ACC203 Solutions - 2T2018 - Week 11 - Workshop 10 PDF

ACC203 Financial Accounting 2 – Workshop Solutions
Chapter 17: Statement of cash flows

Comprehension questions
1. What is the purpose of a statement of cash flows?
Refer to section 17.1. The purpose of a statement of cash flows is to present information about
the changes in cash and cash equivalents of an entity during the period, classified by operating,
investing and financing activities.
2. How might a statement of cash flows be used?
Refer to section 17.1. A statement of cash flows may be used by investors, creditors and other
users of financial statements to assist in evaluating the entity’s:
(a) ability to generate cash and cash equivalents;

(b) ability to affect the timing and certainty of generating future cash flows; and
(c) need to utilise cash and cash equivalents.
In conjunction with other financial statements, the statement of cash flows can be used to assist
users in:
(a) predicting future cash flows;

(b) evaluating the entity’s financial structure, including liquidity, its ability to pay dividends, and
its solvency, i.e., its ability to meet its obligations;
(c) understanding the reasons for the difference between an entity’s profit and the net cash
generated from operating activities, which can be helpful in evaluating the quality of earnings
(profit); and
(d) comparing the operating performance of different entities, particularly as cash flows are
unaffected by different accounting choices and judgments under accrual accounting
(although cash flows may be affected by decisions such as when to pay accounts); and
(e) developing models to assess and compare the present value of expected future cash flows of
different entities (however, this process is impeded in circumstances where it is difficult to
identify non-recurring cash flows included in net cash flows from operating activities).
4. Explain the required classifications of cash flows under AASB107/IAS 7.
Refer to section 17.3. Cash flows must be classified into cash flows from operating, investing
and financing activities.
Operating activities are the principal revenue-producing activities of an entity and any other
activities that do not fall within investing and financing activities. Examples include receipts
from customers, payments to suppliers and employees, and income taxes. Operating cash flows
Resources adopted from Financial reporting in Australia / Janice Loftus, Ken Leo, Sorin Daniliuc, Noel Boys,
Belinda Luke, Hong Ang, Karyn Byrnes. Second edition. John Wiley & Sons Australia, Ltd
may also include interest and dividends received (though these items may be classified as
investing) and interest paid (though this item may be classified as financing).
Investing activities are the acquisition and disposal of long-term assets (such as property, plant
and equipment, subsidiaries, businesses and intangibles) and other investments not included in
cash equivalents (such as shares in other entities). Only expenditures that result in an asset
recognised in the statement of financial position are eligible for classification as investing
activities.
Financing activities are activities that result in changes in the size and composition of the
contributed equity or borrowings of an entity (such as the issue of new shares, buyback of shares,
new borrowings, repayment of borrowings and the payment of dividends, though payment of
dividends is sometimes classified as an operating activity).
6. Explain the differences between the presentation of cash flows from operating activities
under the direct method and their presentation under the indirect method. Do you
consider one method to be more useful than the other? Why?
Refer to section 17.4.1. Under the direct method, classes of operating cash receipts and
payments, such as receipts from customers and payments to suppliers and employees, are
disclosed in the statement to arrive at net cash from operating activities. Under the indirect
method the starting point is the profit before tax, which is adjusted for the effects of transactions
of a non-cash nature (such as depreciation, impairment of non-current assets), and for any
deferrals or accruals of past or future operating cash receipts or payments (increases or decreases
in the amount of receivables or payables outstanding, changes in provisions) and items of income
or expense included in the profit before tax that are associated with investing or financing
activities (such as gains or losses on the sale of plant and equipment).
Both methods have their advantages and disadvantages. The direct method shows the gross
inflows and outflows that will assist a user in predicting future cash inflows and outflows and
allows a comparison to be made of cash receipts from customers with reported revenues from
customers. This comparison will assist in evaluating the quality of revenues. However, while
the indirect method does not disclose the gross inflows and outflows arising from an entity’s
operations, it does present a reconciliation of the operating profit before tax with the cash
generated from operations. This is particularly useful in evaluating the quality of the earnings of
an entity, and flagging possible manipulation of earnings by management through varying
accruals and provisions, such as a provision for restructuring.
7. The statement of cash flows is said to be of assistance in evaluating the financial

