UNSW Business School

School of Accounting

ACCT1511

Topic 4
Cash Flow Statement and Analysis
Student Handout

Contents:

1. Learning Objectives
2. Readings
3. Tutorial Prep Qs/PASS Qs list
4. Topic 4, part 1, lecture slides
5. Lecture workshop questions part 1
6. Topic 4, part 2, lecture slides
7. Lecture workshop questions part 2
8. Topic 4 – Tutorial questions

Website: http://moodle.telt.unsw.edu.au

business.unsw.edu.au

Last Updated 16 January 2017 CRICOS Code 00098G

 Introduction and Learning Objectives

At the end of this topic, you should be able to:

L01. Construct a Statement of Cash Flows using the direct method of calculating cash.
L02. Calculate cash using the indirect method and, in doing so, reconcile net profit with cash from
operations.
L03. Understand why cash flow information is important to financial statement users.
L04. Interpret the Statement of Cash Flows.

Introduced in 1992 in Australia, the Statement of Cash Flows is one of the key financial statements in
a company’s annual report. Unlike the Income Statement and Balance Sheet, that are based on accrual
accounting, the Statement of Cash Flows focuses on actual inflows and outflows of cash. We will be
doing two weeks of cash flow accounting. We will cover the following four concepts. First, what are cash
flow statements? Second, we will learn how to calculate cash flows using the “direct method”. Third, we
will reconcile cash flows and accounting profit using the “indirect method”. In 2007 Australian firms were
permitted to prepare the cash flows from operations in either the direct or indirect method. Fourth, we
will consider the decision usefulness of cash flow statements and accrual information.

Topic 4.1’s Lecture aims to develop an understanding of the nature and content of cash flow reporting.
The first part of the lecture will examine what information cash flow accounting provides. We will also
look at sample cash flow statements, with focus on the classification of total cash flow into operating,
investing and financing components. In the second-part of the lecture, we will learn how to construct a
cash flow statement from the information provided in assets, liabilities, owners’ equity, revenues and
expenses. The method that we will use to construct such cash flow statements is called the “direct
method”. The majority of Australian companies continue to report their cash flows from operations under
the direct method today.

In the first part of the lecture on Topic 4.2, we will continue with the Kurosawa Ltd. demonstration to
calculate cash flows using the indirect method of calculating cash flow from operations. Since 2007
Australian firms have been permitted to prepare their cash flows from operations in either the direct or
indirect method. The indirect method starts with the net profit figure and reconciles it to cash flows from
operations using accrual information. We will also analyse in this lecture the information that the cash
flow statements provide us with about the firm. We will examine some aspects of cash flow performance
measures including cash flow ratios and bankruptcy analysis.

You are required to download this Handout from Moodle in advance to use in the two weeks of
lectures. You will find that a paper copy the Handout will be particularly useful in completing the
preparation of the Statement of Cash Flows for Kurosawa Ltd in a step-by-step hands-on basis.

2
 Readings

TGC: Chapter 14:

• 14.1 to 14.3 (lecture part 4.1) and 14.4 to 14.6 (lecture part 4.2)

Tutorial Prep & PASS Qs

Tutorial PrepQs:

TGC:

PART 1: Ch 14 DQ 1,4,6, P: 14.1, 14.2, 14.3, 14.4, 14.9, 14.10, 14.15

PART 2: Ch 14 DQs 2, 3, 5, 7, 8, 9, 10, 11, P 14.6, 14.7, 14.8, 14.17

PASS Qs:

TGC Chapter 14:

• Practice Problem A (complete part 1 in week 7 and part 2 in week 8)

• Practice Problem B (week 8)
• Practice Problem C –the cash flow statement is to be prepared using the
direct method (in week 7) & note of reconciliation is prepared using the
indirect method (in week 8)

3
 PASS Q1 (week 7)

Prepare a Statement of Cash Flows for Knight Ltd. based on the Balance Sheets and
Income Statement below:

Knight Ltd. Comparative Balance Sheets for 2010 and 2009 ($'000s)
2010 2009
Current Assets c／b opening balance
Cash 91 20
Accounts Receivable 60 40
Inventory 90 80
Total Current Assets 241 140
Non-Current Assets
Plant 310 200
Accum. Depreciation (140) (40)
Total Non-Current Assets 170 160

Total Assets 411 300

Liabilities
Accounts Payable 40 60
Salaries Payable 6 10
Accrued Expenses 10 30
Debentures 90 25
Total Liabilities 146 125
Shareholders’ Equity
Share Capital 190 150
Retained Profits 75 25
Total Shareholders' Equity 265 175

Total Liabilities and Sh. Equity 411 300

Knight Ltd. Income Statement for year ended 30

June, 2010 ($'000s)

Sales 350
Less Expenses:
Cost of Goods Sold (100)
Salaries Expense (20)
Other expenses (180)
Net Profit 50

Additional information

1. Other expenses are tied to accrued expenses. Other expenses also include any depreciation
expense. (Hint: use the accumulated depreciation account to find the depreciation expense)

4
 PASS Q2: Adapted Problem 14.14 from Trotman, Gibbins & Carson 5th ed. (week 8)

From the following data for Tripp Ltd’s financial statements:

2012 2011
$000s $000s
Accounts receivable 240 265
Allowance for doubtful debts 15 12
Inventory 340 380
Salaries payable 80 50
Accounts payable 280 310
Interest payable 10 10
Interest tax payable 95 80

Additional information:

• All sales and purchases are on credit.

• There were no write-offs of accounts receivable during the period.
• Sales revenue totalled $880,000.
• Cost of goods sold was $620,000.
• Salaries expense was $70,000.
• Interest expense was $110,000.
• Income tax expense on the current period’s profit was $35,000.
• Depreciation expense was $4,000.
• Assume there were no other revenues or expenses.

Required:
(1) Calculate the Net Profit after tax.
(2) Calculate Cash flows from Operations using the indirect method.

5
 Topic 4.1

Learning Objectives
n Explain the contents of a statement of cash flows

n Distinguish between cash flow from operations, cash

ACCT1511: AFM1B flow from investing and cash flow from financing
Introduction to Cash n Calculate cash flow from operations, cash flow from
investing and cash flow from financing using direct
Flow Accounting method
n Prepare a statement of cash flows

1 2

A typical Annual Report contains…

Overview of Cash Flow Lectures
•Management Discussion & Analysis
•Structure of Board of directors
• PART 1: •Remuneration of directors, corporate governance

• Introduction to Cash Flow Accounting and Financial Statements

• Direct Method Income Balance Sheet Statement of Statement of
• assets changes in Cash Flows
• PART 2: Indirect Method and Statement • liabilities equity
• revenues • owners’
• expenses equity
• Decision Usefulness of Cash Flows
Notes to the Financial Statements Auditor’s Report

3 4

Where cash could include cash

equivalents

Understanding Cash Flows Cash Account and Cash Flows

Beginning Cash Cash Ending Cash
Cash + Inflows - Outflows = Cash
Balance Balance Beginning Cash Balance

Cash Inflows (+) Cash Outflows (-)

Shown on 30 Shown on 30 June 2011 Shown on 30
June 2010 Cash Flows Statement June 2011
column column
Balance Sheet Balance Sheet Ending Cash Balance

1
 Cash flows from
Statement of Cash Flows general operating
Statement of Cash Flows Cash from operating activities
activities of the
business
Cash inflows
Cash from operating activities Ø Primary activities of buying, selling, and
Cash inflows XX Cash outflows delivering goods or services and activities that
support the primary activities (eg.,
Cash outflows XX XX Cash from investing activities administrative)
Cash from investing activities Cash inflows Inflows:
Cash inflows XX • receipts from the sale of goods and
Cash outflows XX XX Cash outflows services
Cash from financing activities Cash from financing activities • interest received
Cash inflows XX • dividend received
Cash inflows
Cash outflows XX XX
Cash outflows Outflows:
Net cash flow XX
• purchasing inventories
Cash opening balance XX Net cash flow
• paying taxes
Cash closing balance XX Cash opening balance • paying utilities
• interest to lenders
Cash closing balance
7
8

Statement of Cash Flows Cash flows from buying Statement of Cash Flows Ø Owner investment or
and selling of non-current withdrawal, borrowings,
Cash from operating activities
assets Cash from operating activities repayments of borrowings noncurrent liability
Cash inflows
Cash outflows Ø Lending money and collecting
Cash inflows Outflows: loans
on the loans, investment in 不是主营业务导致的 Cash outflows •paying long-term debts
Cash from investing activities other companies (and Cash from investing activities •paying dividends
Cash inflows disinvestment), and buying and Cash inflows
selling property, plant and Inflows:
Cash outflows Cash outflows
equipment
Cash from financing activities Cash from financing activities •proceeds from issuing
Cash inflows Inflows: Cash inflows shares
•receipts from selling Cash outflows •borrowings from banks
Cash outflows
Net cash flow non-current assets Net cash flow Cash flows from
Cash opening balance
get fund from lenders
Cash opening balance Outflows: changing capital
Cash closing balance and shareholders
Cash closing balance •purchasing non-current structure of a business
9
assets
10

Which section of Cash Flows? Example 1: Accounts Receivable

Why Are Dividend Payments a Financing Cash Flow? • The opening balance of accounts receivable is 10,300
and the closing balance is 12,900. Sales during the year
• Dividend paid vs. dividends received会影响SE，放弃了这部分cash were equal to 120,600 and a total of 8,400 was written
off during the year.
Dr. Retained Profit (OE) 的使用权，算作finance • Find the cash collected from customers:
Cr. Cash (outflow) 但是收到的dividend算是operating cf
Dr. A/Rec 120,600
因为
Cr. Sales Revenue 120,600
Dividend payment changes the capital structure of a Dr. Allowance for Bad Debts 8,400
firm by reducing equity and therefore financing in nature Cr. A/Rec 8,400
Dr. Cash ??
Cr. A/Rec ??

11 12

2
 Example 1: Accounts Receivable Example 2: Accounts Payable
• The opening balance of accounts payable is 11,300 and
Accounts receivable the closing balance is 10,900. Purchases during the
o/b 10,300 year were equal to 80,600. No inventory was returned
Sales 120,600 BD written off 8,400 to suppliers and no discounts were earned.
Cash collection ? • Find the cash paid to suppliers:
c/b 12,900
130,900 130,900
Dr. Inventory 80,600
Cr. A/Pay 80,600
o/b 12,900

Dr. A/Pay ??
10,300 + 120,600 - 8,400 – cash received = 12,900
Cr. Cash ??
Cash received from customers = 109,600
13 14

Example 2: Accounts Payable

Accounts payable
ACCT1511: AFM1B
11,300 o/b
Cash paid
c/b
?
10,900
80,600 Purchases invt. The Direct Method
91,900 91,900 Cash Flow statement
10,900 o/b

11,300 + 80,600 – cash paid = 10,900

Cash paid to suppliers = 81,000
15 16

Kurosawa Ltd.
• Task:
• Prepare a Cash Flow Statement for Kurosawa Ltd.

Kurosawa Ltd. for 2010 based on the Balance Sheet and Income
Statement provided in the lecture notes.
• How to follow on:
(A lecture demonstration) • Working area for the accounts (see Lecture
Materials document)
• Spare paper for the transactions (and other notes)

17 18

3
 Direct Method: 2 Ways
Kurosawa Ltd.
• In T&G (and lecture notes), two ways are shown:
• Refer to your lecture notes • T-account reconstruction
• Formula
• You’re given three sets of
information: • Example of formula for Accounts receivable:
Opening balance
• Comparative balance sheets + Credit sales
• Income statement – Cash received from customers
– Bad debts written-off
• Additional information = Closing balance
19 20

Formula method – can be used instead of the T-accounts

Introduction to Kurosawa Ltd.

• To prepare a cash flow statement, you need to convert
accrual-based figures to a cash basis
Alternative
to • Start with operating activities è investing activities è
T-accounts financing activities

22

Receipts from Customers

• Cash from operating activities:
• Cash related to provision of goods & services
• Begin with the income statement
• Work through the income statement line
by line
• Start with “Sales” = $660
• Assume all sales are on credit
23 24

4
Receipts from Customers Receipts from Customers
Strategy: Reconstruct the Accounts receivable T-account to find cash collected • What is the journal entry to record credit sales?
from customers

Accounts receivable (1) Dr. Accounts receivable660

Cr. Sales 660
o/b 120
Sales xxx BD written off xxx
Cash collection xxx
c/b 160 • Balance sheet accounts affected?
xxx xxx • We want to determine what cash was collected…
but if there have been any actual bad debts written-
off then these would affect the a/c receivable
o/b 160 Find the balance
balancing item

25 26

Receipts from Customers Receipts from Customers

(2) Dr. Bad debts expense 20 Accounts receivable Actual BD
o/b 120 write-offs
Cr. Allowance for bad debts 20
(1) 660 13 (3)
Allowance for bad debts 607 (4) Cash collected
Sales from IS
Actual write-offs 15 o/b
20 (2)
160 c/b
BD
(3) 13 from IS
780 780
Find the
c/b 22
balancing item
35 35
o/b 160
Find the
balancing item 22 o/b
n The remaining difference between the DR and CR sides, not explained by
sales or write-offs is cash collected from customers:
(3) Dr. Allowance for bad debts 13
(4) Dr. Cash 607
Cr. Accounts receivable 13 Cr. Accounts receivable 607
27
28

Payments to Suppliers Payments to Suppliers

Inventory
2 steps: o/b 200
Purchases xxx COGS xxx • Cost of goods sold in the income statement
represents a reduction in the inventory account:
c/b 220
xxx xxx
(5) Dr. COGS 170
o/b 220 Cr. Inventory 170

Accounts payable
o/b 80 • Inventory is a balance sheet account so we draw
Cash paid xxx Purchases xxx up it’s T-account to find the missing figure of
purchases for the period
c/b 55
xxx xxx

