Question

Question B4
The following data are extracted from the financial statements of Lala Company:

Income Statement:	2020
Profit	$24,200
Gain/Loss on sale of machine	?
Depreciation expense	13,500
Amortization expense of patent	9,000
Statement of Financial Position:	30 June 2020	30 June 2019
Cash	?	$310,000
Accounts receivable	137,200	119,700
Inventory	353,200	400,000
Interest payable	39,100	51,200
Accounts payable	218,100	185,800

Additional Information:

1. (1) Made a loan of $30,000 to the ABC Company.

2. (2) Repaid a 3-year loan of $100,000 to Hang Seng Bank.

3. (3) Sold the old machine at cash of $122,500 (the cost of the machine is $175,500 and the accumulated depreciation at disposal was $55,000).

4. (4) Purchased a new machine for cash at $300,000.

5. (5) Paid cash dividend of $0.15 per share for the 220,000 ordinary shares issued and outstanding.

Required:

1. (a) Prepare the statement of cash flows for the year ended 30 June 2020 using the indirect method for LaLa Company.

2. (b) In preparing the statement of cash flows under indirect method, state how to deal with a gain on sale of property, plant and equipment? Give one reason to support your answer.

3. (c) Which section of business activities in the statement of cash flow is least likely to show positive net cash flows in a successful and growing business? (1 mark)

Answer 1

Solution:

To complete the cash flow statement we first need to calculate the gain/loss on sale of machine which is not provided.

Given to us, the cost of the machine is $175,500 and the accumulated depreciation at disposal was $55,000. Therefore the Net Block when the machine was sold is 120,500.

In essence, the machine of 120,500 was sold for 122,500. Hence the gain from the sell of machine is 2000.

The cash flow statement of the company as per the indirect method looks as under:

Remember:

For opearating activities

- All non cash items reduced from operating profit are added back to net income

- Increase in current assets in reduced

- Increse in current liabilities is added

- Gain on sale of assets is reduced

For Investment Activities

- Sale proceeds of machinery is positive cash flow, buying new machinery is negative

- New loan to others is investment and a negative cash flow

For Financing Activities

- Taking new loan is positive cash flow while repayment is negative

- Dividend payment is cash outflow

In a successful and growing business, the company will be investing in more assets, in that case Investment Activities is least likely to see positive cashflows.

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