 400 (prepaid insurance) + $98 950 (sundry expenses) = $776 350 Purchase of property and equipment: Motor Vehicles Balance b/d 168 000 Depreciation 16 000 Carrying amount of vehicles sold 4 000 Purchase 32 000 Balance c/d 180 000 200 000 200 000 Accumulated Depreciation – Motor Vehicles Depreciation of vehicles sold 16 000 Balance b/d 52 000 Balance c/d 72 000 Depreciation for current period 36 000 88 000 88 000 Drawings: Retained Earnings – Adrian Balance c/d 60 700 Balance b/d 14 000 Drawings 16 300 Profit allocation 63 000 77 000 77 000 Retained Earnings – Len Balance c/d 42 150 Balance b/d 46 100 Drawings 66 950 Profit allocation 63 000 109 100 109 100 Drawings by partners = $16 300 (Adrian) + $66 950 (Len) = $83 250 (b) A & L Mechanics’ balance of cash and cash equivalents for the period ending 30 June 2020 has increased from $32 800 to $38 000. This is mainly caused by a positive net cash from operating activities, in which cash received from customers totalling $902 800 exceeds cash paid for expenses totalling $776 350. There are negative cash flows for the partnership under both investing and financing activities. The partnership spent $44 000 during the period to purchase long-term investments and motor vehicle and received $6 000 from the sale of existing motor vehicles, resulting in a cash outflow of $38 000 under the investing activities. One of the partners, Adrian, contributed $20 000 capital to the partnership. However, this positive cash flows is offset by a $20 000 repayment made to the creditor of long-term loan. In addition, both partners, Adrian and Len, withdrew cash during the year for their personal use, amounting to $16 300 and $66 950 respectively. The significant drawings made by the partners results in a negative cash flows of $83 250 under financing activities. It may be that these drawings reflect the work that Adrian and Len undertake for the business. Nevertheless, the positive net cash from operating activities of $126 450 is able to absorb the negative cash flows from investing and financing activities, leaving a $ 5200 net increase in cash for the partnership for the period. Problem 18.20 Statement of cash flows, direct and indirect methods The simplified financial statements of Titanium Ltd appear below. Additional information 1. Dividends declared and paid were $26 400. 2. During the year equipment was sold for $10 200 cash. The equipment cost $21 600 and had a carrying amount of $10 200 at the time of sale. 3. Depreciation expense is included as a selling expense in the income statement. 4. All sales and purchases are on credit. Required (a) Prepare a statement of cash flows using the indirect method. (b) Prepare a statement of cash flows using the direct method. (LO8) (a) TITANIUM LTD Statement of Cash Flows for the year ended 30 June 2021 Cash flows from operating activities Profit for the period $15 600 Depreciation expense 13 800 Changes in assets and liabilities Decrease in accounts receivable 16 800 Increase in inventory (12 000) Decrease in accounts payable (4 800) Increase in current tax liability 3 600 3 600 Net cash flows from operating activities 33 000 Cash flows from investing activities Sale of plant and equipment 10 200 Purchase of plant and equipment (43 200) Net cash flows from investing activities (33 000) Cash flows from financing activities Proceeds from loans 4 800 Dividends paid (26 400) Net cash flows from financing activities (21 600) Net increase (decrease) in cash and cash equivalents (21 600) Cash and cash equivalents at beginning of year 37 200 Cash and cash equivalents at end of year $15 600 Workings: Purchase of plant and equipment: Plant and Equipment Balance b/d 72 000 Depreciation 11 400 Carrying amount of equipment sold 10 200 Purchase 43 200 Balance c/d 93 600 115 200 115 200 Accumulated Depreciation – Plant and Equipment Depreciation of equipment sold 11 400 Balance b/d 26 400 Balance c/d 28 800 Depreciation for current period 13 800 40 200 40 200 Dividends paid: Retained Earnings Dividends paid 26 400 Balance b/d 34 000 Balance c/d 23 200 Profit for the period 15 600 49 600 49 600 (b) TITANIUM LTD Statement of Cash Flows for the year ended 30 June 2021 Cash flows from operating activities: Cash receipts from customers $280 800 Cash paid to suppliers and employees (245 400) Cash generated from operations 35 400 Interest paid (1 200) Income taxes paid (1 200) Net cash from operating activities $33 000 Cash flows from investing activities: Sale of plant and equipment 10 200 Purchase of plant and equipment (43 200) Net cash used in investing activities (33 000) Cash flows from financing activities: Proceeds from loans 4 800 Dividends paid (26 400) Net cash used in financing activities (21 600) Net increase (decrease) in cash and cash equivalents (21 600) Cash and cash equivalents at beginning of year 37 200 Cash and cash equivalents at end of year $15 600 Workings: Cash receipts from customers: Accounts Receivable Balance b/d 33 600 Cash from customers 280 800 Sales 264 000 Balance c/d 16 800 297 600 297 600 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 30 000 Cost of Goods sold 216 000 Purchases 228 000 Balance c/d 42 000 258 000 258 000 Accounts Payable Cash paid 232 800 Balance b/d 32 400 Balance c/d 27 600 Purchases 228 000 260 400 260 400 Cash paid to suppliers and employees = $232 800 (inventory) + $16 800 (selling expense) + $9 600 (administrative expense) - $13 800 (depreciation) = $245 400 Income tax paid: Current Tax Liability Cash paid 1 200 Balance b/d 6 000 Balance c/d 9 600 Income tax expense 4 800 10 800 10 800 Problem 18.21 Statement of cash flows for a company The following data relate to Emporium Ltd. Additional information 1. Dividends were paid during the year. 2. The increases in investments and machinery were from cash purchases. 3. The increases in land and buildings were from purchases but were partly funded by an increase in the mortgage with the bank. 4. Share capital was issued during the year for cash. Required (a) Prepare the statement of cash flows for Emporium Ltd for the year ended 30 June 2020, using the direct method. (b) Prepare the note reconciling cash flows from operating activities to profit. (c) Prepare a note to disclose non-cash financing and investing activities. (LO6 and LO8) (a) EMPORIUM LTD Statement of Cash Flows for the year ended 30 June 2020 Cash flows from operating activities: Cash receipts from customers $1 224 000 Cash paid to suppliers and employees (1 068 000) Cash generated from operations 156 000 Net cash from operating activities $156 000 Cash flows from investing activities: Purchase of investments (3 000) Purchase of property, plant and equipment (199 500) Net cash used in investing activities (202 500) Cash flows from financing activities: Proceeds from issue of share capital 75 000 Dividends paid (45 000) Net cash from financing activities 30 000 Net increase (decrease) in cash and cash equivalents (16 500) Cash and cash equivalents at beginning of year 55 500 Cash and cash equivalents at end of year $39 000 Workings: Cash receipts from customers: Accounts Receivable Balance b/d 144 000 Cash from customers 1 224 000 Sales 1 215 000 Balance c/d 135 000 1 359 000 1 359 000 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 120 000 Cost of Goods sold 720 000 Purchases 750 000 Balance c/d 150 000 870 000 870 000 Accounts Payable Cash paid 735 000 Balance b/d 97 500 Balance c/d 112 500 Purchases 750 000 847 500 847 500 Expenses Payable Cash paid 333 000 Balance b/d 6 000 Balance c/d 4 500 Other expenses* 331 500 337 500 337 500 Cash paid to suppliers and employees = $735 000 (inventory) + $333 000 (other expenses) = $1 068 000 Purchase of property, plant and equipment: Purchase of machinery = carrying amount of machinery in 2020 + machinery depreciation* – carrying amount of machinery in 2019 = $300 000 + $30 000 – $225 000 = $105 000 Purchase of buildings = carrying amount of buildings in 2020 + buildings depreciation* – carrying amount of buildings in 2019 = $240 000 + $15 000 – $150 000 = $105 000 *Depreciation must be added back to the 2020 carrying amount to bring the carrying amount of assets pre-2020 depreciation. Only then the carrying amount of assets in 2019 and 2020 can be compared to determine the cost of assets purchased during 2020. Land Balance b/d 67 500 Balance c/d 150 000 Purchase 82 500 150 000 150 000 Purchase of property, plant and equipment = $105 000 (machinery) + $105 000 (buildings) + $82 500 (land) = $292 500 Purchase of property, plant and equipment funded with cash: = $292 500 – $93 000 (increase in mortgage payable) = $199 500 Dividends paid: Retained Earnings Dividends paid 45 000 Balance b/d 166 500 Balance c/d 240 000 Profit for the period 118 500 285 000 285 000 (b) Reconciliation of net cash from operating activities to profit: Profit for the period $118 500 Depreciation – machinery 30 000 Depreciation – buildings 15 000 Changes in current assets and current liabilities: Decrease in accounts receivable 9 000 Increase in inventory (30 000) Increase in accounts payable 15 000 Decrease in expenses payable (1 500) (7 500) Net cash from operating activities $156 000 (c) Non-cash financing and investing activities: • Land and buildings were purchased during the period and this acquisition was financed using $93 000 mortgage with the bank. Problem 18.22 Statement of cash flows Non-GST version Pippa Highton set up a small business from her home by contributing $8000 cash to the business. For the year ended 30 June 2021, the following transactions occurred. Ignore GST. 1. Pippa contributed $8000 cash to the business. 2. Inventory was purchased on credit for $6000. Pippa decided to adopt the perpetual inventory system. 