Solutions Manual: Company Accounting 10e

Chapter 16: Disclosure: statement of cash flows
Solutions Manual
to accompany
Company Accounting 10e

prepared by
Ken Leo
John Hoggett
John Sweeting
Jeffrey Knapp
Sue McGowan
© John Wiley & Sons Australia, Ltd 2015
© John Wiley and Sons Australia, Ltd 2015 16.0

Chapter 16 – Disclosure: statement of cash flows
REVIEW QUESTIONS
1. What is the purpose of the statement of cash flows? In what ways may the
information in the statement be of benefit to users?
The purpose of a statement of cash flows is to provide information about the historical
changes to an entity’s cash and cash equivalents. It is designed to provide users with
information to assess the ability of the entity to generate cash and the needs of the entity to
use cash.
According to paragraphs 4-5 of the standard AASB 107, the statement of cash flows, 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 statement of cash flows may also provide useful information to internal users such as
managers in their planning and controlling operations.
2. What is the concept of cash used in the preparation of the statement of cash flows?
Why is defining cash important?
The concept of cash adopted by AASB 107 covers both cash and cash equivalents. Note the
definitions of “cash” and “cash equivalents” shown in the chapter. 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 definitions of “cash” and “cash equivalents” are important because, in effect, they
determine what items are included in the cash pool and what transactions represent an inflow
to the pool or outflow from the pool. Items included in these definitions cannot create cash
flows by themselves. 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. Distinguish between cash flows from operating activities, investing activities and
financing activities. Explain the importance of cash flows from operating activities.
From the definitions in the standard in paragraph 6:

Operating activities are the principal revenue-producing activities of the entity and other
activities that are not investing or financing activities
Investing activities are the acquisition and disposal of long-term assets and other investments
not included in cash equivalents.
Financing activities are activities that result in changes in the size and composition of the
contributed capital equity and borrowings of the entity.
Section 16.4 of the text provides a detailed discussion of these three activities.
Cash flows from operating activities are important to users of a statement of cash flows
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 an entity’s 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. Cash
flows from operating activities can be used to assess the quality of the entity’s profits. A
company that makes profits but keeps on losing cash or needing more cash from its
stakeholders does not have a sustainable future.
4. Describe how the cash purchase of land and buildings would be classified in the
statement of cash flows by each of the following:
(a) a property development company that purchases land and buildings in the
ordinary course of business to redevelop and sell
(b) an investment property company that holds land and buildings for the purpose
of earning rental income or for capital appreciation
This question highlights how the classification of cash flows can vary across entities.
a) property developer
A property development company purchases land and building as part of its principal
revenue producing activities in a manner similar to the purchase of inventory by a retailer.
It should classify the purchase as a cash flow from operating activities.
b) property investment company
A property investment company that holds land and buildings for the purpose of earning
rental income or for capital appreciation is acquiring the assets for the long term. It should
classify the purchase as a cash flow from investing activities. The rent income received
will be classified in operating activities.

5. Are the following items cash flows pursuant to AASB 107? If so, indicate which
classification from operating, investing or financing activities is appropriate.
(a) increase in bank overdraft
(b) cash loans made to employees
(c) proceeds from sale of investments
(d) depreciation of plant
(e) income tax paid
(f) sale of motor vehicle for cash
(g) issue of ordinary shares in exchange for convertible notes
(h) bad debts written off
(i) bad debts recovered
(j) revaluation increase for land
(k) transfer from general reserve to retained earnings
(l) dividends declared and paid
(m) share buyback
(n) acquisition of a motor vehicle by way of a finance lease
Item (a) will only be a cash flow if the bank overdraft is not included as a component of cash
and cash equivalents. If so, it would be classified in financing activities.
Item (b) is a cash flow. It is classified in investing activities.
Item (c) is a cash flow. It is classified in investing activities for entities other than financial
institutions.
Item (d) is an expense but not a cash flow. It would only be included in the statement if the
indirect method of presenting cash flows from operating activities is used.
Item (e) is a cash flow. It is classified in operating activities. However, some component of
income tax, such as capital gains tax, could be classified in investing activities because it
relates to the sale of non-current assets.
Item (f) gives rise to a cash flow. The cash proceeds on sale is classified in investing
activities. The gain/loss on sale would only be included in the statement if the indirect
method of presenting cash flows from operating activities is used.
Item (g) is not a cash flow. It is included in the statement of changes in equity but not the
statement of cash flows.
Item (h) is not a cash flow. Bad debts expense would only be included in the statement if the
indirect method of presenting cash flows from operating activities is used.
Item (i) is a cash flow. It is classified in operating activities as part of cash receipts from
customers.
Item (j) is not cash flow. The revaluation increment is included in the statement of profit or
loss and other comprehensive income but not the statement of cash flows.
Item (k) is not cash flow. It is included in the statement of changes in equity but not the
statement of cash flows.

Item (l) is a cash flow – for dividends paid during the period. It can be classified in operating
activities, investing activities or financing activities but consistency in classification is
required.
Item (m) is a cash flow. It is classified in financing activities.
Item (n) is not a cash flow. The acquisition of the motor vehicles under finance lease does
not, of itself, give rise to any cash inflows or outflows. The finance lease will give rise to cash
flows during the financial year in the form of lease repayments. The amount of the lease
payments relating to the repayment of the finance lease liability would be classified in
financing activities. The amount of the lease payments relating to the payment of the
financing charges under the lease (the interest) could be classified in operating cash flows or
financing cash flows.
6. Explain the differences between the direct and indirect methods of presenting cash
flows from operating activities. Which method is more informative?
The direct method of presenting cash flow from operating activities shows the details of cash
receipts and cash payments, e.g. the cash flows from receipts from customers and for
payments to suppliers and employees. In contrast, the indirect method of presenting cash
flow from operating activities begins with the profit for the year and makes adjustments in
order to arrive at the net cash flow figure. The adjustments are for non-cash based expenses
(e.g. depreciation), any item included in the profit or loss that is not classified as operating
(e.g. proceeds from sale of plant), and accrual balances (e.g. the increase in accounts
payable).
Under either method of presentation, the final figure for net cash flows from operating
activities is the same. The fact that the standard AASB 107 allows either method suggests that
both provide useful information to the users of the financial reports.
The direct method is relatively more informative about cash flows from operating activities
because it shows the gross cash inflows and outflows rather than a net cash flow amount. In
order to answer certain questions – e.g. “is the company collecting more or less cash from
customers than in previous years?”- the information presented by the direct method is needed.
The AASB/IASB permits either method to be used, but encourages the use of the direct
method (paragraph 19). The direct method also appears to be favoured by the Australian
Securities Exchange as Appendix 4E to the ASX listing rules states as follows:
The statement of cash flows may be condensed but must report as line items each
significant form of cash flow and comply with the disclosure requirements of AASB
107 Statement of Cash Flows, or for foreign entities, the equivalent foreign
accounting standard.
The indirect method does not show the sources of the cash flows but provides a calculation
reconciling the entity’s profit with operating cash flows. The indirect method explains why
profit is different to operating cash flow thereby providing important information on the
extent to which profit is cash-based and accrual based. Many of the top Australian companies

prepare a note disclosure for the reconciliation of profit and cash flows from operations and
this indicates that the reconciliation has information value to shareholders and analysts.
7. Why does AASB 107 require gross cash flows to be reported in the statement of cash
flows? In what limited circumstances can net cash flows be reported?
Gross cash flows are required to be reported under AASB 107 for investing and financing
activities (paragraph 21) and gross cash flows are also required if the direct method of
reporting operating cash flows is used (paragraph 18).
As a general principle, netting off financial statement items results in loss of information
whether it is netting off cash inflows against cash outflows, netting off revenues against
expenses or netting off assets against liabilities.
Paragraph 13 states that reporting specific components of historical cash flows provides a
useful basis for forecasting future cash flows. It is considered that the gross flows approach
is a more informative method of presentation than that which discloses only the net amount
of cash flows with no indication of inflows/outflows of individual items of operating
activities.
Net cash flows can be reported for operating, investing and financing activities in limited
circumstances as discussed in paragraphs 22 to 24. A travel agency is a good example of
whether netting of operating cash flows is appropriate. The travel agency introduces
consumers to service providers of accommodation, flights and car rental. The customer pays
the travel agency and the agency remits cash to the service providers. The travel agency
receives commissions from the suppliers and the suppliers are responsible for settling any
claims by the customer. In substance, the cash flow that relates to the accommodation, flights
and car rental is not cash flow of the travel agency. Rather, the travel agency is just an
intermediary providing a service to connect consumers and service providers for a fee.
8. What are the limitations of a statement of cash flows? Give examples of transactions
that may have significant consequences on the future cash position of a company
which are not reported in the statement?
Limitations of the statement of cash flows are:
 The statement is based on past cash flows and not future cash flows. However by
producing comparative figure for previous periods, trends in cash flows can then be
examined as an aid to predicting future cash flow position.
 Non-cash transactions such as the purchase of a non-current asset by long-term debt
do not affect the current statement of cash flows, but may have an impact in later
periods in regard to interest and principal repayments. Such non-cash transactions are
required to be disclosed in a note; however entities are not required to also disclose
the impact this transaction will have on future cash flows.
 Other important information such as credit standby arrangements and unused loan
facilities do not appear in the statement of cash flows although it might be included in
the disclosure notes. AASB 107 at paragraph 50 merely encourages, rather than
requires, disclosure of information about credit standby arrangements and unused loan

facilities as at the end of the financial year. This information is relevant to assessing
whether the entity has any “head room” for cash resources in the future. Users of the
statement of cash flows should always pay close attention to the disclosure notes that
accompany the statement.
 The statement of cash flows does not enable the user to totally assess the
liquidity/solvency position of an entity as the standard doesn’t require entities to state
that if the assets of the entity were realised, then there would be sufficient cash to pay
off all debts as they fall due.
 Management can manipulate cash flows by prepaying or delaying cash payments that
will affect cash flows for that particular reporting period. Comparative figures would
tend to eliminate this limitation, as the cash flows have to eventually occur. Therefore
the statement of cash flows should not be evaluated for one period only, but rather
over a number of periods.
 Comparability of cash flow information across companies may be affected by
differences in the way companies apply the definition of cash equivalents or classify
cash flows such as interest paid.
Examples of transactions are:
 Purchase of investments in shares in exchange for the issue of shares. The investments
may give rise to dividends received in the future.
 Purchase of a new business in exchange for the issue of shares. The new business may
significantly affect the cash flows from operating activities in the future.
 Sale of non-current assets in exchange for non-cash consideration.
 Sale of an existing business in exchange for shares in another company. The operating
cash flows of the sold business will not be included in future statements.
 Purchase of a major item of plant by way of a finance lease. The finance lease will
give rise to cash payments for interest and principal repayments in the future.
9. A fellow student explained: ‘Profit is the premier measure of financial performance.

You can think of profit as cash flows from operating activities adjusted for the
effects of accrual accounting. Do you agree? Give reasons.
Profit (earnings) is the key measure. Turn on the television to a business show or read the
business section of a newspaper. When a top company’s recent performance is being
discussed, earnings is usually at the forefront of the analysis. The discussion will normally
address whether earnings for the quarter or half year or full year has increased or decreased
relative to a prior period? The discussion may also address whether earnings for the quarter or
half year or full year exceeded or failed to meet the expectations of analysts (the market).
Why is profit the key measure? Why not discuss net cash from operating activities instead?
The answer is because accrual accounting profit is a more complete measure of financial
performance. It includes the financial effects of all transactions and events that affect net
assets (excluding transactions with owners as owners and items of other comprehensive
income) rather than just those transactions that affect cash and cash equivalents.
The indirect method of presenting cash flows from operating activities makes it clear that
profit is composed of cash flows and accrual accounting adjustments. Therefore, the analysis
of a company’s profits should consider both the cash flow component and the accruals

adjustments component. Dissecting profit into cash and accrual components is one way to
think about earnings quality. Profits that are well-backed by cash flow are superior to profits
that rely more on accrual adjustments.
In practice, it has been found that operating cash flow is more persistent than the accrual
component of earnings, i.e., it does not change as much year on year. This means that an
increase in profit is likely to be more reliable if it is supported by an increase in operating
cash flow rather than just some temporary accrual adjustments.
10. A fellow student explained: ‘The easiest way for managers to manage earnings or
manipulate profits is to manipulate the accrual accounting adjustments’ Do you
agree? Provide examples of management decisions that may increase profit but have
no impact on cash flows from operating activities.
Because profit is the key financial measure, managers of top companies tend to be under
pressure to manipulate it to meet market expectations.
Profit is composed of operating cash flows and accruals adjustments. Therefore, management
can manipulate either or both components in order to manipulate profits.
The manipulation of cash flows normally requires the manipulation of real transactions such
as the following:
 cut discretionary spending on advertising or research
 offer discounts to boost customer receipts before year end and delay restocking until after
year-end
 delay payments to suppliers.
But manipulating accruals is easier because the company doesn’t have to change any of its
real activities. This makes manipulating accruals a lower cost option that manipulating cash
flows. Examples of manipulating accruals to increase profits are as follows:
 record revenues in the current period for services to be performed in future
 reduce the allowance for bad and doubtful debts using new management forecasts
 reduce the provision for warranty based on new management forecasts
 reduce the provision for employee benefits based on new estimates of employee retention
and long service leave commitments
 increase deferred tax asset by recognising tax losses not previously brought to account
based on new management expectations of future profits
 allocate additional costs to inventory that were previously recognised as periodic
expenses
 adjust the accounting policy in relation to the depreciation of non-current assets resulting
in lower depreciation charges in the short-term
 reverse prior period impairment losses based on new management forecasts.
11. The statement of cash flows is based on the idea that there is a pool of funds which
increases and decreases as a result of transactions that occur during the reporting
period. The statement uses cash and cash equivalents as the concept for the pool of
funds. Prior to 1992, Australian companies prepared ‘funds statements’ with a
broader concept of funds similar to working capital. However, the best concept of

funds is cash and cash equivalents because it is easy to understand, and with broader
concepts, less is disclosed. Discuss these assertions.
A statement using cash and cash equivalents as the concept of funds makes it easier for users
to understand the statement compared to a broader concept of funds incorporating say
working capital.
A company’s obligations and commitments are usually settled in cash and so cash flow data
is relevant to assess a firm’s ability to sustain operations and meet its commitments as and
when they fall due. Statements based on other concepts of funds do not provide information
that is as relevant to solvency.
As “cash and cash equivalents” is a narrow concept, there is also less chance of any
manipulation occurring to produce a desired result. Also, the broader the concept, the more
likely that differing interpretations will occur.
The arguments in favour of a wider concept of funds is that it would be more consistent with
the accrual accounting techniques that are used in the preparation of the other financial
statements and the movement of accounts in the statement of financial position would be
more fully explained. For example, land purchased by issue of debentures might be included
in a funds flow statement whereas it would not be included in a statement of cash flows.
Conversely, a statement using working capital as the funds concept may result in the loss of
information in other circumstances. For example, inventory, receivables and cash would all
fit into the concept of working capital and sales of inventory on credit or for cash would
result in these items being netted off.
12. A recently graduated accountant made the following observation: For the purposes
of preparing a statement of cash flows, the concept of cash includes ‘cash
equivalents’. It is therefore difficult to see why accounts receivable is not included in
the concept of cash. After all, money owed to the business by the short-term money
market (a receivable) is included in the definition of cash. So let us be consistent and
include all receivables.’ Discuss.
Paragraph 6 of AASB 107 defines cash equivalents as short-term highly liquid investments
that are readily convertible into known amounts of cash, and which are subject to an
insignificant risk of changes in value.
In contrast to deposits in the short term money market, an account receivable is not readily
convertible into known amounts of cash on hand. Customers with accounts often have terms
of 30 days or more and may not pay on time. Risk may also play part with an account
receivable if the customer becomes bankrupt and cannot pay their account.
The standard does not explicitly address if receivables should be included in cash equivalents,
however paragraph 14 clearly indicates that cash received from customer accounts is included
in cash flows from operating activities.
13. A student of accounting, after studying the illustrative examples of AASB 107, was
confused. Long-term borrowings are recognised as a financing activity of an entity,

yet interest paid is included in cash flow from operations. After some consideration
the student concluded, ‘since interest expense is regarded as a financial cost, interest
paid should be treated as part of the financing activities of an entity, and be
classified in the statement of cash flows accordingly.’ Would you support the
conclusion reached by the student? Explain.
It is true that interest expense is classified as a financing cost in the statement of profit or loss
(refer para. 82 of AASB 101) however, revenue and expense classifications do not necessarily
determine classifications of cash flows. It is also true that interest expense enters into the
determination of profit or loss but this fact is not determinative either, e.g. proceeds from sale
of plant as a revenue enters into the profit or loss but is classified in investing activities.
Since interest is being paid on long-term borrowings that were initially reported as a
financing cash inflow, then the conclusion reached by the student is logical. The standard
itself is unclear on the reporting of interest paid. See paragraph 31 of the standard that seems
to allow a choice of classification provided it is applied consistently. Paragraphs 32-33
indicate that the classification of interest paid should be in either operating or financing
activities. Classification in financing activities would also probably assist users for financial
analysis purposes.
The vexed issue of whether interest paid should be classified in operating or financing
activities has a long history. In the context of the United States – refer Nurnberg, H., 1993,
Inconsistencies and ambiguities in cash flow statements under FASB Statement No. 95,
Accounting Horizons, Vol 7, No. 2, June 1993, pp. 60-75. Nurnberg suggests that companies
should not have a choice to report similar cash flows differently.
A similar analysis applies to the treatment of dividends paid on shares. Are they to be
regarded as operating activities or financing activities? The standard permits either treatment
(para. 34).
CASE STUDIES

CauseSdyt1 Increagsiohwfldpt
Lana Ferdinand, the owner-manager of a small proprietary company, had carefully

monitored the 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 statement of profit or loss for the year, she was
dismayed to note that profit had deteriorated significantly. In her anger, she accuses you
of having made errors in the accounting since ‘such a silly situation could not possibly
exist’. How would you respond to Lana Ferdinand?
You need to explain the difference between cash accounting and accrual accounting to Lana
Ferdinand. Accrual accounting is not limited to those transactions that have an effect on cash
and cash equivalents. It recognises the financial effects of all transactions and events of the
period that affect the elements of the financial statements – assets, liabilities, equity, revenues
and expenses.
Possible causes of having an improved cash position with a deteriorating profit could be:
a. Receiving cash for revenue in advance.
b. Receipt of cash for a large one off customer account that was recorded as revenue in
the previous period.
c. Cash proceeds from sale of a non-current asset where a significant loss on sale is
recognised in expenses
d. Cash proceeds from the sale of a significant business at the beginning of the year that
no longer contributes to the bottom line profit of the entity
e. Additional cash from new borrowings with interest costs that are payable at year end
f. Recording of significant new non-cash expenses – depreciation and amortisation,
writing off inventory and impairment losses
g. Recording an expense that was prepaid last year, ie. a significant decrease in
prepayments
CauseSdyt2 Directvsndhmofap

Find and read the following article:

• Bradbury, M 2011, ‘Direct or Indirect Cash Flow Statements?’ Australian Accounting
Review, vol. 21, no. 2, June, pp. 124–30.
Present arguments as to why the direct method is superior to the indirect method of
presenting cash flows from operating activities.
dByburasktheqionmx fwrdctehopsnaiu wl:

1) nCthaediolrmfpvbyc esntaiowhrmdbyl?
2) Doesthdircmnfpavuolt?
3) hIsetdircmoylpa?
For the first question, Bradbury reviews the research evidence that compares estimates of
cash flow data with reported cash flows. Bradbury concludes that net cash flows from
operating activities and individual line items, such as cash receipts from customers, cannot be
reliably estimated by analysts using mechanical accruals reversals procedures. The
calculation of cash flows by company outsiders using indirect means is confounded because
of business acquisitions, discontinued operations and asset growth.
For the second question, Bradbury reviews the research evidence of the predictive ability of
the cash flow data disclosed by the direct method of presentation. The direct method is
encouraged at paragraph 19 of AASB 107 on the basis that it provides information that may
be useful to estimate/predict future cash flows. Bradbury concludes that the operating cash
flows reported by the direct method perform better at predicting future net cash flows from
operating activities than cash flows reported by the indirect method or other alternatives such
as earnings. Bradbury also points to capital market research and concludes that the direct
method of presentation provides information that is value relevant or incremental to that
provided by the indirect method based on its association with share prices or share returns.
Fohrtidequsn,Bybacl veothsnfprgaimcwluedthofprsnaiv cmd.Bbuyoenthwr,aif sudgenctohmark(lys)figedtopncahwrmfu.si
CauseSdyt3 Cashflowndictre

• Flanagan, J & Whittred, G 1992, ‘Hooker Corporation: A Case Study for Cashflow
Reporting’, Australian Accounting Review, vol. 1, no. 3, May, pp. 48–52.
Provide a brief summary of the authors’ main points.
Flanagan and Whittred make the case for cash flow information by discussing the failure of
Hooker Corporation.

They demonstrate how traditional accrual accounting measures (for example return on assets
and equity, quick ratio, current ratio, leverage ratio and interest cover) did not provide
sufficient warning signals that the company was in serious trouble.
They also note that “funds from operations” – the concept of funds that was used before cash
and cash equivalents – was highly correlated with profits and did not indicate that the
company would have trouble meeting its debts as and when they fell due.
They also illustrate how the company’s share price was a comparatively good indicator of the
“bad news” of the company. Changes in share price may be a good red flag of financial
distress for companies listed on the ASX.
CauseSdyt4 Coashwflndtiry

• Carslaw, C & Mills, J 1991, ‘Developing Ratios for Effective Cash Flow Statement
Analysis’, Journal of Accountancy, vol. 172, no. 5, November, pp. 63–70.
Provide a brief summary of how information in the statement of cash flows may be used
in ratio analysis.
Carslaw and Mills group cash flow ratios into the four categories as follows:
(1) cash return

(2) quality of earnings

(3) solvency
(4) capital expenditure commitments.
(1) Cash return ratios
Cash return on assets Cash generated from operations

Total assets
Cash return on equity Net cash from operating activities

Total shareholders’ equity
Cash flow per ordinary Net cash from operating activities less preference
share dividends
Weighted average number of ordinary shares
Cash return on assets shows the cash productivity of assets and excludes interest paid which
goes to how the assets are financed. It is different from the usual profit-based return on assets
because it does not include the effects of accruals and asset allocations such as depreciation
and amortisation. Cash return on equity shows the return made by the providers of share
capital in terms of cash. This ratio can be refined even further to calculate cash flow per
ordinary share.
(2) Quality of earnings ratios
Quality of sales Cash receipts from customers

Sales revenue
Quality of net income Net cash from operating activities

Operating profit after tax
Cash generated from operations

Operating profit before interest, taxes and depreciation
The quality of sales ratio indicates the extent to which sales revenue is being received in cash.
A low ratio could indicate that there is a lag in cash collections or that there is a high level of
uncollectible customer debts. The quality of net income ratios indicates the extent to which
profit is being received in cash. A low ratio would indicate that a significant proportion of
profits is not being realised into cash during the reporting period. If the ratio were
consistently low over a number of years, then this could indicate that the company had
created profits that are not supported by cash flow.
(3) Solvency based ratios
Cash debt coverage Net cash from operating activities less total dividends
Debt
Cash interest coverage Cash generated from operations

Interest expense

Cash dividend coverage Net cash from operating activities

Total dividends
Net cash from operating activities less

preferred dividends
Ordinary dividends
The cash debt coverage ratio is often a good predictor of financial distress because a
company needs cash inflow to meet its debt commitments. Cash interest cover is a
complement to the interest cover ratio that is calculated using net profit. A ratio greater than
one indicates sufficient cash is being generated from operations to meet interest
commitments. In most cases, it would be desirable or prudent for the ratio to be well in
excess of one so that the company has a margin of safety in respect of its interest
commitments. Cash dividend coverage shows the extent to which the current level of
dividends can be maintained using internally generated cash sources.
(4) Capital expenditure ratios
Capital acquisitions Net cash from operating activities less total dividends
Cash payments for capital acquisitions
Investment/Finance Net cash flows from investing activities

Net cash flows from financing activities
Net cash flows from investing activities

Net cash flows from operating and financing activities
The capital acquisitions ratio shows the extent to which current capital expenditure
commitments are covered by cash flows from operations. One difficulty with using this ratio
is that, unlike dividends, capital expenditures may vary considerably from one year to the
next. The investment to finance ratio measures the extent to which funds for investment are
being generated from financing sources. A low ratio would indicate that cash flows from
operating activities are being utilised to fund investing activities.
CauseSdyt5 Eanrgsquilty,hcfowd

• Schipper, K & Vincent, L 2003, ‘Earnings Quality’, Accounting Horizons, vol. 17
(supplement), pp. 97–110.
Provide a brief summary of how cash flows from operating activities and accruals can
be used to measure earnings quality.
Schipper and Vincent discuss four earnings quality measures derived from the relations
between profit accruals and cash flow as follows:
1) Ratio of cash from operations to profit

2) Changes in total accruals

3) Abnormal (discretionary) accruals estimated from accounting fundamentals
4) Direct estimation of accruals-to-cash relations
The first measure of earnings quality based on the ratio of cash from operations to profit
presumes that higher quality earnings means closeness to operating cash flow. For example, a
ratio of one would indicate higher quality earnings than a ratio 0.5.
The second measure of changes in total accruals presumes that some portion of accruals is
constant over time. Therefore, the change in total accruals is a measure of manager’s
manipulation of profit. The higher the percentages change in total accruals the lower earnings
quality.
The third measure is estimated abnormal accruals. This measure presumes that there is some
expected, normal or unmanipulated level of accruals based on the accounting fundamentals of
the company. For example, a company with $100 million of plant and equipment might be
expected to have $14 million of depreciation charges for the year based on an average useful
life. It is possible to develop a statistical model for expected accruals based on accounting
fundamentals. What is unexplained by the model – the error terms - represents abnormal
accruals. Alternatively, the expected accruals can be compared to actual accruals and the
difference is unexpected or abnormal accruals. Higher abnormal accruals indicate more
management manipulation of accruals and lower earnings quality.
The fourth measure is also based on a statistical model but the model uses working capital as
the sole accounting fundamental. Changes in working capital are regressed on current, prior
period and next period cash flows. The error terms of the model arise because management
misestimate accruals (whether intentionally or otherwise). Higher errors indicate lower
earnings quality.
CauseSdyt6 Eanrgsquilty,hcfowd
Compare and contrast the financial information in the following table in respect of a
failed company and surviving company from the same industry.
One.Tel ($000)
1997 1998 1999 2000
Profit (Loss) for the year 3 723 5 910 6 965 –291 100
Net cash flow from operating activities 13 402 –8 000 –28 945 –168 900
(CFO)

Total accruals (TAcc) –9 679 13 910 35 910 –122 200

TAcc/CFO –0.72 –1.74 –1.24 0.72
Telstra ($m)
1997 1998 1999 2000
Profit (Loss) for the year 1 609 3 000 3 488 3 673
Net cash flow from operating activities 5 254 5 635 6 574 6 547
(CFO)
Total accruals (TAcc) –3 636 –2 635 -3 086 -2 874
TAcc/CFO –0.69 –0.47 -0.47 -0.44
Source:dBansimftAPhRMor,vUnyesiwfNSutWal.
It is interesting to compare One.Tel with Telstra because One.Tel failed in 2001 but Telstra is
a survivor. They are both telecommunication companies and should face similar accounting
issues. However, in terms of size One.Tel was small when compared to Telstra.
Notice from 1997-2000 Telstra has increasing profits and increasing positive cash flows from
operations. In contrast, One.Tel’s profit rises from 1997 to 1999 but then declines
spectacularly to a huge loss in 2000; while at the same time its CFO is positive in 1997 but
negative thereafter. Comparing the accruals of both companies provides an insight into the
creative accounting at One.Tel that occurred prior to its collapse.
Notice how Telstra’s total accruals, calculated as profit less operating cash flow, are negative
each year. This is what you would expect for a telecommunications company because, on
average, accounting accruals for non-cash expenses like depreciation and amortisation should
be very significant. In contrast, One.Tel’s total accruals were positive in years 1998 and 1999
and increasing year on year. Large positive total accruals and increasing positive total
accruals are a warning sign that managers may be manipulating earnings.
One.Tel’s total accruals scaled by operating cash flows Tacc/CFO are also larger in each year
in absolute terms than Telstra’s. This indicates that the accrual process is relatively more
important to One.Tel’s profit than Teltra’s, i.e. Telstra’s profit is of higher quality.
The following extract from an article by Paul Barry in the Sydney Morning Herald published
on 1 August 2002 discusses some of the creative accounting of One.Tel in the 1999 year.

One.Tal'shcS,tifpr
By Paul Barry
August 1 2002
Mr Hodgson's second day in the witness box produced more startling evidence of One.Tel's
accounting practices, which allowed the company to turn a
$7 million loss into a $25 million profit in 1999 and to conceal expenses of at least $173
million up to April 2000.
Mr Hodgson revealed that the $14.2 million bonuses paid to Jodee Rich and Brad Keeling
between July 1999 and February 2000 were not debited to the profit-and-loss account at the
time they were paid.
Instead, they were treated as assets of the company - like property and equipment - so the cost
could be spread.
Mr Hodgson agreed that this device boosted One.Tel's profit in 1999 by $3 million and
reduced the company's loss for the first half of 2000 by about $8 million.
Deferring the expense gave One.Tel an excuse for not disclosing the bonuses to shareholders
until 15 months after the first tranche was paid.
Asked whose idea it was to handle the payments in this way, Mr Hodgson said that
instructions came from Mr Silbermann and Mr Rich.
Mr Hodgson said he and Mr Silbermann devised an argument that the bonuses were "set-up
costs" of One.Tel's European businesses (which the company was already deferring).
"You agree, don't you, that it's not a persuasive argument?" retorted Michael Slattery, QC,
counsel for One.Tel's liquidators.
"I believed it was a bit of a stretch and a bit of a grey area, absolutely," Mr Hodgson replied.
"It was a very big stretch, wasn't it?" asked Mr Slattery.
"It was a stretch."
One.Tel's auditor, Steven La Greca, of BDO Nelson Parkhill, also thought it was a bit of a
stretch, but gave it the thumbs up all the same. But by the end of December 1999 he was
raising doubts in writing.
By this time, One.Tel was being investigated by the Australian Securities and Investments
Commission for deferring many millions of dollars of other expenses that would have
plunged the company deep into the red.
And Mr La Greca was also under pressure. He and BDO were ultimately reprimanded and
fined $10,000 each by the Institute of Chartered Accountants of Australia.
After a six-month battle, ASIC insisted that One.Tel's accounting policies be changed. This
ultimately led in August 2000 to the company declaring $245 million of costs that would
otherwise have been hidden.
CauseSdyt7 CashflowtpAuirncme
Select three companies listed on the ASX from different industries; for example, metals

and mining, telecommunication services, consumer staples. Go to www.asx.com.au and

find the most recent annual financial statements of the three companies. Compare their
statements of cash flows and report your findings to the class, especially with respect to
the major categories of operating activities, investing activities and financing activities.
This is an open-ended case for student presentation. Students should use the ASX website by
clicking on “Prices and Research” and then use the drop down menu for “Company
information” then click on “view complete list” from the Listed Companies Directory. Select
three companies from three different industries and go from there to the annual reports of
each company in the “Company Announcements” section to view the statements of cash
flows. Alternatively students can use a search engine, such as Google, to find the statements
of cash flows of three appropriate companies.

