Deegan5e SM Ch20

PART 5: ACCOUNTING FOR THE DISCLOSURE OF CASH FLOWS
Chapter 20
Cash-flow statements
20.1
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.
20.2
Operating
(a) Dividends received*
(c) Interest paid*
(f) Borrowing costs*
(g) Payments to suppliers
(h) Payments to employees
Investing
(d) Acquisition of plant
and equipment
Financing
(b) Dividends paid
(e) Repayment of borrowings
(i) Receipts from share issue
(j) Payments to underwriters
* 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.
20.3
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 cash flow
statement 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:
Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan
201
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.
20.4
The following are cash equivalents: deposits that are available at call (d); deposits on the
money market that are available at two months notice (e); and a bank overdraft (f).
20.5
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 judgements, 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 relevant than profit-based data. This is a good opportunity to
consider the issue of relevance versus reliability.
20.6
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 book value. 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 income statement and balance
sheet.
20.7
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
202
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 701 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 cash flow statement provides information not available in other sections of the
financial report (directly or indirectly). An example is payments to suppliers and
employees. These disclosures may be useful to financial statement users.
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 balance sheet information.
A problem that may arise is that the cash flow statement is inconsistent with the accrual
basis of accounting used in the income statement and balance sheet. 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 cash flow statements are useful for reviewing the cash position of companies,
they must be reviewed carefully and in conjunction with other financial information.
20.8
(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
income statement. 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
203
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 report where the transactions and other events involve parties external
to the entity; and relate to the financing or investing activities of the entity.
20.9 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 must be
disclosed in the financial report 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 cash-flow statement. Such transactions
shall be disclosed elsewhere in the financial report 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 balance sheet. 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 cash-flow statement with
the equivalent items reported in the balance sheet.
(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;
(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:
204
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 shall be
disclosed in the financial report.
20.10 (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.
20.11 This question can be answered by using either the t-account approach or the equations
approach.
The following t-accounts are in $000
Sales
A/c
Rec.
Accounts receivable
400
Op.
bal.
Sales
90
400 Prov. dd
Discounts
CASH
Clos. bal.
490
6
10
394
80
490
Provision for doubtful debts

A/c
rec.
6 Op. bal.
9
Clos.
Dd
bal.
8 expense
5
14
14
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) $6 000 (transfer from provision for doubtful debts which
equals opening balance of the provision plus the doubtful debts expense less the closing
balance of the provision) $10 000 (discounts that may have been given for early payment) =
$394 000.
approach.
205

Disc. rev.
Cash
Clos. bal.
Trade creditors
2 Op. bal.
83 Inventory
35
120
40
80
Op. balance
Trade creditors
120
Inventory
10 COGS
80 Stock w/offs
Clos. bal.
90
60
5
25
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)
2 000 (discounts given by suppliers) + 5 000 (stock write-offs) = 83 000.
approach.
Property, plant and equipment
Op. balance
500
Cash
280 Disposal
Clos. bal.
780
130
650
780
Accumulated depreciation
Disposal
40 Op. balance
Deprec. exp
Clos. bal.
210
250
200
50
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 written down
value of the disposed asset ($90 000, which was provided in the question) to give an original
cost of $130 000.
If we adopt an equation method approach, cash payments to suppliers 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
206
20.14 (i)
Receipts from customers

We need to reconstruct the provision for doubtful debts and accounts receivable.
The cumulative entry to record sales would be:
Dr
Cr
Accounts receivable
Sales
250 000
250 000
The entry to record the doubtful debts expense would be:

Dr
Cr
Doubtful debts expense

25 000
25 000
As the closing balance of 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
Op. balance
250 Prov. dd
Sales
250 CASH
Clos. bal.
500
(ii)
30
200
270
500

