Solutions 05

Subject Code: BUS103

Subject Name: Accounting for Managers
Topic: Chapter 7: Statement of Cash-flows

Comprehension questions

7.4 What is meant by the term ‘cash’?

According to AASB 107 Statement of cash flows, the definition of cash includes cash on hand and cash
equivalents. Cash on hand is all the notes and coins held, and deposits at financial institutions. Cash
Equivalents are highly liquid investments and borrowings that are part of cash management and not subject
to a term facility. Highly liquid investments means those that have short terms to maturity, are readily
converted to cash at the investors’ option, and have a low risk of changing in value

7.5 What is the purpose of a statement of cash flows?

The purpose of the statement of cash flows is to provide users of financial statements with information about
the cash flows of the entity. It shows the cash receipts and payments, and the net effect. The statement of
cash flows can help a user evaluate the entity’s potential to generate cash flows, meet its financial
commitments, fund its activities and obtain finance.

7.6 Which of the following are not disclosed in a statement of cash flows?
a. Cash outflows from operating activities
b. The cash on hand at the beginning of the reporting period
c. The amount of depreciation for a reporting period
d. The payment of a long-term debt

The correct response is c. The amount of depreciation for a reporting period is not disclosed in the statement
of cash flows.

7.7 Outline the format of a statement of cash flows, identifying each of the activity classifications.
The format of a statement of cash flows requires cash flows from operating activities, investing activities and
financing activities to be separately identified with gross inflows, outflows and the net effect shown for each
activity. Also required is the overall net flow for the period, the beginning and ending balances, and
comparative figures from the previous year.

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7.9 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.

Exercises
7.15 The following T-account shows the transactions in the cash account during the month.

Required
Prepare a statement of cash flows based on the cash account.
Statement of Cash Flows
Cash flows from operating activities
Receipts from customers 156 000
Payments to suppliers and employees (130 000)
Dividends received 3 000
Interest paid (3 000)
Income taxes paid (5 000)
Net cash provided from operating activities 21 000
Cash from Investing Activities
Payments for property, plant and equipment --
Proceeds from sale of property, plant and equipment 16 000
Net cash from Investing Activities 16 000
Cash from financing activities
Proceeds from issue shares —
Proceeds from borrowings 30 000
Repayment of borrowings —
Distributions Paid (10 000)
Net cash flow from financing activities 20 000

Net increase/decrease in cash for the year 57 000

Cash at beginning of the financial year 10 000
Cash at the end of the financial year 67 000

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7.16 Three sisters formed a partnership, SkinDeep, to sell skin care products made from organic
ingredients. They have been operating for one year. The bank balance at the end of the year is
$69 000. A summary of business transactions is as follows:

Required
Prepare a statement of cash flows.

Statement of Cash Flows

Cash flows from operating activities
Receipts from customers 217 000
Payments to suppliers and employees (103 000)
Interest received 1 000
Interest paid (8 000)
Net cash provided from operating activities 107 000
Cash from Investing Activities
Payments for property, plant and equipment (26 000)
Proceeds from sale of property, plant and equipment -----
Net cash from Investing Activities (26 000)
Cash from financing activities
Proceeds from equity 21 000
Proceeds from borrowings 21 000
Repayment of borrowings —
Distributions Paid (50 000)
Net cash flow from financing activities (8 000)
Net increase/decrease in cash for the year 73 000
Cash at beginning of the financial year (4 000)
Cash at the end of the financial year 69 000

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7.17 In what section of the statement of cash flows (operating, investing, financing or
reconciliation) would each of the following items appear?
a. Purchase of property, plant and equipment
b. Proceeds from a bank loan
c. Collections from customers
d. Gain/loss from the sale of equipment
e. Cash proceeds from the sale of equipment
f. Dividends to shareholders
g. Proceeds from an equity raising
h. Retirement of debt
i. Change in accounts receivable
j. Profit.
Solution
a. Purchase of property, plant and equipment investing
b. Proceeds from a bank loan financing
c. Collections from customers operating
d. Gain/loss from the sale of equipment reconciliation
e. Cash proceeds from the sale of equipment investing
f. Dividends to shareholders financing
g. Proceeds from an equity raising financing
h. Retirement of debt financing
i. Change in accounts receivable reconciliation
j. Profit reconciliation