strength of an entity, yet the statement can exclude significant non-cash transactions
that can materially affect the financial strength of an entity. How does AASB 107/IAS 7
seek to overcome this issue?
Refer to sections 17.6.2 and 17.6.3. AASB 107/IAS 7 seeks to overcome the problem referred to
above by way of disclosure. Entities must disclose investing and financing transactions that do
not involve cash flows, such as the acquisition of assets by means of a lease or by assuming other
liabilities or through an equity issue, the conversion of debt to equity, the refinancing of a long-
term debt, and the payment of dividends through a share reinvestment scheme.
Changes in the investment structure of an entity may arise from changes in the ownership
interests of subsidiaries or other business units. In such cases, AASB 107/IAS 7 requires the
aggregate cash flows from obtaining control of subsidiaries and other business units and the
aggregate cash flows from the loss of control of subsidiaries and other business units to be
reported in the investing section of the statement of cash flows. This reporting is then required to
be supplemented by separate disclosure in the notes of the aggregate:
• total consideration paid or received
• the portion of the consideration comprising cash and cash equivalents
• the amount of cash and cash equivalents in the subsidiary or other business over which
control is obtained or lost
• the amount of the assets and liabilities other than cash and cash equivalents in the subsidiary
or other business over which control is obtained or lost, summarised by each major category.
8. 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?
This question requires reflection on the differences between profit and net cash flows from
operating activities. This situation is typical of an entity that is growing in size, such that
increases in receivables, inventories and prepayments exceed increases in accounts payable,
accrued liabilities and provisions. The collection of cash from customers usually lags the
payment to suppliers for purchases of goods and services. In a growth phase, this may generate
negative operating cash flows because the entity incurs cash outflows to increase its working
capital, particularly inventories, to accommodate expected increases in future sales volume.
Exercise 17.9
Worksheet
2018 Dr Cr 2019
$ $ $ $
Cash 40 000 (10) 15 000 55 000
Trade receivables 92 000 (2) 48 000 140 000
Investments 35 000 (9) 10 000 (3) 15 000 30 000
Plant 130 000 (4) 50 000 180 000
Accumulated depreciation (45 000) (5) 15 000 (60 000)
252 000 345 000
Accounts payable 75 000 (6) 20 000 95 000

Deferred tax liability (9) 3 000 3 000
Share capital 100 000 (7) 50 000 150 000
Retained earnings 77 000 (1) 30 000 (1) 90 000 90 000
(8) 47 000
Investment revaluation surplus - (9) 7 000 7 000
252 000 345 000
Operating activities
Profit before tax (1) 90 000 90 000
Increase in accounts receivable (2) 48 000 (48 000)
Increase in accounts payable (6) 20 000 20 000
Depreciation of plant (5) 15 000 15 000
Cash generated from operations 77 000
Income tax paid (1) 30 000 (30 000)
Net cash from operating activities 47 000
Investing activities
Purchase of plant (4) 50 000 (50 000)
Proceeds from sale of investments (3) 15 000 15 000
(35 000)
Financing activities
Proceeds from share issue (7) 50 000 50 000
Dividends paid (8) 47 000 (47 000)
Net cash from financing activities 3 000
Net increase in cash and cash equivalents (10) 15 000
Cash and cash equivalents at beginning of year 40 000
Cash and cash equivalents at end of year $55 000
Explanations:
(1) The profit before tax $90 000 is determined by adding back the income tax expense $30
000 to the profit for period $60 000. The income tax expense is equal to the amount of
income tax paid as there was no income tax payable at 30 June 2018 or 2019, and the
increase in the deferred tax liability results from the revaluation of investments. Refer item
(9).
(2) Increase in accounts receivable $48 000.
(3) Investments were sold for $15 000 as there was no gain reclassified to other
comprehensive income from the investment revaluation surplus or otherwise recognised.
Thus, both the cash proceeds and the carrying amount of investment sold was $15 000.
(4) There were no disposals of plant; hence the increase in plant represents purchase of plant
$50 000.
(5) As there were no disposals of plant, the change in accumulated depreciation represents the
depreciation expense for the year $15 000.
(6) Increase in accounts payable $20 000.
(7) Increase in share capital $50 000 represents proceeds from share issue.
(8) Dividends paid $47 000.
(9) The amount of the revaluation of investments is determined as $10 000 because this is the
increment necessary for the closing balance of Investments to be $30 000 after taking into
account the $15 000 reduction in the Investments account from the derecognition of
investments that were sold. Refer to explanation item (3). As the revaluation of
investments increased the accumulated surplus by $7 000, the corresponding tax effect
must be $3 000 ($10 000 - $7 000). This explains the increase in the deferred tax liability.
Green Ltd
Statement of Cash Flows
for the year ended 30 June 2019
$
Cash flows from operating activities
Profit before tax 90 000
Depreciation of plant 15 000
Increase in accounts receivable (48 000)
Increase in accounts payable 20 000
Income tax paid (30 000)
Cash from operating activities 47 000
Cash flows from investing activities

