Practice Questions Workshop 1

Question 1

The following information is taken from Western Ltd’s accounting records as at 31 Dec
2020:
$ $
Plant and Machinery 5,000
Accumulated depreciation of Plant and Machinery 1,500
Rental expense 566
Accounts receivables 2,210
Interest received 3,356
Staff allowance 16,654
Sales 38,567
Discount allowed 663
Accrued salary 265
Sundry expenses 2,667
Sales returns 441
Insurance 7,260
Bank loan (less than one year) 655
Bank deposit 660
Capital as at 1 January 2020
5,438
Wages 13,660 _____
49,781 49,781

Additional information that requires adjustment as at 31 December 2020:

i) The annual rate of depreciation on Plant and Machinery is 10% on a straight-line

basis.

You are required to prepare:

a) The Income Statement for Western Ltd for the year ended 31 December 2020

b) The Owner’s Equity Statement for Western Ltd for the year ended 31 December
2020.
c) The Balance Sheet for Western Ltd as at 31 December 2020.

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Answer 1

a)
Western Ltd
Income Statement for the year ending 31 December 2020٨
$ $
Net Sales (38,567 – 441) 38,126 ٨
Other Income
Interest Received 3356٨
Total Income 41,482٨
Less Expenses:
Staff allowance 16,654٨
Rental expenses 566٨
Sundry expenses 2,667٨
Insurance 7,260٨
Depreciation of Plant 500٨
Discount allowed 663٨
Wages 13,660 ٨ 41,970 ٨
Net loss 488 ٨

b)
Western Ltd
Owner’s Equity Statement for the year ending 31 December 2020٨
$
Capital at 1 January 5438 ٨
Profit for the year (488) ٨
Capital at 31 December 4,950 ٨

Western Ltd
Balance Sheet as at 31 December 2011
$ $ $
Non Current Assets
Plant and Machinery 5000 ٨
Accumulated depreciation 2000 3000 ٨
Current Assets
Accounts receivable 2210٨
Bank deposit 660٨
2870
Current Liability
Bank loan (less than one year) 655٨
Accrued wages 265٨ 920 1950 ٨
4950
Owner’s Equity:
Capital 4950
٨

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Question 2. Preparing an income statement
The directors of Pfahlert Ltd provide you with the following financial information
for the period ended 31 December 2010: selling expenses $39 000; interest expense
$15 000; legal fees $2500, administrative expense $31 000; income tax expense
$16 000; cost of sales $190 000; ordinary share capital (20 000 shares issued)
$80 000; sales revenue $310 000; other revenue $7500; dividends declared (for
current period) $8000. Retained earnings at the beginning $116 000.
Required
(a) Prepare an income statement for Pfahlert Ltd for the period ended 31 Dec
2020
(b) Determine the closing balance of retained earnings at 31 Dec 2020

Answer 2 PFAHLERT LTD

Income Statement
for period ending 31 December 2020

Sales revenue 310 000

Other revenue 7 500 317 500
Less expenses
Cost of sales 190 000
Selling expenses 39 000
Interest expenses 15 000
Legal fees 2 500
Administrative expense 31 000
Income tax expense 16 000 293 500

Profit $ 24 000

A3b) Closing balance of retained earnings = $116 000 + 24 000 – 8 000

= $132 000

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Question 3
From the following account balances of Daisy Pty Ltd as at 30 September 2010, prepare a
balance sheet in both the T-format and the narrative format.
Cash at Bank $50000
Accounts Receivable (net) $25000
Inventory $20000
Land $25000
Fixtures and Fittings $6000
Loan Payable $5000
Tax Payable $5000
Share Capital $20000
Retained Profits $96000

Answer 3
Balance sheet in T-format

Daisy Pty Ltd

Balance Sheet
As at 30 September 2020

Cash at Bank $ 50 000 Loan Payable $ 5 000

Accounts Receivable (net) 25 000 Tax Payable 5 000
Inventory 20 000 Total Liabilities $ 10 000
Land 25 000 Share Capital $ 20 000
Fixtures and Fittings 6 000 Retained Profits 96 000
Total Assets $ 126 000 Total Liabilities and Equity $ 126 000

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Balance sheet in narrative format

Daisy Pty Ltd

Balance Sheet
As at 30 September 2020

Current Assets
Cash at Bank $ 50 000
Accounts Receivable (net) 25 000
Inventory 20 000
Total Current Assets $ 95 000

