Tutorial 11

DQ14
Refer to adidas 2014 consolidated statement of cash flows. Explain why each of
the following adjustments is made to income
(a) Depreciation, amortisation and impairment loss
(b) Interest income
(c) Interest Expense
(d) Losses on sale of property, plant and equipment
a) Depreciation, amortization and impairment loss are expenses accounts (reduce profit) and
credited to non-cash accounts. These entries have no cash effect. Therefore, they need to be
added back to income to eliminate the deductions.
b) Under IFRS, dividend received and interest received, as well as interest paid, must be separately
shown. Since interest income is added to derive the profit, adjustments has to be made by
subtracting from the income.
c) Under IFRS, dividend received and interest received, as well as interest paid, must be separately
shown. Since interest expense is deducted to derive the profit, adjustments has to be made by
adding the amount to profit so that interest paid can be shown separately.
d) Losses on sale of property, plant and equipment arises when the disposal amount is less than the
net book value of the property, plant and equipment. The cash received/paid is not part of the
operating activities but is part of investing activities (They are sale proceeds of the long term
assets and sale proceeds is already included under investing activities.) No operating cash flow
effect occurs. However, because the non-operating loss is a deduction in computing profit, we
need to add it back to profit when computing the cash flow from operating activities. This helps
to prevent double counting.

QS 13-3
Use the following information to determine this companys cash flows from operating
activities using indirect method.
LING COMPANY
Income statement
For Year Ended December 31,2015
Sales

$2,060,000

Cost of goods sold

1,326,400

Gross Profit

733,600

Operating expenses
Depreciation expense

144,000

Other expenses

486,000

Profit before tax

630,000
103,000

Income tax expense

30,800

Net Profit

$72,800
LING COMPANY
Selected Statement of Financial Position Information
December 31, 2015 and 2014
2015

2014

Cash

$338,600

107,200

Accounts Receivable

100,000

128,000

Inventory

240,000

216,400

121,600

102,800

8,200

8,800

Current assets

Current Liabilities
Accounts Payable
Income tax payable

Answer:
LING COMPANY
Statement of Cash Flows
For Year Ended December 31, 2015
Cash flows from operating activities
Profit before tax

103,600

Adjustments to reconcile profit to net cash from

operating activities
Depreciation expense

144,000

Decrease in accounts receivable

28,000

Increase in inventory

(23,600)

Increase in accounts payable

18,800

167,200

Cash generated from operations

270,800

Income tax paid

(31,400)

Net cash from operating activities

239,400

Depreciation expense is a non cash item which has been subtracted to get the net profit
previously. Thus, we need to add it back.
*Increase in current assets is deducted while increase in current liabilities is added*
Current assets (deduct if increase)
Change in accounts receivable: $100,000-$128,000 = $28,000 decrease
Change in inventory: $240,000- $216,400= $23,600 increase
Current liability(add if increase)
Change in accounts payable: $102,800-$121,600 = $18,800 increase
Income Tax Payable
Beginning balance
Income Tax Paid

$31 400

Income Tax expense

Ending Balance

$8,200
30,800
$8,800

P 13-1B
Kite Corporation, a merchandiser, recently completed its calendar-year 2015 operations.
For the year,

(1)
(2)
(3)
(4)
(5)

all sales are credit sales,

all credits to Accounts Receivable reflect cash receipts from customers,
all purchases of inventory are on credit,
all debits to Accounts Payable reflect cash payments for inventory, and
Other Expenses are paid in advance and are initially debited to Prepaid Expenses.
The companys statements of financial position and income statement follow.
KITE CORPORATION
Income statement
For Year Ended December 31,2015
Sales

$1,083,000

Cost of goods sold

585,000

Gross Profit

498,000

Operating expenses
Depreciation expense

$36,600

Other expenses

392,850

Total Operating Expenses

429,450
68,550

Other gains (losses)

Loss on sale of equipment

2,100

Profit before tax

66,450

Income Tax Expense

9,450

Net profit

$57,000

KITE CORPORATION
Selected Statement of Financial Position Information
December 31, 2015 and 2014
2015
Assets

2014

Cash

$136,500

$71,550

74,100

90,750

454,500

490,200

17,100

19,200

278,250

216,000

Accum. depreciation- Equipment

(108,750)

(93,000)

Total assets

$851,700

$794,700

117,450

123,450

Short-term notes payable

17,250

11,250

Long-term notes payable

112,500

82,500

Share capital - Ordinary, $5 par value

465,000

450,000

18,000

121,500

127,500

$851,700

$794,700

Accounts Receivable
Merchandise Inventory
Prepaid Expenses
Equipment

Liabilities and Equity

Accounts Payable

Share premium- Ordinary

Retained Earnings
Total Liabilities and equity

Additional information on Year 2015 Transactions

C. Purchased equipment costing $113,250 by paying $38,250 cash and signing a long
term note payable for the balance

Required
1.
Prepare a complete statement of cash flows; report its operating activities
using the indirect method. Disclose any non cash investing and financing activities in
a note.
KITE CORPORATION
Statement of Cash Flows
For Year Ended December 31, 2015
Cash flows from operating activities
Profit before tax

$66,450

Adjustments to reconcile profit to net cash from

operating activities
Depreciation expense
Loss on sale of equipment

36,600
2,100

Decrease in merchandise inventory

35,700

Decrease in accounts receivable

16,650

Decrease in accounts payable

(6,000)

