1 Solutions to homework

Discussion Questions:
5.2
(a)
Similarities:
- They both represent flow (for the period) statements.
(b)
Differences:
- The cash flow statement is based on cash transactions whereas the
statement of financial performance is based on accrual transactions.
- The cash flow statement incorporates changes in all accounts types while
the statement of financial performance includes only revenue and
expense transactions.

5.5
The accrual profit exceeds the cash flow from operating activities where:
(a) The accrual revenues exceed the cash revenues (eg. increase in debtors;
increase in other receivables) and/or
(b) The accrual expenses are less than the cash expenses (eg increase in
inventories; increase in prepayments; decrease in accounts payable;
decrease in accruals; decrease in provision for taxation; decrease in
interest payable).

5.6
(i) For operating activities it should be an inflow in each period.
(ii) For investing activities the expectation would be for outflows in most
periods.
(iii) For financing activities it will change from year to year but should
balance out over time.

5.8
People and organisations will not normally accept other than cash in settlement
of their claims against the business. If a business wants to employ people it must
pay them in cash. If it wants to buy a new non-current asset to exploit a business
opportunity, the seller of the asset will normally insist on being paid in cash,
usually after a short period of credit. When businesses fail, it is their inability to
find the cash to pay claimants that actually drives them under. These factors
lead to cash being the pre-eminent business asset and, therefore, the one which
analysts and others watch carefully in trying to assess the ability of the business
to survive and/or to take advantage of commercial opportunities as they arise.

5.9
Classification as cash or cash equivalent:

No. Account Yes/ Discussion

No
A Bank overdraft Yes Part of cash
B Accounts receivable No Related to operating activities
C Debentures payable No Related to financing activities
D Deposits at call Yes Part of cash equivalent
E Shares No Related to investing activities

RMIT University Vietnam | Chapter 5 Cash Flow Statements 1

2 Solutions to homework

F Bills receivable No Related to either operating or financing

activities
G Unused bank No Related to non-cash disclosures
overdraft
H Cash advances to No Related to investment activities
staff

5.11
Bad and doubtful debts represent non-cash expenses and are incorporated into
the cash flow statement through the following adjustments

(a) Direct Method:

Cash received from sales
= sales
+/- change in debtors (+ Cr [decreases]; - Dr [increases])
+/- change in allowance for doubtful debts (+ Cr [decreases]; - Dr
[increases])
- bad and doubtful debts expense

(b) Indirect Method:

As part of the reconciliation by adding the credit change in accounts receivable
(decrease)* or deducting the debit change in accounts receivable*(increase).

*will include the allowance for doubtful debts

5.15
Depreciation is a non-cash expense. In terms of the cash flow statement it
represents an add back to net profit after tax in computing the cash flow from
operating activities.

RMIT University Vietnam | Chapter 5 Cash Flow Statements 2

3 Solutions to homework

Application Exercise:
5.1
No. Particulars Activity Cash flow
Eg. Cash received from customers Operating Inflow
(a) Dividends received Financing Inflow
(b) Taxation paid Operating Outflow
(c) Payments to suppliers and Operating Outflow
employees
(d) Interest paid Operating Outflow
(e) Purchase of property, plant and Investing Outflow
equipment
(f) Bonus issue of shares Non-cash
(g) Dividends paid Financing Outflow
(h) Proceeds on sale of investments Investing Inflow
(i) Interest received Financing Inflow
(j) Long term borrowing Financing Inflow
(k) Write-down goodwill Non-cash
(l) Profit on sale of equipment Non-cash

RMIT University Vietnam | Chapter 5 Cash Flow Statements 3