Purchase of plant (50 000)
Proceeds from sale of investments 15 000
Net cash used in investing activities (35 000)
Cash flows from financing activities

Proceeds from share issue 50 000
Dividends paid (47 000)
Net increase in cash and cash equivalents 15 000
Exercise 17.10
Worksheet
2018 Dr Cr 2019
$ $ $ $
Cash 20 000 (14) 71 000 91 000
Trade accounts receivable 65 000 (2) 25 000 90 000
Inventories 58 000 (3) 4 000 62 000
Prepayments 10 000 (4) 2 000 12 000
Land 80 000 (12) 10 000 90 000
Plant 280 000 (13) 40 000 320 000
453 000 573 000
Borrowings 160 000 (9) 30 000 (10) 70 000 200 000
Share capital 200 000 (9) 30 000 230 000
(8) 41 000
453 000 573 000
Increase in accounts receivable (2) 25 000 (25 000)
Increase in inventories (3) 4 000 (4 000)
Increase in Prepayments (4) 2 000 (2 000)
Interest expense (6) 14 000 14 000
Depreciation (7) 32 000 32 000
Cash generated from operations 210 000 31 000 179 000
Interest paid (6) 14 000 (14 000)
Income taxes paid (8) 41 000 (41 000)
Net cash from operating activities 210 000 86 000 124 000
Purchase of land (12) 10 000 (10 000)
Net cash used in investing 50 000 (50 000)
activities
Proceeds from borrowings (10) 70 000 70 000
Dividend paid (11) 73 000 (73 000)
Net cash used in financing activities 70 000 73 000 (3 000)
Net increase in cash and cash equivalents (14) 71 000

Explanations:
(1) Profit before tax $161 000.
(2) Increase in accounts receivable $25 000.
(3) Increase in inventories $4 000
(4) Increase in prepayments $2 000.
(6) Interest expense $14 000, which, in the absence of accrued interest, equals interest paid.
(7) There were no disposals of plant; hence the increase in accumulated depreciation must
represent the depreciation expense for the year $32 000.
(8) Tax expense $41 000; in the absence of current tax payable and deferred tax in the
statement of financial position, it is assumed to also equal income tax paid.
(9) Borrowing of $30 000 settled through the issue of shares - a non-cash transaction.
(10) Proceeds from borrowings $70 000 is determined by as the difference in borrowings after
adjusting for the $30 000 settlement.
(11) Dividend paid $73 000 (refer additional information).
(12) There were no disposals of land and there is no revaluation reserve; hence the increase in
the carrying value of land must represent the purchase of land $10 000.
(13) There were no disposals of plant, hence the increase in the carrying value of plant must
represent the purchase of plant $40 000.
1. Fuchsia Ltd:
Statement of Cash Flows for the year ended 30 June 2019

Interest expense 14 000
Increase in accounts receivable (25 000)
Increase in inventory (4 000)
Increase in prepayments (2 000)
Interest paid (14 000)

Purchase of land (10 000)

Proceeds from borrowings 70 000
Net cash used in financing activities (3 000)
Workings for direct method of presentation of cash from operating activities
Cash received from customers = Sales – increase in accounts receivable

