Deegan 5e Ch20 - CF

PART 5: ACCOUNTING FOR THE DISCLOSURE OF CASH FLOWS
Chapter 20
Cash-flow statements
20.1 Pursuant to AASB 107, the three types of activities reported on the statement of cash flows
are described as follows:
Financing activities are activities that result in changes in the size and composition of
the contributed capital and borrowings of the entity.
Investing activities are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.
Operating activities are the principal revenue-producing activities of the entity and
other activities that are not investing or financing activities.
Each type of cash flow provides important information. For example, it would be hoped that
in the longer term, the majority of the firms cash flows would be generated by its operating
activities. Knowledge about the investing activities of the firm provides information about the
growth or contraction in the asset base of the company and this may be particularly important
when considering future cash flows and prospects. Cash flows relating to financing activities
will show how the financial structure has changed and this may be particularly important in
considering potential changes in the risk of the entity, and the associated changes in expected
returns.
20.2 Operating Investing Financing

(a) Dividends received* (d) Acquisition of plant (b) Dividends paid
(c) Interest paid* and equipment (e) Repayment of borrowings
(f) Borrowing costs* (i) Receipts from share issue
(g) Payments to suppliers (j) Payments to underwriters
(h) Payments to employees
* These expenses might also be treated as financing costs. That is, AASB 107 appears to provide some
discretion as to how some amounts might be disclosed.
20.3 The Objective of AASB 107 is identified in the accounting standard as:
The objective of this Standard is to require the provision of information about the
historical changes in cash and cash equivalents of an entity by means of a cash flow
statement which classifies cash flows during the period from operating, investing
and financing activities.
Cash and cash equivalents are defined in AASB 107 as follows:
Cash comprises cash on hand and demand deposits.
Cash equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant risk
of changes in value.
Paragraphs 7 and 8 of AASB 107 provide further relevant discussion:
Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan 201
7. Cash equivalents are held for the purpose of meeting short-term cash commitments
rather than for investment or other purposes. For an investment to qualify as a cash
equivalent it must be readily convertible to a known amount of cash and be subject
to an insignificant risk of changes in value. Therefore, an investment normally
qualifies as a cash equivalent only when it has a short maturity of, say, three months
or less from the date of acquisition. Equity investments are excluded from cash
equivalents unless they are, in substance, cash equivalents, for example in the case of
preferred shares acquired within a short period of their maturity and with a specified
redemption date.
8. Bank borrowings are generally considered to be financing activities. However, in

some countries, bank overdrafts which are repayable on demand form an integral
part of an entitys cash management. In these circumstances, bank overdrafts are
included as a component of cash and cash equivalents. A characteristic of such
banking arrangements is that the bank balance often fluctuates from being positive to
overdrawn.
20.4 The following are cash equivalents: deposits that are available at call (d); deposits on the
money market that are available at two months notice (e); and a bank overdraft (f).
20.5 The argument that cash-flow data might be more reliable than profit-related data is based on
the view that the determination of profits relies upon many professional judgements, such
that different teams of accountants would rarely calculate the same profit or loss figure for
the same entity. Profit can also be manipulated. By contrast, cash and cash equivalents are
more objectively determined and less susceptible to manipulation. However, it is debatable
whether cash-flow data is more relevant than profit-based data. This is a good opportunity to
consider the issue of relevance versus reliability.
20.6 This question will be useful for stimulating debate among students. Cash-flow data and
accounting-profit data serve different purposes. Arguably, in assessing financial performance,
accounting profits provide a superior measure. Profit takes into account the inflows and
outflows of economic benefits. Cash flows only consider inflows and outflows of cash and
cash equivalents. The flow of cash does not necessarily equate to inflow of net assets to an
entity. For example, we may sell land for cash at a price equal to its book value. Although
there is an inflow of cash, the net assets of the entity would remain unchanged. Nevertheless,
for determining the solvency and cash management of a reporting entity, a statement of cash
flows, and its supporting notes, is a useful complement to the income statement and balance
sheet.
20.7 Practical difficulties include:

(i) Obtaining the information
It may be difficult to extract non-cash flows/non-operating flows from the movements
in the account balances. For example, a payment received from a debtor may relate to
the proceeds from the sale of a non-current asset which does not relate to operating
activities.
(ii) Working out whether transactions relate to operating, investing or financing activities
AASB 107 requires that cash flows be appropriately classified. It will not always be
clear which category a cash flow belongs in.
(iii) Definition of cash equivalents
Cash equivalents are described as short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value. It can sometimes be difficult to determine what
constitutes a cash equivalent of a company. Consider the argument presented in the
newspaper article on page 701 of the textbook.
(iv) Reconciling the cash flows from operations with the net profit
Unless a systematic approach such as a spreadsheet is used, it is easy to omit relevant
items from the reconciliation.
In terms of its value to the statutory accounts

The cash flow statement provides information not available in other sections of the
financial report (directly or indirectly). An example is payments to suppliers and
employees. These disclosures may be useful to financial statement users.
The statement of cash flows shows the difference between cash flows and profits for the
entity and this information can be useful in evaluating the solvency of the business.
Information about past cash flows may be useful in forming predictions about future cash
flows. This would be of value when determining the value of the entity as a going concern.
Cash flow information may serve to summarise managements investment and financing
policies more clearly than balance sheet information.
A problem that may arise is that the cash flow statement is inconsistent with the accrual
basis of accounting used in the income statement and balance sheet. This may lead to
confusion for people without accounting backgrounds. There is, however, a note which
reconciles net profit with cash flows from operations.
Finally, it is debatable whether cash flows from operations, which is often used as a
measure of managerial performance, provides a better benchmark than profit, or say
funds from operations. Some argue that the application of the accrual concept, and
consideration of revenues earned and expenses incurred, is required for this purpose.
How many management performance measures rely on cash flows rather than
conventional accounting measures?
Thus, whilst cash flow statements are useful for reviewing the cash position of companies,
they must be reviewed carefully and in conjunction with other financial information.
20.8 (a) The sale of a non-current asset

The proceeds from the sale of a non-current asset would be disclosed as part of the
cash flows associated with investing activities. It is the cash flow which is relevant to
the statement of cash flows, not the gain or loss on sale as would be included in the
income statement. In the reconciliation of profit after tax with net cash provided from
operations, any gain on sale would need to be deducted from net profits (and any loss
on sale added).
(b) An increase in a provision for long-service leave

It is the actual payments related to the long-service leave entitlements which is
included in the statement of cash flows. The expense, to the extent it is accrued,
would not be the same as the cash flow. To determine the cash flow we would add the
long-service leave expense to the opening provision, from which we would then
deduct the closing provision. In providing the reconciliation of net profit with net
cash provided from operations, any increase in the provision would be added to net
profits after tax (and any decrease would be deducted).
(c) The acquisition of land by way of the issue of shares

This would be a non-cash transaction which would not be included in the statement of
cash flows. The Accounting Standard AASB 107 requires that information about
transactions and other events that do not result in any cash flows during the financial
year, but affect assets and liabilities that are recognised, must be disclosed in the notes
to the financial report where the transactions and other events involve parties external
to the entity; and relate to the financing or investing activities of the entity.
20.9 The Accounting Standard requires that the following be disclosed (by way of a note):
(i) information about transactions and other events that do not result in any cash flows
during the financial year but affect assets and liabilities that are recognised must be
disclosed in the financial report where the transactions or other events involve parties
external to the entity and relate to the financing or investing activities of the entity.
Specifically, paragraph 43 states:
Investing and financing transactions that do not require the use of cash or cash
equivalents shall be excluded from a cash-flow statement. Such transactions
shall be disclosed elsewhere in the financial report in a way that provides all the
relevant information about these investing and financing activities.
(ii) the policy adopted for determining which items are classified as cash and cash
equivalents in the statement of cash flows. Specifically, paragraph 46 of AASB 107
states:
In view of the variety of cash management practices and banking arrangements

around the world and in order to comply with AASB 101 Presentation of
Financial Statements, an entity discloses the policy which it adopts in
determining the composition of cash and cash equivalents.
(iii) a reconciliation of the amount of cash at the end of the financial year to the related
items in the balance sheet. Specifically, paragraph 45 of AASB 107 states:
An entity shall disclose the components of cash and cash equivalents and
shall present a reconciliation of the amounts in its cash-flow statement with
the equivalent items reported in the balance sheet.
(iv) a summary of the used and unused loan facilities of the entity and the extent to which
these can be continued or extended. Specifically, paragraph 50 of AASB 107 states:
Additional information may be relevant to users in understanding the

financial position and liquidity of an entity. Disclosure of this information,
together with a commentary by management, is encouraged and may
include:
(a)the amount of undrawn borrowing facilities that may be available for
future operating activities and to settle capital commitments, indicating
any restrictions on the use of these facilities;
(v) the amount of cash held that is not available for use and the nature of the restrictions
placed upon the use of the cash. Specifically, paragraph 48 of AASB 107 states:
An entity shall disclose, together with a commentary by management, the
amount of significant cash and cash equivalent balances held by the entity
that are not available for use by the group.
(vi) A reconciliation of cash flows arising from operating activities to profit or loss shall be
disclosed in the financial report.
20.10 (a) The main criticism is that the definition of cash and cash equivalents is too narrow
and should include bullion holdings.
(b) and (c)

Cash and cash equivalents are defined in AASB 107 as follows:
Cash comprises cash on hand and demand deposits.

