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Topic 10 Cash flow statements

Chapter 19

Review questions
19.1 Pursuant to AASB 107, the three types of activities reported on the
statement of cash flows are described as follows:
Financing activities are activities that result in changes in the size
and composition of the contributed capital and borrowings of the
entity.
Investing activities are the acquisition and disposal of long-term
assets and other investments not included in cash equivalents.
Operating activities are the principal revenue-producing activities of
the entity and other activities that are not investing or financing
activities.
Each type of cash flow provides important information. For example, it
would be hoped that in the longer term, the majority of the firms cash
flows would be generated by its operating activities. Knowledge about the
investing activities of the firm provides information about the growth or
contraction in the asset base of the company and this may be particularly
important when considering future cash flows and prospects. Cash flows
relating to financing activities will show how the financial structure has
changed and this may be particularly important in considering potential
changes in the risk of the entity, and the associated changes in expected
returns.

19.2

Operating Investing Financing

(a) Dividends received* (d) Acquisition of (b) Dividends paid
(c) Interest paid* plant (e) Repayment of
and equipment borrowings
(f) Borrowing costs* (i) Receipts from share
issue
(g) Payments to suppliers (j) Payments to
underwriters
(h) Payments to
employees
* These expenses might also be treated as financing costs. That is, AASB
107 appears to provide some discretion as to how some amounts might be
disclosed.
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19.3 The objective of AASB 107 is identified in the Accounting Standard as:
The objective of this Standard is to require the provision of
information about the historical changes in cash and cash
equivalents of an entity by means of a statement of cash flows
which classifies cash flows during the period from operating,
investing and financing activities.
Cash and cash equivalents are defined in AASB 107 as follows:
Cash comprises cash on hand and demand deposits.
Cash equivalents are short-term, highly liquid investments that
are readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value.
Paragraphs 7 and 8 of AASB 107 provide further relevant discussion:
7. Cash equivalents are held for the purpose of meeting short-term
cash commitments rather than for investment or other purposes.
For an investment to qualify as a cash equivalent it must be
readily convertible to a known amount of cash and be subject to
an insignificant risk of changes in value. Therefore, an
investment normally qualifies as a cash equivalent only when it
has a short maturity of, say, three months or less from the date
of acquisition. Equity investments are excluded from cash
equivalents unless they are, in substance, cash equivalents, for
example in the case of preferred shares acquired within a short
period of their maturity and with a specified redemption date.
8. Bank borrowings are generally considered to be financing
activities. However, in some countries, bank overdrafts which are
repayable on demand form an integral part of an entitys cash
management. In these circumstances, bank overdrafts are
included as a component of cash and cash equivalents. A
characteristic of such banking arrangements is that the bank
balance often fluctuates from being positive to overdrawn.

19.4 The following are cash equivalents: (d) deposits that are available at call;
(e) deposits on the money market that are available at two months
notice; and (f) a bank overdraft.

19.5 The argument that cash-flow data might be more reliable than profit-
related data is based on the view that the determination of profits relies
upon many professional judgments, such that different teams of
accountants would rarely calculate the same profit or loss figure for the
same entity. Profit can also be manipulated. By contrast, cash and cash
equivalents are more objectively determined and less susceptible to
manipulation. However, it is debatable whether cash-flow data is more

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relevant than profit-based data. This is a good opportunity to consider the

issue of relevance versus representational faithfulness.

19.6 This question will be useful for stimulating debate among students. Cash-
flow data and accounting-profit data serve different purposes. Arguably, in
assessing financial performance, accounting profits provide a superior
measure. Profit takes into account the inflows and outflows of economic
benefits. Cash flows only consider inflows and outflows of cash and cash
equivalents. The flow of cash does not necessarily equate to inflow of net
assets to an entity. For example, we may sell land for cash at a price equal
to its carrying amount. Although there is an inflow of cash, the net assets
of the entity would remain unchanged. Nevertheless, for determining the
solvency and cash management of a reporting entity a statement of cash
flows, and its supporting notes, is a useful complement to the statement
of comprehensive income and statement of financial position.