55 o/b
29 30

5
Payments to Suppliers Payments to Suppliers
n Given these assumptions, the journal entry must
• Given we know the opening and closing balances be:
and we know the CR side adjustment is COGS (6) Dr. Inventory 190
(inventory used up) then the missing figure must be Cr. Accounts payable 190
purchases of inventory from suppliers
Inventory
• We assume that all purchases are on credit o/b 200
COGS from
IS
• Assume Accounts payable is used to record (6) 190 170 (5)
purchases of inventory only Purchases
220 c/b
390 390
Find the
balancing item o/b 220

31 32

Payments to Suppliers
Find the
balancing item Payments to Suppliers
• Unlike the calculation of cash received from Accounts payable
customers, our balancing item (purchases) does not 80 o/b
involve a cash flow. (7) 215 190 (6)
From the
Cash paid Inventories
• We need to next determine of the inventories c/b 55 A/c -
purchased – how much of them were paid? If they 270 270 purchases
were all on credit then…
55 o/b
• Preparing the Accounts payable account will give
n Accounts payable has decreased by $215.
us the missing figure of cash paid for inventories
n Given that we know all the other amounts in the T-account this missing
figure must be payments to suppliers of $215.

(7) Dr. Accounts payable 215

34
Cr. Cash 215
33

Insurance Paid Insurance Paid Prepaid insurance

o/b 10
Cash Insurance
• Next turn to Insurance expense in the income Paid for
(9) 65 45 (8)
Expense
statement. insurance from the IS
30 c/b
• This matches with Prepaid insurance in the balance 75 75
sheet. We are interested in the cash paid only not Find the
the expensing for the period. balancing item
o/b 30

(8) Dr. Insurance expense 45 (9) Dr. Prepaid insurance 65

Cr. Prepaid insurance 45 Cr. Cash 65

n This is cash paid for taking out additional

insurance.
35 36

6
 Depreciation Expense
Depreciation Expense
Depreciation – Buildings & Motor Veh. DR 60
• Depreciation expense is a non-cash item Accum. Depn – Buildings CR 30 (11)
• You may need to estimate the depreciation expense if you are given an Accum. Depn – Motor Vehicles CR 30 (12)
‘other expenses’ that includes depreciation – as you need to take it out
• This example gives you the depreciation expense as line item in the Income
statement To estimate Accum. Depn for equipment:
• If you needed to determine depreciation expense then this can be Closing $60 = Opening $130 - $60 Sold equip. accum.
performed in one of two ways: depreciation – $30 revalued + Depreciation expense ?
• (1) SHORT-CUT If there have been no sales or revaluation of an asset by taking the Depreciation expense = $20
difference between the ending and beginning balances of accumulated depreciation
• (2) LONG WAY - If there have been either sale or revaluation (or both) then you need to (16) Dr. Depreciation Expense - Equipment 20
determine depreciation using the T-account for accumulated depreciation Cr. Accum. depn. - Equipment 20

38

Depreciation Expense Other Expenses Paid

Accumulated depreciation - Equipment
Find the
balancing item 130 o/b Depreciation • Next turn to Other expenses in the income
(14) 60
expense statement. Some of the accrued expenses may
(15) 30 20 (16) have been paid off in the period.
Reductions
from
c/b 60
Sold equip. 150 150
&
Revalued equip • (17) Dr. Other expenses 90
60 o/b
(15) Dr. Accum. depn. – Equipment 30
Cr. Accrued expenses 90
Cr. Equipment 30

Dr. Cash 60
(13 & 14) Dr. Loss on sale of equipment 25
Dr. Accum. depn. - equipment 60
Cr. Equipment 145
39 40

Other Expenses Paid Interest Paid

Accrued expenses
• The balance sheet does not have an Interest
payable or Prepaid interest account.
Find the
balancing item 70 o/b • Thus, interest is not paid earlier (prepaid) or
(18) 65 90 (17) later (payable).
c/b 95
• This implies interest is paid when recognised.
160 160

95 o/b
(19) Dr. Interest expense 50
Cr. Cash 50
(18) Dr. Accrued expenses 65
Cr. Cash 65
n This is the cash paid for Interest expenses.

nThis is the cash paid for Other expenses.

41 42

7
Income Tax Paid Income Tax Paid Income tax payable

• From the info in the BS and IS of Kurosawa Ltd., Find the

50 o/b
balancing item
we can reconstruct the following journal entry: (21) 40 50 (20)
c/b 60
(20) Dr. Income tax expense 50 100 100
Cr. Income tax payable 50

60 o/b

(21) Dr. Income tax payable 40

Cr. Cash 40
n This is the cash paid for income tax.

44
43

Kurosawa Ltd.
Cash flows from Operations ($’000)
Receipts from customers 607
Payments to suppliers (215)
Insurance paid (65)
Other expenses paid
(65)
Interest paid (50)
Income tax paid
(40)
Net cash from operating activities 172
45 46

Cash from Investing Activities Land and Buildings

• Need to reconstruct accounts for: Info 1: Upward revaluation of land
• Land and buildings
• Equipment (22) Dr. Land and buildings 60
• Leased motor vehicles Cr. Revaluation surplus 60

• Goodwill has already been accounted for:

• no change in Goodwill account

47 48

8
 Land and buildings Equipment
o/b 600 • Info 2: Record the sale of equipment.
(22) 60
• Recall:
660 c/b Investing Cash Flow
660 660
(13 & 14)
Dr Cash 60
o/b 660
Dr Loss on sale of equipment 25
Dr Accum. depn. - Equipment 60
Cr Equipment 145

50

Equipment
• Info 4: Effect of the re-valuation
• Recall:
(15) Dr. Accum. depn. – Equipment
Cr. Equipment
(Refer to pp. 428-430 in textbook)
Equipment
• Equipment was re-valued, but we are not told
by how much (see info 4).
• Balancing Revaluation Surplus will reveal the
amount. Note that from:
30 • additional info 1, RR has already been
30 affected by the re-valuation of Land
• additional info 5, a bonus share issue was
paid from the RR - see next slide

51 52

Revaluation Surplus
Bonus Share Issue Revaluation Surplus
Revaluation reserve
Find the 80 o/b
balancing item (24) 40 60 (22)
20 (25)
(24) Dr. Revaluation surplus 40
120
Cr. Share capital 160 160
40
120 o/b

(25) Dr. Equipment 20

Cr. Revaluation surplus 20

53 54

9
 Equipment Find the
Equipment
balancing item o/b 420
• From additional info 3, Equipment was purchased (25) 20 145 (14)
out of Borrowings (26) 10 30 (15)
(27) 100
(26) Dr. Equipment 10 375 c/b
Cr. Borrowings 10 550 550

o/b 375

(27) Dr. Equipment 100

Cr. Cash 100

n This is the cash paid for acquiring

55
56
additional equipment.

