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FINANCIAL ACCOUNTING: ASSETSQuestion 1 (32 marks)Computer question

HAYDEN LTD.Balance Sheet

as at December 31

20X5 20X4

Property, plant & equipment € 6,500,000 € 6,600,000Accumulated depreciation (2,700,000) (2,600,000)Inventories 240,000 300,000Accounts receivable 500,000 480,000Certificates of deposit (2 month maturity) 30,000 18,000Cash 42,000 20,000

€ 4,612,000 € 4,818,000

Accumulated profits € 1,080,000 € 910,000Ordinary shares 2,550,000 2,000,000Notes payable 600,000 1,500,000Income tax payable 15,000 12,000Interest payable 7,000 16,000Accounts payable 360,000 380,000

€ 4,612,000 € 4,818,000

HAYDEN LTD.Income Statement

for the year ending December 31, 20X5

Sales € 3,600,000Gain on sale of plant & equipment 50,000 Cost of goods sold 1,440,000Depreciation expense 400,000Income tax expense 213,000Interest expense 65,000Other expenses 1,212,000 Profit € 320,000

Additional Information:

1. During the year the company purchased property, plant & equipment with a market value of €400,000 by issuing a note for €100,000 and ordinary shares for the remainder.

2. During the year the company sold property, plant & equipment with a cost of €500,000 and accumulated depreciation of €300,000 for €250,000.

3. During the year the company converted €250,000 of notes payable to equity by issuing ordinary shares to the note holder.

4. During the year the company paid €750,000 cash on its notes payable. 5. The company declared and paid a dividend of €150,000.

Before you attempt this question, you should work through Computer illustration 3-1 in the Lesson Notes.

RequiredUsing the worksheet method as outlined in the Lesson Notes, follow the procedure described below to complete worksheet FA2L3Q1 found in your data disk.

1. Copy and paste the following completed segments of your Excel worksheet into your assignment document:

a. (18 marks)

Cash Flow Worksheet, cells A1 to H41.

b. (10 marks)

Cash Flow Statement, cells A45 to D69.

2. (4 marks)

Prepare the note to the financial statements to disclose the non-cash financing and investing activities.

Procedure1. Open the file FA2L3Q1.

2. Examine the layout of the worksheet. The worksheet contains two sections:

Rows 1 to 41 Cash Flow Statement SpreadsheetRows 45 to 69 Cash Flow Statement (direct approach)

Note that the data relating to the balance sheet, as well as the income statement accounts, has already been entered for you.

3. Complete the Cash Flow Statement Spreadsheet and the Cash Flow Statement.

4. Move the cell pointer to cell A1. This is the start of the Cash Flow Worksheet. Both the closing balances for 20X4 and the closing balances for 20X5 have been entered for you. Because of the complexity of the transactions required to calculate the Cash Flow Statement, it is advisable to carefully complete the analysis of the information and write out the transactions before you start.

5. Make sure to enter the transaction references that are on either side of the Debit and Credit column. The reference columns will make it easier for you to keep track of your entries.

6. Remember that you are preparing a cash flow statement. The process is the same as if your were preparing a manual spreadsheet, the only difference is that you are using a computer worksheet instead of a piece of paper to produce the end result. Your starting point is therefore a reconstruction of the year’s transactions starting with an analysis of income statement and the related balance sheet accounts.

7. Column H in the Cash Flow Statement Worksheet section is a verification column for the balance sheet analysis.

You will notice that the column contains the following formula which, until the transactions for the year are posted, results in numerical values being in the cells of that column.

Review the formula in cell H2:

=IF(B2+D2-F2=G2; ;G2-B2)

This formula states that if the December 31, 2004 account balance plus the amount in the debit column less the amount in the credit column equals the December 31, 2005 account balance, then the formula will return a zero balance. If the opening balance plus the debits less the credits does not equal the closing balance, then the formula will return a value that is the difference between the opening and closing balances. This value will stay the same, regardless of the entries made, until the beginning balance plus debits minus credits equals the closing balance. The formula is slightly different for liabilities, equities, and accumulated depreciation because with these accounts credits are added to the opening balance and debits are subtracted. Note also that some accounts require multiple adjustments to either the debit or credit column. The formula has been altered in these instances to accept multiple adjustments.

If a value other that zero remains in column H after making all adjustments, it is an indication that this account has not been properly analyzed and the account must be reviewed to identify and correct any errors.

8. Review the formula in cells D41 and F41. The purpose of these formulas is to act as a check to ensure that the spreadsheet balances. The formula in Cell F41 totals the credit column of the spreadsheet. The formula in cell D41 is as follows:

=IF(SUM(D2:D40)=F41,SUM(D2:D40),#VALUE!)

This formula adds the values in column D from cells D2 to D40, then compares this total to the value in F41. If the values are the same, then the sum of D2 to D40 is entered into the cell. If not, then #VALUE! is entered. This formula will show you automatically whether you are in or out of balance because the value in cell F41 is the total of the credit column, and the sum of the values in cells D2 to D40 is the total of the debit column.

Cash flow statement (direct approach)9. Move the cell pointer to cell A45. The range A50 to D65 has been set up to complete

the Cash flow statement.

10. Use formulas to finish the worksheet. The formulas should either reference to other sections of the spreadsheet, primarily the cash flow statement section, or should be subtotals/totals using cells from other sections of the Cash flow statement.

11. The formulas in cells C53, D56, D60, D65 and D67 calculate the Cash flow statement subtotals.

12. The formula in cell D69 compares the total of opening cash and cash equivalents plus the changes in cash and cash equivalents to the actual closing balance in cash and cash equivalents. If the numbers are the same, the formula enters the balance in cash and cash equivalents. If the number is not the same, #VALUE! is entered. This will let you know that the Cash flow statement is not in balance.

13. After you have completed the Cash flow statement, save a copy of the worksheet.

14. Select cells A1 to H41 in your completed Excel worksheet. Choose Edit Copy to copy these cells, then switch to Word and choose Edit Paste Special (As Picture) to paste these cells in the appropriate place in your assignment Word document.

15. Copy and paste cells A45 to D69 into your assignment Word document.

Question 2 (19 marks)Use the spreadsheet approach to prepare the operating activities section of the Cash flow statement for Hayden Ltd. for the year ending December 31, 20X5, using the indirect method.

a. (9 marks)

Submit your spreadsheet (a computer spreadsheet is not required) along with a list of transactions posted in the worksheet.

b. (10 marks)

Submit the operating activities section of the Cash flow statement presented in good form.

Question 3 (20 marks)Multiple choice (1 mark each)a. Which of the following is a correct statement about the information provided in the

cash flow from operating activities section of the Cash flow statement?

1) The operating activities section of the Cash flow statement provides information about the purchase of non-current assets by the company.

2) The operating activities section of the Cash flow statement provides information about accrual based revenues and expenses.

3) The operating activities section of the Cash flow statement provides information about financing decisions made by the company during the year.

4) The operating activities section of the Cash flow statement provides information about a company’s ability to finance its operating activities internally.

b. Which of the following transactions would not be included in a Cash flow statement?

1) The sale of plant and equipment for €421,0002) Wages paid to employees amounting to €300,0003) The payment of a stock dividend in the amount of €150,0004) The issue of bonds for €800,000

c. Which of the following is not a cash flow from investing activities?

1) Loss on sale of equipment2) Purchase of land for cash3) Proceeds from an insurance claim on a building destroyed in a fire4) Payments made with respect to trademarks

d. In the Cash flow statement, using the indirect method to present the cash flow from operating activities, depreciation would be shown as which of the following?

1) As an addition in the cash flow from investing activities section 2) It would not be disclosed in the statement3) As a deduction in the cash flow from investing activities section 4) As an adjustment to profit in the operating activities section

e. The payment on January 15, 20X6, of a €200,000 dividend declared on December 15, 20X5, would be shown as which of the following in the cash flow statement for the year ending December 31, 20X6?

1) As an addition to profit in the operating activities section 2) Not shown because it was declared in the prior year3) As a deduction in the cash flow from investing activities section 4) As a deduction in the cash flow from financing activities section

f. The December 15, 20X7, purchase of a 60-day certificate of deposit would be reflected on the Cash flow statement for the year ending December 31, 20X7, as which of the following:

1) As an addition in the operating activities section 2) As a deduction in the investing activities section3) As part of the ending cash balance 4) As a deduction in the financing activities section

g. IAS 7 allows for optional treatment of which of the following types of transactions?

