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Audit of Statement of Cash Flows

The audit team finalized the audit of Ultimate Company's balance sheet and income statement, leaving the assistant to prepare the statement of cash flows. Using information gathered during the audit, the assistant will prepare the statement of cash flows using the indirect method and disclose the direct method for operating cash flows. Additionally, the assistant notes the audited statement of profit or loss does not comply with the presentation requirements of IAS 1 and prepares a replacement statement that is compliant with IAS 1 provisions.

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Andrew Manalo
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217 views

Audit of Statement of Cash Flows

The audit team finalized the audit of Ultimate Company's balance sheet and income statement, leaving the assistant to prepare the statement of cash flows. Using information gathered during the audit, the assistant will prepare the statement of cash flows using the indirect method and disclose the direct method for operating cash flows. Additionally, the assistant notes the audited statement of profit or loss does not comply with the presentation requirements of IAS 1 and prepares a replacement statement that is compliant with IAS 1 provisions.

Uploaded by

Andrew Manalo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Ultimate Company is an audit client.

The audit team had finalized the audit of the balance sheet and the income
statement. The other members of the team were reassigned to other clients. You were left to prepare the
Statement of Cash Flows. The audited balance sheet and income statements are attached. The following
information were gathered during the current year audit.

1. The company purchased equipment. The company signed a promissory note and paid ₱ 100,000 cash for
the excess. The company has no other note payable.

2. Gain from valuation of investments is composed of marking to market adjustments for investment property
and investments in equity instruments. The equity instruments were held for trading activities

3. There was no acquisition of investment property during the year.

4. Forex gain recorded for the year is composed of the following:

Unrealized gain from AR valuation ₱ 30,000


Unrealized gain from AP valuation 25,000
Unrealized gain from Cash valuation 22,000
Realized gain from AR valuation 20,000
Realized gain from AP valuation 23,000

5. The company received an interest earning promissory note from a client in exchange of accounts receivable.
There was no gain or loss recorded for this transaction. Except for interest income collections, there were
no other note receivable transactions during the year.

6. ₱ 50,000 of accounts receivable was written-off from the accounts. On the other hand, the company was
also able to collect ₱10,000 from an account previously written off.

7. Loss from inventory valuation of ₱ 27,000 was included in Cost of Goods Sold.

8. Also during the year, the Board of Directors decided to sell the building with the cost of ₱ 900,000. The net
book value of the building on the date of sale was ₱756,250. The gain from disposal is properly recorded in
the income statement.

9. Investments in Debt Securities were purchased at a premium. Interest income includes amortization of
premium of ₱ 35,000. Interest earning assets are all considered as part of the company’s investing
activities.

10. ₱ 1 Million par value investment debt securities matured during the year.

11. The company declared and distributed stock dividends during the year. Also, cash dividends were paid.
Aside from the stock dividend, there were no other issuances or distribution of common stock during the
year.

12. The company did not issue new bonds in the current year. Due to excess cash and favorable market
conditions, the company purchased and retired ₱1,000,000 par value bonds with carrying value of
₱900,000.

13. The company repaid some of its bank loans in the current year. Also, the company received ₱ 1,000,000
bank loan from Piggy bank.

14. There was no reissuance of treasury shares in the current year.

15. Aside from the equipment, Ultimate also acquired a new car during the current year.
Tasks assigned to you:

1. Prepare the Statement of Cash Flows using the indirect method.


2. Prepare the disclosure to show the direct method for operating cash flows.

Tasks not assigned to you but you couldn’t help but point out.

As a UPBAA graduate, you cannot help but noticed that there is something wrong in the company’s Statement of
Profit or Loss. The current audited Statement of Profit or Loss is not in compliant with the presentation
requirements of IAS 1. You decided that you will point this out to the manager in charge of the client account but
before you can do that, you have to prepare the correct financial statement so you can tell your senior that “the
audited statement is not correct but do not worry I already prepared the correct one.”… However, given the
limited information you have (this is your first year as member of this client’s audit team), you can only prepare
the correct financial statement for the current year.

3. What is wrong with the company’s Statement of Profit or Loss based on IAS 1? Read IAS 1. To convince
your seniors, you should indicate the IAS 1 provisions that will support your position.
4. Prepare the IAS 1 required financial statement to replace the audited Statement of Profit or Loss.

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