--
::
How do we
explain the
change in the
cash balance?
Assets
Current assets:
Cash
SMART TOUCH LEARNING LTD
Balance sheet
as at 30 June 2016
I
Liabilities
II
$ 4 800
2 600
Accou nts receivable
Invento ry
30 500
Supp li es
600
2 000
Prepa id rent
Accounts payable
!
900
Interest payable
100
Unearned service revenue
I
Non-cu rrent assets:
$18 000
Bu il d ing
300
Total liabilities
Tota l non-current assets
200
20 000
70 100
Shareholders' equity
17 700
Share capital
48 000
Less: Accumulated depreciation-build ing
400
50 100
Non-current liabilities:
Loans payable
Less: Accumu lated depreciation- furn iture
$ 48 700
Salary payable
Total current liabilities
$ 40 500
Total current assets
Furniture
-
Current liabilities:
47 800
Retained earnings
65 500
Total shareholders' equity
30 000
5 900
35 900
Total liabilities and shareholders'
Tota l assets
$106 000
equity
$106 000
..
Learning objectives
Ir 1 1 Describe the purposes of the cash flow
statement
I r1 2 Report cash flows from operating,
investing and financing activities
r rJ 3 Differentiate between the direct and
indirect methods for reporting cash
flows
I (J 4 Prepare a cash flow statement by the
direct method
ICJ 5 Calculate the cash effects of a wide
variety of business transactions
lfJ 6 Prepare a cash flow statement by the
indirect method
IJJ 7 Summarise supplementary disclosures
required by accounting standards
1ri 8 Analyse cash flows for decision
making
l.(J
9 Use the worksheet approach to prepare
the cash flow statement (Appendix 16A)
WHY IS CASH SO IMPORTANT? You can probably answer that question
from you r own experience: it takes cash to pay the bills. You have some
revenue, you have expenses, and these events create cash receipts and
payments.
Businesses, including Smart Touch Learning Ltd and Greg's Tunes Ltd,
work the same way. Profit is a good thing, but Smart Touch and Greg's both
need enough cash to pay the bi ll s and run their operations. In 2014,
Woolworths Ltd's operations provided more t han $3.4billion of cash. Having
plenty of cash helps Woolworths fight off competition from Coles and others.
Auditors are now say ing that the fina ncial statements of a company are
okay only if the company can continue as a going concern. That 'if' depends
largely on the company's cash flows, w hich are the topic of this chapter.
The cash flow st atement, a required fi nancial statement, reports where
cash came from and how the com pa ny spent it. This chapter is devoted to
analysing cash flows because und erst anding cash flows is vital for makin g
good bus iness decisions. We will see how to prepare the cash flow
statement, which is the basis for the analys is, and how to interpret cash
flow informati on.
I
677
CHAPTER 16 THE CASH FLOW STATEMENT
16.1 INTRODUCTION: THE CASH FLOW STATEMENT
A balance sheet reports financial position, and balance sheets for two periods show whether cash
increased or decreased. For example, Smart Touch's comparative balance sheet reported the
following:
Cash
2016
2015
Increase
(Decrease)
$22000
$42000
$(20000)
LO
Describe the
purposes of the cash
flow statement
-----
You can see that Smart Touch's cash decreased by $20000 during 2016. But the balance sheet
doesn't show why cash decreased. We need the cash flow statement for that. The cash flow
statement reports cash flows-cash receipts and cash payments. It:
shows where cash came from (receipts) and how cash was spent (payments)
reports why cash increased or decreased during the period
covers a span of time and is dated the same as the income statement-'for the year ended
30 June 2016', for example.
The statement of cash flows explains why profit as reported on the income statement doesn 't
equal the change in the cash balance. In essence, the cash flow statement is the communicating
link between the accrua°l-based income statement and the cash reported on the balance sheet.
Exhibit 16-1 illustrates the relationships between the balance sheet, the income statement and the
cash flow statement.
The cash flow statement serves several purposes:
1 Predicts future cash flows . Past cash receipts and payments are good predictors of future
cash flows.
1t
2 Evaluates management decisions. If managers make wise investment decisions, the business
prospers. If they make unwise investments, the business suffers. The cash flow statement reports
cash flows from operations and also the investments the company is making. Investors and
creditors use cash flow information to evaluate managers' decisions.
3 Predicts ability to make debt payments to lenders and to pay dividends to shareholders. Lenders
want to collect interest and principal on their loans. Shareholders want dividends on their
investments. The cash flow statement helps predict whether the business can make these
payments.
30 June 2015
(a point in time)
For the year ended
30 June 2016
(a period of time)
30 June 2016
(a point in time)
Income
statement
Balance
sheet
Statement of
changes in
shareholders'
equity
Cash flow
statement
EXHIBIT 16-1
Timing of the
financial
statements
Balance
sheet
678
CHAPTER 16 THE CASH FLOW STATEMENT
Cash and cash equivalents
On financial statements, cash has a broader meaning than just cash on hand and cash in the
bank. It includes cash equivalents, which are short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject to an insignificant risk of
changes in value (AASB 107)-for example, investments in government bills. Businesses
invest extra cash rather than let it sit idle. Here, cash refers to cash and cash equivalents.
16.2 OPERATING, INVESTINCi AND FINANCING ACTIVITIES
LO 2
Report cash flows
from operating,
investing and
financing activities
A business engages in three basic categories of business activities:
operating activities
investing activities, and
financing activities.
Operations are the most important activity. Investing activities are generally more important
than financing activities because what a company invests in is more important than how it finances
the acquisition.
The cash flow statement in Exhibit 16-2 shows how cash receipts and payments are divided into
operating activities, investing activities and financing activities for Smart Touch Learning Ltd. The
exhibit shows that each set of activities includes both cash inflows (receipts) and cash outflows
(payments). Outflows are shown in parentheses to indicate that payments are subtracted. Each section
of the statement reports net cash provided (net cash receipt) or net cash used (net cash payment).
Operating activities
Operating activities create revenues and expenses. The cash flow statement reports the cash
impacts of the revenues and expenses. The largest cash inflow from operations is the collection
of cash from customers. Smaller inflows are receipts of interest and dividends. The operating
outflows include cash payments to suppliers and employees, and cash payments for interest
and taxes. Exhibit 16-2 shows that Smart Touch's net cash from operating activities is $68 000.
A large positive cash flow from a business's operations is a good sign. In the long run,
operations must be the main source of a business's cash. Investors and lenders are well aware
of this business truth.
Operating activities are related to the transactions that make up profit.
Cash flows from operating activities require analysis of each revenue and expense on the
income statement, along with the related current asset or current liability from the balance sheet.
Investing activities
Investing activities are the buying and selling of the long-term assets the business uses. A purchase
or sale of land, a building or equipment is an investing activity, as is the purchase or sale of a share
or debenture investment. Making a loan is an investing activity because the loan creates a receivable
for the lender. Collecting on the loan is also reported as an investing activity. The acquisition of
non-current assets dominates Smart Touch Learning Ltd's investing activities, which produce net
cash used of $255 000.
Investing activities relate to the long-term asset accounts.
Investments in non-current assets lay the foundation for future operations. A company that
invests in plant and equipment appears stronger than one that is selling off its non-current assets.
CHAPTER 16 THE CASH FLOW STATEMENT
679
SMART TOUCH LEARNING LTD
EXHIBIT 16-2
Cash flow statement
Cash flow
statement
for the year ended 30 June 2016
Increase (decrease) in cash and cash equivalents
(amounts in thousands)
Cash flows from operating activities:
Receipts:
II
Collections from customers
$ 271
Interest received on bills receivable
10
Dividends received on investments in shares
9
290
Total cash receipts
Payments:
To suppliers
$ (133)
To employees
(58)
For interest
(16)
For income tax
(1 5)
(222)
Total cash payments
'I
Net cash provided by operating activities
68
Cash flows from investing activities:
Acquisition of non-current assets
Loan to another company
1
j
Proceeds from sale of non-current assets
$(306)
(11)
62
(255)
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issue of ordinary shares
I'
Proceeds from issue of long-term debt
$ 101
94
Payment of long-term debt
(11)
Payment of dividends
(17)
Net cash provided by financing activities
I
Net decrease in cash
Cash balance, 30 June 2015
Cash balance, 30 June 2016
167
$ (20)
11
42
$ 22
Why? The latter company may be selling revenue-producing assets to pay the bills. Most companies
need long-term assets to operate.
Financing activities
Financing activities obtain the cash needed to launch and sustain the business. Financing activities
include issuing shares, borrowing money by issuing bills and debentures, and paying dividends to
the shareholders.
Payments to creditors include principal payments only. The payment of interest is an operating
activity. The financing activities of Smart Touch Learning Ltd brought in net cash receipts of
$167 000. One thing to watch in financing activities is whether the business is borrowing heavily.
Excessive borrowing has been the downfall of many companies.
Financing activities relate to the non-current liability accounts
and the owners' equity accounts.
680
CHAPTER 16 THE CASH FLOW STATEMENT
EXHIBIT 16-3
Cash receipts and payments on the cash flow statement
,
- - -1
''
Collections from customers
Receipts of interest and dividends
on investments
r;::- -- ---
r
1
I Other operating payments
~1
~--5-a-le_o_f-in_v_e_st_m_e_n-ts_t_h_a_t-ar_e_n_o_t~-l-l►r--ir:;-~;si~ II
cash equivalents
Receipts on loans receivable
Issuing shares
Borrowing money
j
activities
-----
J Payments of interest and income tax
I
Sale of non-current assets
Payments to suppliers
----,
I Payments to employees
Operating
activities
Other operating receipts
Cash payments
I Acquisition of non-current assets
i Purchase of investments that are not
i--...,_,.[
cash equivalents
·---------------! Making loans
I Payment of dividends
; Payment of principal amounts of debts
Overall, Smart Touch's cash decreased by $20000 during 2016. The company began the year
with cash of $42 000 and ended with $22 000. Each category of activities includes both cash
receipts and cash payments, as shown in Exhibit 16-3. The exhibit lists the more common cash
receipts and payments that appear on the cash flow statement.
Interest and dividends as operating activities
You may be puzzled by the listing of cash receipts of interest and dividends as operating activities.
After all, these cash receipts result from investing activities. Interest comes from investments in
loans, and dividends come from investments in shares.
Equally puzzling is listing the payment of interest as part of operations. Interest expense results
from borrowing money-a financing activity. Why do most companies adopt this practice? Because
it affects net profit. Interest revenue and dividend revenue increase net profit, and interest expense
decreases profit. Therefore, cash receipts of interest and dividends and cash payments of interest
are reported as operating activities on the cash flow statement.
In contrast, dividend payments are not operating activities. Why? Because they don ' t enter
into the calculation of profit. Dividend payments are financing activities on the cash flow
statement because they go to the entity's shareholders who finance the business. See the first
financing activity in Exhibit 16-3.
AASB 107 requires cash flows to be classified in a consistent manner over time. It is recognised
that certain items may be classified as operating cash flows by some companies and as financing
cash flows by other companies. So that meaningful comparisons can be made over time, AASB
107 requires consistent classification of cash flows over time.
CHAPTER 16 THE CASH FLOW STATEMENT
681
16.3 FORMAT OF THE CASH FLOW STATEMENT
There are two formats for reporting cash flows from operating activities. The direct method, illustrated
in Exhibit 16-2, lists cash receipts from specific operating activities and cash payments for each major
operating activity. It reports where cash came from and how it was spent on operating activities.
Companies' accounting systems are designed for accrual accounting, and that makes it easy to
calculate cash flows from operating activities by a shortcut method. The indirect method starts
with profit and reconciles to cash flows from operating activities. Exhibit 16-4 gives an overview
of the process of converting from accrual-basis profit to the cash basis for the cash flow statement.
Differentiate
between the direct
and indirect methods
for reporting cash
flows
EXHIBIT 16-4
Revenues
(
LO
Converting from
the accrual basis
to the cash basis
for the cash flow
statement
(indirect method)
Expenses
~_ _A_c_cr_u_a_l_-b_a_s_is_ a_cc_o_u_n_t_i_n_g_~I
I~ _ _ _C
_a_s_h_-b_a_s_i_s_a_c_co_u
_ n_ti_n~g_ ______,
The direct method is easier to understand and it provides better information for decisions. By
learning how to calculate the cash flow amounts for the direct method, you will be learning
something far more important: how to determine the cash effects of business transactions.
AASB 107 allows companies to use either the direct method or the indirect method. If the
direct method is used, AASB 107 requires disclosure in a note showing the reconciliation of cash
flows from operating activities to profit. This disclosure uses a format similar to the operating
activities section of the cash flow statement as prepared using the indirect method.
The two basic ways of presenting the cash flow statement--direct and indirect-arrive at all the
same subtotals and the same change in cash for the period. They differ only in the manner of reporting
operating activities. The following table summarises the differences between these approaches for
calculating cash flows from operating activities. (All dollar amounts are assumed for the illustration.)
Indirect method
Direct method
Collections from customers
$900
Profit
$300
Adjustments:
Deductions:
Payments to suppliers, etc.
(500)
Net cash provided by operating
activities
$400
Depreciation, etc.
Net cash provided by operating
activities
100
$400
16.4 PREPARING THE CASH FLOW STATEMENT
. BY THE DIRECT METHOD
Let's see how to prepare the cash flow statement (direct method) illustrated in Exhibit 16-2. Suppose
that Smart Touch Learning Ltd has assembled the summaiy of 2016 transactions shown in Exhibit 16-5.
These transactions give data for both the income statement and the cash flow statement. Some
transactions affect one statement, some the other. Sales, for example, are reported on the income
statement, but cash collections appeai· on the cash flow statement. Other transactions, such as the cash
receipt of dividend revenue, affect both. The cash flow statement reports only those transactions with
cash effects (those with an asterisk in Exhibit 16-5).
L0 4
Prepare a cash flow
statement by the
direct method
682
CHAPTER 16 THE CASH FLOW STATEMENT
OPERATING ACTIVITIES:
EXHIBIT 16-5
*2
3
*4
*5
6
Summary of
Smart Touch
Learning Ltd's
transactions for
2016
7
*8
9
*10
11
12
*13
*14
Sales on credit, $284 000
Collections from customers, $271 000
Interest revenue on bills receivable, $12 000
Collection of interest receivable, $1 O 000
Cash receipt of dividend revenue on investments in shares, $9 000
Cost of sales, $150 000
Purchases of inventory on credit, $147 000
Payments to suppliers, $133 000
Salary and wage expense, $56 000
Payments of salaries and wages, $58 000
Depreciation expenses, $18 000
Other operating expense, $17 000
Interest expense and payments, $16 000
Income tax expense and payments, $15 000
INVESTING ACTIVITIES:
* 15
* 16
*17
Cash payments to acquire non-current assets, $306 000
Loan to another company, $11 000
Proceeds from sale of non-current assets, $62 000, including $8 000 gain
FINANCING ACTIVITIES:
* 18
*19
*20
*21
Proceeds from issue of ordinary shares, $101 000
Proceeds from issue of long-term bill payable, $94 000
Payment of long-term bill payable, $11 000
Declaration and payment of cash dividends, $17 000
*Indicates a cash flow transaction to be reported on the cash flow statement.
1
2
3
To prepare the cash flow statement, follow three steps:
Identify the activities that increased or decreased cash-those items with asterisks in Exhibit 16-5.
Classify each cash increase and each cash decrease as an operating activity, an investing activity
or a financing activity.
Identify the cash effect of each transaction.
Cash flows from operating activities
Operating cash flows are listed first because they are the most important source of cash for most
businesses. The failure of operations to generate the bulk of cash inflows for an extended period
will signal trouble for a company. Exhibit 16-2 shows that Smart Touch is sound : operating
activities provided the most cash receipts, $290000.
