Question

XY Corporation’s statement of financial position at the end of 2016 included the following items.

Land $ 30,000

Buildings 120,000

Equipment 90,000

Accum. depr.—buildings (30,000)

Accum. depr.—equipment (11,000)

Patents 40,000

Current assets 235,000

Total $474,000

Current liabilities 150,000

Bonds payable $100,000

Share capital—ordinary 180,000

Retained earnings 44,000

Total $474,000

The following information is available for 2017.

1. Net income was $55,000.

2. Equipment (cost $20,000 and accumulated depreciation $8,000) was sold for $9,000.

3. Depreciation expense was $4,000 on the building and $9,000 on equipment.

4. Patent amortization was $2,500.

5. Current assets other than cash increased by $25,000. Current liabilities increased by $13,000.

6. An addition to the building was completed at a cost of $27,000.

7. A long-term investment in debt securities was purchased for $16,000.

8. Bonds payable of $50,000 were issued.

9. Cash dividends of $25,000 were declared and paid.

10. Treasury shares were purchased at a cost of $11,000.

Instructions:

1. Prepare a statement of financial position at December 31, 2017.
2. Prepare a statement of cash flows for 2017.
3. Discuss the uses and limitations of the statement of financial position and the statement of cash flows.

Answer 1

Part-a

Statement of Financial position as at 31.12.2017
	Amount(in $)	Amount(in $)
Assets
Non Current Assets(a)
Tangible Assets
Land		30,000
Buildings	120,000
Less: Accumulated Depreciation	- 30,000	90,000
Equipment	90,000
Less: Accumulated Depreciation	-11,000	79,000
Intangible assets
Patent		40,000
Current assets(b)		235,000
Total assets(a+b)		474,000
Equity(a)
Share Capital(i)		180,000
Retained Earnings(ii)		44,000
Total Equity(i+ii)		224,000
Current Liabilities(b)		150,000
Short Term Borrowings (c )
Bonds payable		100,000
Total Equity and Liabilities(a+b+c)		474,000

Part-b

Statement of cash flows for year ended 31.12.2017
Particulars	Amount(In $)	Amount(In $)
Cash from operating activities
Net Income		55,000
Adjustment for Non cash Transaction
Loss from sale of equipment*	3,000
Depreciaiton expense on building	4,000
Depreciaiton expense on equipment	9,000
Patent Amortisation	2,500	18,500
Cash Flow from working capital change
Increase in current assets	(25,000)
Increase in current Liabilities	13,000	(12,000)
Net Cash flow from Operating activities		61,500
Cash from Investing Activities
Sale of equipment	9,000
Addition to building	(27,000)
Long term investment in Debt securities	(16,000)
Treasury shares purchased	(11,000)
Net Cash flow from Investing activities		(45,000)
Cash from Financing Activities
Bonds payable issued	50,000
Cash dividend declared and paid	(25,000)
Net Cash flow from Financing activities		25,000
Net change in cash		41,500
* Loss on sale of equipment is calculated as follows
cost	20,000
Less: Accumulated Dep	8,000
Less:Sale price	9,000
	3,000

Part c

Financial statement of a company reflects the true and fair view of affairs of the company. It is used by the stakeholders of the company. It shows the financial position of a company and tells how the company is performing.

There are few uses of Statement of Financial position as mentioned below:

Bridging the Gap in management: Financial statement shows the net position and performance of a company. It has access to shareholders through which they can assume their trust on the company. This further helps in bridging the gap between lapses in management and expectations of owners.

Use for Investors: Investors use a company’s financial statements to asses its finances. That helps them figure out how the company’s solvency will be in the longer term. Thus, a company with better financial position brings attention of the investors.

Credit availability: Most of the business runs on credit. They need to borrow funds for functioning. They have to rely on lenders like banks and financial institutions for this purpose. Financial statements play a huge role in this purpose. Since they show a company’s liabilities, debts and profits, investors can use them to make informed decisions.

Apart from these there are other uses of financial statement like, use for government, use for stock exchanges etc.

However there are certain limitation also which are as follows:

There are possibility of management biasness towards financial position. It might not be an accurate representation of company. Accountants might skip a lot of vital information while making financial statement. Many times a lot of qualitative data is missed. financial statements do not show how well a company is performing in the present times. This is because they are made at the end of every financial year. Hence, they only depict performances of the previous twelve months. Even the value of assets and liabilities change as money’s purchasing power fluctuates.

Uses and Limitations of cash flow statement:

A cash flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company. It comes with uses and limitations which are as follows:

Uses

Cash Flow Statement helps a company to prepare sound financial policies. It also helps to evaluate the current cash position and liquidity. A Cash Flow Statement can be prepared in order to know the future cash position of a concern which enables a Company to plan and coordinate its financial operations properly. It helps in taking loan from Banks and other financial institutions. The repayment capacity of the firm can be understood by going through the Cash Flow Statement. The cash flow statement explains the causes for poor cash position even when there is sufficient profits in a Company by throwing light on various applications of cash made by the firm.

Limitations

A Cash Flow Statement only shows the inflow and outflow of cash. The cash balance disclosed by this statement may not depict the true liquid position. A Cash Flow Statement cannot be equated with the income statement. An income statement takes into account both cash and non-cash items. Hence, Cash Fund does not mean net income of the business. Further, the accuracy of cash flow statement is based on the balance sheet. If balance sheet is wrong, the cash flow statement is also wrong.It is not prepared on the basic accounting concept of accrual basis. Hence, the accuracy of cash flow statement is questionable.