Cash equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant
risk of changes in value.
To the extent that gold bullion is readily convertible to cash, then the criticism may be
valid. However, it is not clear from a reading of AASB 107 that gold bullion would
definitely have to be excluded from cash equivalents. The entity, however, would
need to be able to demonstrate that gold bullion is highly liquid, and is used in the
entitys cash management function on a day-to-day basis.
20.11 This question can be answered by using either the t-account approach or the equations
approach.
The following t-accounts are in $000
Sales Accounts receivable Provision for doubtful debts
A/c Op. A/c
Rec. 400 bal. 90 rec. 6 Op. bal. 9
Clos. Dd
Sales 400 Prov. dd 6 bal. 8 expense 5
Discounts 10 14 14
CASH 394
Clos. bal. 80
490 490
Alternatively, we can determine the cash flows from debtors using an equation, as shown
below.
Cash receipts from customers = $400 000 (Sales) + $90 000 (beginning receivables)
$80 000 (ending receivables) $6 000 (transfer from provision for doubtful debts which
equals opening balance of the provision plus the doubtful debts expense less the closing
balance of the provision) $10 000 (discounts that may have been given for early payment) =
$394 000.
approach.
Trade creditors Inventory

Disc. rev. 2 Op. bal. 40 Op. balance 10 COGS 60
Cash 83 Inventory 80 Trade creditors 80 Stock w/offs 5
Clos. bal. 35 Clos. bal. 25
120 120 90 90
If we adopt an equation method approach, cash payments to suppliers would be determined

as:
Cash payments to suppliers = 40 000 (opening accounts payable) 35 000 (closing accounts
payable) + 60 000 (cost of sales) + 25 000 (closing inventory) 10 000 (opening inventory)
2 000 (discounts given by suppliers) + 5 000 (stock write-offs) = 83 000.
approach.
Property, plant and equipment Accumulated depreciation

Op. balance 500 Disposal 40 Op. balance 200
Cash 280 Disposal 130 Deprec. exp 50
Clos. bal. 650 Clos. bal. 210
780 780 250 250
The original cost of the asset that was disposed is determined by adding the accumulated
depreciation pertaining to the asset ($40 000, as determined above) to the written down
value of the disposed asset ($90 000, which was provided in the question) to give an original
cost of $130 000.
If we adopt an equation method approach, cash payments to suppliers would be determined

as:
Cash payments = Closing balance of plant (650 000) opening balance of plant (500 000) +
original cost of asset sold (130 000) = 280 000
20.14 (i) Receipts from customers
We need to reconstruct the provision for doubtful debts and accounts receivable.
The cumulative entry to record sales would be:
Dr Accounts receivable 250 000

Cr Sales 250 000
The entry to record the doubtful debts expense would be:
Dr Doubtful debts expense 25 000

Cr Provision for doubtful debts 25 000
As the closing balance of doubtful debts decreased by $5000, $30 000 must have
been written off against debtors. A reconciliation of accounts receivable shows a cash
collection of $200 000:
Accounts receivable Provision for doubtful debts

Op. balance 250 Prov. dd 30 A/c rec. 30 Op. balance 35
Sales 250 CASH 200
Clos. bal. 270 Clos. bal. 30 Dd exp. 25
500 500 60 60
(ii) Purchases of inventory

XYZ Ltd commenced the period with $160 000 of inventory. After using $130 000
(COGS) it had a closing balance of $180 000. Given that there were no inventory
write-offs, this means that $150 000 of inventory must have been purchased.
Given that trade creditors had an opening balance of $190 000, there were purchases
of $150 000 (above), and there was a closing balance of $200 000, $140 000 must
have been paid in cash. This is shown in the following t-accounts.
Inventory Trade creditors

Op. bal. 160 COGS 130 CASH 140 Op. bal. 190
Trade creditors 150 Clos. bal. 180 Clos. bal. 200 Inv. 150
310 310 340 340
(iii) Accrued salaries

