ch11 SM Carlon 5e

Solutions Manual
to accompany
Financial
Accounting:
Recording, Analysis and
Decision Making
Fifth Edition
Prepared by
Rosina Mladenovic-McAlpine
John Wiley & Sons Australia, Ltd 2016

Chapter 11: Statement of cash flows
CHAPTER 11 – STATEMENT OF CASH FLOWS
ASSIGNMENT CLASSIFICATION TABLE
Brief
Learning Objectives Exercises Exercises Problems
1. Indicate the main purpose of the
statement of cash flows.
2. Distinguish among operating, 1, 2 1, 5 2A, 6B

investing and financing
activities.
3. Prepare a statement of cash flows. 3, 4, 5, 6 2, 4, 6, 7, 1A, 2A, 3A, 4A,

8, 9, 11, 5A, 6A, 7A, 8A,
12, 13 9A, 10A, 1B,
2B, 3B, 4B, 5B,
7B, 8B, 9B,
10B
4. Explain the impact of the product life 7 3

cycle on an entity’s cash flows.
5. Use the statement of cash flows to 4, 10 4A, 8A, 4B, 8B

evaluate an entity.
© John Wiley and Sons Australia Ltd, 2016 11.1

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e
CHAPTER 11 – STATEMENT OF CASH FLOWS
ANSWERS TO QUESTIONS
1. The statement of cash flows answers the following questions about cash:
(a) Where did the cash come from during the period?
(b) What was the cash used for during the period?
(c) What was the change in cash balance during the period?
2. The three activities are:
Operating activities include the cash effects of revenue generating activities (such
as the provisions of goods and services) and activities that are not classified as
financing or investing activities.
Investing activities include:

(a) acquiring and disposing of investments and productive long-lived assets
(b) lending money and collecting loans.
Financing activities include:

(a) obtaining cash from issuing debt and repaying the amounts borrowed
(b) obtaining cash from shareholders and providing them with a return on their
investment (paying dividends).
3. Significant non-cash financing and investing activities must be disclosed in notes to

the financial statements so that users of financial reports are informed about all of the
entity’s financing and investing activities, and not only those involving cash.
4. (a) The phases of the company life cycle are the introductory phase, growth
phase, maturity phase, and decline phase.
(b) During the introductory phase, cash from operations and investing would be
expected to be negative, and cash from financing would be positive.
During the growth phase, a company would be expected to show some small
amounts of cash from operations (moving from negative to positive cash from
operations) while continuing to show negative cash from investing and
positive cash from financing.
During the maturity phase, cash from operations is positive and exceeding
investing needs. Financing cash flows become negative as the entity applies
the cash surpluses to pay dividends and retire debt.
In the decline phase, cash from operations and investment would continue to
be positive while cash from financing would be negative.

5. The advantage of the direct method is that it presents the major categories of cash
receipts and cash payments in a format that is similar to the statement of profit or
loss and familiar to statement users. Its principal disadvantage is that the necessary
data can be expensive and time-consuming to accumulate, although with advances
in computers and information technology, this cost is of declining significance.
The advantage of the indirect method is its reconciliation of profit to net cash
provided by operating activities, while its primary disadvantage is the difficulty in
understanding the adjustments that comprise the reconciliation.
6. Sales $2,000,000
Less: Increase in receivables 200,000
Cash receipts from customers $1,800,000
7. A number of factors could have caused an increase in cash despite the loss for the
period. These are:
(1) high cash revenues relative to low cash expenses
(2) sales of property, plant, and equipment
(3) sales of investments
(4) issue of debt or shares for cash.
8. Any five of the following:

Depreciation expense.
Gain or loss on sale of a non-current asset.
Increase/decrease in accounts receivable.
Increase/decrease in accounts payable.
Increase/decrease in inventory.
Increase/decrease in prepayments.
Increase or decrease in accrued expenses.
Increase/decrease in income tax payable.
9. This transaction is reported in the note or schedule to the financial statements

entitled ‘Noncash investing and financing activities’ as follows: ‘Issue of 2 million
ordinary shares in consideration for equipment’.
10. (a) The current cash debt coverage ratio is a cash-based ratio that measures
liquidity.
(b) Solvency can be measured by the cash debt coverage ratio (cash-based).
(c) Profitability can be measured by the cash return on sales ratio.

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 11.1

Vong’s Thongs Ltd
(a) Cash inflow from financing activity, $100,000

(b) Cash outflow from investing activity, $75,000
(c) Cash inflow from investing activity, $ 10,000
(d) Cash outflow from financing activity, $ 25,000
BRIEF EXERCISE 11.2

King Fisheries Pty Ltd
Cash flows from financing activities:

Proceeds from issue of debentures $200,000
Payment of dividends (40,000)
Net cash provided by financing activities $160,000
BRIEF EXERCISE 11.3
Cheong’s Chinese Herbs Ltd
Cash receipts from Sales  Decrease in accounts receivable 

=   - bad debts written off
customers revenues - Increase in accounts receivable 
$588,000 = $600,000 - $10,000 (Increase in accounts receivable) - $2,000
BRIEF EXERCISE 11.4

Pete’s Pies Ltd
 Increase in prepaid expenses


- Decrease in prepaid expenses
Cash payments for Operating expenses
 and
operating expenses excluding depreciati on
 Decrease in accrued expenses payable

- Increase in accrued expenses payable
$202,800 = $216,000 - $7,920 - $5,280

BRIEF EXERCISE 11.5
Rotorua Rides Ltd
Profit $200,000
Adjustments to reconcile profit to net cash provided by
operating activities:
Decrease in accounts receivable $80,000
Increase in prepaid expenses (12,000)
Increase in inventories (30,000) 38,000
Net cash provided by operating activities $238,000
BRIEF EXERCISE 11.6
Lau Pty Ltd
Original cost of equipment sold $33,000

Less Accumulated depreciation (9,000)
Carrying amount of equipment sold 24,000
Add: Gain on sale of equipment 4,500
Cash flow from sale of equipment $28,500
BRIEF EXERCISE 11.7
(a) Cash from operations would be lower than profit during the growth phase because
inventory must be purchased for future projected sales. Since during the growth
phase sales are projected to be increasing, inventory purchases must increase and
inventory expensed on an accrual basis would be less than inventory purchased on a
cash basis. Also, collections on accounts receivable would lag behind sales; thus,
accrual sales would exceed cash collections during the period.
(b) Cash from investing is often positive during the late maturity phase and the decline
phase because the firm may sell off excess assets that are no longer needed for
productive purposes.
(c) Cash flow from financing activities is often positive during the introductory and growth
phases as finance would often need to be raised either by issuing shares or from
borrowings for investment in assets.