PRACTIEQUOSN
Question 16.1 The cash records approach
Wilko Ltd had cash and cash equivalents at 1 July 2016 of $100 000. The transactions of
Wilko Ltd for the year to 30 June 2017 are as follows:
1. Borrowed $30 000 with a 6-month loan payable

2. Received $380 000 cash for customer accounts
3. Sold for $40 000 cash a plant asset with a carrying amount of
$30 000
4. Issued ordinary shares for $120 000 cash
5. Purchased a plant asset for $87 000; $27 000 in cash and $60 000
vendor loan
6. Exchanged 10 000 shares for land with a fair value of $100 000
7. Received a $40 000 dividend in cash
8. Invested $100 000 cash on the short-term money market
9. Paid fixed-term loan principal of $80 000 and interest of $8000
10 Cash payments for suppliers accounts $250 000
.
Required
Prepare the statement of cash flows of Wilko Ltd for the year to 30 June 2017.
WILKO LTD
Statement of Cash Flows
for the year ended 30 June 2017
Cash flows from operating activities
Cash receipts from customers $380 000
Cash paid to suppliers (250 000
Cash generated from operations )
Interest paid 130 000
Net cash from operating activities (8 000) 122 000
Cash flows from investing activities
Proceeds from sale of plant
Purchase of plant 40 000
Dividends received (27 000)
Net cash used in investing activities 40 000 53 000
Cash flows from financing activities
Proceeds from issue of share capital
Proceeds from short-term borrowings 120 000
Repayments of borrowings 30 000
Net cash used in financing activities (80 000) 70 000
Net increase (decrease) in cash and cash equivalents 245 000
Cash and cash equivalents at beginning of period 100 000
Cash and cash equivalents at end of period $345 00
0

Explanations
*The purchase of plant using finance from the vendor is not a cash flow
* The exchange of shares for land is not a cash flow
* Investing on the short term money market results in the exchange of cash for a cash
equivalent
* Interest paid and dividends received are classified in operating activities and investing
activities respectively in this example.

Question 16.2 The reconstruction of accounts (formulae) approach
Below are the statements of financial position of Brilleaux Ltd as at 30 June 2016 and
2017, and its statement of profit or loss and statement of changes in equity for the year
ended 30 June 2017:
BRILLEAUX LTD
Statements of Financial Position
as at 30 June
2017 2016
Assets
Cash at bank $ 23 000 $ 6 500
Accounts receivable 33 500 37 500
Inventory 82 000 66 000
Prepaid insurance 2 500 3 500
Land 40 000 44 800
Machinery 360 000 300 000
Accumulated depreciation: machinery (81 000 ) (67 000 )
Total assets $ 460 000 $ 391 300
Liabilities
Accounts payable $ 25 000 $ 22 000
Interest payable 3 000 3 400
Other accrued expenses 7 000 4 500
Long-term borrowings 145 000 120 000
Equity
Share capital 170 000 100 000
Retained earnings 110 000 141 400
Total liabilities and equity $ 460 000 $ 391 300
BRILLEAUX LTD
Statement of Profit or Loss
Income
Sales $ 420 000
Lease income received 7 500
Gain on the sale of machinery 9 000 $ 436
Less: Expenses 500
Cost of sales $ 281 000
Interest expense 11 500
Loss on the sale of land 10 000
Depreciation expense 22 000
Insurance expense 3 500
Other operating expenses 81 500
Profit for the year $ 409 50
0
27 00
0

BRILLEAUX LTD
Statement of Changes in Equity
Share Other Retained Total
capital reserve earnings
s
Balance at 1/7/16 $100 000 $ 141 40 $ 241 40
Profit the period 0 0
Dividends paid 27 000 ) 27 000 )
Issue of share capital 70 000 (58 400 (58 400
Balance at 30/6/17 $170 000 $ $ 70 00
110 00 0
0 280 00
0
Additional information
(a) Land with an original cost of $44 800 was sold for cash of $34 800 during the year.
(b) Machinery with a carrying amount of $25 000 (cost $33 000 and accumulated
depreciation $8000) was sold for cash of $34 000.
(c) Lease income is earned from leasing part of the land holdings that are in excess to
operating needs.
Required
Prepare the statement of cash flows of Brilleaux Ltd for the year ended 30 June 2017
based on the direct method of presentation. Include a note disclosure to reconcile the net
cash flows from operating activities with the profit for the year.
BRILLEAUX LTD

Cash paid to suppliers, employees and other (375 500)
Cash generated from operations 48 500
Interest paid (11 900)
Net cash from operating activities 36 600

Proceeds from sale of land 34 800
Proceeds from sale of machinery 34 000
Purchase of land (40 000)
Purchase of machinery (93 000)
Lease income received 7 500
Net cash used in investing activities (56 700)
Proceeds from issue of share capital 70 000
Proceeds from borrowings 25 000
Dividends paid (58 400)
Net cash used in financing activities 36 600
Net increase (decrease) in cash and cash equivalents 16 500
Workings:
Cash receipts from customers
Accounts Receivable
Balance b/d 37 500 Cash (from customers) 424 000
Sales 420 000 Balance c/d 33 500
457 500 457 500
Cash receipts = Sales + Decrease in Accounts Receivable

= 420 000 +4 000
= 424 000
Cash payments to suppliers, employees and other
Inventory
Balance b/d 66 000 Cost of sales 281 000
A/c Payable (purchases)* 297 000 Balance c/d 82 000

363 000 363 000

*balancing item for reconstruction
Accounts Payable
Cash (paid to suppliers) 294 000 Balance b/d 22 000
Balance c/d 25 000 Inventory (purchases) 297 000
319 000 319 000
Other Accrued Expenses

Cash (paid to employees etc) 79 000 Balance b/d 4 500
Balance c/d 7 000 Other expenses 81 500
86 000 86 000
Prepaid Insurance
Balance b/d 3 500 Insurance expense 3 500
Cash (insurance paid) 2 500 Balance c/d 2 500
6 000 6 000
Cash paid = Cost of sales + Other expenses + Insurance expense + Increase in

Inventory – Increase in Accounts Payable – Increase in Other
Accrued Expenses – Decrease in Prepaid Insurance
= 281 000 + 81 500 + 3 500 + 16 000 – 3 000 – 2 500 – 1 000
= 375 500
Interest paid
Interest Payable
Cash (interest paid) 11 900 Balance b/d 3 400
Balance c/d 3 000 Interest Expense 11 500
14 900 14 900
Interest paid = Interest Expense + Decrease in Interest Payable

= 11 500 + 400
= 11 900
Land purchased for cash
Land
Balance b/d 44 800 Sale of land 44 800
Cash (purchase) 40 000 Balance c/d 40 000
84 800 84 800

Machinery purchased for cash
Machinery – at cost
Balance b/d 300 000 Sale of machinery 33 000
393 000 393 000
Machinery – net
Balance b/d 233 000 Carrying amount sold 25 000
Cash (purchase) 93 000 Depreciation expense 22 000
Balance c/d 279 000
326 000 326 000
Other Explanations:
 Proceeds from sale of land – refer additional information
 Proceeds from sale of machinery – refer additional information
 Dividends paid – refer the statement of changes in equity
 Shares issued for cash – refer the statement of changes in equity
 Lease income received as a result of investing activity– refer the statement of profit or
loss
 Proceeds from borrowings – refer the statements of financial position for the increase in
the account
BRILLEAUX LTD
Reconciliation for note disclosure
2017
Profit for the period $ 27 000
Add: Non-cash expenses:
Add/(Less): Non-operating items
Loss on sale of land 10 000
Gain on sale of machinery (9 000)
Lease income (7 500)
Add/(Less): Changes in accrual assets and liabilities
Decrease in accounts receivable 4 000

Increase in inventory (16 000
Decrease in prepaid insurance )
Increase in accounts payable 1 000
Decrease in interest payable 3 000
Increase in other accrued expenses (400)
2 500
Net cash from operating activities $ 36 600

Selected financial statements of Sparko Ltd are shown below.

SPARKO LTD
as at 30 June
2017 2016
Assets
Cash at bank $ 18 000 $ —
Inventory 112 00 96 000
Equipment 0 60 000
Accumulated depreciation – equipment 72 000 ) (18 000 )
Land (30 000 80 000
Buildings 40 000 120 000
Accumulated depreciation – buildings 120 00 ) (6 000 )
Total assets $ 0 $ 360 000
Liabilities (10 000
Bank overdraft 0 20 000
Equity
Retained earnings — 92 000
Total liabilities and equity $ $ 360 000
214
000
90 000
356 00
0
SPARKO LTD
Income
Sales revenue $ 180 000
Less: Expenses:
Cost of sales:
Beginning inventory $ 96 000
Add: Purchases 112 000
Less: Ending inventory (112 00 ) $ 96 00
Depreciation – equipment 0 0
Depreciation – buildings 14 00
Interest expense 0
Other expenses 4 000
Loss on sale of equipment 38 00 168 000
Profit for the year 0 $ 12 00
8 000 0
6 00
0

(a) On 1 July 2016, the shareholders injected a capital contribution of $14 000 cash into
the business.
(b) During the year, equipment costing $12 000 and written down to a carrying amount
of $10 000 was sold for $4000 cash.
(c) Half of the land on hand at the beginning of the year was sold for $32 000 cash.
(d) During the year, dividends to shareholders were declared and paid.
(e) The bank overdraft is considered to be an integral part of the company’s cash
management arrangements.
(f) Ignore income tax.
Required
Prepare the statement of cash flows of Sparko Ltd for the year ended 30 June 2017
based on the direct method of presentation. Include a note disclosure to reconcile the
profit for the year with net cash flows from operating activities.
SPARKO LTD
For year ended 30 June 2017

Cash paid to suppliers and employees (146 000)
Net cash from operating activities $28 000

Proceeds from sale of land 32 000
Proceeds from sale of equipment 4 000
Payment for equipment (24 000)
Net cash from investing activities 12 000

Proceeds from issue of shares 14 000
Net cash from financing activities (2 000)
Net increase in cash and cash equivalents 38 000

Cash and cash equivalents at beginning of the period (20 000)
Cash and cash equivalents at end of the period $18 000

WORKINGS:
Receipts from customers
Accounts Receivable
Balance b/d 28 000 Cash (from customers) 174 000
Sales revenue 180 000 Balance c/d 34 000
208 000 208 000
Cash receipts = Sales – Increase in Accounts Receivable

= 180 000 – 6 000
= 174 000
Payments to suppliers, employees and other
Accounts Payable
Balance c/d 52 000 Purchases 112 000
160 000 160 000
Payments to suppliers and employees = $108 000 + $38 000 = $146 000
Cash paid = Cost of sales + Other expenses + Increase in Inventory – Increase

in Accounts Payable
= 96 000 + 38 000+ 16 000 – 4 000
= 146 000
Purchase of equipment
Equipment - at cost
Balance b/d 60 000 Cost of equipment sold 12 000
Purchase of equipment 24 000 Balance c/d 72 000
84 000 84 000
Purchase of land
Land
Balance b/d 80 000 Cost of land sold 40 000
Purchase of land 0 Balance c/d 40 000
80 000 80 000

Dividend paid
Retained Earnings
Dividends paid 14 000 Balance b/d 92 000
Balance c/d 90 000 Profit 12 000
104 000 104 000
Other Explanations:
 Proceeds from issue of shares – refer increase in share capital in statement of financial
position
 Interest paid classified in financing activities is the same as interest expense as there is no
interest payable or accrued interest
 Proceeds from sale of equipment – refer additional information
SPARKO LTD
Reconciliation for note disclosure
2017
Add: Non-cash expenses:
Add/(Less): Non-operating items
Loss on sale of equipment 6 000
Add/(Less): Changes in accrual assets and liabilities
Increase in accounts receivable (6 000)
Increase in inventory (16 000
Increase in accounts payable )
6 000
Net cash from operating activities $ 28 000

Selected financial statements of The Big Figure Ltd are shown below.
THE BIG FIGURE LTD

as at 30 June
2017 2016
Assets
Cash at bank $ 43 000 $ 62 000
Inventory 113 500 124 000
Land 25 000 62 500
Buildings 265 000 137 500
Accumulated depreciation – buildings (100 000 ) (85 000 )
Plant and equipment 40 000 40 000
Accumulated depreciation – plant and (10 000 ) (5 000 )
equipment $ 461 000 $ 412 000
Total assets
Liabilities
Interest payable 250 750
Provision for employee benefits 3 000 8 750
Long-term loan 66 250 45 000
Equity
THE BIG FIGURE LTD

Income
Sales $ 443 500
Less: Expenses:
Employee expenses 98 000
Loss on the sale of land 6 250
Depreciation expense – buildings 15 000
Depreciation expense - plant and equipment 5 000 412 250
(a) During the year ended 30 June 2017, cash dividends were paid to shareholders.
(b) Building extensions were paid for during the year, and a block of land, costing
$37 500 was sold for $31 250 cash.
(c) No plant was purchased or sold during the year.
Required
A. Prepare the statement of cash flows of The Big Figure Ltd for the year ended 30 June

2017 based on the direct method of presentation.

