Disclosure: Statement
of Cash Flows – Part 2
Chapter 17
Prepared by Lisa Cullen
Faculty
of Business
and Law and
| School
of Accounting
Faculty
of Business
Law
| School
of Accounting
CRICOS Provider
Provider Code
00301J
CRICOS
Code
00301J
Learning Objectives
After studying this module you should be able to:
Understand the difference between profit/(loss) and
net cash flow from operations.
Prepare a Statement of Cash Flows using accrual
accounting methods and applying the reconstruction
- Direct Approach
Explain the benefits and limitations of cash flow
information.
Prepare a Statement of Cash Flows using
statement of financial position approach –
Indirect Approach
Define and classify areas (inflows/outflows) of
the cash flow statement.
Prepare relevant notes to Statement of Cash Flows
and understand disclosure requirements of AASB
107
NOTE: Part 1 is more introductory while Part 2 provides more comprehensive problems once the key concepts are
learned in Part 1. Students should complete Part 1 before attempting Part 2.
Faculty of Business and Law | School of Accounting
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Statement of Cash Flows AASB 107
Reminder from Part 1
FORMAT OF THE STATEMENT OF CASH FLOWS
AASB107 requires reporting of cash inflows and cash outflows in three broad categories
• Cash flows from operating activities
• Cash flows from investing activities
• Cash flows from financing activities
Faculty of Business and Law | School of Accounting
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Statement of Cash Flows AASB 107
EXAMPLE:
Cash Flows from Operating Activities
Cash receipts from customers
Cash paid to suppliers and employees
Cash generated from operations
Interest paid
Income taxes paid
Net cash provided by operating activities
Cash Flows from Investing Activities
Purchase of investments
Purchase of property, plant and equipment
Proceeds from sale of equipment
Interest received
Dividends received
Net cash used in investing activities
Cash Flows from Financing Activities
Proceeds from issue of share capital
Proceeds from long-term borrowings
Repayment of borrowings
Dividends paid
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash
cash
equivalents
at end of period
Faculty ofand
Business
and Law
| School of Accounting
$x
(x)
x
(x)
(x)
(x)
(x)
x
x
x
(x)
$x
x
x
x
(x)
x
x
x
$x
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Statement of Cash Flows AASB 107
OVERALL PROCESS
EQUIVALENTS
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Statement of Cash Flows AASB 107
Step 1: DEFINING CASH
Includes bank overdrafts
to distinguish between
cash and investments
Extract from Qantas Annual Report
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Statement of Cash Flows AASB 107
Step 2: Classifying Cash Flows
Regardless of format used AASB 107 requires that all cash flows be
classified into the following categories:
1) Operating activities (O)
Relate to the principal revenue-producing activities of entity
2) Investing activities (I)
Relate to the acquisition and disposal of long-term assets and other
investments not included in cash equivalents
3) Financing activities (F)
Relate to changes in the size and composition of the contributed equity and
borrowings of the entity
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Statement of Cash Flows AASB 107
Step 2: Classifying Cash Flows
Interest and dividends
AASB 107 does not prescribe how interest and dividends should be
classified (i.e. O/I/F)
However, the standard does require them to be separately disclosed and
classified consistently across periods
The textbook and most businesses approach as follows:
 Interest received 
investing
 Interest paid

operating
 Dividends received 
investing
 Dividends paid

financing
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Statement of Cash Flows AASB 107
Step 3: Determine the Format
2 Formats can be applied under AASB 107
1) Direct Approach
Most Commonly used and we will use this method, however a Note is
still required to reconcile operating activities and balance sheet
movements.
2) Indirect Approach
Includes reconciling note in the format of the Statement of Cash Flows
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Statement of Cash Flows AASB 107
Step 4: Prepare the Statement of Cash Flows – Direct Method
Example from last week
Indirect Method requires
Operating cash flows to be
reconciled
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Statement of Cash Flows AASB 107
Step 4: Prepare the Statement of Cash Flows – Indirect Method
Reconciliation of profit to
net cash from operating
activities: Indirect Method
Ie Relate to Investing
NOTE:
Add Increase in Liabilities
Minus Increase in Assets
Reconciles to Statement of Cash
Flows Operating Activities
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Statement of Cash Flows AASB 107
Comprehensive Example 1 - Refer M7 Handout Part 2
Required
Prepare the Statement of Cash Flows of THE CITY LTD for the year
ended 30 June 2020 in accordance with AASB 107 using either of the
direct method or indirect method of presentation.