If the opening balance of accrued salaries was $18 000, salaries expenses totalled
$30 000, and the closing balance was $22 000, then $26 000, must have been paid.
Accrued salaries
CASH 26 Op. bal. 18
Clos. bal. 22 Salaries 30
48 48
At this stage we can now determine the total cash flows from operations as:
Receipts from customers 200 000

Payments to suppliers (140 000)
Payments for accrued expenses (26 000)
Interest payments (20 000)
14 000
Cash flows from investment activities
Plant and equipment
The journal entries for the disposal of the plant and equipment can be summarised as:
Dr Accum. depreciationplant and equip. 20 000

Cr Plant and equip. 20 000
As Plant increased by $10 000, $30 000 must have been acquired during the period
(this is given in the question), as reconciled below:
Accumulated depreciation Property, plant and equipment

Disposal 20 Op. bal. 30 Op. bal. 90 Disposal 20
Clos. bal. 20 Deprec. exp 10 CASH 30 Clos. bal. 100
40 40 120 120
Cash flows from investing, therefore, were:

Payment for property plant and equipment (30 000)
Cash flows from financing

A reconciliation of movements in share capital would show that there have been no
issues for cash.
The only cash flow from financing relates to $20 000 from long-term loans.
Hence, the total cash flows for the period can be represented as:
Opening cash balance 120 000

Cash from operations 14 000
Cash from investing (30 000)
Cash from financing 20 000
Closing cash balance 124 000
We are now able to present a cash flow statement for XYZ Ltd.
XYZ Limited
Statement of Cash Flows
for the year ended 30 June 2010
$000
Cash flows from operating activities
Receipts from customers 200

Payments to suppliers of goods and services, inclusive of labour (166)
Interest paid (20)
Net cash provided from operating activities (1) 14
Cash flows from investing activities

Payment for property, plant and equipment (2) (30)
Net cash used in investing activities (30)
Cash flows from financing activities
Proceeds from borrowings 20

Net cash from financing activities 20
Net increase in cash held 4
Cash at the beginning of the financial year 120
Cash at the end of the financial year 124
For XYZ, two notes must accompany the Cash Flow Statement, these being:
Note 1: Reconciliation of net cash provided by operating activities to net profit
$000
Net profit 35
Depreciation 10
Decrease in provision for doubtful debts (5)
Increase in accounts receivable (20)
Increase in inventories (20)
Increase in trade creditors 10
Increase in accrued expenses 4
Net cash provided from operating activities 14
Note 2: Reconciliation of cash
2010 2009
$000 $000
For the purposes of the statement of cash flows,
cash includes:
Cash 144 139
Bank overdraft 20 19
24 120
20.15
S Limited
for the Year Ended 30 June 2010
$000 $000

Payments to suppliers of goods and services, inclusive of
labour (1 356)
Interest paid (26)
Income taxes paid (182)
Net cash provided from operating activities (1) 344
Payment for property, plant and equipment (2) (288)

Proceeds from sale of plant 72
Net cash used in investing activities (216)

Note 1: Reconciliation of net cash provided by operating activities to net profit
$000
Net profit 264
Depreciation 216
Increase in provision for doubtful debts 24
Increase in income taxes payable 36
(Increase)/decrease in accounts receivable (144)
(Increase)/decrease in inventories (24)
Increase/(decrease) in trade creditors (24)
(Increase)/decrease in future income tax benefit (10)
Net cash provided from operating activities 344
Note 2: Non-cash financing and investing activities

During the financial year the economic entity also acquired land with an aggregate fair value
of $240 000 by means of issuing 240 000 fully paid $1 ordinary shares.
Workings:
In this question some expenses are transacted for on a cash basis (electricity, rates, and
interest). For those accounts which involve accruals, it is necessary to calculate the cash flow,
by taking into account the opening and closing accrual as well as the expense in the income
statement. This is done below.
(i) Receipts from customers

Debt write-off

As the closing balance of doubtful debts has only increased by $24 000, $72 000 must
have been written-off against debtors:
Provision for doubtful debts
Opening balance at 1/7/2009 72 000

Provided in the year 96 000
Written off against debtors (72 000)
Closing balance at 30/6/2010 96 000
Accounts receivable
The entry to record sales would be:
Dr Accounts receivable 2 124 000

Cr Sales 2 124 000
The cash received from sales is calculated as follows:
Accounts Receivable

Write-off against debtors (above) (72 000)
Sales 2 124 000
CASH received (1 908 000)
(ii) Purchases of inventory
S Ltd commenced the year with $216 000 of inventory. After using $576 000 of this
inventory it had a closing inventory balance of $240 000. This means that $600 000
must have been purchased.
Inventory account

Cost of sales (576 000)
Purchases 600 000
Trade creditors
Given that trade creditors had an opening balance of $192 000, there were purchases
of $600 000 (above), and there was a closing balance of $168 000, $624 000 must
have been paid in cash.
Trade creditors account

Purchases 600 000
CASH paid (624 000)
(iii) Accrued expenses

Salary and lease expenses were accrued prior to payment. If the opening balance of
accrued expenses was $24 000, salaries and lease rentals totalled $648 000, and the
closing balance was $30 000, then $642 000 must have been paid.
Accrued expenses account

Charged in the year 648 000
CASH paid (642 000)
(iv) Taxation
The profit before tax using accounting rules was $472 000. The taxable income for
the year (that is, the profit that is calculated using taxation rules) is calculated after
adding back to accounting profit the building depreciation of $48 000 (which is not
tax deductible in 2010 or any other yearit is a permanent difference). In
determining taxable income we also have to add back the doubtful debts expense and
then subtract the actual doubtful debts write-off against debtors (for tax purposes
only the write-off against debtors is deductible and not the actual doubtful debt
expense). Hence we are adding back $96 000 and subtracting $72 000 (that is, adding
back a net amount of $24 000 which is the increase in the provision). Taxable income
therefore is:
Accounting profit before tax 472 000

Building depreciation (a permanent difference) 48 000
Increase in provision for doubtful debts (a temporary difference) 24 000
Taxable income 544 000
There is a temporary difference caused due to the provision for doubtful debts and
this temporary difference creates a deferred tax asset. Using a tax rate of 40%, the
accounting entries to account for tax pursuant to AASB 112 (see Chapter 17) and to
the nearest $000 are:
Dr Income tax expense (40% of $544 000) 218 000
Cr Income tax payable 218 000
Dr Deferred tax asset (40% of $24 000) 10 000

Cr Income tax expense 10 000
Income tax payable

Charge for the year (see above) 218 000
CASH paid (182 000)
Closing balance 218 000
(v) Total cash flows from operations
Receipts from customers ((i) above) 1 908 000

Payments to suppliers of inventory ((ii) above) 624 000
Payments for accrued expenses ((iii) above) 642 000
Rates and electricity 90 000
Total payments to suppliers (1 356 000)
Interest payments (26 000)
Income taxes paid (182 000)
Total 344 000
(i) Land
A reconciliation of the movements in land shows that no land was acquired for cash.
There was a revaluation, and an exchange of shares in the company for land. The
entries would have been:
Dr Land 120 000

Cr Asset revaluation reserve 120 000
Dr Land 240 000
Cr Share capital 240 000
(ii) Plant and equipment
Dr CASH 72 000
Dr Accumulated depreciation 168 000
Cr Plant and equipment 240 000
As plant and equipment increased by $48 000, despite the disposal above, $288 000
must have been acquired in the year.
Accumulated depreciation

Charge in the year 168 000
Disposal (168 000)
Plant and equipment (Cost)

Acquisitions in the yearCASH 288 000
Disposals in the year (240 000)
Closing balance at 30/6/2010 1 008 000
(iii) Total cash flows from investing
Payment for property, plant and equipment ((ii) above) (288 000)
Proceeds from sale of plant ((ii) above) 72 000
Total (216 000)
A reconciliation of movements in share capital would show that there have been no issues for
cash.
The only cash flow from financing relates to $24 000 from long-term loans.
Total cash flow
Opening cash balance at 1/7/2009 422 000

Cash from operations 344 000
Cash from investing (216 000)
Cash from financing 24 000
Closing cash balance at 30/6/2010 574 000
20.16
T Pty Limited
for the Year Ended 30 June 2010
$000
Receipts from trade and other debtors 31 056

Payments to trade and other creditors and employees (30 136)
Interest paid (315)
Dividends received 51
Finance charges on finance lease (7)
Income tax paid (65)
Net cash flows from operating activities 584
Proceeds from sale of property, plant and equipment 20
Payments for non-trading investments (438)
Net cash flows from investing activities (418)
Repayment of borrowings (300)

Principal repayments under finance lease (5)
Net cash flows from financing activities (305)
Net decrease in cash held (139)
Note 1: Reconciliation of net cash flows from operating activities to net profit
Net profit 150

