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ACCT5001 S1 2010

Self-Study Solutions

Week 12

ACCT5001 S1 2010

Self-Study Solutions

Week 12

Ch.11: Q2, Q3, Q5, Q7, PSA11.4, PSA11.5*, PSA11.9 2. The three activities are: Operating activities include the cash effects of revenue generating activities (such as the provisions of goods and services) and activities that are not classified as financing or investing activities. Investing activities include: (a) (b) acquiring and disposing of investments and productive long-lived assets lending money and collecting loans. Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers 3. Significant non-cash financing and investing activities must be disclosed in notes to the financial statements so that users of financial reports are informed about all of the entitys financing and investing activities, and not only those involving cash. For operating expenses For interest For income taxes Net cash provided by operating activities 5. The advantage of the direct method is that it presents the major categories of cash receipts and cash payments in a format that is similar to the income statement and familiar to statement users. Its principal disadvantage is that the necessary data can be expensive and time-consuming to accumulate, although with advances in computers and information technology, this cost is of declining significance. $199,000 (2) 18,500 (3) 2,000 7,000 (4) 226,500 $9,500 $236,000 (1) PROBLEM SET A 11.4 (a) OReilly Ltd Statement of Cash Flows for the year ended 31 December 2009

Financing activities include: (a) obtaining cash from issuing debt and repaying the amounts borrowed

(b) obtaining cash from shareholders and providing them with a return on their investment (paying dividends).

Cash flows from investing activities: Sale of equipment Net cash provided by investing activities 8,500 8,500

The advantage of the indirect method is its reconciliation of profit to net cash provided by operating activities, while its primary disadvantage is the difficulty in understanding the adjustments that comprise the reconciliation.

Cash flows from financing activities: Redemption of debentures Issue of shares (6,000) 4,000 (2,000) (4,000)

7.

A number of factors could have caused an increase in cash despite the loss for the period. These are: (1) (2) (3) (4) high cash revenues relative to low cash expenses sales of property, plant, and equipment sales of investments issue of debt or shares for cash.

Payment of dividends Net cash used by financing activities

Net increase in cash Cash at beginning of period Cash at end of period

14,000 15,000 $29,000

ACCT5001 S1 2010 Week 12 Self-Study Solutions.doc 23/05/2010

ACCT5001 S1 2010 Week 12 Self-Study Solutions.doc 23/05/2010

ACCT5001 S1 2010

Self-Study Solutions

Week 12

ACCT5001 S1 2010 (b)

Self-Study Solutions

Week 12

OReilly Ltd Computations: (1) Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers $250,000 (14,000) $236,000 Reconciliation of profit to cash provided by operating activities. Cash flows from operating activities: Profit (2) Cash payments to suppliers: Cost of goods sold Deduct: Decrease in inventory Cost of purchases Deduct: Increase in accounts payable Cash payments to suppliers $210,000 (10,000) 200,000 (1,000) $199,000 Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Increase in accounts receivable Decrease in income taxes payable Decrease in inventory Increase in accounts payable (3) Cash payments of operating expenses: Operating expenses Deduct: Depreciation * Cash payments for operating expenses $24,000 (5,500) $18,500 (c) (1) Net cash provided by operating activities $5,500 (14,000) (3,000) 10,000 1,000 (500) $9,500 $10,000 Note to Statement of cash flows for the year ended 31 December 2009

$9,500 $33,000 * $34,000 * * 0.284 : 1 [ Per Part (a)] 2


*$25,000 + $8,000 **$26,000 + $3,000 + $5,000

(4)

Cash payments for income taxes: Income tax expense Add: Decrease in income taxes payable $4,000 3,000 $7,000 (3) (2)

$9,500 $250,000 = 3.8%

Cash payments for income taxes

$9,500

$66,000 * $61,000 * * 0.15 times 2


**$26,000 + $3,000+ $5,000 + $27,000

*Accumulated Depreciation Equipment sold 9,500 Balance, Beginning of year Depreciation Expense Closing Balance 20,000 29,500 Opening Balance 29,500 20,000 24,000 5,500 (d)

*$25,000 + $8,000 + $33,000

The ratios calculated in part (c) suggest that OReilly Ltds cash generated from operating activities in 1 year is 28.4% of its short term obligations. It generates enough cash in 1 year from operating activities to meet 28.4% of the obligations that are due within 1 year and its cash generated from operating activities is 15% of its total liabilities. It would appear that OReilly Ltd may have to liquidate some of its productive assets in order to meet its short term obligations.

ACCT5001 S1 2010 Week 12 Self-Study Solutions.doc 23/05/2010

ACCT5001 S1 2010 Week 12 Self-Study Solutions.doc 23/05/2010

ACCT5001 S1 2010

Self-Study Solutions

Week 12

ACCT5001 S1 2010

Self-Study Solutions

Week 12

PROBLEM SET A 11.5* (a) Tasman Oak Ltd Statement of Cash Flows for the year ended 31 March 2010 (1) Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses For income taxes For interest Net cash provided by operating activities $100,410 (2) 15,110 (3) 7,000 2,230 (124,750) 159,450 (3) Cash flows from investing activities: Purchase of investments Sale of machinery Purchase of machinery Net cash used by investing activities (14,000) 1,500 (85,000) (97,500) Cash payments for operating expenses Cash payments for operating expenses: Operating expenses excluding depreciation Add: Increase in prepaid expenses Decrease in accrued expenses payable $2,400 $12,410 $284,200 (1) (2) Cash payments to suppliers: Cost of goods sold Add: Increase in inventory Cost of purchases Deduct: Increase in accounts payable Cash payments to suppliers $115,460 9,650 125,110 (24,700) $100,410 $342,000 (57,800) $284,200 Computations:

300

2,700 $15,110

Cash flows from financing activities: Issue of shares Redemption of debentures Payment of cash dividends Net cash used by financing activities 35,000 (15,000) (22,350) (2,350)

Net increase in cash Cash at beginning of period Cash at end of period

59,600 38,400 $98,000

ACCT5001 S1 2010 Week 12 Self-Study Solutions.doc 23/05/2010

ACCT5001 S1 2010 Week 12 Self-Study Solutions.doc 23/05/2010

ACCT5001 S1 2010

Self-Study Solutions

Week 12

ACCT5001 S1 2010

Self-Study Solutions

Week 12

PROBLEM SET A 11.9 (b) Tasman Oak Ltd Note to Statement of Cash Flows (Indirect method) for the year ended 31 March 2010 (a) WA Manufacturing Pty Ltd Statement of Cash Flows for the year ended 30 June 2011

Reconciliation of profit to cash provided by operating activities. Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Loss on sale of machinery Increase in accounts receivable Increase in inventory Increase in accounts payable Decrease in accrued expenses payable Increase in prepaid expenses Net cash provided by operating activities $46,500 7,500 (57,800) (9,650) 24,700 (300) (2,400) 8,550 $159,450 $150,900

Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses For income taxes For interest Net cash provided by operating activities $114,290 (2) 21,400 (3) 7,270 5,440 148,400 $121,800 $270,200 (1)

Cash flows from investing activities: Sale of investments Sale of plant and equipment Purchase of plant and equipment Net cash used by investing activities 2,400 15,550 (92,000) (4) (74,050)

Cash flows from financing activities: Proceeds from issue of shares Proceeds from issue of debentures Payment of cash dividends Net cash provided by financing activities Net increase in cash Cash at beginning of period Cash at end of period 50,000 30,000 (80,000) nil 47,750 47,250 $95,000

ACCT5001 S1 2010 Week 12 Self-Study Solutions.doc 23/05/2010

ACCT5001 S1 2010 Week 12 Self-Study Solutions.doc 23/05/2010

ACCT5001 S1 2010

Self-Study Solutions

Week 12

ACCT5001 S1 2010

Self-Study Solutions

Week 12

Computations:

(b) WA Manufacturing Pty Ltd

(1)

Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers $300,000 (29,800) $270,200

Note to Statement of Cash Flows (Indirect Method) For the year ended 30 June 2011

Reconciliation of profit to cash provided by operating activities. (2) Cash payments to suppliers: Cost of goods sold Add: Increase in inventory Cost of purchases Deduct: Increase in accounts payable Cash payments to suppliers (3) Cash payments for operating expenses: Operating expenses Add: Decrease in accrued expenses payable Cash payments for operating expenses $14,670 6,730 $21,400 $99,460 19,250 118,710 (4,420) $114,290 Cash flows from operating activities: Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Gain on sale of equipment Increase in accounts receivable Increase in inventory Increase in accounts payable Decrease in accrued expenses payable Net cash provided by operating activities $49,700 (8,750) (29,800) (19,250) 4,420 (6,730) (10,410) $121,800 $132,210

(4) Plant and Equipment Balance, Beginning of year Cash (purchase of equipment) 205,000 Equipment sold 92,000 Closing Balance 47,000 250,000

297,000 Opening Balance 250,000

297,000

ACCT5001 S1 2010 Week 12 Self-Study Solutions.doc 23/05/2010

ACCT5001 S1 2010 Week 12 Self-Study Solutions.doc 23/05/2010

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