Leased Motor Vehicles Cash from Investing Activities

Cash flow from Investing
($’000)
• What about Leased motor vehicles? Proceeds from sale of equipment 60
Payment for equipment (100)
• no change in Leased motor
vehicles Net cash used in investing activities
(40)

57 58

Cash from Financing Activities

• Need to reconstruct:
• Borrowings
• Revaluation surplus (DONE)
• General reserve
• Retained profits
• Share capital

59 60

10
Borrowings repaid Borrowings repaid
Borrowings
250 o/b
• From a previous slide, we had recorded this Find the (28) 50 10 (26)
entry: balancing item
c/b 210
260 260
(26) Dr. Equipment 10
210 o/b
Cr. Borrowings 10
(28) Dr. Borrowings 50
Cr. Cash 50

n This is the cash outlay for repayment of

62 Borrowings.
61

Lease Liability repayment Share Capital

• In a previous slide, we had recorded the bonus
share issue (see additional info 5):
(29) Dr. Lease liability 10
Cr. Cash 10
(24) Dr. Revaluation surplus 40
Cr. Share capital 40
• This is cash outlay for repayment of Lease liability.

63 64

Share Capital Retained Profits

Share Capital Recall from AFM 1A:
Find the 300 o/b
balancing item
40 (24)
38 (30) Profit Opening Balance Dividends
c/b 378
378 378 Retained Profits

378 o/b
(30) Dr. Cash 38 Transferred from Closing Balance Transferred to
Cr. Share capital 38 Reserves Reserves

n This is the cash proceeds from issuing shares.

65 66

11
 Retained Profits Retained Profits
• Close the Income summary account to Retained Recall from AFM 1A:
profits
Solve for
Profit Opening Balance Dividends
dividends
(32) Dr. Income summary 130
Cr. Retained profits 130
Retained Profits
Transfer to General Reserve
Transferred from Closing Balance Transferred
n General reserve has increased by $30 to
Reserves
Reserves
(33)Dr. Retained profits 30
Cr. General reserve 30
67
68

Retained Profits
Retained Earnings
155
215 o/b
Cash flow from Financing
Find the
(33) 30 130 (32) Cash flow from Financing ($’000)
balancing item
(34)
(34) 100
70
(35) 40 Proceeds from borrowing (50)
c/b 215
145 Lease liability repayment (10)
345
285 345
285 Proceeds from share issue 38
Dividends paid
215
145 o/b (100)
(34) Dr. Retained profits 100
Cr. Dividends payable 100 Net cash used in financing activities (122)
Which implies:

(35) Dr. Dividends payable 100

Cr. Cash 100
70
69

Kurosawa Ltd
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 2029

Cash flows from Operating

Receipts from customers 607
Payments to suppliers (215)
Insurance paid (65)
Other expenses paid (65)
Interest paid (50)
Income tax paid (40)
Net cash from operating activities 172
Cash from Investing Activities
Proceeds from sale of equipment 60
Payment for equipment (100)
Net cash used in investing activities (40)
Cash from Financing Activities
Proceeds from borrowing (50)
Lease liability repayment (10)
Proceeds from share issue 38
Dividends paid (100)
Net cash used in financing activities (122)
Net increase in cash held 10
Cash at the beginning of the finance year 20
71
Cash at the end of the financial year 30

12
 Next week we focus on:

Indirect method and

Cash flows analysis
73

13
 T04.1 Lecture Workshop Question

Kurosawa Ltd
Comparative Balance Sheets as at 30 June 2010
2010 2009
$000 $000
Current Assets
Cash 30 20
Accounts Receivable 160 120
operating Allowance for Doubtful Debt (22) (15)
Inventory 220 200
Prepaid Insurance 30 10
Total Current Assets 418 335
1、shortcut rules－no sales of no reliable
Non-Current Assets 2、long way－t account（有sales or revaluation的时候要用长期）
Goodwill 30 30
revaluation并且进行了买卖，受其他账户影响，所以无法直接通过起初期
Equipment 375 420
末确定现在cash flow价值，要用taccount来计算cash部分
investment Accumulated Depreciation Equipment (60) (130)
用short－cut，因为additional information里没有进行买卖revaluation，所以
Land & Buildings 可以直接用期末余额－期初余额，也就是short cut，不需要通过taccount去算660 600
Accumulated Depreciation Buildings (240) (210)
Leased Motor Vehicles short cut 230 230
Accumulated Depreciation Motor Vehicles (60) (30)
Total Non-Current Assets 935 910

Total Assets 1,353 1,245

Current Liabilities
Accounts Payable 55 80
operating Accrued Expenses 95 70
Income Tax Payable 60 50
Total Current Liabilities 210 200

Non-current Liabilities
Lease Liability 170 180
Borrowings 210 250
Total Non-Current Liability 380 430
financing
Total Liability 590 630
Shareholders’ Equity
Share Capital 378 300
Revaluation Surplus 120 80
General Reserve 50 20
Retained Profits 215 215
Total Shareholders’ Equity 763 615

Total Shareholders’ Equity and Liabilities 1,353 1,245

6
 Kurosawa Ltd
Income Statement for the Year Ended 30 June 2010 ($’000)

Sales 660
Loss from Sale of Equipment not cash，不用 (25)
635
Less:
operating Cost of Goods Sold (170) link to inventory
Insurance Expense (45) link to prepaid insurance，可计入费用的部分prepaid
Bad Debt Expense (20)
Other Expenses (90) link to accrued exp
Depreciation Expenses文本 (80) not cash 不用
Interest Expense (50) (455)
没有interest payable的分录，所以说
Profit before Tax 这里的利息是用cash付的
180
有时候包括折旧费用，由于
折旧费用不算cf，所以要加 Income Tax Expense (50)
回来 Net Profit 有tax payable，所以这里不确定是不是cahs付 130
的，要通过t账户算

Additional Information (Dollar amounts expressed in full units)

1. Land was revalued upwards during the year by $60,000

2. Equipment with an original cost of $145,000 and accumulated depreciation of
$60,000 was sold for $60,000.
3. In addition, some equipment to the value of $10,000 was acquired with the
issue of a long-term note. The amount payable has been included in Borrowings
on the balance sheet.
4. During the year, another item of equipment with an original cost of $120,000
and accumulated depreciation of $30,000 was revalued.
5. A Bonus share issue of $40,000 was declared out of Revaluation Surplus.
6. The interest expense includes interest on the lease liability of $15,000.
7. Dividends were paid during the year for cash.
8. Assume all sales were on credit and that all inventory was purchased on credit.
look at accounts receivable look at 应付账款
Required:

Perform the direct method to prepare the cash flow statement. Show all workings.