1) Dividends received on long-term investments 2) The purchase of assets by issuing share capital3) Insurance proceeds on destruction of assets as a result of natural disasters4) Proceeds from bonds that were issued at a premium

h. An increase in the current portion of long-term debt from 20X6 to 20X7 would be treated as which of the following in the Cash flow statement?

1) As an addition in the cash flows from operating activities section2) As a deduction in the cash flows from operating activities section3) As an addition in the cash flows from financing activities section 4) As a deduction in the cash flows from financing activities section

(2 marks each)i. During the year, the following occurred:

Accounts receivable increased €20,000Unearned revenue increased €30,000

Which of the following statements correctly describes the impact of this activity on the relationship between profit and cash flows from operating activities?

1) Profit will be €50,000 lower than cash flows from operating activities.2) Profit will be €10,000 lower than cash flows from operating activities.3) Profit will be €10,000 higher than cash flows from operating activities.4) Profit will be €50,000 higher than cash flows from operating activities.

j. During 20X4, IHT Ltd. issued bonds with a face value of €10,000,000 for €10,500,000. In addition, property, plant & equipment was purchased by issuing €5,000,000 in bonds payable. Interest paid on the bonds amounted to €800,000 and amortization of the bond premium equalled €20,000. Which of the following statements would be true with respect to the above activity?

1) Financing cash flows would equal €15,500,000 and cash flows from operating activities would equal €780,000.




k. As a result of a severe flood, €200,000 of inventory at Retaw Ltd.’s warehouse was destroyed. The company received €150,000 from its insurance company with respect to the damaged inventory. Cash flows from operating activities, using the direct method of presentation, would reflect which of the following with respect to this loss?

1) A decrease in cash of €200,0002) A decrease in cash of €50,0003) An increase in cash of €150,0004) It would not be reflected in cash flows from operating activities

l. During the year the following activity occurred at BAT Ltd.:

Stock dividends paid €15,000Loan given to president of the company €20,000Repayment of note payable €100,000Cash dividends paid €40,000

The net cash flow from financing activities associated with these activities would equal which of the following?

1) €60,000 outflow2) €140,000 outflow 3) €155,000 outflow 4) €175,000 outflow

m. TAB Ltd. reported a net cash outflow from operating activities of €350,000 for the year ended December 31, 20X4. In addition, the following activity was reflected in the company’s records:

Loss on expropriation of property €132,000Increase in accounts receivable during the year €85,000Decrease in accounts payable during the year €110,000Decrease in inventory €30,000

Purchase of plant & equipment €75,000

What was TAB Ltd.’s loss for the year?

1) €317,0002) €383,0003) €572,0004) €647,000

n. Bret Ltd.’s records included the following information relating to the year ending December 31, 20X5:

Loss on disposal of equipment €20,000Proceeds from sale of equipment €125,000Depreciation of equipment €16,000Loss on expropriation of plant €65,000Cash received for expropriated plant €220,000

Cash flows from investing activities would reflect which of the following with respect to the above activity?

1) €274,000 increase2) €290,000 increase3) €325,0000 increase4) €345,000 increase

Question 4 (6 marks)a. List and describe the three categories of activities about which the Cash flow

statement provides information.

b. For each category listed in a., explain what part of the Balance sheet and/or Income statement is analyzed to arrive at the cash flow from this type of activity.

Question 5 (15 marks)A friend is studying Cash flow statements and has come to you for assistance. Your friend has analyzed a number of transactions and has grouped them in the following manner as operating, investing, or financing activities. Your friend has asked you to review the completed analysis.

Operating cash flows (direct method of presentation)Income tax expenseDepreciation expenseIncrease in unearned revenueDecrease in prepaid insurance Cash purchases of inventoryDecrease in accounts payableProceeds from disposal of equipmentProceeds from issue of ordinary shares

Investing cash flowsPurchase of 60-day certificate of depositGain on disposal of equipment

Purchase of land by issuing ordinary shares Proceeds from insurance company on equipment loss sustained in a fire

Financing cash flowsCash dividends paidAmortization of premium on bonds payableCash received on principal repayment of long-term notes receivable

To assist your friend, create a new schedule using the following format and enter the transactions under the appropriate headings.

Operating cash flows (direct method of presentation)Investing cash flowsFinancing cash flowsNot included as part of operating, investing, or financing activities

Question 6 (8 marks)The following information relates to Fina Ltd.

