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I.
II.
III.
Less:
IV.
Indirect method presenting the cash flow operations begins with the
accrual basis net income and applies a series of adjustments to convert the
income to a cash basis.
Current assets increase deduct
Current assets decrease add
Current liabilities increase add
Current liabilities decrease deduct
Add non-cash expenses (depreciation, amortization,etc)
Add/deduct non-operating item ( gain deduct, loss add)
Illustrative Problem
Simple Company provides the following comparative statement of financial position
and income statement for 2015.
Assets
Cash
Accounts receivable
Inventory
Prepaid insurance
Property, plant and equipment
Accumulated depreciation
Patent
Total assets
2015
2014
3,000,000
940,000
175,000
15,000
2,000,000
(500,000)
40,000
5,620,000
2,000,000
350,000
100,000
20,000
2,000,000
(500,000)
50,000
4,020,000
170,000
25,000
10,000
350,000
10,000
500,000
2,000,000
2,555,000
5,620,000
150,000
10,000
15,000
250,000
40,000
500,000
2,000,000
1,055,000
4,020,000
Income Statement
Year ended December 31, 2015
Sales
Cost of sales:
Inventory Jan.1
Purchases
Goods available for sale
Inventory Dec. 31
Gross income
Rent income
Total income
Expenses:
Salaries
Insurance
Other expenses
Depreciation
Amortization of patent
Interest expense
Income before tax
Income tax
Net Income
6,500,000
100,000
3,200,000
3,300,000
(175,000)
950,000
40,000
500,000
50,000
10,000
55,000
SOLUTION:
1. Direct Method
Accounts receivable, 2014
Add: sales
Less: AR, 2015
Collections from customer
Rent income
Add: unearned rent income - 2015
Less: unearned rent income 2014
Rent received
AP 2014
Add: purchases
Less: AP 2015
Payments to creditors
350,000
6,500,000
940,000
5,910,000
80,000
10,000
40,000
50,000
150,000
3,200,000
170,000
3,180,000
3,125,000
3,375,000
80,000
3,455,000
1,605,000
1,850,000
(350,000)
1,500,000
Salaries
Add: accrued salaries payable-2014
Less: accrued salaries payable-2015
Salaries paid
Insurance
Add: prepaid insurance 2015
Less: prepaid insurance 2014
Payments for insurance
Other expenses paid
950,000
10,000
25,000
935,000
40,000
15,000
20,000
35,000
500,000
Interest expense
Add: accrued interest pay 2014
Less: accrued interest pay 2015
Interest paid
55,000
15,000
10,000
60,000
Income tax
Add: income tax payable 2014
Less: income tax payable 2015
Payment for income tax
350,000
250,000
350,000
250,000
5,910,000
50,000
(3,180,000)
(935,000)
(35,000)
(500,000)
1,310,000
(60,000)
(250,000)
(1,000,000)
2. Indirect method
Net income
Increase in AR
Increase in inventory
Decrease in prepaid insurance
Increase in AP
Increase in accrued salaries pay
1,500,000
(590,000)
(75,000)
5,000
20,000
15,000
(5,000)
100,000
(30,000)
50,000
10,000
1,000,000
*The direct method and indirect method are applicable only to operating
activities.
V.
Assets
Cash
Accounts receivable
Inventory
Prepaid insurance
Property, plant and equipment
Accumulated depreciation
Patent
Total assets
2015
2014
3,000,000
820,000
1,180,000
40,000
4,000,000
(880,000)
450,000
6,760,000
1,800,000
950,000
1,100,000
60,000
2,000,000
(540,000)
500,000
4,950,000
120,000
540,000
600,000
1,000,000
3,000,000
700,000
1,040,000
(240,000)
6,760,000
110,000
600,000
800,000
----------2,500,000
200,000
740,000
----------4950,000
c)
d)
e)
f)
Solution:
Net income
Decrease in accounts receivable
Increase in inventory
Decrease in prepaid expenses
Depreciation
Amortization of patent
Increase in accrued expenses
Decrease in accounts payable
Net cash provided by operating activities
1,000,000
130,000
(80,000)
20,000
340,000
50,000
10,000
(60,000)
1,410,000
(2,000,000)
1,000,000
1,000,000
(200,000)
(700,000)
(240,000)
860,000
270,000
880,000
1,150,000
Comprehensive
Information on LA-DI-DA SHOWY Co.'s financial position and performance as of December 31,
20x2 and 20x1 are presented below.
LA-DI-DA SHOWY Company
Statement of financial position
As of December 31, 20x2
ASSETS
20x2
20x1
Current assets
Cash and cash equivalents
1,000,000
480,000
600,000
-
1,520,000
1,240,000
100,000
40,000
2,000,000
3,600,000
Prepaid insurance
200,000
160,000
5,300,000
5,640,000
360,000
340,000
10,000,000
4,000,000
(800,000)
(800,000)
360,000
400,000
9,920,000
3,940,000
15,220,000
9,580,000
Rent receivable
Inventory
Noncurrent assets
Investment in bonds
Buildings
Accumulated depreciation
Goodwill
Total noncurrent assets
TOTAL ASSETS
480,000
320,000
80,000
120,000
Insurance payable
240,000
180,000
Dividends payable
920,000
480,000
60,000
140,000
200,000
1,780,000
1,440,000
Bonds payable
4,000,000
4,000,000
Discount on bonds
(380,000)
(400,000)
60,000
40,000
3,680,000
3,640,000
TOTAL LIABILITIES
5,460,000
5,080,000
Share capital
8,000,000
4,000,000
Retained earnings
1,760,000
500,000
TOTAL EQUITY
9,760,000
4,500,000
15,220,000
9,580,000
Equity
Sales
Cost of sales
20,000,000
(12,000,000)
Gross income
8,000,000
Rent income
1,800,000
Interest income
80,000
Insurance expense
(400,000)
(60,000)
Interest expense
(400,000)
(160,000)
80,000
Other expenses
(4,800,000)
4,140,000
(1,200,000)
2,940,000
Additional information:
During 20x2, LA-DI-DA purchased held for trading securities for 400,000. The fair value of the
shares on December 31, 20x2 is 480,000.
The allowance for doubtful accounts has balances of 80,000 and 40,000 as of December 31,
20x2 and 20x1, respectively.
During 20x2, LA-DI-DA sold an old building with historical cost of 3,200,000 for 1,040,000.
LA-DI-DA inadvertently included depreciation expense in the Other expenses line item.
There were no acquisitions or disposals of investment in bonds during the period.
During 20x2, LA-DI-DA issued shares with an aggregate par value of 4,000,000 for 4,000,000
cash.
1. How much is the net cash flows from (used in) operating activities?
a. (6,000,000)
b. 6,000,000 c. 6,600,000
d. (7,600,000)
2. How much is the net cash flows from (used in) investing activities?
a. (8,160,000)
b. 8,460,000 c. (9,200,000) d. 8,160,000
3. How much is the net cash flows from (used in) financing activities?
a. (2,560,000)
b. 2,560,000 c. (2,960,000) d. 2,960,000
Solution:
Cash flows from operating activities
Profit for the year
2,940,00
0
Adjustments for:
Depreciation expense
Impairment loss on goodwill
Loss on sale of building
Unrealized gain on held for trading securities
Amortization of discount on investment in bonds
Amortization of discount on bonds payable
2,000,00
0
40,000
160,000
(80,000)
(20,000)
20,000
5,060,00
0
(280,000)
(60,000)
1,600,00
0
(40,000)
160,000
(40,000)
60,000
(80,000)
20,000
6,400,00
0
(400,000)
6,000,00
0