Class Exercises
Exercise 1
Statement of Cash Flow
The following statements have been provided from the annual reports for Premier Products Ltd.
Balance date is 31 December 2008.
Premier Products Ltd Balance Sheet as at 31 December 2008
2008
$
Assets
Property, Plant and Equipment
Land and Buildings
360,000
Accumulated Depreciation - Land and Buildings
(7,800)
Motor Vehicles
25,100
Accumulated Depreciation - Motor Vehicles
(9,750)
Office Equipment
20,000
Accumulated Depreciation - Office Equipment
(8,425)
Investments
Shares in Other Companies
9,375
Current Assets
Inventory
433,125
Accounts Receivable Control
115,000
Allowance for Doubtful Debts
(2,545)
Cash at Bank
10,250
2007
$
265,000
(5,600)
18,200
(6,680)
14,500
(8,020)
9,375
288,750
124,000
(2,480)
5,372
Total Assets
944,330
702,417
Equity
Issued and Paid up Capital
Retained Earnings
Land and Building Revaluation Reserve
265,000
440,745
95,000
235,000
292,187
-
50,000
95,000
71,835
10,200
10,550
1,000
944,330
61,030
9,200
8,500
1,500
702,417
Liabilities
Non-Current Liabilities
Mortgage
Current Liabilities
Accounts Payable Control
Income Tax Payable
Accrued Wages
Accrued Interest Expense
Total Liabilities & Shareholders’ Equity
Premium Products Ltd Income Statement for the year ended 31 December 2008
$
Sales
Less: Cost of Goods Sold
Gross Profit
Dividends Received
Less: Expenses
Depreciation
Advertising
Audit Fees
Discount Allowed
Doubtful Debts
Printing and Postage
Wages
Loss on sale of Office Equipment
Other Operating Expenses
Total Expenses
Net Profit before Interest and Tax
less Interest Expense
less Taxation
Profit after Tax
$
1,472,501
972,528
499,973
2,250
502,223
7,375
42,750
9,000
2,100
65
1,050
167,700
100
6,025
236,165
266,058
15,000
251,058
65,000
186,058
Additional information:
Office Equipment was sold for $13,200 during the year. There were no other sales of property,
plant and equipment.
Required:
1. Prepare the ‘Cash from Operating Activities’ section from the Statement of Cash Flow for
Premier Products Limited using the direct method. All workings must be shown. [Note:
Ignore GST implications. You are not required to prepare the other sections of the Statement
of Cash Flow.]
2. In the Property, Plant and Equipment section of the Balance Sheet, an increase of $5,500 is
shown in the value of Office Equipment. Explain the changes to the Office Equipment
account that have probably taken place during the year.
3. In studying the financial statements for Premier Products Ltd the owner noticed that the total
equity has increased substantially. While she is pleased with this result, she is concerned that
the business has made only a slight improvement in its cash position. Explain to the owner
the change in total equity, detailing why this has not resulted in a corresponding increase in
the cash balance. Support your answer with appropriate calculations.
Exercise 2
Your business completes year end financial statements for a range of clients. The Income
Statement and Balance Sheet for one of your clients, Mt. Albert Bookstores appears below.
Mt Albert Bookstores Income Statement for the year ended 30 September 2008
$’000
$’000
$’000
Sales
$175,000
Total revenue
$175,000
Less
COS
126,300
Gross Profit
48,700
Less expenses
Other expenses
17,000
Interest expense
1,500
Bad debts
2,000
Depreciation expense
3,000
Loss on Sale of Assets
2,000
25,500
Net profit before tax
23,200
Tax expense
7,000
Net profit after tax
$16,200
Mt. Albert Bookstores Balance Sheet as at 30 September 2008
2008
2007
$’000
$’000
Current Assets
Accounts Receivable
Inventory
Prepayments
Non Current Assets
Property, Plant & Equipment
Less:Accumulated Depreciation
Total Assets
Current Liabilities
Bank overdraft
Accounts Payable
Non Current Liabilites
Term loan
Equity
Capital
Retained earnings
Total Liabilities and Equity
43,500
63,000
2,000
108,500
63,000
55,000
2,000
120,000
84,000
16,000
68,000
176,500
82,000
23,000
59,000
179,000
6,500
34,000
40,500
10,000
31,000
41,000
30,000
15,000
60,000
46,000
106,000
60,000
63,000
123,000
176,500
179,000
Additional Information

Property, Plant and Equipment purchased during the year amounted to $17,000,000

Accumulated depreciation on the asset sold amounted to $10,000,000.