Cash collections from customers Cash sales bring in cash immediately, credit sales later
when cash is collected. 'Collections from customers' in Exhibit 16-2 include both cash sales and
collections on account, $271000.
Cash receipts of interest Interest revenue is earned on bills receivable. As the clock ticks,
interest revenue accrues; but cash interest is received only on specific dates. Only the cash receipts
of interest appear on the cash flow statement-$10000 in Exhibit 16-2.
Cash receipts of dividends Dividends are earned on share investments. Dividend revenue is
reported on the income statement, and thi s cash receipt is reported on the cash flow statement$9000 in Exhibit 16-2. (Dividends received are part of operating activities, but dividends paid are
a financing activity.)
Payments to suppliers Payments to suppliers include all cash payments for inventory and most
operating expenses, but not those for interest, income taxes and employee compensation expenses.
Suppliers are entities that provide the business with inventory and essential services. For example,
CHAPTER 16 THE CASH FLOW STATEMENT
683
a clothing store's payments to Levi Strauss, Just Jeans and Reebok are payments to suppliers.
A supermarket's suppliers include Arnott's, Campbell's and Coca-Cola. Other suppliers provide
advertising, electricity and other services. Payments to suppliers exclude payments to employees,
payments for interest and payments for income taxes, because these are separate categories of operating
cash payments. In Exhibit 16-2, Smart Touch Leaming Ltd's payments to suppliers are $133 000.
Payments to employees Salaries, wages, commissions and other forms of compensation require
payments to employees. The cash flow statement in Exhibit 16-2 reports cash payments of $58000.
Payments for interest expense and income tax expense These cash payments are reported
separately from the other expenses. In the Smart Touch Leaming Ltd example, interest and income
tax expenses equal the cash payments. In practice, the expense and cash payment amounts may differ.
The cash flow statement reports the cash payments for interest ($16000) and income tax ($15 000).
Depreciation and amortisation expense These expenses aren't listed on the cash flow
statement in Exhibit 16-2 because they don ' t affect cash. Depreciation is recorded by debiting the
expense and crediting Accumulated depreciation. There is no debit or credit to the Cash account.
Cash flows from investing activities
Investing activities are important because a company's investments determine its future. Purchases
of non-current assets signal expansion, which is a good sign. Low levels of investing activities
indicate that the business isn't replenishing its assets.
Cash payments for non-current assets, investments and loans to other companies All
these cash payments acquire a long-term asset. The first investing activity reported by Smart Touch
Learning Ltd on its cash flow statement in Exhibit 16-2 is the purchase of non-current assets, such
as land, buildings and equipment ($306000). The second transaction is an $11000 loan: Smart
Touch obtains a bill receivable. These are investing activities because the company is investing in
assets for business use rather than for resale. Another transaction in this category- not shown in
Exhibit 16-2-is a purchase of a share or debenture investment.
Proceeds from the sale of non-current assets, investments and the collections of
loans These transactions are the opposites of acquisitions of non-current assets and investments,
and making loans. They are cash receipts from investment transactions.
The sale of the non-current assets needs explanation. The cash flow statement in Exhibit 16-2
reports that Smart Touch Leaming Ltd received $62 000 cash on the sale of non-current assets. The
income statement reports an $8 000 gain on this transaction. What is the appropriate amount to
show on the cash flow statement? It is $62 000, the cash proceeds from the sale. If we assume that
Smart Touch sold equipment that cost $64000 and had accumulated depreciation of $10000, the
following journal entry would record the sale:
Cash
62 000
62 000
Proceeds from sale of non-current assets
Carrying amount of non-current assets sold
54 000
Accumulated depreciation
10 000
Equipment
c....,.,----
64 000
H
The entry indicates that the carrying amount of the equipment was $54 000 ($64 000 - $10 000).
However, the carrying amount of the asset sold isn' t reported on the cash flow statement. Only the
cash proceeds of $62 000 are reported on the statement. For the income statement, the proceeds,
carrying amount and gain are reported.
Because a gain occurred, you may wonder why this cash receipt isn' t reported as part of
operations. Operations consist of buying and selling inventory or rendering services to earn revenue.
Investing activities are the acquisition and disposition of assets used in operations. Therefore, the
sale of non-cutTent assets and the sale of investments are cash inflows from investing activities.
Investors and creditors are often critical of a company that sells large amounts of its noncurrent assets. Such sales may signal an urgent need for cash. In other situations, selling off noncurrent assets may be good news if the company is getting rid of an unprofitable division. Whether
I
684
CHAPTER 16 THE CASH FLOW STATEMENT
sales of non-current assets are good news or bad news should be evaluated in light of a company's
profit (or loss), financial position and other cash flows.
Cash flows from financing activities
Cash flows from financing activities include several specific items. All are related to obtaining
money from investors and lenders and paying them back. Readers of financial statements want to
know how the entity obtains its financing.
Proceeds from issue of shares and bills payable Issuing shares (ordinary and preference)
and bills payable are two common ways to finance operations. In Exhibit 16-2, Smart Touch Learning
Ltd reports that it issued ordinary shares for cash of $101 000 and long-term bills payable for $94 000.
The proceeds from issue of bills payable can also be labelled as 'Borrowing . .. $94 000' .
Payment of bills payable and share buy-backs The payment of bills payable decreases Cash,
which is the opposite effect of borrowing money. Smart Touch Learning Ltd paid $11000 on its longterm bills payable. Other transactions in this category are payments to buy back the company's shares.
Payment of cash dividends The payment of cash dividends decreases Cash and is therefore
reported as a cash payment. Smart Touch's $ 17 000 payment in Exhibit 16-2 is an example.
A dividend in another form-such as a share dividend-has no effect on Cash and isn't reported on
the cash flow statement.
Computerised statements
Computerised accounting systems are programmed to generate the cash flow statement as easily as they
do the balance sheet and the income statement. The amounts for the operating section can be obtained
by copying cash inflows and outflows from the posted accounts. For example, the cash receipts posted
to Accounts receivable provide the information for Cash collections from customers. All other cash
flows for operating activities, financing activities and investing activities are handled similarly.
SUMMARY PROBLEM 16.1
.
..
-
'
"
-.
'
... , '.,
·_,.
Drayton Co. Ltd's accounting records include the following information for the year
ended 30 June 2016:
1 Salary expense, $104000
2 Interest revenue, $8 000
3 Proceeds from issue of ordinary shares, $31 000
4 Declaration and payment of cash dividends, $22 000
5 Collection of interest receivable, $7 000
6 Payments of salaries, $110000
7 Credit sales, $358000
8 Loan to another company, $42000
9 Proceeds from sale of non-current assets, $18000, including $1000 loss
10 Collections from customers, $369000
11 Cash receipt of dividend revenue on share investments, $3 000
12 Payments to suppliers, $319000
13 Cash sales, $92000
14 Depreciation expense, $32 000
15 Proceeds from issue of short-term debt, $38 000
16 Payments of long-term debt, $57 000
17 Interest expense and payments, $11 000
18 Loan collections, $51000
19 Proceeds from sale of investments, $22000, including $13000 gain
20 Amortisation expense, $5000
·---~
I
CHAPTER 16 THE CASH FLOW STATEMENT
21
22
23
24
25
Purchases of invent ory o n credit, $297 000
Income tax expense and payment s, $1 6000
Cash payments t o acqui re no n-current asset s, $83 000
Cost of sales, $284000
Cash bala nce : 30 June 2015-$83 000
30 June 2016-$54000
REQUIREMENT
Prepare Drayton Co. Ltd's cash flow stateme nt and income statement for t he year en ded 30
June 20 16. Follow the fo rm at s of Exhibit 16-2 (p . 679) and Exhi bit 16-6 (p. 687).
SOLUTION
-DRAYTON CO . LTD
Cash flow statement
for the year ended 30 June 2016
Increase (decrease) in cash and cash equivalents
(amounts in thousands)
II
II
Item No.
(Reference only)
Cash flows from operating activities:
Receipts:
(1 0), (13)
(5)
(11)
Collections from customers ($369 + $92)
$461
7
Interest received on bills receivable
Dividends received on investments in shares
3
471
Total cash receipts
Payments:
(12)
(6)
$ (319)
To suppliers
(11 0)
To employees
(17)
For interest
(11)
(22)
For income tax
(16)
(456)
Total cash payments
15
Net cash from operating activities
Cash flows from investing activities:
(23)
(8)
(19)
(9)
(18)
$ (83)
Acquisition of non-current assets
(42)
Loan to another company
Proceeds from sale of investments
22
Proceeds from sale of non-current assets
18
Collection of loans
51
(34)
Net cash used in investing activities
Cash flows from financing activities:
(15)
Proceeds from issue of short-term debt
(3)
Proceeds from issue of ordinary shares
$ 38
31
(16)
Payments of long-term debt
(57)
(4)
Dividends declared and paid
(22)
(10)
Net cash used in financing activities
Net decrease in cash
(25)
Cash balance, 30 June 2015
(25)
Cash balance, 30 June 2016
- ----
-- ---- --------- --
l
u
$ (29)
83
$ 54
-- -
-------- - ---
--
685
686
CHAPTER 16 THE CASH FLOW STATEMENT
DRAYTON CO. LTD
Income statement
for the year ended 30 June 2016
(amounts in thousands)
--
Revenues
Sales revenue ($358 + $92)
$450
Interest revenue
8
Dividend revenue
3
Gain on sale of investments
r,
13
Total revenues
474
Expenses
Cost of sales
$284
Salary expense
104
Depreciation expense
32
Interest expense
11
Amortisation expense
5
Loss on sale of non-current assets
1
Total expenses
437
Profit before income tax
37
Income tax expense
16
Profit
21
..
STOP&THINK
Margaret Mohamed, CEO, knew that the bank would carefully review her company's most
recent cash flow statement before determining whether it would approve the loan needed for expansion. The
bank loan officer had told her that it is important that the business show strong operating cash flows. Margaret
knows that her company's operating cash flow for the past quarter will most likely be negative. Although t he
company recorded significant revenue, most of the revenue was recorded as receivable. Margaret expects th at
the cash will come in soon, but not in time to report a positive operating cash flow. How can she explain t he
situation to the bank?
16.5 CALCULATING INDIVIDUAL AMOUNTS FOR THE CASH
FLOW STATEMENT
LO
Calculate the cash
effects of a wide
variety of business
transactions
How do we calculate the amounts for the cash flow statement? We use the income statement and
changes in the related balance sheet accounts. For the operating cash flow amounts, the adjustment
process follows this basic approach:
Revenue or expense
from the income
statement
+
Adjusted for the change in
the related account(s) from
the balance sheet
Amount for the
statement of cash flows
CHAPTER 16 THE CASH FLOW STATEMENT
687
This is called the T-account approach. Learning to analyse T-accounts is one of the most useful
accounting skills you will acquire. It enables you to measure the cash effects of a wide variety of
transactions.
The following discussions use Smart Touch Learning Ltd's income statement (simplified) in
Exhibit 16-6, comparative balance sheet in Exhibit 16-7 and cash flow statement in Exhibit 16-2.
First, trace the ending and beginning cash balances of $22000 and $42000, respectively, from the
balance sheet in Exhibit 16-7 to the bottom part of the cash flow statement in Exhibit 16-2. As you
see, the beginning and ending cash amounts come from the balance sheet. Now let's calculate the
cash flows from operating activities.
Calculating the cash amounts of operating activities
Cash collections from customers
I
Collections can be calculated by converting sales revenue (an accrual-basis amount) to the cash
basis. Smart Touch Learning Ltd's income statement (Exhibit 16-6) reports sales of $284 000.
Exhibit 16-7 shows that Accounts receivable increased from $80 000 at the beginning of the year to
$93 000 at year-end, a $13 000 increase. Based on those amounts, Cash collections equals $271000,
as shown in the Accounts receivable T-account:
I
Accounts receivable
Beg bal
80 000
Sales
284 000
End bal
Collections
271 000
93 000
I
~ - - - - - - - - - - - - - - - - - - - - - - - ··- - - -----------------
---
SMART TOUCH LEARNING LTD
EXHIBIT 16-6
Income statement
Income statement
for the year ended 30 June 2016
(amounts in thousands)
Revenues
II
Sales revenue
Interest revenue
!
Dividend revenue
Gain on sale of non-current assets*
$284
!
1
~
I
Total revenues
Expenses
I
l
I
I
I ~; !
I
Cost of sales
$150
Salary and wage expense
Depreciation expense
Interest expense
Other operating expense
Total expenses
Profit before income tax
Income tax expense
Profit
*Net of proceeds less carrying amount.
,1---~
II
II
1-1
ti
257
-~:-----i, ,
$ 41
-j
688
CHAPTER 16 THE CASH FLOW STATEMENT
EXHIBIT 16-7
------
Comparative balance sheet
--
-
---------------
--
SMART TOUCH LEARNING LTD
Comparat ive balance sheet
as at 30 June 2016 and 2015
(amounts in thousands)
I
II
I
2015
2016
(Decrease)
II
Assets
Current assets:
Cash
$ 22
$ 42
93
80
3
1
Accounts receivable
Interest receivable
Inventory
Prepaid expenses
135
138
8
7
Non-current assets:
II
II
increase
Long-term receivable from another company
1,
Other non-current assets, net
II
Tota l
11
-
453
219
$725
11
$487
II
l
l
I
I
$ (20)
13
Changes in current
2
(3)
}
assets- Operating
1
Changes in non-current
11
234
}
assets-Investing
$238
I
Liabilities
Current liabilities:
Accounts payable
$ 34
$ 91
$ 57
Salary and wage payable
4
6
(2)
Accrued liabilities
1
3
(2)
160
77
Changes in current
}
liabi lities-Operating
Non-current liabilities:
Long-term debt
83
Changes in long -term
liabilities and sh are
Shareholders' equity
}
101
110
258
86
$725
$487
$238
Share capital
359
Retained earnings
Total
1
24
capital accountsFinancing
}
Ch ange due to profitOperating; and ch ange
due to dividends-
-
Financing
Another explanation: Accounts receivable increased by $13 000, so Smart Touch Learning Ltd
must have received $13 000 less cash than sales revenue for the period. The equation below shows
another way to calculate collections from customers.
A ccounts receivable
Beginning balance
+
Sales
Collections
=
$80 000
+
$284 000
X
-X
=
=
=
X
Ending balance
$93 000
$93 000 - $80 000 - $284 000
$27 1 000
A decrease in Accounts receivable would mean that the company received more cash than the
amount of sales revenue. This calculation is the first item summarised in Exhibit 16-8.
All collections of receivables are calculated the same way. In our example, Smart Touch
Learning Ltd's income statement, Exhibit 16-6, reports interest revenue of $12000. Interest
receivable's balance in Exhibit 16-7 increased by $2000. Cash receipts of interest must be $10000
CHAPTER 16 THE CASH FLOW STATEMENT
FROM THE
INCOME
STATEMENT
CASH FLOWS
CHANGE IN RELATED ACCOUNT FROM THE BALANCE SHEET
Interest revenue ___j+Decrease in Interest receivable
l:J.ncrease in Interest receivable
Of dividends
Dividend revenue __j+'Decrease in Dividends receivable
l:J.ncrease in Dividends receivable
(Interest revenue of $12000 minus the $2000 increase in Interest receivable). Exhibit 16-8
summarises the calculation of cash receipts of interest.
Payments to suppliers
This calculation includes two parts, payments for inventory (related to Cost of sales) and payments
for operating expenses.
Payments for inventory are calculated by converting the cost of sales to the cash basis. To do
this, we analyse the Inventory and Accounts payable accounts. To 'analyse' an account means to
explain each amount in the account. For companies that purchase inventory on short-term bills
payable, we must also analyse Short-term bills payable in the same manner as Accounts payable.