SOLUTIONS TO EXERCISES
EXERCISE 11.1
(a).
Wilderness Equipment Ltd
Reconciliation of profit after tax to cash provided by operating activities
(a) Noncash investing and financing activities.

(b) Financing activities.
(c) Operating activities.
(d) Financing activities.
(e) Investing activities.
(f) Noncash investing and financing activities.
(g) Operating activities.
b).
Operating activities are the entity’s principal revenue-generating activities such as the
provision of goods and services and activities which are not classified as investing or
financing activities.
Investing activities are the acquisition and disposal of long-term assets, including activities
such as purchasing and selling of non-current assets, and lending money and collecting the
loans.
Financing activities are those that affect the size and composition of contributed equity and
borrowing, and include obtaining cash from issuing debt, repaying the amounts borrowed,
obtaining cash from shareholders, and paying them dividends or buying back shares
EXERCISE 11.2
Madonna Ltd
Cash flows from operating activities:

Profit $200,000
Depreciation expense $35,000
Increase in accounts receivable (15,000)
Increase in accounts payable 8,000
Loss on sale of equipment 5,000 28,000

EXERCISE 11.3
Point in Time Phase

A Maturity phase
B Decline phase
C Introductory phase
D Growth phase
During the introductory phase (point C), cash from operations and investing are expected to
be negative while cash from financing would be positive. In the growth phase (point D), a
company would continue to show negative cash from operations and investing and positive
cash from financing. Cash from operations is approximately equal to profit in the maturity
phase (A) and declines in the decline phase (B), when the company also has positive
investing cash flows from selling of assets and negative financing cash flows as it retires
debt.

EXERCISE 11.4
(a)
Big Bang Balloons Pty Ltd
Statement of Cash Flows
for the year ended 30 June 2015

Cash receipts from customers $1,162,800 (1)
Cash payments:
To suppliers $638,400 (2)
For other operating expenses 313,200 (3)
For interest 18,000
For income taxes 54,000 1,023,600
Net cash provided by operating activities 139,200
Cash flows from investing activities:

Sale of land 30,000
Purchase of equipment (72,000)
Net cash used by investing activities (42,000)

Repayment of notes payable (60,000)
Issue of shares 60,000
Net cash used by financing activities (51,600)
Net increase in cash 45,600

Cash at beginning of period 26,400
Cash at end of period $72,000
Calculations:
(1) Cash receipts from customers:
Sales $1,173,600
Deduct: Increase in accounts receivable (10,800)
(2) Cash payments to suppliers:

Cost of sales $633,600
Deduct: Decrease in inventory (10,800)
Cost of purchases 622,800
Add: Decrease in accounts payable 15,600
Cash payments to suppliers $638,400

(3) Cash payments for operating expenses:

Total expenses 1047,600
Deduct: COS (633,600)
Depreciation * (28,800)
Interest expense (18,000)
Tax expense (54,000)
Cash payments for operating expenses $313,200
* In the absence of any disposals of depreciated assets the change

in Accumulated Depreciation is the depreciation expense
(b) 1. Current cash debt coverage:
Net cash provided by

÷ Average current liabilities
operating activities
$139,200 $56,400  $40,800

÷  2.86 times
(per part (a)) 2
2. Cash return on sales ratio:

÷ Sales
$139,200 ÷ $1,173,600 = 11.9%
3. Cash debt coverage:

÷ Average total liabilities
$296400   $220800  
$139,200 ÷  .54 times
2
(* $56,400 + $240,000)
(**$40,800 + $180,000)

EXERCISE 11.5
Simpson Ltd
(a) Investing activity (h) Financing activity

(b) Financing activity (i) Operating activity (reconciliation)
(c) Investing activity (j) Financing activity
(d) Non-cash investing and financing (k) Operating activity
activity
(e) Operating activity (reconciliation) (l) Non-cash financing activity
(f) Financing activity (m) Investing activity (cash proceeds
from sale)
(g) Operating activity (n) Operating activity
EXERCISE 11.6
Christchurch Motors Pty Ltd
Revenues $170,000
Cash receipts from customers* $127,000
Operating expenses 80,000
Deduct: Increase in accounts payable (33,000)
Bad debts expense (1,000)
Cash payments for operating expenses** 46,000
*Accounts Receivable
Balance, Beginning of year -
Revenues for the year 170,000 Cash receipts for year 127,000
Closing Balance 43,000
170,000 170,000
Opening Balance 43,000
**Accounts Payable
Balance, Beginning of year -
Payments for year 46,000 Operating expenses for year 79,000
79,000 79,000
Operating expenses are $79,000 in the reconstruction of Accounts Payable because $1000
of the total operating expenses of $80,000 was for the bad debts expense, a non-cash item.

EXERCISE 11.7
Colin Ltd
(a) Cash payments to suppliers:

Add: Increase in inventory 6,000
Cash paid to suppliers $369,000
(b) Cash payments for operating expenses:

Operating expenses exclusive of depreciation $230,000
Deduct: Decrease in prepaid expenses ($6,000)
Add: Decrease in accrued expenses payable 12,000 6,000
Cash paid for operating expenses $236,000
EXERCISE 11.8
Outdoor Adventures Ltd
Partial Statement of Cash Flows
for the year ended 31 December 2015

Cash receipts from:
Customers *$250,000
Dividends on investment 14,000
264,000
Cash payments:
To suppliers for inventory $100,000
For operating expenses 20,000
For salaries and wages 68,000
For interest 15,000
For income taxes 16,000 219,000
*$60,000 + $190,000

EXERCISE 11.9
Chau Ltd
Cash payments for rentals:

Rent expense $93,000
Deduct: Decrease in prepaid rent (8,700)
Cash payments for rent $84,300
Cash payments for salaries:

Salaries expense $162,000
Deduct: Increase in salaries payable (9,000)
Cash payments for salaries $153,000
Cash receipts from customers:

Revenue from sales $540,000
Add: Decrease in accounts receivable 9,000
Cash receipts from customers $549,000

