BA930 Cash Flow Tutorial To complete our knowledge of Accounting Concepts and Practice we will calculate the cash

h flow of Class Exercise Pty Ltd, using their Income Statement and Balance Sheet. To get a feel for the problem, how much did Class Exercise Pty Ltd pay off their bank loan. How much dividend did they pay? Over the page we re-construct the T accounts to see where the cash came from, and where it went. Class Exercise Pty Ltd Balance Sheet Summary as at 30 June 2006 2006 Cash 55,200 Debtors 94,000 Inventory 107,300 Plant and Equipment 149,000 Accumulated Depn (P&E) (46,000) 359,500 Accounts Payable 41,000 Accrued Expenses 28,200 Income tax Payable 18,000 Bank Loan 90,000 Paid Up Capital 100,000 Retained Earnings 82,300 359,500 Summary Income Statement 2005/06 Sales 384,000 Less COGS 198,000 Gross Profit on Sales Proceeds on Sale of Eqpt 16,000 Less BV of Eqpt Sold 7,000 Profit on Sale of Eqpt Gross Profit less expenses Depreciation 11,000 Interest 9,200 Other Expenses 119,000 Profit before tax Income Tax Expense Profit after tax

2005 73,800 98,000 112,400 102,300 (48,000) 338,500 56,000 5,500 15,000 115,000 80,000 67,000 338,500

186,000

9,000 195,000

139,200 55,800 18,000 37,800

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Cash Flow From Operations

1.Receipts From Customers Sales Date Account $ Date Account Accts Receivable $ 384,000

Accounts Receivable Date 1/07/2005 Account Opening Balance Sales $ 98,000 384,000 482,000 Date 30/06/2006 Account Cash Closing Balance $ 388,000 94,000 482,000

2. Payments To Suppliers COGS Date Inventory Account $ 198,000 Inventory Date 1/07/2005 Account Opening Balance Accounts Payable $ 112,400 192,900 305,300 Date 30/06/2006 Account COGS Closing Balance $ 198,000 107,300 305,300 Date Account $

Accounts Payable Date 30/06/2006 Account Cash Closing Balance $ 207,900 41,000 248,900 Date 1/07/2005 Account Opening Balance Inventory $ 56,000 192,900 248,900

3 Payments to Employees and Service providers Other Expenses Date Account Accrued Expenses $ 119,000 Date Account $

Accrued Expenses Date 30/06/2006 Account Cash Closing Balance $ 96,300 28,200 124,500 Date 1/07/2005 Account Opening Balance Other Expenses $ 5,500 119,000 124,500

4. Interest Interest Date Cash 5 Income Tax Income Tax Expense Date Account Income Tax Payable $ 18,000 Date Account $ Account $ 9,200 Date Account $

Income Tax Payable Date 30/06/2006 Account Cash Closing Balance $ 15,000 18,000 33,000 Date 1/07/2005 Account Opening Balance Other Expenses $ 15,000 18,000 33,000

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1. Cash Flow from Operations The starting points to determine our Cash Flows from Operations are the Income Statement Accounts which we then relate to their Balance Sheet Accounts. Sales links with Accounts Receivable (Debtors). COGS links with Inventory, then Inventory links to Accounts Payable The balance of Accounts Receivable is increased by Sales, and decreased by customer payments (Cash). We know the opening balance (from last years statements), we have this years figure (the closing balance). We know the Sales figure (from our Income Statement), so we can simply calculate the balancing figure which is the cash payments or in In Cash Flow language, Receipts from Customers. Note: You may wonder what happens if we make some cash sales which dont go through Accounts Receivable. To prove it makes no difference, break the sales figure up into two figures, cash sales revenue and credit sales revenue. Now do the T accounts. It makes no difference! Payments to Suppliers is a bit more difficult. First we calculate how much inventory we purchased, then how much we paid through Accounts Payable. A two stage process. The figures shown in red on the previous page have been calculated, once all the other information was in place. Cash Flow from Investing This relates to the purchase of non-current assets. We buy new equipment and sell our surplus old machines. If our accumulated depreciation figure has not increased by the same amount as our depreciation expense we must have disposed of an asset. Any difference can only be the amount of accumulated depreciation on disposed assets. If the figure for a class of Non-current assets (for example Plant & Equipment) has changed, this indicates we have purchased or disposed of assets, or maybe both. Depending on how the Income Statement is formatted (sometimes it shows the book value of the assets disposed of, but often it does not) we may need additional information. In this example we are told that the purchase price of the equipment sold was $20,000. We are left to calculate the rest.