3. Sales revenue of $4500 was earned for the sale of inventory on credit. Cost of sales was $3000. 4. Inventory was acquired for $2800 on credit. 5. Credit sales for $3000 were recorded, the cost of sales being $2100. 6. $3200 cash was received from accounts receivable. 7. $10 000 was borrowed from a bank under a long-term loan. 8. Equipment was purchased for $6000 using the money borrowed. 9. Wages of $800 were paid to a part-time assistant. 10. $3000 cash was paid on accounts payable. 11. Inventory costing $2500 was purchased on credit. 12. Credit sales of $3000 were made, the cost of sales being $1500. The terms of the sale were 2/10, n/30. 13. The customer in (12) paid for the goods within the discount period. Required (a) Prepare journal entries (in general journal form) for the business of Pippa Highton. (b) Prepare the income statement and statement of financial position of the business after all transactions have been recorded. (c) Prepare the statement of cash flows under the direct method for the business using the analysis of cash records. (d) Prepare the statement of cash flows under the direct method for the business by analysing financial statements. (e) Prepare a note reconciling the cash flows from operating activities to profit. (LO4, LO5 and LO6) (a) 1. Cash at Bank 8 000 Capital – P. Highton 8 000 To record capital contributed 2. Inventory 6 000 Accounts Payable 6 000 To purchase inventory on credit 3. Accounts Receivable 4 500 Sales 4 500 Cost of Sales 3 000 Inventory 3 000 To record sales and cost of sales 4. Inventory 2 800 Accounts Payable 2 800 To purchase inventory on credit 5. Accounts Receivable 3 000 Sales 3 000 Cost of Sales 2 100 Inventory 2 100 To record sales and cost of sales 6. Cash at Bank 3 200 Accounts Receivable 3 200 To record cash received from debtors 7. Cash at Bank 10 000 Loan Payable 10 000 To record cash loan from bank 8. Equipment 6 000 Cash at Bank 6 000 To record equipment paid for in cash 9. Wages Expense 800 Cash at Bank 800 To record wages paid 10. Accounts Payable 3 000 Cash at Bank 3 000 To record cash paid to creditors 11. Inventory 2 500 Accounts Payable 2 500 To purchase inventory on credit 12. Accounts Receivable 3 000 Sales 3 000 Cost of Sales 1 500 Inventory 1 500 To record sales and cost of sales 14. Cash at Bank 2 940 Discount Allowed 60 Accounts Receivable 3 000 To record receipt from customer at 2% discount (b) PIPPA HIGHTON Income Statement for the year ended 30 June 2021 INCOME Sales $10 500 Less: EXPENSES Cost of sales 6 600 Wages 800 Discount allowed 60 7 460 PROFIT $3 040 PIPPA HIGHTON Statement of Financial Position as at 30 June 2021 CURRENT ASSETS Cash at Bank $14 340 Inventory 4 700 Accounts Receivable 4 300 TOTAL CURRENT ASSETS $23 340 NON-CURRENT ASSETS Equipment 6 000 TOTAL NON-CURRENT ASSETS 6 000 TOTAL ASSETS 29 340 CURRENT LIABILITIES Accounts Payable 8 300 TOTAL CURRENT LIABILITIES 8 300 NON-CURRENT LIABILITIES Loan 10 000 TOTAL NON-CURRENT LIABILITIES 10 000 TOTAL LIABILITIES 18 300 NET ASSETS $11 040 EQUITY *Capital – P. Highton 11 040 TOTAL EQUITY $11 040 * $8000 + $3040 = $11 040 Workings: Trial Balance (see accounts below) Debit Credit Cash at Bank $14 340 Inventory 4 700 Accounts Receivable 4 300 Equipment 6 000 Accounts Payable $8 300 Loan Payable 10 000 Capital, P. Highton 8 000 Sales 10 500 Cost of Sales 6 600 Wages Expense 800 Discount Allowed 60 Totals $36 800 $36 800 Cash at Bank Accounts Payable Debit Credit Bal Debit Credit Bal (1) 8 000 8 000 (2) 6 000 6 000 (6) 3 200 11 200 (4) 2 800 8 800 (7) 10 000 21 200 (10) 3 000 5 800 (8) 6 000 15 200 (11) 2 500 8 300 (9) 800 14 400 (10) 3 000 11 400 (13) 2 940 14 340 Inventory Loan Payable Debit Credit Bal Debit Credit Bal (2) 6 000 6 000 (7) 10 000 10 000 (3) 3 000 3 000 (4) 2 800 5 800 (5) 2 100 3 700 (11) 2 500 6 200 (12) 1 500 4 700 Accounts Receivable Capital – P. Highton Debit Credit Bal Debit Credit Bal (3) 4 500 4 500 (1) 8 000 8 000 (5) 3 000 7 500 (6) 3 200 4 300 (12) 3 000 7 300 (13) 3 000 4 300 Equipment Sales Debit Credit Bal Debit Credit Bal (8) 6 000 6 000 (3) 4 500 4 500 (5) 3 000 7 500 (13) 3 000 10 500 Wages Expense Cost of Sales Debit Credit Bal Debit Credit Bal (10) 800 800 (3) 3 000 3 000 (5) 2 100 5 100 (12) 1 500 6 600 Discount Allowed Debit Credit Bal (13) 60 60 (c) PIPPA HIGHTON Statement of Cash Flows for the year ended 30 June 2021 Cash flows from operating activities: Cash receipts from customers $6 140 Cash paid to suppliers and employees (3 800) Cash generated from operations 2 340 Net cash from operating activities $2 340 Cash flows from investing activities: Purchase of property, plant and equipment (6 000) Net cash used in investing activities (6 000) Cash flows from financing activities: Proceeds from capital contribution 8 000 Proceeds from long-term borrowings 10 000 Net cash from financing activities 18 000 Net increase in cash and cash equivalents 14 340 Cash and cash equivalents at beginning of year 0 Cash and cash equivalents at end of year $14 340 Workings: Please note: numbers refer to transactions in Cash at Bank account. Receipts from customers (6) + (13) – discount allowed Payments to suppliers and employees (9) + (10) Payment for new equipment (8) Capital (1) Proceeds from long-term bank loan (7) (d) PIPPA HIGHTON Statement of Cash Flows for the year ended 30 June 2021 Cash flows from operating activities: Cash receipts from customers $6 140 Cash paid to suppliers and employees (3 800) Cash generated from operations 2 340 Net cash from operating activities $2 340 Cash flows from investing activities: Purchase of property, plant and equipment (6 000) Net cash used in investing activities (6 000) Cash flows from financing activities: Proceeds from capital contribution 8 000 Proceeds from long-term borrowings 10 000 Net cash from financing activities 18 000 Net increase in cash and cash equivalents 14 340 Cash and cash equivalents at beginning of year 0 Cash and cash equivalents at end of year $14 340 Workings: Cash receipts from customers: Accounts Receivable Balance b/d 0 Cash from customers 6 140 Sales 10 500 Balance c/d 4 300 Discount allowed 60 10 500 10 500 Cash paid to suppliers: Beginning inventory — Purchases 11 300 Available for sale 11 300 less: Ending inventory (4 700) Cost of sales 6 600 Accounts Payable Cash paid 3 000 Balance b/d 0 Balance c/d 8 300 Purchases 11 300 11 300 11 300 Cash paid to suppliers and employees = $3000 (inventory) + $800 (wages) = $3800 Purchase of equipment: Equipment Balance b/d 0 Balance c/d 6 000 Purchase 6 000 6 000 6 000 Cash flows from financing activities: Loan Balance c/d 10 000 Balance b/d 0 Loan received in cash 10 000 10 000 10 000 Capital – P. Highton Balance c/d 11 040 Balance b/d 0 Capital contribution 8 000 Profit for the period 3 040 11 040 11 040 (e) Reconciliation of net cash from operating activities to profit: Profit for the period $3 040 Changes in current assets and current liabilities: Increase in accounts receivable $(4 300) Increase in inventory (4 700) Increase in accounts payable 8 300 (700) Net cash from operating activities $2 340 Problem 18.22 Statement of cash flows GST version Pippa Highton set up a small business from her home by contributing $8000 cash to the business. The business is registered for GST. For the year ended 30 June 2021, the following transactions occurred. 1. Pippa contributed $8000 cash to the business. 2. Inventory was purchased on credit for $3000 plus GST of 10%. Pippa decided to adopt the perpetual inventory system. 3. Sales revenue of $4500 was earned, plus GST, for the sale of inventory on credit. Cost of sales was $3000. 4. Inventory was acquired for $2800 plus GST on credit. 5. Credit sales for $3000 plus GST were recorded, the cost of sales being $2100. 6. $3200 cash was received from accounts receivable. 7. $10 000 was borrowed from a bank under a long-term loan. 8. Equipment was purchased for $6000 plus GST, using the money borrowed. 9. GST owing was paid to the ATO. 10. Wages of $800 were paid to a part-time assistant. 11. $3300 cash was paid on accounts payable. 12. Inventory costing $2500 plus GST was purchased on credit. 13. Credit sales of $3000 plus GST were made, the cost of sales being $1500. The terms of the sale were 2/10, n/30. 14. The customer in (13) paid for the goods within the discount period. Required (a) Prepare journal entries (in general journal form) for the business of Pippa Highton. (b) Prepare the income statement and statement of financial position of the business after all transactions have been recorded. (c) Prepare the statement of cash flows under the direct method for the business using the analysis of cash records. (d) Prepare the statement of cash flows under the direct method for the business by analysing financial statements. (e) Prepare a note reconciling the cash flows from operating activities to profit. (LO4, LO5 and LO6) (a) 1. Cash at Bank 8 000 Capital – P. Highton 8 000 To record capital contributed 2. Inventory 3 000 GST Receivable 300 Accounts Payable 3 300 To purchase inventory on credit 3. Accounts Receivable 4 950 Sales 4 500 GST Payable 450 Cost of Sales 3 000 Inventory 3 000 To record sales and cost of sales 4. Inventory 2 800 GST Receivable 280 Accounts Payable 3 080 To purchase inventory on credit 5. Accounts Receivable 3 300 Sales 3 000 GST Payable 300 Cost of Sales 2 100 Inventory 2 100 To record sales and cost of sales 6. Cash at Bank 3 200 Accounts Receivable 3 200 To record cash received from debtors 7. Cash at Bank 10 000 Loan Payable 10 000 To record cash loan from bank 8. Equipment 6 000 GST Receivable 600 Cash at Bank 6 600 To record equipment paid for in cash 9. GST Payable 750 Cash at Bank 430 GST Receivable 1 180 To record GST refund from Tax Office 10. Wages