Depreciation 140
Increase in provision for doubtful debts 30
Increase in FITB (10)
Increase in trade debtors (243)
Increase in prepayments (115)
Increase in inventory (418)
Inventory written off 50
Increase in trade creditors 619
Increase in provision for tax 160
Increase in provision for warranty 314
Decrease in provision for employee entitlements (93)
Net cash flows from operating activities 584
Note 2: Non-cash financing and investing activities
During the year, the company acquired additional investmentsconsideration for the
purchase of the investment in associated company, Squash Pty Ltd, being 500 000 shares at
$1.50 each plus $250 000 in cash; and other investments acquired for $80 000 for
consideration of tennis equipment.
Plant and equipment, under finance lease, was acquired with a fair value of $25 000.
Workings:
Receipts from customers
We need to reconstruct the provision for doubtful debts and accounts receivable.
The cumulative entry to record sales would be:
Dr Accounts receivable 31 394

Cr Sales 31 394

As the closing balance of doubtful debts increased by $30 000, $5000 must have been
written-off against debtors. A reconciliation of accounts receivable shows a cash collection of
$31 056:
Provision for doubtful debts Accounts receivable

Op. balance 2 654 Prov. dd 5 A/c rec. 5 Op. balance 120
Sales 31 394 Bad debts 90
CASH 31 056
Clos. bal. 2 897 Clos. bal. 150 Dd exp. 35
34 048 34 048 155 155
Purchases of inventory
XYZ Ltd commenced the period with $2 486 000 of inventory. After using $28 205 000
(COGS), writing-off $50 000, and exchanging $80 000 for some investments, it had a closing
balance of $2 774 000. This means that $28 623 000 of inventory must have been purchased.
Given that trade creditors had an opening balance of $1 483 000, there were purchases of
$28 623 000 (above), and there was a closing balance of $1 637 0000, $28 469 000 must
have been paid in cash. This is shown in the following t-accounts.
Inventory Trade creditors

Op. balance 2 486 COGS 28 205 CASH 28 469 Op. bal. 1 483
Trade creds 28 623 Write-off 50
Investment 80
Clos. bal. 2 774 Clos. bal. 1 637 Inv. 28 623
31 109 31 109 30 106 30 106
Accrued expenses
Given the information in the question, it is assumed that rent is accrued to accruals. If the
opening balance of accruals is $1 110 000, rent expenses totalled $600 000, and the closing
balance was $1 575 000, then $135 000, must have been paid.
Accruals
CASH 135 Op. bal. 1 110
Clos. bal. 1 575 Salaries 600
1 710 1 710
Provision for employee entitlements
If the opening balance of the provision is $298 000, salary and wages expenses totalled
$1 324 000, and the closing balance was $205 000, then $1 417 000, must have been paid.
Provision for employee entitlements
CASH 1 417 Op. bal. 208
Clos. bal. 205 Salaries 1 324
1 622 1 622
It has been assumed that finance charges of $7000 were paid as incurred. It is not clear what
the prepayments relate to, but it will be assumed that they relate to some employee salaries.
Payments relating to taxation can be determined as:

Income tax paid:
Opening deferred tax asset 302
Closing deferred tax asset (312)
Opening provision for tax (83)
Closing provision for tax 243
Income tax expense (215)
Income tax paid (65)
At this stage we can now determine the total cash flows from operations as:
Payments to suppliers (28 469)*
Payments for accrued expenses (135)*
Employee-related payments (1 417)*
Prepayments (115)*
Finance charges (7)
Dividends 51
Tax payments (65)
Interest payments (315)
584
* These numbers are added together to give $30 136, which is shown on the statement of
cash flows.
Plant and equipment
Dr Accumulated depreciationplant and equipment 48

Dr CASH 20
Cr Plant and equipment 68
There was also a revaluation of plant and equipment. The entires to record the revaluation
would be:
Dr Accumulated depreciationplant and equipment 500

Cr Plant and equipment 500
Dr Plant and equipment 800
Cr Asset revaluation reserve 800
Accumulated depreciation Plant and equipment
Disposal 48 Op. bal. 548 Op. bal. 768 Disposal 68
P and E 500 Deprec. exp 100 ARR 800 Accum. dep 500
Clos. bal. 100 Lease 25 Clos. bal. 1 025
648 648 1 593 1 593
Therefore, no plant and equipment was acquired for cash. There were some acquisitions of
investments during the period. Acquisition of investments would be recorded as follows:
Dr Investment in associate 1 050

