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.

The ‘objective’ of AASB 107 is identified in the Accounting Standard as:

Information about the cash flows of an entity is useful in providing users of
financial statements with a basis to assess the ability of the entity to generate
cash and cash equivalents and the needs of the entity to utilise those cash flows.
The economic decisions that are taken by users require an evaluation of the
ability of an entity to generate cash and cash equivalents and the timing and
certainty of their generation.
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 statement of cash flows 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:
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 entity’s 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.
 (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 statement of comprehensive income. 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 statements where
the transactions and other events involve parties external to the entity; and
relate to the financing or investing activities of the entity.

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
Accounts 400 Op. balance 90 Allowance for 6
receivable doubtful debts
Sales 400 Discounts 10
Cash 394
Closing 80
balance
400 490 490

Allowance for doubtful debts

Accounts receivable 6 Op. bal. 9
Clos. bal. 8 Doubtful 5
debts expense
14 14
 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) – $6000 (transfer from allowance for doubtful debts
which equals opening balance of the allowance plus the doubtful debts expense less
the closing balance of the allowance) – $10 000 (discounts that may have been given
for early payment) = $394 000.

This question can be answered by using either the t-account approach or the equations
approach.
The following t-accounts are in $000
Accounts payable Inventory
Disc. rev. 2 Op. bal. 40 Op. balance 10 COGS 60
Cash 83 Inventory 80 Accounts 80 Stock w/offs 5
payable
Closing 35 Closing 25
balance balance
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) – 2000 (discounts given by suppliers) + 5000 (stock write-offs) =
83 000.

This question can be answered by using either the t-account approach or the equations
approach.
The following t-accounts are in $000
Property, plant and equipment Accumulated depreciation
Op. balance 500 Disposal 40 Op. 200
balance
Cash 280 Disposal 130 Deprec. 50
exp
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 carrying amount of the disposed asset ($90 000, which was provided in the
question) to give an original cost of $130 000. Because a gain of $20 000 was made
on disposal of property, plant and equipment, $110 000 must have been received for
the disposed asset ($90 000 + $20 000).
If we adopt an equation method approach, cash payments to suppliers of the property,
plant and equipment 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

Receipts from customers

We need to reconstruct the allowance 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 Allowance for doubtful debts 25 000
As the closing balance of allowance for 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 Allowance for doubtful debts
Op. balance 250 Allow. 30 A/c rec. 30 Op. balance 35
for d.d.
Sales 250 Cash 200
Clos. bal. 270 Clos. bal. 30 D.debts 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 accounts payable 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 Accounts payable
Op. bal. 160 COGS 130 Cash 140 Op. bal. 190
Accounts 150 Clos. bal. 180 Clos. bal. 200 Inv. 150
payable
310 310 340 340
(iii) Accruedsalaries
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. depreciation—plant and equip. 20 000
Cr Plant and equipment 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 statement of cash flows for XYZ Ltd.
XYZ Limited
Statement of cash flows
for the year ended 30 June 2020
$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 statement of cash flows, these being:
Note 1: Reconciliation of net cash provided by operating activities to net
profit (optional)
$000
Net profit 35
Depreciation 10
Decrease in allowance for doubtful debts (5)
Increase in accounts receivable (20)
Increase in inventories (20)
Increase in accounts payable 10
Increase in accrued expenses 4
Net cash provided from operating activities 14
 Note 2: Reconciliation of cash
2020 2019
$000 $000
For the purposes of the statement of cash flows, cash includes:
Cash 144 139
Bank overdraft 20 19
124 120

S Limited
Statement of cash flows
for the year ended 30 June 2020
$000 $000
Cash flows from operating activities
Receipts from customers 1 908
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
Cash flows from investing activities
Payment for property, plant and equipment (2) (288)
Proceeds from sale of plant 72
Net cash used in investing activities (216)
Cash flows from financing activities
Proceeds from borrowings 24
Net cash from financing activities 24
Net increase in cash held 152
Cash at the beginning of the financial year 422
Cash at the end of the financial year 574
Note 1: Reconciliation of net cash provided by operating activities to net profit (optional)
$000
Net profit 264
Depreciation 216
Increase in allowance for doubtful debts 24
Increase in income taxes payable 36
(Increase)/decrease in accounts receivable (144)
(Increase)/decrease in inventories (24)
Increase/(decrease) in accounts payable (24)
Increase in accrued expenses 6
(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 statement of comprehensive income. This is done below.
Cash flows from operating activities
(i) Receipts from customers
Debt write-off
The entry to record the doubtful debts expense would be:
Dr Doubtful debts expense 96 000
Cr Allowance for doubtful debts 96 000

As the closing balance of allowance for doubtful debts has only increased by
$24 000, $72 000 must have been written-off against debtors:
Allowance for doubtful debts
Opening balance at 1 July 2019 72 000
Provided in the year 96 000
Written off against debtors (72 000)
Closing balance at 30 June 2020 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
Opening balance at 1 July 2019 528 000
Write-off against accounts receivable (above) (72 000)
Sales 2 124 000
Cash received (1 908 000)
Closing balance at 30 June 2020 672 000

(ii) Purchases of inventory

S Ltd commenced the year with $216 000 of inventory. After using $576 000
of this inventory (cost of sales) it had a closing inventory balance of $240 000.
This means that $600 000 must have been purchased.
Inventory account
Opening balance at 1 July 2019 216 000
Cost of sales (576 000)
Purchases 600 000
Closing balance at 30 June 2020 240 000

Accounts payable
Given that accounts payable 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.
Accounts payable account
Opening balance at 1 July 2019 192 000
Purchases 600 000
Cash paid (624 000)
Closing balance at 30 June 2020 168 000

(iii) expenses
Accrued
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
Opening balance at 1 July 2019 24 000
Charged in the year 648 000
Cash paid (642 000)
Closing balance at 30 June 2020 30 000
(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 2020 or any other year—it 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 accounts receivable (for tax purposes only the write-off
against accounts receivable 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 allowance).
Taxable income therefore is:
Accounting profit before tax 472 000
Building depreciation (a permanent difference) 48 000
Increase in allowance for doubtful debts (a temporary difference) 24 000
Taxable income 544 000

There is a temporary difference caused due to the allowance 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 18) 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

Opening balance at 1 July 2019 182 000
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
 Cash flows from investment activities
(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. After considering the tax implications of the revaluation, the entries
would have been:
Dr Land 120 000
Cr Revaluation surplus 120 000
Dr Revaluation surplus 48 000
Cr Deferred tax asset (120 000 x 0.4) 48 000
Dr Land 240 000
Cr Share capital 240 000

(ii) Plant and equipment

The journal entries for the disposal of the plant and equipment can be
summarised as:
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. There was no gain or loss on
sale as the sale proceeds of $72 000 equalled the carrying amount.
Accumulated depreciation
Opening balance at 1 July 2019 96 000
Depreciation expense for the year 168 000
Disposal (168 000)
Closing balance at 30 June 2020 96 000

Plant and equipment (cost)

Opening balance at 1 July 2019 960 000
Acquisitions in the year—cash 288 000
Disposals in the year (240 000)
Closing balance at 30 June 2020 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)
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 $24 000 from long-term loans.
Total cash flow
Opening cash balance at 1 July 2019 422 000
Cash from operations 344 000
Cash from investing (216 000)
Cash from financing 24 000
Closing cash balance at 30 June 2020 574 000