B. Show how cash flows from operating activities would be presented in the statement if
the indirect method of presentation were used.
PART A. THE DIRECT METHOD OF PRESENTATION
THE BIG FIGURE LTD


Cash paid to suppliers & employees (369 750)
Proceeds on sale of land 31 250
Payment for buildings (127 500)
Net cash from financing activities 17 500
Net decrease in cash and cash equivalents (19 000)
PART B. THE INDIRECT METHOD OF PRESENTATION
THE BIG FIGURE LTD

Cash Flows from Operating Activities
Cash from operating activities

Profit $31 250
Adjustments for:
Depreciation – plant and equipment 5 000
Decrease in inventories 10 500
Decrease in accrued expenses (5 750)

WORKINGS
Accounts Receivable
Balance b/d 76 000 Cash from customers 435 000
Sales 443 500 Balance c/d 84 500
519 500 519 500
Cash receipts = Sales – Increase in Accounts Receivable

= 443 500 – 8 500
= 435 000
Payments to suppliers
Inventory
396 500 396 500
Accounts Payable
333 000 333 000
Payments to employees
Provision for employee benefits

Cash (paid to employees) 103 750 Balance b/d 8 750
Balance c/d 3 000 Employee expenses 98 000
106 750 106 750
Payments to suppliers and employees = $266 000 + $103 750 = $369 750
Cash paid = Cost of sales + Employee expenses – Decrease in Inventory –

Increase in Accounts Payable + Decrease in Provision
= 283 000 + 98 000 – 10 500 – 6 500 + 5 750
= 369 750
Interest paid
Interest Payable
Cash (interest paid) 5 500 Balance b/d 750
Balance c/d 250 Interest expense 5 000
5 750 5 750

Dividends paid
Retained Earnings
203 250 203 250
Purchase of buildings
Buildings- at cost
Balance b/d 137 500
Purchase of buildings 127 500 Balance c/d 265 000
84 000 265 000
Purchase of land
Land
Balance b/d 62 500 Cost of land sold 37 500
Purchase of land 0 Balance c/d 25 000
62 500 62 500
Proceeds from borrowings
Long term loan

Balance b/d 45 000
Balance c/d 66 250 Cash (proceeds) 21 250
66 250 66 250

Keepit Ltd is seeking additional finance from its bank and the bank manager has asked
for a statement of cash flows for the six months to 30 June 2017. From the data
presented below, prepare the statement of cash flows based on the direct method of
presentation. Also prepare a note reconciling net cash flow from operating activities to
the profit for the year.
KEEPIT LTD
as at 30 June
2017 2016
Assets
Cash at bank $ 39 500 $ 20 000
Trade debtors 120 000 77 000
Inventory 150 000 80 000
Equipment $ 75 000 $ 110 000
Acc. depn – (20 00 ) 55 000 (30 00 ) 80 000
equipment 0 0
Buildings 430 00 ) 320 000 330 00 ) 250 000
Acc. depn – 0 $ 684 500 0 $ 507 000
buildings (110 00 (80 00
Total assets 0 0
Liabilities
Trade creditors $ 120 000 $ 60 000
Current tax liability 17 000 7 500
Provision for 30 000 20 000
dividend 80 000 —
Loan due 2020
Equity 420 000 400 000
Retained earnings $ 684 500 $ 507 000
Total liabilities and
equity
KEEPIT LTD
for six months to 30 June 2017

Income
Rent revenue 0
Discount received 14 000 $ 500 00
Less: Expenses 1 000 0
Cost of sales
Discount allowed 365 00
Bad debts 0
Salaries and wages 1 500
Profit before tax 30 000 455 00
Less: Income tax expense 10 00 0
Profit after tax 0 $ 45 000
17 000
28 00
0
(a) New demountable buildings were purchased for cash.

(b) During the quarter, a dividend to shareholders was declared.
(c) A loan was raised during the year to provide cash for working capital needs.
(d) Equipment that had cost $35 000 and been depreciated by $20 000 was sold for cash
of $10 000.
KEEPIT LTD

Rent received 14 000
Income tax paid (7 500)

Payment for demountable buildings (100 000)


Net cash provided by financing activities 80 000

Reconciliation of Net Cash from Operating

Activities with Profit
Profit $28 000
Depreciation 40 000
Increase in current tax liability 9 500
Increased in trade debtors (43 000)
Increase in inventories (70 000)
Increase in trade creditors 60 000
WORKINGS
Trade debtors
Balance b/d 77 000 Discount allowed 1 500
Sales 485 000 Bad debts expense 4 500
Cash (from customers) 436 000
Balance c/d 120 000
562 000 562 000
Received Begin Ending

From accounts accounts Discount Bad
Customers = Sales + rec'able - rec'able + allowed - debts
$436 000 = $485 000 + $77 000 - $120 000 - $1500 - $4500
Payments to suppliers and employees
Inventory
Trade creditors (purchases)* 435 000 Balance c/d 150 000
515 000 515 000

Trade Creditors
Discount received 1 000 Balance b/d 60 000
Cash (paid to suppliers) 374 000 Inventory (purchases) 435 000
Balance c/d 120 000
495 000 495 000
Paid to Cost of Begin Ending

suppliers Sales Begin Ending trade trade Disc
of goods = - invent. + invent. + creditors - creditors - recd.
$374 000 = $365 000 - $80 000 + $150 000 + $60 000$120-0$120 000 - $1 000
Paid to Salaries Begin Ending Begin. Ending

employee Wages accrued accrued prepaid prepaid
other = Expense + expenses - expenses - expenses + expenses
$39 000 = $39 000 + 0 - 0 - 0 + 0
Payments to suppliers, employees and other = $374 000 + $39 000 = $413 000
Income tax paid
Current Tax Liability

Cash (income tax paid) 7 500 Balance b/d 7 500
Balance c/d 17 000 Income tax expense 17 000
24 500 24 500
Income Income Begin Ending

tax tax tax tax
paid = expense + payable - payable
$7 500 = $17 000 + 7 500 - 17 000
Demountable Buildings
Buildings- at cost
Balance b/d 330 000
Payment for demountables 100 000 Balance c/d 430 000
430 000 430 000
Dividends paid
Retained Earnings
Dividends declared* 30 000 Balance b/d 19 500
47 500 47 500

Provision for dividend

Cash (dividends paid) 20 000 Balance b/d 20 000
Balance c/d 30 000 Dividend declared 30 000
50 000 50 000
Other Explanations:
 Rent received – refer rent revenue in the statement of profit or loss (there are no accruals
for rent apparent in the statements of financial position)
 Proceeds from issue of shares – refer change in share capital in the statement of financial
position
 Proceeds from borrowings – refer change in loan due 2020 in the statement of financial
position

From the following information of Outofsight Ltd, prepare a statement of cash flows
for the year ended 30 June 2017 based on the direct method of presentation. Include any
appropriate notes.
OUTOFSIGHT LTD
as at 30 June
2017 2016
Assets
Petty cash $ 400 $ 200
Cash at bank 30 600 24 200
Bank bills 12 000 10 000
$
Accounts receivable 127 400 $ 102 96
Allowance for doubtful (11 40 ) 116 000 0 ) 96 000
debts 0 70 800 (6 960 74 600
Inventory
Motor vehicles 50 400 ) 37 600 42 000 ) 32 000
Acc. depn – motor (12 800 (10 000
vehicles 18 400 ) 10 000 16 000 ) 8 400
Office furniture (8 40 $ 277 400 (7 60 $ 245 400
Acc. depn – office 0 0
furniture $ 47 200 $ 45 000
Total assets 4 200 3 200
Liabilities
Accounts payable 196 000 165 000
Equity $ 277 400 $ 245 400
Share capital
Retained earnings
Total liabilities and equity
OUTOFSIGHT LTD
Income
Proceeds from sale of vehicle 3 000 753 00
Less: Expenses 0
Cost of sales 603 000
Salaries and wages 116 360
Doubtful debts 14 440
Depreciation – motor vehicles 6 000
Depreciation – office equipment 800
Carrying amount of vehicle sold 2 400
Profit before tax 743 00
Less: Income tax expense 0
Profit after tax $ 10 000
4 20
0

5 80
0
(a) A dividend was paid during the year.
(b) The terms of the bank bills do not exceed 90 days.
OUTOFSIGHT LTD

Net cash from operating activities $(1 000)
Payment for vehicle (14 000)
Payment for office furniture (2 400)
Proceeds from sale of vehicle 3 000
Cash and cash equivalents at beginning of period* 34 400
Cash and cash equivalents at end of period** $43 000
Note 1: Cash and cash equivalents consist of cash on hand, balances with banks, and
investments in money market instruments. Cash and cash equivalents included in the
statement of cash flows comprise the following amounts included in the statement of
financial position:
2017 2016
Cash on hand $ 400 $ 200
Cash balances with banks $30 600 $24 200
Short-term investments – bank bills 12 000 10 000
Cash and cash equivalents $43 000 $34 400
Note 2: Reconciliation of Net Cash from Operating

Profit $5 800
Depreciation 6 800
Allowance for doubtful debts 4 440
Gain on sale of vehicle (600)
Current tax liability 1 000
Change in assets and liabilities

Increase in trade debtors (24 440)

Decrease in inventories 3 800
Increase in trade creditors 2 200
Workings
Allowance for Doubtful Debts

Accounts receivable* 10 000 Balance b/d 6 960
(bad debts written off)
Balance c/d 11 400 Doubtful debts expense 14 440
495 000 21 400
Accounts Receivable
Balance b/d 102 960 Allowance for doubt debts 10 000
Sales 750 000 (bad debts written off)
Balance c/d 127 400
852 960 852 960
Received Begin. Ending Bad debts

From accounts Accounts Written
Customers Sales rec'able Rec'able Off
$715 560 $750 000 $102 960 $127 400 $10 000
Payments to suppliers and employees
Inventory
673 800 673 800
Accounts Payable
644 200 644 200
Payments Begin Ending

suppliers Cost of Begin Ending accounts accounts Disc
of goods = Sales - invent. + invent. + payable - Payable - recd.
$597 000 = $603 000 - $74 600 + $70 800 + $45 000$120-$ $47 200 - $0

Payments to employees = Salaries and wages expense = $116 360
Cash payments to suppliers and employees = $597 000 + $116 360 = $713 360
Income tax paid

7 400 7 400

tax tax tax tax
$3 200 = $4 200 + 3 200 - 4 200
Purchase of vehicles for cash
Vehicles - Net (Cost less Accumulated Depreciation)

Balance b/d 32 000 Carrying amount of vehicle 2 400
sold
46 000 46 000
Dividends paid
Retained Earnings
38 000 38 000
Other Explanations:
 Payment for office furniture – refer change in the asset account at cost in the statement of
financial position
 Proceeds from issue of shares – refer change in share capital in the statement of financial
position
 Proceeds from sale of vehicle – refer statement of profit or loss

The trial balances of Cheque Book Ltd for 30 June 2016 and 30 June 2017 are shown
below.
CHEQUE BOOK LTD
Trial Balances
as at 30 June
2016 2017
Debit Credit Debit Credit
Bank overdraft 1 390 8 432
General reserve 5 000 7 500
(opening) $ 25 $ 25
Petty cash 6 537 10 975
Accounts receivable 500 1 000
Allowance for doubtful 18 258 30 289
debts 24 900 39 200
Inventory 2 745 5 750
Machinery 5 000 3 900
Accumulated depn – mach. 1 450 1 500
Office furniture 85 000 100 00
Accumulated depn – furn. — 0
Sales revenue 30 000 35 000 50
Gain on sale of machinery 47 321 49 943
Cost of sales 1 500 1 700
Employee expenses 2 550 3 075
Doubtful debts expense 2 820 2 743
Depreciation expense — 4 000
Income tax expense 2 500
Dividend declared and paid $ — $ 138 91 $ 183 350 $
Transfer to general reserve 138 91 1 183 35
1 0
(a) Office furniture that had originally cost $1100 and had accumulated depreciation of
$200 was sold during the year for cash.
(b) A machine costing $5000 was acquired in exchange for the issue of 5000 shares at a
price of $1 each.
(c) The bank overdraft facility is considered part of the day-to-day cash management of
the company.
Required
A. Prepare the statement of cash flows of Cheque Book Ltd for 30 June 2017 based on
the direct method of presentation.
B. Prepare the required notes to the statement. Also prepare a note that explains the
difference between the net cash from operating activities and profit after tax for the

year.
CHEQUE BOOK LTD


Cash used in operations (2 949)
Income taxes paid (1 743)

Purchase of machinery (9 300)
Proceeds from sale of office equipment 950

Cash and cash equivalents at beginning of period (1 365)
Cash and cash equivalents at end of period $(8 407)

Note 1: Cash and cash equivalents

Cash and cash equivalents included in the statement of cash flows are comprised of the
following amounts included in the statement of financial position:
2017 2016
Cash on hand $ 25 $ 25
Bank Overdraft (8 432) (1 390)
Cash and cash equivalents $ (8 407) $ (1 365)
The bank overdraft is integral to the company’s cash management function.
Note 2: Non-cash Financing and Investing Activities

During the reporting period, machinery of $5 000 was acquired in exchange for the issue of 5
000 shares.
Note 3: Reconciliation of Net Cash from Operating Activities with Profit
Profit for the year $7 589

Depreciation 3 075
Allowance for doubtful debts 500
Gain on sale of furniture (50)
Increase in inventory (12 031)
Decrease in accounts payable (337)
Workings

Accounts receivable* 1 200 Balance b/d 500
Balance c/d 1 000 Doubtful debts expense 1 700
2 200 2 200
Accounts Receivable
Sales revenue 100 000 (bad debts written off)
Balance c/d 10 975
106 537 106 537

Received Begin Ending Bad

From Accnts Accnts debts
customers Sales rec'able rec'able w/o
$94 362 $100 000 $6 537 $10 975 $1 200
Payments to suppliers
Inventory
65 289 65 289
Accounts Payable
53 284 53 284
Payments Cost of Begin Ending

to suppliers sales Begin Ending accts accts
of goods invent invent. payable payable
$47 368 $35 000 $18 258 $30 289 $6 253 $5 916
Payments Begin. Ending Begin Ending

to accrued accrued prepaid prepaid
Employee Expense expenses expenses expenses expenses
$49 943 $49 943 0 0 0 0
Income tax paid

5 743 5 743

tax tax tax tax
$1 743 = $2 743 + 3 000 - 4 000

Purchase of machinery
Machinery - at cost
Balance b/d 24 900
Share capital 5 000
39 200 39 200
Purchase of office furniture
Office Furniture – at cost

Balance b/d 5 000 Sale of office furniture 1 100
(Cost of furn. sold)
Cash (purchase) 0 Balance c/d 3 900
5 000 5 000
Proceeds from sale of office furniture
Sale of Office Furniture

Office furniture 1 100 Accumulated depn 200
(Cost of furn. sold) (Accum depn of furn. sold)
Gain on sale of furn. 50 Proceeds from sale 950
1 150 1 150
Gain on sale = Proceeds less Carrying amount of equip sold

Proceeds = Gain on sale + Carrying amount of equip sold = $50 + $900 = $950
Accum. Depreciation – Office Furniture

Sale of equipment 200 Balance b/d 1 450
Balance c/d 1 500 Depreciation expense – 250
office furniture*
1 700 1 700
Proceeds from issue of shares
Share Capital
Balance b/d 30 000
Machinery 5 000
Balance c/d 45 000 Cash (proceeds) 10 000
45 000 45 000
Dividends paid

Profit or Loss Summary

Cost of sales 35 000 Sales revenue 100 000
Employee expenses 49 943 Gain on sale of machinery 50
Doubtful debts 1 700
Profit for the year* 7 589
100 050 100 050
Retained Earnings
Dividends declared and paid 4 000 Balance b/d 4 382
Transfer to general reserve 2 500 Profit for the year 7 589
Balance c/d* 5 471
11 971 11 971
Other Explanations:
 Dividends paid refer the trial balance

The statements of financial position of Allthrough Ltd as at 30 June 2017 and 30 June
2016 are presented below.
ALLTHROUGH LTD
as at 30 June
2017 2016
Current assets
Cash at bank $ — $ 74 600
Inventory 275 000 221 200
Prepayments 22 800 23 000
Non-current assets
Buildings 639 000 339 000
Accumulated depreciation – buildings (111 400 ) (97 600 )
Equipment 361 200 331 200
Accumulated depreciation – equipment (89 900 ) (67 000 )
Land 168 000 39 00
Long-term investments 70 000 0
Total assets 1 461 90 $ 160 00
0 0
1 134 70
0
Current liabilities
Bank overdraft $ 16 700 $ —
Accrued expenses 10 500 14 000
Non-current liabilities
Loan payable $ 240 000 $ 150 000
Debentures due 1/9/21 300 000 200 000
Total liabilities 808 200 606 000
Net assets 653 700 528 700
Equity
Share capital $ 502 100 $ 388 100
Total equity $ 653 700 $ 528 700
Examination of the company’s general ledger accounts revealed the following:
(a) Depreciation expense was recorded during the year as follows: buildings $13 800;
and equipment $22 900.
(b) An extension was added to the building at a cost of $300 000 cash.
(c) Long-term investments with a cost of $90 000 were sold for $125 000.
(d) Vacant land next to the company’s plant was purchased for $129 000 with payment
consisting of $39 000 cash and a loan payable for $90 000 due on 31 July 2018.
(e) Debentures of $100 000 were issued for cash at nominal value.
(f) Thirty thousand shares were issued at $3.80 per share.
(g) Equipment was purchased for cash.
(h) Sales for the period were $875 600; cost of sales amounted to $525 300; other
expenses (excluding depreciation, carrying amount of investments sold, interest, and

bad debts) amounted to $149 400.

