Chapter 12 The Cash Flow Statement Solutions to exercises

Exercise 12.1
a

Statement of Receipts and Payments

General Ledger Bank

Date Cross-reference Amount $ Date Cross-reference Amount $

July 1 Balance 31 Cash Receipts

8 600 175 000 $183 600

July 31 Cash Payments Balance

180 700 2 900 $183 600

Aug. 1 Balance b CRAFTY CABINETS

2 900

Statement of Receipts and Payments for July 2015

$ Cash Receipts Cash Sales Receipts from Debtors GST Received Capital less Cash Payments Payments to Creditors Electricity Interest Expense Office Expenses Wages Equipment Drawings GST Paid Loan Repayment Prepaid Rent Expense Cash Surplus (Deficit) add Bank Balance at Start Bank Balance at End $ 70 000 2 400 600 5 000 30 000 5 600 40 000 3 100 6 000 18 000 180 700 (5 700) 8 600 2 900 100 000 50 000 10 000 15 000 175 000 $

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Chapter 12 The Cash Flow Statement Solutions to exercises

c Reason d Explanation By preparing a Cash Flow Statement, which shows sources and uses of funds by classifying cash flows as Operating, Investing or Financing activities The business has suffered a Cash Deficit (of $5 700), reducing its Bank balance.

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Chapter 12 The Cash Flow Statement Solutions to exercises

Exercise 12.2
a BOOF HEAD

Cash Flow Statement

Cash Flow Statement for the year ended 30 June 2015 $ OPERATING ACTIVITIES Cash Inflows Cash Sales Receipts from Debtors GST Received less Cash Outflows Payments to Creditors Wages GST Paid Electricity Prepaid Insurance Net Cash Flows from Operations INVESTING ACTIVITIES Cash Outflows Display Cabinets Net Cash Flows from Investing Activities FINANCING ACTIVITIES Cash Inflows Capital Contribution less Cash Outflows Drawings Net Cash Flows from Financing Activities Net Increase (Decrease) in Cash Position Bank Balance at Start Bank Balance at End $ 12 000 (2 000) 15 770 (13 500) 2 270 10 000 6 000 (6 000) 24 000 28 000 930 1 500 1 800 56 230 23 770 50 000 25 000 5 000 80 000 $

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b Explanation Classified as a Financing Outflow as it is a cash flow related to a change in the firms financial structure (i.e. it decreases Owners Equity)

c Reason To keep the bank balance out of overdraft To help fund the purchase of the display cabinets d Explanation It aids decision-making by classifying sources and uses of funds, allowing the owner to identify whether Net Cash Flows from Operations is sufficient to cover other cash requirements.

OR It aids decision-making by allowing the firm to assess its performance in meeting its cash targets. OR It assists in planning for future cash activities by providing a basis for cash targets for the future (in the next Budgeted Cash Flow Statement).

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Chapter 12 The Cash Flow Statement Solutions to exercises

Exercise 12.3
a FLIP FLOPS

Cash Flow Statement

Cash Flow Statement for the quarter ended 30 September 2015 $ OPERATING ACTIVITIES Cash Inflows Cash Sales Receipts from Debtors GST Received less Cash Outflows Payments to Creditors Cash Purchases of Stock Wages GST Paid Electricity Prepaid Rent Expense Interest Expense Net Cash Flows from Operations INVESTING ACTIVITIES Cash Outflows Shelving Net Cash Flows from Investing Activities FINANCING ACTIVITIES Cash Inflows Loan Bodgey Bank less Cash Outflows Loan Repayment Drawings Net Cash Flows from Financing Activities Net Increase (Decrease) in Cash Position Bank Balance at Start Bank Balance at End
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10 000 7 000 1 000 14 000 5 000 6 000 950 500 2 400 550 29 400 (11 400) 18 000

1 600 (1 600)

25 000 1 000 2 000 3 000 22 000 9 000 1 500 $ 10 500

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Chapter 12 The Cash Flow Statement Solutions to exercises

b Explanation Net Cash Flows from Operations is negative, meaning the business is generating insufficient funds from its Operating activities to meet its other cash requirements. (If not for the loan, the bank overdraft would have fallen into o/draft.)

Exercise 12.4
a Calculation

Operating activities

Cash Sales GST Received

60 000 6 000 66 000

les s

GST paid Electricity Wages GST Settlement Payments to Creditors Interest Accrued Interest

380 1 200 6 000 3 000 45 000 150 1 700 57 430 $ 8 570

Net Cash Flows from Operations b Explanation

Classified as an Operating outflow as it is a cash flow related to the firms dayto-day trading activities

c Explanation If Net Cash Flows from Operations are negative, the firm will be unable to meet its other cash requirements without using other sources of finance, such as loans (which must be repaid) or capital (which is limited to the funds of the owner).

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Chapter 12 The Cash Flow Statement Solutions to exercises

Exercise 12.5
a Calculation

Operating activities

GST Refund Receipts from Debtors Cash Sales GST Received

300 15 000 16 000 1 600 32 900

les s

Interest paid GST paid Prepaid Rent Expense

4 800 1 900 15 000

21 700 Net Cash Flows from Operations $ 11 200

b Explanation It is excluded from the Cash Flow Statement altogether as it is a non-cash expense. (It involves a decrease to Debtors Control rather than Bank.)

c Explanation Received from different entities (customers v. ATO) Recorded in different columns in the Cash Receipts Journal (GST v. Sundries) May relate to different Reporting Periods (current v. previous)

Exercise 12.6
a Explanation b Calculation

Investing activities

Cash flows related to the purchase or sale of non-current assets

Fittings + Deposit paid on furniture

5 600 800 6 400 (6 400)

Net Cash Flows from Investing Activities $

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c Explanation Excluded as it doesnt relate to non-current assets; stock is a current asset, so cash purchases is an Operating outflow (relates to day-to-day trading activities)

d Explanation All GST cash flows are reported as Operating activities as all GST paid to suppliers whether for current or non-current assets is recorded in the GST column of the Cash Payments Journal. (GST settlement/refund is a function of by day-to-day trading activities.)

Exercise 12.7
a Calculation

Investing activities

Vehicle + Shelving

32 000 10 000 Net Cash Flows from Investing Activities $ (42 000)

b Reason c Method 1 Method 2 Method 3 d Explanation It increases non-current assets, so Depreciation expense will increase, leading to a reduction in Net Profit. Existing cash reserves/overdraft Net Cash Flows from Operations Loan/Capital contribution It includes GST on (some) Operating outflows.

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Chapter 12 The Cash Flow Statement Solutions to exercises

Exercise 12.8
a Explanation b Calculation

Financing activities

Cash flows related to changes in the firms financial structure

Receipt of Loan NAB

12 000

les s

Drawings

25 000

Net Cash Flows from Financing Activities $ (13 000) c Explanation Excluded as it is an Operating outflow a cash flow related to the firms dayto-day trading activities

General Ledger Capital

Date Cross-reference Amount $ Date Cross-reference Amount $

30/6/1 Drawings * 5 Balance

25 700 38 300 $64 000

1/7/14 Balance 30/6/1 Profit and Loss Summary 5 1/7/15 Balance

48 000 16 000 $64 000 38 300

This amount might be the result of monthly Drawings, posted at the end of each month.

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Chapter 12 The Cash Flow Statement Solutions to exercises

Exercise 12.9
a Calculation

Financing activities

Capital Contribution

30 000

les s

Loan Repayment Cash Drawings

15 000 8 700 23 700 6 300

30 000

Net Cash Flows from Financing Activities $ b Explanation

It is expressly excluded from the definition of revenue as it not earned as a result of the activities of the business (but rather the owner).

c Explanation If it involves the receipt of a Loan, Interest expense may increase, leading to a reduction in Net Profit.

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Exercise 12.10
a Reason

Cash versus profit

The Debtors Control column includes the cash received from debtors plus the discount expense (of $380).

BUZZ WAX PRODUCTS $ $

Cash Flow Statement for August 2015 OPERATING ACTIVITIES Cash Inflows Cash Sales Receipts from Debtors GST Received less Cash Outflows Payments to Creditors Cash Purchases of Stock Wages Interest Expense GST Paid Net Cash Flows from Operations INVESTING ACTIVITIES Cash Outflows Computer Net Cash Flows from Investing Activities FINANCING ACTIVITIES Cash Inflows Capital Contribution less Cash Outflows Drawings Net Cash Flows from Financing Activities Net Increase (Decrease) in Cash Position Bank Balance at Start Bank Balance at End $ 2 450 2 550 2 520 (2 500) (20) 5 000 1 000 (1 000) 4 300 3 000 5 000 750 400 13 450 970 10 000 3 420 1 000 14 420

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c Explanation The cash position is concerning because the Bank Balance at End is in overdraft, but the positive Net Cash Flows from Operations/Net Increase in Cash Position show positive cash performance in August 2015.

d Example 1 Example 2 Explanation Capital Contribution/GST Received was greater than GST Paid. Receipts from Debtors was greater than Credit Sales. Capital Contribution is a cash inflow, which increased Net Cash Flows but is not a revenue and so had no effect on the Net Loss. Receipts from Debtors (cash inflow) increased Net Cash Flows by more than Credit Sales (revenue) increased Net Profit (or decreased the loss).

e Explanation The Cash Flow Statement allows the owner to identify sources and uses of cash, and assess whether the business is generating sufficient Operating cash. This will help to identify problem areas so corrective action can be taken (particularly when it is compared against the Budgeted Cash Flow Statement).

Exercise 12.11
a Higher/Lower Justification

Cash versus profit

Lower Receipts from Debtors and Discount Expense (which decreases debtors) is greater than Credit Sales plus GST (which increases debtors).

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SAW MILLER FURNITURE $ $

Cash Flow Statement for the quarter ended 30 June 2015 OPERATING ACTIVITIES Cash Inflows Cash Sales Receipts from Debtors GST Received less Cash Outflows Cash Purchases of Stock Administration Expenses Wages Prepaid Insurance Accrued Wages GST Paid Net Cash Flows from Operations INVESTING ACTIVITIES Cash Outflows Polishing Equipment Net Cash Flows from Investing Activities FINANCING ACTIVITIES Cash Inflows Loan GIN Bank Capital Contribution less Cash Outflows Drawings Loan Principal Net Cash Flows from Financing Activities Net Increase (Decrease) in Cash Position Bank Balance at Start Bank Balance at End $ 13 500 1 100 14 600 11 400 (6 350) (1 600) (7 950) 20 000 6 000 26 000 13 800 (13 800) 40 700 3 000 11 500 6 000 400 6 350 67 950 (3 950) 25 000 36 500 2 500 64 000

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c Reason d Example 1 Example 2 Explanation Polishing equipment/Repayment of loan/Accrued wages paid/GST paid > recd Prepaid insurance/Payments for stock are greater than Cost of Sales Cash outflows such as repaying a loan/purchasing polishing equipment decrease Bank but are not expenses so do not affect Net Profit in that Reporting Period. Payments for stock ($40 700) are cash outflows that decrease Bank more than the Cost of Sales ($23 500) expense decreases Net Profit. So that the business did not exceed its overdraft limit of $8 000

Exercise 12.12
a Calculation

Cash versus profit

GST on: Prepaid Rent Expense Office Equipment Administration Expenses

600 700 400 1 700

GST paid $

1 700

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FULL COLLECTION
$ $

Cash Flow Statement for January 2015

OPERATING ACTIVITIES Cash Inflows Receipts from Debtors less Cash Outflows GST Paid Prepaid Rent Expense Wages Administration Expenses Net Cash Flows from Operations INVESTING ACTIVITIES Cash Outflows Office Equipment Net Cash Flows from Investing Activities FINANCING ACTIVITIES Cash Inflows Capital Contribution Loan Kyneton Bank less Cash Outflows Drawings Net Cash Flows from Financing Activities Net Increase (Decrease) in Cash Position Bank Balance at Start Bank Balance at End $ 7 500 62 500 57 800 nil 57 800 20 000 50 000 70 000 7 000 (7 000) 1 700 6 000 15 000 4 000 26 700 2 300 29 000

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FULL COLLECTION
$ $

Income Statement for January 2015 Revenue Sales less Cost of Goods Sold Cost of Sales Gross Profit less Other Expenses Interest Expense Rent Expense Depreciation of Office Equipment Wages Administration Expenses Advertising Net Profit (Loss) d Example 1 Example 2 Explanation Loan/Capital Contribution/Stock sold (COS) but unpaid Depreciation of Office Furniture/Advertising Expense/Interest Expense unpaid Loan/Capital Contribution are cash inflows that increase cash but are not revenue so do not affect Net Profit. Depreciation/Advertising /Interest (accrued) are expenses that decrease Net Profit but are not cash outflows and so do not affect cash. 250 1 000 100 15 000 4 000 1 000 $ 21 350 (1 350) 20 000 20 000 40 000

e Explanation The Cash Flow Statement and Income Statement are both important because they report on different aspects of business performance. The Cash Flow Statement reports on cash inflows and outflows, which may differ from the revenues earned and expenses incurred reported in the Income Statement.

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Chapter 12 The Cash Flow Statement Solutions to exercises

Exercise 12.13
a

Cash flows

THE GLASS HOUSE $ $

Cash Flow Statement for October 2015 OPERATING ACTIVITIES Cash Inflows Cash Sales Receipts from Debtors GST Refund GST Received less Cash Outflows Payments to Creditors Cash Purchases of Stock Wages Interest GST Paid Net Cash Flows from Operations INVESTING ACTIVITIES Cash Outflows Shelving Net Cash Flows from Investing Activities FINANCING ACTIVITIES Cash Outflows Drawings Net Cash Flows from Financing Activities Net Increase (Decrease) in Cash Position Bank Balance at Start Bank Balance at End $ 2 110 (2 110) (790) 230 (560) 1 600 (1 600) 5 700 2 900 1 000 100 450 10 150 2 920 6 700 5 200 500 670 13 070

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Chapter 12 The Cash Flow Statement Solutions to exercises

General Ledger Bank

Date Cross-reference Amount $ Date Cross-reference Amount $

Oct. 1 Balance 31 Cash Receipts Balance

230 8 670 560 9 460

Oct. 31 Cash Payments

9 460

9 460 Nov. 1 Balance 560

c Example 1 Example 2 Explanation Cash Purchase of Shelving Cash Drawings Both these cash outflows increase the Bank overdraft, but are classified as Investing and Financing activities, respectively, and so have no effect on Net Cash Flows from Operations.

d Explanation It aids decision-making by classifying sources and uses of funds, allowing the owner to identify whether Net Cash Flows from Operations is sufficient to cover other cash requirements. It aids decision-making by allowing the firms to assess its performance in meeting its cash targets. It assists in planning for future cash activities by providing a basis for cash targets for the future (in the next Budgeted Cash Flow Statement).

OR OR

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e Increase/Decrease Justification Decrease Negative Net Cash Flows from Operations and Investing Activities will outweigh positive Net Cash Flows from Financing Activities.

f Explanation Net Cash Flows from Operations is negative so the firm cannot meet its Investing and Financing cash requirements without additional loans (which must be repaid) or capital (which is limited to the funds of the owner).

g Discussion Net Cash Flows from Investing Activities is negative, which will mean pressure on/a reduction in the firms bank balance. However, negative Investing cash flows may be expected if the business is purchasing new non-current assets, and positive Financing cash flows may be due to loans or a capital contribution to finance these assets. Further, more or better non-current assets may generate more sales, and more cash.

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Chapter 12 The Cash Flow Statement Solutions to exercises

Exercise 12.14
a Effect 1 Effect 2 b Calculation

Cash versus profit

There are no columns for Cash Sales or Cost of Sales. There is no column for GST received.

Discount rate

Discount Debtors column

$1 720 $172 000 Discount rate 10 %

General Ledger Debtors Control

Date Cross-reference Amount $ Date Cross-reference Amount $

1/7/14 Balance 30/6/1 Sales/GST Clearing 5

35 000 198 000

30/6/1 Bank/Discount Expense 5 Bad Debts Balance

172 000 5 000 56 000

$233 000

$233 000

1/7/15 Balance

56 000

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Chapter 12 The Cash Flow Statement Solutions to exercises

BLING RINGS $ $

Cash Flow Statement for the year ended 30 June 2015 OPERATING ACTIVITIES Cash Inflows Receipts from Debtors less Cash Outflows Payments to Creditors Wages Administration Expenses Rent Expense Prepaid Insurance Interest Expense GST Settlement GST Paid Net Cash Flows from Operations INVESTING ACTIVITIES Cash Outflows Display Cabinets Net Cash Flows from Investing Activities FINANCING ACTIVITIES Cash Inflows Loan QZ FinCo. less Cash Outflows Drawings Net Cash Flows from Financing Activities Net Increase (Decrease) in Cash Position Bank Balance at Start Bank Balance at End $ 13 500 1 500 (19 140) 30 000 10 860 15 000 8 000 (8 000) 125 700 34 500 1 000 11 000 4 200 3 000 1 100 2 420 182 920 (12 640) 170 280

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Chapter 12 The Cash Flow Statement Solutions to exercises

e Example 1 Example 2 Explanation Credit Sales is greater than Receipts from Debtors. Prepaid Insurance/Payments to Creditors is greater than Cost of Sales. Credit Sales is revenue and so increases Net Profit by more than Receipts from Debtors increases Net Cash Flows from Operations. Prepaid insurance is a cash outflow, which decreases Net Cash Flows from Operations more than Insurance expense decreases Net Profit.

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