Expense 800 Cash at Bank 800 To record wages paid 11. Accounts Payable 3 300 Cash at Bank 3 300 To record cash paid to creditors 12. Inventory 2 500 GST Receivable 250 Accounts Payable 2 750 To purchase inventory on credit 13. Accounts Receivable 3 300 Sales 3 000 GST Payable 300 Cost of Sales 1 500 Inventory 1 500 To record sales and cost of sales 14. Cash at Bank 3 234 Discount Allowed 60 GST Payable 6 Accounts Receivable 3 300 To record receipt from customer at 2% discount (b) PIPPA HIGHTON Income Statement for the year ended 30 June 2021 INCOME Sales $10 500 Less: EXPENSES Cost of sales 6 600 Wages 800 Discount allowed 60 7 460 PROFIT $3 040 PIPPA HIGHTON Statement of Financial Position as at 30 June 2021 CURRENT ASSETS Cash at Bank $14 164 Inventory 1 700 Accounts Receivable 5 050 GST Receivable 250 TOTAL CURRENT ASSETS $21 164 NON-CURRENT ASSETS Equipment 6 000 TOTAL NON-CURRENT ASSETS 6 000 TOTAL ASSETS $27 164 CURRENT LIABILITIES Accounts Payable 5 830 GST Payable 294 TOTAL CURRENT LIABILITIES $6 124 NON-CURRENT LIABILITIES Loan 10 000 TOTAL NON-CURRENT LIABILITIES 10 000 TOTAL LIABILITIES $16 124 NET ASSETS $11 040 EQUITY *Capital – P. Highton 11 040 TOTAL EQUITY $11 040 * $8000 + $3040 = $11 040 Workings: Trial Balance (see accounts below) Debit Credit Cash at Bank $14 164 Inventory 1 700 Accounts Receivable 5 050 GST Receivable 250 Equipment 6 000 Accounts Payable $5 830 GST Payable 294 Loan Payable 10 000 Capital, P. Highton 8 000 Sales 10 500 Cost of Sales 6 600 Wages Expense 800 Discount Allowed 60 Totals $34 624 $34 624 Cash at Bank GST Payable Debit Credit Bal Debit Credit Bal (1) 8 000 8 000 (3) 450 450 (6) 3 200 11 200 (5) 300 750 (7) 10 000 21 200 (9) 750 — (8) 6 600 14 600 (9) 430 15 030 (13) 300 300 (10) 800 14 230 (14) 6 294 (11) 3 300 10 930 (14) 3 234 14 164 Inventory Loan Payable Debit Credit Bal Debit Credit Bal (2) 3 000 3 000 (7) 10 000 10 000 (3) 3 000 — (4) 2 800 2 800 (5) 2 100 700 (12) 2 500 3 200 (13) 1 500 1 700 Accounts Receivable Capital – P. Highton Debit Credit Bal Debit Credit Bal (3) 4 950 4 950 (1) 8 000 8 000 (5) 3 300 8 250 (6) 3 200 5 050 (13) 3 300 8 350 (14) 3 300 5 050 GST Receivable Sales Debit Credit Bal Debit Credit Bal (2) 300 300 (3) 4 500 4 500 (4) 280 580 (5) 3 000 7 500 (8) 600 1 180 (13) 3 000 10 500 (9) 1 180 — (12) 250 250 Equipment Cost of Sales Debit Credit Bal Debit Credit Bal (8) 6 000 6 000 (3) 3 000 3 000 (5) 2 100 5 100 (12) 1 500 6 600 Accounts Payable Wages Expense Debit Credit Bal Debit Credit Bal (2) 3 300 3 300 (10) 800 800 (4) 3 080 6 380 (11) 3 300 3 080 (12) 2 750 5 830 Discount Allowed Debit Credit Bal (14) 60 60 (c) PIPPA HIGHTON Statement of Cash Flows for the year ended 30 June 2021 Cash flows from operating activities: Cash receipts from customers $6 864 Cash paid to suppliers and employees (4 700) Cash generated from operations 2 164 Net cash from operating activities $2 164 Cash flows from investing activities: Purchase of property, plant and equipment (6 000) Net cash used in investing activities (6 000) Cash flows from financing activities: Proceeds from capital contribution 8 000 Proceeds from long-term borrowings 10 000 Net cash from financing activities 18 000 Net increase in cash and cash equivalents 14 164 Cash and cash equivalents at beginning of year 0 Cash and cash equivalents at end of year $14 164 Workings: Please note: numbers refer to transactions in Cash at Bank account. Receipts from customers (6) + (14) + (9) for $430 Payments to suppliers and employees (8) for 600, + (10) + (11) [Note that GST refunded from the Tax Office is shown as a cash receipt from customers.] Payment for new equipment (8) Capital (1) Proceeds from long-term bank loan (7) Note that GST paid for new equipment is included with other GST amounts in operating activities. (d) PIPPA HIGHTON Statement of Cash Flows for the year ended 30 June 2021 Cash flows from operating activities: Cash receipts from customers $6 864 Cash paid to suppliers and employees (4 700) Cash generated from operations 2 164 Net cash from operating activities $2 164 Cash flows from investing activities: Purchase of property, plant and equipment (6 000) Net cash used in investing activities (6 000) Cash flows from financing activities: Proceeds from capital contribution 8 000 Proceeds from long-term borrowings 10 000 Net cash from financing activities 18 000 Net increase in cash and cash equivalents 14 164 Cash and cash equivalents at beginning of year 0 Cash and cash equivalents at end of year $14 164 Workings: Cash receipts from customers: Accounts Receivable Balance b/d 0 Cash from customers 6 864 Sales 10 500 Balance c/d 5 050 GST Payable 1 044 Discount allowed 60 GST refunds 430 11 974 11 974 Cash paid to suppliers: Beginning inventory — Purchases 8 300 Available for sale 8 300 less: Ending inventory (1 700) Cost of sales 6 600 Accounts Payable Cash paid 3 900 Balance b/d 0 Balance c/d 5 830 Purchases 8 300 GST Receivable 1 430 9 730 9 730 Cash paid to suppliers and employees = $3900 (inventory) + $800 (wages) = $4700 Purchase of equipment: Equipment Balance b/d 0 Balance c/d 6 000 Purchase 6 000 6 000 6 000 Cash flows from financing activities: Loan Balance c/d 10 000 Balance b/d 0 Loan received in cash 10 000 10 000 10 000 Capital – P. Highton Balance c/d 11 040 Balance b/d 0 Capital contribution 8 000 Profit for the period 3 040 11 040 11 040 (e) Reconciliation of net cash from operating activities to profit: Profit for the period $3 040 Changes in current assets and current liabilities: Increase in accounts receivable (5 050) Increase in inventory (1 700) Increase in GST Receivable (250) Increase in accounts payable 5 830 Increase in GST Payable 294 (876) Net cash from operating activities $2 164 Problem 18.23 Statement of cash flows for a company The comparative statements of financial position of Laguna Ltd as at 30 June 2019 and 2020, the statement of profit or loss and other comprehensive income and the statement of changes in equity for the year ended 30 June 2020 are shown on pages 000–00. Additional information 1. Other expenses include $27 000 depreciation expense on plant and insurance expense of $4000. 2. All sales and purchases of inventory are on credit. 3. Plant which had cost $30 000 and had a carrying amount of $17 000 was sold for $26 000 cash. 4. Ignore taxes. Required (a) Prepare the statement of cash flows for Laguna Ltd for the year ended 30 June 2020 using the direct method. (b) Prepare the note reconciling cash flows from operating activities to profit. (LO6 and LO8) (a) LAGUNA LTD Statement of Cash Flows for the year ended 30 June 2020 Cash flows from operating activities: Cash receipts from customers $425 000 Cash paid to suppliers and employees (387 500) Cash generated from operations 37 500 Lease income 6 500 Interest paid (12 500) Net cash from operating activities $31 500 Cash flows from investing activities: Proceeds from sale of property and plant 66 000 Purchase of property and plant (90 000) Net cash used in investing activities (24 000) Cash flows from financing activities: Proceeds from mortgage loan 5 000 Proceeds from issue of share capital 45 000 Dividends paid (41 000) Net cash from financing activities 9 000 Net increase (decrease) in cash and cash equivalents 16 500 Cash and cash equivalents at beginning of year 6 500 Cash and cash equivalents at end of year $23 000 Workings: Cash receipts from customers: Accounts Receivable Balance b/d 35 000 Cash from customers 425 000 Sales 420 000 Balance c/d 30 000 455 000 455 000 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 66 000 Cost of Goods sold 281 000 Purchases 297 000 Balance c/d 82 000 363 000 363 000 Accounts Payable Cash paid 309 000 Balance b/d 32 000 Balance c/d 20 000 Purchases 297 000 329 000 329 000 Prepaid Insurance Balance b/d 3 500 Insurance expense 4 000 Cash paid 3 000 Balance c/d 2 500 6 500 6 500 Other Expenses Payable Cash paid 75 500 Balance b/d 4 500 Balance c/d 5 000 Other expenses* 76 000 80 500 80 500 *Other expenses = $107 000 – $27 000 (depreciation) – $4000 (insurance) = $76 000 Cash paid to suppliers and employees = $309 000 (inventory) + $3 000 (prepaid insurance) + $75 500 (other expenses) = $387 500 Lease income: Lease Income Receivable Balance b/d 2 500 Cash received 6 500 Lease income 7 500 Balance c/d 3 500 10 000 10 000 Interest paid: Interest Payable Cash paid 12 500 Balance b/d 6 000 Balance c/d 5 000 Interest expense 11 500 17 500 17 500 Purchase and sale of property and plant: Property Balance b/d 90 000 Cost of property sold 50 000 Balance c/d 40 000 90 000 90 000 Selling price of property = $50 000 (carrying amount) – $10 000 (loss on sale) = $40 000 Plant Balance b/d 300 000 Depreciation 13 000 Purchase 90 000 Carrying amount of plant sold 17 000 Balance c/d 360 000 390 000 390 000 Sale of property and plant = $40 000 (property) + $26 000 (plant) = $66 000 (b) Reconciliation of net cash from operating activities to profit: Profit for the period $27 000 Depreciation – plant 27 000 Gain on the sale of plant (9 000) Loss on the sale of property 10 000 Changes in current assets and current liabilities: Decrease in accounts receivable 5 000 Increase in lease income receivable (1 000) Increase in inventory (16 000) Decrease in prepaid insurance 1 000 Decrease in accounts payable (12 000) Decrease in interest payable (1 000) Increase in other expenses payable 500 (23 500) Net cash from operating activities $31 500 Problem 18.24 Statement of cash flows, direct and indirect methods Comparative information as at 30 June 2020 and 30 June 2021 for Pretentious Ltd is as follows. Additional information 1. Gross profit for the year ended 30 June 2021 was $321 000, and consisted of: 2. Purchases of inventory for the year were $545 000. 