Chapter 2
STATEMENT OF CASH FLOWS
THE CONTENT AND VALUE OF THE STATEMENT OF CASH FLOWS
The cash flow statement reconciles beginning and ending cash by presenting the cash
receipts and cash disbursements of an enterprise for an accounting period. The receipts and
disbursements are segregated into three classes of activities. Cash receipts and disbursements
from operating activities report on the cash flows of the enterprise related to its business
operations. Cash receipts and disbursements from investing activities report on the cash flows of
the enterprise related to the acquisition and disposition of noncurrent assets. Cash receipts and
disbursements from financing activities report on the cash flows of the enterprise related to the
acquisition and repayment of debt and equity. The information contained in the statement is
useful to creditors and investors for the following reasons:
1. To assess the entity’s ability to generate cash flows in the future
2. The ability of the entity to pay dividends and meet its obligations
3. Reconciliation between net income in the income statement as net cash flow from
operating activities in the statement of cash flows.
4. To assess cash and noncash investing and financing activities of the entity during the
accounting period.
Classification of Cash Flows - There are three classifications of cash flows:
1. OPERATING ACTIVITIES
Cash receipts and disbursements are transactions that relate to net income. More
specifically these transactions relate to operating income. They include cash receipts from the
sale of products or services, the payment to vendors for inventory and the payment of salaries
and wages to employees.
2. INVESTING ACTIVITIES
Cash receipts and disbursements are transactions that relate to noncurrent assets. They
include the purchase and disposition of investments and long-lived assets and loans and
collection of loans to outside parties.
3. FINANCING ACTIVITIES
Cash receipts and disbursements are transactions that relate to long-term debt and
stockholders’ equity. They include borrowing cash from creditors and repayment of such loans
and the sale of capital stock and the payment of dividends and return of capital to equity
investors.
Exercise 1
Using the information below, to prepare a statement of cash flows for the December 31, 2012.
Cash
Accounts Receivables
Inventory
Prepaid expenses
Long-Term Investments
Land
Buildings and Equipment
Accumulated Depreciation
Accounts payable
Accrued Liabilities
Bonds Payable
Long-Term Note Payable
Common Share, RO.2 per share
Paid-in capital in Excess of Par value
Retained Earnings
2012 (RO.)
30,000
410,000
300,000
20,000
50,000
560,000
2,000,000
(800,000)
300,000
40,000
500,000
150,000
200,000
710,000
670,000
2011(RO.)
50,000
460,000
320,000
15,000
25,000
300,000
1,900,000
(770,000)
120,000
50,000
800,000
160,000
550,000
620,000
Additional Information about 2012 transactions:
1. Net income was RO. 110,000
2. Depreciation expense on buildings and equipment was RO.60,000
3. Sold equipment with a cost of RO. 50,000 and accumulated depreciation of RO.30,000
for cash of RO.17,000
4. Declared and paid cash dividends of RO.60,000
5. Issued a RO.150,000 long-term note payable for buildings and equipment.
6. Purchased long-term investments for RO.25,000
7. Paid RO.300,000 on the bonds payable
8. Issued 20,000 shares of RO.2 per value common share for RO.200,000
9. Purchased land for RO.260,000.
Exercise 2
Mars super market to find the cash flows for the year 31 December 2012 from following
information and the company have the cash balance for the year 2012 RO.33,750.
1. The company to purchase a machinery RO. 15,000 and the depreciation charged for six
months each are RO. 4,125 and RO.4,500.
2. The company to sale the old machinery RO.2,200 the original cost of the machinery is
RO.3,000.
3. The company paid dividend to the shareholders RO.21,125 for cash.
4. Purchases of buildings for office purpose RO.11,250 for cash.
5. Company to repay the long-term note RO.10,000.
6. Company to make a profit RO.3,750 for sale the investments worth RO.28,750.
Information below for current assets and liabilities,
Accounts receivable for the year 2011 RO.58,500 and 2012 RO.68250
Accrued payable for the year 2012 RO.3,375 and RO.2625 for 2011.
Inventory for the year 2012 and 2011 are RO.30,000 and 24,000 respectively.
Accounts payable for the year 2012 RO.35,000 and 2011 RO.24,750
During the year 2012 company earn RO.42,500 as a net profit.
Exercise 3
1. ABC Ltd cash flows for the year 31 December 2005 from following information and the
company have the cash balance for the year 2005 RO.25300.
Particulars
Accounts receivable
Accrued payable
Inventory
Accounts payable
Profit & Loss A/C
Additional information:
2004
43900
1900
22500
26000
25000
2005
51100
2500
18000
18500
31900
1. The company to purchase a machinery RO. 11,250 and the depreciation charged for six
months each are RO. 3,100 and RO.3,400.
2. The company decide to purchase of investments RO.6,500
3. The company to sale the old machinery RO.1,650 the original cost of the machinery is
RO.2,250 and purchase of machinery cost RO. 11,250
4. The company paid dividend to the shareholders RO.15,850 for cash.
5. Purchases of buildings for office purpose RO.8,500 for cash.
6. Company to repay the long-term note RO.7,500.
7. Company to make a profit RO.3,000 for sale the investments worth RO.21,500.
Exercise 4
Towell company cash flows for the year 31 December 2015 from following information and the
company have the cash balance for the year 2015 RO.1,100 and net income during the year RO.
810.
Particulars
Accounts receivable
Accrued liabilities
Inventory
Accounts payable
2014
1300
250
1900
800
2015
1750
200
1600
1200
Additional information:
1.
2.
3.
4.
5.
6.
Depreciation as on 31 December 2015 RO.30
To repay on bonds payable RO.250
Sale of investments RO.170 and RO.80 and gain from investments RO.80
Shareholders to get the dividends for investment RO.260
Purchase plant assets during the year 2015 RO.130
Company issue of shares RO.130 for improve the working capital.