To calculate Smart Touch Learning Ltd's cash payments for inventory, we analyse the T-accounts
(again, using Exhibits 16-6 and 16-7 for our numbers):
Accounts payable
Inventory
Beg inventory 138 000
Purchases
Cost of sales
150 000
Payments for
inventory
147 000
57 000
Beg bal
113 000
Purchases
147 000
End bal
End inventory 135 000
91 000
The first equation details the activity in the Inventory account to calculate purchases, as follows:
Inventory
Beginning inventory
+
Purchases
Cost of sales
$138 000
+
X
X
X
$150 000
=
=
=
=
Ending inventory
$135 000
$135 000 - $138 000 + $150 000
$147 000
Now we insert the Purchases figure into Accounts payable to calculate the amount of cash paid
for inventory, as follows:
Accounts payable
Payments for
Beginning balance
+
Purchases
inventory
$57 000
+
$147 000
X
-X
X
=
=
EXHIBIT 16-8
Direct method of
calculating cash
receipts from
operating activities
RECEIPTS:
From customers Sales revenue _j+""oecrease in Accounts receivable
l:J.ncrease in Accounts receivable
Of interest
689
Ending balance
$ 91 000
$ 91000-$57000-$147000
$113 000
Beginning and ending inventory amounts come from the balance sheet, and Cost of sales from
the income statement. Exhibit 16-9 shows the general approach for calculating payments to
suppliers of inventory (first item).
Payments to suppliers ($133000 in Exhibit 16-2) equals the sum of payments for inventory
($113 000) plus payments for operating expenses ($20 000), as explained next.
690
EXHIBIT 16-9
Direct method of
calculating cash
payments for
operating
activities
CHAPTER 16 THE CASH FLOW STATEMENT
FROM THE
INCOME
STATEMENT
CASH FLOWS
CHANGE IN RELATED ACCOUNT FROM THE BALANCE SHEET
PAYMENTS:
~
_I+Decrease in Accounts payable
T
+ Increase .in. Inventory
,o supp 1·1ers Cos t o f sa 1es
l.::Jncrease in Accounts payable
·
t
- Decrease in Inventory
o f inven ory
Other items Operating ___f+Tncrease in Prepaid expenses __f+Decrease_in Accrued _liabi_lities
~ecrease 1n Prepaid expensesl.::Jncrease in Accrued l1ab1 l1 t 1es
expense
To employees Sa lary _____j+Decrease in Salary (wage) payable
expense-------i.::..increase in Salary (wage) payable
For interest
Interest _____j+Decrease_ in Interest payable
~ncrease in Interest payable
expense
Income tax _!+Decrease in Income tax payable
expense ~ncrease in Income tax payable
For income
tax
Payments for operating expenses
Payments for operating expenses other than interest and income tax can be calculated as 'plug'
figures by analysing Prepaid expenses and Accrued liabilities. (Again, all amounts come from
Exhibits 16-6 and 16-7.)
T-accounts
Prepaid expenses
Beg bal
7 000
Accrued liabilities
Payments 3 000
Expiration
of prepaid
Payments 8 000
End bal
Operating expenses
(other than salaries, wages
and depreciation)
Beg bal
3 000
Accrual of
Accrual of
expense 7 000
expense at
expense at
~
year-end 1 000
year-end 1 000 J Expiration
8 000
End bal
1 000
of prepaid
~ - - - - - - - - - - ----. expense 7 000
Payments 9 000
Endbal 17000
Total payments for operating expenses = $20 000
$8 000 + $3 000 + $9 000 = $20 000
Equations
Prepaid expenses
Beginning balance
+
Payments
$7 000
+
X
X
X
Expiration of
prepaid expense
$7 000
=
=
=
=
Ending balance
$8 000
$8 000 - $7 000 + $7 000
$8 000
Accrued liabilities
Beginning balance
+
Accrual of expense
at year-end
$3 000
+
$1 000
Payments
X
-X
X
=
=
=
=
Ending balance
$1 000
$1 000- $3 000- $1 000
$3 000
\
CHAPTER 16 THE CASH FLOW STATEMENT
Operating expenses
Accrual of expense
Expiration of
at year-end
+
prepaid expense
+
$1 000
+
7 000
+
Payments
=
Ending balance
X
X
=
=
X
=
$17 000
$17000-$1000-$7000
$9 000
Payments to employees
Companies keep separate accounts for salaries, wages and other forms of employee compensation.
It is convenient to combine all compensation amounts into one account. Smart Touch's calculation
adjusts Salary expense for the change in Salary payable, as shown in the following T-account:
Salary payable
Beg bal
Payments to employees
58 000
6 000
Salary expense
56 000
End bal
4 000
Salary payable
Beginning balance
+
Salary expense
$6 000
+
$56 000
Payments
X
-X
X
=
=
=
=
Ending balance
$4 000
$4 000 - $6 000 - $56 000
$58 000
Exhibit 16-9 summarises this calculation under Payments to employees.
Payments of interest and income tax
In our example, the expense and payment amount is the same for interest and for income tax.
Therefore, no analysis is required to determine the payment amount. But if the expense and the
payment differ, the payment can be calculated by analysing the related liability account. Exhibit
16-9 summarises the procedure for interest and income tax.
Calculating the cash amounts of investing activities
Investing activities affect asset accounts, such as Plant and equipment, Investments and Bills
receivable. Cash flows from investing activities can be calculated by analysing those accounts. The
income statement and the beginning and ending balance sheets provide the data.
Acquisitions and sales of non-current assets
Companies keep separate accounts for Land, Buildings, Equipment and other non-current assets. It
is helpful to combine all these accounts into a single summary. Also, we subtract accumulated
depreciation from the assets' cost and get a net figure for non-current assets. This approach allows
us to work with a single total for such assets.
To illustrate, observe that Smart Touch Learning Ltd's balance sheet (Exhibit 16-7) reports
beginning Other non-current assets, net of depreciation, of $219000 and an ending net amount of
$453 000. The income statement (Exhibit 16-6) shows depreciation expense of $18 000 and an
$8 000 gain on sale of non-current assets. Further, the acquisitions of non-current assets total
$306 000 (see Exhibit 16-2). How much are the proceeds from the sale of Other non-current assets?
First, we calculate the carrying amount of non-current assets sold, as follows:
Non-current assets, net
Beg bal
219 000
Depreciation
18 000
Acquisitions
306 000
Carrying amount of assets sold
54 000
End bal
453 000
691
692
CHAPTER 16 THE CASH FLOW STATEMENT
Non-current assets, net
Carrying amount
Beginning
balance
+ Acquisitions
$219 000
+
Depreciation -
$306 000
=
of assets sold
$18 000
Ending balance
= $453 000
= $453 000 - $219 000
- $306 000 + $18 000
= $54 000
X
-X
X
The relationship between carrying amount, gain (or loss) and proceeds from the sale of noncurrent assets is as follows:
Carrying amount of assets sold
+
Gain
Loss
=
Sale proceeds
$54 000
+
$8 000
$0
=
$62 000
Trace the sale proceeds ($62000) to the cash flow statement in Exhibit 16-2. If the sale resulted
in a loss of $3 000, the sale proceeds would be $51 000 ($54 000 - $3 000), and the statement would
report $51 000 as a cash receipt from this investing activity.
Where the proceeds from the sale of non-current assets are disclosed separately in the income
statement (see Chapter 10), this figure can be obtained directly from that statement when preparing
the cash flow statement.
Acquisitions and sales of investments, and loans and loan collections
The cash amounts of investment and loan transactions can be calculated in the manner illustrated
for non-current assets. Investments are easier to analyse because there is no depreciation, as shown
in the following T-account:
Investments
Beg bal*
XXX
Purchases**
XXX
End bal *
XXX
Carrying amount of assets sold
XXX
**From the cash flow statement.
*From the balance sheet.
Investments (amounts assumed for illustration only)
Carrying amount of
Beginning balance
+
Purchases
$100 000
+
$50 000
-
investments sold
X
-X
X
=
Ending balance
= $140 000
= $140 000- $100 000- $50 000
= $10 000
Loan transactions follow the pattern described on pages 687-88 for collections from customers.
New loans increase the receivable and decrease cash. Collections decrease the receivable and
increase cash, as follows:
Loans and bills receivable
Beg bal*
XXX
New loans made * *
XXX
End bal*
XXX
*From the balance sheet.
Collections
** From the cash flow statement.
XXX
CHAPTER 16 THE CASH FLOW STATEMENT
Loans and notes rece ivable (amounts assumed for illust ration only}
Beginn ing balance
+
New loans made
$90 000
+
$10 000
-
Collections
X
-X
X
=
=
=
=
Ending balance
$30 000
$30 000- $90 000- $10 000
$70 000
Exhibit 16-10 summarises the calculation of cash flows from investing activities. We must
solve for the dollar amount of each item highlighted with bold type. Use this exhibit as a guide
when you solve the assignment material at the end of the chapter.
EXHIBIT 16-10
CASH RECEIPTS FROM INVESTING ACTIVITIES
From sale of non- Beg inni ng assets
+ Acqu isit ion cost (net)
current assets
From sale of
investments
Carrying amount
of assets sold
Depreciation
Cash received
from sale of
assets
=
Carrying amount
Gain on sale, o r
+ - Loss on sale
of assets sold
Begi nni ng
investments
+
Purchase cost of
investments
Cash received
from sale of
investments
=
Carrying amount
Gain on sale, or
of investments +
- Loss on sale
so ld
From collect ion
Beg inning
, of loans and
loans or bi lls + New loans made bil ls receivabl e
receivable
CASH PAYMENTS FOR INVESTMENT ACTIVITIES
For acquisition of Beginning assets
Acqu isition cost non-current assets
(net)
+
For purchase of
investments
Begi nning
investm ents
+
For new loans
made
Beginnin g
loans or bills
rece ivab le
+ New loans made -
Purchase cost of
investments
Cash flows from investing activities
Carrying amount
of investments
sold
Collections
=
Ending
investments
=
Ending loans or
bills receivable
Carrying amo unt
of assets sold
Dep reciation
Carrying amo unt
of investments
sold
=
Ending
investment s
Collections
=
Ending loan s or
bills receivable
=
=
Ending assets
(net)
Ending assets
(net)
Calculating the cash amounts of financing activities
Financing activities affect the liability and shareholders' equity accounts, such as Bills payable,
Debentures payable, Long-term debt, Share capital and Retained earnings. To calculate the cash
fl ow amounts, analyse these accounts.
Issues and payments of long-term bills payable (borrowing)
The Bills payable, Debentures payable and Long-term debt accounts are related to borrowing,
a fi nancing activity. Their balances come from the balance sheet. If either the amount of new issues
or the amount of payments is known, the other can be calculated. New issues of payable total
$94 000 (see Exhibit 16-2) . Payments of bills payable are calculated from the Long-term bills
payable T-account, as follows (amounts from Exhibit 16-7):
Long-t erm debt
Payments
11 000
Beg bal
77 000
Issue of new debt
94000
End bal
160 000
693
694
CHAPTER 16 THE CASH FLOW STATEMENT
Long-term debt
Beginning balance
$77 000
Issue of
Payments
+
new debt
of debt
=
Ending balance
+
$94 000
X
=
=
=
$160 000
$160 000-$77 000-$94 000
$11 000
-X
X
Issues and buy-backs of shares
These financing activities are calculated by analysing the Share capital account. Using data from
Exhibits 16-2 and 16-7, we have:
Share capital
Share buy-backs
0
Beg bal
258 000
Issue of new shares
101 000
End bal
359 000
Share capital
Issue of
Beginning balance
+
new shares
$258 000
+
$101 000
-
Buy-backs
=
Ending balance
X
-X
=
=
X
=
$359 000
$359 000 - $258 000 - $101 000
$0
Dividend payments
If the amount of the dividends isn't given elsewhere, it can be calculated as follows:
Retained earnings
Dividend
declarations
17 000
Dividends payable
Beg bal
86 000
Profit
41 000
End bal
110 000
Beg bal (assumed)
Dividend
0
Dividend
payments
17 000
declarations
17 000
End bal (assumed)
0
First, we calculate dividend declarations by analysing Retained earnings. Then we solve for
dividend payments with the Dividends payable account. Smart Touch Learning Ltd has no
Dividends payable account, so dividend payments are the same as declarations. The following
calculations show how to calculate Smart Touch Learning Ltd's dividend payments.
Retained earnings
Dividend
Beginning balance
+
Profit
declarations
=
Ending balance
$86 000
+
$41 000
X
-X
X
=
=
=
$110 000
$110 000 - $86 000 - $41 000
$17 000
Dividend
Dividend
~eginning balance
+
declarations
payments
=
$0
+
$17 000
X
-X
X
=
Dividends payable
=
=
Ending balance
$0
$0 - $17000-$0
$17 000
CHAPTER 16 THE CASH FLOW STATEMENT
695
Exhibit 16-11 summarises the calculation of cash flows from financing activities. The bold
highlighting shows amounts that must be calculated. This exhibit will come in handy as you solve
the assignments at the end of the chapter.
EXHIBIT 16-11
Cash flows from financing activities
CA SH RECEIPTS FROM FINANCING ACTIVITIES
From issue of
Beginning longlong-term debt term bills payable +
(b ills payable)
From issue of
Beginning
+
sh ares
capital
Cash received from issue of longterm bills payable
Cash received from issue of new
shares
Payment of bills
=
payable
Buy-backs
Ending longterm bills
payable
=
Ending capital
Payment of bills
payable
=
Ending longterm bills
payable
=
Ending capital
CA SH PAYMENTS FOR FINANCING ACTIVITIES
Of long-term
debt (bills
payable)
For share buybacks
For dividends
Beginning long~
Cash received from issue of long-term
term bills payable +
bills payable
Beginning
+
capital
Beginning
retained earnings +
Beginning
dividends payable +
Cash received from issue of new
shares
Net profit
Dividend declarations
Buy-backs
Dividend
declarations
Dividend
payments
Ending retained
profits
Ending dividends
=
payable
=
16.6 PREPARING THE CASH FLOW STATEMENT BY THE
INDIRECT METHOD
An alternative to the direct method of calculating cash flows from operating activities is the indirect
method, or the reconciliation method. This method starts with profit from the income statement
and reconciles to operating cash flows.
The indirect method shows the link between profit and cash flow from operations better than
the direct method. The main drawback of the indirect method is that it doesn't report the detailed
operating cash flows-collections from customers and payments to suppliers and employees, and
for interest and taxes.
These two methods (direct and indirect) of preparing the cash flow statement affect only the
operating activities section of the statement. No difference exists for investing or financing
activities.
LO 6
Prepare a
cash flow statement
by the indirect
method
CONNECT TO: Accounting standards
AASB 107 allows companies to use either the direct method or the indirect method. If the direct method
is used, the indirect method forms the basis for supplementary disclosures in a note accompanying the
cash flow statement.
