SWINBURNE UNIVERSITY OF TECHNOLOGY

SARAWAK CAMPUS

FACULTY OF BUSINESS, DESIGN AND ARTS

ACC10007 FINANCIAL INFORMATION FOR

DECISION MAKING

Semester 1, 2020

Discussion Questions and Solutions

Topic 3: Preparation and use of Cash Flow

Statement
7.40 Preparing a statement of cash flows
Comparative balance sheets as at 31 December 2016 and 2017 for Chartowers
Ltd are shown below.

Please refer to Page 314 for the Balance Sheets.

Sales for 2017 were $180 000, and profit after tax was $16 350. Cost of sales was
$136 456. Dividends of $6000 were declared and paid during the year. Interest
earned and received was $2340, and interest incurred and paid was $1654. Tax
expense for the period was $3000 and this was paid in the period. Other expenses
(including depreciation) were $24 880. Property, plant and equipment were
purchased for cash.

Required
Prepare a statement of cash flows for Chartowers Ltd for 2017.
 CHARTOWERS LTD
Statement of cash flows
For the year ended 31 December 2017

Cash from operating activities

Receipts from customers1 $177 157
Payments to suppliers and employees2 (166 139)
Dividends received —
Interest received 2 340
Interest paid (1 654)
Income taxes paid (3 000)
Net cash from operating activities 8 704

Cash from investing activities

Payments for property, plant and equipment (14 217)
Proceeds from sale of property, plant and equipment —

Net cash from investing activities (14 217)

Cash from financing activities

Proceeds from issue shares —
Proceeds from borrowings 12 794
Repayment of borrowings —
Distributions paid (6 000)

Net cash from financing activities 6 794

Net increase/decrease in cash for the year 1 281

Cash at the beginning of the financial year 3 554
Cash of the end of the financial year 4 835

1
Cash from customers = opening accounts receivable + sales – closing accounts receivable
= $8 529 + $180 000 – $11 372
= $177 157

Cash paid to suppliers = opening accounts payable + purchases – closing accounts payable
2

= $10 490 + $142 853* – $7 108

= $146 235
*Purchases = cost of sales + ending inventory – opening inventory
= $136 456 + $22 034 – $15 637
= $142 853
Cash paid to other suppliers = other expenses +/– increase (decrease) in prepayments +/– decrease
(increase) in accruals
= $20 615* + ($711) + $0
= $19 904
*Other expenses = other expenses less depreciation
= $24 880 – ($18 480 – $14 215)
= $20 615

Total paid to suppliers and employees = $146 235 + $19 904 = $166 139
Notes

 In order to prepare a Statement of Cash Flows (SOCF), you need to know:

o The structure of the SOCF, and
o How to calculate the numbers that are in the SOCF

 For our purposes, the basic structure of the SOCF is as follows:

Statement of Cash Flows for the period ended <Date>

Cash flow from operating activities

Receipts from customers xxx
Payments to suppliers (xxx)
Payments for other expenses (xxx)
Dividends received xxx
Interest received xxx
Interest paid (xxx)
Income taxes paid (xxx)

Net cash flow from operating activities xxx

Cash flow from investing activities

Payments for PPE (xxx)

Net cash flow from investing activities (xxx)

Cash flow from financing activities

Proceeds from share issues xxx
Proceeds from borrowings xxx
Repayment of borrowings (xxx)
Dividends paid (xxx)

Net cash flow from financing activities xxx

Net increase (decrease cash) xxx

Cash at beginning of period xxx

Cash at end of period xxx

 The following items result in cash inflows (i.e. positive figures in SOCF):

Item Location in SOCF

Receipts from customers See Note 1 Operating activities

Dividends received Operating activities
Interest received Operating activities
Proceeds from share issues Financing activities
Proceeds from borrowings / loans / mortgages / debentures Financing activities
 The following items result in cash outflows (i.e. negative figures in SOCF):

Item Location in SOCF

Payments to suppliers See Note 2 Operating activities

Payments for other expenses See Note 3 Operating activities
Interest paid Operating activities
Income taxes paid Operating activities
Payments for Property, Plant and Equipment (PPE) Investing activities
Repayment of borrowings / loans / mortgages / debentures Financing activities
Dividends paid Financing activities

 Note 1: Receipts from customers is calculated as follows:

Sales xxx
Add: Receivables at beginning xxx
Less: Receivables at end (xxx)
= Receipts from customers xxx

 Note 2: Payments to suppliers is calculated using a 2-step process as follows:

Cost of sales xxx

Add: Inventory at end xxx
Less: inventory at beginning (xxx)
= Purchases xxx

Purchases xxx
Add: Payables at beginning xxx
Less: Payables at end (xxx)
= Payments to suppliers xxx

 Note 3: Payments for other expenses is calculated as follows:

Expenses recorded in SOCI xxx

Less: Depreciation expense (xxx)
Less: Increase in accruals # (xxx)
Less: Decrease in prepayments ## (xxx)
= Payments for other expenses xxx

# Add: Decrease in accruals

## Add: Increase in prepayments
7.41 Preparing a reconciliation of cash flow
Prepare a reconciliation of cash flows from operating activities and operating
profit after tax for Chartowers Ltd from problem 7.40.

Operating profit after tax $16 350

+ Depreciation 4 265
(Increase)/decrease in accounts receivable (2 843)
(Increase)/decrease in prepaid expenses 711
(Increase)/decrease in inventory (6 397)
Increase/(decrease) in accounts payable (3 382)
Net cash flow from operating activities 8 704)

Notes

 For our purposes, the basic reconciliation formula is as follows:

Profit after tax xxx

Add: Depreciation expense xxx

(Increase) Decrease in Accounts Receivables (xxx) / xxx

(Increase) Decrease in Prepaid Expenses (xxx) / xxx

(Increase) Decrease in Inventory (xxx) / xxx

Increase (Decrease) in Accounts Payables xxx / (xxx)

Increase (Decrease) in Accruals xxx / (xxx)

Increase (Decrease) in Tax Payable xxx / (xxx)

-------------

Net Cash Flow from Operating Activities xxx

========

 Remember:
 Start the reconciliation with Profit After Tax

 Always add Depreciation Expense; never subtract

 For all Current Assets (except Cash): Subtract “increases” and add “decreases”

 For all Current Liabilities: Add “increases” and subtract “decreases”

 Ignore movements (i.e. increases/decreases) in:

 Non-Current Assets,

 Non-Current Liabilities and

 Equity