Ch12 Solution

7/31/2019 Ch12 Solution

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Chapter 12 The Cash Flow Statement Solutions to exercises

Exercise 12.1 Statement of Receipts and Payments

a General Ledger Bank

Date Cross-reference Amount$


July 1 Balance 8 600 July 31 Cash Payments 180 700

31 Cash Receipts 175 000 Balance 2 900

$183600

$183600

Aug. 1 Balance 2 900

b CRAFTY CABINETS

Statement of Receipts and Payments for July 2015

$ $

Cash Receipts

Cash Sales 100 000

Receipts from Debtors 50 000

GST Received 10 000 Capital 15 000 175 000

less Cash Payments

Payments to Creditors 70 000

Electricity 2 400

Interest Expense 600

Office Expenses 5 000

Wages 30 000

Equipment 5 600

Drawings 40 000

GST Paid 3 100

Loan Repayment 6 000

Prepaid Rent Expense 18 000 180 700

Cash Surplus (Deficit) (5 700)

add Bank Balance at Start 8 600

Bank Balance at End $ 2 900

Simmons, Hardy 1 Cambridge University Press 2012


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c

Reason The business has suffered a Cash Deficit (of $5 700), reducing its Bank

balance.

d

Explanation By preparing a Cash Flow Statement, which shows sources and uses of fundsby classifying cash flows as Operating, Investing or Financing activities



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Exercise 12.2 Cash Flow Statement

a BOOF HEADCash Flow Statement for the year ended 30 June 2015

$ $

OPERATING ACTIVITIES

Cash Inflows

Cash Sales 50 000


GST Received 5 000 80 000

less Cash Outflows


Wages 28 000

GST Paid 930

Electricity 1 500

Prepaid Insurance 1 800 56 230

Net Cash Flows from Operations 23 770

INVESTING ACTIVITIES

Cash Outflows

Display Cabinets 6 000

Net Cash Flows from Investing Activities (6 000)

FINANCING ACTIVITIES

Cash Inflows

Capital Contribution 10 000

less Cash Outflows

Drawings 12 000

Net Cash Flows from Financing Activities (2 000)

Net Increase (Decrease) in Cash Position 15 770

Bank Balance at Start (13 500)




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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 theowner to identify whether Net Cash Flows from Operations is sufficient tocover other cash requirements.

OR It aids decision-making by allowing the firm to assess its performance inmeeting its cash targets.

OR It assists in planning for future cash activities by providing a basis for cashtargets for the future (in the next Budgeted Cash Flow Statement).



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Exercise 12.3 Cash Flow Statement

a FLIP FLOPS

Cash Flow Statement for the quarter ended 30 September 2015

$ $


Cash Inflows

Cash Sales 10 000



less Cash Outflows


Cash Purchases of Stock 5 000

Wages 6 000

GST Paid 950

Electricity 500

Prepaid Rent Expense 2 400 Interest Expense 550 29 400

Net Cash Flows from Operations (11 400)


Cash Outflows

Shelving 1 600



Cash Inflows

Loan Bodgey Bank 25 000

less Cash Outflows


Drawings 2 000 3 000

Net Cash Flows from Financing Activities 22 000


Bank Balance at Start 1 500




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b

Explanation Net Cash Flows from Operations is negative, meaning the business isgenerating insufficient funds from its Operating activities to meet its other cashrequirements. (If not for the loan, the bank overdraft would have fallen intoo/draft.)

Exercise 12.4 Operating activities

a

Calculation

Cash Sales 60 000 less

GST paid 380

GST Received 6 000 Electricity 1 200

66 000 Wages 6 000

GST Settlement 3 000

Payments toCreditors

45 000

Interest 150

Accrued Interest 1 700

57 430

Net Cash Flows from Operations $ 8 570

b

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

c

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



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Exercise 12.5 Operating activities

a

Calculation

GST Refund 300 less

Interest paid 4 800

Receipts from Debtors 15 000 GST paid 1 900

Cash Sales 16 000 Prepaid Rent Expense

15 000

GST Received 1 600

32 900 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-cashexpense. (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 Investing activities

a

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

b

Calculation

Fittings 5 600

+ Deposit paid on furniture 800 6 400

Net Cash Flows from Investing Activities $ (6 400)



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c

Explanation Excluded as it doesnt relate to non-current assets; stock is a current asset, socash purchases is an Operating outflow (relates to day-to-day tradingactivities)

d

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

Exercise 12.7 Investing activities

a

Calculation

Vehicle 32 000

+ Shelving 10 000

Net Cash Flows from Investing Activities $ (42 000)

b

Reason It includes GST on (some) Operating outflows.

c

Method 1 Existing cash reserves/overdraft

Method 2 Net Cash Flows from OperationsMethod 3 Loan/Capital contribution

d

Explanation It increases non-current assets, so Depreciation expense will increase, leadingto a reduction in Net Profit.



