Chapter 16, Problem 12E

To determine

Concept Introduction:

Cash Flow Statement:

Cash Flow Statement is the statement reflecting the flow of Cash & Cash Equivalents.

Cash:

It includes Cash in Hand & Deposits with Bank.

Cash Equivalents:

It includes those investments which are short term investment and highly liquid i.e. maturity period is of three months or less.

Operating Activities:

Operating Activities are the principal revenue generating activities of enterprise. In other words activities that are not financing and investing activities.

Investing Activities:

Investing activities are the activities related to acquisition and disposal of long term assets and investments. The investments are those investments which are not included in cash & cash equivalent.

Financing Activities:

Financing activities are the activities which results in change in size and composition of owner’s capital and borrowing of the enterprise.

Cash Flow from Operating Activities:

Cash flow from operating activities includes the inflow from principal revenue generating activities of enterprise. In other words inflow from activities that are not financing and investing activities.

Total Assets:

Total Assets includes the Non-Current Assets and Current Assets of an enterprises.

Average Total Assets:

Average total assets can be calculated by using the formula mentioned below

  $\frac{\left(Opening\text{ Total Assets }+\text{ Closing Total Assets}\right)}{2}$

Current Assets:

Current Assets are the assets that are either in the form of Cash & Cash Equivalents or can be converted into Cash or Cash Equivalent within a short period of time i.e. 12 months.

Non-Current Assets:

Non-Current Assets are those assets which are not current assets. It includes Fixed Assets (Tangible and intangible), Long term Investments, Long term loans and advances and other non-current assets.

Cash Flow on Total Assets Ratio:

It is an efficiency ratio used to calculate the efficiency of Assets to generate cash flows.

Requirement 1:

To Calculate and Prepare:

1. The Cash Flow from/(Used in) Operating Activities
2. The Cash Flow from/(Used in) Investing Activities
3. The Cash Flow from/(Used in) Financing Activities
4. The Cash Flow Statement for the Year ended on 30^th Jun 2015

Explanation of Solution

1. The Cash Flow from Operating Activities : $151,410
2. The Cash Flow Used in Investing Activities : $47,600
3. The Cash Flow Used in Financing Activities : $60,310
4. The Cash Flow Statement for the Year ended on 30^th Jun 2015: The statement is prepared below.

In the Books of IKIBAN INC. Cash Flow Statement For the year ended June 30, 2015

Particulars	Amount (In $)	Amount (In $)
I. Cash Flow from Operating Activities: - Cash Received from Customers (Working Note No.1) - Less : Cash Paid for Purchase of goods/Inventory (Working Note No.2) - Less: Cash Paid for Other Expenses (Working Note No.3) Cash Generated from Operations Less : Income Tax Paid (Working Note No.4 ) Cash Flow from Operating Activities II. Cash Flow from Investing Activities - Proceeds from Sale of Equipment (Working Note No.5) - Acquisition of New Equipment Cash Used in Investing Activities III. Cash Flow from Financing Activities - Proceeds from Issue of Common Stock ($220,000-$160,000) - Payment for Dividend (Working Note No.6) - Payment for Retirement of Note Payable Cash used in Financing Activities IV. Net Increase in Cash & Cash Equivalents (I+II+III) V. Add : Cash and Cash Equivalents in the beginning of the year - Cash VI. Cash and Cash Equivalents at the end of the year - Cash	664,000 (393,300) (75,000) 10,000 (57,600) 60,000 (90,310) (30,000)	195,700 (44,290) 151,410 (47,600) (60,310) 43,500 44,000 87,500

Explanations:

The working notes attached to the cash flow statement above are as under −

Working Notes:

1. Calculation of Cash Received from Customers

Dr. Accounts Receivable A/c Cr.

Particulars	Amount (In $)	Particulars	Amount (In $)
To Balance Brought Down To Sales (All sales are on credit)	51,000 678,000	By Cash A/c- Cash Received from Customers During the Year (Balancing Figure) By Balance Carried Forward	664,000 65,000
	729,000		729,000

1. Calculation of Amount Paid for Purchase of Goods/Inventory

Dr. Inventory A/c Cr.

Particulars	Amount (In $)	Particulars	Amount (In $)
To Balance Brought Down To Purchases A/c (Balancing Figure)	86,500 388,300	By Cost of Goods Sold during the year − as given in Income Statement By Balance Carried Forward	411,000 63,800
	474,800		474,800

Dr. Accounts Payable A/c Cr.

Particulars	Amount (In $)	Particulars	Amount (In $)
To Cash A/c −Cash Paid to Purchase Goods/Inventory (Balancing Figure) To Balance Carried Forward	3,93,300 25,000	By Balance Brought Down By Purchases A/c- (Total Purchases during the year)	30,000 388,300
	418,300		418,300

1. Statement showing calculation of amount paid for other Expenses

Particulars	Amount (In $)
Other Expenses (As per Income Statement)	67,000
Add: Closing Prepaid Expenses	4,400
Add: Opening Wages Payable	15,000
Less: Opening Prepaid Expenses	(5,400)
Less: Closing Wages Payable	(6,000)
Amount paid for other expenses	75,000

1. Calculation of Income Tax Paid

Dr. Income Tax Payable A/c Cr.