3. All purchases and sales of inventories were on credit. 4. Profit for the year ended 30 June 2021 was $62 500, after deducting expenses of $258 500 from the gross profit figure. 5. Expenses of $258 500 include depreciation on buildings, and on plant and equipment, a loss on sale of land, and $10 000 in interest expense. 6. During the year ended 30 June 2021, cash dividends were paid. 7. Building extensions were paid for during the year, and a block of land, costing $75 000, was sold for $62 500 cash. 8. No plant was purchased or sold during the year. Required (a) Prepare the statement of cash flows for Pretentious Ltd for the year ended 30 June 2021 using the direct method. (b) Show how cash flows from operating activities in the statement would be presented under the indirect method. (LO8) (a) PRETENTIOUS LTD Statement of Cash Flows for the year ended 30 June 2021 Cash flows from operating activities: Cash receipts from customers $870 000 Cash paid to suppliers and employees (739 500) Cash generated from operations 130 500 Interest paid (11 000) Net cash from operating activities $119 500 Cash flows from investing activities: Proceeds from sale of land 62 500 Payment for building extensions (255 000) Net cash used in investing activities (192 500) Cash flows from financing activities: Proceeds from mortgage loan 42 500 Dividends paid (7 500) Net cash from financing activities 35 000 Net increase (decrease) in cash and cash equivalents (38 000) Cash and cash equivalents at beginning of year 124 000 Cash and cash equivalents at end of year $86 000 Workings: Cash receipts from customers: Accounts Receivable Balance b/d 152 000 Cash from customers 870 000 Sales 887 000 Balance c/d 169 000 1 039 000 1 039 000 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 248 000 Cost of Goods sold 566 000 Purchases 545 000 Balance c/d 227 000 793 000 793 000 Accounts Payable Cash paid 532 000 Balance b/d 121 000 Balance c/d 134 000 Purchases 545 000 666 000 666 000 Other Expenses Payable Cash paid 207 500 Balance b/d 17 500 Balance c/d 6 000 Other expenses* 196 000 213 500 213 500 *Other expenses = $258 500 – $30 000 (building depreciation) – $10 000 (plant depreciation) – $12 500 (loss on sale of land) – $10 000 (interest expense) = $196 000 Cash paid to suppliers and employees = $532 000 (inventory) + $207 500 (other expenses) = $739 500 Interest paid: Interest Payable Cash paid 11 000 Balance b/d 1 500 Balance c/d 500 Interest expense 10 000 11 500 11 500 Purchase of property, plant and equipment: Land Balance b/d 125 000 Cost of land sold 75 000 Balance c/d 50 000 125 000 125 000 Buildings Balance b/d 275 000 Balance c/d 530 000 Extensions 255 000 530 000 530 000 Dividends paid: Retained Earnings Dividends paid 7 500 Balance b/d 344 000 Balance c/d 399 000 Profit for the period 62 500 406 500 406 500 (b) PRETENTIOUS LTD Statement of Cash Flows for the year ended 30 June 2021 Cash flows from operating activities Profit for the period $62 500 Depreciation – buildings 30 000 Depreciation – plant and equipment 10 000 Loss on sale of land 12 500 Changes in assets and liabilities: Increase in accounts receivable (17 000) Decrease in inventory 21 000 Increase in accounts payable 13 000 Decrease in interest payable (1 000) Decrease in other expenses payable (11 500) 4 500 Net cash flows from operating activities 119 500 Cash flows from investing activities Proceeds from sale of land 62 500 Payment for building extensions (255 000) Net cash flows used in investing activities (192 500) Cash flows from financing activities Proceeds from mortgage loan 42 500 Dividends paid (7 500) Net cash flows from financing activities 35 000 Net increase (decrease) in cash and cash equivalents (38 000) Cash and cash equivalents at beginning of year 124 000 Cash and cash equivalents at end of year $86 000 Problem 18.25 Statement of cash flows for a company The financial statements for Moon Ltd are shown below. Additional information 1. Office furniture that had originally cost $22 000 and had accumulated depreciation of $4000 was sold during the year for $19 000 cash. 2. Plant and machinery costing $100 000 was paid for by the issue of 100 000 shares at a price of $1 each. 3. The company pays tax in one instalment. Income tax expense as reported ($54 860) consists of the tax expense for the year ($80 000) less an overprovision for tax from the previous year ($25 140). 4. The bank overdraft facility is considered part of the day-to-day cash management operations. Required (a) Prepare a statement of cash flows in accordance with IAS 7/AASB 107 using the direct method. Also show any notes to the statement that are necessary. (LO8) (a) MOON LTD Statement of Cash Flows for the year ended 30 June 2021 Cash flows from operating activities: Cash receipts from customers $1 887 240 Cash paid to suppliers and employees (1 946 220) Cash generated from operations (58 980) Income taxes paid (34 860) Net cash used in operating activities $(93 840) Cash flows from investing activities: Proceeds from sale plant and equipment 19 000 Purchase of plant and equipment (186 000) Net cash used in investing activities (167 000) Cash flows from financing activities: Proceeds from issue of share capital 200 000 Dividends paid (80 000) Net cash from financing activities 120 000 Net increase (decrease) in cash and cash equivalents (140 840) Cash and cash equivalents at beginning of year (27 300) Cash and cash equivalents at end of year $(168 140) Notes to the Statement of Cash Flows: 1. Reconciliation of cash: Cash and cash equivalents consist of petty cash and bank overdraft facility (which is classified as current liability). Cash and cash equivalents included in the statement of cash flows comprise the following statement of financial position amounts: 2020 2021 Petty cash $ 500 $ 500 Bank overdraft (27 800) (168 640) Cash and cash equivalents $(27 300) $(168 140) 2. Reconciliation of net cash from operating activities to profit: Profit for the period $151 780 Depreciation expense 61 500 Gain on sale of furniture (1 000) Changes in current assets and current liabilities: Increase in accounts receivable (93 020) Increase in allowance for doubtful debts 10 000 Decrease in bills receivable 4 260 Increase in inventory (240 620) Decrease in accounts payable (10 480) Increase in bills payable 3 740 Increase in current tax liability 20 000 (306 120) Net cash used in operating activities $(93 840) 3. Non-cash financing and investing activities: During the reporting period, plant and machinery costing $100 000 were purchased through the issue of 100 000 shares at a price of $1 per share. Workings: Cash receipts from customers: Accounts Receivable Balance b/d 115 620 Cash from customers 1 857 000 Sales 2 000 000 Bad debts written off 24 000 Bills receivable 25 980 Balance c/d 208 640 2 115 620 2 115 620 Allowance for Doubtful Debts Bad debts written off 24 000 Balance b/d 10 000 Balance c/d 20 000 Bad debt expense 34 000 44 000 44 000 Bills Receivable Balance b/d 15 120 Cash from customers 30 240 Accounts receivable 25 980 Balance c/d 10 860 41 100 41 100 Cash received from customers = $1 857 000 (accounts receivable) + $30 240 (bills receivable) = $1 887 240 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 365160 Cost of Goods sold 700 000 Purchases 940620 Balance c/d 605780 1305780 1305780 Accounts Payable Cash paid 890 520 Balance b/d 96 640 Bills payable 60 580 Purchases 940 620 Balance c/d 86 160 1 037 260 1 037 260 Bills Payable Cash paid 56 840 Balance b/d 28 420 Balance c/d 32 160 Accounts payable 60 580 89 000 89 000 Cash paid to suppliers and employees = $890 520 (accounts payable) + $56 840 (bills payable) + $998 860 (other expenses) = $1 946 220 Income tax paid: Current Tax Liability Cash paid 34 860 Balance b/d 60 000 Overprovision for tax 25 140 Income tax expense 80 000 Balance c/d 80 000 140 000 140 000 Purchase and sale of plant and equipment: Plant and Machinery Balance b/d 498 000 Balance c/d 784 000 Share capital 100 000 Cash purchase 186 000 784 000 784 000 Furniture and Equipment Balance b/d 100 000 Cost of furniture sold 22 000 Balance c/d 78 000 100 000 100 000 Problem 18.26 Statement of cash flows for a company Comparative statements of financial position for Gold Ltd on 30 June 2020 and 2021 are presented below. Examination of the company’s statement of profit or loss and other comprehensive income and general ledger accounts disclosed the following. 1. Profit (after tax) for the year ending 30 June 2021 was $80 000. 2. Depreciation expense was recorded during the year on buildings, $13 800, and on equipment, $22 900. 3. An extension was added to the building at a cost of $300 000 cash. 4. Long-term investments with a cost of $90 000 were sold for $125 000. 5. Vacant land next to the company’s factory was purchased for $129 000 with payment consisting of $39 000 cash and a loan payable for $90 000 due on 30 June 2024. 6. Debentures of $100 000 were issued for cash at nominal value. 7. 30 000 shares were issued at $3.80 per share. 8. Equipment was purchased for cash. 9. Net sales for the period were $875 600; cost of sales amounted to $525 300; other expenses (other than depreciation, carrying amount of investments sold, interest, and bad debts written off, $3500) amounted to $149 400. 