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Source: Company
Accounting 11th Edition
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Statement of Cash Flows AASB 107
STEP 1:
What is the Cash and Cash Equivalents balance as at 30 June 2020?
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Statement of Cash Flows AASB 107
STEP 2:
Review movements of 1) Balance sheet items – Refer handout and
Excel Template
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Statement of Cash Flows AASB 107
STEP 2:
Review movements of 2) Profit and Loss items
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Statement of Cash Flows AASB 107
STEP 3:
Read the additional information and make notes for adjustments
$50,000 Lease - Financing
Loss on sale $1600 – Cash? Investing
$30,000 - Financing
Profit on sale investments $22,600 – Cash? Investing
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Statement of Cash Flows AASB 107
STEP 4:
Reconstruct Accounts to determine Operating, Investing and Financing Activities
1) Operating Activities
Accounts receivable*
(bad debts written off)
Balance c/d
Balance b/d
Sales revenue
Allowance for Doubtful Debts
2 200 Balance b/d
2 500
4 700
Bad debts expense
Accounts Receivable
37 800 Allowance for doubt debts
1 386 000
(bad debts written off)
Discount allowed
Cash (from customers)
Balance c/d
1 423 800
CONTRA ASSET
1 900
BS
2 800
4 700
PL
ASSET
2 200
PL
950
1 371 350
49 300
1 423 800
BS
Cash receipts from customers = $1,371,350
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Statement of Cash Flows AASB 107
STEP 4:
Reconstruct Accounts to determine Operating, Investing and Financing Activities
Cash receipts from customers = $1,371,350
Cash receipts = Sales – Increase in Accounts Receivable – Bad debts
written off – Discount Allowed
= 1 386 000 – 11 500 – 2 200 – 950
= 1 371 350
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Statement of Cash Flows AASB 107
STEP 4:
Cash flows from operating activities (cont…)
Cash paid to suppliers and employees
= (1 325 050) = 900,940 + 424,110
Balance b/d
A/c Payable (purchases)*
Discount received
Cash (paid to suppliers)
Balance c/d
Faculty of Business and Law | School of Accounting
Inventory
96 600 Cost of sales
929 600
Balance c/d
1 026 200
Accounts Payable
2 100 Balance b/d
900 940
Inventory (purchases)
120 520
1 023 560
ASSET
932 000
94 200
1 026 200
LIABILIT
Y
93 960
929 600
1 023 560
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Statement of Cash Flows AASB 107
STEP 4:
Cash flows from operating activities (cont…)
Cash paid to suppliers and employees
= (1 325 050) = 900,940 + 424,110
ASSET
LIABILIT
Prepaid Expenses / Accrued Expenses Liability (Net)
Y
Balance b/d (Prepaid exp)
4 200 Balance b/d (Accrued exp)
8 340
Cash (paid employees/other)
424 110 Employee other expenses
418 950
Balance c/d (Accrued exp)
9 780
Balance c/d (Prepaid exp)
10 800
438 090
438 090
Can merge for ease of calculation – careful with opening and closing depending on whether
asset or liability
Cash paid = Cost of sales + Employee/Other expenses – Discount received –
Decrease in Inventory – Increase in Accounts Payable + Increase
in Prepaid expenses – Increase in Accrued Expenses
= 932 000 + 418 950 – 2 100 – 2 400 – 26 560 + 6 600 – 1 440
= 1 325 050
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Statement of Cash Flows AASB 107
STEP 4:
Cash flows from operating activities (cont…)
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers, employees and other
Cash generated from operations
Interest paid
Income taxes paid
Net cash from operating activities
Faculty of Business and Law | School of Accounting
$1 371 350
(1 325 050)
46 300
(17 400)
(15 000)
$13 900
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Statement of Cash Flows AASB 107
STEP 4:
Cash flows from operating activities (cont…)
Cash (interest paid)
Balance c/d
Interest Payable
17 400 Balance b/d
4 000
Interest expense
21 400
3 000
18 400
21 400
Interest paid = Interest Expense – Increase in Interest Payable
= 18 400 – 1 000
= 17 400
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Statement of Cash Flows AASB 107
STEP 4:
Cash flows from operating activities (cont…)
DTA bal c/d
DTL bal b/d
Cash (income tax paid)
Balance c/d
Current Tax Liability (DTA/DTL) NET
12 200 DTA bal b/d
23 000 DTL bal c/d
15 000 Balance b/d
13 600 ITE (from P&L)
63 800
14 400
20 000
15 000
14 400
63 800
Can merge for ease of calculation – careful with opening and closing depending on whether
asset or liability
Income tax paid = Income tax expense + Decrease in Current tax liability +
Increase in Deferred tax asset – Increase in Deferred tax liability
= 14 400 + 2 200 + 1 400 – 3 000
= 15 000
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Statement of Cash Flows AASB 107
STEP 4:
Cash flows from operating activities (cont…)
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers, employees and other
Cash generated from operations
Interest paid
Income taxes paid
Net cash from operating activities
Faculty of Business and Law | School of Accounting
$1 371 350
(1 325 050)
46 300
(17 400)
(15 000)
$13 900
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Statement of Cash Flows AASB 107
STEP 4:
Cash flows from investing activities (Interest & Dividends received)
Cash flows from investing activities
Interest received
From P&L
Dividends received
Purchase of equipment
Purchase of buildings
Proceeds from sale of investments
Proceeds from sale of equipment
Net cash used in investing activities
Balance b/d
Interest income
Faculty of Business and Law | School of Accounting
4 560
7 200
(17 400)
(120 000)
54 800
18 400
Interest Receivable
1 800 Cash (interest received)
4 360
Balance c/d
6 160
(52 440)
4 560
1 600
6 160
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Statement of Cash Flows AASB 107
STEP 4:
Cash flows from investing activities (Interest & Dividends received)
Cash flows from investing activities
Interest received
Dividends received
Purchase of equipment (a)& (b)
Purchase of buildings
Proceeds from sale of investments
Proceeds from sale of equipment
Net cash used in investing activities
Balance b/d
Finance lease liability
Cash (purchase)
Faculty of Business and Law | School of Accounting
4 560
7 200
(17 400)
(120 000)
54 800
18 400
Equipment – at cost
154 800 Sale of equipment
(Cost of equip sold)
50 000
17 400
Balance c/d
222 200
(52 440)
42 200
180 000
222 200
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Statement of Cash Flows AASB 107
STEP 4:
Non-cash component (ie finance lease) requires note disclosure
Note 2: Non-cash Financing and Investing Activities
During the period, new equipment was acquired for $67 400, part of the purchase consideration
amounting to $50 000 is subject to a finance lease.
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Statement of Cash Flows AASB 107
STEP 4:
Cash flows from investing activities (Building purchase)
Cash flows from investing activities
Interest received
Dividends received
Purchase of equipment
BS movement
Purchase of buildings
Proceeds from sale of investments
Proceeds from sale of equipment
Net cash used in investing activities
4 560
7 200
(17 400)
(120 000)
54 800
18 400
(52 440)
$360 000 – 240 000 = 120 000
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Statement of Cash Flows AASB 107
STEP 4:
Cash flows from investing activities (Proceeds – Investments)
Cash flows from investing activities
Interest received
Dividends received
Purchase of equipment
Purchase of buildings
Proceeds from sale of investments
Proceeds from sale of equipment
Net cash used in investing activities
(d)
Share investments
(cost of investments sold)
Gain on sale P&L
(d)
(52 440)
Sale of Investments
32 200 Proceeds from sale
54 800
22 600
54 800
54 800
Gain on sale = Proceeds – Carrying amount of asset sold
Proceeds= Gain on sale + Carrying amount of asset sold
= 22 600 + 32 200 = 54 800
Faculty of Business and Law | School of Accounting
4 560
7 200
(17 400)
(120 000)
54 800
18 400
Ie if you made a gain you must have
received more cash than original cost
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Statement of Cash Flows AASB 107
STEP 4:
Cash flows from investing activities (Proceeds – Equip)
Cash flows from investing activities
Interest received
Dividends received
Purchase of equipment
Purchase of buildings
Proceeds from sale of investments
Proceeds from sale of equipment
Net cash used in investing activities
(b)
Equipment sold Cost
Sale of Equipment A/C
42,200
4 560
7 200
(17 400)
(120 000)
54 800
18 400
(52 440)
Acc Dep Equip Sold
Loss on Sale Equip
Proceeds From Sale
42,200
Loss on sale = Proceeds – Carrying amount of asset sold
Proceeds= Loss on sale + Carrying amount of asset sold
= – 1 600 + 20 000 = 18 400
Faculty of Business and Law | School of Accounting
22,200
1,600
18,400
42,200
Ie if you made a loss you must have
received less cash than carrying
amount
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Statement of Cash Flows AASB 107
STEP 4:
Cash flows from Financing activities
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Statement of Cash Flows AASB 107
Question 6.9 (Refer to Handout)
STEP 4:
Cash flows from Financing activities
Cash flows from financing activities
Proceeds from issue of shares
Proceeds from issue of debentures
Net cash provided by financing activities
Check Dividends
Dividends paid
Balance c/d
Faculty of Business and Law | School of Accounting
21 340
30 000
51 340
Share Issue
206 240 – 184 900 = 21 340
Debentures
180 000 – 150 000 = 30 000
Retained Earnings
0 Balance b/d
80 360
Profit
80 360
67 600
12 760
80 360
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Statement of Cash Flows AASB 107
What is our Cash and Cash Equivalents balance as at 30 June 2020?
