Unit 2 _ Activities & Worked Examples_ FIN

Scenario:
You are a Chartered Accountant working for Flexi Pty Ltd. An extract of Flexi’s key accounts are provided in the table. The below additional information relate to Flexi Pty Ltd in the financial year.

Additional Information:
• All revenue is made on credit.
• Included in other expenses is $10,000 in interest paid.
• There were no disposals of equipment during the year.
• Equipment was purchased for cash during the year.
• Flexi undertook a share issue during the year.
• An interim dividend of $50,000 was paid in November 20X5.
• There are no temporary differences for tax purposes.

Task:
Prepare the statement of cash flows for Flexi Pty Ltd, using
the direct method, for the year ended 30 June 20X6.Ref: Questions adapted from Activities.

More questions related to this Unit – click below to view

OCI items

Prepare the statement of changes in equity

Sample Answer Show

Direct Method_Prep of Income Statement-Q&A- PDF/Click here to download
Step by Step notes- PDF /Click Here to Download

How to construct a T-account 1 - Equipment at cost

How to construct a T-account 2 - Allowance for impairment loss

Unit 2 – Work through question

Learning outcome 2 – Prepare, analyse and explain a complete set of financial statements.

Prepare the cash flow statement

Draft a T account

Opening balance for an Asset account is in the DR side;
Opening Balance for a liability account is in the Cr side.

Identify the issue

To prepare a cash flow statement – Three parts -> Cash flow from operation activity; Cash flow from Investing activity; Cash flow from Financing activity;

So, 1) identify the cash inflow and outflow first; 2) separate them into these three different activities.

Analyse the dot points of questions one by one

All Revenue is made on credit – BS shows revenue in 20x6 is 5.5 million. When it’s made on credit, it means we DR Trade Receivable CR Revenue [1]
$10,000 in interest paid included in other expense –> There is no interest paid account on Balance sheet - > when interest is paid -> Dr Interest expense Cr Cash [3]
No disposals of equipment - > no cash inflow -> So balance sheet movement means the acquisition of the equipment, i.e. when we purchase an equipment, we DR equipment, CR cash; [4]
Share issue -> DR Cash, CR Share Capital [5]
Interim dividend of $50,000 paid – [6]
On the BS, there is a Dividends Declared $200,000 [7]
No Temporary differences for tax purposes = > NO DTA or DTL impact on Current Tax liability account = > DR income tax; CR Current Tax liability [8]

Then go to the Balance Sheet and P&L to see if there are any balance sheet accounts that we haven’t checked.

Allowance for impairment loss – Trade receivables & Impairment loss have not been used [2]
Accumulated depreciation of equipment - > This is used to work out the deprecation expense
Bank overdraft => This Drop from $140,000 to $0, so a cash outflow of $140,000
Trade payable = > Create a T- account by putting O/B and E/B
Impairment of Trade receivables $70,000 - > DR impairment expense CR Allowance for Trade receivables [9] |
Bad debts expense $10,000 - > [10]
Other expenses (incl depreciation and interest) $ 4 mil -> Depreciation is $1,250,000- 800,000 = $450,000; interest expense is $10,000 - > $ 4 mil - $450,000 - $10,000 = $3,540,000

Trade Receivables – T account (Dr Bad debt Cr Trade Receivable) (Dr Trade Receivable Cr Revenue/Sales) (DR Cash CR Trade Receivable)
DR	CR
O/B: 1,000,000	C/B: 750,000
[1] sales on credit: 5,500,000	Cash inflow: $ 5,660,000
	Bad Debt: 10,000 [10]
	Allowance for impairment – trade receivables: 80,000 [2]
6,500,000	6,500,000

Allowance for impairment loss – Trade receivables (DR impairment loss $70,000 CR Allowance for impairment loss – trade receivable $70,000)
DR	CR
C/B: 50,000	O/B: 60,000
Trade receivables: 80,000 [2]	Impairment loss: 70,000 [9]
130,000	130,000

