Question

Compact Ltd is a parcel delivery business. Detailed below is selected information for the financial year ending 30 June 2019.

Item	$
Interest paid for the year	6,000
Dividends paid to Shareholders	30,000
Profit on sale of truck	25,000
Cash at bank at July 1, 2018	1,100,000
Depreciation for the year	160,000
Payment for Motor vehicle purchased on 28th April 2019	40,000
Loan repayments made	70,000
Tax expense / paid to the Tax Office	78,000
Salaries Paid	250,000

Cash received from the sale of a truck	90,000
Delivery Income – Cash Receipts for year ending 30 June 2019	700,000
Dividend received from investment	200,000
Cash paid for Shares in companies listed on the ASX (Australia Security Exchange)	40,000
Cash received from accounts receivable customers	300,000
Bad Debts expense	10,000
Other cash operating expenses	77,000
Credit purchases of fuel for the year ending 30 June 2018	480,000
Fuel Stock – petrol 1/7/2018	500,000
Fuel Stock – petrol 30/6/2019	150,000
Payments to suppliers for prior purchases on credit	200,000
Delivery Income - On Credit to account customers for the year ending 30 June 2019	150,000
Money borrowed from Net Bank	50,000
Purchase of property and land for cash	700,000

REQUIRED

(a) Prepare a fully classified Income Statement and Cash Flow Statement for the year ending 30 June 2019 based on the information above. Fully state any assumptions you have made in preparing these financial reports.

(b) Upon completing the Cash Flow and Income Statement Compact management are confused in that the Income Statement is indicating they made a net loss (negative profit) over the same period whilst reporting a positive cash inflow from operations. With reference to the question and your work in answering(a) above, explain to Compact management providing two possible reasons why this discrepancy could occur when comparing cash flow from operations (cash profit) with accrual accounting profit/ loss. For each cause identified highlight the impact on Assets= Liabilities +Owners Equity and profit versus cash flow to explain potential differences (80 word limit)

(c) Given the above differences discuss which statement (Income Statement or Cash Flow from Operations) better reflects the financial performance / wealth creation for the period ending 30 June 2019. (Justify your answer with reference to accrual accounting) (80 word limit)

Answer 1

b) The main reason for difference in net profit and cash flow is Sales- There is higher cash collections from customers during the period and Purchases- lower payment to suppliers for purchase of fuel. Hence cash flow from operations is higher and net loss during the period . When cash is collected from customers Assets will increase but since sales is recognized based on accrual concept to that extent there will be lower profit and get adjusted in Owner's Equity. When payment to supplies is delayed Current Liabilities will increase but profit will be based on accrual concept and hence gets adjusted in Owner's equity

c) Income Statement gives the true picture of profit/loss during the period since it shows actual sales and purchases happened during the period based on accrual concept. A cash flow just shows the timing of cash inflows and outflows . But it does not show overall profit made by the business during an accounting period.