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CHAPTER 12STATEMENT OF CASH FLOWS QUESTIONS1. Though the profit and loss statement provides information about an enterprise's financial performance during a period, it does not show the cash generated through an enterprise's operations because earnings are measured by accrual accounting. The balance sheet provides information about an enterprise's asset and how these assets have been financed by owned and borrowed funds at a point of time, but it does not explain the changes during a period in assets, obligations, and owner's equity resulting from an enterprise's activities. Therefore, a statement providing information on the major sources of cash receipts and cash outlays is needed. 2. Cash equivalents are short-term, highly liquid investments, including Treasury bills, certificates of deposit, commercial paper, and money market deposits. 3. The primary purpose of the statement of cash flows is to provide relevant information about the cash receipts and cash payments of an enterprise during a period. 4. The information in the statement of cash flows will help financial statement users to assess the amounts, timing, and uncertainty of prospective cash flows to the enterprise. The statement of cash flows is useful to investors, lenders, analysts, and others in assessing an enterprise's liquidity, financial flexibility, profitability, and risk. It also provides a feedback about previous assessments of these factors. 5. Cash flows are classified into three categories: Operating, Investing, Financing activities. Examples for each category are as follows: Operating activities : Cash receipts from customers for sale of goods and services and cash payments to suppliers for purchase of materials. Investing activities: Cash receipts from collections of loans and cash payments for disbursements of loans. Financing activities: Proceeds from issuing equity instruments and payment of dividends. 6. Although non cash transactions do not result in cash inflows or outflows in the period in which they occur, they generally have a significant effect on the prospective cash flows of a company. For example, conversion of debt to equity will eliminate payments of interest on the debt and a finance lease obligation requires future lease payments in cash. Therefore, information about major non cash investing and financing activities is usually provided in a note or schedule to the statement of cash flows. 7. The direct method shows major classes of operating cash receipts and payments, such as cash received from customers, cash paid to suppliers and employees, and income taxStatement of Cash Flows Chapter 12 p.1

paid, the sum of which is net cash flow from operating activities. The indirect method starts with net profit and adjusts it for revenue and expense items that did not involve operating cash receipts or cash payments in the current period to arrive at net cash flow from operating activities. Both methods result in the same figure of net cash flow from operating activities. 8. Possible sources of the difference include: increase in debtors, increase in inventory, gain on sale of fixed assets or investments, decrease in creditors, and decrease in bills payable. 9. Classification of items: a. b. c. d. e. A cash outflow from financing activities. A cash inflow from investing activities. A cash outflow from financing activities. A cash inflow from investing activities. A part of the sale price of related investments, hence a cash inflow from investing activities, Under the indirect method, the gain is deducted from net profit. f. Does not involve any cash flow. g. A part of the cash outflow for redemption of debentures, hence a cash outflow from financing activities. Under the indirect method, the gain is deducted from net profit.

10. Adjustment of items: a. b. c. d. e. f. Add to net profit. Deduct from net profit. Deduct from net profit. Add to net profit. Add to net profit. Add to net profit.

11. The sale price of Rs 29,000 will appear as a cash inflow in the investing activities section of the statement of cash flows. 12. None of a, b, and c involves any cash inflow or outflow. All of them will be shown in the supplemental schedule of non-cash transactions. 13. Possible reasons include: increase in debtors , increase in inventory, decrease in creditors, decrease in bills payable, net purchase of plant and machinery, net of purchase of investments, payment of dividends, and redemption of debentures. 14. If the sum of net cash flows from investing and financing activities is negative and it exceeds net cash flow from operating activities, it can be generally inferred that shortterm, operating cash flows have been used for long-term purposes.

p.2 Instructor's Manual to Accompany Financial Accounting: A Managerial Perspective 2/e

EXERCISESExercise 12.1: Classification of Activities a. None of the above. b. Financing activity. c. Investing activity. d. Investing activity. e. Non cash activity. f. Financing activity. g. Investing activity. h. Financing activity. i. Investing activity. j. Operating activity, extraordinary item. k. Operating activity. l. Non cash activity. m. Financing activity.

Exercise 12.2: Classification of Activities a. None of the above. b. Operating activity. c. Non cash activity. d. Operating activity. e. Operating activity. f. Operating activity. g. None of the above. h. Non cash activity. i. Non cash activity. j. Financing activity. k. None of the above. l. Non cash activity. m. Operating activity.