REQUIRED:
Prepare a Statement of Cash Flow (using the direct method) for the year ended 30 September
2008. Show all workings.
Out of Class Exercises
Exercise 1
The following information has been extracted from Lowe Dairy Products Company’s
Balance Sheet and Income Statement for the years ended 31 March 2005 and 31 March
2006.
2005
2006
Sales
$689,000
$785,000
Cost of Goods Sold
470,000
534,000
Gross Profit
219,000
251,000
Wages Expense
57,000
90,000
Rent expense
46,000
60,000
Interest expense
18,000
32,000
Income tax expense
20,000
26,000
Depreciation expense
6,000
8,000
Loss on disposal of equipment
7,000
Gain on sale of long-term investments
(12,000)
Dividends
10,000
13,000
Profit
63,000
27,000
Non-Current Assets, at cost
Land
207,000
257,000
Plant & Equipment
215,000
198,000
Accumulated Depreciation
61,000
60,000
Long-term Investments
33,000
25,000
Current Assets
Cash
41,000
36,000
Prepaid Asset – Rent
25,000
28,000
Accounts Receivable
49,000
73,000
Inventory
102,000
114,000
Current Liabilities
Accounts Payable
41,000
57,000
Interest Payable
20,500
22,000
Income Tax Payable
23,500
20,000
Wages Payable
25,000
24,000
Non-Current Liabilities
Long-term loan
240,000
250,000
Issued Ordinary Capital
205,000
215,000
Retained Earnings
56,000
83,000
Note:Purchased land for $50,000 cash, sold long-term investments costing $8,000 for cash
$20,000, and purchased plant during the year for $5,000.
Required:
(a) Prepare a Statement of Cash Flow using the Direct Method (ignore GST implications).
(b) Prepare a note of reconciliation for the operating activities using the indirect method.
Exercise 2
The financial statements for Patty’s Premium Products Ltd are provided below:
Patty’s Premium Products Ltd
Income Statement for the Year Ended 31 March 2006
Sales
$175,000
Less: Cost of Sales
87,000
Gross Profit
$88,000
Less: Operating Expenses
$29,000
Wages
23,000 52,000
Net Profit before Tax
36,000
Less Tax
10,800
Net Profit after Tax
$25,200
Patty’s Premium Products Ltd
Balance Sheet as at:
31 March 2006 31 March 2005
Assets:
Cash at Bank
Accounts Receivable
Inventory
Prepayments
Plant and Machinery
Accumulated Depreciation
$2,500
41,500
63,000
4,000
94,000
(16,000)
$189,000
$ (1000)
54,000
55,000
2,000
82,000
(13,000)
$179,000
Liabilities and Owners’ Equity:
Accounts Payable
$33,500
$ 30,000
Wages Due
500
1,000
Mortgage
30,000
15,000
Issued Capital
60,000
60,000
Retained Earnings
65,000
73,000
$189,000
$179,000
Required:
(a) Prepare a Statement of Cash Flow using the Direct Method (ignore GST implications).
(b) The statement of cash flow is divided into three separate categories of activities.
Discuss how this layout will assist users to assess the cash flows of the business.
Exercise 3
Davey’s Farming Products Ltd provided the following information:
Davey’s Farming Products Ltd
Income Statement for the year ended 31 December 2006
$
$
Sales
260,000
Cost of Goods sold
170,000
Gross Profit
90,000
Income Tax Expense
5,000
Interest Expense
2,000
Wages Expense
42,000
Depreciation Expense
9,000
Other Operating Expenses
14,000
72,000
Net Profit
$18,000
Davey’s Farming Products Ltd
Comparative Balance Sheet at 31 December
2006
2005
Assets
Cash
10,000
8,000
Accounts Receivable
28,000
35,000
Inventory
29,000
26,000
Prepaid Expenses
2,000
4,000
Plant
100,000
75,000
Accumulated Depreciation
(30,000)
(21,000)
139,000
127,000
Liabilities & Shareholders Equity
Accounts Payable
5,600
8,000
Wages Payable
2,400
1,700
Income Tax Payable
1,000
1,300
Bonds Payable
20,000
Issued Capital
60,000
60,000
Retained Profits
50,000
56,000
139,000
127,000
Additional information:
Plant was purchased for cash, bonds payable were issued for cash and cash dividends of
$24,000 were declared and paid during the financial year.
Required:
Prepare a Statement of Cash Flow using the Direct Method (ignore GST implications).
Suggested Solutions to Out of Class Exercises
Exercise 1
(a)
Lowe Dairy Products Company
Statement of Cash Flow
For the year ended 31 March 2006
CASH FLOW FROM OPERATING ACTIVITIES
Cash was provided from:
Receipts from Customers (785+49-73)*
Cash was applied to:
Payments to suppliers (534+114-102+41-57)* 530,000
Payments to employees (90+25-24)*
91,000
Payments for other expenses (60+28-25)*
63,000
Interest payments (32+20.5-22)*
30,500
Income tax (26+23.5-20)*
29,500
744,000
$17,000
NET CASH INFLOW (OUTFLOW) FROM OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was provided from:
Proceeds from sale of long term investment
Proceeds from sale of equipment
761,000
20,000
6,000
26,000
Cash was applied to:
Purchase of land
Purchase of plant
50,000
5,000
55,000
$(29,000)
NET CASH INFLOW (OUTFLOW) FROM INVESTING ACTIVITIES
CASH FLOW FROM FINANCING ACTIVITIES
Cash was provided from:
Proceeds from taking out a loan
Proceeds from issuing shares
10,000
10,000
20,000
Cash was applied to:
Payment of dividends to share holders
NET CASH INFLOW (OUTFLOW) FROM FINANCING ACTIVITIES
13,000
$7,000
Net increase (decrease) in cash
add Opening cash balance
equals Closing cash balance
(5,000)
41,000
36,000
Note: Amounts in brackets with * refer to $000s
Exercise 2
(a)
Patty’s Premium Products Ltd
Statement of Cash Flow
For the year ended 31 March 2006
CASH FLOW FROM OPERATING ACTIVITIES
Cash was provided from:
Receipts from Customers (175+54-41.5)*
Cash was applied to:
Payments to suppliers (87+30-33.5 +63-55)*
Payments to employees (23+1-0.5)*
Payments for other expenses (29+4-2-3)*
Tax
187,500
91,500
23,500
28,000
10,800
153,800
$33,700
NET CASH INFLOW (OUTFLOW) FROM OPERATING ACTIVITIES
CASH FLOW FROM INVESTING ACTIVITIES
Cash was applied to:
Purchase of plant & machinery (94-82)*
NET CASH INFLOW (OUTFLOW) FROM INVESTING ACTIVITIES
CASH FLOW FROM FINANCING ACTIVITIES
Cash was provided from:
Proceeds from increased mortgage (30-15)*
Cash was applied to:
Dividends paid (25.2+73-65)*
NET CASH INFLOWS (OUTFLOWS) FROM FINANCING ACTIVITIES
Net increase (decrease) in cash
add Opening cash balance
equals Closing cash balance
12,000
(12,000)
15,000
33,200
(18,200)
3,500
(1,000)
2,500
Note: Amounts in brackets with * refer to $000s
(b)
The Statement of Cash Flow is separated into three categories of activities: operating, financing,
and investing activities. Operating cash flows are generally the result of the provision of goods
and services. Investing cash flows are the result of any purchases or sales of assets and
investments, including those used to generate economic benefits over more than one future
accounting period. Financing cash flows are associated with equity and debt financing activities.
The three categories provide information about the major economic activities that use cash in the
organisation; this information can assist decision-makers by providing a more complete picture
of the organisation’s economic position and activities.
Exercise 3
Davey’s Farming Products Ltd
Statement of Cash Flow
For the year ended 31 December 2006
CASH FLOW FROM OPERATING ACTIVITIES
Cash was provided from:
Receipts from Customers (260+35-28)*
Cash was applied to:
Payments to suppliers (170+29-26 +8-5.6)*
Payments to employees (42+1.7-2.4)*
Payments for other expenses (14+2-4)*
Interest Expense
Tax Expense (5+1.3-1)*
267,000
175,400
41,300
12,000
2,000
5,300
236,000
$31,000
NET CASH INFLOW (OUTFLOW) FROM OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was applied to:
Purchase of plant & machinery (100-75)*
NET CASH INFLOW (OUTFLOW) FROM INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Cash was provided from:
Proceeds from bond
Cash was applied to:
Dividends paid
NET CASH INFLOWS (OUTFLOWS) FROM FINANCING ACTIVITIES
Net increase (decrease) in cash
add Opening cash balance
equals Closing cash balance
Note: Amounts in brackets with * refer to $000s
25,000
(25,000)
20,000
24,000
(4,000)
2,000
8,000
$10,000