(i) Bad debts of $3500 were written off.
(j) Income tax paid during the year amounted to $73 700.
(k) Interest expense and interest paid amounted to $40 000.
(l) The bank overdraft is integral part of the company’s cash management function.
Required
A. Prepare the statement of cash flows of Allthrough Ltd for the year ended 30 June
2017 using the direct method of presentation.
B. Prepare a note disclosure to reconcile net cash flows from operating activities with
the profit for the year and also prepare any other notes required by AASB 107.
A.
ALLTHROUGH LTD

Cash paid to suppliers, employees and other (734 800)

Payments for property (339 000)
Proceeds from sale of investments 125 000

Proceeds from issue of debentures 100 000
Cash and cash equivalents at end of period $(16 700)

B.

2017 2016
Cash at bank $ – $ 74 600
Bank Overdraft (16 700) –
Cash and cash equivalents $(16 700) $ 74 600
The bank overdraft is integral to the company’s cash management function.

During the period, property was acquired for $129 000, part of the purchase consideration
amounting to $90 000 is deferred until July 2018
Note 3: Reconciliation of Net Cash from Operating Activities with Profit

Depreciation 36 700
Gain on sale of investments (35 000)
Decrease in prepayments 200
Decrease in accounts payable (3 000)
Decrease in accrued expenses (3 500)

Workings
Accounts Receivable
Balance b/d 111 300 Bad debts expense 3 500
Sales 875 600 Cash (from customers) 856 200
Balance c/d 127 200
986 900 986 900

From Accounts accounts Bad debts
Customers Sales rec'able Rec'able
$856 200 $875 600 $111 300 $127 200 $3 500
Inventory
800 300 800 300
Accounts Payable
797 100 797 100
Payments Begin Ending

suppliers Cost of Begin Ending Accts Accts
of goods sales invent invent. payable Payable
$582 100 $525 300 $221 200 $275 000 $218 000 $215 000
Prepayments and Accrued Expenses Liability (Net)

Balance b/d 9 000 Other operating expenses 149 400
Cash (paid employees/other) 152 700 Balance c/d 12 300
161 700 161 700

Employees accrued accrued prepaid prepaid
Other Expense expenses expenses expenses expenses
$152 700 $149 400 $14 000 $10 500 $23 000 $22 800

Income tax paid

Balance c/d 26 000 Income tax expense* 75 700
99 700 99 700
Dividends paid
Profit or Loss Summary

Cost of sales 525 300 Sales revenue 875 600
Other operating expenses 149 400 Proceeds from sale of invest 125 000
Depn expense - buildings 13 800
Depn expense - equipment 22 900
Cost of investments sold 90 000
Bad debts expense 3 500
Profit for the year* 80 000
1 000 600 1 000 600
Retained Earnings
220 600 220 600
Other Explanations:
Interest paid – additional info item (k)
Income taxes paid – additional info item (j)
Purchase of equipment – additional info item (g) ($361 200 – $331 200 = $30 000)
Purchase of property – additional info items (b) and (d) ($300 000 + 39 000 = $339 000)
Proceeds from sale of investments – additional info item (c )
Proceeds from issue of shares – additional info item (f) (30 000 x $3.80= $114 000)
Proceeds from long term borrowings – additional info item (e)

The draft statements of financial position of Thecity Ltd as at 30 June 2017 and 30 June
2016 are presented below.
THECITY LTD
as at 30 June
2017 2016
Assets
Cash at bank $ 54 800 $ 42 000
Bank bills 10 000 8 600
Deposits at call 6 400 5 000
Allowance for doubtful debts (2 500 ) (1 900 )
Inventory 94 200 96 600
Prepaid expenses 10 800 4 200
Interest receivable 1 600 1 800
Share investments 35 600 67 800
Land 70 000 70 000
Buildings 360 000 240 00
Accumulated depreciation – buildings ( 104 40 ) 0 )
Equipment 0 (94 500
Accumulated depreciation – equipment 180 00 ) 154 80 )
Deferred tax asset 0 0
(57 900 (69 600
14 40 12 20
0 0
Total assets $ 722 300 $ 574 80
0
Liabilities
Accrued expenses 9 780 8 340
Interest payable 4 000 3 000
Bank overdraft 34 800 32 000
Finance lease 50 000 —
Debentures (10%) 180 000 150 00
Deferred tax liability 23 000 0
Equity 20 000
Share capital (ordinary shares, issued at $1) 206 240
0
67 60
0
0
THECITY LTD

Income
Sales $ 1 386 00
Interest income 0
Dividend income 4 360
Discount received 7 200
Gain on sale of share investments 2 100
22 60
0
1 422 26
Less: Expenses 0
Bad debts expense 0
Interest expense 950
Employee and other expenses 18 400
418 95 1 395 10
0 0
Less: Income tax expense (14 400 )
Additional information in relation to the year ended 30 June 2017
(a) New equipment was purchased at a cost of $67 400 of which $17 400 was paid in
cash. The balance was covered by taking out a finance lease.
(b) Equipment, which cost $42 200 and had a carrying amount of $20 000 was sold for
cash.
(c) Debentures were issued at nominal value ($100 each) for cash.
(d) Share investments with an original cost of $32 200 were sold for cash.
(e) Bank bills held and bank overdraft form part of cash and cash equivalents.
Required
Prepare the statement of cash flows of Thecity Ltd for the year ended 30 June 2017 in
accordance with AASB 107 using either of the direct method or indirect method of
presentation.
A. Direct method
THECITY LTD

Cash receipts from customers $1 371 350
Cash paid to suppliers, employees and other (1 325 050)


Interest received 4 560
Dividends received 7 200
Purchase of equipment (17 400)
Purchase of buildings (120 000)
Proceeds from sale of investments 54 800

2017 2016
Cash at bank $ 54 800 $ 42 000
Bank bills held 10 000 8 600
Bank Overdraft (34 800) (32 000)
Cash and cash equivalents $36 400 $ 23 600

During the period, new equipment was acquired for $67 400, part of the purchase
consideration amounting to $50 000 is subject to a finance lease.
Workings

Balance c/d 2 500 Bad debts expense 2 800
4 700 4 700
Accounts Receivable
Sales revenue 1 386 000 (bad debts written off)

Discount allowed 950

Cash (from customers) 1 371 350
Balance c/d 49 300
1 423 800 1 423 800
Cash receipts = Sales – Increase in Accounts Receivable – Bad debts written off –
Discount allowed
= 1 386 000 – 11 500 – 2 200 – 950
= 1 371 350
Inventory
1 026 200 1 026 200
Accounts Payable
Cash (paid to suppliers) 900 940 Inventory (purchases) 929 600
Balance c/d 120 520
1 023 560 1 023 560
Prepaid Expenses / Accrued Expenses Liability (Net)

Balance b/d (Prepaid exp) 4 200 Balance b/d (Accrued exp) 8 340
Cash (paid employees/other) 424 110 Employee other expenses 418 950
Balance c/d (Accrued exp) 9 780 Balance c/d (Prepaid exp) 10 800
438 090 438 090
Cash paid to suppliers & employees = $900 940 + $424 110 = $1 325 050
Cash paid = Cost of sales + Employee/Other expenses – Discount received –

Decrease in Inventory – Increase in Accounts Payable + Increase
in Prepaid expenses – Increase in Accrued Expenses
= 932 000 + 418 950 – 2 100 – 2 400 – 26 560 + 6 600 – 1 440
= 1 325 050
Interest paid
Interest Payable
Balance c/d 4 000 Interest expense 18 400
21 400 21 400
Interest paid = Interest Expense – Increase in Interest Payable

= 18 400 – 1 000
= 17 400
Income taxes paid
Journal entry:
Income Tax Expense Dr 14 400
Deferred Tax Asset Dr 2 200
Current Tax Liability Cr 13 600
Deferred Tax Liability Cr 3 000

Balance c/d 13 600 ITE/DTA/DTL 13 600
28 600 28 600
Income tax paid = Income tax expense + Decrease in Current tax liability +
Increase in Deferred tax asset – Increase in Deferred tax liability
= 14 400 + 2 200 + 1 400 – 3 000
= 15 000
Interest received
Interest Receivable
Balance b/d 1 800 Cash (interest received) 4 560
Interest income 4 360 Balance c/d 1 600
6 160 6 160
Interest received = Interest Income + Decrease in Interest Receivable

= 4 360 + 200
= 4 560
Proceeds from sale of investments
Sale of Investments
Share investments 32 200 Proceeds from sale 54 800
(cost of investments sold)
Gain on sale 22 600
54 800 54 800
Gain on sale = Proceeds – Carrying amount of asset sold

Proceeds= Gain on sale + Carrying amount of asset sold
= 22 600 + 32 200 = 54 800

Proceeds from sale of equipment
Sale of Equipment
Equipment 20 000
Loss on sale 1 600 (carrying amount sold)
Proceeds from sale 18 400
20 000 20 000
Loss on sale = Proceeds – Carrying amount of asset sold

Proceeds= Loss on sale + Carrying amount of asset sold
= – 1 600 + 20 000 = 18 400
Equipment – at cost
Balance b/d 154 800 Sale of equipment 42 200
(Cost of equip sold)
Finance lease liability 50 000
222 200 222 200
Dividends paid
Retained Earnings
Dividends paid 0 Balance b/d 67 600
80 360 80 360
B. Indirect method
THECITY LTD
Statement of Cash Flows (extract)

Profit before tax $27 160
Gain on sale of share investments (22 600)
Interest income (4 360)
Dividend income (7 200)
Increase in allowance for doubtful debts 600
Decrease in inventory 2 400

Increase in prepaid expenses (6 600)

Increase in accrued expenses 1 440

Selected financial statements of Imahog Ltd are shown below.

IMAHOG LTD
as at 30 June
2017 2016
Assets
Cash at bank $ 82 000 $ 78 000
Allowance for doubtful debts (10 100 ) (8 900 )
Inventory 132 000 123 20
Interest receivable 860 0
Prepaid insurance 960 940
Marketable securities 35 000 810
342 00
0
Accumulated depreciation – plant and (74 600 ) (62 300 )
equipment 8 200 7 72
Deferred tax asset 0
Total assets $ 711 920 $ 624 27
0
Liabilities
Bank overdraft $ 7 600 $ 9 430
Accrued interest 2 680 2 500
Unearned revenue 1 100 410
Final dividend payable 40 000 17 500
Convertible notes 80 000 60 000
Deferred tax liability 6 400 6 040
Total liabilities 225 200 169 02
0
Net assets $ 486 720 $ 455 25
Equity 0
Share capital (ordinary shares) 400 000
General reserve 40 000 350 00
Retained earnings 46 720 0
40 000
65 25
0
Total equity $ 486 720 $ 455 25
0
IMAHOG LTD
Income

Sales $ 432 00
Interest revenue 0
Dividend revenue 1 200
Proceeds — sale of plant 680 $ 447 38
Less: Expenses 12 00 0
0

Carrying amount of plant sold 0
Depreciation – plant 10 500
Insurance expense 11 200
Long-service leave expense 2 120
Wages expense 1 560 419 23
97 60 0
0
Less: Income tax expense (6 680 )
0
(a) The plant sold during the year originally cost $30 000.
(b) 20 000 ordinary shares were issued for cash at a price of $2.50 per share.
(c) 1250 ordinary shares in a company listed on the ASX were acquired for cash at a
price of $4 per share.
(d) The overdraft facility extends to a limit of $15 000 payable on demand. This facility
is regarded as part of the overall cash management of the company.
Required
A. Prepare the statement of cash flows of Imahog Ltd for the year ended 30 June 2017
in accordance with AASB 107 either the direct method or indirect method of
presentation.
B. Prepare an appropriate note to the financial statement to justify the definition of
cash and cash equivalents used.
A. Direct Method
IMAHOG LTD

Cash paid to suppliers & employees (356 590)


Proceeds on sale of plant 12 000
Purchase of plant (104 000)
Purchase of marketable securities (shares) (5 000)
Proceeds from long-term borrowings 20 000
Note 1: 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 statement of
cash flows comprise the following balance sheet amounts:
2017 2016
Cash on hand and balances with banks $82 000 $78 000
Bank overdraft (7 600) (9 430)
Cash and cash equivalents $74 400 $68 570

Workings using ledger accounts
1. Cash receipts from customers

___________________________________________________________________
A/c receivable (written off) 10 000 Balance b/d 8 900
20 100 20 100
Accounts Receivable/Unearned Revenue (Net)

___________________________________________________________________
Balance (A/c rec) b/d 112 800 Balance (A/c rec) c/d 121 600
Balance (Unearned rev) c/d 1 100 Balance (Unearned rev) b/d 410
Sales 432 000 Total written off 10 000
______ Cash (from customers) 412 480
545 900 545 900
2. Cash paid to suppliers, employees and other
Inventory
___________________________________________________________________
Balance b/d 123 200 Balance c/d 132 000
A/C payable (Purchases) 270 640 Cost of sales 261 840
393 840 393 840
Accounts Payable
___________________________________________________________________
Balance c/d 69 000 Balance b/d 57 400
Discount received 680
Cash (to suppliers) 258 360 Inventory (Purchases) 270 640
328 040 328 040
Provision for Employee Benefits

___________________________________________________________________
Cash (to employees) 96 880 Expenses* 99 160
108 500 108 500
*Expenses = LSL $1 560 + wages $97 600 = $99 160
Prepaid Insurance
___________________________________________________________________
Balance (prepaid insur) b/d 810 Balance (prepaid insur) c/d 960

Cash (insurance paid) 1 350 Insurance Expenses 1 200

2 160 2 160
Paid to suppliers employees and other = $258 360 + $96 880 + $1 350= $356 590
3. Interest paid
Accrued Interest
___________________________________________________________________
Cash (interest paid) 1 940 Expense 2 120
4 620 4 620
4. Income taxes paid

___________________________________________________________________
13 080 13 080
Journal entries for income tax:
Income Tax Expense (current) Dr 6 680

Deferred Tax Asset Dr 480
Deferred Tax Liability Cr 360
5. Cash paid for plant and equipment
Plant and Equipment at cost