19.7 Practical difficulties include:

(i) Obtaining the information

It may be difficult to extract non-cash flows/non-operating flows from the movements in the account
balances. For example, a payment received from a debtor may relate to the proceeds from the sale of a
non-current asset which does not relate to operating activities.

(ii) Working out whether transactions relate to operating, investing or

financing activities

AASB 107 requires that cash flows be appropriately classified. It will not always be clear which category a
cash flow belongs in.

(iii) Definition of cash equivalents

Cash equivalents are described as short-term, highly liquid

investments that are readily convertible to known amounts of cash
and which are subject to an insignificant risk of changes in value. It
can sometimes be difficult to determine what constitutes a cash
equivalent of a company. Consider the argument presented in the
newspaper article on page 668 of the textbook.
(iv) Reconciling the cash flows from operations with the net profit

Unless a systematic approach such as a spreadsheet is used, it is

easy to omit relevant items from the reconciliation.
In terms of its value to the statutory accounts:
The statement of cash flows provides information not available in
other sections of the financial statements (directly or indirectly). An
example is payments to suppliers and employees. These disclosures
may be useful to financial statement users.

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The statement of cash flows shows the difference between cash flows
and profits for the entity and this information can be useful in
evaluating the solvency of the business.
Information about past cash flows may be useful in forming
predictions about future cash flows. This would be of value when
determining the value of the entity as a going concern.
Cash flow information may serve to summarise managements
investment and financing policies more clearly than statement of
financial position information.
A problem that may arise is that the statement of cash flows is
inconsistent with the accrual basis of accounting used in the
statement of comprehensive income and statement of financial
position. This may lead to confusion for people without accounting
backgrounds. There is, however, a note which reconciles net profit
with cash flows from operations.
Finally, it is debatable whether cash flows from operations, which is
often used as a measure of managerial performance, provides a
better benchmark than profit, or say funds from operations. Some
argue that the application of the accrual concept, and consideration
of revenues earned and expenses incurred, is required for this
purpose. How many management performance measures rely on
cash flows rather than conventional accounting measures?
Thus, whilst statements of cash flows are useful for reviewing the cash
position of reporting entities, they must be reviewed carefully and in
conjunction with other financial information.

19.8 (a) The sale of a non-current asset

The proceeds from the sale of a non-current asset would be disclosed as part of the
cash flows associated with investing activities. It is the cash flow which is relevant to
the statement of cash flows, not the gain or loss on sale as would be included in the
statement of comprehensive income. In the reconciliation of profit after tax with net
cash provided from operations, any gain on sale would need to be deducted from net
profits (and any loss on sale added).

(b) An increase in a provision for long-service leave

It is the actual payments related to the long-service leave entitlements which is included in the statement of
cash flows. The expense, to the extent it is accrued, would not be the same as the cash flow. To determine
the cash flow we would add the long-service leave expense to the opening provision, from which we would
then deduct the closing provision. In providing the reconciliation of net profit with net cash provided from
operations, any increase in the provision would be added to net profits after tax (and any decrease would be
deducted).

(c) The acquisition of land by way of the issue of shares

This would be a non-cash transaction which would not be included in the statement of cash flows. The
Accounting Standard AASB 107 requires that information about transactions and other events that do not
result in any cash flows during the financial year, but affect assets and liabilities that are recognised, must
be disclosed in the notes to the financial statements where the transactions and other events involve
parties external to the entity; and relate to the financing or investing activities of the entity.

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19.9 The Accounting Standard requires that the following be disclosed (by way
of a note):
(i) information about transactions and other events that do not result
in any cash flows during the financial year but affect assets and
liabilities that are recognised, where the transactions or other
events involve parties external to the entity and relate to the
financing or investing activities of the entity. Specifically, paragraph
43 states:
Investing and financing transactions that do not require the
use of cash or cash equivalents shall be excluded from a
statement of cash flows. Such transactions shall be disclosed
elsewhere in the financial statements in a way that provides all
the relevant information about these investing and financing
activities.
(ii) the policy adopted for determining which items are classified as
cash and cash equivalents in the statement of cash flows.
Specifically, paragraph 46 of AASB 107 states:
In view of the variety of cash management practices and
banking arrangements around the world and in order to
comply with AASB 101 Presentation of Financial Statements,
an entity discloses the policy which it adopts in determining
the composition of cash and cash equivalents.
(iii) a reconciliation of the amount of cash at the end of the financial
year to the related items in the statement of financial position.
Specifically, paragraph 45 of AASB 107 states:
An entity shall disclose the components of cash and cash
equivalents and shall present a reconciliation of the
amounts in its statement of cash flows with the equivalent
items reported in the statement of financial position.
(iv) a summary of the used and unused loan facilities of the entity and
the extent to which these can be continued or extended.
Specifically, paragraph 50 of AASB 107 states:
Additional information may be relevant to users in
understanding the financial position and liquidity of an
entity. Disclosure of this information, together with a
commentary by management, is encouraged and may
include:
(a) the amount of undrawn borrowing facilities that may
be available for future operating activities and to settle
capital commitments, indicating any restrictions on the
use of these facilities.

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(v) the amount of cash held that is not available for use and the nature
of the restrictions placed upon the use of the cash. Specifically,
paragraph 48 of AASB 107 states:
An entity shall disclose, together with a commentary by
management, the amount of significant cash and cash
equivalent balances held by the entity that are not
available for use by the group.
(vi) a reconciliation of cash flows arising from operating activities to
profit or loss.

19.10 (a) The main criticism is that the definition of cash and cash
equivalents is too narrow and should include bullion holdings.
(b) and (c) Cash and cash equivalents are defined in AASB 107 as follows:
Cash comprises cash on hand and demand deposits.
Cash equivalents are short-term, highly liquid investments
that are readily convertible to known amounts of cash and
which are subject to an insignificant risk of changes in value.
To the extent that gold bullion is readily convertible to cash, then the criticism may be valid. However, it is
not clear from a reading of AASB 107 that gold bullion would definitely have to be excluded from cash
equivalents. The entity, however, would need to be able to demonstrate that gold bullion is highly liquid,
and is used in the entitys cash management function on a day-to-day basis.

19.11 This question can be answered by using either the t-account approach or
the equations approach.
The following t-accounts are in $000

Sales
Accounts receivable
Accounts 400 Op. balance 90 Allowance 6
receivabl for doubtful
e debts
Sales 400 Discounts 10
Cash 39
4
Closing 80
balance
400 490 49
0

Allowance for doubtful debts

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Accounts 6 Op. bal. 9

receivable
Clos. bal. 8 Doubtful 5
debts
expense
14 1
4

Alternatively, we can determine the cash flows from debtors using an

equation, as shown below.
Cash receipts from customers = $400 000 (Sales) + $90 000 (beginning
receivables) $80 000 (ending receivables) $6000 (transfer from
allowance for doubtful debts which equals opening balance of the
allowance plus the doubtful debts expense less the closing balance of the
allowance) $10 000 (discounts that may have been given for early
payment) = $394 000.

19.12 This question can be answered by using either the t-account approach or
the equations approach.
The following t-accounts are in $000
Accounts payable
Inventory
Disc. rev. 2 Op. bal. 40 Op. balance 10 COGS 60
Cash 83 Inventory 80 Accounts 80 Stock w/offs 5
payable
Closing 35 Closing 25
balance balance
120 120 90 90

If we adopt an equation method approach, cash payments to suppliers

would be determined as:
Cash payments to suppliers = 40 000 (opening accounts payable) 35
000 (closing accounts payable) + 60 000 (cost of sales) + 25 000 (closing
inventory) 10 000 (opening inventory) 2000 (discounts given by
suppliers) + 5000 (stock write-offs) = 83 000.

19.13 This question can be answered by using either the t-account approach or
the equations approach.
The following t-accounts are in $000

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Property, plant and equipment

Accumulated depreciation
Op. balance 500 Disposa 40 Op. 200
l balance
Cash 280 Disposal 130 Deprec. 50
exp
Clos. bal. 650 Clos. 210
bal.
780 780 250 250

The original cost of the asset that was disposed is determined by adding
the accumulated depreciation pertaining to the asset ($40 000, as
determined above) to the carrying amount of the disposed asset ($90 000,
which was provided in the question) to give an original cost of $130 000.
Because a gain of $20 000 was made on disposal of property, plant and
equipment, $110 000 must have been received for the disposed asset
($90 000 + $20 000).
If we adopt an equation method approach, cash payments to suppliers of
the property, plant and equipment would be determined as:
Cash payments = Closing balance of plant (650 000) opening balance of
plant (500 000) + original cost of asset sold (130 000) = 280 000

19.14 (i) Receipts from customers

We need to reconstruct the allowance for doubtful debts and

accounts receivable.
The cumulative entry to record sales would be:
Dr Accounts receivable 250 000
Cr Sales 250 000

The entry to record the doubtful debts expense would be:

Dr Doubtful debts expense 25 000
Cr Allowance for doubtful debts 25 000
As the closing balance of allowance for doubtful debts decreased by $5000, $30 000 must have been
written off against debtors. A reconciliation of accounts receivable shows a cash collection of $200 000:

Accounts receivable
Allowance for doubtful
debts
Op. balance 250 Allow. 30 A/c rec. 30 Op. 35
for d.d. balance
Sales 250 Cash 200

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Clos. 270 Clos. 30 D.debts 25

bal. bal. exp
500 500 60 60

(ii) Purchases of inventory

XYZ Ltd commenced the period with $160 000 of inventory. After
using $130 000 (COGS) it had a closing balance of $180 000. Given
that there were no inventory write-offs, this means that $150 000 of
inventory must have been purchased.
Given that accounts payable had an opening balance of $190 000,
there were purchases of $150 000 (above), and there was a closing
balance of $200 000, $140 000 must have been paid in cash. This is
shown in the following t-accounts.
Inventory
Accounts payable
Op. bal. 160 COGS 130 Cash 140 Op. 190
bal.
Accounts 150 Clos. 180 Clos. 200 Inv. 150
payable bal. bal.
310 310 340 340

(iii) Accrued salaries

If the opening balance of accrued salaries was $18 000, salaries expenses totalled $30 000, and the closing
balance was $22 000, then $26 000, must have been paid.

Accrued salaries
Cash 26 Op. bal. 18
Clos. bal. 22 Salaries 30
48 48

At this stage we can now determine the total cash flows from operations as:

Receipts from customers 200 000

Payments to suppliers (140 000)
Payments for accrued expenses (26 000)
Interest payments (20 000)
14 000

Cash flows from investment activities

Plant and equipment

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The journal entries for the disposal of the plant and equipment can
be summarised as:
Dr Accum. depreciationplant and 20 000
equip.
Cr Plant and equipment 20 000

As plant increased by $10 000, $30 000 must have been acquired during the period (this is given in the
question), as reconciled below:

Accumulated depreciation
Property, plant and
equipment
Disposal 20 Op. bal. 30 Op. bal. 90 Disposa 20
l
Clos. bal. 20 Deprec. exp 10 Cash 30 Clos. 100
bal.
40 40 120 120

Cash flows from investing, therefore, were:

Payment for property plant and equipment (30
000)

Cash flows from financing

A reconciliation of movements in share capital would show that
there have been no issues for cash.
The only cash flow from financing relates to $20 000 from long-term
loans.
Hence, the total cash flows for the period can be represented as:
Opening cash balance 120 000
Cash from operations 14 000
Cash from investing (30
000)
Cash from financing 20 000
Closing cash balance 124
000

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We are now able to present a statement of cash flows for XYZ Ltd.
XYZ Limited

Statement of cash flows

for the year ended 30 June 2016

$000

Cash flows from operating activities

Receipts from customers 200
Payments to suppliers of goods and services, inclusive of (166)
labour
Interest paid (20)
Net cash provided from operating activities (1) 14
Cash flows from investing activities
Payment for property, plant and equipment (2) (30)
Net cash used in investing activities (30)
Cash flows from financing activities
Proceeds from borrowings 20
Net cash from financing activities 20
Net increase in cash held 4
Cash at the beginning of the financial year 120
Cash at the end of the financial year 124
For XYZ, two notes must accompany the statement of cash flows, these being:

Note 1: Reconciliation of net cash provided by operating activities

to net profit
$000

Net profit 35
Depreciation 10
Decrease in allowance for doubtful debts (5)
Increase in accounts receivable (20)
Increase in inventories (20)
Increase in accounts payable 10
Increase in accrued expenses 4

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Net cash provided from operating activities 14

Note 2: Reconciliation of cash

2016 201
5

$000 $00
0

For the purposes of the statement of cash flows, cash

includes:
Cash 144 139
Bank overdraft 20 19
124 120

19.15 S Limited

Statement of cash flows

for the year ended 30 June 2016

$000 $000

Cash flows from operating activities

Receipts from customers 1 908

Payments to suppliers of goods and services,

inclusive of labour
(1 356)
Interest paid (26)

Income taxes paid (182)

Net cash provided from operating activities (1) 344

Cash flows from investing activities

Payment for property, plant and equipment (2) (288)
Proceeds from sale of plant 72
Net cash used in investing activities (216)

Cash flows from financing activities

Proceeds from borrowings 24
Net cash from financing activities 24
Net increase in cash held 152
Cash at the beginning of the financial year 422

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Cash at the end of the financial year 574

Note 1: Reconciliation of net cash provided by operating activities to net

profit

$000

Net profit 264

Depreciation 216
Increase in allowance for doubtful debts 24
Increase in income taxes payable 36
(Increase)/decrease in accounts receivable (144)
(Increase)/decrease in inventories (24)
Increase/(decrease) in accounts payable (24)
Increase in accrued expenses 6
(Increase)/decrease in future income tax benefit (10)
Net cash provided from operating activities 344

Note 2: Non-cash financing and investing activities

During the financial year the economic entity also acquired land with an aggregate fair value of $240
000 by means of issuing 240 000 fully paid $1 ordinary shares.

Workings:

In this question some expenses are transacted for on a cash basis

(electricity, rates, and interest). For those accounts which involve accruals,
it is necessary to calculate the cash flow, by taking into account the
opening and closing accrual as well as the expense in the statement of
comprehensive income. This is done below.

Cash flows from operating activities

(i) Receipts from customers
Debt write-off
The entry to record the doubtful debts expense would be:
Dr Doubtful debts expense 96 000
Cr Allowance for doubtful debts 96 000

As the closing balance of allowance for doubtful debts has only

increased by $24 000, $72 000 must have been written-off against
debtors:
Allowance for doubtful debts
Opening balance at 1 July 2015 72 000
Provided in the year 96 000

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Written off against debtors (72 000)

Closing balance at 30 June 2016 96 000

Accounts receivable
The entry to record sales would be:
Dr Accounts receivable 2 124
000
Cr Sales 2 124 000

The cash received from sales is calculated as follows:

Accounts receivable
Opening balance at 1 July 2015 528 000
Write-off against accounts receivable (above) (72 000)
Sales 2 124 000
Cash received (1 908
000)
Closing balance at 30 June 2016 672 000

(ii) Purchases of inventory

S Ltd commenced the year with $216 000 of inventory. After using
$576 000 of this inventory (cost of sales) it had a closing inventory
balance of $240 000. This means that $600 000 must have been
purchased.
Inventory account
Opening balance at 1 July 2015 216 000
Cost of sales (576 000)
Purchases 600 000
Closing balance at 30 June 2016 240 000

Accounts payable

Given that accounts payable had an opening balance of $192 000,

there were purchases of $600 000 (above), and there was a closing
balance of $168 000, $624 000 must have been paid in cash.
Accounts payable account
Opening balance at 1 July 2015 192 000
Purchases 600 000

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Cash paid (624

000)
Closing balance at 30 June 2016 168 000

(iii) Accrued expenses

Salary and lease expenses were accrued prior to payment. If the
opening balance of accrued expenses was $24 000, salaries and
lease rentals totalled $648 000, and the closing balance was $30
000, then $642 000 must have been paid.
Accrued expenses account
Opening balance at 1 July 2015 24 000
Charged in the year 648 000
Cash paid (642 000)
Closing balance at 30 June 2016 30 000

(iv) Taxation
The profit before tax using accounting rules was $472 000. The taxable income for the year (that is, the
profit that is calculated using taxation rules) is calculated after adding back to accounting profit the building
depreciation of $48 000 (which is not tax deductible in 2016 or any other yearit is a permanent
difference). In determining taxable income we also have to add back the doubtful debts expense and then
subtract the actual doubtful debts write-off against accounts receivable (for tax purposes only the write-off
against accounts receivable is deductible and not the actual doubtful debt expense). Hence we are adding
back $96 000 and subtracting $72 000 (that is, adding back a net amount of $24 000 which is the increase
in the allowance). Taxable income therefore is:

Accounting profit before tax 472 000

Building depreciation (a permanent difference) 48 000
Increase in allowance for doubtful debts (a temporary 24 000
difference)
Taxable income 544 000

There is a temporary difference caused due to the allowance for doubtful debts and this temporary
difference creates a deferred tax asset. Using a tax rate of 40%, the accounting entries to account for tax
pursuant to AASB 112 (see Chapter 18) and to the nearest $000 are:

Dr Income tax expense (40% of $544 000) 218 000

Cr Income tax payable 218 000
Dr Deferred tax asset (40% of $24 000) 10 000
Cr Income tax expense 10 000

Income tax payable

Opening balance at 1 July 2015 182 000
Charge for the year (see above) 218 000
Cash paid (182

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000)
Closing balance 218 000

(v) Total cash flows from operations

Receipts from customers ((i) above) 1 908 000
Payments to suppliers of inventory ((ii) above) 624 000
Payments for accrued expenses ((iii) above) 642 000
Rates and electricity 90 000
Total payments to suppliers (1 356
000)
Interest payments (26 000)
Income taxes paid (182 000)
Total 344 000

Cash flows from investment activities

(i) Land
A reconciliation of the movements in land shows that no land was acquired for cash. There was a revaluation
and an exchange of shares in the company for land. After considering the tax implications of the
revaluation, the entries would have been:

Dr Land 120 000

Cr Revaluation surplus 120 000
Dr Revaluation surplus 48 000
Cr Deferred tax asset (120 000 x 0.4) 48 000
Dr Land 240 000
Cr Share capital 240 000

(ii) Plant and equipment

The journal entries for the disposal of the plant and equipment can be summarised as:

Dr Cash 72 000
Dr Accumulated depreciation 168 000
Cr Plant and equipment 240 000
As plant and equipment increased by $48 000, despite the disposal above, $288 000 must have been
acquired in the year. There was no gain or loss on sale as the sale proceeds of $72 000 equalled the
carrying amount.

Accumulated depreciation
Opening balance at 1 July 2015 96 000
Depreciation expense for the year 168 000
Disposal (168

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000)
Closing balance at 30 June 2016 96 000

Plant and equipment (cost)

Opening balance at 1 July 2015 960 000

Acquisitions in the yearcash 288 000
Disposals in the year (240
000)
Closing balance at 30 June 2016 1 008
000

(iii) Total cash flows from investing

Payment for property, plant and equipment ((ii) (288 000)
above)
Proceeds from sale of plant ((ii) above) 72 000
Total (216 000)

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Cash flows from financing

A reconciliation of movements in share capital would show that
there have been no issues for cash.
The only cash flow from financing relates to $24 000 from long-term
loans.
Total cash flow
Opening cash balance at 1 July 2015 422 000
Cash from operations 344 000
Cash from investing (216 000)
Cash from financing 24 000
Closing cash balance at 30 June 2016 574 000

Challenging question:
19.16 T Pty Limited

Statement of cash flows

for the year ended 30 June 2016

$000

Cash flows from operating activities

Receipts from accounts receivable and other debtors 31 056
Payments to accounts payable and other creditors and (30 136)
employees
Interest paid (315)
Dividends received 51
Finance charges on finance lease (7)
Income tax paid (65)
Net cash flows from operating activities 584

Cash flows from investing activities

Proceeds from sale of property, plant and equipment 20
Payments for non-trading investments (438)
Net cash flows from investing activities (418)

Cash flows from financing activities

Repayment of borrowings (300)
Principal repayments under finance lease (5)
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Net cash flows from financing activities (305)

Net decrease in cash held (139)
Cash at the beginning of the financial year 274
Cash at the end of the financial year 135

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Note 1: Reconciliation of net cash flows from operating activities to net

profit
Net profit 150
Depreciation 140
Increase in allowance for doubtful debts 30
Increase in Deferred tax asset (10)
Increase in accounts receivable (243)
Increase in prepayments (115)
Increase in inventory (418)
Inventory written off 50
Increase in accounts payable 619
Increase in provision for tax 160
Increase in provision for warranty 314
Decrease in provision for employee entitlements (93)
Net cash flows from operating activities 584

Note 2: Non-cash financing and investing activities

During the year, the company acquired additional investments
consideration for the purchase of the investment in associated company,
Squash Pty Ltd, being 500 000 shares at $1.50 each plus $250 000 in
cash; and other investments acquired for $80 000 for consideration of
tennis equipment.
Plant and equipment, under finance lease, was acquired with a fair value
of $25 000.
Workings:

Receipts from customers

We need to reconstruct the allowance for doubtful debts and accounts
receivable.
The cumulative entry to record sales would be:
Dr Accounts receivable 31 394
Cr Sales 31 394

The entry to record the doubtful debts expense would be:

Dr Doubtful debts expense 35 000
Cr Allowance for doubtful debts 35 000

As the closing balance of allowance for doubtful debts increased by $30

000, $5000 must have been written-off against debtors. A reconciliation of
accounts receivable shows a cash collection of $31 056:

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Accounts receivable Allowance for doubtful debts

Op. 2 654 Prov. d.d. 5 A/c rec. 5 Op. 120
balance balance
Sales 31 394 Bad 90
debts
Cash 31
056
Clos. bal. 2 897 Clos. bal. 150 D.d. exp. 35
34 048 34 048 155 155

Purchases of inventory

T Pty Ltd commenced the period with $2 486 000 of inventory. After using
$28 205 000 (COGS), writing-off $50 000, and exchanging $80 000 for
some investments, it had a closing balance of $2 774 000. This means
that $28 623 000 of inventory must have been purchased.
Given that accounts payable had an opening balance of $1 483 000, there
were purchases of $28 623 000 (above), and there was a closing balance
of $1 637 0000, $28 469 000 must have been paid in cash. This is shown
in the following t-accounts.

Inventory Accounts payable

Op. 2 486 COGS 28 205 Cash 28 Op. bal. 1 483
balance 469
Accounts 28 Write-off 50
payable 623
Investme 80
nt
Clos. bal. 2 774 Clos. 1 637 Inv. 28 623
bal.
31 31 109 30 106 30 106
109

Accrued expenses

Given the information in the question, it is assumed that rent is accrued to

accruals. If the opening balance of accruals is $1 110 000, rent expenses
totalled $600 000, and the closing balance was $1 575 000, then $135
000, must have been paid.
Accruals
Cash 135 Op. bal. 1 110
Clos. bal. 1 575 Rent 600
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1 710 1 710

Provision for employee entitlements

If the opening balance of the provision is $298 000, salary and wages
expenses totalled $1 324 000, and the closing balance was $205 000, then
$1 417 000, must have been paid.
Provision for employee entitlements
Cash 1 417 Op. bal. 298
Clos. bal. 205 Salaries 1 324
1 622 1 622

It has been assumed that finance charges of $7000 were paid as incurred.
It is not clear what the prepayments relate to, but it will be assumed that
they relate to some employee salaries.
Payments relating to taxation can be determined as:

Income tax paid:

Opening deferred tax asset 302
Closing deferred tax asset (312)
Opening provision for tax (83)
Closing provision for tax 243
Income tax expense (215)
Income tax paid (65)

At this stage we can now determine the total cash flows from operations
as:
Receipts from customers 31 056
Payments to suppliers (28 469)*
Payments for accrued expenses (135)*
Employee-related payments (1417)*
Prepayments (115)*
Finance charges (7)
Dividends 51**
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Tax payments (65)

Interest payments (315)
584
* These numbers are added together to give $30 136, which is shown on
the statement of cash flows.
**The dividend revenue of $51 000 is assessed to have been received in
cash as there was no dividend receivable. Similarly, the interest of $315
000 is assumed to have been paid in cash as there is no interest payable.

Cash flows from investment activities

Plant and equipment
The journal entries for the disposal of the plant and equipment can be
summarised as:
Dr Accumulated depreciationplant and 48
equipment
Dr Cash 20
Cr Plant and equipment 68

There was also a revaluation of plant and equipment. The entries to record
the revaluation, together with its tax effects, would be:
Dr Accumulated depreciationplant and 500
equipment
Cr Plant and equipment 500
Dr Plant and equipment 800
Cr Revaluation surplus 800
Dr Revaluation surplus 240
Cr Deferred tax liability 240

Accumulated depreciation Plant and equipment

Disposal 48 Op. bal. 548 Op. 768 Disposal 68
bal.
P and E 500 Deprec. 100 Reval. 800 Accum. 500
exp surplu dep
s
Clos. bal. 100 Lease 25 Clos. bal. 1 025
648 648 1 593 1 593

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In relation to the land we are told that land is devalued against a previous
revaluation increment. The original entry back when the land was revalued
would have been a debit to land and a credit to revaluation surplus of
$250 000. There would also be an entry to recognise the tax effect of the
revaluation. With a tax rate of 30 per cent this would have required a debit
to revaluation surplus of $75 000 and a credit to deferred tax liability. To
reverse this previous revaluation increment the following entry would be
required:
Dr Revaluation surplus 250
Cr Land 250
Dr Deferred tax liability 75
Cr Revaluation surplus 75

The balance in revaluation surplus and deferred tax liability can now be
reconciled as follows:

Revaluation surplus Deferred tax liability

Land 250 Op. bal. 175 Reval 75 Op bal 75
surplu
s
(land)
Deferred 240 Deferred 75 Closin 240 Reval. 240
tax tax g Surplus
liability liability balanc (plant)
e
Clos. bal. 560 Plant and 800
equipment
105 105 315 315
0 0

No plant and equipment was acquired for cash. There were some
acquisitions of investments during the period. Acquisition of investments
would be recorded as follows:
Dr Investment in associate 1 050
Cr Cash 250
Cr Provision for deferred payment 50
Cr Paid-up capital 750

The account investments increased from $948 000 to $1 216 000. This
increase is partly explained by the acquisition financed by the $80 000 of
tennis equipment (see Additional information part (i)). The balance of the

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increase ($188) is assumed to have been acquired for cash. This gives
total cash acquisition of investments of $438 000.
Cash flows from investing were:
Proceeds from sale of property plant and equipment 20 000
Payment for investments (438 000)
(418 000)

Cash flows from financing

Repayment of borrowings
Opening (3 800)
Closing 3 500
(300)

Principal repayment under finance lease

Opening (25)
Closing (current portion of 5 plus non-current portion of 15) 20
5

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