Cr Cash 250
Cr Provision for deferred payment 50
Cr Share premium reserve 250
Cr Paid-up capital 500
The account investments increased from $948 000 to $1 216 000. This increase is partly
explained by the acquisition financed by the $80 000 of tennis equipment (see Additional
information part (i)). The balance of the increase ($188) is assumed to have been acquired
for cash. This gives total cash acquisition of investments of $438 000.
Cash flows from investing were:
Proceeds from sale of property plant and equipment 20 000

Payment for investments (438 000)
(418 000)
Repayment of borrowings
Opening (3 800)
Closing 3 500
(300)
Principal repayment under finance lease

Opening (25)
Closing 20
5
20.17 Cash flows from operating activities
1. Cash receipts from customers
Accounts receivable
Opening balance 60 CASH 80
Sales 60 Provision for doubtful debts 4
Closing balance 36
120 120
Provision for doubtful debts

Accounts receivable 4 Opening balance 8
Closing balance 12 Expense 8
16 16
2. Cash payments for inventory
Inventory
Opening balance 52 Cost of goods sold 40
Accounts payable 80 Closing balance 92
132 132
Accounts payable
CASH 80 Opening balance 60
Closing balance 60 Inventory 80
140 140
3. Expense provisions/accrued expenses
Accrued wages
Closing balance 20 Wages 20
36 36
Accrued employee entitlements

(provision for annual leave)
Closing balance 8 Employee entitlements 16
28 28
Therefore, total cash flows from operating activities:
From customers 80
Payments to employees (16 + 20) (36)
Payments to suppliers (80)
Interest received 4
(32)
Cash flows from investing activities.
Accumulated depreciation
Disposal 4 Opening balance 20
Closing balance 36 Expense 20
40 40
Property, plant and equipment

Opening balance 120 Disposal 24
Asset revaluation reserve 20 Closing balance 156
CASH 40
180 180
To determine the original cost of the asset disposed, we are told that the property had a
written-down value of $20 000. From the above t-account analysis we have determined that
the accumulated depreciation related to the disposed asset was $4000. Therefore, its original
cost must have been $24 000. As the property had a written-down value of $20 000, and as
Cabarita Ltd recorded a profit on sale of $8000, it must have received $28 000 from the
disposal. Therefore, total cash flows from investing activities:
From sale of plant 28

Acquisition of plant (40)
(12)
In the absence of any information to the contrary, it must be assumed that the increase in
share capital of $120 000 was received in cash. There were also additional borrowings of
$60 000.
Having considered the cash flows associated with the operating, investing and financing
activities we are now in a position to compile the statement of cash flows.
Cabarita Ltd
for the year ended 30 June 2010
$000 $000
Receipts from customers 80

Payments to suppliers (80)
Payments to employees (36)
Interest received 4
Net cash provided by operating activities (note 1) (32)
Proceeds from sale of plant 28

Acquisition of plant (40)
Net cash from investing activities (12)
Proceeds from share issue 120

Cash at the beginning of the year (note 2) (40)
Cash at the end of the year 96
To comply with AASB 112, a number of supporting notes are also required.
Note 1: Reconciliation of net cash provided by operating activities and net profit.
Operating profit after tax (32)

add/(subtract)
Depreciation expense 20
Increase in receivables 24
Profit on sale of property plant and equipment (8)
Increase in inventories (40)
Decrease in annual leave provision (4)
Increase in provision for doubtful debts 4 0
Cash flows from operating activities (32)
Note 2: Reconciliation statement for cash as shown in the statement of cash flows.
Cash at the end of the year as shown in the statement of cash flows is reconciled to the
related items in the statement of financial position as follows:
2010 2009
$000 $000
Cash per statement of financial position 96
Bank overdraft per statement of financial position (40)
Cash as year end per statement of cash flows 96 (40)
Note 3: Accounting policy note

In the statement of cash flows, cash includes cash at bank and bank overdraft.
Note 4: Details of credit standby arrangements and used/unused loan facilities

This is a required note. For Cabarita Ltd there are no such facilities.
Note 5: Details of non-cash financing and investing activities

This is a required note. For Cabarita Ltd there were no such transactions.
20.18
(a) Cook the books is an expression that has been used for many years and means that
somebody has manipulated the accounting records so as to generate a predetermined
or desired result. Somebody who is involved in such an action is clearly not being
objective and hence is ignoring one of the fundamental principles of accounting. One
of the primary qualitative characteristics of accounting is reliability (which requires,
amongst other things, that the accounting process is free from bias) and hence
cooked books would not satisfy this expectation. Because many people might use
financial reports for various decisions (including retirees who are electing to invest
their savings), such an action as cooking the books is to be deplored.
(b) A reader of financial reports does not have access to the underlying records, and
hence, it would not generally be possible to determine that the books have been
cooked. Indeed, those people involved in manipulating the financial reports would
perform the manipulation in a way such that any manipulation would be very difficult
to detect. Often manipulation only becomes evident when a company subsequently
gets into financial difficulty and further investigation is performed. One safeguard,
which certainly is not infallible, is the appointment of external auditors. A large
company like Harris Scarf would have auditors appointed who are required to
provide a report about whether the financial reports comply with accounting
standards and other generally accepted accounting principles. Ideally, the auditors
work should uncover any material deviations from accepted accounting principles.
However, the auditor does not check the accuracy of every accounting entry (much
sampling and professional judgement is involved) and hence any cooking of the
books will not always come to light.
(c) It is certainly more difficult to be creative in relation to the statement of cash flows
than it is in relation to the statement of financial position or the statement of financial
performance. The statement of financial position and the statement of financial
performance are generated as a result of accrual accounting, which requires much
estimation and professional judgement. The statement of cash flow, however,
provides a reconciliation of opening and closing cashboth of which are fairly
hard numbers which are not heavily based on judgement (there might be some
argument about whether something constitutes cash, but such arguments would
generally be limited) and which can be traced directly and fairly easily to records
provided by external parties, such as banks. There is some possibility of manipulating
the categorisation of certain cash flows (for example, classifying a cash flow as
relating to ordinary operations rather than investment activities), and perhaps
nominating something as cash when it should not bebut the ability to do this is
typically very limited.

Deegan 5e Ch20 - CF

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Deegan 5e Ch20 - CF

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PART 5: ACCOUNTING FOR THE DISCLOSURE OF CASH FLOWS

20.2 Operating Investing Financing

Cash and cash equivalents are defined in AASB 107 as follows:

Cash comprises cash on hand and demand deposits.

Paragraphs 7 and 8 of AASB 107 provide further relevant discussion:

8. Bank borrowings are generally considered to be financing activities. However, in

20.7 Practical difficulties include:

In terms of its value to the statutory accounts

20.8 (a) The sale of a non-current asset

(b) An increase in a provision for long-service leave

(c) The acquisition of land by way of the issue of shares

In view of the variety of cash management practices and banking arrangements

Additional information may be relevant to users in understanding the

(b) and (c)

Cash comprises cash on hand and demand deposits.

Trade creditors Inventory

If we adopt an equation method approach, cash payments to suppliers would be determined

The following t-accounts are in $000

Property, plant and equipment Accumulated depreciation

If we adopt an equation method approach, cash payments to suppliers would be determined

Dr Accounts receivable 250 000

The entry to record the doubtful debts expense would be:

Dr Doubtful debts expense 25 000

Accounts receivable Provision for doubtful debts

(ii) Purchases of inventory

Inventory Trade creditors

(iii) Accrued salaries

Receipts from customers 200 000

Dr Accum. depreciationplant and equip. 20 000

Accumulated depreciation Property, plant and equipment

Cash flows from investing, therefore, were:

Cash flows from financing

Opening cash balance 120 000

Receipts from customers 200

Cash flows from investing activities

Net cash used in investing activities (30)

Cash flows from financing activities

Proceeds from borrowings 20

Note 1: Reconciliation of net cash provided by operating activities to net profit

Note 2: Reconciliation of cash

Cash flows from operating activities

Cash flows from investing activities

Payment for property, plant and equipment (2) (288)

Cash flows from financing activities

Proceeds from borrowings 24

Note 1: Reconciliation of net cash provided by operating activities to net profit

Note 2: Non-cash financing and investing activities

Cash flows from operating activities

(i) Receipts from customers

Dr Doubtful debts expense 96 000

Provision for doubtful debts

Opening balance at 1/7/2009 72 000

The entry to record sales would be:

Dr Accounts receivable 2 124 000

The cash received from sales is calculated as follows:

Opening balance at 1/7/2009 528 000

(ii) Purchases of inventory

Opening balance at 1/7/2009 216 000

Opening balance at 1/7/2009 192 000

(iii) Accrued expenses

Opening balance at 1/7/2009 24 000

Accounting profit before tax 472 000