MULUNGUSHI UNIVERSITYBAF311/BAC361 FT

TEST 2 DURATION 1Hour Date 06/11/2019

Question One
State if the following statement is TRUE or FALSE, if it’s false explains what the true statement should be. (7
marks)
1.The primary purpose of the statement of cash flows is to provide cash-basis information about the company’s operating,
investing, and financing activities.
2.The statement of cash flows provides information to help investors and creditors assess the cash and non-cash investing
and financing transactions during the period.
3.Companies classify some cash flows relating to investing or financing activities as operating activities.
4.The first step in the preparation of the statement of cash flows is to determine the net cash flow from operating activities.
5.The net increase (decrease) in cash reported on the statement of cash flows should reconcile the beginning and ending
cash balances reported in the comparative statements of financial position.
6.When computing diluted earnings per share, convertible bonds are ignored.
7. Dilutive convertible securities must be used in the computation of basic earnings per and dilutive earnings per
Question two
KCM has recently decided to go public and has hired the firm where you are working as a trainee Accountant to help in
preparing the financial statements. One statement that the enterprise is anxious to have prepared is a statement of cash
flows. Financial statements of KCM for 2019 and 2018 are provided below.
STATEMENT OF FINANCIAL POSITION
12/31/19 12/31/18
Property, plant and equipment K304,000 K480,000
Less accumulated depreciation (160,000) 144,000 (152,000) 328,000
Inventory 192,000 240,000
Accounts receivable 180,000 108,000
Cash 204,000 96,000
K720,000 K772,000

Share capital-ordinary K108,000 K108,000

Retained earnings 168,000 120,000
Bonds payable 180,000 300,000
Income taxes payable 176,000 196,000
Accounts payable 88,000 48,000
K720,000 K772,000

INCOME STATEMENT
For the Year Ended December 31, 2019
Sales K4,200,000
Cost of sales 3,576,000
Gross profit 624,000
Selling expenses K300,000
Administrative expenses 96,000 396,000
Income from operations 228,000
Interest expense 36,000
Income before taxes 192,000
Income taxes 48,000
Net income K 144,000
The following additional data were provided:
1. Dividends for the year 2019 were K96, 000.
2. During the year, equipment was sold for K120, 000. This equipment cost K176, 000 originally and had a book value of
K144, 000 at the time of sale. The loss on sale was incorrectly charged to cost of sales.
3 All depreciation expense is in the selling expense category.
Required
a) Calculate the net cash provided by operating activities using the indirect method (5 marks)
b) Calculate the net cash from investing activities (4 marks)
c) Using the direct method, calculate the cash received from customers (3 marks)
d) Calculate the total taxes paid (3 marks)
e) Calculate the net cash from financing activities (3 marks)
f) Using the cash flow figures that you have calculated explain the positive aspects that you can use to give financial advice to investors on
why they should consider investing in KCM.(5 marks)
g) Using the cash flow figures that you have calculated explain the weakness that you have observed and advice KCM management on how
they can improve the situation (5 marks)

Compiled by Musawa Nsama Njebele Page 1

 MULUNGUSHI UNIVERSITYBAF311/BAC361 FT
TEST 2 DURATION 1Hour Date 06/11/2019

Solutions
Question 1
1) False - The primary purpose of the statement of cash flows is to provide information about
cash receipts and cash payments of an entity during a period. A secondary objective is to
report the entity's operating, investing, and financing activities during the period.
2)T,
3)T,
4F-the first step is to determine the change in cash. This is the difference between the
beginning and the ending cash balance shown on the comparative statements of financial
position
5.T
6.F convertible bonds are not ignored as they are among the securities that contribute to the
dilution
7. F convertible securities are only used to compute dilutive earnings per
Question2
a) Calculate the net cash provided by operating activities using the indirect method (5 marks)
Profit before tax 192,000
add backDepretion 40,000
add loss on sale of asset 24,000
add decrease in inventory 48,000
less decrease in receivables (72,000)
add increase in payables 40,000
Less Tax paid (68,000)
Total cash flow Oparating activities204,000 (5 marks)(See detailed workings)
b) Calculate the net cash from investing activities (4 marks)
K120, 000 from the sale of equipment
c) Using the direct method, calculate the cash received from customers (3 marks)
Cash received from customers
Opening receivables 108,000
Add Revenue for the (I/S) (assuming all sales are on credit) 4,200,000
Less Receipts (balancing figure) cash flow Item 4,128,000
Closing receivables 180,000 (3 marks)
d) Calculate the total taxes paid (3 marks)
Cash paid for tax
Opening tax payable 196,000
Charge for the I/S 48,000
Payment (Balancing figure) ( 68,000) (3 marks)
Closing tax payable 176,000
e) Calculate the net cash from financing activities (3 marks)
Dividends paid (K96, 000)
Bonds paid (K120, 000)
(K216, 000). (3 marks)
Summary of cash flow statement
Cash flow from operations Activities 204,000
Cash flow from investment activities 120,000
Cash flow from Financing activities (216,000)
Net cash from 108,000

Compiled by Musawa Nsama Njebele Page 2

 MULUNGUSHI UNIVERSITYBAF311/BAC361 FT
TEST 2 DURATION 1Hour Date 06/11/2019
f) Using the cash flow figures that you have calculated explain the positive aspects that you can
use to give financial advice to investors on why they should consider investing in KCM.(5
marks)
Strengths
-Cash flow from ops of 204,000 is more than the dividends of 96,000 meaning company is able
to pay dividends
-Cash flow from ops is high so the company is able to generate sufficient cash from operations
to pay its bills without further borrowing
Put more strengths
g) Using the cash flow figures that you have calculated explain the weakness that you have
observed and advice KCM management on how they can improve the situation (5 marks)
-Companies should improve in investments as there is no outflow relating to this and yet there is
depreciation and disposals
-negative Cash flow from financing is too high .Company should plan its bond repayment
Put more weakness

Detailed workings
Cashflow working
Reconciling Items
Non-Current Assets 2018 Dr CR 2019 Category Notes
Actual cashflow for investment is
120,000 as that was what was
Plant assets 480,000 176,000 304,000 Investing realised from the sell.(176,000 less
32,000accum dep-
24,000loss=120,000)
loss Disposal 24,000 Ops
Deprecaition for the year is
40,000(authough the actual
Accumulated depreciation 152,000 32,000 40,000 160,000 Ops
movement of 8000 the 32,000 from
the disposed asset should be added

Current Assets
Inventory 240,000 48,000 192,000 Opos
Accounts Receivables 108,000 72,000 180,000 Opos
Cash 96,000 204,000 108,000 Reconcilling item
Total Assets
Share capital (ordinary) 108,000 0 108,000 Finaancing
Retained earnings 120,000 96,000 144,000 168,000 Finaancing
Bonds payable 300,000 120,000 180,000 Finaancing
Accounts payable 48,000 40,000 88,000 Opos
Tax payable 196,000 68,000 48,000 176,000 Opos

Compiled by Musawa Nsama Njebele Page 3