7
 Working Area

Accounts Receivable Allowance for Doubtful Debts

DR CR DR CR
o/b o/b
120 收回的坏账 15
(1) 13 (3)
收回的坏账 (3) (2)
本月增加的credit sales 影响AR 13
本期收回的应收账款 (4) 通过bad debt exp算出本期增
加的add－20
160
22
c/b c/b

Inventory Prepaid Insurance

DR CR DR CR
o/b 通过COGS确定卖出的存货 o/b
本期从prepaid转出转入费用的
(6) (5) (9)本期又支付的prepaid (8)

c/b c/b

14
dr cash 60
accu。dep 60
Goodwill loss on sale 25
DR CR cr equipment 145
15 调整至现价
o/b
dr accu。dep 30
cr equipment 30

25
dr equipment
c/b cr revaluation surplus

Equipment Accum. Dep'n - Equipment

DR CR DR CR
o/b 130 o/b
revaluation增加的 sales 60
(25) (14) (14)
机器价值
(26) borrow买进的机器 (15) (15) revalue30 (16)
(27) cash买进的
c/b c/b 60

8
 Land & Buildings Accum. Dep'n - Buildings
DR CR DR CR
o/b o/b
(22) (11)
(23)

c/b c/b

Leased Motor Vehicle Accum. Dep'n - Leased Moter Vehicle

DR CR DR CR
o/b o/b
(12)

c/b c/b

Accounts Payable Accrued Expenses

DR CR DR CR
o/b o/b
(7) 本期用cash已付的 本期用应付的 (6) (18) (17)

c/b c/b

Income Tax Payable

DR CR
o/b
(21) (20)

c/b

9
 Borrowings Lease Liability
DR CR DR CR
o/b o/b
(50) cash本期还的 borrowing buy equip (26) (29)
borrowing

c/b c/b

Share Capital Revaluation Surplus

DR CR DR CR
o/b o/b
文本 (24) (24) (22)
(30) (25)
本期share issue获得的cf

c/b c/b

General Reserve Retained Profits

DR CR DR CR
o/b o/b
(33) (33) (32)
(34)

c/b c/b

10
 Cash Flow Statement for the Year Ended 30 June 2010

Cash from Operating Activities

Net cash from Operating Activities

Cash from Investing Activities

ppe的买卖，类似于equipment的cf

Net cash used in Investing Activities

Cash from Financing Activities

lease liability repayment－from borrowings

Net cash used in Financing Activities

Net increase in cash held

Cash at the beginning of the financial year
Cash at the end of the financial year

11


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You can use this page for working.

12
 Topic 4.2 Learning objectives
• Understand the difference between cash and accrual measures of
performance
ACCT1511: AFM1B • Reconcile the difference between net profit and cash from operations

Cash Flow Statement - 文本

The Indirect Method

1
2

Assumptions for Cash Flows Direct vs. Indirect Method

• Throughout the cash flow lectures, unless told otherwise, assume: 企业将indirect 写在notes里
• Two methods of reporting CFO
• All sales are on credit (Accounts receivable) • Direct method:
• All inventory purchases are on credit where Accounts payable is used to n Report major classes of operating cash receipts
and payments to derive CFO
record purchases of inventory only
n Information obtained:
• Other expenses is tied to Accrued expenses n from the accounting records; OR
• All buying and selling of non-current assets are for cash n by linking items in the Income St to the accounts
in the Balance Sheets and reconstructing the T-
accounts
文本 n AASB 107

3 4

Direct vs. Indirect Method Converting net income to cash flow from operations
reverse them out
• Two methods of reporting CFO (cont.)
• Indirect method: Accrual method Cash method
nAdjust NPAT to derive CFO Revenue earned Non-cash expenses
nAASB 107 + (e.g. depreciation)
n disclose a note showing the reconciliation of – Expenses incurred
Decreases in current assets
net profit and cash from operations (CFO) + Increases in current liabilities
n Purpose of this note? To reconcile why net Net profit
profit and CFO are different Increases in current assets
– Decreases in current liabilities
Cash flow from
operations

1
 Indirect Method – A Demonstration
Indirect Method - Steps 间接法只跟operating activities 有关

Joe Ltd. Example (LN):

• To reconcile net profit and cash from operations
(CFO):
• Income Statement for year-end 2010 (in $’000)
1. Start with the Net profit after tax figure
2. Adjust for the effects of:
永远不会影响 cash flow，要将他减去 Sales 350
(a) Permanent differences Differences that will reverse over
(b) Timing differences time COGS (100)
文本 •accrual basis vs. cash basis
3. NPAT is now reconciled with CFO (i.e., recognizing revenues and Salaries expense (20)
expenses at times other than the
receipt or payment of cash) Other expenses (80)
Depreciation expenses (100)
Differences that will not reverse over time Net profit 50
•non-cash items that affect net profit (e.g., depreciation)
•gains/losses on disposal of non-current assets
7 8

JOE LTD.
Statement of Cash Flows
Joe Ltd. 30 June 2010 ($‘000)
• Balance sheet items (in $’000): clicad：资本增加 减
负债增加 加 Cash Flows from Operating Activities
Receipts from customers 340
Payments to suppliers and employees (270)
2010 2009 Net cash flow from operating activities 70
Accounts receivable 50 40 Cash Flows from Investing Activities
－10
Purchase of Plant (165)
Inventory 120 100 －20 Net cash flow from financing activities (165)
Accounts payable 60 90 －30 Cash Flows from Financing Activities
－5
Proceeds from debenture issue 75
Salaries payable 50 55 Proceeds from share issue 25
Accrued expenses 85 100 －15 Net cash flow from financing activities 100
Net increase in cash 5
Cash opening balance 20
Cash closing balance 25

9 10

Indirect Method – A Demonstration Difference between Net Profit & CFO

Income Statement Cash from Operations (CFO)
• Joe Ltd. Example:
Sales 350 Receipts from customers 340
• Net profit after tax = $50,000
COGS (100) Cash paid to suppliers (150)
• From the Statement of Cash Flows using the direct method, CFO = Salaries expense (20) Salaries paid (25)
$70,000 Other expenses (80) Other expenses paid (95)
• Why do they differ? Depreciation (100) N/A -

Net Profit 50 CFO 70

Net Profit is $20 lower than CFO. WHY??

11 12

2
 Timing differences
Difference between Net Profit & CFO
Adjusting for Permanent Differences
Income Statement Cash from Operations (CFO)

Sales 350 Receipts from customers 340

COGS (100) Cash paid to suppliers (150) Net Profit 50
Salaries expense (20) Salaries paid (25)
Other expenses (80) Other expenses paid (95) + Depreciation 100
Depreciation (100) N/A -

Net Profit 50 CFO 70

Net Cash from Operations 70

Permanent difference

13 14

Adjusting for Timing Differences Adjusting for Timing Differences

(1) Dr. Accounts receivable 350
Income Statement Cash from Operations (CFO) Cr. Sales revenue 350

Sales 350 Receipts from customers 340

COGS (100) Cash paid for supplies (150) (2) Dr. Cash 340
Salaries expense (20) Salaries paid (25) Cr. Accounts receivable 340
Other expenses (80) Other expenses paid (95)
Depreciation (100) N/A - Accounts receivable 表示的是两种方法的cash的区别

Net Profit 50 Net CFO 70

o/b 40
(1) 350 340 (2)

$350 $340 c/b 50

Increase in AR by 10
What explains this $10 difference?
16
15

Adjusting for Timing Differences Adjusting for Timing Differences

Net Profit 50
• é in Account receivable by $10
• Net profit (Accrual revenue) recognises $10 more than CFO + Depreciation 100
• To reconcile net profit with CFO
Changes in assets and liabilities:
• Subtract $10 from net profit
- increase in A/R (10)
In summary:
• é in AR Subtract from net profit