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Statement of Cash Flows AASB 107
Question 6.9 (Refer to Handout)
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Statement of Cash Flows AASB 107
Notes
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Statement of Cash Flows AASB 107
Note to reconcile Profit to Operating Activities
The City Ltd
Note 1: Reconciliation of net cash used in operating activities to profit
Profit AFTER income tax
Non-Cash and Non-Operating Items
Depreciation - Equipment
Depreciation - Buildings
Loss on Sale of Equipment
Investing
Gain on Sale of Investments
Dividend income
Interest Income
Changes in assets and liabilities related to operating activities
- Increase in accounts receivable
+ Increase allowance for doubtful debts
+ Decrease in inventories
- Increase in prepayments
+ Increase in accounts payable
+ Increase in accrued expenses
+ Increase Interest Payable
- Decrease Current Tax Liability
- Increase in 'Deferred Tax Asset
+ Increase Deferred Tax Liability
Net Cash from Operating Activities
Faculty of Business and Law | School of Accounting
12,760
-
-
-
-
10,500
9,900
1,600
22,600
7,200
4,360 -
11,500
600
2,400
6,600
26,560
1,440
1,000
1,400
2,200
3,000
From P&L AFTER tax
1)
Adjust for non- cash and non-operating items
in P&L
12,160
2)
Adjust for movements in balance sheet items
(ie related to Operating)
Add Increase in Liabilities
Minus Increase in Assets
13,300
13,900
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Statement of Cash Flows AASB 107
Note to reconcile Profit to Operating Activities
The City Ltd
Note 1: Reconciliation of net cash used in operating activities to profit
Profit BEFORE income tax
27,160
Non-Cash and Non-Operating Items
Depreciation - Equipment
Depreciation - Buildings
Loss on Sale of Equipment
Investing
Gain on Sale of Investments
Dividend income
Interest Income
10,500
9,900
1,600
- 22,600
- 7,200
- 4,360 -
Changes in assets and liabilities related to operating activities
- Increase in accounts receivable
+ Increase allowance for doubtful debts
+ Decrease in inventories
- Increase in prepayments
+ Increase in accounts payable
+ Increase in accrued expenses
+ Increase Interest Payable
- 11,500
600
2,400
- 6,600
26,560
1,440
1,000
Income tax paid
Net Cash from Operating Activities
Faculty of Business and Law | School of Accounting
1)
Adjust for non- cash and non-operating items
in P&L
12,160
13,900
Net Cash from Operating Activities before tax
28,900
-
From P&L BEFORE tax
15,000
13,900
2)
Adjust for movements in balance sheet items
(ie related to Operating)
Add Increase in Liabilities
Minus Increase in Assets
[or opposite]
Note: movement in BS tax accounts not
included as before tax is the starting point
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The City Ltd
Statement of Cash Flows
For the year ended 30 June 2020
Cash flows from operating activities
Profit BEFORE income tax
Depreciation - Equipment
Depreciation - Buildings
Loss on Sale of Equipment
Gain on Sale of Investments
Dividend income
Interest Income
Interest Expense
- Increase in accounts receivable
+ Increase allowance for doubtful debts
+ Decrease in inventories
- Increase in prepayments
+ Increase in accounts payable
+ Increase in accrued expenses
Cash generated from operations
Interest Paid
Income tax paid
Net cash from operating activities
-
-
-
-
Indirect Method - Compliance with AASB107 requires Interest
paid & tax paid (operating) & dividends paid (financing) to be
shown separately.