Particulars	Amount (In $)	Particulars	Amount (In $)
To Cash A/c −Income Tax Paid During the Year (Balancing Figure) To Balance Carried Forward	44,290 3,400	By Balance Brought Down By Provision for Income Tax − (as per Income Statement)	3,800 43,890
	47,690		47,690

1. Calculation of Proceeds from Sale of Equipment

Dr. Equipment A/c Cr.

Particulars	Amount (In $)	Particulars	Amount (In $)
To Balance Brought Down To Cash A/c- New Equipment Purchased To Gain on Sale of Equipment −given in adjustment	115,000 57,600 2,000	By Accumulated Depreciation-Equipment A/c By Cash A/c- Proceeds from Sale of Equipment (Balancing Figure) By Balance Carried Forward	40,600 10,000 124,000
	174,600		174,600

Dr. Accumulated Depreciation-Equipment A/c Cr.

Particulars	Amount (In $)	Particulars	Amount (In $)
To Equipment A/c- Depreciation on Sold Equipment (Balancing Figure) To Balance Carried Forward	40,600 27,000	By Balance Brought Down By Depreciation for the Current Year − (as per Income Statement)	9,000 58,600
	67,600		67,600

1. Calculation of Dividend Paid during the Year

Dr. Retained Earnings A/c Cr.

Particulars	Amount (In $)	Particulars	Amount (In $)
To Cash A/c −Dividend Paid Income Tax Paid During the Year (Balancing Figure) To Balance Carried Forward	90,310 33,300	By Balance Brought Down By Net Income- Income transferred from Income Statement− (as per Income Statement)	24,100 99,510
	123,610		123,610

The following are the steps involved in preparation of Cash Flow Statement by following the Direct Method

1. Determine the Cash Flow from/(Used in) Operating Activities

Given:

Total Sales = $678,000 (As per Income Statement)
By using this Information
Receipt from Customer
Increase in Accounts Receivable= $14,000 (Current Assets) Can be calculated

Cost of Goods Sold= $411,000 (As per Income Statement) Use this Information
Decrease in Inventory= $22,700 (Current Assets) to Calculate Amount
Decrease in Accounts Payable= $5,000 (Current Assets) Paid for Inventory

Other Expenses =$67,000 (As per Income Statement) Use this Information
Decrease in Prepaid Expenses= $1,000 (Current Assets) to calculate amount
Decrease in Wages Payable= $9,000 (Current Assets) paid for expenses

Income Tax Expenses= $43,890 Use this Information
Income Tax Payable= $3,800 (Opening Balance) To Calculate Income Tax
Income Tax Payable= $3,400 (Closing Balance) Paid During the Year

Particulars	Amount (In $)
Receipt from Customer (Working Note No.1)	664,000
Less: Amount paid towards purchase of Goods (Working Note No.2)	393,300
Less: Cash Paid towards other Expenses (Working Note No.3)	75,000
Cash Generated from Operations	195,700
Less: Income Tax Paid (Working Note No.4)	44,290
Cash Flow from Operating Activities	151,410

Note: As described above, the Amount received/paid can be calculated by preparing the T-Shape Account. The Rules for preparing the T-Shape Accounts is mentioned below:

Nature of Account	Debit Side	Credit Side
Asset Account	Increases	Decrease
Liabilities Account	Decreases	Increase
Revenue Account	Decreases	Increase
Expenses Account	Increases	Decrease
Capital Account	Decreases	Increase

1. In this step, Calculation of Cash Flow from/(Used in) Investing Activities:-

Given:

New Equipment purchased= $57,600
Cost of Equipment sold= $48,600
Gain on Sale of Equipment = $2,000
Now to calculate the amount received from sale of equipment, we can prepare the Equipment A/c and Accumulated Depreciation-Equipment A/c. (The Account is prepared in Working Note No.5)

Particulars	Amount (In $)
Cash from sale of old equipment (Working Note No.5)	10,000
Less :Cash Paid for purchase of New Equipment	(57,600)
Cash Used in Investing Activities	(47,600)

In this step, Calculation of Cash Flow from/(Used in) Financing Activities:-

Given:

Proceeds from Issue of Common Stock = $60,000 ($220,000-$160,000)
Payment for Retirement of Note Payable = $30,000

Calculate: Payment towards the dividend can be calculated by preparing the Retained earning account. The account is prepared in working Note No.6

Particulars	Amount (In $)
Proceeds from Issue of Common Stock (As per Comparative Balance Sheet)	60,000
Less: Payment for Retirement of Notes Payable	(30,000)
Less: Dividend Paid (Working Note No.6)	(90,310)
Cash Used in Financing activities	(60,310)

1. In this Step, Calculation of Net Decrease in Cash & Cash Equivalents

Particulars	Amount (In $)
Cash flow from Operating Activities (Computed in Step 1)	151,410
Cash used in Investing Activities (Computed in Step 2)	(47,600)
Cash Used in Financing activities (Computed in Step 3)	(60,310)
Net Increase in Cash and Cash Equivalent	43,500

In this last Step, Calculation of Cash and Cash Equivalents as on Jun 30,2015

Given:

Cash and Cash Equivalents on Jun 30, 2014= $44,000

Particulars	Amount (In $)
Net Decrease in Cash and Cash Equivalent (Computed in step 4)	43,500
Add: Opening Cash & Cash Equivalents	44,000
Cash and Cash Equivalents at the end of year i.e. Jun 30,2015	87,500

Current Assets: Current Assets are the assets that are either in the form of Cash & Cash Equivalents or can be converted into Cash or Cash Equivalent within a short period of time i.e. 12 months.

Current Liabilities: Current Liabilities are the liabilities which are repayable in a short period of time i.e. 12 months.

Conclusion

The Cash and Cash Equivalents of IKIBAN INC as on 30^th Jun 2015 is $87,500.

Requirement 2

To determine

To Calculate:

The Cash Flow to Total Asset Ratio for the year ended on Jun 30,2015.

Solution 2:

The Cash Flow to Total Asset Ratios for the year ended on Jun 30,2015 is 0.496 times

The formula to calculate the Cash Flow on Total Asset Ratio is mentioned below:
  $Cashflowtototalassetsratio=\frac{Cashflowfromoperatingactivities}{AverageTotalAssets}$

Statement showing Calculation of Cash Flow to Total Asset Ratio:

Particulars	2015
A. Cash Flow from Operating Activities	$151,410
B. Average Total Assets (Working Note No.1 )	$305,300
C. Cash Flow to Total Assets (A/B)	0.496 times

The Cash Flow on Total Assets is 0.496 times for fiscal year 2015.

Explanation of Solution

Working Note:

1. Calculation of Average Total Assets

Particulars	Amount (In $)
A.Total Assets (as on Jun 30, 2014)	$292,900
B. Total Assets (as on Jun 30, 2015)	$317,700
C. Total (A+B)	$610,600
D. Average Total Assets (C/2)	$305,300

The Following are the steps involved in Calculation of Cash Flow on total Assets Ratio:

Step1: Calculation of Cash Flow from Operating Activities

Given
Cash Flow from Operating Activities for Year ending on 30^th Jun 2015 = $151,410

The steps involved in Calculating Cash Flow from Operating activities are as below.

1. Determine the Cash Flow from/(Used in) Operating Activities

Given:

Total Sales = $678,000 (As per Income Statement)
By using this Information
Receipt from Customer
Increase in Accounts Receivable= $14,000 (Current Assets) Can be calculated

Cost of Goods Sold= $411,000 (As per Income Statement) Use this Information
Decrease in Inventory= $22,700 (Current Assets) to Calculate Amount
Decrease in Accounts Payable= $5,000 (Current Assets) Paid for Inventory

Other Expenses =$67,000 (As per Income Statement) Use this Information
Decrease in Prepaid Expenses= $1,000 (Current Assets) to calculate amount
Decrease in Wages Payable= $9,000 (Current Assets) paid for expenses

Income Tax Expenses= $43,890 Use this Information
Income Tax Payable= $3,800 (Opening Balance) To Calculate Income Tax
Income Tax Payable= $3,400 (Closing Balance) Paid During the Year

Particulars	Amount (In $)
Receipt from Customer (Working Note No.1)	664,000
Less: Amount paid towards purchase of Goods (Working Note No.2)	393,300
Less: Cash Paid towards other Expenses (Working Note No.3)	75,000
Cash Generated from Operations	195,700
Less: Income Tax Paid (Working Note No.4)	44,290
Cash Flow from Operating Activities	151,410

Note: As described above, the Amount received/paid can be calculated by preparing the T-Shape Account. The Rules for preparing the T-Shape Accounts is mentioned below:

Nature of Account	Debit Side	Credit Side
Asset Account	Increases	Decrease
Liabilities Account	Decreases	Increase
Revenue Account	Decreases	Increase
Expenses Account	Increases	Decrease
Capital Account	Decreases	Increase

Step2: Calculation of Average Total Assets

Given
Total Assets for Year ending on Jun 30, 2015= $317,700
Total Assets for Year ending on Jun 30, 2014= $292,900
Now, The Average Total Assets for year ended on Jun 30, 2015 can be calculated as follows

  $Average\text{ Total Assets =}\frac{\left(Opening\text{ Total Assets }+\text{ Closing Total Assets}\right)}{2}$

  $Average\text{ Total Assets=}\frac{\left(\text{317,700 }+\text{ 192,900}\right)}{2}$

  $Average\text{ Total Assets=}\frac{\left(610,600\right)}{2}$

Average Total Assets=$305,300

Step3: Calculation of Cash Flow on Total Assets Ratio

Particulars	Jun 30,2015
A. Cash Flow from Operating Activities (As per Solution No.1)	$151,410
B. Average Total Assets (Step2)	$305,300
C. Cash Flow to Total Assets (A/B)	0.496 times

Conclusion

The Cash Flow to Total Asset Ratios for the year ended on Jun 30, 2015 is 0.496 times. The Company is efficiently using its assets to generate cash flows.