A/c rec.
30 Op. balance
35
Clos. bal.
30 Dd exp.
60
25
60
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 trade creditors 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
Op. bal.
160 COGS
Trade creditors
150 Clos. bal.
310
(iii)
Trade creditors
CASH
140 Op. bal.
Clos. bal.
200 Inv.
340
130
180
310
190
150
340
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.
CASH
Clos. bal.
Accrued salaries
26 Op. bal.
22 Salaries
48
18
30
48
At this stage we can now determine the total cash flows from operations as:
Payments to suppliers
Payments for accrued expenses
Interest payments
200 000
(140 000)
(26 000)
(20 000)
14 000
207
Cash flows from investment activities

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

Plant and equip.
20 000
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:
Disposal
20 Op. bal.
Clos. bal.
20 Deprec. exp
40
30
10
40

Op. bal.
90 Disposal
20
CASH
30 Clos. bal.
100
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
Cash from operations
Cash from investing
Cash from financing
Closing cash balance
120 000
14 000
(30 000)
20 000
124 000
We are now able to present a cash flow statement for XYZ Ltd.
208
XYZ Limited
Statement of Cash Flows
for the year ended 30 June 2010
$000
Cash flows from operating activities
Payments to suppliers of goods and services, inclusive of labour
Interest paid
Net cash provided from operating activities (1)
200
(166)
(20)
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
Net cash from financing activities
Net increase in cash held
Cash at the beginning of the financial year
Cash at the end of the financial year
20
20
4
120
124
For XYZ, two notes must accompany the Cash Flow Statement, these being:
Note 1: Reconciliation of net cash provided by operating activities to net profit
$000
35
10
(5)
(20)
(20)
10
4
14
Net profit
Depreciation
Decrease in provision for doubtful debts
Increase in accounts receivable
Increase in inventories
Increase in trade creditors
Increase in accrued expenses
Net cash provided from operating activities
Note 2: Reconciliation of cash
2010
$000
2009
$000
144
20
24
139
19
120
For the purposes of the statement of cash flows,

cash includes:
Cash
Bank overdraft
209
20.15
S Limited
for the Year Ended 30 June 2010
$000
$000

Payments to suppliers of goods and services, inclusive of
labour
Interest paid
Income taxes paid
Net cash provided from operating activities (1)
1 908
(1 356)
(26)
(182)
344

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

24
24
152
422
574
Note 1: Reconciliation of net cash provided by operating activities to net profit

Net profit
Depreciation
Increase in provision for doubtful debts
Increase in income taxes payable
(Increase)/decrease in accounts receivable
(Increase)/decrease in inventories
Increase/(decrease) in trade creditors
(Increase)/decrease in future income tax benefit
Net cash provided from operating activities
$000
264
216
24
36
(144)
(24)
(24)
6
(10)
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.
2010
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 income
statement. This is done below.
(i)

Debt write-off
Dr
Cr

96 000
96 000
As the closing balance of doubtful debts has only increased by $24 000, $72 000 must
have been written-off against debtors:
Opening balance at 1/7/2009
Provided in the year
Written off against debtors
Closing balance at 30/6/2010
72 000
96 000
(72 000)
96 000
Accounts receivable
The entry to record sales would be:
Dr
Cr
Accounts receivable
Sales
2 124 000
2 124 000
The cash received from sales is calculated as follows:

Accounts Receivable
Write-off against debtors (above)
Sales
CASH received
(ii)
528 000
(72 000)
2 124 000
(1 908 000)
672 000
S Ltd commenced the year with $216 000 of inventory. After using $576 000 of this
inventory it had a closing inventory balance of $240 000. This means that $600 000
must have been purchased.
2011
Inventory account
Cost of sales
Purchases
216 000
(576 000)
600 000
240 000
Trade creditors
Given that trade creditors 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.
Trade creditors account
Purchases
CASH paid
(iii)
192 000
600 000
(624 000)
168 000
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
Charged in the year
CASH paid
(iv)
24 000
648 000
(642 000)
30 000
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 2010 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 debtors (for tax purposes
only the write-off against debtors 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 provision). Taxable income
therefore is:
Accounting profit before tax
Building depreciation (a permanent difference)
Increase in provision for doubtful debts (a temporary difference)
Taxable income
472 000
48 000
24 000
544 000
There is a temporary difference caused due to the provision 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 17) and to
the nearest $000 are:
2012
Dr
Cr
Income tax expense (40% of $544 000)

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

Income tax expense
218 000
218 000
10 000
10 000
Income tax payable

Charge for the year (see above)
CASH paid
Closing balance
(v)
182 000
218 000
(182 000)
218 000
Total cash flows from operations

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

(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. The
entries would have been:
Dr
Cr
Dr
Cr
(ii)
Land
Asset revaluation reserve
Land
Share capital
120 000
120 000
240 000
240 000
Plant and equipment

Dr
Dr
Cr
CASH
Plant and equipment
72 000
168 000
240 000
As plant and equipment increased by $48 000, despite the disposal above, $288 000
must have been acquired in the year.
2013
Charge in the year
Disposal
96 000
168 000
(168 000)
96 000
Plant and equipment (Cost)

Acquisitions in the yearCASH
Disposals in the year
(iii)
960 000
288 000
(240 000)
1 008 000
Total cash flows from investing

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

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 1/7/2009
Cash from operations
Cash from investing
Cash from financing
Closing cash balance at 30/6/2010
422 000
344 000
(216 000)
24 000
574 000
20.16
T Pty Limited
for the Year Ended 30 June 2010
$000
Receipts from trade and other debtors
Payments to trade and other creditors and employees
Interest paid
Dividends received
Finance charges on finance lease
Income tax paid
Net cash flows from operating activities
31 056
(30 136)
(315)
51
(7)
(65)
584

2014
Proceeds from sale of property, plant and equipment

Payments for non-trading investments
Net cash flows from investing activities
20
(438)
(418)

Repayment of borrowings
Principal repayments under finance lease
Net cash flows from financing activities
Net decrease in cash held
(300)
(5)
(305)
(139)
274
135
Note 1: Reconciliation of net cash flows from operating activities to net profit
Net profit
Depreciation
Increase in FITB
Increase in trade debtors
Increase in prepayments
Increase in inventory
Inventory written off
Increase in trade creditors
Increase in provision for tax
Increase in provision for warranty
Decrease in provision for employee entitlements
Net cash flows from operating activities
150
140
30
(10)
(243)
(115)
(418)
50
619
160
314
(93)
584
Note 2: Non-cash financing and investing activities

During the year, the company acquired additional investmentsconsideration 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:
We need to reconstruct the provision for doubtful debts and accounts receivable.
The cumulative entry to record sales would be:
Dr
Cr
Accounts receivable
Sales
31 394
31 394

Dr
Cr

35 000
35 000
2015
As the closing balance of 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:
Op. balance
2 654 Prov. dd
5
Sales
31 394 Bad debts
90
CASH
31 056
Clos. bal.
2 897
34 048
34 048
A/c rec.
Accounts receivable
5 Op. balance
120
150 Dd exp.
155
35
155
Clos. bal.
XYZ 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 trade creditors 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.
Op. balance
Trade creds
Inventory
2 486 COGS
28 623 Write-off
Investment
Clos. bal.
31 109
28 205
50
80
2 774
31 109
CASH
Clos. bal.
Trade creditors
28 469 Op. bal.
1 637 Inv.
30 106
1 483
28 623
30 106
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.
CASH
Clos. bal.
Accruals
135 Op. bal.
1 575 Salaries
1 710
1 110
600
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.
2016
Provision for employee entitlements

CASH
1 417 Op. bal.
208
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
Closing deferred tax asset
Opening provision for tax
Closing provision for tax
Income tax expense
Income tax paid
302
(312)
(83)
243
(215)
(65)
At this stage we can now determine the total cash flows from operations as:
Payments for accrued expenses
Employee-related payments
Prepayments
Finance charges
Dividends
Tax payments
Interest payments
31 056
(28 469)*
(135)*
(1 417)*
(115)*
(7)
51
(65)
(315)
584
* These numbers are added together to give $30 136, which is shown on the statement of
cash flows.
Plant and equipment
Dr
Dr
Cr
Accumulated depreciationplant and equipment

CASH
Plant and equipment
48
20
68
There was also a revaluation of plant and equipment. The entires to record the revaluation
would be:
Dr
Cr
Dr
Cr
Accumulated depreciationplant and equipment

Plant and equipment
Plant and equipment
500
500
800
800
2017
Disposal
48 Op. bal.
P and E
500 Deprec. exp
Clos. bal.
100
648
548
100
648
Plant and equipment

Op. bal.
768 Disposal
ARR
800 Accum. dep
Lease
25 Clos. bal.
1 593
68
500
1 025
1 593
Therefore, 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
Cr
Cr
Cr
Cr
Investment in associate
Cash
Provision for deferred payment
Share premium reserve
Paid-up capital
1 050
250
50
250
500
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 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
Payment for investments
20 000
(438 000)
(418 000)

Repayment of borrowings
Opening
Closing
(3 800)
3 500
(300)
Principal repayment under finance lease

Opening
Closing
(25)
20
5
2018
20.17 Cash flows from operating activities

1.
Cash receipts from customers
Opening balance
Sales
Accounts receivable
Closing balance
2.
Accounts receivable
60
CASH
60
Closing balance
120

4
Opening balance
12
Expense
16
80
4
36
120
8
8
16
Cash payments for inventory
Opening balance
Accounts payable
Inventory
52
Cost of goods sold
80
Closing balance
132
40
92
132
CASH
Closing balance
Accounts payable
80
Opening balance
60
Inventory
140
60
80
140
3.
Expense provisions/accrued expenses
CASH
Closing balance
CASH
Closing balance
Accrued wages
16
Opening balance
20
Wages
36
Accrued employee entitlements
(provision for annual leave)
20
Opening balance
8
Employee entitlements
28
16
20
36
12
16
28
Therefore, total cash flows from operating activities:

From customers
Payments to employees (16 + 20)
Interest received
80
(36)
(80)
4
(32)
Cash flows from investing activities.

2019
4
Opening balance
36
Expense
40
Disposal
Closing balance
Opening balance
CASH

120
Disposal
20
Closing balance
40
180
20
20
40
24
156
180
To determine the original cost of the asset disposed, we are told that the property had a
written-down value of $20 000. From the above t-account analysis we have determined that
the accumulated depreciation related to the disposed asset was $4000. Therefore, its original
cost must have been $24 000. As the property had a written-down value of $20 000, and as
Cabarita Ltd recorded a profit on sale of $8000, it must have received $28 000 from the
disposal. Therefore, total cash flows from investing activities:
From sale of plant
Acquisition of plant
28
(40)
(12)

In the absence of any information to the contrary, it must be assumed that the increase in
share capital of $120 000 was received in cash. There were also additional borrowings of
$60 000.
Having considered the cash flows associated with the operating, investing and financing
activities we are now in a position to compile the statement of cash flows.
2020
Cabarita Ltd
for the year ended 30 June 2010
$000
$000

Payments to employees
Interest received
Net cash provided by operating activities (note 1)
80
(80)
(36)
4
(32)

Proceeds from sale of plant
Acquisition of plant
Net cash from investing activities
28
(40)
(12)

Proceeds from share issue
Cash at the beginning of the year (note 2)
Cash at the end of the year
120
60
180
136
(40)
96
To comply with AASB 112, a number of supporting notes are also required.
Note 1: Reconciliation of net cash provided by operating activities and net profit.
Operating profit after tax
add/(subtract)
Depreciation expense
Increase in receivables
Profit on sale of property plant and equipment
Increase in inventories
Decrease in annual leave provision
(32)
20
24
(8)
(40)
(4)
4
4
0
(32)
2021
Note 2: Reconciliation statement for cash as shown in the statement of cash flows.
Cash at the end of the year as shown in the statement of cash flows is reconciled to the
related items in the statement of financial position as follows:
Cash per statement of financial position

Bank overdraft per statement of financial position
Cash as year end per statement of cash flows
2010
$000
96
96
2009
$000
(40)
(40)
Note 3: Accounting policy note

In the statement of cash flows, cash includes cash at bank and bank overdraft.
Note 4: Details of credit standby arrangements and used/unused loan facilities
This is a required note. For Cabarita Ltd there are no such facilities.
Note 5: Details of non-cash financing and investing activities
This is a required note. For Cabarita Ltd there were no such transactions.
20.18
(a)
Cook the books is an expression that has been used for many years and means that
somebody has manipulated the accounting records so as to generate a predetermined
or desired result. Somebody who is involved in such an action is clearly not being
objective and hence is ignoring one of the fundamental principles of accounting. One
of the primary qualitative characteristics of accounting is reliability (which requires,
amongst other things, that the accounting process is free from bias) and hence
cooked books would not satisfy this expectation. Because many people might use
financial reports for various decisions (including retirees who are electing to invest
their savings), such an action as cooking the books is to be deplored.
(b)
A reader of financial reports does not have access to the underlying records, and
hence, it would not generally be possible to determine that the books have been
cooked. Indeed, those people involved in manipulating the financial reports would
perform the manipulation in a way such that any manipulation would be very difficult
to detect. Often manipulation only becomes evident when a company subsequently
gets into financial difficulty and further investigation is performed. One safeguard,
which certainly is not infallible, is the appointment of external auditors. A large
company like Harris Scarf would have auditors appointed who are required to
provide a report about whether the financial reports comply with accounting
standards and other generally accepted accounting principles. Ideally, the auditors
work should uncover any material deviations from accepted accounting principles.
However, the auditor does not check the accuracy of every accounting entry (much
sampling and professional judgement is involved) and hence any cooking of the
books will not always come to light.
(c)
It is certainly more difficult to be creative in relation to the statement of cash flows

than it is in relation to the statement of financial position or the statement of financial
performance. The statement of financial position and the statement of financial
performance are generated as a result of accrual accounting, which requires much
estimation and professional judgement. The statement of cash flow, however,
provides a reconciliation of opening and closing cashboth of which are fairly
2022
hard numbers which are not heavily based on judgement (there might be some
argument about whether something constitutes cash, but such arguments would
generally be limited) and which can be traced directly and fairly easily to records
provided by external parties, such as banks. There is some possibility of manipulating
the categorisation of certain cash flows (for example, classifying a cash flow as
relating to ordinary operations rather than investment activities), and perhaps
nominating something as cash when it should not bebut the ability to do this is
typically very limited.
2023

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PART 5: ACCOUNTING FOR THE DISCLOSURE OF CASH FLOWS

The Objective of AASB 107 is identified in the accounting standard as:

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Practical difficulties include:

Obtaining the information

Working out whether transactions relate to operating, investing or financing activities

Definition of cash equivalents

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

In terms of its value to the statutory accounts

The sale of a non-current asset

An increase in a provision for long-service leave

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

The acquisition of land by way of the issue of shares

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

An entity shall disclose, together with a commentary by management, the

(b) and (c)

Provision for doubtful debts

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

The following t-accounts are in $000

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

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Receipts from customers

The entry to record the doubtful debts expense would be:

Doubtful debts expense

Provision for doubtful debts

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Cash flows from investment activities

Accum. depreciationplant and equip.

Property, plant and equipment

Cash flows from investing, therefore, were:

Cash flows from financing

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Cash flows from investing activities

Net cash used in investing activities

Cash flows from financing activities

For the purposes of the statement of cash flows,

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activities

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

Note 2: Non-cash financing and investing activities

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Receipts from customers

Doubtful debts expense

The cash received from sales is calculated as follows:

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Income tax expense (40% of $544 000)

Deferred tax asset (40% of $24 000)

Income tax payable

Total cash flows from operations

Cash flows from investment activities

Plant and equipment

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Plant and equipment (Cost)

Total cash flows from investing

Cash flows from financing

Cash flows from investing activities

Proceeds from sale of property, plant and equipment

Cash flows from financing activities

Note 2: Non-cash financing and investing activities

The entry to record the doubtful debts expense would be: