Week 9 - Solutions to Preparation Questions Solution to...

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Unformatted text preview: Solutions to Preparation Questions Solution to Problem 13.6 1. The story of how there can be a profit but no cash on hand is as follows: There was cash on hand at the beginning Cash flow from operations (Cash profit) for 2009 was The bank loan provided some more cash 1000 12000 7000 20000 20000 0 Bikes and shed were purchased So no cash left Natasha spent all the cash she had at the start plus the cash she received from customers during the year and the cash the bank provided on bikes and the shed. 2. The loan from Natasha's parents would increase cash by $4000 and would be shown under Financing in the cash flow statement. The bank loan is a little trickier: a. If the bank loan were treated as a shortterm liability but not part of cash, then it would increase cash by $2000 and would be shown under Financing. b. It the loan is to be considered as part of cash and cash equivalents because of its demand nature, then this loan would have no effect on the cash flow statement. Cash would go up by $2000, but the loan would also be part of cash and cash equivalents and this would reduce it by $2000. So there would be no net effect on Cash and Cash Equivalents. Solution to Problem 13.7 1. Given that it has $400,000 cash inflow from investing activities it appears that it is selling off PPE or some part of the business. This indicates that the Narooma Limited is contracting its operations. 2. Most likely repayment of borrowings but could also include dividends and share buybacks. 3. It appears to be declining. While it had a positive cash flow from operations, it used these funds plus those from the sale of investments to reduce financing. Solution to Question 2 Final Exam 1999 Statement of Cash Flows for the yearended 30 June 1998 ($'000s) Cash from operating activities Cash received from customers (1410+20) Cash paid to suppliers and employees (470+80+90+240) Interest Paid Income Tax Paid Net cash flow from operating activities Cash from investing activities Sale of Motor Vehicle Purchase of Motor Vehicle Purchase of Buildings Purchase of Equipment Net cash flow from investing activities Cash from financing activities Proceeds from borrowings Paid off debentures Final Dividend Paid Interim dividends paid Issuing Shares Net cash flow from financing activities Net cash flow Cash opening balance Cash closing balance 1,430 (880) (120) (210) 220 280 (280) (100) (30) (130) 110 (110) (140) (60) 60 (140) (50) 120 70 Working Area Operating Activities Cash Received From Customers Accounts Receivable DR o/b (1) 1990 2011 o/b 560 540 1450 20 1410 560 1990 CR (3) (4) c/b Allowance for Doubtful Debt DR CR 50 o/b (3) 20 50 (2) c/b 80 100 100 80 2011 o/b Notes Opening and Closing Balances from Balance Sheet 1: Sales (from Income Statement): Recall that when sales are recorded the following journal entry is passed: Dr Accounts Receivable Cr Sales 1450 1450 2: Bad Debt Expense (from Income Statement): Recall when Bad Debt Expense is recorded, the following journal entry is passed: Dr Bad Debt Expense Cr Allowance for Doubtful Debt 50 50 3: Amount of Accounts Receivable that is not going to be collected and written off to Allowance for Doubtful Debt Dr Allowance for Doubtful Debt Cr Accounts Receivable 20 20 Since we do not have this information, it is calculated as the balancing item in the Allowance for Doubtful Debt Account 4. Amount of Cash Collected from Customers. Recall that the journal entry for Collecting Cash is: Dr Cash Cr Accounts Receivable 1410 1410 Since we do not have this information, it is calculated as the balancing item in the Accounts Receivable Account Cash Received From Customers 1410 Unearned Subscription Revenue DR CR 60 o/b 5) 30 20 (6) c/b 50 80 80 50 2011 o/b Notes Opening and Closing Balances from Balance Sheet 5: Subscription Revenue (from Income Statement): Recall that when revenues are recorded the following journal entry is passed: Dr Unearned Subscr. Revenue Cr Subscription Revenue 30 30 6. Amount of Cash Collected for Subscriptions. Recall that the journal entry for Collecting Cash is: Dr Cash Cr Unearned Subscr. Revenue 20 20 Since we do not have this information, it is calculated as the balancing item in the Accounts Receivable Account Cash Received for Subscriptions Total Cash Received from Customers 20 1430 Payment to Suppliers Accounts Payable DR (9) c/b 470 360 830 320 510 830 360 2011 o/b 2011 o/b CR o/b (8) DR o/b (8) Inventory CR 300 510 540 270 810 810 270 (7) c/b Notes: Opening and Closing Balances from Balance Sheet 7: Cost of Goods Sold (from Income Statement): Recall when a sale is recorded, the following journal entry is passed: Dr COGS Cr Inventory 540 540 8: Amount of purchased Inventory: Recall when purchasing Inventory the following journal entry is passed: Dr Inventory Cr Accounts Payable 510 510 Since we do not have this information, it is calculated as the balancing item in the Inventory Account 9: Amount of Cash paid to suppliers: Recall when paying Investors, the