7.18 Consider the following transactions:

i. Credit purchases, $10 000
ii. Cash paid to suppliers, $12 000
iii. Credit sales, $16 000
iv. Cost of sales, $12 000
v. Cash payments received on accounts receivable, $16 000
vi. Salaries accrued, $4000
vii. Machine purchased, $2000 cash
viii. Depreciation expense, $500
ix. Dividends declared, $950
x. Rent received, $1000
xi. Declared dividends paid, $950
xii. Lease paid, $1500.
Required
a. Indicate the effect on the balance sheet categories only in the following format.

b. State, for the transactions affecting cash, whether they relate to an operating, investing or
financing activity.

a. Indicate the effect on balance sheet categories in the following format.

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Transaction Cash Other Non- Current Non-current Owners’
Number Current current liabilitie liabilities equity
assets assets s
1 +$10 000 +$10 000
2 -$12 000 +$12 000
3 +16 000 +16 000
4 -12 000 -12 000
5 +16 000 -$16 000
6 +$4 000 -$4 000
7 -$2 000 +$2 000
8 -$500 -$500
9 +$950 -$950
10 +$1 000 +$1 000
11 -$950 -$950
12 -$1 500 -$1 500

b. State, for the transactions affecting cash, whether they relate to an operating, investing or
financing activity.

i. Credit purchases, $10 000 non-cash

ii. Cash paid to suppliers, $12 000 operating
iii. Credit sales, $16 000 non-cash
iv. Cost of sales, $12 000 non-cash
v. Cash payments received on accounts receivable, $16 000 operating
vi. Salaries accrued, $4000 non-cash
vii. Machine purchased, $2000 cash investing
viii. Depreciation expense, $500 non-cash
ix. Dividends declared, $950 non-cash
x. Rent received, $1000 operating
xi. Dividends paid, $300 financing
xii. Lease paid, $1500 operating

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 7.19 Compute the cash from operations in each of the following cases (A and B). All sales and
purchases are made on credit.

A B

Sales $50 000 $70 000

Less COS 30 000 $76 000
Gross Margin 20 000 $(6 000)
Less Operating Expenses 9 000 11 400
Operating Profit $11 000 $(17 400)
Add back:
depreciation $6 000 $10 000
(Increase)/decrease in current assets:
Inventories (10 000) 20 000
Accounts receivable (7 000) (2 000)
Prepayments 1 000 2 000
Increase/(decrease) in current liabilities:
Accounts Payable (30 000) 9 000
Other Current Liabilities 16 000 (20 000)

Cash from operating activities $(13 000) $1 600

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7.20 The cash flows below were extracted from the accounts of Ryan Smith, a music shop owner.

Prepare a statement of cash flows using the direct method.

Ryan Smith’s Music Shop

Statement of Cash Flows

Cash flows from operating activities

Receipts from customers 273 000
Payments to suppliers and employees (257 400)
Interest Received 1 560
Interest paid (780)
Income taxes paid (3 120)
Net cash provided from operating activities 13 260
Cash from Investing Activities
Payments for property, plant and equipment (23 400)
Proceeds from sale of property, plant and equipment 390 000
Net cash from Investing Activities 366 600
Cash from financing activities
Proceeds from issue shares -
Proceeds from borrowings -
Repayment of borrowings (390 000)
Distributions Paid -
Net cash flow from financing activities (390 000)
Net increase/decrease in cash for the year (10 140)
Cash at beginning of the financial year 7 800
Cash at the end of the financial year ($2 340)

Payments to suppliers and employees= payment to employees $78000+ Expenses paid $23400 + payments
to suppliers $156000= $257,400 total payments.

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7.21 Ben Burton Pty Ltd has the following items in its accounts:

a. Bank interest paid

b. Loan repaid
c. Cash purchase of fixed asset
d. Sale of goods on credit
e. Taxation payable
f. Receipts from share capital issue
g. Cash from loan
h. Dividends payable
i. Purchase of goods for cash

State whether each of the above items would appear in the statement for cash flows and, if
so, under which classification it would appear (investing, operating or financing).

a. Bank interest paid operating

b. Loan repaid financing
c. Cash purchase of fixed asset investing
d. Sale of goods on credit non-cash item
e. Taxation payable non-cash item
f. Receipts from share capital issue financing
g. Cash from loan financing
h. Dividends payable non-cash item
i. Purchase of goods for cash operating

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7.22 Paul and Peter Partnership provides specialist financial planning services to its clients.
The following information relates to the year just ended.