Non-Current Assets
Land $ 25 000
Fixtures and Fittings 6 000
Total Non-Current Assets $ 31 000
Total Assets $ 126 000

Current Liabilities
Loan Payable $5 000
Tax Payable 5 000
Total Liabilities $ 10 000
Net Assets $ 116 000

Equity
Share Capital $ 20 000
Retained Profits 96 000
Total Equity $ 116 000

Question 4

Bodie, the managing director of a public company, successfully negotiates (without any
payment to the company) to keep his luxury car upon being dismissed for poor

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performance. The car is valued at $165 000. Doyle, the company accountant, leaves the
value of the vehicle on the company’s balance sheet so as to leave the accounting equation
in balance. Other benefits for this course of action are to make the assets of the company
look good and to continue the tax deduction benefits the car has given the company.

a. Has Doyle done anything wrong here?

b. Who are the stakeholders in such circumstances and how could each be affected
by Doyles’s decision?
c. What advice would you give Doyle over her concern regarding the accounting
equation issue?

Answer 4
(a) It appears that Doyle has acted in an improper or careless manner by leaving the vehicle
on the company books. As it is no longer used for business purposes it should not be
considered a company asset nor should it be claimed as a business tax deduction.

(b) Some of the major stakeholders in this situation include shareholders (who may believe
that the company assets are higher than they really are and likewise the profit is lower than
what it should be due to the tax deduction for the ‘phantom’ car); potential investors who
may buy shares based on what is shown in the balance sheet (because the company looks
sound due to the good asset base); the Australian Taxation Office and therefore the
Australian taxpayer (the company is gaining an unfair higher tax deduction than they
should receive).

(c) Regarding the accounting equation issue — more specific information is definitely
required here. Depending on how the car was financed the balance sheet will still balance
after the car is removed from the books through what is referred to as a balance day
adjustment e.g. writing off the carrying asset value against the loss on disposal expense. A
note to the financial reports should stipulate the details of any such adjustment.

Question 5.

Identify users who would be interested in the performance of an entity and explain their
interest.

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Answer 5

Users who would be interested in the performance of an entity include both internal and external
users:

a. internal users (i.e. management) are interested in ascertaining whether the entity’s strategic
directions, investing and financing decisions, and product lines are profitable.
b. external users such as:
 shareholders are interested in the profit generated by the entity as the profit will influence
return on equity, future dividends and capital returns.
 creditors (e.g. banks) are interested in ascertaining if borrowers can generate sufficient
cash to service debt obligations when they fall due.
 parties performing a review or oversight function (e.g. government, labour union).
Examples include: regulators who are interested in knowing whether entities are
complying with the relevant regulations and satisfying reporting requirement; labour
unions can use reported accounting numbers to support their wage demands; and
government can use reported accounting numbers to determine the need for increasing or
decreasing government assistance for various activities and industries.

Question 6

Are the following statements true or false?

(a) Income statements are used only by users external to the entity.

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False. Internal users such as management also need the Income Statement to assess the
profitability of their investment decisions and the appropriateness of their financing decisions.

(b) Expenses are to be included in the income statement when they are paid, not
when they are incurred.

False. Since financial statements are prepared on the basis of accrual accounting rather than
cash accounting, it is not necessary for cash to have been paid for an item to be recognised as an
expense. Under accrual accounting, expenses are recognised when they are incurred.

(c) The loss on the sale of a business segment is classified as an extraordinary item.

False. International reporting standards do not permit any income and expense items to be
classified as extraordinary items.

(d) At the end of the reporting period, accrued expenses need to be included in the
profit or loss determination.

True. Based on the accrual basis of accounting, all expenses incurred in the reporting period are
recognised in the income statement. Expenses incurred but unpaid at balance date are included
as an expense with a liability recognised in the balance sheet.

(e) At the end of the reporting period, revenue received for services not yet
provided needs to be included in the profit or loss determination.

False. Under the accrual accounting, revenue should be recognised when the earning process is
complete. If the services have not been rendered or provided, irrespective of the cash being
received, the earnings process is incomplete and the revenue should not be recognised in the
current period.

Question 7

Why is depreciation an expense?

Depreciation is the allocation of the cost of an asset over its useful life and represents the future
economic benefits of the depreciable assets that have contributed to earning income in the
period. Depreciation reduces the value of the asset in the Balance Sheet and consequently

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decreases the equity during the reporting period. Depreciation is an example of an expense that
does not involve an outflow of cash.

Question 8

When comparing the profit of entities, accounting policy choices need to be considered.
Why?

Generally accepted accounting principles (GAAP) permit choices when transactions are being
recorded, and require estimations by preparers. For example, there are several permissible
methods in calculating depreciation that will result in different depreciation amounts. Similarly,
there are alternative means of costing inventory and treating development expenditure.
Financial statement preparation involves estimations (e.g. estimating the useful life of an asset).
Therefore, it is important to consider accounting policy choices when comparing profits across
entities because, even if two entities were identical in terms of operating, investing and
financing decisions, income and expense figures and hence profit could vary according to their
respective accounting policy choices.

Question 9

Explain how you would determine if an income or expense item is material.

The materiality of an item is subjective and involves professional judgment. Information is

defined as material if its omission, misstatement or non-disclosure has the potential,
individually or collectively, to: (a) influence the economic decisions of users taken on the basis
of the financial statement; or (b) affect the discharge of accountability by the management or
governing body of the entity.

An Australian accounting standard exists on materiality (AASB 1031). It provides guidelines to

determine if information is material and requires aggregate or individual disclosure. In
determining whether the amount of an item or an aggregate of items is material, appropriate
benchmarks are required. A balance sheet item may be compared with the recorded amount of
equity or the appropriate asset or liability class total. An income statement item may be
compared to profit or loss and the appropriate income or expense amount for the current
reporting period or the average profit or loss and the average of the appropriate income or
expense amounts for a number of reporting periods. Similarly, when determining materiality of
a cash flow item, the benchmark may be net cash provided by or used in the operating,
investing, financing or other activities, as appropriate, for the current or the average of a number
of reporting periods.

The arbitrary guidance on assessing materiality states that an amount which is equal to or
greater than 10 per cent of the appropriate base amount may be presumed to be material and an
amount which is equal to or less than 5 per cent of the appropriate base amount may be
presumed not to be material. These arbitrary limits may be applied to assess materiality unless
there is evidence to the contrary.

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Question 10

What is the rationale for regulating the presentation and disclosure of the income
statement for reporting entities? What differences would you expect to notice in an income
statement prepared for a reporting entity versus a small business?

Regulation of the presentation of the Income Statement avoids confusion among users and as it
promotes comparability. Given complete discretion, entities may come up with different formats
to present the Income Statement and use different definitions and accounting terms. Potentially,
this confuses and misleads users in interpreting the financial statement. Regulating the
presentation of the Income Statement means that there is uniformity across the entities in
presenting the Income Statement to ensure that the statement will be understandable to users. In
addition, since the Income Statement is prepared by the management of the entity who privately
own the accounting information, there is a tendency of the management not to disclose certain
information for personal gains. By imposing regulations regarding what information must be
disclosed, the interests of users of the income statement may be protected and the relevance,
reliability and comparability of the information increased.

The format of an income statement prepared by a reporting entity would be slightly different
compared to a small business. A reporting entity is required to prepare an income statement in
accordance with prescribed accounting standards that specify the presentation of income
statement. Hence, the format of income statement for reporting entities would be more uniform
across entities and more aggregated compared to small businesses. In addition, as the
accounting standards also require that some income and expense items to be disclosed in the
notes to the financial statements, the income statement prepared by a reporting entity would
normally contains the information of which note that discloses certain income/expense items.
On the other hand, there is no prescribed reporting format for non-reporting entities, which
mostly include small businesses, and therefore the presentation and classification of the income
and expense items in the income statements may differ greatly between small businesses. The
income statement prepared by a small business is also usually more detailed and less aggregated
than that prepared by a reporting entity, as the income statement is prepared mainly for internal
rather than external users.

Question 11

Explain, in an accounting sense, what happens to the profit at the end of the reporting
period.

At the end of the reporting period, profit from the Income Statement is transferred to an account
in the owner’s equity section of the Balance Sheet. Hence, profit (loss) increases (decreases)
equity. Since the profit (loss) generated belongs to the owners of the entity, it is added
(subtracted) to the retained earnings from previous periods. Retained earnings is an equity item
and represents the accumulation of the entity’s profits that have not been distributed.

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Question 12

Items of income and expenses may be included in the income statement only if they can be
measured with certainty. Discuss.