Exercise 12.3: Determining Net Cash Flow from Operating ActivitiesDirect Method Praveen Company Cash Flow from Operating Activities For the Year Ended December 31, 20X5 Cash Flow from Operating Activities Cash Received from Customers (1) Rs 4,74,000 Cash Paid to Suppliers and Employees (2) (2,71,000) Income Tax Paid (3) (56,000) Net Cash Provided by Operating Activities

Rs 1,47,000

(1) (25,000 + 4,36,000 + 78,000 49,000 16,000). (2) (2,69,000 + 61,000 43,000 7,000 + 62,000 + 51,000 + 3,000 67,000 39,000 19,000). (3) (53,000 + 14,000 11,000). Exercise 12.4: Determining Net Cash Flow from Operating ActivitiesIndirect Method Ajay Company Cash Flow from Operating Activities For the Year Ended December 31, 20X7 Cash Flow from Operating Activities Net Profit Adjustments to Reconcile Net profit to Cash Flow from Operating Activities Depreciation Expense 49,000 Gain on Sale of Investments (8,000) Decrease in Inventory 13,000 Increase in Debtors (33,000)

Rs 3,40,000

Statement of Cash Flows Chapter 12 p.3

Increase in Prepaid Expenses Increase in Creditors Decrease in Income Tax Payable Total Adjustments Net Cash Provided by Operating Activities

(11,000) 4,000 (6,000) 8,000 3,48,000

Exercise 12.5: Determining Net Cash Flow from operating ActivitiesDirect Method Abhijit Company Cash Flow from Operating Activities For the Year Ended December 31, 20X5 Cash Flow from Operating Activities Cash Received from Customers (1) Rs 7,20,000 Cash Paid to Suppliers and Employees (2) (5,98,000) Income Tax Paid (3) (52,000) Net Cash Provided by Operating Activities

Rs 70,000

(1) (7,29,000 + 92,000 97,000 4,000). (2) (4,85,000 + 56,000 45,000 29,000 + 68,000 + 81,000 + 74,000 + 21,000 57,000 41,000 15,000). (3) (67,000 + 33,000 48,000). Exercise 12.6: Determining Net Cash Flow from Operating ActivitiesIndirect Method Dutt Company Cash Flow from Operating Activities For the Year Ended December 31, 20X2 Cash Flow from Operating Activities Net Profit Adjustments to Reconcile Net Profit to Cash Flow from Operating Activities Depreciation Expense Rs 67,000 Provision for Doubtful Debts 15,000 Gain on Sale of Investments (12,000) Dividend from Subsidiaries (3,000) Loss on Sale of Plant & Machinery 8,000 Increase in Inventory (14,000) Increase in Debtors (28,000) Increase in Prepaid Expenses (3,000) Increase in Creditors 21,000 Interest Income (9,000) Interest Expense 11,000 Decrease in Bills Payable (44,000) Decrease in Income Tax Payable (7,000) Total Adjustments Net Cash Provided by Operating Activities

Rs 89,000

2,000 91,000

p.4 Instructor's Manual to Accompany Financial Accounting: A Managerial Perspective 2/e

Exercise 12.7: Determining Net Cash Flow from Investing Activities Haveli Company Cash Flow from Operating Activities For the Year Ended March 31, 20X7 Cash Flow from Investing Activities a. Purchase of Investments Rs (65,000) b. Proceeds from Sale of Investments 34,000 c. Purchase of Plant & Machinery (1,58,000) d. Construction of Building (78,000) e. Proceeds from Sale of Plant and Machinery 52,000 Net Cash Used in Investing Activities Exercise 12.8: Determining Net Cash Flow from Financing Activities Supra Corporation Cash Flow from Operating Activities For the Year Ended November 30, 20X9 Cash Flow from Financing Activities a. Dividend Paid Rs (12,000) b. Redemption of Secured Debentures (47,000) c. Payment of Unsecured Loans (21,000) d. Proceeds from Issuance of Secured Convertible 1,70,000 Debentures Net Cash Provided by Financing Activities Item e is a non cash transaction to be shown in a supplement schedule. Exercise 12.9: Preparing the Statement of Cash Flows Sikandar Company Statement of Cash Flows For the Year Ended March 31, 20X4 Cash Flow from Operating Activities Cash Received from Customers (1) Rs 9,20,000 Cash Paid to Suppliers and Employees (2) (7,75,000) Income Tax Paid (3) (68,000) Net Cash Provided by Operating Activities Cash Flow from Investing Activities Purchase of Investments Rs (1,87,000) Proceeds from Sale of Plant and Machinery 41,000 Proceeds from Sale of Patents 4,000 Purchase of Investments (23,000) Proceeds from Sale of Investments 42,000 Interest Received 8,000 Net Cash Used in Investing Activities Cash Flow from Financing Activities Proceeds from Issuance of Share Capital Rs 75,000

Rs (2,15,000)

Rs 90