Decrease in prepaid expense

2,100

87,150

Cash generated from operations

153,600

Income tax paid

(9,450)

Net cash from operating activities

144,150

Cash flows from investing activities

Cash received from sale of equipment

$28,050

Cash paid for equipment

(38,250)

Net cash used in investing activities

(10,200)

Cash flows from financing activities

Cash borrowed on short term notes
Cash paid on long-term note
Cash received from issuing share
Cash paid for dividends
Net cash used in financing activities

$6,000
(45,000)
33,000
(63,000)
(69,000)

Net increase in cash

64,950

Cash balance at beginning of the year

71,550

Cash balance at the end of the year

136,500

Note: Purchased equipment costing 113,250 by paying $ 38,250 cash and signing a long
term note of $75 000

Workings:
Cash paid for equipment = $38 250 (Under investing activities)
Equipment
Dec 31,2014
Purchase

216 000
113 250

Dec 31,2015

278 250

Sale

51 000
Cost of disposed equipment
= ($216 000 + $113 250) - $278 250
= $51 000

Accumulated Depreciation-Equipment
Sale

20 850

Accumulated depreciation of disposed equipment

= ($93 000 + $36 600) - $108 750
= $20 850

Dr Cash
Dr Accumulated depreciation-equipment
Dr Loss on sale of equipment
Cr Equipment

Dec 31,2014
Depreciation expense
Dec 31,2015

$28 050
20 850
2 100

93 000
36 600
108 750

Cash received from sale of equipment

(Under investing activities)
51 000

Loss on sale of equipment

(Under operating activities)

Decrease in accounts receivable = $90 750 - $74 100

= $16 650 (Under operating activities)
Decrease in merchandise inventory = $490 200 - $454 500
= $35 700 (Under operating activities)
Decrease in prepaid expenses = $19 200 - $17 100
= $2 100 (Under operating activities)
Decrease in accounts payable = $123 450 - $117 450
= $6 000 (Under operating activities)
Cash borrowed on short-term note = $17 250 - $11 250
= $6 000 (Under financing activities)
Long-term notes payable
Cash paid on long-term note
= ($82 500 + $75 000) - $112 500
= $45 000 (Under financing activities)
Payment

$45 000

Dec 31, 2014

Equipment

$82 500
75 000

Amount of note payable issued for

purchase of equipment
= $113 250 - $38 250
= $75 000
Dec 31, 2015

$112 500

Cash received from issuing shares = ($465 000 - $450 000) + $18 000
= $33 000 (Under financing activities)
Retained Earnings
Cash paid for dividends
= ($127 500 + $57 000) - $121 500
= $63 000 (Under financing activities)
Dividends

$63 000

Dec 31, 2014

Net Profit

$127 500
57 000

Dec 31, 2015

$121 500

2. Analyse and discuss the statement of cash flows prepared in part 1, giving special
attention to the wisdom of the cash dividend payment
Kite Corporation's dividend payments of $63,000 represents 111% [(63 000/57 000) * 100%] of
the $57,000 net income for the year, which seems a bit high. However, operating activities
provide a net cash inflow of $144,150.
Therefore, although companies usually pay dividends that are less than net income, the
analysis of cash flows indicates no strong reason to question the amount of the current
dividend. Indeed, the liquidity position of the company did not deteriorate as a result of its cash
dividend
Further analysis reveals that investing activities used a modest $10,200 and financing activities
used $69 000. This resulted in a $64,950 increase in the company's cash balance for the year, a
91% increase.

Additional Question
Prepare a complete statement of cash flows; report its operating activities using the
direct method.
KITE CORPORATION
Statement of Cash Flows
For Year Ended December 31, 2015
Cash flows from operating activities
Cash received from customers

$1,099,650

Cash paid for merchandise inventory

(555,300)

Cash paid for other operating expenses

(390,750)

Income tax paid

(9,450)

Net cash from operating activities

$144,150

Cash flows from investing activities

Cash received from sale of equipment

$28,050

Cash paid for equipment

(38,250)

Net cash used in investing activities

(10,200)

Cash flows from financing activities

Cash borrowed on short term notes
Cash paid on long-term note
Cash received from issuing share
Cash paid for dividends
Net cash used in financing activities

$6,000
(45,000)
33,000
(63,000)
(69,000)

Net increase in cash

64,950

Cash balance at beginning of the year

71,550

Cash balance at the end of the year

Workings:

$136,500

Accounts receivable
Beginning Bal.
Sales

$90,750
1,083,000 Collections

Ending Bal.

$1,099,650

Cash received from customers

= ($90,750 + $1,083,00) - $74,100
= $1,099,650

$74,100

Merchandise Inventory
Beginning Bal.

$490,200

Purchases
= $454,500 + $585,000 - $490,200
= $549,300
Purchases
Ending Bal.

COGS

$585,000

549,300
$454,500
Accounts payable
Beginning Bal.

Payments for inventory

$555,300

Cash paid for merchandise

inventory
= ($123,450 + $549,300) - $117,450
= $555,300

Purchases
Ending Bal.

$123,450
549,300
$117,450

Prepaid Expenses
Beginning Bal.

$19,200

Cash payments

390,750 Other operating expenses

Ending Bal.

$17,100

Cash paid for other operating expenses

= $392,850 - ($19,200 - $17,100)
= $390,750

$392,850