Chapter 16, Problem 1GLP

To determine

Introduction: Cash Flow Statement is an important part of the Financial Statements of an enterprise. It shows the inflow and outflow of Cash during a particular period. It is an analytical tool to check the short term ability of a company to pay its coming liabilities. It comprises of three activities called Operating Activities, Investing Activities and Financing Activities.

Operating activity is the most important section of the Statement of Cash Flows. It depicts the Cash Inflows and Outflows with respect to the day-to-day operations of the enterprise. Here, Cash Inflows are cash receipts from customers for sale of merchandise inventory or services and Cash Outflows are payments for purchase of merchandise inventory or operating expenses. As per IFRS, Interest & Dividend incomes, Interest & Dividend payments can also be included in operating activities.

Operating Activities can be reported using any of the following methods:

1. Indirect Method: It starts from Net Income and adjusts it to arrive at net cash provided by operating activities.

2. Direct Method: It shows directly the cash receipts and payments from operations of the business. Some T-accounts are prepared in this method to arrive at the cash flows.

Investing Activity shows the inflow and outflow of Cash due to sale or purchase of Assets and/or Investments. Example: Purchase of Fixed Asset, Sale of Investments.

Financing Activity shows flow of Cash from Issuance or buy-back of Shares, redemption of debentures etc.

To State:

1(a). Statement of Cash Flows (Direct Method).

1(b). Reconciliation to the Indirect Method for Net Cash provided by Operating Activities.

2. Company’s cash flow on Total Asset ratio for fiscal year 2017.

Answer to Problem 1GLP

Solution:

1(a). Cash Flow Statement of IXIBAN INC. for the year ending June 30, 2017 using Direct Method is as follows:

IXIBAN INC.
Statement of Cash Flows
For the year ended June 30, 2017
Cash Flows from Operating Activities:	$	$
Receipts:
Collections from Customers		664000
Payments:
Payment to Suppliers	-393300
Payment towards Other Expenses	-75000
Payment towards Income Tax Expense	-44290	-512590
Net Cash provided by Operating Activities		15,410
Cash Flows from Investing Activities:
Cash Payment for Acquisition of Equipment	-57,600
Cash Receipt for Disposal of Equipment	10,000	-47,600
Net Cash used for Investing Activities (B)		-47,600
Cash Flows from Financing Activities:
Cash Payment of Notes Payable	-30,000
Cash Receipt from Issuance of Common Stock	60,000
Cash Payment of Dividend	-90,310	-60,310
Net Cash used for Financing Activities (C )		-60,310
Net Increase in Cash & Cash Equivalents (A+B+C)		43,500
Cash & Cash Equivalents at the Beginning of the year		44,000
Cash & Cash Equivalents at the End of the year		87,500

1(b). Reconciliation of Cash Flow from Operating Activities of IXIBAN Inc. for the year ending June 30, 2017 using Indirect Method is as follows:

IXIBAN INC.
Statement of Cash Flows
For the year ended June 30,2017
	$	$
Cash Flow from Operating Activities:
Net Income		99,510
Adjustments:
Depreciation Expense	58,600
Gain on Sale of Equipment	-2,000
Increase in Accounts Receivable	-14,000
Decrease in Inventory	22,700
Decrease in Prepaid Expenses	1,000
Decrease in Accounts Payable	-5,000
Decrease in Wages Payable	-4,000
Decrease in Income Taxes Payable	-400	51,900
Net Cash provided by Operating Activities (A)		1,51,410

2. Cash Flow on Total Asset Ratio for fiscal year 2017.

Cash Flow to Total Assets ratio is similar to return on total assets ratio. This ratio signifies that how efficiently the assets of the business are used to generate return or income in the form of cash collections from customers. Higher the ratio better the retun.\

Formula:

CashFlowtoTotalAssets=CashflowsfromOprations/AverageTotalAssets

Calculation:

Cash Flow to Total Assets= 151400/(317700+292900)/2

= 151410/305300

= 0.49

Explanation of Solution

Explanation: The above mentioned solution is explained below:

( Direct Method )

1. Collections from Customers = Opening Accounts Receivable + Sales - Closing Accounts Receivable

= $51,000 + $678,000 - $65,000

=$664,000

2. Payment to Suppliers = Closing Inventory + Cost of Goods Sold - Opening Inventory + Opening Accounts Payable - Closing Accounts Payable

=$63,800 + $411,000 - $86,500 + $30,000 - $25,000

=$393,300

3. Payment towards Other Expenses = Closing balance of Prepaid Expenses + Other Expenses for the year - Opening balance of Prepaid Expenses + Opening balance of Wages Payable - Closing balance of Wages Payable

=$4,400 + $67,000 - $5,400 + $15,000 - $6,000

=$75,000

* Prepaid Expenses & Wages Payable relate to Other Expenses. Hence, these are combined.

4. Payment towards Income Tax Expense = Opening balance of Income Tax Payable + Income Tax Expense for the year - Closing Balance of Income Tax Payable

=$3,800 + $43,890 - $3,400

=$44,290

5. The above adjustments are made to arrive at Net Cash provided / used by Operating Activities.

6. Cash paid for Acquisition of Equipment is an Outflow from Investing Activities.

7. Cash received from Disposal of Equipment = Original Cost of the Equipment sold - Accumulated Depreciation + Gain on sale

=$48,600 - $40,600 + $2,000

=$10,000

* Accumulated Depreciation on sold Equipment = Opening balance of Depreciation + Depreciation Expense for the year - Closing balance of Depreciation

= $9,000 + $58,600 - $27,000

= $40,600

8. Cash Payment of Notes Payable is an Outflow from Financing Activities.

9. Cash receipt from Issuance of Common Stock is Cash Inflow from Financing Activities.

10. Cash Payment of Dividend is Cash Outflow from Financing Activities.

Cash Payment of Dividend = Opening balance of Retained Earnings + Net Income for the year - Closing balance of Retained Earnings

= $24,100 + $99,510 - $33,300

= $90,310

( Indirect Method )

1. Depreciation Expense is a non-cash expense. Hence, it has been added to Net Income to arrive at cash flows from operating activities.

2. Gain on Sale of Equipment is a part of Investing Activities. Therefore, it has been deducted to the Net Income to arrive at cash flows from Operating Activities.

3. In Indirect method, we take into account the Changes in Working Capital. Increase in Current Assets & Decrease in Current Liabilities is deducted from the Net Income. It signifies that there is outflow of cash by increasing assets like inventory and/or by paying liabilities like accounts payable. Whereas, Decrease in Current Assets & Increase in Current Liabilities is added in the Net Income. It signifies that there is inflow of cash by decreasing assets like debtors and/or by increasing the amount of dues.

4. These adjustments are made to arrive at Net Cash provided/used by Operating Activities.

Conclusion

Conclusion: Hence, we can conclude that Net Cash provided by Operating Activities ($151,410 ) computed using direct method is reconciled with the indirect method.