= $300 000 - $25 000
= $275 000
Revenue - Expenses (excluding tax expense) = profit before tax
Hence, total expenses excluding income tax expense = $300 000 - $161 000 = $139 000
Total expenses 139 000

Less Depreciation (32 000)
Interest expense (14 000)
Expenses for supply of goods and services 93 000
+ increase in inventory 4 000
+ increase in prepayments 2 000
- increase in accounts payable (3 000)
Cash paid for supply of goods and services $96 000
2. Cash from operations presented using the direct method:
$
Cash collected from customers 275 000
Cash paid for supply of goods and services (96 000)
Net cash from operating activities $124 000
Exercise 17.11
2018 2019 Increase

(decrease)
$ $ $
Cash 30 000 68 000 38 000
Trade receivables 46 000 70 000 24 000
Inventory 30 000 32 000 2 000
Investments 35 000 40 000 5 000
Plant 125 000 150 000 25 000
Accumulated depreciation (23 000) (35 000) 12 000
243 000 325 000
Accounts payable 39 000 43 000 4 000
Accrued interest 3 000 5 000 2 000
Current tax payable 10 000 12 000 2 000
Deferred tax liability - 1 500 1 500
Borrowings 60 000 100 000 40 000
Share capital 100 000 100 000 -
Retained earnings 31 000 60 000 29 000
Investment revaluation reserve - 3 500 3 500
243000 325000
Receipts from customers:
Sales 700 000
Increase in receivables (24 000)
Cash received 676 000
Payments to suppliers and employees

Cost of sales 483 000
Other expenses:
Distribution costs 62 000
Administration costs 74 000
Depreciation (12 000) 124 000
Increase in inventory 2 000
Increase in accounts payable (4 000)
Total payments 605 000
Interest paid
Increase in accrued interest (2 000)
Interest paid 4 000
Income tax paid
Income tax expense 23 000
Increase in tax payable (2 000)
Income tax paid 21 000
Investments
Revaluation gain net of tax 3 500
Increase in deferred tax liability 1 500
Purchase of investments -
Increase in investments $5 000
Explanations:
• The increase in deferred tax liability is the tax effect of the revaluation increment, as per the
additional information.
• As the increase in investments can be explained by the revaluation, and there were no
disposals of investments, we can conclude that there were no purchases of investments
during the year.
• The purchases of plant are determined as the increase in plant in the absence of any disposals
of plant during the year.
Denim Ltd
Cash flows from operating activities $

Receipts from customers 676 000
Payments to suppliers and employees (605 000)


Dividend paid (23 000)
Exercise 17.12
Worksheet
2018 Dr Cr 2019
$ $ $ $
Cash 96 000 (23) 47 000 49 000
Accounts receivable - sale of plant - (18) 22 000 22 000
Accounts receivable - other 147 000 (2) 6 000 141 000
Prepayments 20 000 (3) 5 000 15 000
Inventory 60 000 (4) 44 000 104 000
Land 40 000 40 000
Plant 368 000 (14) 72 000 (16) 20 000 420 000
Accumulated depreciation (45 000) (17) 5 000 (8) 30 000 (70 000)
Deferred tax asset 20 000 (13) 4 000 24 000
706 000 745 000
Accounts payable - purchase of plant 34 000 (15) 34 000 -
Accounts payable - other 106 000 (5) 46 000 152 000
Accrued liabilities - interest 3 000 (10) 1 000 4 000
Accrued liabilities - other 33 000 (6) 5 000 38 000
Current tax payable 24 000 (12) 7 000 31 000
Dividend payable 56 000 (22) 6 000 50 000
Borrowings 73 000 (19) 2 000 75 000
Share capital 335 000 (20) 10 000 345 000
(21) 84 000
706 000 745 000
Decrease in accounts receivable (2) 6 000 6 000
Decrease in prepayments (3) 5 000 5 000
Increase in inventory (4) 44 000 (44 000)
Increase in accrued liabilities (6) 5 000 5 000
Depreciation (8) 30 000 30 000
Gain on sale of plant (7) 7 000 (7 000)
Interest expense (9) 6 000 6 000
236 000 51 000 185 000
Interest paid (10) 1 000 (9) 6 000 (5 000)
Income tax paid (12) 7 000 (11) 46 000
(13) 4 000 (43 000)
244 000 107 000 137 000
Purchase of plant (14) 72 000
(15) 34 000 (106 000)
Proceeds from sale of plant (16) 20 000 (17) 5 000
(7) 7 000 (18) 22 000 -
27 000 133 000 (106 000)
Borrowings (19) 2 000 2 000
Dividends (20) 10 000 (21) 84 000
(22) 6 000 (80 000)
12 000 90 000 (78 000)
Net decrease in cash and cash equivalents (23) (47 000)
Cash and cash equivalents at end of year
$ 49 000
Explanations:
(1) Profit before tax $138 000, calculated as profit + income tax expense.
(2) Decrease in net accounts receivable (excluding receivables for plant) $6 000.
(3) Decrease in prepayments $5 000.
(4) Increase in inventory $44 000.
(5) Increase in accounts payable (excluding accounts payable arising from the purchase of
plant) $46 000.
(6) Increase in accrued liabilities (excluding interest accrued liabilities) $5 000.
(7) Gain on sale of plant $7 000.
(8) Depreciation expense for the year $30 000. This is calculated as the increase in
accumulated depreciation, after taking into account the reduction in accumulated
depreciation for the plant sold during the year. Refer item (17).
(9) Adjustment for interest expense $6 000 included in profit before tax.
(10) Increase in accrued interest; note that the interest paid $5 000 = interest expense $6 000 –
increase in accrued interest $1 000.
(11) Income tax expense for year 46 000.
(12) Increase in current tax payable $7 000.
(13) Increase in deferred tax asset $4 000. As there were no items of other comprehensive
income, the increase in deferred tax asset is recognised as the deferred component of
income tax expense.
(14) Plant additions for year $72 000.
(15) Decrease in plant accounts payable $34 000.
(16) Cost of plant sold $20 000. Refer additional information.
(17) Accumulated depreciation on plant sold $5000. Note book value of plant sold was $15
000; proceeds from sale = $15 000 + gain on sale $7000 = $22 000.
(18) Increase in accounts receivable arising from sale of plant $22 000; hence, there is no cash
received in the current year arising from the sale of plant.
(19) Increase in borrowings $2 000. This represents the increase in borrowings and in the
absence of other information it is assumed there are no loan repayments.
(20) Dividends reinvested as share capital $10 000 (refer additional information).
(21) Dividends declared out of profits for the year $84 000.
(22) Decrease in dividend payable $6 000. Note dividends paid amount to $80 000, which
comprises dividend payable at beginning of year $56 000 + Interim dividend $34 000 –
Reinvestment of dividends $10 000.
(23) Decrease in cash $47 000.
The doubtful debts expense is not used in calculating net cash from operating activities under the
indirect method. It is a component of the movement in net receivables.
Crimson Ltd
$
Gain on sale of plant (7 000)
Decrease in accounts receivable 6 000
Increase in inventory (44 000)
Decrease in prepayments 5 000
Increase in accrued liabilities 5 000


Net decrease in cash and cash equivalents (47 000)
Exercise 17.13
Worksheet
2018 Dr Cr 2019
$ $ $ $
Cash 45 000 (15) 10 000 35 000
Trade receivables 69 000 (2) 38 000 (1) 2 000 105 000
Allowance for doubtful debts (3 000) (1) 2 000 (2) 5 000 (6 000)
Inventories 45 000 (4) 22 000 67 000
Equity investments 53 000 (8) 7 000 60 000
Plant 187 000 (10) 38 000 225 000
361 000 433 000
Accrued interest 5 000 (6) 2 000 7 000
Current tax payable 15 000 (7) 3 000 18 000
Deferred tax 30 000 (8) 2 000 37 000
(9) 5 000
Borrowings 80 000 (12) 20 000 100 000
Share capital 100 000 100 000
Investment revaluation reserve 2 000 (8) 5 000 7 000
361 000 433 000
Receipts from customers 1 035 000 (2) 33 000
(3) 5 000 997 000
Payments to suppliers and employees (774 000) (3) 5 000 (4) 22 000
(76 000) (5) 10 000
(96 000) (11) 18 000 (935 000)
Cash generated from operations 89 000 62 000
Interest paid (7 000) (6) 2 000 (5 000)
Income taxes paid (24 000) (7) 3 000
(9) 5 000 (16 000)
Net cash from operating activities 58 000 (13) 41 000
Borrowings (12) 20 000 20 000
Dividend paid (14) 33 000 (33 000)
Net decrease in cash and cash equivalents (15) (10 000)