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Cash Flow from Investing Note: an item which had been purchased for $20,000 was disposed of during the year 1. Calculate Depreciation Details of Plant Sold Depreciation Expense Date Account Acc Depreciation $ 11,000 Date Account $

Accumulated Depreciation Date 30/06/2006 Account Plant & Equipment Closing Balance $ 13,000 46,000 59,000 Date 1/07/2005 Account Opening Balance Depreciation Exp $ 48,000 11,000 59,000

Plant & Equipment Date 1/07/2005 Account Opening Balance Cash (Purchase) $ 102,300 66,700 169,000 Date Account Accum Depreciation b/v of eqpt sold Closing Balance $ 13,000 7,000 149,000 169,000 $ 16,000

30/06/2006

Proceeds of Sale (Revenue Account) Date Account $ Date Cash Book Value of Eqpt Sold (Expense Account) Date Account Plant & Equipment $ $7,000 Date Account $ Account

The above accounts can be a challenge to interpret! If we look at the second journal above we see that accumulated depreciation has decreased from $48,000 to $46,000 despite there being a credit of $11,000 from depreciation expense. The $13,000 balancing item is the accumulated depreciation of the asset disposed of. So the book value of the asset disposed of was $7,000 ($20,000 - $13,000). The $16,000 proceeds from the sale of plant and equipment is directly available on the Income Statement. The Plant and Equipment (P&E) T account shows the disposal of the old machine, which has reduced the value of P&E by $20,000 on the left hand side. The balancing item, shown in red can only be the new machine that has been purchased!

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Cash Flow from Financing

The third segment of the Cash Flow Statement covers equity (share) issues, debt finance (a new loan is an inflow or receipt, a repaid loan is an outflow or payment) and any dividend paid. The calculation of the dividend is shown in the T account below.
Date Account Cash (Dividend) Closing Balance Retained Earnings $ Date 22,500 82,300 104,800 30/6/06 Account Opening Balance P&L Summary $ 67,000 37,800 104,800

30/06/2006

Inspection of the Balance Sheet reveals that $20,000 of equity was issued, and $25,000 was repaid off the loan. And Finally Bringing all the figures together, we now have the Cash Flow Statement below. Note the reconciliation with the cash account at the bottom of the statement. Class Exercise Pty Ltd Statement of Cash Flows for Year ended 30 June 2006
From Operations Receipts from Customers Payments to suppliers/emps Interest Paid Income Tax Paid From Investing Purchase of New Eqpt Disposal of old Eqpt From Financing Proceeds of Share Issue Repayment of Loan Dividend Paid 388,000 (304,200) (9,200) (15,000) 59,600 (66,700) 16,000 (50,700) 20,000 (25,000) (22,500) (27,500) Cash Account 1 July 2005 + Net Cash Flow for Year ended 20 June 2006 = Cash Account 30 June 2006 73,800 (18,600) 55,200

Continue over the page to find an example for you to do!

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SLJ Pty Ltd Balance Sheet Summary as at 30 June 2006 2006 Cash 23,000 Debtors 52,000 Inventory 79,000 Plant and Equipment 91,000 Accumulated Depn (P&E) (35,000) 210,000 Accounts Payable 28,000 Accrued Expenses 4,500 Income tax Payable 14,000 Bank Loan 31,200 Paid Up Capital 50,000 Retained Earnings 82,300 210,000 Summary Income Statement 2005/06 Sales 267,000 Less COGS 142,000 Gross Profit on Sales Proceeds on Sale of Equipment 29,000 Less BV of Equipment Sold 20,000 Profit on Sale of Equipment Gross Profit less expenses Depreciation Interest Other Expenses Profit before tax Income Tax Expense Profit after tax

2005 28,500 61,300 74,500 98,500 (46,000) 216,800 35,400 6,800 11,000 56,600 40,000 67,000 216,800

125,000

9,000 134,000

10,500 8,800 74,300

93,600 40,400 14,000 26,400

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