EXERCISE 11.10
Kang Ltd and Jang Ltd
Kang Ltd Jang Ltd
(a) Current cash debt coverage ratio $220,000 $240,000

 4.4 times  2.4 times
$50,000 $100,000
(b) Cash debt coverage ratio $220,000 $240,000

1.1 times  .96 times
$200,000 $250,000
(c) Cash return on sales ratio $220,000 $240,000

 .55 : 1  .30 : 1
$400,000 $800,000
Kang Ltd’s liquidity, solvency and profitability ratios are all higher (better) than Jang
Ltd’s comparable ratios. Kang current cash debt coverage ratio and cash return on
sales ratio are almost twice as high as those of Jang. These ratios indicate that Kang is
substantially more liquid and profitable than Jang and is slightly more solvent.
EXERCISE 11.11
Home and Away Travels Ltd

Cash receipts from:
Customers *$350,000
Dividends on investment 19,600
369,600
Cash payments:
To suppliers for inventory $140,000
For operating expenses 28,000
For salaries and wages 95,200
For interest 21,000
For income taxes 22,400 306,600
*$84,000 + $266,000

EXERCISE 11.12
Opotiki Ltd

Profit $153,000
Adjustments to reconcile profit to net cash provided
by operating activities:
Decrease in accounts payable (7,000)
Increase in accrued expenses payable 10,000
Increase in prepaid expenses
(5,000)
Decrease in inventory 25,000
11,000

EXERCISE 11.13
Castle Ltd
(Indirect method)
Reconciliation of profit after tax to cash provided by operating activities.

Profit $16,750
Adjustments to reconcile profit to net cash
provided by operating activities:
Add Depreciation expense $7,000
Add loss on sale of equipment $750
Less Increase in current assets
Add Decrease in current assets
Add Increases in current liabilities
Less Decrease in current liabilities
Net cash provided by operating activities $xxx xxx
Cash flows from investing activities

Sale of equipment * 500
Net cash provided by investing activities (17,000)
Cash flows from financing activities

Dividends paid (3,500)
* Cash flow from sale of equipment
Original cost of equipment sold $8,750

Less Accumulated depreciation (7,500)
Less: Loss on sale of equipment 750
Cash flow from sale of equipment $500

SOLUTIONS TO PROBLEM
SET A
PROBLEM SET A 11.1
Waihi Beach Surfboards Pty Ltd


Purchase of land (60,000)
Sale of plant and equipment 10,250 (1)
Purchase of plant and equipment (50,000)
Equipment
Opening balance 177,500 Cost of equipment sold 27,500
Equipment purchased 50,000 Closing balance 200,000

227,500 227,500
(1) Proceeds on sale of equipment = gain on sale plus carrying amount

= 3,000 + (27,500 – 20,250) = 3,000 + 7,250 = 10,250
*Accumulated Depreciation - Equipment

Equipment sold 20250 Balance, Beginning of year 97,500
Depreciation Expense (2) 22,750
120,250 120,250
(2) Depreciation expense – equipment = total depreciation expense – building depreciation expense
= 47,750 – 25,000 = 27,750

PROBLEM SET A 11.2
(a) Operating activities is the most important category because it shows the cash provided
or used by operations. This source of cash is generally considered to be the best measure of
whether an entity can generate sufficient cash to continue as a going concern and to
expand.
(b)
Phillips Screwdrivers Ltd
for the year ended 31 March 2017

Cash payments:
To suppliers $4,700,000 (2)
For operating expenses 1,240,000 (3)
Tax paid 100,000 (6,040,000)
Net cash provided by operating activities $1,160,000
Calculations:

Sales $6,900,000

Cost of sales $4,700,000
Deduct: Decrease in inventories (300,000)
Cost of purchases 4,400,000
Cash payments to suppliers $4,700,000

Operating expenses, exclusive of *$990,000
depreciation
Add: Increase in prepaid expenses $150,000
Decrease in accrued expenses 100,000 250,000
payable
Cash payments for operating expenses $1,240,000
*$450,000 + ($600,000 - $60,000)

(c)
Phillips Screwdrivers Ltd
Note to Statement of Cash Flows

Profit $1,050,000
Decrease in accounts receivable 300,000
Decrease in accrued expenses payable (100,000 110,000

PROBLEM SET A 11.3

Peebody Enterprises Ltd
(a)

Cash payments:
For operating expenses $862,400 (2)
For income taxes 64,400 (3) 926,800
Calculations:
(1) Computation of cash receipts from customers:

Revenues $1,176,000
Add: Decrease in accounts receivable ($79,800 - $65,800) 14,000
(2) Computation of cash payments:

Operating expenses per statement of profit or loss $873,600
Deduct: Increase in accounts payable ($57,400 - $46,200) (11,200)
(3) Income tax expense per statement of profit or loss $56,000

Add: Decrease in income tax payable ($14,000 - $5,600) 8,400
Cash payments for income taxes $64,400
(b)
Peebody Enterprises Ltd
Reconciliation of profit to cash provided by operating activities.
Profit $126,000
Loss on sale of equipment 36,400
Decrease in income taxes payable (8,400) 137,200

PROBLEM SET A 11.4

(a)
Metro Meats Ltd

Cash receipts from customers $236,000 (1)
Cash payments:
For operating expenses 18,500 (3)
For interest 2,000

Sale of equipment 8,500
Net cash provided by investing activities 8,500

Redemption of debentures (6,000)


Calculations:

Sales $250,000

(3) Cash payments of operating expenses:

Operating expenses $24,000
Deduct: Depreciation * (5,500)
(4) Cash payments for income taxes:

Income tax expense $4,000
Add: Decrease in income taxes payable 3,000
*Accumulated Depreciation
Equipment sold 9,500 Balance, Beginning of year 24,000
Depreciation Expense 5,500
29,500 29,500

(b)
Metro Meats Ltd
Note to Statement of cash flows

Profit $10,000
Decrease in income taxes payable (3,000)
Increase in accounts payable 1,000 (500)
$9,500 $33,000 *  $34,000 * *

(c) (1)   .284 : 1
[ Per Part (a)] 2
*$25,000 + $8,000 **$26,000 + $3,000 + $5,000
(2) $9,500  $250,000 = .038
$66,000 *  $61,000 * *
(3) $9,500   .15 times
2
*$25,000 + $8,000 + $33,000 **$26,000 + $3,000+ $5,000 + $27,000
(d) The ratios calculated in part (c) suggest that Metro Meats Ltd’s cash generated from
operating activities in 1 year is 28.4% of it’s short term obligations. It generates
enough cash in 1 year from operating activities to meet 28.4% of the obligations that
are due within 1 year and its cash generated from operating activities is15% of its
total liabilities. It would appear that Metro Meats Ltd may have to liquidate some of its
productive assets in order to meet its short term obligations.

PROBLEM SET A 11.5

(a)
Freshest Farmers Ltd

Cash payments:
For income taxes 10,500
For interest 3,345 (187,125)

Purchase of investments (21,000)
Sale of machinery 2,250
Purchase of machinery (127,500)

Redemption of debentures (22,500)
Payment of cash dividends (33,525)


Calculations:

Sales $513,000


Operating expenses excluding depreciation $18,615
Decrease in accrued expenses
payable 450 4,050
(b)
Freshest Farmers Ltd
(Indirect method)

Profit $226,350
Loss on sale of machinery 11,250
Increase in inventory (14,475)
Decrease in accrued expenses payable (450)
Increase in prepaid expenses (3,600) 12,825

PROBLEM SET A 11.6

(a)
Sticky Stationery Supplies Ltd

Cash payments:
For operating expenses 1,275,000 (3) (6,655,000)
Net cash used by operating activities ($65,000)
Calculations:

Sales $7,100,000

Cost of purchases per statement of financial performance 5,430,000

Operating expenses ($400,000 + $525,000) $925,000
Decrease in accrued expenses
payable 180,000 350,000
(b)
Sticky Stationery Supplies Ltd
Reconciliation of profit after tax to cash used by operating activities.

Profit $860,000
Amortisation expense 30,000
Decrease in accrued expenses payable (180,000) (925,000)

PROBLEM SET A 11.7

(a)
Yu’s Shoes Ltd

Cash payments:
For income taxes 176,000 (3) 758,000

Revenues $1,160,000
(2) Computation of cash payments for operating expenses:

Add: Decrease in accounts payable ($82,000 - $60,000) 22,000
(3) Income tax expense: $180,000

Deduct: Increase income taxes payable ($12,000 - $8,000) (4,000)
(b)
Yu’s Shoes Ltd

Note to Partial Statement of Cash Flows
(Indirect method)

Profit $420,000
Increase in accounts receivable ($20,000)
Increase in income taxes payable 4,000 (38,000)

PROBLEM SET A 11.8
(a)
Mountain King Tours Ltd

Cash payments:
For interest 2,000

Sale of boat 10,000
Purchase of motors (7,000)

Proceeds from issue of shares 5,000
Proceeds from issue of debentures 5,000


Calculations:

Sales $250,000

(3) Operating expenses $28 000 + $16 000 $44,000

Less depreciation (11,000)
$33,000
(b)
Mountain King Tours Ltd


Profit $17,000
Decrease in income taxes payable (5,000) (1,000)

(c) (1) Current cash debt coverage
$44,000 *  $53,000 * *
$16,000   .33 times
2
*$29,000 + $15,000 **$33,000 + $20,000
(2) Cash return on sales ratio $16,000 ÷ $250,000 = 6.4% or .064:1
(3) Cash debt coverage
$59,000 *  $63,000 * *
$16,000   .26 times
2
*$29,000 + $15,000 + $15,000 **$33,000 + $20,000 + $10,000
(4) Free cash flow $16,000 - $7,000 = $9,000
(d) 33% of Mountain King Tours Ltd’s short term obligations in one year could be
covered by the cash generated from its operating activities and the cash flow from
operating activities is sufficient to cover 26% of its total obligations. The cash return
on sales figure of 6.4% compares favourably to the profit ratio of 6.8%
(17,000/250,000) and there is free cash flow of $9,000 which suggests that after
investing in new property, plant and equipment to maintain operations at their current
level, there is still cash available for expansion or payment of dividends.

PROBLEM SET A 11.9

(a)
Takahashi Enterprises Pty Ltd

Cash payments:
For interest 2,720 74,200

Sale of investments 1,200
Sale of plant and equipment 7,775
Purchase of plant and equipment (46,000) (4)

Net cash provided by financing activities nil
Calculations:

Sales $150,000

Add: Decrease in accrued expenses payable 3,365

(4)
Plant and Equipment
Balance, Beginning of year 102,500 Equipment sold 23,500
Cash (purchase of equipment) 46,000 Closing Balance 125,000
148,500 148,500
(b)
Takahashi Enterprises Pty Ltd
(Indirect Method)

Profit $66,105
Gain on sale of equipment (4,375)

PROBLEM SET A 11.10
(a)
DVD’S and More Ltd


Cash payments:

Purchase of land (6) (80,000)
Sale of land 100,000
Sale of equipment (5) 30,000
Purchase of equipment (60,000 – 20,000) (40,000)

Repayment of borrowings (100,000 + 60,000) (160,000)


Calculations:

Sales $620,000
Deduct: Bad debts written off (4,000)

Add: Decrease in accounts payable 20 ,000
(3) Operating expenses $28 000 -$5,000 $23,000

Income tax expense(92,000 + 18,000) $110,000
deduct: Increase in income taxes payable (47,000)
(b)
DVD’s and More Ltd
Reconciliation of profit to cash provided by operating activities
Profit $100,000
Loss on sale of office equipment $20,000
Profit on sale of land ($20,000)
Increase in allowance for doubtful debts 8,000
Decrease in prepaid rent 40,000
Increase in accrued expenses 5,000
Increase in income taxes payable 47,000 160,000

(5)
Equipment
Purchase via long term note 20,000
340,000 340,000
Accumulated Depreciation - Equipment

Balance, Beginning of year 90,000
Accum. Depn. Equip. sold 40,000 Depreciation Expense 60,000
150,000 150,000
(5)
Land
Balance, Beginning of year 360,000 Land sold 80,000
Land purchased 80,000
Upward revaluation 60,000 Closing Balance 420,000
500,000 500,000

SOLUTIONS TO PROBLEM
SET B
PROBLEM SET B 11.1
Wholesale Foods Ltd
Cash flows from investing activities

Proceeds from sale of equipment 3,000
Purchase of land (30,000)
Buildings
750,000 750,000
*Accumulated Depreciation - Buildings

337,500 337,500
Equipment
320,000 320,000
Total depreciation expense 101,500

Less depreciation expense - building 37,500
= depreciation expense – equipment 64,000

*Accumulated Depreciation - Equipment

Equipment sold 16,000 Balance, Beginning of year 96,000
160,000 160,000
Carrying amount of equipment sold (20,000 - 16,000) $4,000

Loss on sale of equipment 1,000
Proceeds of sale of equipment $3,000

PROBLEM SET B 11.2

(a)
Okamoto Motors Ltd

Cash payments:
To suppliers 845,000 (2)
For operating expenses 232,500 (3) 1,077,500
Calculations:
Sales $1,350,000


Add: Increase in prepaid expenses 42,500
Deduct: Increase in accrued expenses payable (41,250)

(b)
Okamoto Motors Ltd
(Indirect Method)
Profit $260,000
Increase in prepaid expenses ((42,500)
Increase in accrued expenses payable 41,250 140,000

PROBLEM SET B 11.3

(a)
Nguyen and Tran Ltd


Cash payments:

Revenues $430,000
(2) Computation of cash payments for operating expenses:

Add: Decrease in accounts payable ($41,000 - $30,000) 11,000
(3) Income tax expense: $47,000

Deduct: Increase income taxes payable ($6,000 - $4,000) (2,000)
(b)
Nguyen and Tran Ltd
Note to Partial Statement of Cash Flows
Reconciliation of profit after tax to cash used by operating activities.

Profit $103,000
Increase in accounts receivable ($10,000)
Increase in income taxes payable 2,000 (19,000)

(c) Direct method is a method of presenting cash payments as deductions from cash
receipts to determine net cash provided by operating activities.
Indirect method is a method of preparing a cash flow statement in which profit is

adjusted for timing differences, non-cash items and cash flows classified as investing
to determine net cash provided by operating activities.
PROBLEM SET B 11.4
(a)
Kiwi Ltd

Cash payments:
To suppliers 284,700 (2)
For income taxes 1,300 (4)

Proceeds from sale of equipment 13,000

Proceeds from issue of bonds 13,000
Dividends paid (46,800) (6)
Net decrease in cash (9,100)


Calculations:

Sales $371,800


Operating expenses (36,400 – 10,400 + 11,700) $37,700
(4) Income tax expense $9,100

Increase in income tax payable (7,800)
Income taxes paid $1,300
(5)
Property, Plant and Equipment
110,500 110,500
(6)
Retained Earnings
Dividends paid 46,800 Balance, Beginning of year 36,400
Profit 53,300
89,700 89,700

(b)
Kiwi Ltd

Profit $53,300
Increase in income tax payable 7,800 (32,500)
(c) (1) Current cash debt coverage = $20,800  ($74,100 + $81,900)/2 = 0.27:1
(2) Cash debt coverage = $20,800  ($100,100 + $94,900)/2 = 0.21:1
(3) Free cash flow = $20,800 - $9,100 = $11,700
(d) Kiwi Ltd has the ability to cover 27% of its short-term liabilities from the cash
generated from its operating activities. The cash debt coverage of 0.21 shows that
Kiwi Ltd’s cash flows from operating activities is sufficient to cover 21% of its total
liabilities. After investing in new property, plant and equipment to maintain operations
at their current level, Kiwi Ltd still has $11,700 cash available for expansion or
payments of dividends, as shown by its free cash flow of $11,700.

PROBLEM SET B 11.5
(a)
Aleksia Ltd

Cash payments:


Proceeds from issue of bonds 70,000
Payment of cash dividends (75,000) (5)
Net cash provided by financing activities 45,000


Calculations:

Sales $297,500


(4)
Plant and Equipment
346,000 346,000
Accumulated Depreciation – Equipment

Sale of equipment 26,000 Depreciation expense 35,500
75,500 75,500
Original cost of equipment sold 36,000

Less accumulated depreciation 26,000
Sale price 15,000
Gain on sale of equipment 5,000

(5)
Retained Earnings
Dividends paid 75,000 Balance, Beginning of year 107,940
Profit 142,660
250,600 250,600
(b)
Aleksia Ltd
(Indirect Method)

Profit $142,660

PROBLEM SET B 11.6
Transaction Where Reported (O), Cash Inflow, Cash outflow, No Effect

Investing (I), Financing (F) or
as non-cash (NC)
(a) No effect
(b) O Outflow
(c) I Inflow
(d) NC No effect
(e) F Outflow
(f) NC No effect
(g) O Inflow
(h) No effect
(i) O Outflow
(j) No effect
PROBLEM SET B 11.7

(a)
Bear’s Chairs Ltd
for the year ended 30 November 2015

Cash payments:
For operating expenses 1,290,000 (3) 6,030,000
Calculations:

Sales $7,700,000

Cost of purchases per statement of profit or loss 4,400,000

Operating expenses ($1,150,000 - $110,000) $1,040,000
Add: Decrease in accrued expenses
payable 100,000 250,000

(b)
Bear’s Chairs Ltd
for the year ended 30 November 2015

Profit $1,650,000

PROBLEM SET B 11.8
(a)
XYZ Children’s Centre Ltd

Cash payments:
For interest 4,800

Sale of Furniture 24,000
Purchase of Equipment (16,800)



Calculations:

Sales $600,000

(3) Operating expenses $60 000 + $45 600 $105,600

Less depreciation (26,400)
$79,200
(b)
XYZ Children’s Centre Ltd

(Indirect method)

Profit $40,800

(c) (1) Current cash debt coverage = $38,400/ [($105,600* + 127,200**)/2] = 0.33
*$69,600 + $36,000
**$79,200 + $48,000
(2) Cash return on sales ratio $38,400 ÷ $600,000 = 6.4% or .064:1
(3) Cash debt coverage = $38,400/[(141,600* + 151,200**)/2] = 0.26
*$69,600 + $36,000 + $36,000

**$79,200 + $48,000 + $24,000
(4) Free cash flow $38,400 - $16,800 = $21,600
(d) 33% of XYZ Children’s Centre Ltd’s short term obligations in one year could be
covered by the cash generated from its operating activities and the cash flow from
operating activities is sufficient to cover 26% of its total obligations. The cash return
on sales figure of 6.4% compares favourably to the profit ratio of 6.8%
(40,800/600,000) and there is free cash flow of $21,600 which suggests that after
investing in furniture and equipment to maintain operations at their current level,
there is still cash available for expansion or payment of dividends.

PROBLEM SET B 11.9
(a)
ABC Manufacturing Pty Ltd

Cash payments:
For interest 2,940 (145,900)

Purchase of plant and equipment (92,000)

Issuance of debentures 30,000

Calculations:

Sales $297,500


(b)
ABC Manufacturing Pty Ltd

Profit $132,210

PROBLEM SET B 11.10
(a)
SIMIC AND NIKOLIC Ltd

Cash payments:
For operating expenses 1,976,000 (3)
For interest expenses 160,000 (4)
For income taxes 1,200,000 (5) 12,182,000

Sale of equipment (8) 430,000
Sale of land (6) 640,000
Purchase of plant & equipment (8) (696,000)
Purchase of office equipment (9) (50,000)
Purchase of building (7) (430,000)

Proceeds from issue of shares (11) 200,000
Payment of cash dividends (10) (750,000)
Proceeds from borrowings 800,000
Net increase in cash 1,930,000

Cash at beginning of period 1,220,000
Cash at end of period $3,150,000

Calculations:

Sales $14,126,000
Deduct: Bad debts written off (18,000)

Cost of sales $8,876,000
Cost of purchases 9,096,000

Other expenses + insurance expense ($1796,000 + $1,936,000
$140,000)
Add: Increase in prepaid insurance 20,000
Add: Decrease in accrued expense payable 20,000
(4) Cash payments for interest expense:

Interest expense $180,000
Deduct: Increase in interest payable (20,000)
Cash payments for interest expense $160,000

Income tax expense (1,100,000 + 80,000) $1,180,000
add: decrease in income taxes payable 20,000
Cash payments for income taxes $1,200,000

(6)
Land
Balance, Beginning of year 1,900,000 Land sold 430,000
Upward revaluation 160,000 Closing Balance 1,630,000
2,060,000 2,060,000
Opening Balance 1,630,000
Proceeds from land sold = cost 430,000 + gain of 210,000 = $640,000
(7)
Building
Balance, Beginning of year 1,670,000
Purchase 430,000 Closing Balance 2,100,000
2,100,000 2,100,000
Accumulated Depreciation – Building

Closing Balance 540,000 Depreciation expense 40,000
540,000 540,000
(8)
Plant and Equipment
Balance, Beginning of year 1,258,000 Equipment sold 500,000
Cash (purchase of equipment) 696,000 Closing Balance 1,454,000
1,954,000 1,954,000
Accumulated Depreciation – Plant and Equipment

Plant sold 300,000 Balance, Beginning of year 610,000
Closing Balance 440,000 Depreciation expense (250,000 – 130,000
80,000-40,000)
740,000 740,000
Carrying amount of plant sold = 500,000 – 300,000 = 200,000

Proceeds from sale = carrying amount + gain = 200,000 + 230,000 = 430,000

(9)
Office Equipment
Balance, Beginning of year 380,000 Equipment sold 0
430,000 430,000
Accumulated Depreciation – Office Equipment

Office equipment sold 0 Balance, Beginning of year 190,000
Closing Balance 270,000 Depreciation expense 80,000
270,000 270,000
(10)
Retained Earnings
Cash dividends declared/paid 850,000 Balance, Beginning of year 1,618,000
Transfer to reserve 100,000 Profit 2,096,000
Closing Balance 2,764,000
3,714,000 3,714,000
Dividend Payable
Cash paid 750,000 Balance, Beginning of year 500,000
Closing Balance 600,000 Dividends declared 850,000
1,350,000 1,350,000
(11)
Share Capital
Balance, Beginning of year 1,000,000
Asset revaluation reserve 200,000
Closing Balance 1,400,000 Cash 200,000
1,400,000 1,400,000

(b)
SIMIC AND NIKOLIC Ltd
(Indirect method)
Reconciliation of profit to cash provided by operating activities
Profit $2,096,000
Gain on sale of land ($210,000)
Gain on sale of equipment ($230,000)
Increase in allowance for doubtful debts 10,000
Increase in prepaid insurance (20,000)
Decrease in accrued expenses (20,000)
Increase in interest payable 20,000

BUILDING BUSINESS SKILLS
FINANCIAL REPORTING AND ANALYSIS
BUILDING BUSINESS SKILLS 11.1 FINANCIAL REPORTING PROBLEM
Domino’s Pizza Enterprises Ltd
(a) Net cash provided by operating activities:
2013 $33,180,000
2012 $37,678,000
Domino’s 2013 cash flows are consistent with the growth phase. Operating cash
flows are positive and cash receipts from customers and revenue have increased in
2013 over 2012. Cash generated by operations is positive and Domino’s is still and
borrowing and investing to grow the business.
(b) The decrease in cash for the year ended 30 June 2013 was $21,649,000 and for
the year ended 30 June 2012 was $12,255,000 increase in cash.
(c) The change in borrowings comprised repayments of $20,506,000 and additional

borrowings of $43,721,000
(d) Total cash used for investing activities in 2013 was ($30,395,000).
(e) The interest (borrowing cost) paid in 2013 was $405,000 and income tax paid was
$11,796,000 in 2013.

BUILDING BUSINESS SKILLS 11.2 COMPARATIVE ANALYSIS PROBLEM
Company A vs. Company B
(a)
All dollar amounts are in $’000
Company A Company B
1. Current $113,393 $131,615

cash debt  0.93times  0.75 times
($112,907  $130,769) / 2 $(188,896  $162,582) / 2
coverage
2. Cash return $113,393 $131,615

on sales ratio  0.22 : 1  .18 : 1
$505,754 $744,285
3. Cash debt $113,393 $131,615

coverage  0.83 times  0.36 times
($124,497  $149,139) / 2 ($387,638  $334,298) / 2
(b) The current cash debt coverage uses cash generated from operations during the
period and provides a better representation of liquidity on an average day than
measures such as the current ratio. Company A’s ratio of $0..93 of cash from
operations for every dollar of current liabilities was more than Company B’s $0.75 of
cash from operations per dollar of current liabilities and indicates that Company A
was more liquid than Company B in 2017.
The cash return on sales ratio indicates a company’s ability to turn sales into dollars
(cash). Since Company A’s cash return on sales ratio was slightly higher than
Company B’s (0.22 vs. 0.18), Company A was more efficient in turning sales into
cash in 2017.
The cash debt coverage ratio shows a company’s ability to repay its liabilities from
cash generated from operating activities without having to liquidate the assets
employed in its operations. Since Company A’s cash debt coverage was more than
2 times greater than Company B’s (.83 vs. .36), Company A’s ability to repay
liabilities with cash from operations was significantly greater than Company B’s in
2017.

BUILDING BUSINESS SKILLS 11.3 INTERPRETING FINANCIAL STATEMENTS
Peter’s of Buckingham Ltd
All dollar amounts are in $million.
Capital expenditure ratio and free cash flow:
Capital expenditure ratio Free cash flow

2018 $7,433 ÷ $3,683 = 2.02 $7,433 - $3,683 = $3,750
2017 $7,057 ÷ $3,332 = 2.12 $7,057 - $3,332 = $3,725
2016 $7,098 ÷ $3,662 = 1.94 $7,098 - $3,662 = $3,436
,
Peter’s of Buckingham was able to finance its capital expenditure from the cash provided by
operations each year from 2016 to 2018. Free cash flow increased from 2016 to 2017 and
remained stable in 2018. The capital expenditure ratio increased in 2017 and declined in
2018, as both CFO and capital expenditure increased.
Current cash debt coverage:
$7,433
2018  1.11times
($5,834  $7,576 ) / 2
$7,057
2017  1.00 times
($8,230  $5,834 ) / 2
$7,098
2016  0.81times
($9,279  $8,230 ) / 2
The current cash debt coverage has increased consistently from 2016, when it was below
one. The improvement reflected reduced current liabilities in 2017 and increased cash
provided by operations in 2018. The increased current cash debt coverage indicates Peter’s
of Buckingham’ improved liquidity since 2016.
Cash debt coverage:
$7,433
2018  0.37 times
($20,177  $19,632) / 2
$7,057
2017  0.32 times
($24,113  $20,177 ) / 2
$7,098
2016  0.30 times
($23,751  $24,113) / 2
The cash debt coverage mirrored the current cash debt coverage. Peter’s of Buckingham
solvency has improved. It has provided more cash from operations for every dollar of
liabilities each year from 2016 to 2018. The improvement reflected reduced liabilities in 2017
and increased cash provided by operations in 2018.
Cash return on sales ratio:
2018 $7,433 ÷ $20,737 = 0.36

2017 $7,057 ÷ $20,495 = 0.34
2016 $7,098 ÷ $20,196 = 0.35
Peter’s of Buckingham ability to generate cash from sales has remained stable at around
35% during the three-year period from 2016 to 2018.

BUILDING BUSINESS SKILLS 11.4 RESEARCH CASE
(a) Profit is an accrual-based measure of performance. Net cash provided by operations

includes receipts and payments in the period in which cash is paid or received, rather
than when the initiating transaction, such as the sale of goods, occurs. The difference
between cash provided by operations and profit can be explained quantitatively by
examining the reconciliation between profit and cash provided by operations,
disclosed in the notes to the financial statements. Students’ answers will vary with
the choice of company and year of the annual report used.
(b) Students’ answers will vary with the choice of company and year of the annual report
used.
(c) Students’ answers will vary with the choice of company and year of the annual report
used.
(d) Students’ answers will vary with the choice of company and year of the annual report
used.
BUILDING BUSINESS SKILLS 11.5 FINANCIAL ANALYSIS ON THE WEB
Answers will vary depending on the company chosen by the students and the year of the
financial statements.
(a) company chosen by student
(b) Company provided financial statements on its website Y or N?
(c) Amounts of cash generated or used by operating activities?

CRITICAL THINKING
BUILDING BUSINESS SKILLS 11.6 WRITTEN COMMUNICATION ACTIVITY
Cool Shooz Pty Ltd
MEMO
To: Peter Sole
From: Student
Date: XX/MM/YYYY
Subject: Statement of cash flows
The statement of cash flows provides information about the cash receipts and cash
payments of a firm, classified as operating, investing and financing activities. The operating
section of your company’s statement of cash flows shows the amount of cash received
through operating activities such as the sale of goods and collection of cash from customers.
Cash payments relating to operating activities such as the payment of salaries and wages
are deducted from cash receipts to determine net cash provided by operating activities.
The investing section of the statement reports the cash flows resulting from changes in
investments and other non-current assets.
The financing section of the statement reports the cash flows resulting from changes in
financial liabilities and equity, such as the issue of shares, borrowings and the payment of
cash dividends.
If you have any further questions, please do not hesitate to contact me.
Signature

BUILDING BUSINESS SKILLS 11.7 ORAL COMMUNICATION ACTIVITY
Students are asked to present a 5 minute presentation on one of the projects on the B team
website. The B team is a Richard Branson initiative he initiated to explore how people in
business can develop a better version of capitalism that considers how people are treated
and how businesses impact the
cultures they are based in, economically, socially and environmentally.
Answers will vary depending on the company chosen by the students and the year of the
financial statements.
1. Project chosen by student explains some background to the problem this project is
aiming to address.
2.Outlines What businesses are being asked to do differently based on the objectives of this
project?
3. Explains the social and environmental impacts and the intended benefits of this project?
Also, whether any benefits have any been achieved?
BUILDING BUSINESS SKILLS 11.8 ETHICS CASE
Big Rubber Ltd
(a) It is unethical of the board to placed undue pressure on the managing director to
have a cash dividend each year to keep her job “safe”.
The managing director’s statement: ‘We must get that amount above $1million’, puts
undue pressure on the accountant and expresses a willingness to report cash flows
more favourably than would result from the application of standards and the true and
fair principle. This statement along with her statement, ‘I know you won’t let me
down’, encourages the accountant to do something unethical.
The accountant’s reclassification (intentional misclassification) of a cash inflow from a

long-term note (financing activity) issue to an ‘increase in payables’ (affecting the
calculation of cash provided by operating activities) is inappropriate and unethical. It
provided biased information intended to mislead other directors so that a dividend will
be paid in circumstances when it would otherwise not be paid.
Hence the managing director’s actions are unethical and she is requesting that the
accountant intentionally provide misleading information to users of financial
statements
And by intentionally preparing incorrect financial statements the accountant actions
are unethical as well.
(b) Are the board members or anyone else likely to discover the misclassification?
It is unlikely that any board members (other than board members who are also
officers of the company) would discover the misclassification. Board members
generally do not have detailed enough knowledge of their company’s transactions to
detect this misstatement. It is possible that an officer of the bank that made the loan
would detect the misclassification upon close reading of Big Rubber Ltd’s statement
of cash flows. It is also possible that close scrutiny of the balance sheet and notes to
the financial statements showing an increase in notes payable (long-term debt) would
reveal that there is no comparable financing activity item (proceeds from note
payable) in the statement of cash flows.