Exhibit 16-12 is Smart Touch Learning Ltd's cash flow statement prepared by the indirect
method. Only the operating section of the statement differs from the direct method format
(Exhibit 16-2). The new items A, B and Care keyed to their explanations, which are discussed in
696
CHAPTER 16 THE CASH FLOW STATEMENT
SMART TOUCH LEARNING LTD
Cash flow statement
EXHIBIT 16-12
Cash flow
statement (indirect
method for
operating
activities)
for the year ended 30 June 2016
Thousands
Cash flows from operating activities:
Profit
l
Add (subtract) items that affect profit and cash flows differently:
11
11 0
0
II
Depreciation
l
Decrease in inventory
8
II
,I
Increase in prepaid expenses
Increase in accounts payable
(2)
I
I,
Decrease in accrued liabilities
Cash flows from investing activities:
Acquisition of non-current assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issue of ordinary shares
Proceeds from issue of long-term debt
34
I~
' ~'- --,
(2)
27
$ 68
II
$(306)
(11)
Loan to another company
Proceeds from sale of non-current assets
3
(1)
(2)
Decrease in salary and wage payable
Net cash provided by operating activities
II
(13)
Increase in accounts receivable
11
$ 18
(8)
Gain on sale of non-current assets
Increase in interest receivable
I
II
$ 41
11
62
(255)
i
I
$101
94
Payment of long-term debt
(11)
Payment of dividends
(17)
Net cash provided by financing activities
167
Increase (decrease) in cash
$(20)
Cash balance, 30 June 2015
42
Cash balance, 30 June 2016
$ 22
the following section. For ease of reference, we repeat Smart Touch Learning Ltd's income
statement and balance sheet here as Exhibits 16-13 and 16-14.
logic behind the indirect method
The indirect-method cash flow statement begins with profit from the income statement. Additions
and subtractions follow. These are labelled 'Add (subtract) [items that affect profit and cash flows
differently]'. The first adjustment is for depreciation.
Depreciation and amortisation expenses (A)
These expenses are added back to net profit to calculate cash flow from operations. Let's see why.
Depreciation is recorded as follows:
Depreciation expense
Accumulated depreciation
18 000
18 000
CHAPTER 16 THE CASH FLOW STATEMENT
---- --- - - - - - - -
- --
--- -
--- -
----
697
--- r,,
-
SMART TOUCH LEARNINCi LTD
Income statement
EXHIBIT 16-13
Income statement
for the year ended 30 June 2016
(amounts in thousands)
ri
I
-
I:'
$284
12
Sales revenue
Interest revenue
Dividend revenue
9
II
Gain on sale of non-current assets
8
I
Expenses
I
I Ii
I
I
!I
le
Revenues
Total revenues
313
"'
l
$150
Cost of sales
Salary and wage expense
56
Depreciation expense
18
Interest expense
16
Other operating expense
17
)
1:
Total expenses
257
Profit before income tax
56
Income tax expense
15
I
!
$ 41
Profit
---I•!
This entry neither debits nor credits Cash because depreciation has no cash effect. But
depreciation expense is deducted from revenues to calculate profit. Therefore, in going from profit
to cash flow, we add depreciation back to profit. The add-back cancels the earlier deduction.
The following example should help. Suppose that a company had only two transactions, a
$1000 cash sale and depreciation expense of $300. Profit is $700 ($1000 - $300). But cash flow
from operations is $1000. To go from profit ($700) to cash flow ($1000), we must add back the
depreciation amount ($300).
All expenses with no cash effects are added back
to net profit on the cash flow statement.
Depreciation and amortisation are added back.
Likewise, revenues that don't provide cash are subtracted from net profit.
Gains and losses on the sales of assets (B)
Sales of non-current assets are investing activities on the cash flow statement. Recall that Smart
Touch sold equipment for $62 000, producing a gain of $8 000. The $8 000 gain is reported on the
income statement and included in profit.
The cash receipt from the sale is $62 000, and that is what we report on the cash flow statement.
The $62 000 of cash received also includes the $8 000 gain on the sale. To avoid counting the gain
twice, we need to remove the gain from profit and report the cash receipt of $62 000 in the investing
activities section of the statement. Starting with profit, we subtract the gain. This deduction
removes the gain's earlier effect on profit. The sale of non-current assets is reported as a $62000
cash receipt from an investing activity, as shown in Exhibit 16-12.
____,,,..
698
CHAPTER 16 THE CASH FLOW STATEMENT
EXHIBIT 16-14
Comparative balance sheet
SMART TOUCH LEARNING l TD
Comparative balance sheet
as at 30 June 2016 and 2015
(amounts in thousands)
Increase
It,
201 6
2015
(Decrease)
::
Assets
Current assets:
Cash
Accounts receivable
Interest receivable
Inventory
Prepaid expenses
Non-current assets:
Long-term receivable from another company
Other non-current assets, net
Total
$ 22
93
3
13 5
8
$ 42
80
1
138
7
$ (20)
11
45 3
$72 5
-
219
$487
11
234
$238
13
2
(3)
1
} Changes ;n '""ent
assets-Operating
} Changes in non-current
assets-Investing
11,
:i
Liabilities
II
Current liabilities:
Accounts payable
Salary and wage payable
Accrued liabilities
Non-current liabilities:
Long-term debt
$ 91
4
1
$ 57
6
3
$ 34
(2)
(2)
160
77
83
35 9
11 0
258
86
101
$72 5
$487
$238
Shareholders' equity
Share capital
Retained earnings
Total
~·--
I
-
24
} Changes ;n '""ent
liabilities-Operating
1,:
Ii'
1,
} Changes ;n long-te,m
liabilities and share
capital accountsFinancing
} Change due to profitOperating; and change
_J
due to dividends-
Ir
Financing
A loss on the sale of non-current assetsis also an adj ustment to profit on the cash flow statement.
A loss is added back to profit to calculate cash flow from operations. The proceeds from selling the
non-current assets are then reported under investing activities.
Changes in the current asset and current liability accounts (C)
Most current assets and current liabilitie s result from operating activities. Changes in the current
accounts are reported as adjustments to profit on the cash flow statement. The following rules
apply:
1 An increase in a current asset other than cash is subtracted from profit to calculate cash
flow from operations. Suppose that S mart Touch Learning Ltd makes a sale on credit. Profit is
increased by the sale amount. Accoun ts receivable increases, but Smart Touch receives no cash.
Exhibit 16-14 reports that Smart Touch Learning Ltd's Accounts receivable increased by
___.
■
CHAPTER 16 TH E CASH FLOW STATEMENT
699
$13 000 during 2016. To calculate the impact of revenue on Smart Touch's cash flows, we must
subtract the $13 000 increase in Accounts receivable from profit (see Exhibit 16-12). The reason
is this: we have not collected this $13 000 in cash. The same logic applies to the other current
assets. If they increase during the period, subtract the increase from profit.
Remember this:
Curre, asset other than Cash (Receivables,
Inventory, Supplies)
2
i
and Cash
A decrease in a current asset other than cash is added to profit. Suppose that Smart Touch's
Accounts receivable balance decreased by $4000. Smart Touch's Accounts receivable decreased
and Cash increased, so decreases in Accounts receivable and the other current assets are added
to profit.
Symbolically,
Current asset other than Cash (Receivables,
Inventory, Supplies)
i
and Cash
J,
------------------------
3
A decrease in a current liability is subtracted from profit. The payment of a current liability
decreases both cash and the current liability, so subtract the decrease from profit. In Exhibit 1612, the $2000 decrease in Accrued liabilities is subtracted from profit to calculate net cash inflow
from operating activities. This summary will help you to remember that:
Current liability (Accounts payable, Salary
payable, Accrued liabilities, Unearned revenue)
4
i
and Cash
J,
An increase in a current liability is added to profit. Smart Touch's Accounts payable
increased during the year. This increase can occur only if cash isn't spent to pay this liability.
Therefore, cash payments are less than the related expense. As a result, we have more cash.
Increases in current liabilities are added to profit.
!
Current liability (Accounts payable, Salary
payable, Accrued liabilities, Unearned revenue)
I
i
and Cash
J,
Exhibit 16-15 summarises the adjustments needed to convert profit to net cash flow from
operating activities by the indirect method.
Profit
+ Depreciation and amortisation
+ Loss on disposal of a long-term asset or early extinguishment
Add (subtract) items
that affect net profit
and cash flow differently
-
+
-
+
-
of bill payable
Gain on disposal of a long-term asset or early extinguishment
of bill payable
Decrease in current asset other than cash
Increase in current asset other than cash
Increase in current liability*
Decrease in current liability*
Net cash inflow (or outflow) from operating activities
* Short-term bills payable for genera l borrowing, and current portion of long-term bills payable, are related to financing
activities, not to operating activities.
EXHIBIT 16-15
Indirect method
of determining
cash flows from
operating
activities
700
CHAPTER 16 THE CASH FLOW STATEMENT
16.7 SUPPLEMENTARY DISCLOSURES
LO 7
Summarise
supplementary
disclosures required
by accounting
standards
Supplementary disclosures are required in the notes accompanying cash flow statements prepared
in accordance with AASE 107.
The first disclosure illustrated in Appendix 1 to AASE 107 provides a reconciliation of cash as
used in the cash flow statement with related items from the balance sheet. Exhibit 16-16 shows a
reconciliation of cash disclosure accompanying the cash flow statement in Caltex's 2013 financial
report.
Where the direct method is used, AASE 107 requires disclosure in a note of a reconciliation of
cash flows from operating activities to profit. This disclosure, as illustrated in the examples
accompanying the standard, uses a format similar to the operating section of the cash flow statement
as prepared using the indirect method. Such a disclosure in the Caltex 2013 financial report is also
shown in Exhibit 16-16.
Disclosure is also required for transactions and other events not resulting in cash flows but
which affect assets and liabilities. Such transactions and events are referred to as non-cash
financing and investing activities.
Our Smart Touch example didn't include transactions of this type because the company didn't
have any non-cash transactions during the year. So, to illustrate them, let's consider the three noncash transactions for Greg's Tunes. How would they be reported? First, we gather the non-cash
activities for the company:
1
2
3
Acquired $300000 building by issuing shares
Acquired $70000 land by issuing bill payable
Paid $100000 bill payable by issuing shares
Now, we consider each transaction individually.
EXHIBIT 16-16
Supplementary
disclosures
25 NOTES TO THE CASH FLOW STATEMENTS
a Reconciliation of cash and cash equivalents
Thousands of dollars
2013
For the purposes of the cash flow statements, cash and cash equivalents includes:
Cash at bank
199 922
199 922
Total cash and cash equivalents
b Reconciliation of net profit to net operating cash flows
Thousands of dollars
2013
Net profit
528 757
Adjustments for:
(44 881)
Net gain on sale of property, plant and equipment
(7 238)
Interest paid capitalised
Amortisation of finance costs
4 359
Depreciation/amortisation of property, plant and equipment
155 079
Amortisation of intangibles
10 538
(13 253)
Treasury stock movements net of expense
Share of associates' and joint ventures' net profit
292
Movements in assets and liabilities:
Decrease/(increase) in receivables
58 340
(373 433)
(lncrease)/decrease in inventories
Decrease/(increase) in other assets
6 392
lncrease/(decrease) in payables
220 925
lncrease/(decrease) in current tax liabilities
45 499
lncrease/(decrease) in deferred tax assets
44 708
(28 144)
(Decrease)/increase in provisions
Net operating cash inflows
607 940
2012
209 929
209 929
2012
57 601
(22
(1
4
116
9
4
(1
883)
258)
027
430
269
213
634)
(46
67
(6
(184
(3
(82
490
399
585)
021
619)
538)
936)
317)
947
738
Source: Notes to the Financial Statements, Ca ltex, 20 13, p. 104. Reproduced courtesy of Caltex.
CHAPTER 16 THE CASH FLOW STATEMENT
1
Greg's Tunes issued ordinary shares of $300000 to acquire a building. The journal entry to
record the purchase would be as follows:
Building
(A+)
Share capital
2
300 000
(Q+)
300 000
This transaction wouldn't be reported on the cash flow statement because no cash was paid. But
thebuilding and the shares are important. The purchase of the building is an investing activity.
/
The issue of ordinary shares is a financing activity. Taken together, this transaction is a noncash financing and investing activity.
The second transaction listed indicates that Greg 's Tunes acquired $70 000 of land by issuing a
bill. The journal entry to record the purchase would be as follows:
Land
70 000
(A+)
Bills payable
3
701
70 000
(L+)
This transaction wouldn' t be reported on the cash flow statement because no cash was paid. But
the land and the bills payable are important. The purchase of the land is an investing activity.
The issue of the bill is a financing activity. Taken together, this transaction is a non-cash
financing and investing activity.
The third transaction listed indicates that Greg's Tunes exchanged $100000 of debt by issuing
ordinary shares. The journal entry to record the transaction would be as follows:
Notes payable
(L-)
Share capital
100 000
100 000
(Q+)
This transaction wouldn't be reported on the cash flow statement because no cash was paid. But
the bills payable and the shares are important. The payment on the bill and the issue of the
ordinary shares are both financing activities. Taken together, this transaction, even though it is
two financing transactions, is reported in the non-cash financing and investing activities.
Non-cash financing and investing activities are reported in a note to the cash flow statement.
AASE 107 also requires the disclosure of comparative data from the previous accounting
period.
16.8 MEASURING CASH ADEQUACY: FREE CASH FLOW
Throughout this chapter we have focused on cash flows from operating, investing and financing
activities. Some investors want to know how much cash a company can 'free up' for new
opportunities. Free cash flow is the amount of cash available from operations after paying for
planned investments in long-term assets and after paying cash dividends to shareholders. Free cash
flow can be calculated as follows:
Free cash flow
=
Net cash provided by
operating activities
Cash payments planning
for investments in longterm assets
Cash
dividends
Many companies use free cash flow to manage their operations. Suppose Greg's Tunes expects
net cash provided by operations of $200b00. Assume Greg's Tunes plans to spend $160000 to
modernise its production facilities and pays $15 000 in cash dividends. In this case, Greg's Tunes'
free cash flow would be $25 000 ($200000-$160000-$15 000). If a good investment opportunity
comes along, Greg 's Tunes should have $25 000 cash available to invest.
LO 8
Analyse cash
flows for decision
making
........
702
CHAPTER 16 THE CASH FLOW STATEMENT
Using cash flow information in investment and credit analysis
Cash flows are important to a company's survival. A cash shortage is usually the most pressing
problem of a struggling organisation. Abundant cash allows a company to expand, invest in
research and development, and hire the best employees. How, then, do investors and creditors use
cash flow information for decision making?
Neither cash flow, profit nor balance sheet data tell investors all they need to know about a
company. Decision making is much more complex than plugging a few numbers into a formula.
Investors analyse Westpac's financial statements, articles in the financial press and data about
the industry to decide whether to invest in Westpac shares . To evaluate a large loan request by a
company, a bank loan officer may interview the company's top management to decide whether
they are trustworthy. Both investors and creditors are mainly interested in where a company is
headed. They want to make predictions about profit and future cash flows. Unfortunately, as
we have recently learned, published financial reports may not prove to be as reliable as we
would wish.
It has been said that cash flow data help to spot losers better than they help to spot winners. This
is often true. When a company's business is booming, profits are high and cash flows are usually
improving. In almost all cases, a negative cash flow from operations warrants investigation. A cash
downturn in a single year isn't necessarily a danger signal. But negative cash flows for two
consecutive years may throw a company into liquidation. Without cash flow from operations, a
business simply cannot survive .
.You may ask, 'Can't the business raise money by issuing shares or by borrowing?' The answer
is no, because if operations cannot generate enough cash, then shareholders won't buy the
company's shares. Bankers won't lend it money. Over the long run, if a company cannot generate
cash from operations, it is doomed.
The Decision Guidelines feature provides investors and creditors with a few suggestions on
how to use cash flow information for decision making.
CHAPTER 16 THE CASH FLOW STATEMENT
703
DECISION GUIDELINES 16.1
--------.
\
-~r"'
·-
Using cash flow and related information to evaluate investments
Ann Browning is a private investor. Over the years, she has devised some guidelines for evaluating
investments. Here are some of her guidelines .
I
QUESTION
FINANCIAL
STATEMENT
WHAT TO LOOK FOR
INVESTORS
Where is most of the company's
cash coming from?
Cash flow
statement
Operating activities ➔ Good sign
Investing activities ➔ Bad sign
Financing activities ➔ Okay sign
Do high sales and profits
translate into more cash?