Equipment at cost (DR equipment CR Cash)
DR	CR
O/B: 2,000,000	C/B: 2,500,000
Cash outflow: 500,000 [4]
2,500,000	2,500,000

Trade Payables (Dr Trade Payables Cr Cash) (Dr Other expenses Cr Trade payable) $ 4 mil - $425,000 (depreciation) - $10,000 (interest expense)= $324,000
DR	CR
C/B: 590,000	O/B: 680,000
Cash outflow (payment to suppliers): 3,630,000	Other expenses: 3,540,000
4,220,000	4,220,000
Dividend payable (Dr Dividend payable Cr Cash) (Dr Dividend declared Cr Dividend payable)
DR	CR
C/B: 150,000	O/B: 120,000
Cash (dividend paid): 170,000 (incorrect) [6] Including the interim dividend paid	Dividend declared: 200,000 [7]
320,000	320,000

Current Tax Liability
DR	CR
C/B: 426,000	O/B: 300,000
Cash outflow (tax paid): 300,000	Income tax expense: 426,000 [8]

726,000	726,000
Share Capital (equity account)
DR	CR
C/B: 2,500,000	O/B: 1,200,000
	Cash inflow (share issue): 1,300,000 [5]
2,500,000	2,500,000

* Then construct a cash flow statement

Cash flow from operating activities
Cash received from customers	5,660,000
Income tax paid	(300,000)
Cash payments to suppliers, employees and others	(3,630,000)
Interest paid	(10,000) [3]
Net cash provided by operating activities	1,720,000
Cash flow from investing activities
Purchasing equipment	(500,000) [4]
Net cash provided used in investing activities	(500,000)
Cash flow from Financing activities
Dividend paid	(170,000)
Proceeds from Share issue	1,300,000
Net cash from financing activities	1,130,000
Net Cash Inflow	2,350,000 [11]
Cash at the beginning of the year	240,000 (2,590,000-380,000)
Cash at the end of the year	2,590,000

Check

Cash C/B: 2,590,000

Cash O/B: 380,000

Bank Draft O/B: 140,000

Cash movement = $2,590,000-380,000-140,000 = $2,350,000 [11]

Tips:

You can reconcile this number to the Net Cash Inflow. How good is that!

So basically, you should be happy if you can get a Direct Method – Cashflow statement question in the exam because 1) you will be able to check if your final answer is correct. 2) even it’s not correct, you can still get some marks when the some of the answer in these steps are correct.

Prerna 2020年6月28日
Hi,
There are other questions in CAANZ for unit 2. are you going to discuss that too? sorry I’m new to this so I don’t know much.
Thank you
- 果教授 2020年6月29日
  This is a good question.
  We don’t discuss each questions but we can answer specific questions.
  For example, if you find one questions (Act 2/1/2.2) in the Activities or Worked Examples- one calculation or one part is difficult to understand. You can put the specific questions here.
  By walking through each questions won’t help you pass CA. This is because in the end candidates need to develop their own ability to tackle each questions by themselves. We don’t want you to have the idea that by just reading or listening to the questions you can pass the CA. You NEED to pen down your own answer. You will not get it correct or not be able to complete it fully, but that’s fine. Only by doing this, you will then know the specific questions that you would like to check and that’s where we can further help.
  The general recommended hours for studying CA is 10 – 15 hours per week. If you are not doing this, you need to catch up.
  Having said that, we do walk through some questions. Like the one we did in Q 2 and Q 4. The purpose of this is to establish a good foundation for you and give you a big picture in terms of how to tackle a daunting question. This is a shortcut for you and you will feel confident to answer similar questions.
  Once you study the CSG and listen to our sessions, you will be able to address the majority of the questions in the activities and worked examples.
Prerna 2020年6月30日
For cash flow statements do we need to do indirect method also?
- 果教授 2020年6月30日
  Yes. Attempt the Act 2.1 Task B – reconciliation of cash flow from operating activities to profit for the year.

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Unit 2 _ Activities & Worked Examples_ FIN

Unit 2 – Work through question

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