FINA LTD.Income Statement


Sales € 6,200,000Gain on sale of land* 50,000

6,250,000 Cost of goods sold 2,480,000Wage and salary expense 1,300,000Depreciation expense 33,000Interest expense 18,000Income tax expense 390,000Other expenses 1,449,000

5,670,000 Profit for the period € 580,000

* Land was sold for €180,000 cash

FINA LTD.Partial Cash Flow Statement


Cash flows from operating activitiesProfit € 580,000Adjustments for non cash revenues and expenses:

Gain on sale of land (50,000)Depreciation expense 33,000Interest expense 18,000Income tax expense 390,000

Profit before working capital changes 971,000Decrease in accounts receivable 47,000Increase in inventory (58,000)Decrease in accounts payable (29,000)

Increase in salaries payable 4,000 Net cash generated from operations 935,000

Interest paid (20,000)Taxes paid (390,000 )

Net cash from operating activities € 525,000

Using the above information, prepare the Cash flows from operating activities section of the Cash flow statement using the direct method of presentation.

Suggested solutions

Question 1 (32 marks)Computer solutiona. (18 marks)

Balance Sheet 20X04 Ref DR Ref Cr 20X5 Check

Property, plant& equipment 6,600,000 n. € 400,000 c. € 500,000 6,500,000 0

Accumulated depreciation –2,600,000 c. 300,000 g. 400,000 –2,700,000 0

Inventories 300,000 e. 1,380,000 d. 1,440,000 240,000 0Accounts receivable 480,000 a. 3,600,000 b. 3,580,000 500,000 0Certificates of deposit 18,000 s. 12,000 30,000 0Cash 20,000 s. 22,000 42,000 0Accumulated Profits 910,000 r. 150,000 q. 320,000 1,080,000 0Ordinary shares 2,000,000 n. 300,000 2,550,000 0

o. 250,000Notes payable 1,500,000 o. 250,000 n. 100,000 600,000 0

p. 750,000Income tax payable 12,000 l. 210,000 h 213,000 15,000 0Interest payable 16,000 k. 74,000 j. 65,000 7,000 0Accounts payable 380,000 f. 1,400,000 e. 1,380,000 360,000 0

Income StatementSales a. 3 600,000Gain on sale of plant

& equipment c. 50,000Cost of goods sold d. 1,440,000Deprciation expense g. 400,000Income tax expense h 213,000Interest expense j. 65,000Other expenses m 1,212,000Profit q. 320,000

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Cash Flow StatementOperating Cash Flows

Collections from customers b. 3,580,000Cash paid to suppliers f. 1,400,000Income tax paid l. 210,000Interest paid k. 74,000Other expenses paid m 1,212,000

Investing Cash FlowsProceeds — Property,

plant & equipment sold c. 250,000Financing Cash Flows

Payment of notes payable p. 750,000Dividends paid r. 150,000

Net increase in cash s. 34,000 Total (check) € 16,028 000 € 16,028,000

b. (10 marks)

HAYDEN LTD.Cash Flow Statement


Cash flows from operating activitiesCash receipts from customers € 3,580,000Cash paid to suppliers –1,400,000Cash paid for other operating expenses –1,212,000 Cash generated from operations 968,000Interest paid –74,000Income taxes paid –210,000


Cash flows from investing activitiesProceeds from sale of plant & equipment 250,000

Net cash from investing activities 250,000

Cash flows from financing activitiesPayment of notes payable –750,000Dividends paid –150,000

Net cash from financing activities –900,000

Net decrease in cash & cash equivalents 34,000Cash & cash equivalents, January 1, 20X5 38,000 Cash & cash equivalents, December 31, 20X5 € 72,000

Requirement 2 (4 marks)

Note to the financial statements

Non-cash financing and investing activities:

1. During the year the company purchased property, plant & equipment with a value of €400,000 by issuing a note payable for €100,000 and ordinary shares for the remainder.