Cash flow
statement
Usually, but cash flows from operating activities must
be the main source of cash for long-term success.
If sales and profits are low, how
is the company generating cash?
Cash flow
statement
If investing activities are generating the cash, the
business may be in trouble because it is selling off its
long-term assets.
If financing activities are generating the cash, that
cannot go on forever. Sooner or later, investors will
demand cash flow from operating activities.
Is the cash balance large enough
to provide for expansion?
Balance sheet
The cash balance should be growing over time. If
not, the company may be in trouble.
CREDITORS
Can the business pay its debts?
Income statement
Increasing trend of profit
Cash flow
statement
Cash flows from operating activities should be the
main source of cash
Balance sheet
Current ratio, debt ratio
EXCEL EXERCISE '16.1
Goal:
To create an Excel worksheet that calculates cash flows from operating activities using the
indirect method.
As the accountant of Smart Touch Learning Ltd, you have been asked to calculate the
net cash from operating activities using the indirect method for the current period. This will be
used to prepare the supplementary disclosures accompanying the cash flow statement.
Scenario:
STEP-BY-STEP
Open a new Excel worksheet.
2 Create a bold-faced heading for your worksheet that contains:
a Chapter 16 Excel Exercise
b Smart Touch Learning Ltd
c Net cash from operating activities
d for the period ended 31 December 2016
704
CHAPTER 16 THE CASH FLOW STATEMENT
3 Design your worksheet to calculate changes in current assets (other than Cash) and current
liabilities as follows (using the data from Exhibit 16-14):
Current assets
Accounts receivable
Interest receivable
Inventory
Prepaid expenses
Current liabilities
Accounts payable
Salary and wages payable
Accrued liabilities
Year 2
Year 1
Change
93
3
135
8
80
1
138
7
13
91
4
1
57
6
3
34
2
(3)
(2)
(2)
4 Now des ign your worksheet to calculate net cash from operating activities, similar to the
calculation in Exhibit 16-12. Use formulas fo r all calculations. Use the format below:
Cash flows from operating activities
Profit
Add (subtract) items that affect profit and cash flows differently:
Depreciation
Doubtful debts
Gain on sale of non-current assets
Loss on sale of non-current assets
41
18
0
(8)
0
10
51
Subtract change in:
Accounts receivable
Interest receivable
Inventory
Prepaid expenses
13
2
(3)
1
13
38
Add change in:
Accounts payable
Salary and wage payable
Accrued liabilities
Net cash provided by operating activities
5 Save your work and print a copy for your files.
34
(2)
(2)
30
68
CHAPTER 16 THE CASH FLOW STATEMENT
!
: .
SUMMARY PROBLEM 16.2
,
705
••
.-
· .·
-;
''
·~~ ...
· ·:···--.·:·
~~;~
The Adams Corporation Ltd reported the following income statement and comparative balance
sheet for 2016 and 2015, along with transaction data for 2016:
ADAMS CORPORATION LTD
Income statement
1-::
for the year ended 31 December 2016
Sales revenue
$662 000
Cost of sales
560 000
Gross profit
$102 000
i
Operating expenses:
Salary expense
$46 000
Depreciation expense
10 000
..
2 000
Rent expense
Total operating expenses
58 000
1
$ 44 000
Other items:
(2 000)
Loss on sale of equipment
$ 42 000
Profit before income tax
16 000
Income tax expense
Profit
$ 26 000
'
ADAMS CORPORATION LTD
Balance sheet
as at 31 December 2016 and 2015
Assets
2016
2015
Cash and cash equivalents $ 22 000 $
3 000
Accounts payable
Accounts receivable
22 000
23 000
Accrued liabilities
Inventory
35 000
34000
Income tax payable
Total current assets
2015
Current:
Current:
Equipment, net
2016
Liabilities
$ 79 000 $ 60 000
126 000
72 000
$ 35 000 $ 26 000
Total current liabilities
Debentures
7 000
9 000
10 000
10 000
$ 52 000 $ 45 ObO
74 000
48 000
Share capital
52 000
20 000
Retained earnings
27 000
19 000
Shareholders' equity
Total liabilities and
Total assets
$205 000 $132 000
shareholders' equity
$205 000 $132 000
-=
Transaction data for 2016:
Purchase of equipment
Payment of dividends
Issue of ordinary shares to repay debentures
Issue of debentures to borrow cash
Cash receipt from issue of ordinary shares
Cash receipt from sale of equipment (carrying amount, $76000)
Repayment of debentures
l
!
$140 000
18 000
13 000
44 000
19 000
74 000
5 000
706
CHAPTER 16 THE CASH FLOW STATEMENT
REQUIREMENT
Prepa re Adams Corporation 's cash flow stat ement fo r t he year e nded 31 December 2016. Fo rmat
operating cash flows by t he indi rect method. Follow t he four st eps outl ined below:
STEP 1. Lay out the forma t of the cash fl ow statement.
STEP 2. From the compa rative balance sheet, calculate the cha nge in cash duri ng the year.
STEP 3. From the inco me statement, take profit, depreciat ion and t he loss on sale of eq ui pment
t o the cash flow statement.
STEP 4. Com pl et e t he cash flow statement. Account for t he year-to-yea r change in ea ch bala nce
sheet account. Prepare a T-account t o show the transaction activit y in each long-t e rm
ba lan ce sheet account.
SOLUTION
~
ADAMS CORPORAT I ON LTD
Cash flow statement
:i
for the year ended 31 December 2016
:
Cash flows from operating activities:
Profit
!
$26 000
Adjustments to reconci le profit to net cash
provided by operating activities:
Depreciation
$ 10 000
Loss on sale of equipment
2 000
Decrease in accounts receivable
1 000
Increase in inventory
::
::
'. I
(1 000)
;,
Increase in accounts payable
9 000
i:
Decrease in accrued liabilities
(2 000)
19 000
Net ca sh provided by operating activities
$45 000
Cash flows from investing activit ies :
Purchase of equipment
$(140 000)
Sale of equ ipment ·
74000
' ··
Net cash used for investing activities
Payment of dividends
I:!;,
(66 000)
I'
II
II
II
Ii'
$ 19 000
(18000)
44000
Payment of debentures
(5 000)
Ill
40 000
Ii[
Net increase in cash
$19 000
Cash balance, 31 December 2015
3 000
Cash ba lance, 31 December 2016
$22 000
it>
Non-cash financing 'and investing activities:
Issue of ordinary shares to repay debentures
II
~~-
II
Issue of debentures
Net cash provided by financing activities
I!
1::::
Cash flows from financing activities:
Issue of ordinary shares
1,
r:
I
II
:r ,·
Total non -cash investing and f inancing activities
,~
-
""
.
$13 000
$13 000
iii
707
CHAPTER 16 THE CASH FLOW STATEMENT
RELEVANT T-ACCOUNTS:
Equipment, net
31/12/15 Bal
31/12/15 Bal
72 000
140 000
31/12/16 Bal
Debentures
10 000
13 000
76 000
5 000
126 000
31/12/16 Bal
48 000
44 000
,,
74000
1:
I
Share capital
31/12/15 Bal
Retained earnings
20 000
13 000
19 000
31/12/16 Bal
52 000
31 /12/15 Bal
18 000
19 000
26 000
31/12/16 Bal
27 000
I :
CHAPTER 16 THE CASH FLOW STATEMENT
REVIEW
Accounting vocabulary
cash equivalents (p. 678)
cash flow statement (p. 677)
cash flows (p. 677)
direct method (p. 681)
financing activities (p. 679)
free cash flow (p. 701)
indirect method (p. 681)
investing activities (p . 678)
non-cash financing and investing
activities (p. 700)
operating activities (p. 678)
Student success tips
The following are hints on some common trouble areas for students in this chapter:
I
Keep in mind that the cash flow statement explains why the change in the cash balance
isn't the same as the profit or loss for the period.
1
Remember that the cash flow statement has three sections: operating, investing and
financing .
I
Remember that Cash is an asset, so changes in other asset accounts have the opposite
effect on Cash (when other asset account increases, Cash decreases). Changes in liability
and equity accounts have the same effect on Cash (when liability or equity account
increases, Cash increases).
ASSESS
Quick check
1 The purposes of the cash flow statement are to:
a evaluate management decisions
b determine ability to pay liabilities and dividends
c
predict future cash flows
d all of the above
2 The main categories of cash flow activities are:
a direct and indirect
b current and non-current
c
non-cash financing and investing
d operating, investing and financing
3 Operating activities are most closely related to:
a non-current assets
b current assets and current liabilities
c
non-current liabilities and owners' equity
d dividends and shares
4 Which item does not appear on a cash flow statement prepared by the indirect method?
a collections from customers
b depreciation
C
profit
d gain on sale of land
CHAPTER 16 THE CASH FLOW STATEM ENT
5 Leather Shop earned a profit of $57 000 after deducting depreciation of $5 000 and all
other expenses. Current assets decreased by $4000, and current liabilities increased by
$8 000. How much was Leather Shop's cash provided by operating activities (indirect
method)?
a
$40000
b $66000
C
$48000
d
$74000
6 The non-current assets account of Star Media shows the following:
Non-current assets, net
Beg
80 000
Depr
34 000
Purchase
428 000
Sale
42 000
End
432 000
Star Media sold non-current assets at an $11 000 loss. Where on the cash flow statement
should Star Media report the sale of non-current assets? How much should the business
report for the sale?
a financing cash flows-cash receipt of $42 000
b investing cash flows-cash receipt of $53 000
c
investing cash flows-cash receipt of $31 000
d investing cash flows-cash receipt of $42 000
7 Mountain Water Co. Ltd issued ordinary shares of $28000 to pay off long-term bills payable
of $28000. In what section(s) would these transactions be recorded?
a financing activities-payment of bill ($28000)
b financing activities-cash receipt $28000
c
non-cash financing and investing-$28000
d both a and b are correct
8 Holmes Co. Ltd expects cash flow from operating activities to be $160000, and the company
plans purchases of equipment of $83 000 and buy-back of shares of $24 000. What is
Holmes' free cash flow?
a
$53000
b $160000
C
$77000
d
$83000
9 Maxwell Furniture Centre had accounts receivable of $20000 at the beginning of the year
and $54000 at year-end . Sales on credit for the year totalled $116000. How much cash did
the business collect from customers?
a
$150000
b
$62000
C
$116000
d
$82000
10 Magic Toys Company Ltd had operating expense of $48000. At the beginning of the year,
Magic Toys owed $10000 on accrued liabilities. At year-end, accrued liabilities were $5 000.
How much cash did Magic Toys pay for operating expenses?
a
$38000
b $53000
C
$48000
d
$43000
'.
CHAPTER 16 THE CASH FLOW STATEMENT
Starters
LO 1
S16-1 Purposes of the cash flow statement
Financial statements all have a goal. The cash flow statement does as well.
Requirement
Describe how the cash flow statement helps investors and creditors perform each of the
following functions:
a predict future cash flows
b evaluate management decisions
c
LO 2,3,5
predict the ability to make debt payments to lenders and to pay dividends to
shareholders.
S16-2 Elements of cash flow statement
Answer these questions about the cash flow statement:
1 What is the 'check figure' for the cash flow statement? Where do you get this check
figure?
2 List the categories of cash flows in order of importance.
3 What is the first dollar amount to report for the indirect method?
4 What is the first dollar amount to report for the direct method?
LO 3
S16-3 Preparing the direct method cash flow statement
Jelly Bean Ltd began 2015 with cash of $53 000. During the year, Jelly Bean earned revenue
of $597000 and collected $621000 from customers. Expenses for the year totalled $437000,
of which Jelly Bean paid $427000 in cash to suppliers and employees. Jelly Bean also paid
$145000 to purchase equipment and a cash dividend of $54000 to its shareholders during
2015.
Requirement
Prepare the company's cash flow statement for the year ended 31 December 2015. Format
operating activities by the direct method.
LO 3
S16-4 Preparing operating activities using the direct method
Happy Tot's Learning Centre has assembled the following data for the year ended 30June
2016:
Payments to suppliers
Purchase of equipment
Payments to employees
Payment of bill payable
Payment of dividends
Cash receipt from issue of shares
Collections from customers
Cash receipt from sale of land
$117 000
42 000
72 000
25 000
7 000
18 000
190 000
60 000
Requirement
Prepare the operating activities section of the business's cash flow statement for the year
ended 30 June 2016, using the direct method.
Note: Starter 16-5 should be used only after completing Starter 16-4.
LO 3
S16-5 Preparing the direct method cash flow statement
Use the data in Starter 16-4 and your results.
Requirement
Prepare the business's complete cash flow statement for the year ended 30 June 2016,
using the direct method for operating activities. Stop after determining the net increase (or
decrease) in cash .
CHAPTER 16 THE CASH FLOW STATEMENT
S16-6 Preparing the direct method cash flow statement
Rouse Toy Company Ltd reported the following comparative balance sheet:
ROUSE TOY COMPANY LTD
Comparative balance sheet
as at 31 December 2016 and 2015
2016
Assets
2015
Current:
Liabilities
2016
ri
2015
Current:
Cash
Accounts receivable
!! $ 17 ooo ll $ 11 ooo jj
59 000
49 000
Inventory
11
Prepaid expenses
Long-term investments
Non-current assets, net
78 000 11
84 000 11
3 100 11
75 ooo
2 100
85 ooo ll
227
00011
189
00011
Accounts payable
$ 43000 1$ 38
24 500
19
Accrued liabilities
5 ooo ll 13
Long-term bills payable
60 000
70
Salary payable
l
000
000
000
000
Shareholders' equity
Ordinary share capital
Retained earnings
42 000
284 600
39 000
241 100
Total liabilities and
Total assets
$459 100 $420 100
shareholders' equity
11 $459 100 11$420 100
Requirement
Calculate the following for Rouse Toy Company:
a collections from customers during 2016 (Sales totalled $143 000)
b
payments for inventory during 2016 (Cost of sales was $80 000).
S16-7 Classifying items on the indirect cash flow statement
Destiny Corporation Ltd is preparing its cash flow statement by the indirect method. Destiny
has the following items for you to consider in preparing the statement:
_ _ _ _ _ a Increase in accounts payable
_ _ _ _ _b
Payment of dividends
_ _ _ _ _c
Decrease in accrued liabilities
_ _ _ _ _d
Issue of ordinary shares
_ _ _ _ _e
Gain on sale of building
_ _ __ _ f
Loss on sale of land
_ _ _ _ _g
Depreciation expense
_ _ _ _ _h
Increase in inventory
Decrease in accounts receivable
Purchase of equipment
Requirement
Identify each item as a(n):
• operating activity-addition to profit (O+) or subtraction from profit (O-)
•
investing activity-addition to cash flow (I+) or subtraction from cash flow (I-)
•
financing activity-addition to cash flow (F+) or subtraction from cash flow (F-)
•
activity that isn't used to prepare the indirect method cash flow statement (N)
LO 2,5
CHAPTER 16 TH E CASH FLOW STATEMENT
S16-8 Calculating cash flows from operating activities-indirect method
One Way Cellular Ltd accountants have assembled this data for the year ended 30 September
2015:
Cash receipt from sale of land
Depreciation expense
Payment of dividends
Cash receipt from issue of ordinary
shares
$34 000
20 000
6 100
30 000
Profit
Purchase of equipment
Decrease in current liabilities
Increase in current assets other than
cash
$55 000
39 000
19 000
14 000
Requirement
Prepare the operating activities section using the indirect method for One Way Cellular's cash
flow statement for the year ended 30 September 2015.
Note: Starter 16-9 should be used only after completing Starter 16-8.
LO 5
S16-9 Calculating cash flows-indirect method
Use the data in Starter 16-8 to complete this exercise.