following journal entry is passed: Dr Accounts Payable Cr Cash 470 470 Since we do not have this information, it is calculated as the balancing item in the Accounts Payable Account Payment to Suppliers 470 Payment of Rent No Balance Sheet Account (i.e. No rent payable/paid in advance account). Implication: Rent Expenses are paid when incurred 10: Rent Expense (from Income Statement): Recall when rent expense is recorded, the following journal entry is passed: Dr Rent Expense Cr Cash 80 80 Payment of Rent 80 Payment of Insurance Prepaid Insurance DR o/b (12) 50 90 140 2011 o/b 50 90 50 140 CR (11) c/b Notes Opening and Closing Balances from Balance Sheet 11: Insurance Expense (from Income Statement): Recall when incurring an insurance expense, the following journal entry is passed Dr Insurance Expense Cr Prepaid Insurance 90 90 12: Cash Paid for Insurance: When Insurance is paid for, the following journal entry is passed: Dr Prepaid Insurance Cr Cash 90 90 Since we do not have this information, it is calculated as the balancing item in the Prepaid Insurance Account Payment of Insurance 90 Payment of Other Expenses Goodwill amortisation expense is not posted to Accrued Expenses as it appears in the P&L account separate from "Other Expenses". But there is no separate line item in the income statement for depreciation expenses relating to buildings, equipment, and motor vehicles. Consequently, depreciation expenses must be included in other expenses. Since depreciation expenses does not involve cash, we need to find the remaining other expenses after subtracting depreciation expenses. Accrued Expenses DR (18) c/b 240 80 320 190 130 320 80 2011 o/b CR o/b (17) Accum. Dep'n Motor Vehicle DR CR 100 o/b (13) 100 50 (14) c/b 50 150 150 50 2011 o/b 14) Depreciation Expense for Motor Vehicles = 50 15) Depreciation Expense for Buildings= 320 300 = 20 16) Depreciation Expense for Equipment= 240 210 = 30 17) Remaining Other Expenses = 230 50 20 30 = 130 Notes Opening and Closing Balances from Balance Sheet 13: When motor vehicles were sold (additional information), the following journal entries would have been passed: Dr Cash Dr Accum. Depn. Motor Vehicles Cr Gain from sale of MV Cr Motor Vehicles 280 100 80 300 14: Depreciation Expense Motor Vehicles: Recall that when depreciation expense is recognised, the following journal entry is passed: Dr Depreciation Expense (MV) 50 Cr Accum. Depreciation (MV) 50 Since we do not have this information, it is calculated as the balancing item in the Accum. Dep'n (MV) Account. No Cash payment for Depreciation Expense 15: Depreciation Expense Buildings: Recall that when depreciation expense is recognised, the following journal entry is passed: Dr Depreciation Expense Buildings 20 Cr Accum. Depreciation Buildings 20 Since we do not have this information, it is calculated as the increase in the Accum. Dep'n (Buildings) Account. No Cash payment for Depreciation Expense 16: Depreciation Expense Equipment: Recall that when depreciation expense is recognised, the following journal entry is passed: Dr Depreciation Expense Equipment 30 Cr Accum. Depreciation Equipment 30 Since we do not have this information, it is calculated as the increase in the Accum. Dep'n (Equipment) Account. No Cash payment for Depreciation Expense 17: Other Expenses (from Income Statement less depreciation expenses): Recall that when other expenses is incurred, the following journal entry is passed: Dr Other Expenses Cr Accrued Expenses 130 130 18: Payment of other expenses: Recall that when accrued expenses is paid, the following journal entry is passed: Dr Accrued Expenses Cr Cash 240 240 Since we do not have this information, it is calculated as the balancing item in the Accrued Expenses Account Cash Paid for Other Expenses 240 Payment of Interest No Balance Sheet Account (i.e. No interest payable account). Implication: Interest Expenses are paid when incurred 19: Interest Expense (from Income Statement): Recall when interest expense is recorded, the following journal entry is passed: Dr Interest Expense Cr Cash 120 120 The amount paid for interest expense is therefore found in the income statement Payment of Interest 120 Payment of Income Tax Income Tax Payable DR (21) c/b 210 130 340 190 150 340 130 2011 o/b CR o/b (20) Notes Opening and Closing Balances from Balance Sheet 20: Income Tax Expense (from Income Statement): Recall that when income tax expense is recognised, the following journal entry is passed: Dr Income Tax Expense Cr Income Tax Payable 150 150 21: Payment of income tax: Recall that when income tax is paid, the following journal entry is passed: Dr Income Tax Payable Cr Cash 210 210 Since we do not have this information, it is calculated as the balancing item in the Income Tax Payable Account Payment of Income Tax Investing Activities 210 Cash Paid/Received for Motor Vehicles Motor Vehicles DR o/b (22) 420 280 700 2011 o/b 400 300 400 700 CR (13) c/b Notes Opening and Closing Balances from Balance Sheet 13: When motor vehicles were sold (additional information), the following journal entries would have been passed: Dr Cash Dr Accum. Depn. Motor Vehicles Cr Gain from sale of MV Cr Motor Vehicles 280 100 80 300 22: Cash paid for Motor Vehicles. Recall that the journal entry that would have been passed is: Dr Motor Vehicles Cr Cash 280 280 Cash Received for Motor Vehicles Cash Paid for Motor Vehicles 280 280 Cash Paid/Received For Land and Buildings Buildings DR o/b (23) 900 100 1000 2011 o/b 1000 1000 1000 c/b CR Notes Opening and Closing Balances from Balance Sheet 23: Cash paid for Land and Buildings. Recall that the journal entry that would have been passed is: Dr Land and Buildings Cr Cash 100 100 Since we do not have this information, it is calculated as the balancing item in the Land and Buildings account. Cash Paid for Land and Buildings 100 Cash Paid/Received For Equipment Equipment DR o/b (26) (27) 640 20 30 690 2011 o/b 690 690 690 c/b CR Notes Opening and Closing Balances from Balance Sheet Calculation of revaluation Amount of Equipment 26: Additional Information 2: Equipment was revalued upwards during the year by $20,000. Journal Entry would be: Dr Equipment Cr Revaluation Reserve 20 20 27: Cash paid for Equipment: Recall that the journal entry that must have been passed would be: Dr Equipment Cr Cash 30 30 Since we do not have this information, it is calculated as the balancing item in the Equipment Account Cash Paid for Equipment 30 Financing Activities Cash Received/Repaid from Borrowings Borrowings DR c/b 570 570 CR 460 110 570 570 2011 o/b o/b (28) Notes Opening and Closing Balances from Balance Sheet 28: Cash Borrowed: Recall that the journal entry that must have been passed would be: Dr Cash Cr Borrowings 110 110 Since we do not have this information, it is calculated as the balancing item in the Borrowings Account Cash Received from Borrowings 110 Cash Received/Repaid from Debentures Debentures DR (29) c/b 110 200 310 CR 310 o/b 310 200 2011 o/b Notes Opening and Closing Balances from Balance Sheet 29: Repayment of Debentures: Recall that the journal entry that must have been passed would be: Dr Debentures Cr Cash 110 110 Since we do not have this information, it is calculated as the balancing item in the Debentures Account Repayment of Debentures 110 Proceeds From Share Issue Share Capital DR c/b 520 520 CR 450 10 60 520 520 2011 o/b o/b (30) (31) Revaluation Reserve DR CR 100 o/b 10 20 (26) 110 120 120 110 2011 o/b (30) c/b Notes Opening and Closing Balances from Balance Sheet Revaluation Amount of Equipment 26: Additional Information 2: Equipment was revalued upwards during the year by $20,000. Journal Entry would be: Dr Equipment Cr Revaluation Reserve 20 20 30: Additional Information 3: A Bonus share issue was declared out of Revaluation Reserve. Journal Entry: Dr Revaluation Reserve Cr Share Capital 10 10 Since we do not have this information, it is calculated as the balancing item in the Revaluation Reserve Account 31: Cash proceeds from share issue. Recall that the journal entry would have been: Dr Cash Cr Share Capital 60 60 Since we do not have this information, it is calculated as the balancing item in the Share Capital Account Proceeds From Share Issue 60 Payment of Final Dividend Final Dividend Payable DR CR 140 o/b 140 160 (33) 160 300 300 160 2011 o/b (32) c/b Notes Opening and Closing Balances from Balance Sheet Dividend Paid: Recall that at balance date last year when the final dividend was declared (i.e. Opening balance) the journal entry was: Dr Retained Earnings Cr Final Dividend Payable 140 140 32: The payment of that dividend would have occurred during the current year Dr Final Dividend Payable Cr Cash 140 140 Payment of final dividend 140 33: Dividend that is declared at the end of current year (i.e. Closing balance): Dr Retained Earnings Cr Final Dividend Declared It will be paid next year 160 160 Payment of Interim Dividend Retained Earnings DR (35) (33) (36) c/b 30 160 60 310 560 CR 280 280 o/b (34) c/b 560 310 2011 o/b DR 150 150 General Reserve CR 120 30 150 150 2011 o/b o/b (35) Notes Opening and Closing Balances from Balance Sheet 34: Net Profit (from Income statement): Recall that at the end of year, net profit is closed off to Retained Earnings: The journal entry would be: Dr Net Profit Cr Retained Earnings 280 280 35: Transfers to General Reserve. Recall that the journal entry for transfers to General Reserve would be: Dr Retained Earnings Cr General Reserve 30 30 Since we do not have this information, it is calculated as the balancing item in the General Reserve Account 33: Recall that a final dividend of 160 was declared: The journal entry would be: Dr Retained Earnings Cr Final Dividend Payable 160 160 36: Interim Dividend Paid: Recall that the journal entry would have been: Dr Retained Profits Cr Cash 60 60 Since we do not have this information, it is calculated as the balancing item in the Retained Profits Account Payment of Interim Dividend 60 ...
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This note was uploaded on 03/19/2012 for the course ACCT 1511 taught by Professor Kim during the Three '10 term at University of New South Wales.

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