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Exercise 12.8 Financing activities

a

Explanation Cash flows related to changes in the firms financial structure

b

Calculation

Receipt of Loan NAB 12 000 less

Drawings 25 000

Net Cash Flows from Financing Activities $ (13000)

c

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

d General Ledger

Capital



30/6/15

Drawings * 25 700 1/7/14 Balance 48 000

Balance 38 300 30/6/15

Profit and Loss Summary 16 000

$64 000 $64 000 1/7/15 Balance 38 300

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



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Exercise 12.9 Financing activities

a

Calculation

Capital Contribution 30 000 less


Cash Drawings 8 700

30 000 23 700

Net Cash Flows from Financing Activities $ 6 300

b

Explanation It is expressly excluded from the definition of revenue as it not earned as aresult 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 areduction in Net Profit.



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Exercise 12.10 Cash versus profit

aReason The Debtors Control column includes the cash received from debtors plus the

discount expense (of $380).

b BUZZ WAX PRODUCTS

Cash Flow Statement for August 2015

$ $


Cash Inflows

Cash Sales 10 000



less Cash Outflows



Wages 5 000 Interest Expense 750

GST Paid 400 13 450

Net Cash Flows from Operations 970


Cash Outflows

Computer 1 000



Cash Inflows


less Cash Outflows

Drawings 2 450




Bank Balance at End $ (20)



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c

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

d

Example 1 Capital Contribution/GST Received was greater than GST Paid.

Example 2 Receipts from Debtors was greater than Credit Sales.

Explanation Capital Contribution is a cash inflow, which increased Net Cash Flows but isnot 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 ofcash, and assess whether the business is generating sufficient Operatingcash. This will help to identify problem areas so corrective action can be taken(particularly when it is compared against the Budgeted Cash Flow Statement).


a

Higher/Lower Lower

Justification Receipts from Debtors and Discount Expense (which decreases debtors) isgreater than Credit Sales plus GST (which increases debtors).



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b SAW MILLER FURNITURE

Cash Flow Statement for the quarter ended 30 June 2015

$ $


Cash Inflows

Cash Sales 25 000



less Cash Outflows


Administration Expenses 3 000

Wages 11 500

Prepaid Insurance 6 000

Accrued Wages 400

GST Paid 6 350 67 950


INVESTING ACTIVITIESCash Outflows

Polishing Equipment 13 800



Cash Inflows

Loan GIN Bank 20 000

Capital Contribution 6 000 26 000

less Cash Outflows

Drawings 13 500

Loan Principal 1 100 14 600


Net Increase (Decrease) in Cash Position (6 350)


Bank Balance at End $ (7 950)



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c

Reason So that the business did not exceed its overdraft limit of $8 000

d

Example 1 Polishing equipment/Repayment of loan/Accrued wages paid/GST paid > recd

Example 2 Prepaid insurance/Payments for stock are greater than Cost of Sales

Explanation Cash outflows such as repaying a loan/purchasing polishing equipmentdecrease Bank but are not expenses so do not affect Net Profit in thatReporting Period. Payments for stock ($40 700) are cash outflows thatdecrease Bank more than the Cost of Sales ($23 500) expense decreases Net

Profit.


