Question

The Statements of Financial Position of Dream Limited for the year ended 31 December 2015 are provided below:

Dream Limited
Statement of Financial Position as at 31 December:
	2015	2014
	$’000	$’000
Assets:
Land	350	200
PPE	950	510
Accumulated depreciation	(380)	(240)
	570	270
Cash at bank	20	-
Inventories	110	200
Accounts receivable	200	180
Total	1,250	850
Liabilities:
Accounts payable	160	210
Bank overdraft	0	20
Salary payable	40	20
Tax payable	80	60
Dividends Payable	50	30
8% debenture	160	180
Total	490	520
Equity:
Ordinary shares of $1	300	190
Share premium	90	-
Retained profits	240	140
Revaluation reserves	130	----
Total	760	330

Additional information:

1. The depreciation expense is included in cost of sales.
2. During the year, a machine costing $120,000 was sold for $40,000. The accumulated depreciation up to the date of disposal for this machine amounted to $100,000. The profit or loss on disposal of this machine was already included in operating profit for the year of 2015.
3. The revaluation reserves were arising from revaluation of land. There is purchase, but no sale of land during the year.
4. During the year, $18,000 debentures were settled by way of issuing 10,000 new ordinary shares. Other debentures repaid were by cash.
5. All accounts payable relate to inventory purchases.
6. The company declared dividends in 2015. Net income for 2015 is 402.
7. Retained profits were affected only by net profit and dividends declared during the year.
8. The company classified interest payment, dividend received and interest received as cash flow from operating activities and dividend payment as cash flow from financing activities.

Required:

The company prepares the cash flow statement for the year ended 31 December 2015, using indirect method. Please answer the following questions.

1. In the cash flow of operating activities, the adjustment for depreciation expense should be (all numbers in thousands, for example, 100 means 100,000; same rule applies for MC question1-5):

1. Add 140
2. Add 240
3. Add 380
4. None of the above

2. In the cash flow of operating activities, the adjustment for profit on disposal of fixed asset should be:

1. Subtract 20.
2. Add 20.
3. Subtract 80
4. Add 80.

3. In the cash flows from investing activities, “purchase of fixed asset” (including both land and PPE) should be___.

1. Subtract 580.
2. Subtract 590.
3. Subtract 710
4. None of the above.

4. In the cash flows from financing activities, “repayment of debenture” should be ___.

1. Subtract 2.
2. Subtract 20.
3. Subtract 160.
4. None of the above.

5. In the cash flows from financing activities, “dividend paid” should be ___.

1. Subtract 50.
2. Subtract 282.
3. Subtract 302.
4. None of the above.

Answer 1

Note: All figures below are in thousands.

1) In the cash flow of operating activities, the adjustment for depreciation expense should be:

Answer - B. Add 240

Calculation:

Depreciation Expense = Closing Balance + Accumulated Depreciation - Opening Balance

= 380 + 100 - 240

= 240

Depreciation is a non-cash expense. It is an expense that does not generate cash outflow and is therefore, added back to the net profit.

2) In the cash flow of operating activities, the adjustment for profit on disposal of fixed asset should be:

Answer - A. Subtract 20

Calculation:

Profit on disposal = Sales Value of Machine - (Cost of Machine - Accumulated Depreciation)

= 40 - (120 - 100)

= 40 - 20

= 20

Profit on disposal of fixed asset is a non-cash income. It is an income that does not generate cash inflow and is therefore, subtracted from net profit.

3) In the cash flows from investing activities, “purchase of fixed asset” (including both land and PPE) should be___.

Answer - B. Subtract 590

Calculation:

Purchase of Fixed asset = Value of Land and PPE in 2015 - Value of Land and PPE in 2014

= (350 + 950) - (200 + 510)

= 1300 - 710

= 590

Purchase of fixed asset is a cash outflow. Therefore, it is subtracted.

4) In the cash flows from financing activities, “repayment of debenture” should be ___.

Answer - A. Subtract 2

Calculation:

Repayment of Debenture = Value of Debenture in 2014 - Value of Debenture in 2015

= 180 - 160

= 20

18 of it was not repaid by cash. Only 2 was. Therefore, cash outflow is 2

Repayment of Debenture is a cash outflow and is therefore, subtracted.

5) In the cash flows from financing activities, “dividend paid” should be ___.

Answer - B. Subtract 282

Calculation:

Dividend Paid = Opening Balance + Declared Dividend - Closing Balance

Declared Dividend = Opening Balance of Retained Profits + Net Income - Closing Balance of Retained Profits

= 140 + 402 - 240

= 302

Dividend Paid = 30 + 302 - 50

= 282

Dividend Paid is a cash outflow. Therefore it is subtracted.