7.5 What is the purpose of a statement of cash flow? 7.8 ABC Company had a posit
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Question
7.5 What is the purpose of a statement of cash flow?
7.8 ABC Company had a positive net cash flow for the year, but its income statement reported a loss for the period. Explain.
7.16 Three sisters formed a partnership, SkinDeep, to sell skincare products made from organic ingredients. They have been operating for one year. The bank balance at the end of the year is $41 000. A Summary of business transactions is as follows:
Sales to customers $256 000
Receipts from customers 199 000
Payments for inventory 103 000
Payments for electricity, telephone, rent and insurance 5 000
Purchase of a motor vehicle 30 000
Drawings 50 000
Payment of interest 8 000
Loan proceeds 20 000
Interest received 1 000
Income taxes paid 3 000
Equity injection 20 000
Required
Prepare a statement of cash flows.
7.17 In what section of the statement of cash flows (operating, investing or financing) would each of thefollowing items appear?
a. Purchase of property, plant and equipment f. Dividends to shareholders
b. Proceeds from a bank loan g. Proceeds from an equity raising
c. Collections from customers h. Retirement of debt
d. Gain/loss from the sale of equipment i. Change in accounts receivable
e. Cash proceeds from the sale of equipment j. Profit.
7.23 ‘We made a profit of $66,000. So why is there only $6000 in the bank?’, exclaimed Mr Beattie, the owner of the local fish takeaway store. Explain to Mr Beattie the relationship between profit and cash flow, to help himunderstand the reason why there is such a big difference between profit and cash in the bank.
7.25 The sole trader of Pentland Store has approached you for a loan. You note that the closing cash balances for the last two years were $10920 and $13650 respectively. Pentland Store also took outa loan of $22750 for the current year, and sold plant worth $54 600 over the past two years. The cash from operating activities last year was negative $30 940, and in the preceding year was $4550. Indicate wether you would advance the loan. Give reasons.
7.26 Camellia Blooms Ltd has cash from operating activities of $59 746. It has incurred capital expenditure of $49 896, of which $36 300 was for additional equipment. Calculate the entity’s free cash flow. Comment on what the figure indicates.
7.27 Corporate Catering Ltd's capital expenditure for the current year of new equipment was $145 900. Current liabilities and non-current liabilities were $48 590 and $682 800 respectively. Sales for the current year were $281 650, and cash flows from operating activities totalled $58 760. Compute the cash adequacy ratio, cash flow ratio, debt coverage ratio and cash flow to sales ratio.
7.36 Refer to the data on Gonash Ltd in exercise 7.35 and answer the following questions.
a. Gonash Ltd's profit for 2013 and 2014 was $19000 and $42 000 respectively. This is lower than its net cash flows from operations. Is this normal? Why?
b. The net cash flows from investing activities are negative. Is this normal? Why?
c. The net cash flows from financing activities are negative. Is this normal? Why?
d. What do you see as the most important cash activity for an entity? Why?
7.38 Preparing a statement of cash flows
Presented below is information for the Hale Partnership for the year ended 31 December 2014. Use the information to prepare a statement of cash flows.
Cash balance, 31 December 2014 $ 51 618
Cash paid to employees and suppliers 220 013
Cash received from sale of land 38 079
Cash paid as income t axes and 16 924
Cash received from debentures 25 386
Cash paid to purchase truck 30 000
Cash balance, 1 January 2014 38 925
Cash paid as drawings 53 311
Cash received from customers 279 247
Cash received as interest 6 770
Cash paid for interest 4 231
Cash paid to purchase equipment 12 310
Explanation / Answer
7.5: The primary purpose of the statement of cash flows is to provide information about cash receipts, cash payments, and the net change incash resulting from the operating, investing, and financing activities of a company during the period.
7.8: A common explanation for a company with a net loss to report a positive cash flow is depreciation expense. Depreciation expense reduces a company's net income (or increases its net loss) but it does not involve a payment of cash in the current period.
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