a

Calculation

GST on: Prepaid Rent Expense 600

Office Equipment 700 AdministrationExpenses

400 1 700

GST paid $ 1 700



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b FULL COLLECTION

Cash Flow Statement for January 2015

$ $


Cash Inflows


less Cash Outflows

GST Paid 1 700

Prepaid Rent Expense 6 000

Wages 15 000

Administration Expenses 4 000 26 700



Cash Outflows

Office Equipment 7 000



Cash Inflows


Loan Kyneton Bank 50 000 70 000

less Cash Outflows

Drawings 7 500



Bank Balance at Start nil




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c FULL COLLECTION

Income Statement for January 2015

$ $

Revenue

Sales 40 000

less Cost of Goods Sold

Cost of Sales 20 000

Gross Profit 20 000

less Other Expenses

Interest Expense 250

Rent Expense 1 000

Depreciation of Office Equipment 100

Wages 15 000


Advertising 1 000 21 350

Net Profit (Loss) $ (1 350)

d

Example 1 Loan/Capital Contribution/Stock sold (COS) but unpaid

Example 2 Depreciation of Office Furniture/Advertising Expense/Interest Expense unpaid

Explanation Loan/Capital Contribution are cash inflows that increase cash but are notrevenue so do not affect Net Profit. Depreciation/Advertising /Interest(accrued) are expenses that decrease Net Profit but are not cash outflows andso do not affect cash.

e

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



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Exercise 12.13 Cash flows

a THE GLASS HOUSE

Cash Flow Statement for October 2015$ $


Cash Inflows

Cash Sales 6 700


GST Refund 500

GST Received 670 13 070

less Cash Outflows



Wages 1 000

Interest 100

GST Paid 450 10 150



Cash Outflows

Shelving 1 600



Cash Outflows

Drawings 2 110 Net Cash Flows from Financing Activities (2 110)

Net Increase (Decrease) in Cash Position (790)

Bank Balance at Start 230

Bank Balance at End $ (560)



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b General Ledger

Bank



Oct. 1 Balance 230 Oct. 31 Cash Payments 9 460

31 Cash Receipts 8 670

Balance 560

9 460 9 460

Nov. 1 Balance 560

c

Example 1 Cash Purchase of Shelving

Example 2 Cash Drawings

Explanation Both these cash outflows increase the Bank overdraft, but are classified asInvesting and Financing activities, respectively, and so have no effect on NetCash Flows from Operations.

d

Explanation It aids decision-making by classifying sources and uses of funds, allowing theowner to identify whether Net Cash Flows from Operations is sufficient tocover other cash requirements.

OR It aids decision-making by allowing the firms to assess its performance inmeeting its cash targets.

OR It assists in planning for future cash activities by providing a basis for cashtargets for the future (in the next Budgeted Cash Flow Statement).



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e

Increase/Decrease DecreaseJustification 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 itsInvesting and Financing cash requirements without additional loans (whichmust 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 pressureon/a reduction in the firms bank balance. However, negative Investing cashflows 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 contributionto finance these assets. Further, more or better non-current assets maygenerate more sales, and more cash.



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a

Effect 1 There are no columns for Cash Sales or Cost of Sales.

Effect 2 There is no column for GST received.

b

Calculation

Discount rate = Discount

Debtorscolumn

= $1 720

$172 000

Discount rate 10 %

c General Ledger

Debtors Control

Date Cross-reference Amount

$

Date Cross-reference Amount

$

1/7/14 Balance 35 000 30/6/15

Bank/Discount Expense 172 000

30/6/15

Sales/GST Clearing 198 000 Bad Debts 5 000

Balance 56 000

$233000

$233000

1/7/15 Balance 56 000



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d BLING RINGS

Cash Flow Statement for the year ended 30 June 2015

$ $


Cash Inflows


less Cash Outflows


Wages 34 500


Rent Expense 11 000

Prepaid Insurance 4 200

Interest Expense 3 000

GST Settlement 1 100

GST Paid 2 420 182 920


INVESTING ACTIVITIESCash Outflows

Display Cabinets 8 000



Cash Inflows

Loan QZ FinCo. 15 000

less Cash Outflows

Drawings 13 500


Net Increase (Decrease) in Cash Position (19 140)

Bank Balance at Start 30 000




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e

Example 1 Credit Sales is greater than Receipts from Debtors.Example 2 Prepaid Insurance/Payments to Creditors is greater than Cost of Sales.

Explanation Credit Sales is revenue and so increases Net Profit by more than Receiptsfrom Debtors increases Net Cash Flows from Operations. Prepaid insurance isa cash outflow, which decreases Net Cash Flows from Operations more thanInsurance expense decreases Net Profit.

Ch12 Solution

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