Question

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

Q1- The answer is (c) add 380. This is because we are preparing cash flow statement for the year 2015 so the accumulated depreciation for the year will be added to the cash flow of operating activities. Addition is made to nullify the effect of previous subtraction as depreciation is a non cash expense and in cash flow statement we need only cash transactions.

Q2-The answer is (b) add 20.

book value of machinery sold= cost- depreciation=120000-100000=20000

loss= sale value - book value= 40000-20000=20000

The loss is added because it was earlier subtracted to reach to net income in income statement but this is a transaction of investing activity so the loss is added to operating activity to nullify the earlier subtraction effect.

Q3-The answer is (C) subtract 710

purchase of land in 2015= value in 2015 - value in 2014 = 350-200= 150

purchase of PPE in 2015= 2015value - (2014 value - cost of sale)= 950- (510-120)= 560

total purchase= 150+560= 710

Purchase is subtracted as this represents the cash outflows.

Q4- The answer is (b) subtract 20

repayment= 2014 balance - 2015balance= 180 - 160= 20

repayment is subtracted because when debentures are repaid there is outflow of cash

Q5- The answer is (a) subtract 50

this is because dividend paid for the year is 50. Dividend payable involves cash outflow