Required
Using the direct method, prepare the operating activities section of the statement of cash flows
for the period ending 30 June 2017.

Cash flows from operating activities

Receipts from customers* 143 000
Payments to suppliers and employees# (107 000)
Net cash provided from operating activities $36 000
*Cash from customers = opening accounts receivable + sales – closing accounts receivable
= 43,000 + 156,000 – 56,000
= 143,000
#Cash paid to suppliers = opening accounts payable + purchases – closing accounts payable
= 37,000 + (105,000-3,000) – 34,000
= 105,000
Cash paid to other suppliers = other expenses +/- increase (decrease) in prepayments +/- decrease
(increase) in accruals
= 0 + 2,000 +/- 0
= 2000
Cash paid to suppliers = $105,000 + $2,000 = $107,000

7.23 ‘We made a profit of $66 000, so why is there only $6000 in the bank?’, exclaimed Mr Beattie,
the owner of the local fish takeaway store. Explain to Mr Beattie the relationship between
profit and cash flow, to help him understand the reason why there is such a big difference
between profit and cash in the bank.
The recording of transactions to determine a profit or loss for a period is based on accrual accounting. That
is a matching of revenues and expenses. Cash flow is concerned with when receipts and payments are made
and not the underlying transaction.
Mr. Beattie should be advised to examine the cash tied up in his working capital (i.e. his current assets and
liabilities). He may find that he has a significant amount of inventory that he has paid for, but that is just sitting
there. He may also have a healthy sales figure but may not have collected debts from customers, thus
increasing cash tied up in accounts receivable. He should also examine the timing of when he pays his own
suppliers (accounts payable). Apart from working capital, Mr. Beattie may have bought a new piece of
equipment or paid out a debt. An examination of a statement of cash flows will answer these sorts of questions
for Mr. Beattie.

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Problems
7.35 Preparing a statement of cash flows
Presented below is information for Jill Winter, a sole trader for the year ended 31 December
2017. Use the information to prepare a statement of cash flows.

Jill Winter
Statement of cash flows
For the year ended 31 December 2017

$
Cash from operating activities
Receipts from customers 369 700
Payments to suppliers and employees (291 300)
Dividends received —
Interest received 8 960
Interest paid (5 600)
GST paid (22 400)
Net cash from operating activities 59 360

Cash from investing activities

Payments for property, plant and equipment (56 000)
Proceeds from sale of property, plant and equipment 50 420
Net cash from investing activities (5 580)

Cash from financing activities

Proceeds from issue shares —
Proceeds from borrowings 33 600
Repayment of borrowings —
Distributions Paid (70 580)
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Net cash from financing activities (36 980)
Net increase/decrease in cash for the year 16 800
Cash at the beginning of the financial year 51 540
Cash of the end of the financial year 68 340

7.36 Preparing a statement of cash flows

Presented below is information for the Hale Partnership for the year ended 31 December
2016. Use the information to prepare a statement of cash flows.

HALE Partnership
Statement of cash flows
For the year ended 31 December 2016

$
Cash flows from operating activities
Receipts from customers 279 247
Payments to suppliers and employees (220 013)
Dividends received —
Interest received 6 770
Interest paid (4 231)
GST paid (16 924)
Net cash provided from operating activities 44 849

Cash from Investing Activities

Payments for property, plant and equipment (42 310)
Proceeds from sale of property, plant and equipment 38 079
Net cash from Investing Activities (4 231)

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Cash from financing activities
Proceeds from issue shares —
Proceeds from borrowings 25 386
Repayment of borrowings —
Distributions Paid (53 311)
Net cash flow from financing activities (27 925)

Net increase/decrease in cash for the year 12 693

Cash at beginning of the financial year 38 925
Cash of the end of the financial year 51 618

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