Requirement
Prepare One Way Cellular's cash flow statement using the indirect method for the year ended
30 September 2015. Stop after determining the net increase (or decrease) in cash.
LO 2,4
S16-10 Calculating investing and financing cash flows
Kyler Media Corporation Ltd had the following income statement and balance sheet for 2016:
KYLER MEDIA CORPORATION LTD
Income statement
for the year ended 31 December 2016
Service revenue
$80 000
Depreciation expense
5 600
Other expenses
49 000
Profit
$25 400
..
KYLER MEDIA CORPORATION LTD
Comparative balance sheet
as at 31 December 2016 and 2015
Assets
2016
2015
$ 4 800
$ 3 800
Current:
l'C'
--
Liabilities
r--
--
2016
2015
$ 9 000
$ 4 000
9 000
15 000
Current:
Cash
Accounts receivable
Equipment, net
9 600
4100
78 000
67 000
Accounts payable
Long-term bills payable
Shareholders' equity
Ordinary share capital
22 000
17 000
Retained earnings
52 400
38 900
$92 400
$74 900
Total liabilities and
I
Total assets
.=.~···
- -·-~,•··•
$92 400
~·
$74 900
shareholders' equity
CHAPTER 16 THE CASH FLOW STATEMENT
Requirement
Calculate for Kyler Media Corporation during 2016 the:
a acquisition of equipment. The business sold no equipment during the year.
b payment of a long-term bill payable. During the year, the business issued a $5 300 bill
payable.
Note: Starter 16-11 should be used only after completing Starter 16-10.
S16-11 Preparing the cash flow statement-indirect method
Use the Kyler Media Corporation data in Starter 16-10 and the results you calculated from the
requirements.
LO 5
Requirement
Prepare Kyler Media's cash flow statement-indirect method-for the year ended 31 December
2016.
S16-12 Calculating the change in cash; identifying non-cash transactions
Judy's Makeup Shops earned profit of $22 000. The only non-cash expense was depreciation
of $14000. Judy's acquired a $119000 building by borrowing $119000 on a long-term bill
payable.
L0 6
Requirements
1 How much did Judy's cash balance increase or decrease during the year?
2 Were there any non-cash transactions for the company? If so, show how they would be
reported in the cash flow statement.
S16-13 Calculating free cash flow
Cooper Company Ltd expects the following for 2016:
• net cash provided by operating activities of $158 000
•
net cash provided by financing activities of $60 000
•
net cash used for investing activities of $80000 (no sales of long-term assets)
•
cash dividends paid to shareholders is $10 000.
LO B
Requirement
How much free cash flow does Cooper expect for 2016?
Exercises
E16-1 Predicting future cash flows [10 min]
Anderson's Armoires reported net loss for the year of $25 000; however, it reported an increase
in cash balance of $50 000. The chief financial officer (CFO) states, 'Anderson's Armoires would
have shown a profit were it not for the depreciation expense recorded this year.'
LO 1
Requirements
1 Can the CFO be right? Why?
2 Based on the information provided, what would you predict future cash flows to be?
E16-2 Identifying activity categories-direct method [10-15 min]
Consider the following transactions:
_ _ _ _ _ a Collection of accounts receivable.
_ _ _ _ _b
Issue of bill payable to borrow cash.
_ _ _ _ _c
Depreciation.
_ __ _ _d
Issue of preference shares for cash.
_ _ _ _ _e
Payment of cash dividend.
_ _ _ _ _f
Sale of land.
_ _ _ _ _g
Acquisition of equipment by issue of bill payable.
_ _ _ _ _h
Payment of bill payable.
LO 2
CHAPTER 16 THE CASH FLOW STATEMENT
Payment of long -term debt.
Issue of ordinary shares for cash.
_ _ _ __ k Payment of account payable.
Acquisition of building by issue of ordinary shares.
_ _ _ _ _ m Purchase of equipment.
_ _ _ _ _n
Payment of wages to employees.
_ _ _ __ o
Collect ion of cash interest.
_ __ __ p
Sale of building .
Requirement
Identify each of the transactions as a(n):
• operating activity (O)
•
investing activity (I)
•
financing activity (F)
•
non-cash financing and investing activity (NFI)
•
transaction that isn't reported on the cash flow statement (N)
'
Fo r each cash flow, indicate whether the item increases (+) or decreases (-) cash . The direct
method is used for cash flows from ope rating activities.
E16-3 Identifying activity categories of transactions-direct method [5-10 min]
Consider the following transactions:
(a)
Land
Cash
(b)
(c)
II Debentures payable II
II
!
II
36 000
·
Building
Bill payable
(e) j Cash
Accounts receivable
(f)
9 800
II
Equipment
Cash
(d)
II
Cash
Ih
Cash
17 000
II
Dividends payable
11
s 200 II
(g) Sa lary expense
17 000
II
!I
II
II
II (hilCash
9 800
36 000
I
II
Ordinary share capital
5 200
11 92
000
11 92 000
11
II (i) II Long-te rm debt
I! 16 300 II
II
!l
Cash
16 300
11
l
Cash
(j)
128 000
!I
jj 128 000 II jj
2 200
II
Cash
19 800
Interest revenue
ll (k) ll Land
2 200
II
(1)
19 800
3 200
11
11
j
Accounts payabl e
11
11
3 200
l 64 000 I
11"4 000
Cash
11
11
I
II
1
10 200
Cas h
II
U10 200
Requirement
Indicate where, if at all, each of the transactions would be reported on a cash flow statement
prepared by the direct method and the accompanying schedule of non-cash financing and
investing activities.
LO 3
E16-4 Preparing operating activities cash flow-direct method [10-15 min]
Th e accounting records of Fuzzy Dice Auto Parts Pty Ltd reveal the following:
Payment of salaries and wages
Depreciation
Payment of interest
Payment of dividends
Collections from customers
$ 31 000
13 000
16 000
6 000
117 000
Profit
Payment of income tax
Collection of d ividend revenu e
Payment to supp liers
$21
11
6
54
000
000
000
000
CHAPTER 16 THE CASH FLOW STATEMENT
Requirement
Calculate cash flows from operating activities using the direct method.
E16-5 Identifying activity categories of transactions-direct method [5-10 min]
Selected accounts of Printing Networks Ltd show the following:
Accounts receivable
Beginning balance
9 100
Service revenue
40 000
Ending balance
11 100
Cash collections
38 000
Land
Beginning balance
87 000
Acquisition
14 000
Ending balance
101 000
Long-term bills payable
Beginning balance
Payments
73 000
Issue for cash
Ending balance
274 000
84 000
285 000
Requirement
For each account, identify the item or items that should appear on a cash flow statement prepared
by the direct method. Also state each item's amount and where to report the item.
LO 3
E16-6 Preparing the cash flow statement-direct method [20-30 min]
The income statement and additional data of Best Corporation Ltd follow:
BEST CORPORATION LTD
Income statement
for the year ended 30 June 2016
Revenues:
Sales revenue
I II
$231 000
Dividend revenue
8 000
Expenses:
Cost of sales
Salary expense
Depreciation expense
Advertising expense
Income tax expense
Interest expense
II
l
I
$239 000
$102 000
48 000
I
28 000
I
11 000
13 000
3 000
Profit
II
205 000
$ 34 000
Additional data follow:
a Collections from customers are $15 500 more than sales.
b
Dividend revenue, interest expense and income tax expense equal their cash amounts.
c
Payments to suppliers are the sum of cost of sales plus advertising expense.
d
Payments to employees are $1 000 more than salary expense.
e
Acquisition of non-current assets is $102 000.
f
Cash receipts from sale of land total $24000.
g
Cash receipts from issue of ordinary shares total $32 000.
CHAPTER 16 THE CASH FLOW STATEMENT
h
Payment of long-term bil l payab le is $17 000.
Payment of dividends is $1 O500.
Cash balance, 30 June 2016, was $28000; 30 June 20 15 was $25 000.
Requirement
Prepare Best Corporation's cash flow statement for the year ended 30 June 2016. Use t he
direct method .
L0 3,4
E16-7 Calculating cash flow items-direct method [10- 15 min]
Consider the following facts :
a Beginning and ending Accounts receivable are $20000 and $24 000, respect ive ly. Credit
sales for the period total $62 000.
b Cost of sales is $76000. Beginning Inventory balance is $27000, and end ing Invento ry
balance is $22000. Beginning and end ing Accounts payable are $14000 and $9000,
respectively.
Requirements
1 Calculate cash collections from customers.
2 Calculate cash payments for inventory.
L0 3,4
E16-8 Calculating cash flow items-direct method [20-30 min]
Superb Mobile Homes Ltd reported the following in its financia l statements for the year
ended 31 December 2016:
2016
2015
$25 118
$21 115
18 088
15 432
Income statement
Net sales
Cost of sales
Depreciation
Other operating expenses
Income tax expense
Profit
273
232
4 411
4 283
481
536
$ 1 810
$
687
$
$
13
Balance sheet
Cash and cash equivalents
Accounts receivable
15
799
619
Inventories
3 489
2 839
Property and equipment, net
4 346
3 436
Accounts payable
1 544
1 364
Accrued liabilities
941
853
Long-term liabilities
479
468
Ordinary share capital
Retained earnings
Requirement
Determine the following for Superb Mobile Homes during 2016:
a collections from customers
b
payments for inventory
c
payments of operating expenses
d
acquisitions of property and equipment (no sales of property during 2016)
e
borrowing, with Superb paying no non-current liabilities
f
cash receipt from issue of ordinary shares
g
payment of cash dividends.
443
3 779
CHAPTER 16 THE CASH FLOW STATEMENT
E16-9 Calculating financing and investing amounts for the cash flow statement [10-15 min]
Consider the following facts for Espresso Place:
a
Beginning and ending Retained earnings are $44000 and $70000, respectively. Profit for
the period is $61 000.
b
Beginning and ending Non-current assets, net, are $104000 and $109000, respectively.
Depreciation for the period is $17 000, and acquisitions of new non-current assets total
$28000. Non-current assets were sold at a $5000 gain.
Requirements
How much are cash dividends?
2 What was the amount of the cash receipt from the sale of non-current assets?
E16-10 Classifying items on the indirect method cash flow statement [5-10 min]
The cash flow statement categorises like transactions for optimal reporting.
Requirement
Identify each of the following transactions as one of the following:
•
operating activity (O)
•
investing activity (I)
•
financing activity (F)
•
non-cash financing and investing activity (NFI)
•
transaction that is not reported on the cash flow statement (N)
For each cash flow, indicate whether the item increases (+) or decreases(-) cash. The indirect
method is used to report cash flows from operating activities.
_ _ __ _ a Loss on sale of land.
_ _ _ _ _b
Acquisition of equipment by issue of bill payable.
_ _ __ _c
Payment of long-term debt.
_ _ _ _ _d
Acquisition of building by issue of ordinary shares.
_ _ __ _e
Increase in salary payable.
_ _ _ _ _f
Decrease in inventory.
_ _ _ _ _g
Increase in prepaid expenses.
_ _ _ _ _h
Decrease in accrued liabilities.
Cash sale of land.
Issue of long-term bill payable to borrow cash.
_____ k Depreciation.
Purchase of long-term investment.
_ _ _ __ m Issue of ordinary shares.
_ _ _ _ _n
Increase in accounts payable.
_ _ _ _ _o
Profit.
_ _ _ _ _p
Payment of cash dividend.
LO 5
CHAPTER 16 THE CASH FLOW STATEMENT
E16-11 Classifying transactions on the cash flow statement-indirect method [5-10 min]
Consider the following transactions:
(a)
II Cash
(g)
72 000
72 000
Ordinary share capital
(b)
II Long-term debt
-
-,1
Cash
(d)
Land
(c)
(e)
Debentures payable
U)
103 000
Accumulated depreciation
137 000
137 000
Bill payable, long-term
(k)
6 800
51 000
Building
103 000
Depreciation expense
51 000
Cash
88 000
Cash
9 600
Equipment
(i)
Sales revenue
9 600
Cash
16 500
88 000
22 000
Cash
(h)
16 500
Cash
22 000
Land
Loss on disposal of
equipment
6 800
1 800
1 800
Equipment, net
(f )
Dividends payable
19 500
Cash
19 500
~
-
·"
Requirement
Indicate whether each transaction would result in an operating activity, an investing activity
or a financing activity for an indirect method cash flow statement and the accompanying
schedule of non-cash financing and investing activities.
LO 5
E16-12 Calculating operating activities cash flow-indirect method [10-15 min]
The records of McKnight Colour Engraving Ltd reveal the following:
Profit
Sales revenue
Loss on sale of land
Acquisition of land
$38 000
51 000
5 000
39 000
$ 4 000
28 000
Depreciation
Decrease in current liabilities
Increase in cu rrent assets other
than cash
14 000
Requirements
1 Calculate cash flows from operating activities by the indirect method.
2
LO 5
Evaluate the operating cash flow of McKnight Colour Engraving. Give the reason for your
evaluation.
E16-13 Calculating operating activities cash flow-indirect method [15-20 min]
The accounting records of DVD Sales Ltd include the following accounts:
Cash
Accounts receivable
Inventory
Jul 1
5 500
????
????
????
Jul 31
3 000
Jul 31 17 000
Jul 31 25 500
Jul 1
Jul 1
Accumulated deprequipment
Accounts payable
Jul 1
21 000
14 500
Jul 1
55 000
????
Depr
3 000
Jul31 19500
Jul 31
58 000
22 000
Retained earnings
Jul 1
Dividend19 000
65 000
Profit 65 000
Ju I 31 111 000
CHAPTER 16 THE CASH FLOW STATEMENT
Requirement
Calculate DVD's net cash provided by (used for) operating act ivities during July. Use the
indirect method.
LO 5
E16-14 Preparing the cash flow statement-indirect method [20-30 min]
The income statement of Minerals Plus Ltd follows:
MINERALS PLUS LTD
Income statement
for the year ended 30 September 2016
II
Revenues:
i
I
I
$235 000
Service revenue
I $97 000
Expenses:
Cost of sa les
II
Sal ary expense
Depreciati on expe nse
Income ta x expense
57 000
26 000
4 000
II
,,
Profit
184 000
$ 51 000
Additional data follow:
a Acquisition of non-current assets is $118000. Of this amount, $100000 is paid in cash and
$18000 by signing a bill payable.
b
Cash receipt from sale of land totals $28000. There was no gain or loss.
c
Cash receipts from issue of ordinary shares total $29000.
d
Payment of bill payable is $18000.
e
Payment of dividends is $8000.
f
From the balance sheet:
30 September
Cu rrent assets:
Cash
Acco unts receiva ble
Inventory
Cu rrent liabilit ies:
Accou nts payab le
Accrued liabi liti es
2016
2015
$30 000
41 000
97 000
$ 8 000
59 000
93 000
$30 000
11 000
$17 000
24 000
Requirement
Prepare Minerals Pius's cash flow statement for the year ended 30 September 2016, using the
indirect method. Include a separate section for non-cash f inancing and investing activities.
E16-15 Analysing free cash flow [15 min]
Use the Best Corporation Ltd data in Exercise 16-6. The company plans to purchase a truck for
$29000 and a forklift for $121000 next year.
Requirement
Calculate the amount of free cash flow Best Corporation has fo r the coming year.
LO S
CHAPTER 16 THE CASH FLOW STATEMENT
Problems
P16-1 Purpose of the statement and preparing the cash flow statement-direct method
[40-50 min]
National Reserve Rare Coins Ltd (NRRC) was formed on 1 January 2017. Additional data for
the year follows:
a On 1 January 2017, NRRC issued ordinary shares for $525000.
b
Early in January, NRRC made the following cash payments:
1 for store fixtures, $55000
2 for inventory, $320000
3 for rent expense on a store building, $17000.
c
Later in the year, NRRC purchased inventory on account for $244000. Before year-end,
NRRC paid $164000 of this account payable.
d
During 2017, NRRC sold 2 500 units of inventory for $400 each. Before year-end, the
company collected 85% of this amount. Cost of sales for the year was $320000, and
ending inventory totalled $244000.
e The store employs three people. The combined annual payroll is $80000, of which NRRC
still owes $3 000 at year-end.
f
At the end of the year, NRRC paid income tax of $20 000.
g
Late in 2017, NRRC paid cash dividends of $39000.
h For equipment, NRRC uses the straight-line depreciation method, over five years, with
zero residual value.
Requirements
1 What is the purpose of the cash flow statement?
LO 3,4
2
Prepare NRRC's income statement for the year ended 31 December 2017. Use the singlestep format, with all revenues listed together and all expenses listed together.
3
Prepare NRRC's balance sheet at 31 December 2017.
4
Prepare NRRC's cash flow statement using the direct method for the year ended
31 December 2017.
P16-2 Preparing the cash flow statement-direct method [35-45 min]
MPG Ltd's accountants have developed the following data from the company's accounting
records for the year ended 30 April 2016:
a Purchase of non-current assets, $59400.
b
Cash receipt from issue of bills payable, $46100.
c
Payments of bills payable, $44000.
d
Cash receipt from sale of non-current assets, $24 500.
e
Cash receipt of dividends, $4800.
f
Payments to suppliers, $374300.
g
Interest expense and payments, $12 000.
h
Payments of salaries, $88000.
Income tax expense and payments, $37000.
j
Depreciation expense, $59 900.
k
Collections from customers, $605 500.
Payment of cash dividends, $49400.
m Cash receipt from issue of ordinary shares, $64900.
n
Cash balance: 30 April 2015, $40000; 30 April 2016, $121700.
Requirement
Prepare MPG's cash flow statement for the year ended 30 April 2016. Use the direct method
for cash flows from operating activities.
CHAPTER 16 THE CASH FLOW STATEMENT
P16-3 Preparing the cash flow statement-direct method with non-cash transactions
[30-40 min]
The 2017 comparative balance sheet and income statement of All Wired Ltd follow:
All WIRED LTD
Comparative balance sheet
as at 31 December 2017 and 2016
2017
2016
$ 26 700
$ 15 600
Current assets:
Cash and cash equivalents
Accounts receivable
26 500
25 300
79 900
91 900
35 500
11 000
Equipment
123 480
108 840
Accumulated depreciation-equipment
(20 580)
(18 140)
11
Inventories
Non-current assets:
Land
Total assets
$271 500
$234 500
Accounts payable
$ 35 600
$ 30 500
Accrued liabilities
28 900
30 600
77 000
103 000
88 200
64 300
Current liabilities:
I
II
II
Non-current liabilities:
Bills payable
Shareholders' equity:
Ordinary share capital
Retained earnings
Total liabilities and shareholders' equity
41 800
6 100
$271 500
$234 500
All WIRED LTD
Income statement
for the year ended 31 December 2017
II
Revenues:
Sales revenue
$438 000
Interest revenue
8 500
Total revenues
446 500
Expenses:
Cost of sales
$209 200
Salary expense
72 400
Depreciation expense
14 500
Other operating expense
10 000
Interest expense
21 500
Income tax expense
19 400
Total expenses
Profit
347 000
$ 99 500
CHAPTER 16 THE CASH FLOW STATEMENT
Additionally, All Wired purchased land of $24500 by financing it 100% with long-term bills
payable during 2017. During the year, there were no sales of land, no additional issues of bills
payable and no buy-back of shares. An item of equipment was disposed of for $0. The cost
and accumulated depreciation of the disposed equipment was $12 060.
Requirements
LO 3,4
1
Prepare the 2017 cash flow statement, formatting operating activities by the direct
method.
2
How w ill what you learned in this problem help you evaluate an investment?
P16-4 Preparing the cash flow statement-direct met hod [45-60 min]
To prepare the cash flow statement, accountants fo r E-Mobile Ltd have summarised 2016
activity in the Cash account as follows:
Cash
Beginning balance
87 200
Payments of operating expenses
46 800
Issue of ordinary shares
60 200
Payments of salaries and wages
64 500
Receipts of interest revenue
16 100
Payment of bill payable
79 000
308 400
Payment of income tax
7 500
Collections from customers
Payments on accounts payable
101 600
Payments of dividends
Ending balance
1 400
Payments of interest
21 700
Purchase of equipment
49 500
99 900
Requirement
Prepare E-Mobile's cash flow statement for the year ended 31 December 2016, using the
direct method to report operating activities.
LO 2,5
P1 6·5 Preparing the cash flow statement-indirect method [35-45 min]
Accountants for Johnson Ltd have assembled the following data for the year ended
31 December 2016:
31 December
Current accounts:
Current assets:
Cash and cash equivalents
Accounts receivable
Inventories
Current liabilities:
Accounts payable
Income tax payable
2016
2015
$92 100
64 500
87 000
$17 000
69 200
80 000
57 900
14 400
56 200
17 100
Transaction data for 2016:
Issue of ordinary shares for cash
$40 000
Depreciation expense
25 000
Purchase of equipment
75 000
Acquisition of land by issuing long-term
bill payable
122 000
Cost of building sold
53 000
Payment of bill payable
Payment of cash dividends
Issue of bill payable to borrow cash
Gain on sale of building
Profit
$48 100
54 000
67 000
5 500
70 500
CHAPTER 16 TH E CASH FLOW STATEMENT
Requirement
Prepare Johnson's cash flow statement using the indirect method. Include an accompanying
schedule of non-cash financing and investing activities.
P16-6 Preparing the cash flow statement-indirect method, evaluating cash flows and
measuring free cash flows [35-45 min]
The comparative balance sheet of Jackson Educational Supply Ltd at 31 December 2016
reported the fol lowing:
31 December
Current assets:
Cash and cash equivalents
Accounts receivable
Inventories
Current liabilities:
Accounts payable
Accrued liabilities
2016
2015
$88 200
14 400
63 600
$22 500
21 700
60 400
28 600
10 600
27 100
11 200
Jackson's transactions during 2016 included the following:
'payment of cash dividend
Purchase of equipment
Issue of long-term bill payable to
borrow cash
$17 200
54 400
50 000
Depreciation expense
Purchase of building
Profit
Issue of ordinary shares for cash
$ 16 700
100 000
59 600
106 000
Requirements
1 Prepare the cash flow statement of Jackson Educational Supply fo r the year ended
31 December 2016. Use the indirect method to report cash flows from operating
activities.
2
Evaluate Jackson's cash flows for the year. Mention all three categories of cash flows and
give the reason for your evaluation.
3
If Jackson plans similar activity for 2017, what is its expected free cash flow?
P16-7 Preparing the cash flow statement-indirect method with non-cash transact ions
[35-45 min]
Use the All Wired data from Problem 16-3.
Requirements
1
Prepare the 2017 cash flow statement, formatting operating activities by the indirect
method.
2
How will what you learned in this problem help you evaluate an investment?
P16-8 Preparing the cash flow statement-supplementary disclosure [15-20 min]
Use the National Reserve Rare Coins Ltd data from Problem 16-1.
Requirement
Prepare a supplementary reconciliation of net cash from operating activities to profit.
LO 6,8
CHAPTER 16 THE CASH FLOW STATEM ENT
Continuing exercise
LO 5
E16-16 Preparing the cash flow statement-indirect method [25-35 min]
This exercise continues the Lawlor Lawn Service situation from Exercise 15-14 of Chapter 15.
Refer to the compa rative balance sheet for Lawlor Lawn Service:
LAWLOR LAWN SERVICE LTD
Comparative balance sheet
as at 31 May 2016 and 2015
2016
Assets
$ 17 420
Cash
Accounts receivable
Lawn supplies
Equipment
Building
50
150
40
1 440
1 440
120 000
Accumulated depreciation
2015
$2 420
2 550
(360)
Accumulated depreciation
11
(30)
0
(2 500)
Total assets
$138 700
$3 920
440
$1 440
555
0
Current portion of mortgage payable
12 000
0
Mortgage payable
99 000
0
$111 995
$1 440
2 700
1 700
Liabilities
Accounts payable
Interest payable
Total liabilities
I
$
Shareholders' equity
Ordinary share capital
Retained earnings
Total liabilities and shareholders' equity
24 005
780
$138 700
$3 920
Requirement
Prepare the cash flow statement using the
declared or paid during the year.
indirect method. Assume no dividends were
CHAPTER 16 THE CASH FLOW STATEMENT
Continuing problem
P16-9 Preparing the cash flow statement-indirect method [25-35 min]
This problem continues the Draper Consulting Ltd situation from Problem 15-7 of Chapter 15.
Refer to the comparative balance sheet for Draper Consulting:
DRAPER CONSULTING LTD
Comparative balance sheet
as at 31 December 2017 and 2016
Assets
-
Cash
11
Accounts receivable
Supplies
,I
Equipment
Furniture
11
2017
2016
$514936
$16 350
37 500
1 750
2 200
200
16 000
1 800
5 700
4 200
125 000
Building
(2 753)
Accumulated depreciation
Total assets
0
(100)
$698 583
$24 200
$ 10 000
$ 4 650
Liabilities
II
Accounts payable
4 100
685
i
0
700
10 667
0
I
40 000
0
Debentures payable
400 000
0
I!
Discount on debentures payable
(36 184)
0
I,
Ordinary share capital
130 000
18 000
Retained earnings
140 000
165
$698 583
$24 200
II
Salary payable
Unearned service revenue
Interest payable
II
I
Bills payable
Shareholders' equity
11
Total liabilities and shareholders' equity
Requirement
Assume profit for 2017 is $141 235. Prepare the statement of cash flows using the indirect
method.
APPLY
Decision cases
Case 16-1
The 2016 comparative income statement and the 2016 comparative balance sheet of Golf
Australia Ltd have just been distributed at a meeting of the company's board of directors.
The members of the board of directors raise a fundamental question: why is the cash balance
so low? This question is especially troublesome to the board members because 2016 showed
record profits. As the controller of the company, you must answer the question.
CHAPTER 16 THE CASH FLOW STATEMENT
GOLF AUSTRALIA LTD
Comparative income statement
for the years ended 31 December 2016 and 2015
I
I
I
2016
(In thousands)
'
I
Revenues and gains:
18
II
$444
Tota l revenues and gains
Expenses and losses:
ii
I
Cost of sales
Salary expense
13
Amortisation expense on patent
I
11
-
-
28
22
I
20
II
11
-
I
Total expenses and losses
Profit
$1 62
I
46
It
Loss on sale of land (sale price, $61)
$328
48
I
Depreciation expense
,,
$221
Interest expense
·-·-•- •·---
$310
I
-
Gain on sale of equipment (sale price, $33)
-
I
$444
Sales revenue
2015
35
339
278
$105
$ 50
-
·-
--
-
~
. __.__ ..
_
,
·-
_,___,..
...........
-
GOLF AUST RALIA LTD
Comparative balance sheet
-
as at 31 December 2016 and 2015
I
--
(In thousands)
11
Assets
I
Cash
II
II
Property, p lant and equ ipment
II
II
11
Accounts receivable, net
Inventories
-
I
I
Long-term investments
I
Accumulated depreciation
Patents
Total s
Liabilities and owners' equity
II
I'
Ordinary shares
II
Totals
$ 25
72
I
Bi lls payable, long-term
11
Retained earnings
I:
2015
$ 63
61
181
31
0
369
259
(244)
(198)
177
188
$624
$554
I
$ 63
12
179
149
221
11
:1
194
I
Accounts payable
Accrued liabil it ies
2016
$624
I
I
I
II
$ 56
17
264
61
156
$554
-
Requirements
1
Prepare a cash flow statement for 2016 in the format that best shows the relationship
bet ween profit and operat ing cash flow. The co m pany sold no non-current assets or
long-term investments and issued no bills payable during 2016. There were no non-cash
fi nancing and investing transactions during the yea r. Show all amounts in thousands .
CHAPTER 16 THE CASH FLOW STATEMENT
2 Answer the board members' question: why is the cash balance so low? In explaining the
business's cash flows, identify two significant cash receipts that occu rred during 2015 but
not in 20 16. Also point out the two largest cash payments during 20 16.
3 Considering profit and the company's cash flows during 2016, was it a good year or a bad
year? Give your reasons.
Case 16-2
Showcase Cinemas Ltd and Theatre by Design Co. Ltd are asking you to recommend their
shares to your clients. Because Showcase Cinemas and Theatre by Design earn about the
same profit and have simila r financial positions, your decision depends on t heir cash flow
statements, summarised as follows:
Showcase Cinemas
Net cash provided by operating activities:
Theat re by Design
$ 70 000
$ 30 000
Cash provided by (used in) investing activities:
Purchase of non-current assets
Sale of non-current assets
$(100 000)
10 000
$(20 000)
(90 000)
40 000
20 000
Cash provided by (used in) financing activities:
Issue of ordinary shares
30 000
Paying off long-term debt
Net increase in cash
(40 000)
$10 000
$10 000
Requirement
Based on their cash flows, which company looks better? Give your reasons.
Focus on ethics
Moss Exports Ltd is having a bad year. Profit is only $60 000. Also, two important overseas
customers are falling behind in their payments to Moss, and Moss's accounts receivable are
ballooning. The company desperately needs a loan. The Moss board of directo rs is considering
ways to put the best face on the company's financial statements. Moss's bank closely examines
cash flow from operations. Daniel Peach, Moss's controller, suggests reclassifying as noncurrent the receivables from the slow-paying clients . He explains to the board that removing
the $80 000 rise in accounts receivable from current assets will increase net cash provided by
operations. This approach may help Moss get the loan .
Requirements
1 Using only the amount s given, calculate net cash provided by operations, both without
and with the reclassifica t ion of the receivables. Which report ing makes Moss look better?
2
Under what condition would the reclassification of t he receivables be ethical? Unethical?
Fraud case
Frank Lin had recently been promoted to construct ion manager at a development firm . He
was responsible for dealing with contractors who were bidding on a multi-million dollar
excavation job for a new high-rise. Times were t ough: severa l contractors had gone under
recently, and the ones left standing we re viciou sly competitive. That morning, four bids were
sitting on Frank's desk. The deadline was midnight , and the bids would be opened the next
morning. The first bidder, Bob Freely, was a tough but personable cha racter whom Frank had
known for years . Frank had lunch with him today and, after a few beers, Bob hinted that, if
Frank 'inadvertently' mentioned the amount of the lowest bid, he'd receive a 'birthday card'
CHAPTER 16 THE CASH FLOW STATEMENT
with a gift of cash. After lunch, Frank carefully unsealed the bids and noticed that another
firm had underbid Bob's company by a small margin. Frank took Bob's bid envelope, wrote
the low bid amount in pencil on it and carried it downstairs where Bob's son William was
waiting. Later that afternoon, a new bid came in from Bob's company. The next day, Bob's
company got the job and Frank got a birthday card in his mailbox.
Requirements
1 Was Frank's company hurt in any way by this fraudulent action?
2 How could this action hurt Frank?
3 How can a business protect against this kind of fraud?
Financial statement case
Use the latest JB Hi-Fi cash flow statement (available from their website}, along with the
company's other financial statements, to answer the following questions. Use the consolidated
figures.
1 Which category of cash flows (operating, investing and financing) provided the majority
of cash inflows? Which category had the greatest outflows?
2
Identify the primary cash receipts and cash payments during the year.
3 What were the main non-cash financing and investing activities?
4
Evaluate the company, in terms of profit, cash flows, financial position and overall
results. Be specific.
729
CHAPTER 16 THE CASH FLOW STATEMENT
APPENDIX 16A
16.9 THE WORKSHEET APPROACH TO PREPARING THE
CASH FLOW STATEMENT
The body of this chapter discusses the uses of the cash flow statement in decision making and
shows how to prepare the statement using T-accounts. The T-account approach works well as a
learning device. In practice, however, most companies face complex situations. In these cases, a
worksheet can help accountants prepare the cash flow statement. This appendi x shows how to
prepare that statement using a specially designed worksheet.
The worksheet starts with the beginning balance sheet and concludes with the ending balance
sheet. Two middle columns- one for debit amounts and the other for credit amounts-complete
the worksheet. These columns, labelled 'Transaction analysis ', contain the data for the cash flow
statement. Exhibit 16A-1 presents the worksheet. Accountants can prepare the statement directly
from the lower part of the worksheet (Panel B in Exhibit 16A-l). Exhibit 16A-2 (p. 732) is based
on the Smart Touch Learning Ltd data presented in the chapter.
LO
Use the worksheet
approach to prepare
the cash flow
statement
EXHIBIT 16A-1
SMART TOUCH LEARNING LTD
Worksheet for cash flow statement
for the year ended 30 June 2016
I
I
Balances
Transaction analysis
30 June 2015
Debit
PANEL A- Account titles
Credit
l'
Cas h
A ccounts rece ivabl e
,
Retain ed ea rnings
PANEL B-Cash flow statement
1
Cash f low s from operating activities
l
Cash f lows from investing activities
Cash f lows from f inancing acti vi ties
Net increase (decrease) in cash
h
11
I
III
Balances
30 June 2016
730
CHAPTER 16 THE CASH FLOW STATEMENT
Preparing the worksheet-direct method for operating activities
The direct method separates operating activities into cash receipts and cash payments. The
worksheet can be prepared by following these steps:
Step 1: Panel A gives the beginning and ending balances for Cash and all other balance sheet
accounts through Retained earnings . The amounts are taken directly from the beginning
and ending balance sheets in Exhibit 16-7 (p. 688) .
Step 2: Panel B lays out the framework of the cash flow statement- that is, the headings for cash
flows from operating, investing and financing activities. Exhibit 16A-l is based on the
direct method and splits operating activities into Receipts and Payments.
Step 3: The bottom of the worksheet shows Net increase in cash or Net decrease in cash, as the
case may be. This final amount is the difference between ending cash and beginning
cash, from the balance sheet. The cash flow statement explains why this change in cash
occurred during the period.
Step 4: Analyse the period's transactions in the middle columns of the worksheet.
Step 5: Prepare the cash flow statement directly from Panel B of the worksheet.
Transaction analysis on the worksheet-direct method
For your convenience, we repeat the Smart Touch Learning Ltd transaction data from Exhibit 16-5.
These data are given below. Transactions with cash effects are denoted by an asterisk.
Operating activities:
a Sales on credit, $284000.
*b Collections from customers, $271000.
c Interest revenue earned, $12000.
*d Collection of interest receivable, $10 000.
*e Cash receipt of dividend revenue, $9 000.
f Cost of sales, $150000.
g Purchases of inventory on credit, $147 000.
*h Payments to suppliers, $133 000.
Salary and wage expense, $56 000.
*j Payments of salaries and wages, $58 000.
k Depreciation expense, $18 000.
Other operating expense, $17 000.
*m Interest expense and payments, $16000.
*n Income tax expense and payments, $15 000.
Investing activities:
*o Cash payments to acquire non-current assets, $306000.
*p Loan to another company, $11000.
*q Proceeds from sale of non-current assets, $62 000, including $8 000 gain.
Financing activities:
*r Proceeds from issue of ordinary shares, $101000.
*s Proceeds from issue of Jong-term debt, $94000.
*t Payment of long-term debt, $11000.
*u Declaration and payment of cash dividends, $17 000.
Operating activities
The transaction analysis on the worksheet appears in the form of journal entries. Observe that only
accounts from the balance sheet appear on the worksheet. There are no accounts from the income
CHAPTER 16 THE CASH FLOW STATEMENT
statement. Therefore, revenue transactions are entered on the worksheet as credits to Retained earnings.
For example, in transaction a, sales on credit are entered on the worksheet by debiting Accounts
receivable and crediting Retained earnings. Cash is neither debited nor credited because credit sales
don't affect cash. Nevertheless, this transaction and all other transactions should be entered on the
worksheet in order to identify all the cash effects of the period's transactions. In transaction c, the
earning of interest revenue is entered by debiting Interest receivable and crediting Retained earnings.
The revenue transactions that generate cash are also recorded by crediting Retained earnings.
For example, transaction e is a cash receipt of dividend revenue. The worksheet entry credits
Retained earnings and debits Dividends received as a cash receipt from operating activities.
Transaction dis a collection of interest receivable. The worksheet entry debits Interest received-a
cash receipt from operating activities-and credits Interest receivable.
Expense transactions are entered on the worksheet as debits to Retained earnings. In transaction f,
cost of sales is entered by debiting Retained earnings and crediting Inventory. Transaction i for salary
and wage expense is entered by debiting Retained earnings and crediting Salary and wage payable.
In transaction k, depreciation is entered by debiting Retained earnings and crediting Non-current
assets, net. (This worksheet uses no Accumulated depreciation account.) In transaction I, other
operating expense is entered by debiting Retained earnings and crediting Accrued liabilities. These
transactions should be entered on the worksheet even though they have no direct effect on cash.
Transaction m is a cash payment of interest expense. The worksheet entry debits Retained
earnings and credits Payments for interest under operating activities. Transaction n is a cash
payment for income tax.
Transaction h deserves special emphasis. The Payment to suppliers of $133 000 includes three
individual amounts: payments of accounts payable, $113000; payments of accrued liabilities,
$19000; and payments of prepaid expenses, $1 000. How were these three amounts calculated?
These amounts are the differences needed to reconcile each account's beginning balance to its
ending balance. For example, Prepaid expenses increased from a beginning balance of $7 000 to an
ending amount of $8 000. This increase must occur through a cash payment of $1 000 (transaction h3).
Payments of prepaid expenses are labelled as Payments to suppliers on the cash flow statement
when operating activities are reported by the direct method. The $113 000 debit to Accounts payable
(transaction bl) is calculated as the amount needed to complete the reconciliation from the
beginning balance ($57 000) to the ending amount ($91 000), taking into consideration the $147 000
credit purchase of inventory in transaction g ($57 000 + $147 000 - $91000 + $113 000). The
$19000 debit to Accrued liabilities (transaction h2) is the amount needed to reconcile the beginning
balance to the ending balance after considering the $17 000 credit amount in transaction I.
Investing activities
The first investing activity listed in Panel B ,of the worksheet is transaction o, the $306000 cash
payment to acquire non-current assets. This transaction is entered on the worksheet by debiting
Non-current assets, net and crediting Acquisition of non-current assets under cash flows from
operating activities. Transaction q is a cash receipt from an investing activity. The cash proceeds of
$62 000 from the sale of non-current assets are entered as a cash receipt under investing activities.
The $8 000 gain is credited to Retained earnings, with the remaining $54 000-the asset's carrying
amount-credited to Non-current assets, net. The last investing transaction (transaction p) is a loan
to another company, entered on the worksheet by debiting Long-term receivable from another
company and crediting Loan to another company under investing activities.
Financing activities
The issue of ordinary shares for $101000 cash (transaction r) is entered on the worksheet by
debiting Proceeds from issue of ordinary shares under financing activities and crediting Share
capital. The $94000 issue oflong-term debt (transactions) is entered in a similar manner but with a
credit to Long-term debt. The payment of long-term debt (transaction t) debits Long-term debt and
credits Payment of long-term debt under financing activities. The payment of dividends (transaction
u) debits Retained earnings and credits Payment of dividends as a financing cash payment.
731
732
CHAPTER 16 THE CASH FLOW STATEMENT
Net increase (decrease) in cash
The net increase or net decrease in cash for the period is the balancing amount needed to equate the
total debits and total credits ($567 000) on the cash flow statement. In Exhibit 16A-2, Smart Touch
Learning Ltd experienced a $20 000 decrease in cash. This amount is entered as a credit to Cash
(transaction v) at the top of the worksheet and a debit to Net decrease in cash at the bottom.
Totalling the columns completes the worksheet.
Preparing the cash flow statement from the worksheet
To prepare the cash flow statement, which appears as Exhibit 16-2 on page 679 of the text, the accountant
has only to rewrite Panel B of the worksheet and add subtotals for the three categories of activities. In
Exhibit 16A-2, net cash from operating activities totals $68 000 [receipts of $290000 ($271000 +
$10000 + $9000) minus payments of $222000 ($113000 + $19000 + $1000 + $58000 + $16000 +
$15000)]. Net cash used in investing activities is $255000 ($306000 + $11000 - $62000). Net cash
from financing activities equals $167000 ($101000 + $94000 - $11000 - $17000). Altogether, these
three subtotals explain why cash decreased by $20000 ($68000-$255000 + $167000 = - $20000).
EXHIBIT 16A-2
SMART TOUCH LEARNING LTD
Worksheet for cash flow statement (direct method)
for the year ended 30 June 2016
(amounts in thousands)
I'
Balances
Transaction analysis
30 June 2015 :1
Debit
Balances
Credit
PANEL A- Account titles
Cash
11
Accounts receivable
Interest receivable
Inventory
42
80
Ii'
Prepaid expenses
I,
I
138
Long-term receivable from another company
Totals
219
!1
Accounts payabl e
Share capital
(g)
147
,,
,,
77
86
II
II,,
(d)
10
(f)
150
(p)
11
(o)
306
(h 1)
I
22
93
,
3
13 5
11
(k)
18
(q)
54
i'.
4 53
725
(j)
(g)
58 11 (i)
(h2)
19
(I)
17
(t)
11
(s)
94
160
(r)
101
359
284
(I)
150 1, (a)
(c)
17
(i)
56 11 (e)
(k)
18
(m)
16
(n)
15
(f)
I (U)
487
I
30 June 2016
8
11 3
258
Retained earnings
Totals
12
271
I
II
3
It
(c)
(b)
487
6
Accrued liabilities
Long -term debt
11
57
Salary and wage payable
284
20
(h3)
7
Non-current assets, net
(a)
(v)
I
(q)
147
91
56
4
110
12
9 11
8
I'
17
1 251
II'
II
1 251
725
733
CHAPTER 16 THE CASH FLOW STATEMENT
EXHIBIT 16A-2
I
(Amounts in thousands)
Balances
Transaction analysis
Balances
PANEL B-Cash flow statement
Cash flows from operating activities:
II
,1
Receipts:
I
ii
Collections from customers
(b)
271
Interest received
(d)
10
Dividends received
(e)
9
Payments:
To suppliers
II
(h1)
113
(h2)
19
(h3)
I
,I
(j)
58
For interest
(m)
16
For income tax
(n)
15
(o)
306
(p)
11
To employees
I
Ii
I'
Cash flows from investing activities:
Acquisition of non-current assets
Proceeds from sale of non-current assets
11
(q)
62
Loan to another company
,,
Cash flows from financing activities:
II
I
,,
Proceeds from issue of ordinary shares
(r)
101
Proceeds from issue of long-term debt
(s)
94
Payment of long-term debt
(u)
547
Totals
I,
(t)
Payment of dividends
Net decrease in cash
continued
(v)
11
17
567
20
567
567
CHAPTER 16 THE CASH FLOW STATEMENT
ASSESS
Problems
LO 9
P16A-1 Preparing the worksheet for the cash flow statement-direct method
[35-45 min]
The 2016 comparative balance sheet and income statement of Alden Group Ltd follow. Alden
had no non-cash financing and investing transactions during 2016.
ALDEN GROUP LTD
Comparative balance sheet
as at 31 December 2016 and 2015
Increase
2016
2015
(Decrease)
$ 13 700
$ 15 600
$ (1 900)
41 500
43 100
(1 600)
600
900
(300)
94 300
89 900
1 700
2 200
(500)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable
Interest receivable
Inventories
Prepaid expenses
4400
Non-current assets:
Land
35 100
10 000
25 100
100 900
93 700
7 200
$287 800
$255 400
$32 400
$ 16 400
$ 17 900
$ (1 500)
Interest payable
6 300
6 700
(400)
Salary payable
2 100
1 400
700
18 100
18 700
6 300
3 800
2 500
55 000
65 000
(10 000)
131 100
122 300
8 800
Equipment, net
Total assets
Liabilities
Current liabilities:
Accounts payable
Other accrued liabilities
Income tax payable
(600)
Long-term liabilities:
Bills payable
Shareholders' equity
Share capital
Retained earnings
Total liabilities and shareholders' equity
52 500
19 600
32 900
$287 800
$255 400
$32 400
CHAPTER 16 THE CASH FLOW STATEMENT
ALDEN GROUP LTD
Income statement
for the year ended 31 December 2016
!I
Revenues
$438 000
Sales revenue
11 700
Interest revenue
449 700
Total revenues
Expenses
Cost of sales
Salary expense
II
$205 200
76 400
Depreciation expense
15 300
Other operating expense
49 700
Interest expense
24 600
Income tax expense
16 900
Total expenses
Profit
I
388 100
$ 61 600
Requirement
Prepare the worksheet for the 2016 cash flow statement. Format cash flows from operating
activities by the direct method.
CHAPTER 16 THE CASH FLOW STATEMENT
P16A-2 Preparing the worksheet for the cash flow statement-direct method [35--45 min]
Grant Ltd's comparative balance sheet as at 30 September 2016 follows.
GRANT LTD
Balance sheet
as at 30 September 2016 and 2015
Increase
2016
2015
(Decrease)
$ 48 700
$ 17 600
$31 100
41 900
44 000
Assets
Current assets:
Cash
Accounts receivable
Interest rece ivab le
Inventories
4100
2 800
121 700
116 900
Prepa id expenses
8 600
9 300
Long-term investments
55 400
18 100
Land
65 800
93 000
Equipment, net
89 500
49 700
Tota I assets
$435 700
$3 51 400
(2 100)
1 300
4 800
(700)
37 300
(27 200)
39 800
I
$84 300
Liabilities
Current liabilities:
Bills payable, short-term
$ 22 000
$
0
$22 000
(8 500)
Accounts payabl e
61 800
70 300
Income tax payab le
21 800
24 600
(2 800)
Accrued liabi lities
17 900
29 100
(11 200)
Interest payable
4 500
3 200
1 300
Salary payable
1 500
1 100
400
62 900
61 300
1 600
Bills payable, long-term
Shareholders' equity
Share capital
142 100
90 200
51 900
Retained earnings
101 200
71 600
29 600
$435 700
$351 400
$84 300
Total liabilities and shareholders' equity
Transaction data for the year ended 30 September 20 16 are as follows:
a Profit, $93 900.
b
Depreciation expense on equipment, $8 500.
c
Acquired long-term investments, $37 300.
d
Sold land for $38100, including $10 900 gain.
e
Acquired equipment by issuing long-term bill payable, $26300.
f
Paid long-term bill payable, $24 700.
g
Received cash of $51900 for issue of ordinary shares.
h
Paid cash dividends, $64300.
Acquired equipment by issuing short-term bill payable, $22000.
Requirement
Prepare Grant's worksheet for the cash flow statement for the year ended 30 September 2016
using the direct method for operating activities. The income statement reports the following :
sales, $370600; gain on sale of land, $10900; interest revenue, $7300; cost of sales, $161500;
salary expense, $63400; other operating expenses, $29600; income tax expense, $18400;
interest expense, $13 500; depreciation expense, $8 500. Include on the worksheet the noncash financing and investing activities.