The Framework specifies two requirements that must be satisfied for an item to be recognised
as income or expense. Firstly the increase (decrease) in the future economic benefits must be
probable (more likely than less likely), and secondly it must be able to be measured reliably.
The term ‘reliably’ does not necessarily mean with certainty, because in practice there are many
transactions involving estimations that cannot be measured with certainty. For example, in
determining the depreciation expense, the useful life of the asset needs to be estimated. The
term ‘reliably’ then means the item can be objectively determined, and the reason behind the
estimation (if any) can be justified. Therefore, for income or expenses to be included in the
Income Statement they must meet the probability criteria and secondly, they have to satisfy the
reliable measurement criterion.

Question 13

Why are some items of income and expense recognised directly in equity? In what
financial statement are such items reported?

Some accounting standards allow income and expense items to bypass the income statement and
be taken directly to an equity account. Examples of items that are excluded from profit
determination and taken directly to equity include increments in property, plant and equipment
valued at fair value, movements in the foreign exchange translation reserve and adjustments to
retained profits upon adoption of a new accounting standard. Such items are reported in the
statement of comprehensive income instead of the income statement. The decision to recognise
income and expenses directly in equity rather than in the income statement is not a discretionary
management decision. It is permissible to bypass the income statement only if this is the
accounting treatment prescribed by the accounting standard.

Question 14

What is the difference between income and revenue?

The definition of income includes both revenue arising in the ordinary course of activities (e.g.
sales, fees, dividends) and gains (e.g. gains on disposal of non-current assets). Therefore,
revenue is a subset of income.

Question 15

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Explain the items in a statement of changes in equity that are not in a statement of
comprehensive income.

The statement of changes in equity shows the change in an entity’s equity between two
reporting dates. The statement shows all changes in equity and separates changes arising from
transactions with owners in their capacity as owners (e.g. equity contributions, dividends paid
and shares repurchased) from non-owner changes in equity (e.g. profit). The statement of
comprehensive income, on the other hand, refers to all changes in equity during the reporting
period other than those resulting from transactions with owners as owners. Therefore, some of
the items in the statement of changes in equity that are not in the statement of comprehensive
income would include transactions with owners as owners such as capital contributions by
owners, dividends paid, and shares purchases.

Question 16

Are the following statements true or false?

a. The terms ‘accounts payable’ and ‘creditors’ mean the same thing. TRUE – these terms
are used interchangeably to describe entities/people to whom money is owed. If the money
owed arises as a result of purchase of goods or services, the creditors can be referred to as
trade creditors.

b. The balance sheet is a financial statement that shows the results of an entity’s trading
over a reporting period. FALSE – the balance sheet shows the assets, liabilities and equity
of an entity at a point in time, hence is it titled ‘Balance Sheet as at…’. The income
statement is the financial statement that shows the results of an entity’s trading over a
reporting period, hence it is titled ‘Income Statement for the period ended…’.

c. Ms Entrep invests her own cash to start a business. This transaction will increase the
equity and assets of the business. TRUE – the owner’s contribution of cash increases the
assets of the entity. The dual effect of this is to recognise that the owner has contributed
equity to the business, and the equity in the balance sheet increases by the same amount as
the assets have increased.

d. Reserve accounts are all created in the same way and involve cash being put aside from
profits. FALSE – reserve accounts can arise in a variety of ways and do not generally
involve cash being put aside from profits. For example, the asset revaluation reserve arises
as a result of upward revaluations of the entity’s property, plant and equipment. The
property, plant and equipment has not been sold and hence no cash has been generated. A
general reserve arises from transferring profits from retained profits to the general reserve
account.

e. All assets on the balance sheet are measured on the same basis. FALSE – at acquisition
date, assets are recorded at their cost price. Subsequent to their acquisition different
measurement basis may be applied to various asset types. For example, entities have a

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 choice of measuring classes of property, plant and equipment at either cost or fair value.
Other assets such as agricultural assets are required to be measured at their net market value
at reporting date. Accounts receivables are measured at the amount of cash that is expected
to be received.

Question 17

The balance sheet for Au Yong Pty Ltd reveals cash on hand of $2000, accounts
receivable of $12 000, inventory measured at $15 000 and plant and equipment measured
at $30 000. The liabilities of the entity are: accounts payable $8000, a bank overdraft of
$10 000 and a loan of $60 000. Comment on the liquidity of the entity.

Liquidity refers to the ability of the entity to pay their debts as they fall due. Liquidity can be
assessed by comparing the entity’s current assets and current liabilities. The current assets of Au
Yong total $29 000 being: cash $2000, accounts receivable $12 000, and inventory $15 000.
The entity’s current liabilities are $18 000 being the accounts payable $8000 and bank overdraft
of $10 000. Although not explicitly stated, it is assumed that the loan is for a period exceeding
one year and therefore is not a current asset. As Au Yong’s current assets exceed their current
liabilities the entity would not appear to have a liquidity problem. This assumes that the
inventory is saleable, the cash can be recovered from the debtors and the entity is generating
sufficient cash flow to service its debt obligations. Given the entity’s stated liabilities exceed its
stated assets, the entity’s equity is negative. This suggests that the entity has accumulated losses.

Question 18

An entity has total assets measured at $170 000 on the balance sheet. The entity’s liabilities
total $100 000, of which $40 000 is a bank loan. What are the entity’s net assets? Comment
on the entity’s financing decision.

Net assets refer to an entity’s total assets less total liabilities. Given that the entity’s assets are
$170 000 and the total liabilities are $100 000, the entity’s net assets are:
Net Assets = Assets less Liabilities
Net Assets = $170 000 – $100 000
Net Assets = $70 000

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The entity is financing its assets with $100 000 of liabilities and $70 000 of equity. This means
that the entity is using more debt than equity to finance its assets. For every $1 of assets, the
entity has $0.59 of liabilities and $0.41 of equity. Relative to equity funding, interest-bearing
debt has to be serviced via regular interest payments and the entity would have to have
sufficient cash to meet these fixed interest payments.

Question 19

The Snags Software Company wants to increase its asset base by recognising the
databases that it has created as assets. Discuss whether this is permissible.

Databases are regarded as intangible assets and accounting rules applicable from 1 January 2005
to reporting entities specify that certain intangible assets that are internally generated (rather
than being purchased) cannot be recorded as assets on the balance sheet. Prior to 1 January
2005, Australian entities had discretion to record internally generated intangibles as assets. This
means that The Snags Software Company would not be able to increase its asset base by
recognising the databases that it has created.

While it can be argued that such assets satisfy the asset definition criteria, regulators’ concerns
are that being able to reliably measure such assets, when they do not trade in an active and
liquid market, is problematic. If Snags had acquired the databases as part of a business
acquisition, it could legitimately record them as intangible assets since they had been purchased.

Accounting for intangible assets is controversial and many Australian firms were opposed to
being disallowed the opportunity to recognise internally generated intangible assets as assets on
the balance sheet.

(Note: Show students an extract of a company report with derecognised identifiable intangibles
– Coca-Cola would be a good example given that it had to derecognise many millions of dollars
of intangible assets).

Note: it is interesting to explore students’ views as to the appropriateness of having different

accounting treatments for internally generated versus acquired intangible assets.

Question 20

Trotter Pty Ltd operates a horse riding business. The business has just been notified that
its annual insurance premium will increase from $5000 per annum to $15 000. The owners
decide not to renew their insurance but to self-insure. This involves setting aside a portion
of the profits each year to a provision for insurance account. The provision for insurance
is recognised as a liability account on the balance sheet. Referring to the definition and
recognition criteria for recognising liability, discuss the appropriateness of Trotter’s
accounting for self-insurance.

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When deciding the appropriateness of recognising an asset or liability on the balance sheet, it is
necessary to refer to the definition and recognition criteria in the Framework. Referring to the
Framework, a liability involves:
 an outflow from the entity of resources embodying economic benefits
 a present obligation to another entity
 arising from a past transaction or event.

The decision of the owners of Trotter Pty Ltd not to renew their insurance but to self- insure by
setting aside a portion of the profits each year (i.e. reduce retained profits) to a provision for
insurance (i.e. increase liabilities) would not satisfy the liability definition. As at reporting date
there is no present obligation to another entity as a past transaction (i.e. the insurable event) has
not occurred. A present obligation usually, although not necessarily, involves a legal obligation
and means that the entity has no option but to make the economic sacrifice. Reporting entities
are expected to apply the principles in the Framework and, assuming Trotter Pty Ltd is a
reporting entity, their current accounting treatment would be difficult to justify.

Question 21

Knowing that you have some accounting experience, a friend has sought your advice
regarding a business that he intends purchasing. The balance sheet for the business shows
total assets of $200 000 and liabilities of $75 000. The selling business has provided no
notes to accompany the balance sheet. On the basis of the information provided, your
friend believes the business is worth $125 000. Advise your friend as to the accuracy of his
assessment and what questions regarding the balance sheet he should ask the seller.

The carrying amount of the net assets of the entity is $125 000 (i.e. the $200 000 assets less the
$75 000 liabilities). However this does not mean that this is what the net assets of the entity are
worth. Considering the variety of measurement bases that can be applied to an entity’s assets
and liabilities and the possibility that a business may have valuable resources that are not
captured on the balance sheet (i.e. strong management), a balance sheet does not portray the
worth of the entity. To illustrate,  consider an entity that acquired some land at a cost of

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$200 000 five years ago. The entity can legitimately report the land on the balance sheet at its
historical cost (i.e. $200 000). This will not necessarily bear any resemblance to the current
value of the land. Assuming that real estate prices have increased, the land may currently be
valued at $500 000. Therefore carrying it at $200 000 on the balance sheet is not reflecting its
current value. As the balance sheet does not reflect the current value for all assets and liabilities,
valuing an entity based on the carrying amount of the net assets may be inappropriate. Usually,
it would be expected that the entity is worth more than the net assets reported on the balance
sheet.

This question highlights the importance of ascertaining things such as:

 the measurement bases applied to the various asset and liability classes;
 the depreciation method and assumptions used to calculate depreciation;
 the amount of inventory of hand ;
 the age of the debtors;
 the underlying profitability of the business;
 the cash generating capability of the business;
 an independent valuation of assets such as property, plant and equipment.

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Question 22

As an investor in the share market, you use the financial statements to assess the financial
condition of entities. Would you find it more useful to have items of property, plant and
equipment valued at historical cost or fair value? Why?

An investor requires information that is both relevant and reliable for their decision making.
Often it is necessary to trade-off the desirable characteristics of relevance and reliability. This is
evident when considering historical cost and fair value. Generally, the fair value of property,
plant and equipment (PPE) is more relevant to assess the financial position of the entity relative
to historical cost. Fair value is the price at which a willing, knowledgeable seller and buyer
would exchange an asset in an arms length transaction. Knowing the fair value of the PPE gives
the investor a better indication as to what the assets are worth in the market. However, without a
sale transaction to verify the fair value, subjectivity is introduced into the measurement process.
Thus, compared to historical cost that is more objective, fair value may not be as reliable.

To extend this question, other issues that could be raised include:

 the importance of recognition relative to disclosure;
 if items of PPE are measured at historical cost, would investors find it useful to have the
fair values disclosed?
 how could the investors assess the reliability of the fair value?

Question 23
Explain the following independently:
a.What information does the statement of cash flows provide?
b. Describe the three sections of the statement of cash flows?
c.Discuss the difference between the statement of cash flows and the income statement.
d. Outline some cash-flow warning signals.

Answer 23
a. What information does the statement of cash flows provide?
The statement of cash flows shows the actual cash received and paid by an entity and the
beginning and ending cash balances. This information provides a user with the ability to assess
the cash generation power of the business, whether it has the ability to service any debt and its
ability to pay investors a return on their investment. It also allows an assessment to be made
about future cash flows by assessing the business’ investment outflows in existing operations
and on growth opportunities.

b. Describe the three sections of the statement of cash flows?

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The three sections are:
 the cash from operating activities are the activities that related of the provision of goods
and services (the normal activities of the entity);
 the cash from investing activities are those activities that relate to the acquisition and/or
disposal of non-current assets (including property, plant and equipment, and other
productive assets) as well as investments (such as securities); and
 the cash from financing activities are those activities that change the size and/or
composition of the financial structure of the entity (including equity) and borrowings.

c.Discuss the difference between the statement of cash flows and the income statement.

The income statement and the statement of cash flows are both ‘flow’ accounts. The income
statement presents the accounting information based on accrual accounting (the underlying
transactions) while the statement of cash flows presents the accounting information based on the
actual inflows and outflows of cash.

d. Outline some cash-flow warning signals.

Some cash flow warning signals are:

 cash received less than cash paid

 operating ‘outflow’
 cash receipts from customers being less than cash payments to suppliers and employees
 cash from operating activities being lower then operating profit after tax
 proceeds of share capital being used to finance operating activities
 consistent inflows from investing activities
 proceeds from borrowings continually much greater than the repayment of borrowings.

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