Net Cash from Operations 70

17 18

3
 Adjusting for Timing Differences +CLICAD means…
+: Current Liability Increases
+: Current Asset Decreases

If the change is not one of the above then…

§ Increases (decreases) in current assets are subtracted It must be a minus.
from (added to) net profit.
§ Increases (decreases) in current liabilities are added
to (subtracted from) net profit.
19

Adjusting for Timing Differences Reconciliation of Net Profit to CFO

• Which assets and liabilities should I look at? Net Profit 50

• Those that are used in calculating CFO in the Cash Flow Statement + Depreciation 100
• Rule of thumb:
Changes in assets and liabilities
• All current assets (except cash) - increase in Accounts receivable (10)
• All current liabilities (except dividends payable and short-term - increase in Inventory (20)
borrowings). WHY? - decrease in Accounts payable (30)
属于financing activities，但间接法只适用于operating activiities
- decrease in Salaries payable (5)
- decrease in Accrued expenses (15)
Net Cash from Operations 70

21 22

A Few Examples Kurosawa Ltd. example - Reconciliation

• Changes in… Subtract
• AR Profit after tax 130
Add 卖出时记的cogs，但实际没有cash流出，所以加回去
• Inventory
N/A 属于investing activities，不能用间接法
Permanent difference XXX
• Buildings unearned rev下降表示转入rev，
• Unearned Revenue Subtract 然而cash无流出不可算rev，所以减

• Dividends Payable N/A Timing difference

XXX
• Short-term Loan N/A
属于financing activities

Net Cash from Operations 172

23 24

4
Cash from Operating Activities
Receipt from customers 607
Payment to suppliers (215) Adjusting for Differences
Payment for insurance (65)
Payment for other expenses (65) Timing differences:
Payment for interest (50)
Payment for income tax (40) Changes in assets and liabilities:
Net cash flow from operating activities 172
- increase in Accounts receivable (40)
Cash from Investing Activities add属于credit nature（资产的反方），所以遵循liability的clicad
Disposal of equipment 60 + increase in Allowance for d. debts 7
Purchase of equipment (100) 说明花钱买了存货，不计net profit
- increase in Inventory (20)
中，但是cash flow out，所以减去
Net cash flow from investing activities (40) - increase in Prepaid insurance (20)
Cash from Financing Activities - decrease in Accounts payable (25)
Repayment of borrowings (50)
+ increase in Accrued expenses 25
Repayment of lease liability (10)
Proceeds from share issue 38 + increase in Income tax payable 10
Payment of dividends (100) Total timing differences (63)
Net cash flow from financing activities (122)
Net Cash Inflow 10
Cash opening balance 20
Cash closing balance 30

25 26

Adjusting for Differences Reconciliation: Kurosawa Ltd.

Permanent differences: Profit after tax 130

Permanent difference 105

+ Depreciation expense - Buildings 30
- Motor vehicles 30
(63)
- Equipment 20 Timing difference
+ Loss from sale of equipment gain on sale subtract
loss on sale add
25
Total permanent differences 105 Net Cash from Operations 172

(to be continued ...)

27 28

David Jones Ltd 2010 Annual Report

大部分企业用direct method，然后在notes中用indirect列示
David Jones Ltd 2010 Annual Report, Notes

Direct
Method

Indirect method in the

Notes

5
 Woodside Petroleum Limited 2011 Annual Report

us直接用indirect method，所以不需要再在notes中列出
Indirect Method: A Summary
• What are being reconciled?
• Net Profit and Cash Flow from Operations
• Is the reconciliation mandatory?
• Required by AASB 107
• As a NOTE to the Statement of Cash Flow
• Differences between NP and CFO due to?
• Permanent differences and timing differences
• Use of formula +CLICAD
• For timing differences

32

Indirect Method: A Summary Topic 4.2 (part 2)

• Use of the Direct method:

• To prepare the Statement of Cash Flows ACCT1511: AFM1B
• Report cash inflows and outflows

• Use of the Indirect method:

Decision Usefulness of
• To prepare the Note to the Statement of Cash Flows Cash Flows
• Report adjustments to net profit to arrive at CFO (reconciliation)

33 34

Learning objectives Clarification of Direct Method vs. Indirect Method

Australia United States International
• Why cash flow information is important?
Accounting standards AASB 107 FASB 95 IAS 7
• Measuring financial flexibility
Reporting cash flows Permits both Permits both Permits both direct
• Cash flow patterns and bankruptcy risk from operations direct and direct and and indirect
indirect indirect method
method method

Practice Majority tend to Majority tend to Mixed

report using report using
CFO in the CFO in the
DIRECT INDIRECT
method method

35 36

6
International treatment
• One area where there can be substantial differences
between IFRS and GAAP relates to the classification
of interest, dividends, and taxes. The following table
indicates the differences between the two approaches.
US
Looking to the Future - hypothetical
Presently, the FASB and the IASB are involved in a joint
project of convergence.
One interesting approach, revealed in a published proposal
from that project is that in the future:
• the income statement and balance sheet could adopt
headings similar to those of the statement of cash flows.

• that is, the income statement and statement of financial

position would be broken into operating, investing, and
financing sections.

37

Cash from Operating Activities Speed Buy Ltd.

Receipt from customers 607 Cash Flow Statement for the Year Ended 31 December 2005
Payment to suppliers (215) Cash flows from operating activities:
Payment for insurance (65) Net profit after tax $86,400
Payment for other expenses (65) Add: Depreciation $31,000
Payment for interest (50) Deduct: Gain on sale of investments $(85,000)
strip away accruals
Payment for income tax (40)
Add: Decrease in accounts receivable $11,500
Net cash flow from operating activities 172
Deduct: Increase in inventory $(12,000)
Cash from Investing Activities Deduct: Increase in prepaid expenses $(15,000)
Disposal of equipment 60 Deduct: Decrease in accounts payable $(13,000)
Purchase of equipment (100) Net cash flow from operating activities $3,900
Direct Method
Net cash flow from investing activities (40)
Cash from Financing Activities Cash flows from investing activities:
Cash received from investments sold $130,000 Indirect Method
Repayment of borrowings (50)
Cash paid for purchase of store equipment $(51,000)
Repayment of lease liability (10) Net cash flow from investing activities 79,000
Proceeds from share issue 38
Payment of dividends (100) Cash flows from financing activities:
Net cash flow from financing activities (122) Cash paid for dividends $(40,000)
Net Cash Inflow 10 Net cash flow used for financing activities (40,000)
Cash opening balance 20
Increase in cash $42,900
Cash closing balance 30
Cash at beginning of the year $27,500
Cash at end of the year $70,400
40

Would you Invest in this Company? Would you Invest in this Company?
80
70 Would you invest in Hooker Corp?
60 • A ‘premier’ Australian real estate development
$M (AUD)

50 company
40 Profit • Collapsed in July 1989
30
• Banks (WBC, CBA, SBNSW, Citibank, First Fidelity,
20 First Chicago) were owed more than $400m
10
0
79 80 81 82 83 84 85 86 87 88
Year (1979 - 1988)
41 42

7
 Hooker Corp: Net Profit & CFO
Net Profit
100

0
79 80 81 82 83 84 85 86 87 88
$M

-100

CFO
-200

-300
Year (1979 - 1988) 1993澳大利亚有了cash flow statements
Source: Flanagan and Whittred (1992) Hooker Corporation: A Cash For Cash Flow Reporting, Australian Accounting Review
43

cf 来自于operating cf是最健康的
大量来自于finance（bank loan share capital）有破产风险
positive cf in investing activities时不健康的，说明企业一旦卖掉自己的的
Why is Cash Flow Information Important and To Whom?
Five Important Questions
固资，就相当于卖掉整个企业。所以企业应该多购买固资也就是cash flow流出

• Where is the cash flow coming from (source) or where is • Assess ability of firm to:
it going (use), and why (purpose)?
1. Generate future cash flows investors most interested in it

• How much is the cash inflow or outflow?

• Is the cash flow recurring?
2. Continue meeting its financial obligations creditors and lenders最在意
本期cash outflow，使得下一期拥有positive operating cf是健康的
• When will the cash flow occur?
• Will the cash flow affect some other cash flows?
3. Pay future dividends shareholders最在意

• Source: King, T.E., V.C. Lembke & J.H. Smith.

(2001). Financial Accounting. (2nd ed.). John
Wiley & Sons, p. 73
45 46

How to Analyze the Statement of Cash Flows? 1. Relating the Financial Statements
• E.g., Collection of Accounts Receivable
1. Relate the Cash Flow Statement to the Balance
Sheet and Income Statement ̶ If balance sheet shows:
n Accounts Receivable
2. Examine the cash flows from operations (CFO)
and total net cash flows ̶ And income statement shows:
n Sales Revenue steady
3. Examine the relationship between cash flows from
operating, investing and financing activities ̶ Should check cash flow statement to see:
n What is happening to Cash from Customers?
4. Calculate cash flow ratios

47 48

8
 1. Relating the Financial Statements 1. Relating the Financial Statements
• E.g., Payment of Accounts Payable • If the company is improving its management of
̶ If balance sheet shows: inventory and debtor collection, then:
slow down paying back our suppliers
存货越少越好 n Inventory and Accounts Payable 是一个warning sign 企业可能 go bad • Inventory and Accounts Receivable should be (BS)
这种情况下suppliers 供应商会马上停止供应

̶ Should check both income statement and cash • Sales Revenue should be close to Cash from
flow statement: Customers (IS and CFS)

n Are they straining to keep up inventory levels, • COGS should be close to Cash Paid to Suppliers (IS
or are they struggling to pay suppliers? and CFS)

49 50

Hooker Corp: NP & CFO

2. Examining CFO and Total Cash Flows
Net Profit
• Examine cash flows from operations: 100
• A company that has negative CFO over an
extended period is in trouble. Why?
0
• Recall: Hooker Corp. 79 80 81 82 83 84 85 86 87 88
$M

-100

CFO
-200

-300
Year (1979 - 1988)
51 52

2. Examining CFO and Total Cash Flows 3. Relating Operating, Investing &
Financing Cash Flows
• What if the company has positive CFO?
• Examining the relationship between cash flows from operating,
• Should examine how well cash is managed: investing and financing activities can also indicate the maturity of a
• Paying off debt (financing CF) business
• Paying dividends (financing CF) • Life cycle of firms
• Buying more non-current assets (investing CF)
• Buying securities (investing CF)

53 54

9
Life Cycle of Firms Life Cycle of Firms
• Start-up/Inception / growth • Maturity/Stability
• young firms, new start-ups, seek capital to invest in • ceases to invest in new projects, only maintains current
projects, often not generating large amounts of operating capacity, repays financing, uses revolving credit facilities,
cash flows generates large returns from earlier investments, generates
large amounts of free cash flows

Operating Investing Financing Operating Investing Financing

CF CF CF CF CF CF
Inception/growth - /Low - + Maturity/stability High 0 0/-

55 56

Life Cycle of Firms Cash Flow Patterns of Firms

• Decline
Operating Investing Financing
• starts to lose profitability, tends to sell projects and not to CF CF CF
gain new financing
文本
Inception/Growth -/Low - +

Operating Investing Financing

CF CF CF Stability High 0 0/-
Decline Low + -
Decline Low + -

57 58

Cash Flow & Life Cycle of Firms 4. Calculate Cash Flow Ratios
$
Free cash
quiz会考！！！！
Operating flow
Financing
cash flow cash flow
Income • Free cash flow = CFO – Capital expenditure
• (maintenance)

•
Inception Growth Maturity Decline
0 Time
A measure of financial slack
Investing cash
flow

59
60

10
 Financial Flexibility 4. Calculate Cash Flow Ratios
• A company's management must to take into account the need for to invest
at a base level (i.e. capital expenditure) in new property, plant and • Cash flow ratios:
equipment, in order to just maintain a company's level of operations. • Solvency & liquidity
• It is difficult to measure capital expenditure - a company must understand
the balance between maintaining current operations versus investment for nOperating cash flow ratio
expansion. = CFO / Current liabilities
• If a company can cover its capital expenditure with the cash flows from nCash current debt coverage ratio
operations then any excess will indicate that the company is financially
flexible - i.e. has free cash flows to invest in growth projects. = (CFO – Cash dividends) / Current debt

62

4. Calculate Cash Flow Ratios Identifying Risk of Bankruptcy

• Cash flow ratios:
• Foster and Ward (1997) Sep 1997. Vol. 67,
• Viability as a going-concern Iss. 9, p. 60-61 article in The CPA Journal
nCapital expenditure ratio
• What did the authors suggest as the relationship
= CFO / Capital expenditures between cash flows and bankruptcy?
nCash flow to total debt ratio • Contrast cash flow patterns for healthy firms (Figure
1) vs. bankrupt firms (Figure 2)
= CFO / Total debt

63 64

Cash Flow Patterns for Healthy Firms Cash Flow Patterns for Bankruptcy Firms

CFO
CFF
positive heathy trend
CFF
cfo总是negative：unheathy
Foster and Ward CFO Foster and Ward
(1997) (1997)

CFI
smaller investing activities CFI
一开始investing太多，因为cfo是负数，所以无法偿付，unheathy

65 66

11
 T04.2 Lecture Workshop Question

Question 1, Mid-session Exam 2006s2 (modified) 10 marks

The following financial information relates to AFM Ltd for the financial year ending 30th June 2006.

AFM Ltd
Comparative Balance Sheets

30/6/2006 30/6/2005
000’s 000’s
Assets
Current assets
Cash $ 193 $ 275
Accounts receivable 632 357
Allowance for doubtful debts (31) (15)
Inventories 504 512
Prepaid insurance 9 11

Non-current assets
Land 295 245
Buildings 460 350
Acc. depreciation - buildings (193) (170)
Equipment 270 285
Acc. depreciation - equipment (144) (148)
$1,995 $1,702

Liabilities & Shareholders’ Equity

Current liabilities
Accounts payable $ 365 $ 377
Wages payable 31 21
Interest payable 10 -
Income tax payable 124 137

Non-current liabilities
Borrowings - 60
Long-term bonds payable 240 -

Shareholders’ equity
Share capital 320 275
Revaluation surplus 50 45
General reserve 129 129
Retained profits 633 570
$1,995 $1,702

13
 Because of a catastrophic computer systems crash, some of accounting records relating to the Income
Statement and the Cash Flow Statement for the year ending 30 June 2006 were destroyed. The IT
officer, however, was able to recover the following information for the period ending 30 June 2006:

000’s
Receipts from customers $1,275
Payments to suppliers 940
Payments for insurance 8
Payments for wages 182
Payments for interest on borrowings 5
Payments for income tax 152
Payments for dividends 153
Proceeds from disposal of equipment 63
Operating profit after tax net profit 221

You were also able to retrieve the following information for 2006 after talking to various divisional
managers:

1. Land was revalued upwards during the year by $50,000.

2. Equipment with an original cost of $65,000 and accumulated depreciation of $45,000 was sold
for cash. net profit是减去了本期的dep exp，而这个exp需要t账户才能得出，所以不是b／s的简单加减
3. A bonus share issue of $45,000 was declared out of the Revaluation Surplus.
4. Bad debts of $10,000 were written off during the year.

14
 Q1 Continued

Required:

Prepare the reconciliation of profit after tax to operating cash flows for AFM Ltd.

AFM Ltd
Reconciliation Note
30 June 2006

DO NOT WRITE OUTSIDE THE BOX

15
 Tutorial Questions – topic 4

Question 1 - Final Exam – Semester 2, 2007

An Income Statement and a comparative Balance Sheet for Darby Ltd are as follows:

Darby Ltd
Comparative Balance Sheet
As at 30 June 2006 and 2005
2006 2005
$’000 $’000
Cash 229 66
Accounts receivable 145 128
Allowance for doubtful debts (16) (12)
Inventory 175 190
Long-term investments 214 169
Land 172 149
Buildings 186 225
Accumulated depreciation—buildings (75) (81)
Equipment 437 437
Accumulated depreciation—equipment (214) (149)
Total assets $ 1,253 $ 1,122

Accounts payable $ 87 $ 51
Accrued expenses 27 11
Income tax payable 15 23
Short-term loan 9 20
Mortgage debenture 75 0
Bonds payable 109 259
Share capital 491 420
Revaluation surplus 32 17
General reserve 78 29
Retained profits 330 292
Total liabilities & shareholders’ equity $ 1,253 $ 1,122

16
 Darby Ltd.
Income Statement
For Year Ended 30 June 2006
Sales $ 1,520,000
Cost of goods sold (1,110,000)
Gross profit $ 410,000
Expenses:
Bad debt expense $ (15,000)
Insurance expense (9,000)
Other expenses (198,000)
Interest expense (25,000)
Loss on disposal of land (18,000)
(265,000)
$ 145,000
Other income:
Gain on sale of buildings $ 31,000
Dividends received 5,000
$ 36,000
Profit before income tax $ 181,000
Income tax payable (67,000)
Net profit $ 114,000

The following additional information during the year was obtained from an examination of the ledger:

• Buildings with original cost of $89,000 and accumulated depreciation of $43,000 were sold.
• A parcel of land with an original cost of $60,000 was disposed of.
• Another parcel of land was revalued upward.
• A bonus share issue of $15,000 was declared out of Revaluation Surplus.

17
 WORKINGS:

Accounts Receivable Allowance for Doubtful Debts

DR CR DR CR

o/b o/b

c/b c/b

Accounts Payable Inventory

DR CR DR CR

o/b o/b

c/b c/b

Acc. Depreciation - Buildings Acc. Depreciation - Equipment

DR CR DR CR

o/b o/b

c/b c/b

Accrued Expenses Income Tax Payable

DR CR DR CR

o/b o/b

c/b c/b

18
 Land Buildings

DR CR DR CR

o/b o/b

c/b c/b

Revaluation Surplus Investments

DR CR DR CR

o/b o/b

c/b c/b

Mortgage debenture Share Capital

DR CR DR CR

o/b o/b

c/b c/b

19
 Short term Loan Bonds Payable

DR CR DR CR

o/b o/b

c/b c/b

Retained Profits General Reserve

DR CR DR CR

o/b o/b

c/b c/b

CASH FLOW TEMPLATE NEXT PAGE

Note: there will not be templates in the Final Exam

20
 Darby Ltd.
Cash Flow statement
For Year Ended 30 June 2006

Cash flows from Operations

Cash flows from Investing

Cash flows from Financing

Net Cash Flow

Cash Opening Balance
Cash Closing Balance

DO NOT WRITE OUTSIDE THE BOX

21
 Q2: Using the indirect method prepare the reconciliation of Net Profit for Cash flows from
Operations for Darby Ltd

Darby Ltd
Reconciliation Note

DO NOT WRITE OUTSIDE THE BOX

22
 Q3: Final Exam 2015s2 (2 marks)

The following diagram depicts a typical pattern of cash flows and income for a firm over its lifecycle.

$
4

1 2
3

0 Time

Required:
Which line in the above graph best represents investing cash flows over the firm’s lifecycle? Provide
a reason for your answer. (2 marks)












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 Q4: PAST EXAM, SEMESTER 2, 2010 QUESTION 1: CASH FLOW STATEMENT (11 marks)

The following information relates to Blackwolf Ltd.:

Blackwolf Ltd.
Comparative Balance Sheet
As At 30 June 2010 and 2009
2010 2009
$ $
Cash 25,000 19,000
Accounts receivable 176,000 82,000
Inventory 117,000 64,000
Buildings 31,000 51,000
Acc. depreciation - buildings (15,000) (15,000)
Equipment 30,000 55,000
Acc. depreciation - equipment (5,000) (16,000)
Total assets 359,000 240,000

Accounts payable 107,000 62,000

Accrued expenses 5,000 6,000
Interest payable 5,000 2,000
Income tax payable 10,000 4,000
Short-term loan 3,000 5,000
Share capital 98,000 88,000
Retained profits 131,000 73,000
Total liabilities & shareholders' equity 359,000 240,000

Additional information during the year:

• ALL sales and expenses are on credit.
• A building with original cost of $20,000 and accumulated depreciation of $5,000 was sold
cash for a price of $20,000.
• A piece of equipment with an original cost of $25,000 and accumulated depreciation of
$15,000 was sold cash for a price of $5,000.
• Blackwolf Ltd had a net profit of $67,000 this year.

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 Required:
(a) Using the indirect method prepare the reconciliation of Net Profit for Cash flows from
Operations (10 marks).

Blackwolf Ltd
Reconciliation Note

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(c) Indicate which Blackwolf’s stage of life-cycle and provide evidence you use to support the life-cycle
phase you indicated (1 mark)






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