The auditors (internal or external), who have access to the detail of transactions and
journal entries, may detect the misrepresentation in their audit of the financial
statements.
Alternatively, if the company cannot pay its bills and goes into receivership – the
administrators may find the misclassification.
(c) The key stakeholders in this situation could be positively or negatively

impacted by the note reclassification as follows:
The managing director of Big Rubber Ltd benefits if the misrepresentation is not
discovered as she gets to keep her job. She could lose her job and reputation if the
intentional misrepresentation is revealed.
The Board of Directors are responsible for the presentation of the financial
statements and effective leadership. Harmful to their reputation if the
misrepresentation is discovered and particularly because it was done as a result of
undue pressure on the managing director’s job security by the board.
The accountant could lose his job and reputation if the intentional misrepresentation
is revealed. Benefit: The accountant could keep the managing director happy and
reduce conflict at work.
The shareholders of Big Rubber Ltd could benefit in the short term by receiving a
dividend. In the long term this payment might put the firm at financial risk.
Users of Big Rubber’sfinancial statements could make poor investing and lending
decisions
(d) What ethical actions could the accountant take? Explain the implications of these
actions.
First the accountant could talk to the managing director and refuse to make the
change. The negative consequence is that it might result in harming the relationship
with the managing director and might even get fired. The positive outcome is the
accountant has acted professionally and ethically. If the managing director will not
listen, the accountant can approach to board to expose the undue pressure. If the
board will not back down, then the accountant has no choice but to go outside the
organisation. The accountant could approach the auditor, the accounting professional
bodies or a government authority to report the undue pressure. The implications are
the accountant has acted professionally and ethically, however, will now be seen as
a ‘whistle blower’.

BUILDING BUSINESS SKILLS 11.9 SUSTAINABILITY
Part A
(1) the nature of the environmental laws that have come into effect in some countries Apple
Inc operates in is the requirement to provide customers the ability to return the electrical
product they purchased form the company at the end of its useful life at no charge to the
customer which places the responsibility and the cost for environmentally safe disposal or
recycling of components with the Apple Inc.
The Waste Electrical and Electronic Equipment Directive (WEEE Directive) is a Eurpean
community (EU) directive on waste electrical and electronic equipment (WEEE) which
became law in Europe 2003. The directive imposes the responsibility for the disposal of
waste electrical and electronic equipment on the manufacturers of the equipment. Those
companies should establish an infrastructure for collecting WEEE, in such a way that "Users
of electrical and electronic equipment from private households should have the possibility of
returning WEEE at least free of charge". Also, the companies are compelled to use the
collected waste in an ecologically-friendly manner, either by ecological disposal or by
reuse/refurbishment of the collected WEEE.
(2) Compliance with these environmental laws could materially adversely affect the
Company as it would require them to develop the infrastructure to collect products at the end
of their life (for example you may have seen the mobile phone recycling bins located in
various phone re-seller shops), as well as the infrastructure or the outsourcing to enable the
recycling and or disposal of the electrical products in an environmentally friendly manner. All
of this takes time and resources which can have negative impact on the finances and
operations of Apple Inc’s business.
Part B
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Solutions Manual

John Wiley & Sons Australia, Ltd 2016

CHAPTER 11 – STATEMENT OF CASH FLOWS

ASSIGNMENT CLASSIFICATION TABLE

2. Distinguish among operating, 1, 2 1, 5 2A, 6B

3. Prepare a statement of cash flows. 3, 4, 5, 6 2, 4, 6, 7, 1A, 2A, 3A, 4A,

4. Explain the impact of the product life 7 3

5. Use the statement of cash flows to 4, 10 4A, 8A, 4B, 8B

© John Wiley and Sons Australia Ltd, 2016 11.1

CHAPTER 11 – STATEMENT OF CASH FLOWS

2. The three activities are:

Investing activities include:

Financing activities include:

3. Significant non-cash financing and investing activities must be disclosed in notes to

© John Wiley and Sons Australia Ltd, 2016 11.2

8. Any five of the following:

9. This transaction is reported in the note or schedule to the financial statements

© John Wiley and Sons Australia Ltd, 2016 11.3

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 11.1

(a) Cash inflow from financing activity, $100,000

BRIEF EXERCISE 11.2

Cash flows from financing activities:

BRIEF EXERCISE 11.3

Cheong’s Chinese Herbs Ltd

Cash receipts from Sales  Decrease in accounts receivable 

$588,000 = $600,000 - $10,000 (Increase in accounts receivable) - $2,000

BRIEF EXERCISE 11.4

 Increase in prepaid expenses

$202,800 = $216,000 - $7,920 - $5,280

© John Wiley and Sons Australia Ltd, 2016 11.4

BRIEF EXERCISE 11.5

Rotorua Rides Ltd

BRIEF EXERCISE 11.6

Lau Pty Ltd

Original cost of equipment sold $33,000

BRIEF EXERCISE 11.7

© John Wiley and Sons Australia Ltd, 2016 11.5

(a) Noncash investing and financing activities.

Cash flows from operating activities:

© John Wiley and Sons Australia Ltd, 2016 11.6

Point in Time Phase

© John Wiley and Sons Australia Ltd, 2016 11.7

Cash flows from operating activities:

Cash flows from investing activities:

Cash flows from financing activities:

Net increase in cash 45,600

(2) Cash payments to suppliers:

© John Wiley and Sons Australia Ltd, 2016 11.8

(3) Cash payments for operating expenses:

* In the absence of any disposals of depreciated assets the change

(b) 1. Current cash debt coverage:

Net cash provided by

$139,200 $56,400  $40,800

2. Cash return on sales ratio:

Net cash provided by

$139,200 ÷ $1,173,600 = 11.9%

3. Cash debt coverage:

Net cash provided by

© John Wiley and Sons Australia Ltd, 2016 11.9

(a) Investing activity (h) Financing activity

© John Wiley and Sons Australia Ltd, 2016 11.10

(a) Cash payments to suppliers: