Scribd
Upload
34 views2 pages

ACC - ACF1200 Topic 5 SOLUTIONS To Questions For Self-Study

The document contains solutions to questions about cash flow statements. It defines key terms, explains how a company can report a loss on the income statement but have positive cash flow, identifies potential cash flow warning signs, and provides examples of analyzing a cash flow statement and commenting on investment decisions and potential accounting errors.

Uploaded by

Chuangjia Ma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
34 views2 pages

ACC - ACF1200 Topic 5 SOLUTIONS To Questions For Self-Study

The document contains solutions to questions about cash flow statements. It defines key terms, explains how a company can report a loss on the income statement but have positive cash flow, identifies potential cash flow warning signs, and provides examples of analyzing a cash flow statement and commenting on investment decisions and potential accounting errors.

Uploaded by

Chuangjia Ma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

ACC/ACF1200 Self-study questions SOLUTIONS

Topic 5 – Cash Flow Statements


Question 1

In what section of the statement of cash flows (operating, investing or financing) would each of the following
items appear?

(a) Purchase of property, plant and equipment Investing


(b) Proceeds from a bank loan Financing
(c) Collections from customers Operating
(d) Proceeds from the sale of equipment Investing
(e) Dividends paid to shareholders Financing
(f) Proceeds from issuing shares Financing
(g) Repayment of debt Financing

Question 2

What is the purpose of a statement of cash flows?

The purpose of the statement of cash flows is to provide users of financial statements with information about the
cash flows of the entity. It shows the cash receipts and payments, and the net effect of these. The statement of cash
flows can help a user evaluate the entity’s potential to generate cash flows, meet its financial commitments, fund its
activities and obtain finance.

Question 3

XYZ Company had a positive net cash flow for the year, but its income statement reported a loss for the period.
Explain how this is possible.

There are three sources of net cash flow: cash from operating activities, investing activities and financing activities.
The loss indicated in the income statement could be related to the cash from operating activities. However, the
entity could have significant positive cash flows from the financing and investing activities. That is, the entity could
have borrowed money or could have sold a significant investment, such as an asset.

The statement doesn’t indicate whether the loss indicated in the financial performance was from normal operations
or was after an extraordinary event, such as a sale of a major asset. There may have been a major loss on the sale of
an asset which resulted in a loss in the income statement but affected a significant cash inflow in the statement of
cash flows. More information is needed to investigate the causes.

Question 4

Outline some cash-flow warning signals.

Some cash flow warning signals are:


 cash received less than cash paid
 operating ‘outflow’
 cash receipts from customers being less than cash payments to suppliers and employees
 cash from operating activities being lower than operating profit after tax
 proceeds of share capital being used to finance operating activities
 consistent inflows from investing activities
 proceeds from borrowings continually much greater than the repayment of borrowings
Question 5

Analyse the following statement of cash flows. Provide at least seven (7) meaningful observations about the
entity’s cash flows and position.

- Cash flows from operating activities is positive (good)


- Cash was invested in plant and equipment as well as buildings
- The plant and equipment that was sold generated more than enough cash to finance new equipment
- A significant loan repayment was made
- Further capital was raised from shareholders
- Shareholders were rewarded with a dividend
- Net cash flow was positive (which is good)
- The cash balance increased by $20,000 (it almost doubled)

Question 6

(a) Comment on the entity’s financial performance during the year ended 30 June 2016.
Taylor Furniture Manufacturing had a positive financial result with a healthy profit of over $18,000. The gross
profit was 63% of the selling price which was easily able to cover other expenses.
(b) Identify the two largest expenses for the period and comment on whether you think it makes sense that
they are the largest.
Cost of sales and wages are the two largest expenses. It makes sense that the cost of sales is high, as materials
are used in the manufacture of furniture. It is also likely that wages were significant due to the labour-intensive
nature of furniture manufacturing.
(c) Comment on whether you think the entity has a problem with bad/doubtful debts.
Bad debts for the period were $1,200 compared to total sales of $277,200. This only represents less than one
percent, so there is not a high incidence of customers who do not pay their accounts.
(d) Comment on the investment decisions made during the year, including how they were financed.
Equipment was sold during the year at a loss of $1,000, but this generated a cash inflow of $15,000 (this means it
was recorded in the business records at $16,000 after deducting accumulated depreciation, but they were only
able to sell it for $15,000). New equipment was purchased for a cash outflow of $72,000. There is no loan or
capital contribution, so the purchase was financed entirely by surplus cash from operating activities.
(e) If the expense in the income statement for other operating expenses was $18,200 during the year, but
only $9,200 was paid in cash for other operating expenses, do you agree that there must be $9,000 owing
for these expenses at the end of the year?
If the reported expense (under accrual accounting) was higher than the cash paid for the expense during the
period, it is easy to assume there is an amount still owing for the expense (as a liability in the balance sheet). In
this case, there is no liability related to other operating expenses. However, there is a prepaid account, which
indicates that the business paid for operating expenses in advance. They must have consumed some of those
prepaid expenses during the period, so the cash flow is lower than the expense.

(f) Taylor is not well trained in accounting, and nearly made a mistake in recording a transaction. He nearly
recorded the cash paid for equipment as an increase in cost of sales expense! What would have been the
effect on each of the three financial statements if he had not corrected the error?
If the error had remained, the following would have been affected:
Income statement – would have been an overstatement of cost of sales and understatement of profit.
Balance sheet – would have been an understatement of non-current assets (equipment)
Statement of cash flows – the cash outflow would have been omitted from investing cash flows, therefore
understating the amount spent on investing activities.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy