|
$2,050
Test your understanding 2
The correct answer is A
Receivables
$
$
Balance b/f
30,000 Bank
40,000
Credit sales (ß)
50,000 Contras with payables
3,000
Balance
c/f
37,000
––––––
––––––
80,000
80,000
––––––
––––––
Balance b/f
37,000
Incomplete records
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Receivables
Total sales = credit sales + cash sales = $50,000 + $15,000 =
$65,000
OR
Total receivables
$
$
Balance b/f
30,000 Bank (total cash rec’d)
55,000
Total sales (ß)
65,000 Contras with payables
3,000
Balance
c/f
37,000
––––––
––––––
95,000
95,000
––––––
––––––
Test your understanding 3
The correct answer is D
Total payables
$
$
Bank 14,000
Balance
b/f
15,000
Discount received
500 Purchases (ß)
12,500
Balance c/f
13,000
––––––
––––––
27,500
27,500
––––––
––––––
Balance
b/f
13,000
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Test your understanding 4
The correct answer is B
Statement of profit or loss (extracts):
Expenses
Electricity (–250 + 1,000 + 300) = $1,050
Rent (300 + 2,000 – 400) = $1,900
Test your understanding 5
The correct answer is D
Bank
$
$
Receipts (ß)
12,130 Balance b/f
1,367
Payments
8,536
Balance
c/f
2,227
––––––
––––––
12,130
12,130
––––––
––––––
Balance b/f
2,227
Test your understanding 6
The correct answer is C
Cash in till
$
$
Balance b/f
900 Bank
10,000
Receipts 13,100
Drawings 1,000
Wages
2,000
Balance
c/f
1,000
––––––
––––––
14,000
14,000
––––––
––––––
Balance c/f
1,000
Incomplete records
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Test your understanding 7
The correct answer is C
Gross profit: $1,000 × 25% = $250
Cost of sales:
$
Sales 1,000
Cost of sales (ß)
(750)
–––––
Gross profit
250
Test your understanding 8
The correct answer is A
Gross profit: $600 × 25% = $150
$
Sales (ß)
750
Cost of sales
(600)
––––
Gross profit
150
Test your understanding 9
$
$
%
Sales:
3,200
100
Cost of sales:
Opening inventory
800
Purchases 2,840
Closing inventory
(600)
–––––
(3,040)
(95)
–––––
–––––
Gross profit:
160
5
–––––
–––––
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Test your understanding 10
The correct answer is B
$
$
%
Sales:
100,000
100
Cost of sales:
Opening inventory
10,000
Purchases 82,000
Closing inventory
(3,000)
Inventory lost (ß)
(9,000)
––––––
(80,000)
(80)
––––––
––––
Gross profit:
20,000
20
––––––
––––
Test your understanding 11
$
$
%
Sales:
10,000
125
Cost of sales:
Opening inventory
2,000
Purchases 7,500
Inventory lost (ß)
(1,500)
–––––
(8,000)
(100)
–––––
–––––
Gross profit:
2,000
25
–––––
–––––
Dr Profit or loss (expense):
1,500
Cr Profit or loss (cost of sales):
1,500
Being the recording of uninsured inventory destroyed by the fire.
Incomplete records
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Statement of cash flows
Chapter learning objectives
Upon completion of this chapter you will be able to:
•
differentiate between profit and cash flows
•
recognise the benefits and drawbacks to users of financial
statements of a statement of cash flows
•
calculate the figures needed for the statement of cash flows
•
calculate cash flows from operating activities using the
indirect and direct method
•
prepare statements of cash flows and/or extracts from given
information.
Chapter
19
PER
One of the PER performance objectives (PO7) is
to prepare and review financial statements in
accordance with legal and regulatory
requirements. Working through this chapter
should help you understand how to demonstrate
that objective.
Statement of cash flows
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1 Overview
Introduction
This chapter deals with the need for a statement of cash flows, along with
its preparation and interpretation.
Much of the content of this chapter is new. Preparation and interpretation
of a statement of cash flows is examinable content for Financial
Reporting and Strategic Business Reporting.
2
The need for a statement of cash flows
Profit and cash
Whilst a business entity might be profitable this does not mean it will be able to
survive. To achieve this, a business entity needs cash to be able to pay its
debts. If a business entity could not pay its debts it would become insolvent and
could not continue to operate.
The main reason for this problem is that profit is not the same as cash flow.
Profits (from the statement of profit or loss) are calculated using the accruals
basis. Most goods and services are sold on credit so that, at the point of sale,
revenue is recognised but no cash is received. The same can be said of
purchases made on credit. There are also a number of expenses that are
recognised that have no cash impact – depreciation is a good example of this.
Therefore, it is possible for a business entity to be profitable but have
insufficient cash available to pay its suppliers.
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For this reason it is important that users of the financial statements can assess
the cash position of a business entity at the end of the year but also how cash
has been generated and used by the business entity during the accounting
period. In the case of limited liability entities, IAS 7 requires that (with very few
exceptions) a statement of cash flows is included as part of the annual financial
statements that corporate business entities make available to shareholders and
other users of that information.
Cash flow management
As mentioned above, cash flow is vital to the survival of a business entity
both in the long and the short term. To reflect this, one of the key
measures of the health of a business is solvency or liquidity. These
concepts will be discussed at greater length in the interpretations chapter.
In summary, management have various liquid assets at their disposal that
they can use to settle the entity’s debts in the short term. These include
inventory, receivables and cash (i.e. current assets) which are then used
to pay off overdrafts, trade payables, loan interest and tax balances (i.e.
current liabilities).
Management should maintain sufficient current assets to be able to pay
the entity’s current liabilities as they fall due. If management do not do
this, the entity will default on payment of its liabilities, lose supplier
goodwill or suffer fines and sanctions. In the worst case scenario a
supplier, lender or tax authority may even have a business entity
declared insolvent in an attempt to recover amounts due.
To ensure an effective balance, management must consider inventory
production and storage cycles and have an effective system of credit
control to ensure cash is received as soon as possible. On the flip side it
must also manage the level of debt it is exposed to.
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