10. Income tax paid during the year amounted to $73 700, and interest paid on liabilities amounted to $40 000. Required (a) Prepare a statement of cash flows for the year ended 30 June 2021 using the direct method, and assuming that bank overdraft is part of the entity’s cash management activities. (b) Prepare any notes required to be attached to the statement. (LO6 and LO8) (a) GOLD LTD Statement of Cash Flows for the year ended 30 June 2021 Cash flows from operating activities: Cash receipts from customers $ 856 200 Cash paid to suppliers and employees (734 800) Cash generated from operations 121 400 Interest paid (40 000) Income taxes paid (73 700) Net cash from operating activities $7 700 Cash flows from investing activities: Purchase of property, plant and equipment (369 000) Proceeds from sale of investments 125 000 Net cash used in investing activities (244 000) Cash flows from financing activities: Proceeds from issue of share capital 114 000 Proceeds from long-term borrowings 100 000 Dividends paid (69 000) Net cash from financing activities 145 000 Net decrease in cash and cash equivalents (91 300) Cash and cash equivalents at beginning of year 74 600 Cash and cash equivalents at end of year $(16 700) Workings: Cash receipts from customers: Accounts Receivable Balance b/d 111 300 Cash from customers 856 200 Sales 875 600 Bad debts written off 3 500 Balance c/d 127 200 986 900 986 900 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 221200 Cost of Goods sold 525 300 Purchases 579100 Balance c/d 275 000 800300 800 300 Accounts Payable Cash paid 482 100 Balance b/d 168 000 Bills payable 95 000 Purchases 579 100 Balance c/d 170 000 747 100 747 100 Bills Payable Cash paid 100 000 Balance b/d 50 000 Balance c/d 45 000 Accounts payable 95 000 145 000 145 000 Prepaid Expenses Balance b/d 23 000 Expenses 23 000 Cash paid 22 800 Balance c/d 22 800 45 800 45 800 Other Expenses Payable Cash paid 129 900 Balance b/d 14 000 Balance c/d 10 500 Other expenses* 126 400 140 400 140 400 *Other expenses = $149 400 – $23 000 (prepaid expenses expired) = $126 400 Cash paid to suppliers and employees = $482 100 (accounts payable) + $100 000 (bills payable) + $22 800 (prepaid expenses) + $129 900 (other expenses) = $734 800 Purchase of property and equipment: Buildings Balance b/d 339 000 Balance c/d 639 000 Extensions 300 000 639 000 639 000 Land Balance b/d 39 000 Balance c/d 168 000 Cash purchase 39 000 Loan payable 90000 168 000 168 000 Equipment Balance b/d 331 200 Balance c/d 361 200 Purchase 30 000 361 200 361 200 Cash purchase of property and equipment = $300 000 (building extensions) + $39 000 (land) + $30 000 (equipment) = $369 000 Dividends paid: Retained Earnings Dividends paid 69 000 Balance b/d 140 600 Balance c/d 151 600 Profit for the period 80 000 220 600 220 600 (b) Notes to the Statement of Cash Flows: 1. Reconciliation of cash: Cash and cash equivalents consist of cash at bank and bank overdraft facility (which is classified as current liability). Cash and cash equivalents included in the statement of cash flows comprise the following statement of financial position amounts: 2020 2021 Cash at bank $74 600 $ — Bank overdraft — (16 700) Cash and cash equivalents $74 600 $(16 700) 2. Reconciliation of net cash from operating activities to profit: Profit for the period $80 000 Depreciation – buildings 13 800 Depreciation – equipment 22 900 Gain on sale of investments (35 000) Changes in current assets and current liabilities: Increase in accounts receivable $(15 900) Increase in inventory (53 800) Decrease in prepaid expenses 200 Increase in accounts payable 2 000 Decrease in bills payable (5 000) Decrease in accrued expenses (3 500) Increase in current tax liability 2 000 (74 000) Net cash from operating activities $7 700 3. Non-cash financing and investing activities: During the reporting period, land costing $129 000 was purchased, part of which amounting to $90 000 was financed by means of a long-term loan. Problem 18.27 Statement of cash flows for a company Tulloch Ltd’s comparative statements of financial position and statement of profit or loss and other comprehensive income for the year ended 30 June 2021 are shown below. Additional information 1. New equipment was purchased at a cost of $33 700, paid in cash. 2. Equipment that cost $21 100 and had a carrying amount of $10 000 was sold for cash. 3. Additions to buildings were partly funded by a mortgage loan. 4. Debentures were issued at nominal value ($50) for cash. 5. Share investments with a carrying amount of $16 100 were sold for cash at a profit. 6. The company was given permission to pay income tax in one instalment. 7. No interim dividends were paid during the year. Required (a) Prepare the statement of cash flows for Tulloch Ltd for the year ended 30 June 2021 in accordance with AASB 107, using the classifications shown in illustrative example A to the standard. (b) Prepare the note showing the reconciliation of net cash from operating activities to profit for the year ended 30 June 2021. (LO8) (a) TULLOCH LTD Statement of Cash Flows for the year ended 30 June 2021 Cash flows from operating activities: Cash receipts from customers $685 675 Cash paid to suppliers and employees (672 525) Cash generated from operations 13 150 Interest paid (8 700) Income taxes paid (7 500) Net cash used in operating activities $(3 050) Cash flows from investing activities: Purchase of intangible assets (1 100) Purchase of property, plant and equipment (73 700) Proceeds from sale of equipment 9 200 Proceeds from sale of investments 27 400 Interest received 2 280 Dividends received 3 600 Net cash used in investing activities (32 320) Cash flows from financing activities: Proceeds from issue of share capital 55 270 Proceeds from issue of long-term borrowings 11 500 Dividends paid (16 000) Net cash from financing activities 50 770 Net decrease in cash and cash equivalents 15 400 Cash and cash equivalents at beginning of year 27 800 Cash and cash equivalents at end of year $43 200 Workings: Cash receipts from customers: Accounts Receivable Balance b/d 18 900 Cash from customers 685 675 Sales 693 000 Bad debts written off 1 100 Discount allowed 475 Balance c/d 24 650 711 900 711 900 Allowance for Doubtful Debts Bad debts written off 1 100 Balance b/d 950 Balance c/d 1 250 Bad debt expense 1 400 2 350 2 350 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 48 300 Cost of Goods sold 466 000 Purchases 464 800 Balance c/d 47 100 513 100 513 100 Accounts Payable Cash paid 459 070 Balance b/d 46 280 Bills payable 1 700 Purchases 464 800 Discount received 1 050 Balance c/d 49 260 511 080 511 080 Trade Bills Payable Cash paid 1 400 Balance b/d 700 Balance c/d 1 000 Accounts payable 1 700 2 400 2 400 Prepaid Expenses Balance b/d 2 100 Expenses 2 100 Cash paid 5 400 Balance c/d 5 400 7 500 7 500 Expenses Payable Cash paid 206 655 Balance b/d 4 170 Balance c/d 4 890 Other expenses* 207 375 211 545 211 545 *Other expenses = $209 475 – $2100 (prepaid expenses expired) = $207 375 Cash paid to suppliers and employees = $459 070 (accounts payable) + $1400 (bills payable) + $5400 (prepaid expenses) + $206 655 (other expenses) = $672 525 Interest paid: Interest Payable Cash paid 8 700 Balance b/d 1 500 Balance c/d 2 000 Interest expense 9 200 10 700 10 700 Income tax paid: Current Tax Liability Cash paid 7 500 Balance b/d 7 500 Balance c/d 7 200 Income tax expense 7 200 14 700 14 700 Interest received: Interest Receivable Balance b/d 900 Cash received 2 280 Interest income 2 180 Balance c/d 800 3 080 3 080 Sale of share investments: Share Investments Balance b/d 33 900 Cost of investments sold 16 100 Balance c/d 17 800 33 900 33 900 Selling price of investments sold = $16 100 (carrying amount) + $11 300 (gain) = $27 400 Purchase of property and equipment: Buildings Balance b/d 120 000 Balance c/d 180 000 Cash purchase 40 000 Mortgage loan 20 000 180 000 180 000 Equipment Balance b/d 77 400 Cost of equipment sold 21 100 Purchase 33 700 Balance c/d 90 000 111 100 111 100 Selling price of equipment sold = $10 000 (carrying amount) – $800 (loss) = $9200 Cash purchase of property and equipment = $40 000 (building additions) + $33 700 (equipment) = $73 700 Dividends paid: Retained Earnings Final dividends declared 17 400 Balance b/d 33 800 Balance c/d 22 780 Profit for the period 6 380 40 180 40 180 Final Dividend Payable Cash paid 16 000 Balance b/d 16 000 Balance c/d 17 400 Final dividend declared 17 400 33 400 33 400 (b) Reconciliation of net cash from operating activities to profit: Profit for the period $6 380 Depreciation – equipment 5 250 Depreciation – buildings 4 950 Gain on sale of investments (11 300) Loss on sale of equipment 800 Interest received (2 280) Dividends received (3 600) Changes in current assets and current liabilities: Increase in accounts receivable (5 750) Increase in allowance for doubtful debts 300 Decrease in inventory 1 200 Increase in prepaid expenses (3 300) Decrease in interest receivable 100 Increase in accounts payable 2 980 Increase in trade bills payable 300 Increase in expenses payable 720 Increase in interest payable 500 Decrease in current tax liability (300) (3 250) Net cash used in operating activities $(3 050) Problem 18.28 Cash flow from operating activities and income tax entries The information overleaf relates to Cascade Ltd. Additional information in relation to the year ended 30 June 2021 1. A loan payable of $45 000 was satisfied by conversion into 45 000 ordinary shares, valued at $1 each. 2. The sold equipment cost $41 000 and had a carrying value of $34 000 when sold. Land with a carrying value of $25 000 was sold during the year for $25 000. 3. The company pays tax in four instalments on the normal due dates throughout the year. The first three instalments paid in cash were for $15 000, $12 750 and $16 000 respectively. Required (a) Prepare only the cash flows from operating activities section of Cascade Ltd’s statement of cash flows for the year ended 30 June 2021 in accordance with IAS 7/AASB 107, using the direct method. (b) Reconstruct all journal entries in relation to income tax for the year ended 30 June 2021. (LO8) (a) CASCADE LTD Statement of Cash Flows (Extract) for year ended 30 June 2021 Cash flows from operating activities: Cash receipts from customers $839 500 Cash paid to suppliers and employees (655 800) Cash received from operations 183 700 Interest paid (10 000) Income taxes paid (68 200) Net cash from operating activities $105 500 Workings based on account reconstruction: Cash receipts from customers: Accounts Receivable Bal b/d 32 000 Bal c/d 73 500 Sales 890 000 Debts written off 9 000 __ __ CASH 839 500 922 000 922 000 Allowance for doubtful debts Accounts receivable (written off) 9 000 Bal b/d 6 000 Balance c/d 7 000 Bad debts exp 10 000 16 000 16 000 Cash paid to suppliers & employees: To suppliers Inventory Bal b/d 10 000 Bal c/d 54 000 Purchases 509 000 Cost of sales 465 000 519 000 519 000 Accounts payable Bal c/d 75 200 Bal b/d 56 000 CASH 489 800 Purchases 509 000 565 000 565 000 To employees etc.: Prepaid insurance / Other expenses payable Prepaid insurance b/d 7 000 Prepaid insurance c/d 5 000 Other exps payable c/d 10 000 Other exps pay b/d — CASH 166 000 Expenses* 178 000 183 000 183 000 *$2 000 (insurance) + 134 000 (salaries & wages) + 42 000 (other) = 178 000 Total paid to suppliers & employees = $489 800 + $166 000 = 655 800 Interest paid: Interest payable Bal c/d 2 000 Bal b/d — CASH 10 000 Expense 12 000 12 000 12 000 (b) Income tax paid: Journal entries for income tax: 2020 28/7 Current Tax Liability Dr 15 000 Cash Cr 15 000 1st instalment being last year’s liability 28/10 Income Tax Expense Dr 12 750 Cash Cr 12 750 2nd instalment 2021 28/2 Income Tax Expense Dr 16 000 Cash Cr 16 000 3rd instalment 28/4 Income Tax Expense Cr 24 450* Cash Dr 24 450* 4th instalment *4th instalment = Total tax expense of $65 000 – $12 750 – $16 000 – $11 800 30/6 Income Tax Expense Dr 11 800 Current Tax Liability (given) Cr 11 800 Total tax paid during the year ended 30 June 2021 = $15 000 + $12 750 + $16 000 + $24 450 = $68 200. Problem 18.29 Statement of cash flows and analysis The financial statements of Triathlon Ltd are provided below. Additional information During the year ended 30 June 2020, Triathlon Ltd entered into the following transactions relevant to the preparation of the statement of cash flows. 1. Building additions were completed at a cost of $600 000 cash. 2. New equipment was purchased at a cost of $250 000; $150 000 was paid in cash and the balance covered by arranging a long-term mortgage loan with Running Finance Ltd. 3. Equipment with a cost of $120 000 and accumulated depreciation of $105 000 was sold for $94 000 cash. 4. Shares in Bike Ltd were sold for $245 000 cash. 5. Debentures (9%) were issued at nominal value for cash, $200 000. 6. An additional 40 000 ordinary shares were issued for cash for $6 per share. 7. A cash dividend of $195 000 was paid during the year. 8. $20 000 of mortgage due 30 June 2020 was repaid during the year. 9. The company pays tax in four instalments, and the first three instalments have been paid in relation to the current year. 10. The bank overdraft facility is used as part of the company’s everyday cash management facilities. Required (a) Prepare a statement of cash flows in accordance with accounting standards using the direct method. (b) Prepare notes to the statement to (1) reconcile cash at end shown in the statement of cash flows to the figures in the statement of financial position and (2) reconcile the net cash from operating activities to profit. (c) Comment on the company’s cash flows during the year ended 30 June 2020 and cash position at 30 June 2020. (d) Discuss whether accounting standards should allow the option to prepare the statement of cash flows using the direct or indirect method. (LO6 and LO8) (a) TRIATHLON LTD Statement of Cash Flows for the year ended 30 June 2020 Cash flows from operating activities: Cash receipts from customers $6 506 100 Cash paid to suppliers and employees (5 913 600) Cash generated from operations 592 500 Interest paid (70 500) Income taxes paid (278 000) Net cash from operating activities $244 000 Cash flows from investing activities: Purchase of property, plant and equipment (750 000) Proceeds from sale of investments 245 000 Proceeds from sale of equipment 94 000 Dividends received 43 000 Net cash used in investing activities (368 000) Cash flows from financing activities: Proceeds from issue of share capital 240 000 Proceeds from long-term borrowings 200 000 Repayment of long-term borrowings (mortgage) (20 000) Dividends paid (195 000) Net cash from financing activities 225 000 Net increase in cash and cash equivalents 101 000 Cash and cash equivalents at beginning of year (66 000) Cash and cash equivalents at end of year $35 000 Workings: Cash receipts from customers: Accounts Receivable Balance b/d 208 000 Cash from customers 6 482 100 Sales 6 580 000 Bad debts written off 11 650 Discount allowed 5 250 Bills receivable 27 000 Balance c/d 262 000 6 788 000 6 788 000 Allowance for Doubtful Debts Bad debts written off 11 650 Balance b/d 11 500 Balance c/d 14 500 Bad debt expense 14 650 26 150 26 150 Trade Bills Receivable Balance b/d 12 000 Cash from customers 24 000 Accounts receivable 27 000 Balance c/d 15 000 39 000 39 000 Cash received from customers = $6 482 100 (accounts receivable) + $24 000 (bills receivable) = $6 506 100 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 477 600 Cost of Goods sold 3475 000 Purchases 3500 400 Balance c/d 503 000 3978 000 3978 000 Accounts Payable Cash paid 3 492 550 Balance b/d 448 000 Bills payable 16 600 Purchases 3 500 400 Discount received 12 750 Balance c/d 426 500 3 948 400 3 948 400 Trade Bills Payable Cash paid 19 200 Balance b/d 9 600 Balance c/d 7 000 Accounts payable 16 600 26 200 26 200 Expenses Payable Cash paid 2 401 850 Balance b/d 29 500 Balance c/d 33 750 Other expenses* 2 406 100 2 435 600 2 435 600 *Other expenses = $2 411 100 (other expenses) – $5000 (prepaid expenses expired) = $2 406 100 Cash paid to suppliers and employees = $3 492 550 (accounts payable) + $19 200 (bills payable) + $2 401 850 (other expenses) = $5 913 600 Interest paid: Interest Payable Cash paid 70 500 Balance b/d 22 500 Balance c/d 25 000 Interest expense 73 000 95 500 95 500 Income tax paid: Current Tax Liability Cash paid 278 000 Balance b/d 64 500 Balance c/d 77 300 Income tax expense 290 800 355 300 355 300 Sale of share investments: Shares in Bike Ltd Balance b/d 375 000 Cost of investments sold 150 000 Balance c/d 225 000 375 000 375 000 Purchase of property and equipment: Buildings Balance b/d 1 350 000 Balance c/d 1 950 000 Purchase 600 000 1 950 000 1 950 000 Equipment Balance b/d 760 500 Cost of equipment sold 120 000 Cash purchase 150 000 Balance c/d 890 500 Mortgage loan 100 000 1 010 500 1 010 500 Cash purchase of property and equipment = $600 000 (building additions) + $150 000 (equipment) = $750 000 (b) Note 1: Reconciliation of cash: Cash and cash equivalents consist of cash on hand and balances with banks, investments in money market instruments (if any) and bank overdrafts used as an integral part of the cash management function. Cash and cash equivalents included in the cash flow statement comprise the following balance sheet amounts: 2020 2019 Bank bills (due 31 July) $15 000 — Short-term investments at call 83 000 $41 000 Bank overdraft (63 000) (107 000) Cash and cash equivalents $35 000 $(66 000) Note 2: Reconciliation of Net Cash from Operating Activities to Profit: Profit $457 450 Depreciation (46 500 + 36 000) 82 500 Allowance for doubtful debts 3 000 Investment income (dividends) (43 000) Gain on sale of equipment (79 000) Gain on sale of share investment (95 000) Increase in current tax liability 12 800 Change in assets and liabilities Increase in trade accounts receivable (54 000) Increase in trade bills receivable (3 000) Increase in inventories (25 400) Decrease in prepaid expenses 5 000 Decrease in trade accounts payable (21 500) Decrease in trade bills payable (2 600) Increase in accrued expenses 4 250 Increase in interest payable 2 500 Net cash provided by operating activities $244 000 (c) The reporting period saw a $101 000 increase in the cash position of the company. Net cash from operating activities showed a strong result generating $244 000 cash. Considerable cash was provided by financing activities with share and debenture issues resulting in cash inflows of $440 000. The positive net cash inflows from operations and financing enabled investment of $368 000 on non-current assets and the payment of a substantial cash dividend. The net cash flow during the period was strong and resulted in a very sound cash position at the end of the year, compared with the previous year. (d) There are advantages and disadvantages of the direct and indirect presentation of cash flows from operating activities. When the direct method is used, the statement of cash flows shows an entity’s operating cash flows under various types of activities, such as cash received from customers for sale of goods and services, payments made to suppliers, wages paid, income tax payments, and interest paid on loans. A statement of cash flows prepared using direct method is easier to understand, particularly for users with no or limited accounting background. However, entities would need significantly more time to record the information required to prepare a direct method statement of cash flows, which can be labour-intensive and costly. For example, the entities using this method would have to record cash sales and credit sales separately. When the indirect method is used, net income is converted from the accrual to the cash basis. This is done by adjusting net income for non-cash expenses (such as depreciation and amortisation), gains or losses from sale of non-current assets, as well as changes in current assets and current liabilities. Although a statement of cash flows prepared using the indirect method may be more difficult to understand, the indirect method uses readily available information in preparing a statement of cash flows and arguably many entities find it easier to employ compared to the direct method. The current accounting standards (IAS 7 and AASB 107) permits entities to prepare the statement of cash flows using the direct or indirect method. Nevertheless, both standards recommend the use of direct method as the standard setters believe that such a method provides users with more detailed information for predicting an entity’s future cash flow performance. In addition, AASB 107 requires that entities disclose a note reconciling cash flows from operating activities to profit when direct method is used. Some students might argue that accounting standards should allow the option to prepare the statement of cash flows using the direct or indirect method, just like what the current practice is. Although standard setters believe that using the direct method provides more detailed information to users for decision making, they also acknowledge the additional time and cost required in applying this method. Hence, they should leave it to the reporting entities to decide which method to use, after considering the costs and benefits involved. It is widely known that most entities opt to prepare the statement of cash flows using indirect method, as the indirect method is arguably less complex and less costly for reporting purposes. Conversely, other students might argue that the option of choosing between direct and indirect method in preparing the statement of cash flows should not be allowed by the accounting standards. Since the objective of general purpose financial statements is to provide information useful for decision making, the accounting standards need to make sure that this objective is achieved. Instead, entities should be required to prepare the statement of cash flows using the direct method, with a note reconciling cash flows from operating activities to profit. By doing this, the statement of cash flows will provide more detailed information to users to assist them in making decisions, and the format of the statement of cash flows will be more consistent across entities when all reporting entities use only the direct method. Problem 18.30 Statement of cash flows and report to management The management of Locale Ltd is worried because the bank overdraft has increased by a substantial amount over the financial year ended 30 June 2021 despite a large profit and the introduction of additional capital. The internal comparative statements of financial position at 30 June 2020 and 2021 were as follows. The statement of profit or loss and other comprehensive income for the year ended 30 June 2021 for Locale Ltd, prepared for management purposes, is shown below. Additional information 1. The land was revalued upwards during the year by $22 500. 2. During the year, a dividend of $33 750 had been paid. 3. Plant and equipment which had originally cost $82 500 and had been depreciated by $15 000 was sold during the year for $71 250. 4. The company pays income tax in four instalments and the first three instalments have been paid. For the year ended 30 June 2020, the ATO issued an amended assessment of $12 750 resulting in an under provision of $3750 being recorded in 2021. Required (a) Prepare a statement of cash flows as per current accounting standards using the direct method. (b) Prepare a note reconciling cash flows from operating activities to profit. (c) Prepare a brief report to management explaining the flow of cash and cash equivalents. (LO6 and LO8) (a) LOCALE LTD Statement of Cash Flows for the year ended 30 June 2021 Cash flows from operating activities: Cash receipts from customers $656 250 Cash paid to suppliers and employees (703 550) Cash generated from operations (47 300) Income taxes paid (65 700) Net cash used in operating activities $(113 000) Cash flows from investing activities: Purchase of property, plant and equipment (222 000) Proceeds from sale of equipment 71 250 Net cash used in investing activities (150 750) Cash flows from financing activities: Proceeds from issue of share capital 127 500 Dividends paid (33 750) Net cash from financing activities 93 750 Net decrease in cash and cash equivalents (170 000) Cash and cash equivalents at beginning of year (88 200) Cash and cash equivalents at end of year $(258 200) Workings: Cash receipts from customers: Accounts Receivable Balance b/d 161 250 Cash from customers 656 250 Sales 825 000 Bad debts written off 30 000 Balance c/d 300 000 986 250 986 250 Allowance for Doubtful Debts Bad debts written off 30 000 Balance b/d 15 000 Balance c/d 30 000 Bad debt expense 45 000 60 000 60 000 Cash paid to suppliers: Cash payments for purchases: Inventory Balance b/d 273 750 Cost of Goods sold 415 500 Purchases 600 000 Balance c/d 458 250 873 750 873 750 Accounts Payable Cash paid 608 675 Balance b/d 54 300 Discount received 1125 Purchases 600 000 Balance c/d 44 500 654 300 654 300 Cash paid to suppliers and employees = $608 675 (inventory) + $90 375 (salaries) + $4 500 (electricity) = $703 550 Income tax paid: Current Tax Liability Cash paid 65 700 Balance b/d 9 000 Balance c/d 22 050 Under provision for tax 3 750 Income tax expense 75 000 87 750 87 750 Purchase of property and equipment: Plant and Equipment Balance b/d 310 500 Cost of equipment sold 82 500 Purchase 222 000 Balance c/d 450 000 532 500 532 500 (b) Reconciliation of net cash from operating activities to profit: Profit for the period $130 500 Depreciation – buildings 7 500 Depreciation – plant and equipment 57 750 Gain on sale of plant and equipment (3 750) Changes in current assets and current liabilities: Increase in accounts receivable (138 750) Increase in allowance for doubtful debts 15 000 Increase in inventory (184 500) Decrease in accounts payable (9 800) Increase in current tax liability 13 050 (305 000) Net cash used in operating activities $(113 000) (c) Locale Ltd experiences a significant decrease of $170 000 in cash and cash equivalents for the period ending 30 June 2021. Overall, cash and cash equivalents has decreased from negative $88 200 (a bank overdraft) at the beginning of the period to a negative $258 200 (a bank overdraft) at the end of the period. Net cash flows from operating activities is negative, which is caused by a large increase in both inventory and outstanding receivables. Cash received from the sales of inventory is insufficient to cover for payments made for the inventory purchased and for other expenses. In addition, the entity spent $65 700 to pay for income tax for the period. A business is not sustainable if it cannot generate cash receipts from operating activities in excess of cash payments from operating activities. Net cash flows from investing activities is also negative, as Locale Ltd made a large investment in plant and equipment. The purchase of plant and equipment was only partly covered by the sale of old equipment with the additional funds raised through a share issue. Increase in inventory and receivables and investment in non-current assets mainly account for the significant increase in the bank overdraft for the period, which has worsened the entity’s cash position. Management is urgently required to take some actions in the near future in order to improve the liquidity of the entity. Case studies Decision analysis Several years ago, an article entitled From accounting to ‘forecounting’ (Cormier & Magnan, 2005) claimed that accounting would rely increasingly on forecasting future cashflow. Even though this article was very insightful, many questioned its premise. But after close observation of the standards developed by the International Accounting Standards Board (IASB) in recent years, particularly International Financial Reporting Standards (IFRS) related to financial instruments and revenue recognition, some firmly believe that accounting is transforming to ‘forecounting ‘. Required (a) The definitions of assets and liabilities in the conceptual framework refer to generating future cash inflows (assets) and cash outflows (liabilities). Explain how a statement of cash flows is useful in projecting cash flows. (b) Transforming accounting to forecounting calls for more integration of accountancy with other disciplines. Discuss the disciplines that are useful in developing analytical skills to forecast future cash flows. (a) A statement of cash flows provides information about an entity’s cash position for the reporting period, as well as movements in cash as a result of the entity’s operating, investing and financing activities. Although the information in the statement of cash flows is based on past cash flows, the statement of cash flows can be used to assist in projecting cash flows by looking at the trend in the entity’s cash flows from the previous year(s). The accounting standards require entities to produce comparative figures in their financial statements, which means a two-year trend of cash flows can be established from an entity’s statement of cash flows for the current period. By examining the trend from statement of cash flows, users will be able to predict the entity’s future cash flows associated with increase/decrease in cash received or paid by the entity for its operations and changes in the entity’s current assets/liabilities. Despite its usefulness in projecting future cash flows, it is important to understand that information in the statement of cash flows is only a part of the total analysis necessary to determine the entity’s cash position and future performance. Other information related to the entity’s current operations, management plan, and economic condition are also needed in projecting cash flows. (b) Some disciplines that are useful in developing analytical skills to forecast future cash flows are below. • Finance: - A number of figures reported in the financial statements are derived from valuation process, which require not only professional accounting judgement but also knowledge in finance discipline. For example, the accounting for equity-based compensation uses finance-based valuation models that imply key assumptions about future cash flows and growth of the entity. • Economics: - Knowledge and understanding about macro and micro economic conditions are vital in forecasting future cash flows. Reliance on past information from financial statements will not give the complete analysis of an entity’s cash flows and performance. • Actuarial science: - Actuarial science applies mathematical and statistical methods to assess risk in insurance, finance and other industries. The accounting standards require the use of actuarial valuation method in the measurement of employee benefits. Communication and leadership Reporting on cash flows In groups of three, obtain the latest statement of cash flows for a company (other than JB Hi-Fi Limited). Financial reports are available from company websites, and usually from internet sites subscribed to by university libraries. Required (a) For the statement of cash flows you have obtained, prepare a report to an investor of at least one page in length outlining the strengths and weaknesses of the company’s cash flows from operating, investing and financing activities. (a) The group’s solutions to this will depend on the company and year of the cash flow statement that they use. Students should ensure that they discuss the cash flow under each of the three headings separately. Students should also compare the cash flow from operations to the profit figure and attempt to explain the difference. Ethics and governance Read the below article and answer the questions that follow. Required (a) Describe two theories explaining why corporations fail the ethics test. (b) Identify Moon’s four reasons why corporations behave badly. (c) The article provides examples to illustrate each of the four reasons. Provide your own examples to illustrate each of the reasons. (a) The first theory is that many senior business leaders are ‘corporate psychopaths’, implying that senior managers are people of unsound mind, self-centred, and only care about their own well-being. Jeremy Moon believes that this is an overstatement. This theory is an unfair portrayal of most business leaders. The second theory follows on the comment of former US President George W. Bush in the wake of Enron collapse, that there are just a few ‘bad apples’ in a corporation. This theory implies that corporations do not behave ethically because of the influence of a few bad people within the organisations — a theory that Jeremy Moon believes is an understatement. That is, the corporations are basically sound and ethical in general, but it is just inevitable that every corporation always has a few bad apples and there is nothing particularly wrong with that. Jeremy Moon commented that this argument is too lenient, as it attempts to justify institutional inaction and managerial failure. (b) Moon’s four reasons of why corporations do not conduct business ethically are below. • What the public (e.g. consumers) expect about ethical behaviour does not align well with the way market operates. • There is a lack of ethical leadership, i.e. some leaders fail to step up to the mark ethically. • Failure of ‘professionalisation’ in the way that both employees and managers do not implement ethical behaviour • Regulatory regimes have not always delivered ethical outcomes. (c) What the public (e.g. consumers) expect about ethical behaviours does not align well with the way market operates, for example: • Consumers demand that companies get their supply of materials from ethically-run businesses, however they are not prepared to buy fair-trade products (such as chocolate, coffee or footwear) because such products are more expensive. • Consumers condemn anti-competitive behaviours (e.g. price war between Coles and Woolworth), but they still shop at these supermarkets due to various reasons (price, convenience). There is a lack of ethical leadership, i.e. some leaders fail to step up to the mark ethically, for example: • Hewlett-Packard CEO, Mark Hurd, resigned for submitting false expense reports concerning his relationship with a contractor. • Lee B. Farkas, former chairman of giant mortgage lender Taylor, Bean & Whitaker, was found guilty in April 2011 for his role in one of the largest bank fraud schemes in American history. Failure of ‘professionalisation’ in the way that both employees and managers do not implement ethical behaviours, for example: • Senior managers use insider information to gain in the share market; • Sexual harassment and bullying among employees; • Inappropriate use of computer at work for personal reasons. Regulatory regimes have not always delivered ethical outcomes, for example: • In the past women were not allowed to vote because of perceived inequality. • Ineffective equal opportunity laws. Financial analysis Read the below article and answer the questions that follow. Required Access the 2015 financial report of Dick Smith http://www.asx.com.au/asxpdf/20150818/pdf/430kvhrl8cpg0l.pdf and answer the following questions. (a) For the purposes of the statement of cash flows, identify how cash is defined. (b) Identify the most significant source or use of: i. cash flows from operating activities ii. cash flows from investing activities iii. cash flows from financing activities. (c) Identify and explain any non-cash financing or investing transactions that occurred during the last financial year. (d) Discuss if Dick Smith’s cash position at the end of the 2015 financial year is better or worse than the previous year. (e) How does Dick Smith classify dividends and interest received and paid in the statement of cash flows? (f) Explain the impact on cash flows of a build-up in inventory. (a) In Note 15 to the financial statements (p. 75), cash and cash equivalents include cash on hand and in banks and other financial institutions, net of outstanding bank overdrafts. The cash and cash equivalents in the Statement of Cash Flows can be reconciled to the figures in the Statement of Financial Position. (b) i. The largest source of cash inflows under operating activities is receipts from customers ($1.446 billion) and the largest source of cash outflows under operating activities is payments to suppliers and employees ($1.431 billion). In 2015, Dick Smith Ltd reported negative net cash flows from operating activities. This is not sustainable in the long run. ii. The largest (and only) source of cash inflows under investing activities is proceeds in 2015 and 2014 is from sale of plant and equipment ($0.5 million) in the 2014 year. The largest source of cash outflows under investing activities is payments to purchase plant and equipment ($31.6 million). iii. The largest (and only) source of cash inflows under financing activities in 2015 is proceeds from borrowings ($122.5 million) and largest sources of cash outflows under financing activities is repayment of borrowings ($52 million) and payment of dividends ($35.5 million). Netting is not permitted in the Statement of Cash Flows which is why the new borrowings are shown separately from the repayment of borrowings. (c) There was no non-cash financing or investing transactions that occurred during the financial year. Note 15 to the financial statements (p. 75) only provides reconciliation of net cash flows from operating activities to profit. (d) Dick Smith Limited’s cash position at the end of the 2015 financial year is lower than the previous year, with the net decrease being $531,000. This brings Dick Smith Limited’s cash and cash equivalents balance at the end of the 2015 financial year is $29.5 million, compared to $29.9 million at the end of previous financial year. At the end of 2013 the company had cash and cash equivalents of $46.5 million. The decrease in cash and cash equivalents is mainly due to the increase in outflows under operating activities. Net cash outflows from operating activities is negative with payments to suppliers and employees increasing from $1,261 million in 2014 to $1,431 million in 2015. This suggests that there has been a build-up in inventory with the company needing to pay suppliers. This increase is not matched by an increase in receipts from customers. While receipts from customers has increased from 2014 to 2015, the increase is lower than the increase in the payments to suppliers and employees. (e) Dick Smith Limited classifies dividends paid as cash outflows under financing activities. The entity does not receive any dividends during the reporting period. Both interest received and interest paid are classified as cash flows under operating activities. (f) A build-up of inventory would reduce operating cash flows if the inventory purchases are being paid. If the build-up of inventory is accompanied by a build-up in accounts payable (e.g. the company is purchasing the inventory on credit and not paying suppliers) then the impact on cash flows is minimal. Note 2 f) of the 2015 Financial Report notes “cash flows are included in the statement of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows.” Solution Manual for Accounting John Hoggett, John Medlin, Claire Beattie, Keryn Chalmers, Andreas Hellmann, Jodie Maxfield 9780730344568