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8/11/2019 Week 10 Student
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MIT565702
WEEK 10
CASH FLOW STATEMENTS
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Case Discussion 1
How was the value of inventory determined?
How was this used to manipulate profits?
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Case Discussion 2
Why was the inventory write-down necessary?
Why were the corporate overheads expensed rather than
capitalised?
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Lecture Objectives
• At the end of this lecture you should be able to:
– Understand what is a cash flow statement
– Explain the need for a cash flow statement
– Explain the purpose of a cash flow statement
– Distinguish between operating, investing and financing
activities – Prepare a cash flow statement using the direct method
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What is a Cash Flow Statement?
AASB 107 Cash Flow Statements requires a cash flowstatement
– In addition to income statement and balance sheet
Cash flow statement reports inflows and outflows ofcash under the headings of:
– Operating;
– Investing; and – Financing activities
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Why is a Cash Flow Statement
Necessary?
Recognition of the overriding importance of liquidityto an entity
To supplement the information provided by the incomestatement
– Strong profit does not necessarily mean goodliquidity
To supplement the information provided by the balance sheet
– Assess long-term financial structure
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What is the Purpose of a Cash Flow
Statement ?
Evaluate ability to generate future cash flows
Evaluate management decisions
–
Investing/financing decisions Determine ability to meet obligations and pay dividends
to shareholders
Compare profit/loss for the year and net cash provided(used) by operating activities
– Are credit management policies effective?
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Format of the Cash Flow Statement
Operating activiti es are the principal revenue-producing activities ofthe entity and other activities that are not investing or financingactivities
Cash inflows include:
– receipts from customers/clients for providing goods/services
– interest received
– dividends received
Cash outflows include:
– payments to suppliers for goods/services provided
–
payments to employees for services – interest paid
– income taxes paid
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I nvesting activities are the acquisition and disposal of long-term assets
and other investments not included in cash equivalents
• Cash inflows include:
– sale of property, plant and equipment (etc) for cash
– sale/redemption of shares/debentures of other entities for cash
– repayment of loans provided to other entities
• Cash outflows to:
– purchase property, plant and equipment (etc) for cash
– purchase of shares/debentures of other entities for cash
– lend money to other entities
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F inancing activities are activities that result in changes in the sizeand composition of the contributed capital and borrowings of theentity
Cash inflows include:
– sale/issue of shares in the entity for cash – issuing debentures or unsecured notes for cash
– obtaining a loan
Cash outflows include:
–
payments to shareholders for share buy-backs – dividends paid
– repayment of a loan
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Classification of Cash Flow Transactions
Operating Investing Financing
Receipts from: Receipts from: Receipts from:Sale of goods andservices
Sales of property,plant and equipment
Issue of sharesBorrowings
Interest or dividends
received
Repayment of loans
by other entitiesSale of shares held as
investments
Payments for: Payments for: Payments for:Purchase of inventoryWages of employees
Acquisition ofproperty, plant and
equipment
Dividend distributionsShare buy-backs
Taxes to governments
Interest to lenders
Acquisition of shares
and debentures forinvestment purposes
Repayment of
borrowings
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The statement of cash flows excludes non-cash activities such as:
Purchase of investments or property by incurring long-term debt
Acquiring another business entity by issuing shares
Conversions of liabilities to equity
Acquiring equipment by entering into a lease
Acquiring investments or property in exchange for other
investments or property
Revaluation of assets
Exclusions
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Student Task
Have a go at practice problem 1 (pg 222) for discussion
in 5 minutes
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Workings
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Format of the Cash Flow Statement
(Exhibit 13.4 of Textbook)
Cash Flow Statement for the month ended 31 May 2012
Cash flows from operating activities
Receipts from customers
Payments to suppliers and employees
$
50,000
(27,500)
$
22,500
Cash flows from investing activities
Purchase of land
Purchase of plant and equipment
(40,000)
(20,000) (60,000)
Cash flows from financing activities
Proceeds from mortgage 35,000
Net increase/(decrease) in cash held
Cash at the beginning of the month
Cash at the end of the month
(2,500)
25,000
22,500
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How do we determine Cash Flows
from Operating Activities?
There are two methods available to derive cash flows from
operating activities:
I ndirect method
•
Adjusts net profit for non-cash items to derive cash flowsfrom operating activities
• Reconciliation of net profit and cash flows from operating
activities must be disclosed as a note
• Not examinable in this subject!
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Direct method
• Reports gross cash inflows less gross cash outflows
• Use one of two approaches:
• (1) Using the accounting system which directlyrecords any cash flow information;
• (2) Using information from the income statement and
balance sheet to reconstruct cash flow information
•
It is approach (2) that is emphasised in this subject• Also applied to determine cash flows from investing
and financing activities
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Lecture Example
Logan Ltd provides the following information regarding
its income statement for the year ended 30 June 2012
and extracts from the balance sheet as at 30 June
2011 and 2012:
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Logan Ltd Income Statement for the year ended 30 June 2012
$ $
SalesCost of goods sold
Gross profit
Operating expenses:
Wages expense
Rent expense
DepreciationInterest expense
Net profit before tax
Income tax expense
Net profit after tax
4,000
3,000
7,5004,500
70,00037,000
33,000
19,000
14,000
4,200
9,800
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Logan Ltd
Comparative Balance Sheets (extract):
2011$ 2012$ Accounts receivableInventoryPrepaid rent Accounts payableWages payableIncome tax payable
15,0004,000
30031,000
2005,000
12,0005,000
25029,000
4006,400
Required:
From the preceding information calculate cash flows
from operating activities
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Workings – T-account Reconstruction
Cash Inflows
Accounts Receivable1/7/11
1/7/12
BalanceSales
Balance
15,00070,00085,00012,000
30/6/12Cash at bankBalance
73,00012,00085,000
Receipts from customers
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Workings – Cash Inflows
= Sales + decrease in accounts receivable
= $70,000 + $3,000 ($15,000 - $12,000)
= $73,000
Receipts from customers
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1. First establish the p urchases for the period (assume perpetual method).
Inventory
1/7/11
1/7/12
Balance Accounts payab le
Balance
4,00038,00042,000
5,000
30/6/12 Cost of Goods SoldBalance 37,0005,00042,000
2. The discover y of purc hases allows the calculation of the amount paid tocreditors
Accounts Payable
30/6/12Cash at bankBalance
40,00029,000
69,000
1/7/11
1/7/12
BalanceInventory
Balance
31,00038,000
69,00029,000
Workings – T-account Reconstruction
Cash Outflows
Payments to suppliers and employees
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Wages Payable
30/6/12Cash at bankBalance
3,800400
4,200
1/7/11
1/7/12
BalanceWages expense
Balance
2004,0004,200
200
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Workings – Cash Outflows
Payments to suppliers of goods:
= COGS + increase in inventory + decrease in accounts payable
= $37,000 + $1,000 + $2,000
= $40,000
Payments for wages expense:
= Wages expense – increase in accrued wages
= $4,000 - $200
= $3,800
Payments to suppliers and employees
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Prepaid Rent
1/7/11
1/7/12
BalanceCash at bank
Balance
3002,950
3,250250
30/6/12Rent expenseBalance
3,000250
3,250
Payments for rent expense
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Income Tax Payable
30/6/12Cash at bankBalance
2,8006,4009,200
1/7/11
1/7/12
BalanceIncome tax exp.
Balance
5,0004,2009,2006,400
Interest paid = $4,500
Income tax paid
W ki C h O tfl
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Workings – Cash Outflows
= Rent expense –
decrease in prepaid rent= $3,000 - $50
= $2,950
= Interest expense – change in balance sheet item
= $4,500 - $0
= $4,500
= Income tax expense – increase in income tax payable
= $4,200 - $1,400
= $2,800
Interest paid
Income tax paid
Payments for rent expense
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Logan Ltd
Cash flows from Operating Activities
$ $
Receipts from customers 73,000
Payments to suppliers and employees (46,750)
Interest paid (4,500)
Income tax paid (2,800) Net cash inflow from operating activities 18,950
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Student Task
Have a go at practice problem 2 (pg 212) for discussion
in 10 minutes
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Cash flows from Operating Activities
$ $
Workings
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Investing Cash Flows
The purchase and sale of non-current assets (e.g., motorvehicles, equipment, machinery)
The disposal of such assets and the acquisition of
replacements often occurs in the same accounting period Must reconstruct ledger accounts to find:
(a) Carrying amount of asset sold; and/or
Cash proceeds from sale of asset; and
(b) Cash outlay on purchase of replacement asset
How is thi s done?
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Investing Cash Flow – T account
Reconstruction
Reconstruct the following accounts:
– Accumulated Depreciation
Figure out the accumulated depreciation on the
asset sold
– Carrying Amount of Asset Sold
Temporary account
Figure out the cost of the asset sold – Asset
Figure out the cost of the replacement asset
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Example
Balance Sheet (extract)
30/6/11 30/6/12
$ $
Equipment 800,000 900,000
Acc. Depreciation (240,000) (270,000)
Income Statement (extract) for the year ended 30 June 2012
$
Loss on disposal of equipment 20,000
Depreciation expense 80,000
Additional Information
The equipment was sold for $30,000 cash
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Sale of Equipment
Date Particulars DR CR
Cash at bank
Accumulated depreciation
Loss on disposal
Equipment
30,000
?
20,000
?
Look famili ar?
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Accumulated Depreciation on Equipment
Closing bal (B/S t ) 270000 Opening bal (B/S t - 1 ) 240000
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Accumulated Depreciation on Equipment
Closing bal (B/S t ) 270000 Opening bal (B/S t - 1 ) Depreciation expense (I/S)
240000 80000
$320000 $320000
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Accumulated Depreciation on Equipment
Carr. amt. of equip. sold
Closing bal (B/S t ) 50000
270000 Opening bal (B/S t - 1 ) Depreciation expense (I/S)
240000 80000
$320000 $320000
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Carrying Amount of Equipment Sold
Accu mulated depreciation 50000
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Carrying Amount of Equipment Sold Accu mulated depreciation
Book value of equip sold*
50000
50000
100000
* Proceeds ($30,000) + Loss on disposal ($20,000)
Proceeds – Prof i t on sale = Book value
100000
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Carrying Amount of Equipment Sold
Equipment 100000 Accu mulated depreciation
Book value of equip. sold
50000
50000
100000 100000
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Sale of Equipment
Date Particulars DR CR
Cash at bank
Accumulated depreciation
Loss on disposal
Equipment
30,000
50,000
20,000
100,000
This now helps us work out the purchase of equipment
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Equipment
Opening bal (B/S t - 1 ) 800000 Closing bal B/S t ) 900000
Purchase of Equipment
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Equipment
Opening bal (B/S t - 1 ) 800000 Carr. amt. of equip. sold
Closing bal B/S t ) 1 00000 900000
1000000 1000000
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Lecture Example
Blue Sky L td provides the following information
regarding its income statement for the year ended 30
June 2012 and i ts balance sheets as at 30 June
2011 and 2012:
Blue Sky Ltd
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Blue Sky LtdIncome Statement for year ended 30 June 2012
$ $
Sales 700,000Cost of goods sold 450,000
Gross profit 250,000
Operating expenses:
Selling and administration 25,000Depreciation - plant 70,000
Loss on disposal of plant 5,000 100,000
Net profit before tax 150,000
Income tax expense 75,000 Net profit after tax 75,000
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Blue Sky Ltd
Comparative balance sheets as at 30 June 2011 and 2012
30/6/11 30/6/12
$ $
ASSETS
Inventory 100,000 128,000
Accounts receivable 105,000 100,000
Land and buildings 400,000 450,000
Plant 250,000 300,000
Accumulated depn. – plant (160,000) (190,000)
Patents 5,000 15,000
TOTAL ASSETS 700,000 803,000
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30/6/11 30/6/12
$ $LIABILITIES Bank overdraft 172,000 43,000Accounts payable 25,000 43,000Income tax payable 45,000 75,000Dividend payable 18,000 22,500
Bank loan - 60,000TOTAL LIABILITIES 260,000 243,500SHAREHOLDERS EQUITYShare capital 350,000 425,000Retained profits 65,000 90,000General reserve 25,000 34,500
Revaluation reserve - 10,000SHAREHOLDERS EQUITY 440,000 559,500LIAB AND SHOLDERS EQUITY 700,000 803,000
Additional information for the year ended 30 June 2012:
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Additional information for the year ended 30 June 2012:
An issue of shares was made during the year
– 75,000 shares for cash at $1 per share Patents were revalued
The plant was sold for $10,000
During the year the company paid the dividends payable at 30/6/2012
During the year the company declared: – An interim dividend of $18,000 (paid during the year); and
– A final dividend of $22,500
Required:
Prepare a statement of cash flows for the year ended 30 June 2012 inaccordance with AASB 107 Cash Flow Statements
WORKING SPACE FOR BLUE SKY
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WORKING SPACE FOR BLUE SKY
WORKING SPACE FOR BLUE SKY
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Blue Sky Cash Flow Statement for the year ending 30
J 2012
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June 2012
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Lecture Outcomes
• You should now be able to:
– Understand what is a cash flow statement
– Explain the need for a cash flow statement
– Explain the purpose of a cash flow statement
– Distinguish between operating, investing and financingactivities
–
Prepare a cash flow statement using the direct method
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Homework – This Week
Questions from Required Exercises?
H k N t W k
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Homework – Next Week
Required Exercises P13.3* , P13.17, P13.18, P13.24*
(* ignore reconcil iation)
Chapter 14 of the textbook (stop at the middle of page 626)