Question

2108AFE Financial Accounting Assessable Workshop Question

Topic 9 – Statement of Cash Flows

Question 1

Yellow Submarine Ltd’s Balance Sheets at the end of June 2016 and 2017 were as follows:

Yellow Submarine Ltd. Balance Sheets as at 30 June
	2017	2016
ASSETS
Current Assets
Accounts Receivable	200,000	107,500
Allowance for Doubtful Debts	(20,000)	(10,000)
Inventory	305,500	182,500
	485,500	280,000
Non-Current Assets
Land	25,000	10,000
Buildings	60,000	60,000
Accumulated Depreciation – buildings	(35,000)	(30,000)
Plant & Equipment	300,000	207,000
Accumulated Depreciation – plant & equipment	(55,500)	(27,000)
	294,500	220,000
TOTAL ASSETS	780,000	500,000
LIABILITIES AND OWNERS’ EQUITY
Current Liabilities
Bank Overdraft	167,950	58,800
Accounts Payable	29,300	36,200
Current Tax Payable	15,000	6,000
	212,250	101,000
Owners’ Equity
Share Capital	385,000	300,000
Asset Revaluation Reserve	15,000	-
General Reserve	85,000	50,000
Retained Profits	82,750	49,000
Total Equity	567,750	399,000
TOTAL LIABILITIES AND OWNERS’ EQUITY	780,000	500,000

The company’s Income Statements for the year ended 30 June 2017 and general ledger revealed the following information:

	$	$
Net Sales		550,000
Cost of Goods sold		277,000
Gross Profit		273,000
Proceeds from sale of plant & equipment		47,500
Gross profit		320,500
Expenses: Carrying amount of equipment sold Salaries and wages expense	40,000 60,250
Depreciation expense - buildings	5,000
Depreciation expense - plant & equipment	38,500
Electricity expense	3,000
Bad debts expense	30,000	176,750
Net Profit before tax		143,750
Income tax expense		52,500
Net Profit after tax		91,250

Additional Information:

Plant and equipment which had originally cost $50,000 and had been depreciated by $10,000, was sold during the year for $47,500

The company pays income tax in one payment.

The land was revalued upwards during the year by $15,000.

During the year, a dividend of $22,500 was paid. Yellow Submarine Ltd classifies dividends paid as a financing activity.

All purchases and sales were made on credit.

Required:

Prepare a Cash Flow Statement for the year ended 30 June 2017, in accordance with AASB 107 Cash Flow Statements. Show workings.

FOR HOMEWORK SUBMISSION – ONLY ONE METHOD REQUIRED (T account OR Equation)

OPERATING ACTIVITIES

Receipts from Customers

Account Reconstruction Method

Provision for Doubtful Debts

Accounts Receivables

OR Formula Method

Cash receipts from customers =

Payments to Suppliers and Employees

Payments to Suppliers for Inventory Purchases

Inventories

Accounts Payable

OR

Payments to suppliers for purchases of inventory =

Cash Paid to Suppliers of Services

Cash paid to suppliers of services =

TOTAL payments to Suppliers and Employees

Payments for Income Tax (required as a separate line item)

Current Income Tax (using Current Tax Payable account) =

INVESTING ACTIVITIES

Plant and Equipment

Accumulated Depreciation - Plant and Equipment (NCA)

Plant and Equipment (NCA)

Yellow Submarine Ltd Statement of Cash Flows For the year ended 30 June 2017
Cash flows from operating activities	$
Net cash from/used in operating activities
Cash flows from investing activities
Net cash from/used in investing activities
Cash flows from financing activities
Net cash from/used in financing activities
Net increase/decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year

Question 2 - Theory

An entity may report significant profits over a number of successive years and still experience negative net cash flows from its operating activities. How can this happen?

Answer 1

Cash flow statement with WORKINGS:
OPERATING ACTIVITIES
Receipts from Customers
Account Reconstruction Method
Provision for Doubtful Debts
Opening Balance	10000
Add: New provision(Income statement)	30000
Less: Ending balance	-20000
Provn.written back		20000
Accounts Receivables
Opening Balance	107500
Add: Credit sales(Income statement)	550000
Less: Provn. Written back	-20000
Less: Ending balance	-200000
Cash from customers-------------------1		437500
Payments to Suppliers and Employees
Payments to Suppliers for Inventory Purchases
Inventories
Cl.balance	305500
Add: COGS	277000
Less: Op.bal	-182500
Purchases		400000
Accounts Payable
Op.bal.	36200
Add: Purchases	400000
Less: Cl.bal.	-29300
Payments to suppliers of Inventory----a		406900
Cash Paid to Suppliers of Services
Salaries & electricity(60250+3000)----b	63250
		63250
TOTAL payments to Suppliers,services &Employees---(a+b)=-2		470150
Payments for Income Tax (required as a separate line item)
Current Income Tax (using Current Tax Payable account) =
Op. bal.	6000
Add: Current yr.	52500
Less: Cl. Bal.	-15000
Cash paid towards Tax -----------------3		43500
Cash used in operating activities(1-2-3)			-76150
INVESTING ACTIVITIES
Plant and Equipment
Accumulated Depreciation - Plant and Equipment (NCA)
Op. bal.	27000
Add: Current yr. depn.	38500
Less: Cl.bal.	-55500
Depn.on P&E sold		10000
Plant and Equipment (NCA)
Cl.Bal.	300000
Add: P&E sold	50000
Less: op. bal.	-207000
P& E purchased		143000
Sale of P&M		47500
Cash used in Investing activities			-95500
Financing activities
Payment of dividends	-22500
Issue of share capital	85000
Cash from financing activities			62500
Net cash generated			-109150
Add: Beginning Bank OD			-58800
Less: Ending Bank OD			-167950

Summary
Cash flow statement
Cash used in operating activities	-76150
Cash used in Investing activities	-95500
Cash from financing activities	62500
Net cash generated	-109150
Add: Beginning Bank OD	-58800
Less: Ending Bank OD	-167950

2. It is due to the presence of considerable amounts non-cash incomes as additions deductions to the revenues generated---such as gain on sale assets--- which increases book profits but does not create any cash flow within the company.