Revenues are adjusted to provide cash receipts from

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revenues are adjusted to provide cash receipts from customers. Accrual-basis expenses (e.g. cost of sales, wages, and other expenses) are adjusted to reflect cash outflows from various classes of operating activities. The indirect method, on the contrary, does not show major classes of operating cash inflows and outflows. When using the indirect method to determine net cash flows from operating activities, non-cash items (such as gains or losses from disposal of non-current assets and depreciation) and any changes in current assets and current liabilities are added or subtracted from accrual-basis profit to make adjustment to cash-basis profit. Although entities are allowed to use either direct method or indirect method in preparing cash flows from operating activities, the AASB 107 recommends the use of direct method because it provides information not otherwise available in the other financial statements and a more reliable basis for estimating future cash
flows from operations, whereas the indirect method does not provide information about cash inflows or outflows from individual items of operating activities.
Exercise 18.8 Direct and indirect methods The comparative statements of financial position of Hutt Electrical as at 30 June 2016 and 2017 and the income statement for the year ended 30 June 2017 are shown overleaf. Additional information Other expenses include $55 500 depreciation expense. All sales and purchases of inventory are on credit. Required A. Prepare a statement of cash flows from operating activities only for Hutt Electrical for the year ended 30 June 2017 using the direct method. B. Repeat requirement A using the indirect method. HUTT ELECTRICAL Comparative Statements of Financial Position as at 30 June 2016 2017 ASSETS Cash at bank Accounts receivable Inventory Prepaid insurance Property Plant and equipment Accum. depreciation – plant and equip- ment $ 22 500 82 500 165 000 7 500 190 500 757 500 (102 000 ) $ 69 000 70 500 216 000 1 500 172 500 1 072 500 (154 500 ) TOTAL ASSETS $1 123 500 $1 447 500 LIABILITIES AND EQUITY Accounts payable Interest payable Other accrued expenses Mortgage payable Share capital Retained earnings $ 64 500 7 500 13 500 367 500 500 000 170 500 $ 75 000 4 500 18 000 442 500 750 000 157 500 TOTAL LIABILITIES AND EQUITY $1 123 500 $1 447 500 HUTT ELECTRICAL Income Statement for the year ended 30 June 2017 Sales Less: Cost of sales $1 047 000 780 000 GROSS PROFIT Add: Other income: Rent income Gain on sale of property $ 9 000 20 000 267 000 29 000 296 000 Less: Expenses: Interest expense Loss on sale of plant Other expenses 34 500 6 500 231 000 272 000 PROFIT $ 24 000
HUTT ELECTRICAL Statement of Cash Flows (Extract) for the year ended 30 June 2017 Cash flows from operating activities: Cash receipts from customers $1 059 000 Cash paid to suppliers and employees (985 500) Cash generated from operations 73 500 Interest paid (37 500) Net cash from operating activities $36 000 Workings: Cash receipts from sales Accounts Receivable Balance b/d 82 500 Cash from customers 1 059 000 Sales 1 047 000 Balance c/d 70 500 1 129 500 1 129 500 Cash payments for purchases Inventory Balance b/d 165 000 Cost of Goods sold 780 000 Purchases 831 000 Balance c/d 216 000 996 000 996 000 Accounts Payable Cash 820 500 Balance b/d 64 500 Balance c/d 75 000 Purchases 831 000 895 500 895 500

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