Class Exercises

Exercise 1
Statement of Cash Flow
The following statements have been provided from the annual reports for Premier Products Ltd.
Balance date is 31 December 2008.

Premier Products Ltd Balance Sheet as at 31 December 2008

2008 2007
Assets $ $
Property, Plant and Equipment
Land and Buildings 360,000 265,000
Accumulated Depreciation - Land and Buildings (7,800) (5,600)
Motor Vehicles 25,100 18,200
Accumulated Depreciation - Motor Vehicles (9,750) (6,680)
Office Equipment 20,000 14,500
Accumulated Depreciation - Office Equipment (8,425) (8,020)
Investments
Shares in Other Companies 9,375 9,375
Current Assets
Inventory 433,125 288,750
Accounts Receivable Control 115,000 124,000
Allowance for Doubtful Debts (2,545) (2,480)
Cash at Bank 10,250 5,372

Total Assets 944,330 702,417

Equity
Issued and Paid up Capital 265,000 235,000
Retained Earnings 440,745 292,187
Land and Building Revaluation Reserve 95,000 -

Liabilities
Non-Current Liabilities
Mortgage 50,000 95,000

Current Liabilities
Accounts Payable Control 71,835 61,030
Income Tax Payable 10,200 9,200
Accrued Wages 10,550 8,500
Accrued Interest Expense 1,000 1,500
Total Liabilities & Shareholders Equity 944,330 702,417
Premium Products Ltd Income Statement for the year ended 31 December 2008

$ $
Sales 1,472,501
Less: Cost of Goods Sold 972,528
Gross Profit 499,973
Dividends Received 2,250
502,223
Less: Expenses
Depreciation 7,375
Advertising 42,750
Audit Fees 9,000
Discount Allowed 2,100
Doubtful Debts 65
Printing and Postage 1,050
Wages 167,700
Loss on sale of Office Equipment 100
Other Operating Expenses 6,025
Total Expenses 236,165
Net Profit before Interest and Tax 266,058
less Interest Expense 15,000
251,058
less Taxation 65,000
Profit after Tax 186,058

Additional information:
Office Equipment was sold for $13,200 during the year. There were no other sales of property,
plant and equipment.

Required:
1. Prepare the Cash from Operating Activities section from the Statement of Cash Flow for
Premier Products Limited using the direct method. All workings must be shown. [Note:
Ignore GST implications. You are not required to prepare the other sections of the Statement
of Cash Flow.]
2. In the Property, Plant and Equipment section of the Balance Sheet, an increase of $5,500 is
shown in the value of Office Equipment. Explain the changes to the Office Equipment
account that have probably taken place during the year.
3. In studying the financial statements for Premier Products Ltd the owner noticed that the total
equity has increased substantially. While she is pleased with this result, she is concerned that
the business has made only a slight improvement in its cash position. Explain to the owner
the change in total equity, detailing why this has not resulted in a corresponding increase in
the cash balance. Support your answer with appropriate calculations.
Exercise 2
Your business completes year end financial statements for a range of clients. The Income
Statement and Balance Sheet for one of your clients, Mt. Albert Bookstores appears below.

Mt Albert Bookstores Income Statement for the year ended 30 September 2008
$000 $000 $000
Sales $175,000
Total revenue $175,000
Less
COS 126,300
Gross Profit 48,700
Less expenses
Other expenses 17,000
Interest expense 1,500
Bad debts 2,000
Depreciation expense 3,000
Loss on Sale of Assets 2,000 25,500
Net profit before tax 23,200
Tax expense 7,000
Net profit after tax $16,200

Mt. Albert Bookstores Balance Sheet as at 30 September 2008

2008 2007
$000 $000
Current Assets
Accounts Receivable 43,500 63,000
Inventory 63,000 55,000
Prepayments 2,000 2,000
108,500 120,000
Non Current Assets
Property, Plant & Equipment 84,000 82,000
Less:Accumulated Depreciation 16,000 23,000
68,000 59,000
Total Assets 176,500 179,000
Current Liabilities
Bank overdraft 6,500 10,000
Accounts Payable 34,000 31,000
40,500 41,000
Non Current Liabilites
Term loan 30,000 15,000
Equity
Capital 60,000 60,000
Retained earnings 46,000 63,000
106,000 123,000

Total Liabilities and Equity 176,500 179,000

Additional Information
Property, Plant and Equipment purchased during the year amounted to $17,000,000
Accumulated depreciation on the asset sold amounted to $10,000,000.