2. During the year the company converted €250,000 of notes payable to equity.

Question 2 (19 marks — 9 for spreadsheet and 10 for statement)20X4 Ref DR Ref CR 20X5

Balance Sheet

Property, plant & equipment 6,600,000 6,500,000

Accumulated depreciation –2,600,000 (c) 400,000 –2,700,000

Inventories 300,000 (g) 60,000 240,000Accounts receivable 480,000 (f) 20,000 500,000Certificates of deposit 18,000 30,000Cash 20,000 42,000Accumulated profits 910,000 (a) 320,000 1,080,000Ordinary shares 2,000,000 2,550,000Notes payable 1,500,000 600,000Income tax payable 12,000 (j) 3,000 15,000Interest payable 16,000 (i) 9,000 7,000Accounts payable 380,000 (h) 20,000 360,000

Cash Flow Statement Inflows OutflowsOperating cash flows

(OCF)Profit (a) 320,000Adjustments for:

Non cash transactionsGain on sale of plant

& equipment (b) 50,000

Depreciation expense (c) 400,000

Separate disclosure itemsIncome tax expense (d) 213,000Interest expense (e) 65,000

Changes in working capital accountsIncrease in accounts

receivable (f) 20,000

Decrease in inventories (g) 60,000

Decrease in accounts payable (h) 20,000

Income tax paid (j) 3,000 (d) 213,000Interest paid (e) 65,000

(i) 9,000

Note that only transactions relating to the cash flow from operating activities section of the spreadsheet have been considered.

HAYDEN LTD.Cash Flow Statement


Cash flows from operating activitiesProfit € 320,000Adjustments for:

Gain on sale of plant & equipment –50,000Depreciation expense 400,000Interest expense 65,000Income tax expense 213,000

Operating profit before working capital changes 948,000Increase in accounts receivable –20,000Increase in inventory 60,000Decrease in accounts payable –20,000

Cash generated from operations 968,000Income tax paid –210,000Interest paid –74,000


Question 3 (20 marks)Multiple choice (1 mark each)a. 4)

b. 3)

This is a non-cash transaction which would not be included in the Cash flow statement but would be included in the notes to the financial statements.

c. 1)

d. 4)

e. 4)

Note that it could be shown elsewhere as well. This is the most common placement.

f. 3)

g. 1)

h. 3)

(2 marks each)i. 2)

Profit – €20,000 + €30,000 = Cash flow from operating activities. Therefore profit is €10,000 lower than cash flow from operating activities.

j. 3)

Financing: €10,500,000. Operating: €800,000 (Amortization of the bond premium is not a cash flow.)

k. 3)

l. 2)

€100,000 + €40,000 = €140,000

m. 1)

– €350,000 – €132,000 + €85,000 + €110,000 – €30,000 = €317,000

n. 4)

€125,000 + €220,000 = €345,000

Question 4 (6 marks)Part a

1. Operating activities. These are the activities an entity engages in to generate income on a day-to-day basis.

2. Investing activities. These are the activities an entity engages in to maintain its productive capacity.

3. Financing activities. These are the activities an entity engages in relating to its capital structure (debt and equity).

Part b

1. Operating activities. The operating activities section of the Cash flow statement is prepared based on an analysis of operating/working capital assets and liabilities as well as an analysis of the income statement.

2. Investing activities. The investing activities section of the Cash flow statement is prepared based on an analysis of non-operating assets (primarily non-current assets).

3. Financing activities. The financing activities section of the Cash flow statement is prepared based on an analysis of non-operating liabilities (primarily non-current liabilities) and shareholders’ equity.

Question 5 (15 marks)Operating cash flows (direct method of presentation)Income tax expenseCash purchases of inventory

Investing cash flows Proceeds from insurance company on equipment loss sustained in a fireProceeds from disposal of equipmentCash received on principal repayment of long term note receivable

Financing cash flowsCash dividends paidProceeds from issue of ordinary shares

Not included as part of operating, investing, or financing activities Depreciation expenseIncrease in unearned revenueDecrease in prepaid insuranceDecrease in accounts payablePurchase of 60-day certificate of deposit (the certificate is a “cash equivalent”)Gain on disposal of equipment Purchase of land by issuing ordinary shares Amortization of premium on bonds payable

Question 6 (8 marks)FINA LTD.

Cash Flow Statementfor the year ended December 31, 2X05

Cash flows from operating activitiesCash receipts from customers (6,200,000 + 47,000) € 6,247,000Cash paid to suppliers (2,480,000 + 58,000 + 29,000) (2,567,000)Cash paid to employees (1,300,000 – 4,000) (1,296,000)Cash paid for other operating expenses (1,449,000 )Cash generated from operations 935,000Interest paid (18,000 + 2,000) (20,000)Taxes paid (390,000 )Net cash from operating activities € 525,000

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