27,160
10,500
9,900
1,600
22,600
7,200
-4360
18,400
11,500
600
2,400
6,600
26,560
1,440
46,300
17,400
15,000
The City Ltd
Statement of Cash Flows
For the year ended 30 June 2020
13,900
Cash flows from investing activities
Interest received
Dividends Received
Purchase of Equipment
Purchase of Buildings
Proceeds from Sale of Investments
Proceeds from Sale of Equipment
Net cash used in investing activities
4,560
7,200
- 17,400
- 120,000
54,800
18,400
Cash flows from financing activities
Proceeds from Share issue
Proceeds from Debenture issue
Net cash from financing activities
21,340
30,000
- 52,440
Net increase(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Faculty of Business and Law | School of Accounting
51,340
12,800
23,600
36,400
Cash flows from operating activities
Profit BEFORE income tax
Depreciation - Equipment
Depreciation - Buildings
Loss on Sale of Equipment
Gain on Sale of Investments
Dividend income
Interest Income
Interest Expense
- Increase in accounts receivable
+ Increase allowance for doubtful debts
+ Decrease in inventories
- Increase in prepayments
+ Increase in accounts payable
+ Increase in accrued expenses
Cash generated from operations
Interest Paid
Income tax paid
Net cash from operating activities
-
-
-
27,160
10,500
9,900
1,600
22,600
7,200
4,360
18,400
11,500
600
2,400
6,600
26,560
1,440
46,300
17,400
15,000
13,900
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Statement of Cash Flows AASB 107
Question 6.9 (Refer to Handout)
Indirect Method Reconciliation
replaces this section but take
care to show interest paid, tax
paid (operating) and dividends
paid (financing) separately
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Direct Method
Source: Qantas Annual Report 2018
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Source: Qantas Annual Report 2018
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Source: Qantas Annual Report 2018
Operating
profit
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Let’s have a 10-min break!
Next we will work on Seminar questions
Exercise 17.11 and an Additional question
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Exercise 17.11
Correction Plant $560,000
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Exercise 17.11
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Assume Profit $240,000 is after tax and
interest
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Additional Question – Kongsi Ltd
Refer Handout
Required:
a)
b)
c)
Prepare a cash flow statement for Kongsi Ltd for the year ended 30 June 2016 in accordance with
AASB 107. Show all workings.
Prepare a note to the statement reconciling cash at the end of the period in the cash flow
statement with the balance sheet figures.
Prepare a note to the statement reconciling net cash used in operating activities with operating
profit after tax.
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Additional Question – Kongsi Ltd
The following information relating to Kongsi Ltd is available:
Kongsi Ltd
Income Statement
for the year ended 30 June 2016
$
920,000
540,000
380,000
Sales
Less: Cost of goods sold
Add:
Less:
Discount received
Dividends revenue
Interest revenue
Gain on the sale of investments
Interest expense
Inventory write down
Doubtful debts expense
Discount allowed
Loss on the sale of machinery
Other operating expenses
Profit before tax
Income tax expense
Profit
Faculty of Business and Law | School of Accounting
4,000
8,000
7,000
10,000
12,000
2,000
3,000
5,000
9,000
200,000
29,000
409,000
231,000
178,000
46,000
132,000
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Additional Question – Kongsi Ltd
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Additional Question – Kongsi Ltd
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Additional Question – Kongsi Ltd
Additional information
i)
ii)
Operating expenses include depreciation expense and impairment losses.
During the year a machine was sold for cash. This machine had a carrying amount of $39,000 at
the time of sale.
iii) New machinery costing $85,000 was purchased for cash during the year.
iv) Shares in AMZ Ltd were purchased for $11,000 cash to be held as a long-term investment.
v) Accrued expenses include the following items:
2016
2015
$
$
Annual leave
21,000
13,000
Advertising
14,000
19,000
Interest
5,000
3,000
vi) The company pays tax in four instalments, and the first three instalments have been paid in
relation to the current year.
vii) An interim dividend was paid during the year.
viii) The bank overdraft facility is used as part of the company’s everyday cash management
facilities.
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Additional Question – Kongsi Ltd
STEP 1:
What is our Cash and Cash Equivalents balance as at 30 June 2016?
2016
Bank bills
Short-term investments at call
Bank overdraft
Cash and cash equivalents
Faculty of Business and Law | School of Accounting
100,000
93,000
(92,000)
101,000
2015
60,000
30,000
(110,000)
(20,000)
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Additional Question – Kongsi Ltd
STEP 2:
Calculate all the movements of balance sheet items
STEP 3:
Read the additional information and make notes for adjustments
Hints:
For first part direct method and account reconstruction
• Join A/C receivable and bills receivable into 1 t-account
• Join prepaid and accrued expenses into 1 t-account
• Join current and deferred tax accounts into 1 t-account
• Dividends – 2 types?
For second part indirect method
• Deduct increases in assets
• Add increases in liabilities
Faculty of Business and Law | School of Accounting
Operating items
or
add decreases in assets
or
deduct decreases in liabilities
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THANK YOU!
Any Questions?
Don’t forget to
keep up-to-date
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