REQUIRED:

Prepare a Statement of Cash Flow (using the direct method) for the year ended 30 September
2008. Show all workings.
Out of Class Exercises
Exercise 1

The following information has been extracted from Lowe Dairy Products Companys
Balance Sheet and Income Statement for the years ended 31 March 2005 and 31 March
2006.
2005 2006
Sales $689,000 $785,000
Cost of Goods Sold 470,000 534,000
Gross Profit 219,000 251,000
Wages Expense 57,000 90,000
Rent expense 46,000 60,000
Interest expense 18,000 32,000
Income tax expense 20,000 26,000
Depreciation expense 6,000 8,000
Loss on disposal of equipment - 7,000
Gain on sale of long-term investments - (12,000)
Dividends 10,000 13,000
Profit 63,000 27,000
Non-Current Assets, at cost
Land 207,000 257,000
Plant & Equipment 215,000 198,000
Accumulated Depreciation 61,000 60,000
Long-term Investments 33,000 25,000
Current Assets
Cash 41,000 36,000
Prepaid Asset Rent 25,000 28,000
Accounts Receivable 49,000 73,000
Inventory 102,000 114,000
Current Liabilities
Accounts Payable 41,000 57,000
Interest Payable 20,500 22,000
Income Tax Payable 23,500 20,000
Wages Payable 25,000 24,000
Non-Current Liabilities
Long-term loan 240,000 250,000
Issued Ordinary Capital 205,000 215,000
Retained Earnings 56,000 83,000

Note:Purchased land for $50,000 cash, sold long-term investments costing $8,000 for cash
$20,000, and purchased plant during the year for $5,000.

Required:
(a) Prepare a Statement of Cash Flow using the Direct Method (ignore GST implications).
(b) Prepare a note of reconciliation for the operating activities using the indirect method.
Exercise 2

The financial statements for Pattys Premium Products Ltd are provided below:

Pattys Premium Products Ltd

Income Statement for the Year Ended 31 March 2006
Sales $175,000
Less: Cost of Sales 87,000
Gross Profit $88,000
Less: Operating Expenses $29,000
Wages 23,000 52,000
Net Profit before Tax 36,000
Less Tax 10,800
Net Profit after Tax $25,200

Pattys Premium Products Ltd

Balance Sheet as at:
31 March 2006 31 March 2005
Assets:
Cash at Bank $2,500 $ (1000)
Accounts Receivable 41,500 54,000
Inventory 63,000 55,000
Prepayments 4,000 2,000
Plant and Machinery 94,000 82,000
Accumulated Depreciation (16,000) (13,000)
$189,000 $179,000
Liabilities and Owners Equity:
Accounts Payable $33,500 $ 30,000
Wages Due 500 1,000
Mortgage 30,000 15,000
Issued Capital 60,000 60,000
Retained Earnings 65,000 73,000
$189,000 $179,000
Required:
(a) Prepare a Statement of Cash Flow using the Direct Method (ignore GST implications).
(b) The statement of cash flow is divided into three separate categories of activities.
Discuss how this layout will assist users to assess the cash flows of the business.
Exercise 3

Daveys Farming Products Ltd provided the following information:

Daveys Farming Products Ltd

Income Statement for the year ended 31 December 2006
$ $
Sales 260,000
Cost of Goods sold 170,000
Gross Profit 90,000
Income Tax Expense 5,000
Interest Expense 2,000
Wages Expense 42,000
Depreciation Expense 9,000
Other Operating Expenses 14,000 72,000
Net Profit $18,000

Daveys Farming Products Ltd

Comparative Balance Sheet at 31 December

2006 2005
Assets
Cash 10,000 8,000
Accounts Receivable 28,000 35,000
Inventory 29,000 26,000
Prepaid Expenses 2,000 4,000
Plant 100,000 75,000
Accumulated Depreciation (30,000) (21,000)
139,000 127,000
Liabilities & Shareholders Equity
Accounts Payable 5,600 8,000
Wages Payable 2,400 1,700
Income Tax Payable 1,000 1,300
Bonds Payable 20,000 -
Issued Capital 60,000 60,000
Retained Profits 50,000 56,000
139,000 127,000
Additional information:
Plant was purchased for cash, bonds payable were issued for cash and cash dividends of
$24,000 were declared and paid during the financial year.

Required:
Prepare a Statement of Cash Flow using the Direct Method (ignore GST implications).
Suggested Solutions to Out of Class Exercises

Exercise 1
(a)
Lowe Dairy Products Company
Statement of Cash Flow
For the year ended 31 March 2006

CASH FLOW FROM OPERATING ACTIVITIES

Cash was provided from:
Receipts from Customers (785+49-73)* 761,000
Cash was applied to:
Payments to suppliers (534+114-102+41-57)* 530,000
Payments to employees (90+25-24)* 91,000
Payments for other expenses (60+28-25)* 63,000
Interest payments (32+20.5-22)* 30,500
Income tax (26+23.5-20)* 29,500
744,000
NET CASH INFLOW (OUTFLOW) FROM OPERATING ACTIVITIES $17,000

CASH FLOWS FROM INVESTING ACTIVITIES

Cash was provided from:
Proceeds from sale of long term investment 20,000
Proceeds from sale of equipment 6,000
26,000
Cash was applied to:
Purchase of land 50,000
Purchase of plant 5,000
55,000
NET CASH INFLOW (OUTFLOW) FROM INVESTING ACTIVITIES $(29,000)

CASH FLOW FROM FINANCING ACTIVITIES

Cash was provided from:
Proceeds from taking out a loan 10,000
Proceeds from issuing shares 10,000
20,000
Cash was applied to:
Payment of dividends to share holders 13,000
NET CASH INFLOW (OUTFLOW) FROM FINANCING ACTIVITIES $7,000

Net increase (decrease) in cash (5,000)

add Opening cash balance 41,000
equals Closing cash balance 36,000

Note: Amounts in brackets with * refer to $000s

Exercise 2

(a)
Pattys Premium Products Ltd
Statement of Cash Flow
For the year ended 31 March 2006
CASH FLOW FROM OPERATING ACTIVITIES
Cash was provided from:
Receipts from Customers (175+54-41.5)* 187,500
Cash was applied to:
Payments to suppliers (87+30-33.5 +63-55)* 91,500
Payments to employees (23+1-0.5)* 23,500
Payments for other expenses (29+4-2-3)* 28,000
Tax 10,800
153,800
NET CASH INFLOW (OUTFLOW) FROM OPERATING ACTIVITIES $33,700

CASH FLOW FROM INVESTING ACTIVITIES

Cash was applied to:
Purchase of plant & machinery (94-82)* 12,000
NET CASH INFLOW (OUTFLOW) FROM INVESTING ACTIVITIES (12,000)

CASH FLOW FROM FINANCING ACTIVITIES

Cash was provided from:
Proceeds from increased mortgage (30-15)* 15,000
Cash was applied to:
Dividends paid (25.2+73-65)* 33,200
NET CASH INFLOWS (OUTFLOWS) FROM FINANCING ACTIVITIES (18,200)

Net increase (decrease) in cash 3,500

add Opening cash balance (1,000)
equals Closing cash balance 2,500

Note: Amounts in brackets with * refer to $000s

(b)
The Statement of Cash Flow is separated into three categories of activities: operating, financing,
and investing activities. Operating cash flows are generally the result of the provision of goods
and services. Investing cash flows are the result of any purchases or sales of assets and
investments, including those used to generate economic benefits over more than one future
accounting period. Financing cash flows are associated with equity and debt financing activities.
The three categories provide information about the major economic activities that use cash in the
organisation; this information can assist decision-makers by providing a more complete picture
of the organisations economic position and activities.
Exercise 3

Daveys Farming Products Ltd

Statement of Cash Flow
For the year ended 31 December 2006

CASH FLOW FROM OPERATING ACTIVITIES

Cash was provided from:
Receipts from Customers (260+35-28)* 267,000
Cash was applied to:
Payments to suppliers (170+29-26 +8-5.6)* 175,400
Payments to employees (42+1.7-2.4)* 41,300
Payments for other expenses (14+2-4)* 12,000
Interest Expense 2,000
Tax Expense (5+1.3-1)* 5,300
236,000
NET CASH INFLOW (OUTFLOW) FROM OPERATING ACTIVITIES $31,000

CASH FLOWS FROM INVESTING ACTIVITIES

Cash was applied to:
Purchase of plant & machinery (100-75)* 25,000
NET CASH INFLOW (OUTFLOW) FROM INVESTING ACTIVITIES (25,000)

CASH FLOWS FROM FINANCING ACTIVITIES

Cash was provided from:
Proceeds from bond 20,000
Cash was applied to:
Dividends paid 24,000
NET CASH INFLOWS (OUTFLOWS) FROM FINANCING ACTIVITIES (4,000)

Net increase (decrease) in cash 2,000

add Opening cash balance 8,000
equals Closing cash balance $10,000

Note: Amounts in brackets with * refer to $000s