___________________________________________________________________
Balance b/d 342 000 Balance c/d 416 000
Plant acquired 104 000 Cost of plant sold 30 000
446 000 446 000
6. Interest received
Interest Receivable
___________________________________________________________________
Balance b/d 940 Balance c/d 860
Interest revenue 1 200 Cash (interest received) 1 280
2 140 2 140

7. Dividends paid = last year’s liability. There are no interim dividends.
Retained earnings
___________________________________________________________________
Dividends declared 40 000 Profit for the year 21 470
86 720 86 720
Final Dividend Payable

___________________________________________________________________
Cash (dividend paid) 17 500 Dividends declared 40 000
57 500 57 500
B. Indirect method
IMAHOG LTD
Statement of Cash Flows (extract)

Profit before tax $28 150
Depreciation – plant 31 800
Proceeds on sale of plant (12 000)
Carrying amount of plant sold 10 500
Interest revenue (1 200)
Dividend revenue (1 500)
Allowance for doubtful debts 1 200
Increase in prepaid insurance (150)
Increase in provision for employee benefits 2 280
Increase in unearned revenue 690

Foryoubaby manufactures and distributes a range of educational products for babies

and toddlers. Selected financial statements of Foryoubaby Ltd prepared for internal
management purposes are provided below.
FORYOUBABY LTD
as at 30 June
2017 2016 Changes
Current assets
Bank bills (due 31 July) $ 15 000 $ — $ 15 000
Deposits at call 83 000 41 000 42 000
Accounts receivable 277 000 220 000 57 000
Allowance for doubtful (14 500 ) (11 500 ) (3 000 )
debts 503 000 477 600 25 400
Inventory 40 000 45 000 (5 000 )
Prepaid expenses
Total current assets 903 500 772 100 131 40
0
Non-current assets
Deferred tax asset 2 200 2 000 200
Shares in Neerbub Ltd 225 000 375 000 (150 00 )
0
Buildings (cost) 1 950 00 1 350 00 600 000
Accumulated depreciation 0 ) 0 ) (36 000 )
– buildings (505 000 (469 000 130 000
Equipment (cost) 890 500 ) 760 500 ) (58 500 )
Accumulated depreciation (289 500 (348 000 0
– equipment 500 00 500 00
Land (cost) 0 0
Total non-current assets 2 773 20 2 170 50 602 700
0 0
Total assets 3 676 70 2 942 60 734 100
0 0
Current liabilities
Bank overdraft $ 63 000 $ 107 000 $ (44 000 )
Accounts payable 433 500 457 600 (24 100 )
Provision for employee 33 750 29 500 4 250
benefits 25 000 22 500 2 500
Interest payable 180 000 195 000 (15 000 )
Dividend payable 72 000 60 000 12 00
Current tax liability 0
Total current liabilities 807 250 871 600 (64 35 )
0
Deferred tax liability 7 500 6 500 1 000
Bank loan (secured) 180 000 100 000 80 000
Debentures 800 00 600 00 200 000
0 0
Total non-current 987 50 706 50 281 000

liabilities 0 0
Total liabilities 1 794 75 1 578 10 216 650
0 0
Net assets $ 1 881 95 $ 1 364 50 $ 517 450
0 0
Equity
Share capital $ 1 129 50 $ 889 500 $ 240 000
Retained earnings 0 475 00 277 450
752 45 0
0
Total equity $ 1 881 95 $ 1 364 50 $ 517 450
0 0
FORYOUBABY LTD
Income
Sales revenue $ 6 580 00
Dividends received 0
Proceeds from sale of share investment 43 000
12 750
Total income $ 6 974 75
Expenses 0
Cost of sales 3 475 00
Carrying amount of shares sold 0
Carrying amount of equipment sold 150 000
Depreciation expense – equipment 15 000
Depreciation expense – buildings 46 500
73 000
Employee and other expenses 2 411 10 6 226 50
0 0
Income tax expense (290 800 )
FORYOUBABY LTD
Share capital Other Retained Total
reserves earnings
Balance at $ 889 500 $ 475 000 $ 1 364 50
1/7/16 0
Comprehensiv 457 450
e income for (180 00 ) 457 450 )
the period 240 00 0 (180 000

Dividends $ 0 $ $ 240 000

declared 1 129 50 752 45 1 881 95
Issue of share 0 0 0
capital
Balance at
30/6/17
During the year, Foryoubaby Ltd entered into the following transactions relevant to the
preparation of the statement of cash flows:
(a) New equipment was purchased at a cost of $250 000; $150 000 was paid in cash
and the balance covered using the company’s existing debt facilities.
(b) Equipment with a cost of $120 000 and accumulated depreciation of $105 000
was sold for $94 000 cash.
(c) Shares in Neerabup Ltd were sold for $245 000 cash.
(d) Debentures (9%) were issued at nominal value for cash, $200 000.
(e) An additional 40 000 ordinary shares were issued for cash at $6 per share.
(f) The bank overdraft facility is used as part of the company’s everyday cash
management facilities.
(g) Repayments of loan principal amounting to $20 000 were made during the year.
Required
A. Prepare a statement of cash flows in accordance with AASB 107 using the direct
method of presentation.
B. Prepare notes as follows: (a) explain the composition of cash and cash equivalents
using relevant accounts included in the statement of financial position; and (b)
reconcile the net cash from operating activities to profit after tax.
C. Comment on the company’s cash flows during the year ended 30 June 2017 and cash
position at 30 June 2017.
A.
FORYOUBABY LTD

Cash receipts from customers $6 506 100
Cash paid to suppliers and employees (5 913 600)

Payment for building additions (600 000)
Proceeds from sale of shares 245 000


Proceeds from bank borrowings 100 000
Repayment of bank borrowings (20 000)
Net increase in cash in cash and cash equivalents 101 000
Cash and cash equivalents at beginning of period (66 000)
Cash and cash equivalents at end of period $ 35 000
B.
Note 1: 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 statement of
cash flows comprise the following statement of financial position amounts:
2017 2016
Bank bills (due 31 July) $ 15 000 -
Deposits 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

Depreciation - equipment 46 500
Dividends received (43 000)
Gain on sale of equipment (79 000)
Gain on sale of share investment (95 000)
Increase in inventories (25 400)
Decrease in prepaid expenses 5 000
Decrease in accounts payable (24 100)
Increase in accrued expenses 4 250
Increase in interest payable 2 500
Increase in allowance for doubtful debts 3 000
Increase in deferred tax liability 1 000
Increase in deferred tax asset (200)

C. The reporting period saw an increase in the cash position of the company of $101 000.
Net cash from operating activities showed a strong result to the extent of $244 000.
Considerable funds were 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 considerable net spending of $468 000 on non
current assets and the payment of a cash dividend. The net cash flow during the period
was strong and resulted in an improved cash position at the end of the year, compared
with the previous year.

Workings

26 150 26 150
Accounts Receivable
Sales revenue 6 580 000 (bad debts written off)
Cash (from customers) 6 506 100
Balance c/d 277 000
6 800 000 6 800 000

From accts accts Bad
custom's Sales rec'able rec'able debts
6 506 100 6 580 000 220 000 277 0005250 11 650
Inventory
Balance b/d 477 600 Cost of sales 3 475 000
A/c Payable (purchases)* 3 500 400 Balance c/d 503 000
3 978 000 3 978 000
Accounts Payable
Cash (paid to suppliers) 3 511 750 Inventory (purchases) 3 500 400
Balance c/d 433 500
3 958 000 3 958 000
Payments Cost of Begin Ending

suppliers sales Begin Ending accts accts
of goods invent invent. pay pay Recd
3 511 750 3 475 000 477 600 503 000 457 600 433 500 12 750

Prepaid Expenses / Provision for Employee Benefits (Net)

Balance b/d (Prepaid exp) 45 000 Balance b/d (Provision) 29 500
Cash (paid employees/other) 2 401 850 Employee other expenses 2 411 100
Balance c/d (Provision) 33 750 Balance c/d (Prepaid exp) 40 000
2 480 600 2 480 600

For accrued accrued prepaid prepaid
Services Expense expenses expenses expenses expenses
2 401 850 2 411 100 29 500 33 750 45 000 40 000
Cash paid to suppliers, employees & other = $3 511 750 + $2 401 850 = $5 913 600
Interest paid
Interest Payable
Balance c/d 25 000 Interest expense 73 000
95 500 95 500
Payment Begin Ending

For accrued accrued
Interest Expense interest interest
70 500 73 000 22 500 25 000
Income taxes paid

350 000 350 000
The entry for income tax is as follows

Income Tax Expense Dr 290 800
Deferred Tax Asset Dr 200
Deferred Tax Liability Cr 1 000
Income
Tax Begin Begin Begin
Paid DTA DTA
278 290.8

Equipment – at cost
Balance b/d 760 500 Sale of equipment 120 000
1 010 500 1 010 500
Accumulated Depreciation - Equipment

Sale of equipment 105 000 Balance b/d 348 000
Balance c/d 289 500 Dep’n expense 46 500
394 500 394 500
Dividend paid
Dividend Payable
Cash (dividends paid) 195 000 Balance b/d 195 000
Balance c/d 180 000 Dividends declared 180 000
375 000 375 000
Other explanations
 Purchase of buildings – refer change in asset account in statement of financial position
 Dividends received – refer statement of profit or loss (no dividends are receivable)
 Proceeds from sale of equipment – refer statement of profit or loss
 Proceeds from sale of investments – refer statement of profit or loss
 Proceeds from issue of shares – refer change in share capital account in statement of
financial position
 Proceeds from bank borrowings – refer additional info item (a)
 Repayment of bank borrowings – refer additional info item ((g)


with a business acquisition
Selected financial statements of Oyeh Ltd are shown below.

OYEH LTD
Statement of Profit or Loss and Other Comprehensive Income
for the year ended 31 December 2017
$000 $000
Income
25 74
Sales revenue 5
Proceeds on sale of equipment 113 27 216
Expenses
Cost of sales 16 410
Employee expenses 4 248
Amortisation of licences 295
Depreciation 780
Doubtful debts 50
Carrying amount of equipment
sold 80
Warranty expenses 1 210
Other operating expenses 3 133 26 497
Profit before tax 719
(384
Income tax expense )
Profit after tax 335
Other Comprehensive Income
Revaluation increase on land 736
Income tax on revaluation increase (221) 515
Comprehensive income 850
OYEH LTD
as at 31 December
2017 2016
$000 $000
Current assets
Cash at bank 4 961 4 667
(144
Allowance for doubtful debts ) (110)
Inventories 2 263 1 779
Prepayments 759 601
Non-current assets
Marketable securities – at cost 1 700 60
Land - at fair value 1 336 400
Plant and equipment – at cost 5 327 5 104

Less: Accumulated (2 646 (2 038

depreciation ) )
Deferred tax asset 451 323
Licences – at cost 5 398 3 811
Less: Accumulated (1 186 (891
amortisation ) )
Current liabilities
Bank loans 3 055 1 816
Provision for dividends 340 260
Provision for employee benefits 570 392
Provision for warranty 255 —

Bank loans 5 000 6 000
Deferred tax liability 785 665
Shareholders’ equity
General reserve 803 770
Asset revaluation surplus 515 —

Total liabilities and shareholders’
equity 25 143 18 679
OYEH LTD
Share Retained Asset General Total
Capital Earnings Revaluatio Reserve
n Surplus
$000 $000 $000 $000 $000
Balance at 2 000 4 205 — 770 18 679
1/1/17
Comprehensive 335 515 850
income
Dividends (340) (340)
declared
Transfer to (33) 33 —
reserve
Shares issued 3 000 3 000
Shares bought (250) (250)
back
Balance at 4 750 4 167 515 803 25 143
31/12/17

During the year, Oyeh Ltd entered into the following transactions relevant to the
preparation of the statement of cash flows:
(a) On 15 July 2017, the company acquired the Woohoo business from a competitor. The
details of the business acquisition were as follows:
$000
Cash used to acquire Woohoo 1 89
business 2
Fair value of the assets acquired
and liabilities assumed
1 24
Accounts receivable 3
28
Inventories 4
18
Plant and equipment 2
63
Marketable securities 7
1 00
Licences 0
Provision for employee
benefits (154)
(1 023
Accounts payable )
(277
Bank loans – current )
1 892
(b) Shares were issued and bought back during the period for cash.
(c) The primary bank loan is a revolving credit facility with a limit of $10 000 000.
Required
A. Prepare the statement of cash flows of Oyeh Ltd for the year ended 31 December
2017 using the direct method of presentation.
B. Prepare a note disclosure to reconcile net cash flows from operating activities with
the profit for the year.
A.
OYEH LTD
$000 $000
Cash receipts from customers 25,021
(23,992
Cash paid to suppliers, employees and other )
Cash generated from operations 1,029
Interest paid (280)
Income taxes paid (403)
Net cash from operating activities 346


Interest received 1,358
Proceeds from sale of equipment 113
Purchase of plant and equipment (293)
Purchase of land (200)
Purchase of marketable securities (1,003)
Purchase of licences (587)
Purchase of Woohoo business (1,892)
(2,504
Net cash from investing activities )
Proceeds from share issue 3,000
Payments for shares bought back (250)
Repayment of bank loans (38)
Dividends paid (260)
Net cash from financing activities 2,452
Net increase in cash and cash equivalents 294
Cash and cash equivalents at 1 January 2017 4,667
Cash and cash equivalents at 31 December 2017 4,961

LEDGER RECONSTRUCTIONS
Allowance doubtful debts ($000)
Dr Cr Bal
Opening balance 110 CR
Doubtful debts expense 50
A/c receivable (bad debts w/o) * 16
Closing balance 144 CR
Accounts receivable ($000)
Dr Cr Bal
Opening balance 4,973 DR
Acquisition of Woohoo business 1,243
Sales revenue 25,745
Allowance (bad debts w/o) 16
Cash (receipts from customers) 25,021
Closing balance 6,924 DR
Provision for employee benefits ($000)
Dr Cr Bal
Acquisition of Woohoo business 154
Employee entitlements expense 4,248
Cash (paid to employees) 4,224
Prepayments ($000)
Dr Cr Bal
Opening balance 601 DR
Other operating expenses 3,133
Cash (paid other expenses) 3,291
Closing balance 759 DR
Inventories ($000)
Dr Cr Bal
Cost of sales 16,410
Accounts payable (purchases) 16,610
Accounts payable ($000)
Dr Cr Bal
Opening balance 2,416 CR
Inventory (purchases) 16,610
Cash (paid to suppliers) 15,522
Closing balance 4,527 CR

Interest payable ($000)

Dr Cr Bal
Cash (interest paid) 280
Provision for warranty ($000)
Dr Cr Bal
Opening balance - CR
Warranty expense 1,210
Cash (warranty paid) 955
Current tax liability ('$000)
Dr Cr Bal
ARR/ITE/DTA/DTL 613
Cash (income tax paid) 403
Income tax journal entry

Dr Asset revaluation reserve 221
Dr Income tax expense 384
Dr Deferred tax asset 128
Cr Deferred tax liability 120
Cr Current tax liability 613
Land - at fair value ( $000)

Dr Cr Bal
Revaluation increment on land 736
Cash (purchase) 200
Plant and equipment - net ( $000)
Dr Cr Bal
Depreciation expense 780
Carrying amount of equipment sold 80
Cash (purchase) 293
Licences at cost ($000)
Dr Cr Bal
Cash (purchase) 587

Provision for dividends ($000)

Dr Cr Bal
Dividends declared 340
Cash (dividends paid) 260
Share capital ( $000)
Dr Cr Bal
Cash (proceeds from issue) 3,000
Cash (paid for buyback) 250
Marketable securities ('$000)
Dr Cr Bal
Cash (purchase) 1,003
Bank loans - current and non-current ('$000)
Dr Cr Bal
Cash (repayment) 38

Note Disclosure
$000
Amortisation of licences 295
Carrying amount of equipment sold 80
Proceeds from equipment sold (113)
Interest received (1,358)
Increase in asset and liability accounts:
Increase in accounts payable 1,088
Increase in interest payable 11
Increase in current tax liability 210
Increase in provision for employee benefits 24
Increase in provision for warranty 255
Increase in accounts receivable (708)
Increase in inventories (200)
Increase in prepayments (158)
Decrease in deferred tax liability (101)
Net cash from operating activities 346
Additional explanations of the note

 The increase/decrease in the asset and liability accounts does not include any amount
attributable to the acquisition of the Woohoo business, i.e., the increase in accounts
payable of $1,088,000 is calculated as follows: $4,527,000 – 1,023,000 – 2,416,000.
 There is a decrease in the deferred tax liability account because the amount relating to the
deferred tax on the revaluation of land is not included, i.e., the decrease in the DTL of
$101,000 is calculated as follows: $785,000 – 221,000 – $665,000

Question 16.13 Statement of financial position approach
Selected financial statements of Roxette Ltd are shown below.

ROXETTE LTD
as at 31 December
2017 2016
$000 $000
Current assets
Cash at bank 1 722 1 266
Inventories 720 648
Trade receivables 2 016 1 584
Allowance for doubtful debts (288 ) (216 )
Non-current assets
Land 1 800 720
Buildings 2 880 2 880
Accumulated depreciation – buildings (432 ) (288 )
Accumulated depreciation – plant and (288 ) (288 )
equipment 30 -
Deferred tax asset 11 184 9 186
Total assets
Current liabilities
Trade payables 504 576
Current tax payable 654 546
Borrowings 1 152 720
Equity
Total liabilities and equity 11 184 9 186
ROXETTE LTD
$00 $000
Income 0
Sales revenue
Proceeds from sale of plant 6 37 6 588
Less: Expenses 2
Cost of sales 216
Salaries and wages
Doubtful debts 1 72
Depreciation – buildings 8
Depreciation – plant and equipment 1 44
Interest 288
Rent and utilities 144 5 172
Profit before tax 504 1 416

Less: Income tax expense 216 624

Profit after tax 78 792
774
(a) Plant that had cost $720 000 was sold during the year for $216 000. At the date of
sale, the plant had accumulated depreciation of $504 000.
(a) Land was acquired in exchange for 100 000 shares issued at $2.40 each.
Required
A. Apply the statement of financial position approach to prepare the statement of cash
flows of Roxette Ltd for the year ended 31 December 2017.
B. Prove your answer to part A using the accounts reconstruction (formulae) approach.
C. Prepare a note that reconciles net cash flow from operating activities with the profit
after tax.
A.
ROXETTE LTD
$000 $000
Cash receipts from customers 5,724
Cash paid to suppliers, employees and other (4,086)
Cash generated from operations 1,638
Interest paid (60)
Income tax paid (546)
Net cash from opeating activities 1,032
Purchase of plant & equipment (864)
Proceeds on sale of plant 216
Net cash from investing activities (1,488)
Proceeds from borrowing 432
Proceeds from share issue 480
Net cash from financing activities 912
Net increase in cash and cash equivalents 456
Cash and cash equivalents at 1 January 2017 1,266

Cash and cash equivalents at 31 December 2017 1,722

Workings - Spreadsheet Balance Sheets Total Adjustment Entries Cash Operate- Invest- Financ-
2017 2016 Change Dr. Cr. (In)/Out ing ing ing
$000 $000 $000 $000 Ref $000 $000 $000 $000 $000
Cash at bank 1,722 1,266 456
Inventories 720 648 72 h 72 -
Trade receivables 2,016 1,584 432 216 b/c 6,372 (5,724) (5,724)
Allowance for doubtful debts (288) (216) (72) 288 a/b 216 -
Land 1,800 720 1,080 l 240 840 840
Buildings 2,880 2,880 - -
Accumulated depreciation (432) (288) (144) 144 d -
Plant and equipment 3,024 2,880 144 720 g 864 864
Accumulated depreciation (288) (288) - 504 e/g 504 -
Deferred tax asset 30 - 30 k 30 -
11,184 9,186 1,998
Trade payables 504 576 (72) i 72 -
Interest payable 90 72 18 78 f 60 60
Current tax payable 654 546 108 624 j 546 546
30 k
Borrowings 1,152 720 432 (432) (432)
Share capital 3,600 2,880 720 240 l (480) (480)
Retained earnings 5,184 4,392 792 6,372 c/a 288 4,086 4,086
72 h/d 144
72 i/e 504
f 78
j 624
Cash proceeds from sale of plant g 216 (216) (216)
11,184 9,186 1,998 9,360 9,360 (456) (1,032) 1,488 (912)
© John Wiley and Sons Australia, Ltd 2015

Adjustments to reverse non-cash
$000 $000
a) Reverse doubtful debts expense
Dr. Allowance for doubtful debts 288
Cr. Retained earnings 288
b) Reverse bad debts written off the allowance account
Dr. Trade receivables 216
Cr. Allowance for doubtful debts 216
c) Reverse sales revenue
Dr. Retained earnings 6,372
Cr. Accounts receivable 6,372
d) Reverse depreciation of building
Dr. Accumulated depreciation - Building 144
e) Reverse depreciation of plant and equipment
Dr. Accumulated depreciation - P&E 504
f) Reverse interest expense
Dr. Interest payable 78
g) Reverse sale of plant and equipment
Dr. Plant and equipment 720
Cr. Accumulated depreciation 504
Cr. Retained earnings (Gain/loss on sale) -
Cr. Cash proceeds on sale 216
h) Reverse increase in inventories
Dr. Retained earnings 72
Cr. Inventories 72
i) Reverse decrease in accounts payable
Dr. Retained earnings 72
Cr. Accounts payable 72
j) Reverse income tax expense
Dr. Current tax payable 624
k) Reverse increase in deferred tax asset
Dr. Current tax payable 30
Cr. Deferred tax asset 30
l) Reverse shares issued in exchange for land
Dr. Share capital 240
Cr. Land 240
B. Workings – Account Reconstructions
Allowance for doubtful debts ($000)

Dr Cr Bal
Trade receivables. (write/off) * 216
Trade receivables ($000)
Dr Cr Bal
Sales revenue 6,372
Allowance (write/off) 216
Inventories ($000)
Dr Cr Bal
Cost of sales 1,728
Trade Payables (Purchases) 1,800
Trade payables ($000)
Dr Cr Bal
Inventories (Purchases) 1,800
Interest payable ($000)
Dr Cr Bal
Interest expense 78
Current Tax Payable ( $000)
Dr Cr Bal
Income tax expense 624
Deferred tax asset 30
Cash (income taxes paid) 546
Plant and equipment - at cost ($000)
Dr Cr Bal
Sale of plant 720
Cash (purchases) 864
Borrowings ($000)
Dr Cr Bal

Cash (proceeds) 432

Land - at cost ($000)
Dr Cr Bal
Share capital 240
Cash (purchases) 840
Share capital ($000)
Dr Cr Bal
Land 240
Cash (proceeds) 480
C. Reconciliation
$000
Add back expenses not derived from external transaction
Depreciation - buildings 144
Depreciation - plant and equipment 504
Doubtful debts 288
Add/Deduct effects of accruals balances
Increase in trade receivables (648)
Decrease in trade payables (72)
Increase in current tax payable 108
Increase in interest payable 18
Net cash from operating activities 1,032
Question 16.14 Statement of financial position accounts approach
Riotincell Ltd sells premium fashion wear made in Australia. The statement of
profit or loss of Riotincell Ltd for 31 December 2017 and its statements of
financial position as at 31 December 2017 and 31 December 2016 are shown
below.
RIOTINCELL LTD
$
Income
Sales 12 140 364


Proceeds from sale of plant and equipment 464 420
12 630 327
Expenses
(5 186 695
Cost of sales )
(3 033 562
Employee expenses )
Depreciation – plant and (706 993
equipment )
(205 000
Depreciation – buildings )
Carrying amount of plant and equipment (516 757
sold )
(10 310
Amortisation of intangibles )
(36 850
Bad debts )
(32 694
Audit and accounting fees )
(510 000
Other operating expenses )
(126 546
Interest expense )
(10 365 407
)
Profit before tax 2 264 920
(932 530
Income tax expense )
Profit after tax 1 332 390
RIOTINCELL LTD
as at 31 December
2017 2016
$ $
Non-current assets
6 450 00
Land and buildings (net) 6 991 800 0
2 200 60
Plant and equipment (net) 4 571 450 0
743 28
Investments at cost 783 361 2
Intangibles (net) 112 650 122 96

0
Current assets
25 89
Cash on hand 12 624 5
100 00
Deposits at call 150 000 0
1 700 68
1 065 04
Inventories 1 838 295 0
97 46
Prepayments 165 697 8
12 505 93
1 200 00
Bank loans-secured 1 068 250 0
1 268 24
411 60
Provision for warranty 642 000 0
Current liabilities
50 00
Bank loans – secured 100 000 0
494 55
Bank overdraft – secured 566 723 3
2 110 24
9 40
Accrued interest 13 500 0
423 05
Other accrued expenses 640 070 0
312 69
Current tax liability 898 635 8
98 00
Provision for warranty 182 612 8
21 50
Provision for employee benefits 15 000 0
Equity
2 058 00
4 048 63
12 505 93
Total liabilities and equity 16 673 490 0
(a) The bank overdraft is considered to be an integral part of the company’s cash
management function.

(b) Dividends of $642 000 were declared and paid during the period.
(c) A new bank loan of $500 000 was arranged during the year to provide
additional funds for working capital.
(d) Interest and dividends paid are classified in cash flows from financing
activities.
Required
A. Apply the statement of financial position approach to prepare the statement of
cash flows of Riotincell Ltd for the year ended 31 December 2017.
B. Prove your answer to part A using the accounts reconstruction (formulae)
approach.
C. Prepare note disclosures to explain the following: (1) the balance of cash and
cash equivalents; and (2) the difference between net cash from operating
activities and profit after tax for the year.
A. STATEMENT OF CASH FLOWS FULL BALANCE SHEET APPROACH
RIOTINCELL LTD
$ $
Receipts from customers 11,756,586
Payments to suppliers, employees and other (7,964,522)
Cash generated from operations 3,792,064
Income tax paid (346,593)
Net cash from operating activities 3,445,471
Interest received 2,625
Dividends from investments 22,918
Proceeds from sale of plant 464,420
Purchase of plant and equipment (3,594,600)
Purchase of land and building (746,800)
Purchase of investments (40,079)
(3,891,51
Net cash from investing activities 6)
Proceeds from share issue 1,256,800
Proceeds from bank loans 500,000
Repayment of bank loans (581,750)
Interest paid (122,446)
Dividends paid (642,000)
Net cash from financing activities 410,604

Net decrease in cash and cash equivalents (35,441)

Cash and cash equivalents at 1 January 2017 (368,658)
Cash and cash equivalents at 31 December 2017 (404,099)

WORKINGS WITH A Balance Sheets Total Adjustment Entries Cash Operating Investing Financing
SPREADSHEET 2017 2016 Change DR CR (In)/Out Cashflow Cashflow Cashflow
$ $ $ $ Ref $ $ $ $ $
Land and buildings (net) 6,991,800 6,450,000 541,800 205,000 m 746,800 746,800
Plant and equipment (net) 4,571,450 2,200,600 2,370,850 706,993 l 3,594,600 3,594,600
516,757 o
Investments 783,361 743,282 40,079 40,079 40,079
Intangibles (net) 112,650 122,960 (10,310) 10,310 n -
Cash on hand 12,624 25,895 (13,271)
Deposits at call 150,000 100,000 50,000
Accounts receivable 2,047,613 1,700,685 346,928 36,850 a/b 12,140,364 (11,756,586) (11,756,586)
Inventories 1,838,295 1,065,040 773,255 c 773,255 -
Prepayments 165,697 97,468 68,229 r 68,229 -
16,673,490 12,505,930 4,167,560
Bank loan (non-current) (1,068,250) (1,200,000) 131,750 131,750 131,750
Provn employee (non-current) (1,470,568) (1,268,245) (202,323) 202,323 e -
Provision for warranty (642,000) (411,600) (230,400) 230,400 g -
Bank loan (current) (100,000) (50,000) (50,000) (50,000) (50,000)
Bank overdraft (566,723) (494,553) (72,170)
Accounts payable (3,022,306) (2,110,240) (912,066) 912,066 d -
Accrued interest (13,500) (9,400) (4,100) 126,546 j 122,446 122,446
Other accrued expenses (640,070) (423,050) (217,020) 217,020 i -
Current tax liability (898,635) (312,698) (585,937) 932,530 k 346,593 346,593
Provision for warranty (182,612) (98,008) (84,604) 84,604 h -
Provn employee (current) (15,000) (21,500) 6,500 f 6,500 -
Share capital (3,314,800) (2,058,000) (1,256,800) (1,256,800) (1,256,800)
Retained profits (4,739,026) (4,048,636) (690,390) 12,140,364 b/a 36,850 7,964,522 7,964,522
773,255 c/d 912,066
6,500 f/e 202,323
22,918 p/h 84,604
2,625 q/ 230,400
g
68,229 r/i 217,020
j 126,546
k 932,530
l 706,993
m 205,000
n 10,310
o 52,337
s 642,000
Cash proceeds on sale of plant & equip o 464,420 (464,420) (464,420)
Dividends received p 22,918 (22,918) (22,918)
Interest received q 2,625 (2,625) (2,625)
Dividends paid 642,000 s 642,000 642,000
(16,673,490) (12,505,930) (4,167,560) 17,837,290 17,837,290 35,441 (3,445,471) 3,891,516 (410,604)

Adjustments made in the spreadsheet to reverse non-cash account movements
$ $
a) Reverse bad debts expense
DR Accounts receivable 36,850
CR Retained profits 36,850
b) Reverse sales revenue
DR Retained profits 12,140,364
CR Accounts receivable 12,140,364
c) Reverse increase in inventories
DR Retained profits 773,255
CR Inventories 773,255
d) Reverse increase in accounts payable
DR Accounts payable 912,066
e) Reverse increase in non-current provision for employee benefits
DR Provision for employee benefits 202,323
f) Reverse decrease in current provision for employee benefits
CR Provision for employee benefits 6,500
g) Reverse increase in non-current provision for warranty
DR Provision for warranty 230,400
h) Reverse increase in current provision for warranty
DR Provision for warranty 84,604
i) Reverse increase in other accrued expenses
DR Other accrued expenses 217,020
j) Reverse interest expense
DR Accrued interest 126,546
k) Reverse income tax expense
DR Current tax liability 932,530
l) Reverse depreciation of plant and equipment
DR Plant and equipment (net) 706,993
m) Reverse depreciation of building
DR Land and buildings (net) 205,000
n) Reverse amortisation
DR Licences (net) 10,310
o) Reverse sale of plant and equipment

DR Plant and equipment (net) 516,757
CR Retained profits (loss on sale) 52,337
CR Cash proceeds on sale 464,420
p) Dividends received
CR Dividends received 22,918
q) Interest received
CR Interest received 2,625
r) Reverse increase in prepayments
CR Prepayments 68,229
s) Dividends paid
DR Dividends paid 642,000
B. RECONSTRUCTED LEDGERS
Accounts receivable ( $)
Dr Cr Bal
Opening balance 1,700,685 DR
Bad debts expense 36,850
Sales 12,140,364
Cash (receipts from cust) 11,756,586
Closing balance 2,047,613 DR
Inventories ($)
Dr Cr Bal
Cost of sales 5,186,695
Accounts payable (purchases) 5,959,950
Accounts Payable ($)
Dr Cr Bal
Opening balance 2,110,240 CR
Inventory 5,959,950

Cash (paid to suppliers) 5,047,884

Closing balance 3,022,306 CR
Provision for employee benefits - current and non current ($)
Dr Cr Bal
Employee expenses 3,033,562
Cash (paid to employees) 2,837,739
Prepayments, provision for warranty and other accrued expenses - net ($)
Dr Cr Bal
Audit and accounting fees 32,694
Other operating expenses 510,000
Cash (paid other) 78,899
Accrued interest($)
Dr Cr Bal
Interest expense 126,546
Cash (interest paid) 122,446
Current tax liability ($)
Dr Cr Bal
Income tax expense 932,530
Cash (income tax paid) 346,593
Land and building - net ( $)
Dr Cr Bal
Depreciation expense 205,000
Cash (purchases) 746,800
Plant and equipment - net ( $)
Dr Cr Bal
Carrying amount of plant sold 516,757
Cash (purchases) 3,594,600
Investments ( $)
Dr Cr Bal
Cash (purchases) 40,079
Share capital ( $)
Dr Cr Bal
Cash (proceeds from issue) 1,256,800
Bank loans - current and non current ($)
Dr Cr Bal

Cash (new bank loan) 500,000

Cash (repayments of loans) 581,750

C. NOTES

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 statement of cash flows comprise the following statement of financial position
amounts:
2017 2016
Cash on hand $ 12 624 $ 25,895
Bank overdraft (566 723) (494 553)
Cash and cash equivalents $(404 099) $(368 658)
Note 2: Reconciliation of profit and net cash from operating activities
$
Profit after income tax 1,332,390
Add back non-cash expenses
Amortisation of intanigibles 10,310
Carrying amount of plant sold 516,757
Add/Deduct items classified as non-operating
Proceeds from sale of plant (464,420)
Interest expense 126,546
Dividends received (22,918)
Interest received (2,625)
Add/Deduct effects of accrual balances
Increase in accounts payable 912,066
Increase in current tax liability 585,937
Increase in provision for employee benefits 195,823
Increase in account receivables (346,928)
Increase in inventories (773,255)
Increase in prepayments (68,229)
Increase in provision for non-current warranty 315,004
Increase in other accrued expenses 217,020
Net cash from operating activities 3,445,471

Question 16.15 Statement of financial position approach
Block No. 9 Ltd is a manufacturer of tennis racquets and fashion wear. Selected
financial statements of Block No. 9 Ltd are shown below.
BLOCK NO. 9 LTD
as at 31 December
2017 2016
$000 $000
Current assets
13
Cash at bank 5 274
2 77
Inventories 4 2 486
11
Prepaid rent 5 —
2 89
Accounts receivable 7 2 654
(15 (12
Allowance for doubtful debts 0) 0)
Non-current assets
2 47
Investments 8 1 250
2 00
Land 0 1 750
80
Buildings 0 800
(20 (16
Less: Accumulated depreciation 0) 0)
1 12
Plant and equipment 5 768
(60 (54
Less: Accumulated depreciation 0) 8)
11 37
Total assets 4 9 154
Current liabilities
3 20
Accounts payable 0 2 583
1
Accrued interest 2 10
24
20
Provision for employee benefits 5 298
5
Payable to EO Ltd 5 —
31
Provision for warranty 4 —

3 51
Bank borrowings 5 3 800
7 54
Total Liabilities 4 6 774
3 83
Net assets 0 2 380
Shareholders’ equity
2 75
Share capital 0 2 000
1 08
Retained earnings 0 380
3 83
Total Shareholders’ Equity 0 2 380
BLOCK NO. 9 LTD

Statements of Profit or Loss
for the year ended 31 December
2017 2016
$000 $000
Income
31 94
Sales 4 27 346
5
Dividends from investments 1 47
2
Proceeds on sale of plant 0
Expenses
(28 20 (24 611
Cost of sales 5) )
(12 (125
Bad and doubtful debts 5) )
(5
Inventory written off 0) —
(31
Warranty expense 4) —
(4 (40
Depreciation – building 0) )
Depreciation – plant and (10 (60
equipment 0) )
(60 (680
Rent expense 0) )
(1 32 (1 231
Salaries and wages 4) )
(2
Carrying amount of plant sold 0)
(32 (428
Interest expense 2) )
91

(21 (90
Income tax expense 5) )
70
Profit after tax 0 128
(a) In March 2017, the company sold tennis racquets in exchange for investments
having a fair value of $80 000.
(b) In December 2017, the company acquired investments from EO Ltd at the
agreed value of $805 000. The consideration for the acquisition is comprised
of 500 000 shares issued at $1.50 each and $55 000 in cash to be paid in
January 2018.
(c) In December 2017, plant was sold for cash of $20 000. The plant had
originally cost $68 000 and had accumulated depreciation of $48 000 at the
date of sale.
(d)The bank borrowings relate to a revolving credit facility having a limit of
$5 000 000.
Required
A. Apply the statement of financial position approach to prepare the statement of
cash flows of Block No. 9 Ltd for the year ended 31 December 2017.
B. Prove your answer to part A using the accounts reconstruction (formulae)
approach.
C. Prepare a note disclosure to explain the difference between net cash from
operating activities and profit after tax for the year.
PART A
BLOCK NO. 9 LTD

$000 $000
Receipts from customers 31,606
Payments to suppliers, employees and other (30,138)
Interest paid (320)
Income taxes paid (55)
Net cash from operating activities 1,093

Dividends received 51
Proceeds from sale of plant and equipment 20
Purchase of plant and equipment (425)
Purchase of investments (343)

Net cash from investing activities (947)

Repayment of borrowings (285)
Net cash from financing activities (285)
Net decrease in cash and cash equivalents (139)

Cash and cash equivalents at 1 January 2017 274
Cash and cash equivalents at 31 December 2017 135

WORKINGS WITH A Balance Sheets Total Adjustment Entries Cash Operating Investing Financing
SPREADSHEET 2,017 2,016 Change DR CR (In)/Out Cashflow Cashflow Cashflow
$000 $000 $000 $000 Ref $000 $000 $000 $000 $000
Cash at bank 135 274 (139)
Inventories 2,774 2,486 288 50 e -
80 f/g 418
Prepaid rent 115 - 115 p 115 -
Accounts receivable 2,897 2,654 243 90 b/d 31,944 (31,606) (31,606)
5 c
Allowance for doubtful debts (150) (120) (30) 35 a/c 5 -
Investments 2,478 1,250 1,228 f 80 343 343
o 805
Land 2,000 1,750 250 250 250
Buildings 800 800 - -
Less: Accumulated depreciation (200) (160) (40) 40 k -
Plant and equipment 1,125 768 357 68 n 425 425
Less: Accumulated depreciation (600) (548) (52) 100 l/n 48 -
11,374 9,154 2,220
Accounts payable (3,200) (2,583) (617) 617 h -
Accrued interest (12) (10) (2) 322 m 320 320
Current tax liability (243) (83) (160) 215 q 55 55
Provision for employee benefits (205) (298) 93 i 93 -
Payable to EO (55) - (55) 55 o -
Provision for warranty (314) - (314) 314 j -
Borrowings (3,515) (3,800) 285 285 285
Share capital (2,750) (2,000) (750) 750 o -
Retained profits (1,080) (380) (700) 31,944 d/a 35 30,138 30,138
418 g/b 90
93 i/e 50
115 p/h 617
51 r/j 314
Retained profits (continued) k 40
l 100
m 322
q 215
Cash proceeds on sale of plant & equip n 20 (20) (20)
Dividends received r 51 (51) (51)
(11,374) (9,154) (2,220) 35,362 35,362 139 (1,093) 947 285

Adjustments made in the spreadsheet to reverse non-cash account movements
$000 $000
a) Reverse doubtful debts expense
DR Allowance for doubtful debts 35
CR Retained profits 35
b) Reverse bad debts expense
DR Accounts receivable 90
c) Bad debts written off allowance
DR Accounts receivable 5
CR Allowance for doubtful debts 5
d) Reverse sales revenue
CR Accounts receivable 31,944
e) Reverse inventory written off
DR Inventories 50
f) Reverse acquisition of investments using inventory
DR Inventories 80
CR Investments 80
g) Reverse increase in inventory
DR Retained profits 418
CR Inventories 418
h) Reverse increase in accounts payable
DR Accounts payable 617
i) Reverse decrease in provision for employee benefits
CR Provision for employee benefits 93
j) Reverse increase in provision for warranty
DR Provision for warranty 314
k) Reverse depreciation of building
DR Accumulated depreciation 40
l) Reverse depreciation of plant and equipment
DR Accumulated depreciation 100
m) Reverse interest expense
DR Accrued interest 322
n) Reverse sale of plant and equipment
DR Plant and equipment 68
CR Accumulated depreciation 48
CR Cash proceeds on sale 20
o) Reverse acquisition of investments for issue of shares and deferred payment

DR Share capital 750
DR Payable to EO Ltd 55
CR Investments 805
p) Reverse increase prepaid rent
CR Prepaid rent 115
q) Reverse income tax expense
DR Current tax liability 215
r) Dividends received
CR Dividends received 51

PART B
RECONSTRUCTED LEDGER ACCOUNTS

Allowance doubtful debts ($000)
Dr Cr Bal
Accounts receivable (debts w/o) 5
Accounts receivable ($000)
Dr Cr Bal
Bad debts written off ( P&L) 90
Provision for doubtful debts 5
Sales revenue 31,944
Inventories ($000)
Dr Cr Bal
Cost of sales 28,205
Inventory written off 50
Investments (exchange) 80
Purchases (accounts payable) * 28,623
Accounts Payable ($000)
Dr Cr Bal
Inventory purchases 28,623
Provision for employee benefits ($000)
Dr Cr Bal
Salary and wages expense 1,324
Cash (paid to employees) 1,417
Prepaid rent ($000)
Dr Cr Bal
Opening balance - DR
Rent expense 600
Cash (rent paid) 715
Cash paid to suppliers, employees & other, 28,006 + 1,417 + 715 = 30,138
Accrued Interest ($000)

Dr Cr Bal
Current tax liability ('$000)

Dr Cr Bal
Income tax expense 215
Cash (income taxes paid) 55
Plant and equipment - cost ( $000)
Dr Cr Bal
Sale of plant and equipment 68
Cash (purchase) 425
Plant and equipment - Net ( $000)
Dr Cr Bal
Cash (purchase) 425
Investments ( $000)
Dr Cr Bal
Share capital 750
Payable to EO Ltd 55
Inventories 80
Cash (purchase) 343
Land ( $000)
Dr Cr Bal
Cash (purchase) 250
Borrowings ( $000)
Dr Cr Bal
Cash (proceeds) 285
PART C
Reconciliation Note
$000
Add back expenses not derived from external transactions
Depreciation expense - building 40
Depreciation expense - plant and equipment 100
Add/Deduct items classified as non-operating items
Dividends received (51)
Add/Deduct effects of accrual balances
Deduct: Increase in current assets

Increase in accounts receivable (243)

Increase in prepaid rent (115)
Add: Increase in current liabilities
Increase in accounts payable 617
Increase in accrued interest 2
Increase in current tax liability 160
Increase in provision for warranty 314
Deduct: Decrease in current liabilities
Decrease in provision for employee benefits (93)
Net cash flows operating activities 1,093

Solutions Manual: Company Accounting 10e

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Solutions Manual: Company Accounting 10e

Uploaded by

Copyright:

Available Formats

Chapter 16: Disclosure: statement of cash flows

Company Accounting 10e

© John Wiley & Sons Australia, Ltd 2015

© John Wiley and Sons Australia, Ltd 2015 16.0

Chapter 16 – Disclosure: statement of cash flows

© John Wiley and Sons Australia, Ltd 2015 16.1

From the definitions in the standard in paragraph 6:

© John Wiley and Sons Australia, Ltd 2015 16.2

Item (b) is a cash flow. It is classified in investing activities.

© John Wiley and Sons Australia, Ltd 2015 16.3

Item (m) is a cash flow. It is classified in financing activities.

© John Wiley and Sons Australia, Ltd 2015 16.4

Limitations of the statement of cash flows are:

© John Wiley and Sons Australia, Ltd 2015 16.5

Examples of transactions are:

9. A fellow student explained: ‘Profit is the premier measure of financial performance.

© John Wiley and Sons Australia, Ltd 2015 16.6

© John Wiley and Sons Australia, Ltd 2015 16.7

© John Wiley and Sons Australia, Ltd 2015 16.8

© John Wiley and Sons Australia, Ltd 2015 16.9

Lana Ferdinand, the owner-manager of a small proprietary company, had carefully

© John Wiley and Sons Australia, Ltd 2015 16.10

Find and read the following article:

dByburasktheqionmx fwrdctehopsnaiu wl:

Fohrtidequsn,Bybacl veothsnfprgaimcwluedthofprsnaiv cmd.Bbuyoenthwr,aif sudgenctohmark(lys)figedtopncahwrmfu.si

Find and read the following article:

© John Wiley and Sons Australia, Ltd 2015 16.11

Find and read the following article:

© John Wiley and Sons Australia, Ltd 2015 16.12

(2) quality of earnings

(1) Cash return ratios

Cash return on assets Cash generated from operations

Cash return on equity Net cash from operating activities

Quality of sales Cash receipts from customers

Quality of net income Net cash from operating activities

Cash generated from operations

Cash interest coverage Cash generated from operations

© John Wiley and Sons Australia, Ltd 2015 16.13

Cash dividend coverage Net cash from operating activities

Net cash from operating activities less

Investment/Finance Net cash flows from investing activities

Net cash flows from investing activities

Find and read the following article:

© John Wiley and Sons Australia, Ltd 2015 16.14

2) Changes in total accruals

© John Wiley and Sons Australia, Ltd 2015 16.15

Total accruals (TAcc) –9 679 13 910 35 910 –122 200

© John Wiley and Sons Australia, Ltd 2015 16.16

© John Wiley and Sons Australia, Ltd 2015 16.17

and mining, telecommunication services, consumer staples. Go to www.asx.com.au and

© John Wiley and Sons Australia, Ltd 2015 16.18

Question 16.1 The cash records approach

1. Borrowed $30 000 with a 6-month loan payable

© John Wiley and Sons Australia, Ltd 2015 16.19

© John Wiley and Sons Australia, Ltd 2015 16.20

Question 16.2 The reconstruction of accounts (formulae) approach

© John Wiley and Sons Australia, Ltd 2015 16.21

Statement of Cash Flows

for the year ended 30 June 2017

Cash receipts from customers $424 000

Cash paid to suppliers, employees and other (375 500)

Cash generated from operations 48 500

Interest paid (11 900)