Explanations:
• Receipts from customers – The starting point is sales for the year $1 035 000. This is shown
as the first item in the operating activities section of the worksheet.
• The expenses other than interest and taxes reported in the statement of comprehensive
income are used as the starting point to calculate cash paid to suppliers and employees.
(1) The bad debt write-off does not affect the movement in net receivables.
(2) Net receivables increase by $33 000 from $66 000 to $99 000. It comprises an increase
in gross receivables $38 000 and the increase in allowance for doubtful debts $5 000 (a
non-cash expense).
(3) The doubtful debts expense is $5000. Refer additional information. The doubtful debts
expense is deducted from sales revenue in the calculation of cash collected from
customers because it is a component of the movement in net receivables that does not
represent cash collected from customers. The doubtful debts expense is deducted from
administration expenses in calculating cash paid to suppliers and employees.
(4) Increase in inventory $22 000.
(6) Increase in accrued interest $2 000.
(7) Increase in current tax payable $3 000.
(8) Deferred tax on revaluation of equity investments $2 000. The revaluation gain in the
statement of comprehensive income is net of tax. As there were no acquisitions or
disposals of investments during the year, the increase in investments, $7 000, is the
revaluation increment. The related deferred tax amount is calculated as the difference
between the revaluation increment $7 000 and the revaluation gain $5 000.
(9) The deferred component of the income tax expense for the year is $5 000, calculated as
the increase in the deferred tax liability other than the increment recognised directly in
equity (i.e., balance of movement in deferred tax liability).
(10) Purchase of plant $38 000 (there are no disposals, refer additional information).
(11) Depreciation for year $18 000. As expenses are classified by function in the statement of
profit or loss and other comprehensive income, the depreciation expense is not shown as
a separate item. It must be deducted from expenses in the calculation of cash paid to
suppliers of goods and services.
(12) New borrowings $20 000 (in the absence of other information, this has been calculated as
the difference between borrowings at 2018 and at 2019).
(13) Profit for the year $58 000.
(14) Dividends paid $33 000 (refer additional information).
(15) Decrease in cash $10 000.
1.
Bronze Ltd
$
Receipts from customers 997 000
Payments to suppliers and employees (935 000)
Dividend paid (33 000)
Net decrease in cash and cash equivalents (10 000)
2.
$
Depreciation expense 18 000
Increase in net receivables (33 000)
Increase in inventories (22 000)
Net cash from operating activities $41 000

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ACC203 Financial Accounting 2 – Workshop Solutions

Chapter 17: Statement of cash flows

1. What is the purpose of a statement of cash flows?

2. How might a statement of cash flows be used?

(a) ability to generate cash and cash equivalents;

(a) predicting future cash flows;

4. Explain the required classifications of cash flows under AASB107/IAS 7.

7. The statement of cash flows is said to be of assistance in evaluating the financial

Accounts payable 75 000 (6) 20 000 95 000

Cash flows from investing activities

Cash flows from financing activities

Cash and cash equivalents at beginning of year 20 000

Statement of Cash Flows for the year ended 30 June 2019

Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activities

Workings for direct method of presentation of cash from operating activities

Cash received from customers = Sales – increase in accounts receivable

Revenue - Expenses (excluding tax expense) = profit before tax

Total expenses 139 000

2. Cash from operations presented using the direct method:

2018 2019 Increase

Payments to suppliers and employees

Cash flows from operating activities $

Cash flows from investing activities

Cash flows from financing activities

Cash flows from investing activities

Cash flows from financing activities

Cash and cash equivalents at end of year $35 000

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