Chapter 12 Exercise Reviews

Question 1

State one reason why the owner should be unhappy with the cash performance of the firm

Answer 1

The business has suffered a Cash Deficit of $5 700, reducing its Bank balance.

Question 2

only statement of receipts and payments prepared

Explain one way to improve the information reported to the owner about the firms cash performance

Answer 2

By preparing a Cash Flow Statement, which shows the sources and uses of funds by classifying cash flows as Operating, Investing or Financing activities

Question 3

Operating Activities

Answer 3

Cash flows related to day to day trading activities

Question 4

Investing Activities

Answer 4

Cash flows related to the purchase and sale of non-current assets

Question 5

Financing Activities

Answer 5

Cash flows related to changes in the financial structure of the firm

Question 6

Explain your treatment of drawings

Answer 6

Classified as a Financing Outflow as it is a cash flow related to a change in the firm’s financial structure (i.e. it decreases Owner’s Equity)

Question 7

Explain one reason why the owner made the capital contribution of $10 000

Answer 7

To keep the bank balance out of overdraft

To help fund the purchase of the display cabinets

Question 8

Explain one benefit of preparing a cash flow statement rather than a statement of receipts and payments (3)

Answer 8

It aids decision-making by classifying sources and uses of funds, allowing the owner to identify whether Net Cash Flows from Operations is sufficient to cover other cash requirements.

It aids decision-making by allowing the firm to assess its performance in meeting its cash targets.

It assists in planning for future cash activities by providing a basis for cash targets for the future (in the next Budgeted Cash Flow Statement).

Question 9

cash surplus but negative operating cash flow

Explain one reason why the owner should be concerned about the firms cash performance for the reporting period

Answer 9

Net Cash Flows from Operations is negative, meaning the business is generating insufficient funds from its Operating activities to meet its other cash requirements. If not for the loan, the bank overdraft would have fallen into overdraft

Question 10

Explain your treatment of Accrued Interest Paid in the Cash Flow Statement

Answer 10

Classified as an Operating outflow as it is a cash flow related to the firm’s day-to-day trading activities

Question 11

Explain the importance of Net Cash Flows from the Operations to the success of a trading business

Answer 11

If Net Cash Flows from Operations are negative, the firm will be unable to meet its other cash requirements without using other sources of finance, such as loans which must be repaid or capital which is limited to the funds of the owner.

Question 12

Explain your treatment of discount expense

Answer 12

It is excluded from the Cash Flow Statement altogether as it is a non-cash expense. It involves a decrease to Debtors Control rather than Bank.

Question 13

Explain why GST received and GST Refund must be reported separately in the cash flow statement (3)

Answer 13

Received from different entities (customers v. ATO)

Recorded in different columns in the Cash Receipts Journal (GST v. Sundries)

May relate to different Reporting Periods (current v. previous)

Question 14

Explain why the GST paid on a non-current asset is not reported as an investing activity

Answer 14

All GST cash flows are reported as Operating activities as all GST paid to suppliers, whether for current or non-current assets, is recorded in the GST column of the Cash Payments Journal.

Question 15

Suggest 3 ways the purchase of the new vehicle may have been financed

Answer 15

Existing cash reserves/overdraft

Net Cash Flows from Operations

Loan/Capital contribution

Question 16

Explain how negative net cash flows form investing activities may lead to a reduction in net profit

Answer 16

It increases non-current assets, so Depreciation expense will increase, leading to a reduction in Net Profit.

Question 17

Explain how a positive from net financing activities may lead to a reduction in net profit

Answer 17

If it involves the receipt of a Loan, Interest expense may increase, leading to a reduction in Net Profit.

Question 18

Explain why capital contribution is not reported in the income statement

Answer 18

It is expressly excluded from the definition of revenue as it not earned as a result of the activities of the business but rather the owner.

Question 19

State one reason why the total of the debtors control column in the cash receipts journal does not equal receipts from debtors

Answer 19

The Debtors Control column includes the cash received from debtors plus the discount expense

Question 20

Explain why the owner should be concerned about the firms cash position but less concerned about its cash performance in August

Answer 20

The cash position is concerning because the Bank Balance at End is in overdraft, but the positive Net Cash Flows from Operations and Net Increase in Cash Position show positive cash performance in August 2015

Question 21

Explain how a business can increase cash but suffered a net loss

Answer 21

Capital Contribution

GST Received was greater than GST Paid.

Receipts from Debtors was greater than Credit Sales.

Capital Contribution is a cash inflow, which increased Net Cash Flows but is not a revenue and so had no effect on the Net Loss. Receipts from Debtors (cash inflow) increased Net Cash Flows by more than Credit Sales (revenue) increased Net Profit (or decreased the loss).

Question 22

Explain how the cash flow statement can aid decision making

Answer 22

The Cash Flow Statement allows the owner to identify sources and uses of cash, and assess whether the business is generating sufficient Operating cash. This will help to identify problem areas so corrective action can be taken

Question 23

Explain how a business can decrease cash but have a net profit

Answer 23

Polishing equipment

Repayment of loan

Accrued wages paid

GST paid more than GST received

Prepaid insurance/Payments for stock are greater than Cost of Sales

Cash outflows such as repaying a loan/purchasing polishing equipment decrease Bank but are not expenses so do not affect Net Profit in that Reporting Period. Payments for stock ($40 700) are cash outflows that decrease Bank more than the Cost of Sales ($23 500) expense decreases Net Profit.

Question 24

Net loss and Cash surplus

Answer 24

Loan

Capital Contribution

Stock sold (COS) but unpaid

Depreciation of Office Furniture/Advertising

Expense/Interest Expense unpaid

Loan/Capital Contribution are cash inflows that increase cash but are not revenue so do not affect Net Profit. Depreciation/Advertising /Interest (accrued) are expenses that decrease Net Profit but are not cash outflows and so do not affect cash.

Question 25

The bank overdraft increased despite an increase in the net cash flows of operating activities, explain how this could have occurred

Answer 25

Cash Purchase of Shelving

Cash Drawings

Both these cash outflows increase the Bank overdraft, but are classified as Investing and Financing activities, respectively, and so have no effect on Net Cash Flows from Operations.

Question 26

Explain one benefit of a cash flow statement

Answer 26

It aids decision-making by classifying sources and uses of funds, allowing the owner to identify whether Net Cash Flows from Operations is sufficient to cover other cash requirements.

It aids decision-making by allowing the firm’s to assess its performance in meeting its cash targets.

It assists in planning for future cash activities by providing a basis for cash targets for the future (in the next Budgeted Cash Flow Statement).

Question 27

net cash flows form operating is negative

Explain hwy the owner must be concerned about the firms net cash flows from investing activities

Answer 27

Net Cash Flows from Operations is negative so the firm cannot meet its Investing and Financing cash requirements without additional loans (which must be repaid) or capital (which is limited to the funds of the owner).

Question 28

Discussion of cash flow statement

Answer 28

Net Cash Flows from Investing Activities is negative, which will mean pressure on/a reduction in the firm’s bank balance. However, negative Investing cash flows may be expected if the business is purchasing new non-current assets, and positive Financing cash flows may be due to loans or a capital contribution to finance these assets. Further, more or better non-current assets may generate more sales, and more cash.

Question 29

Net profit despite net cash flow decrease

Answer 29

Credit Sales is greater than Receipts from Debtors.

Prepaid Insurance

Payments to Creditors is greater than Cost of Sales.

Credit Sales is revenue and so increases Net Profit by more than Receipts from Debtors increases Net Cash Flows from Operations. Prepaid insurance is a cash outflow, which decreases Net Cash Flows from Operations more than Insurance expense decreases Net Profit.

Question 30

*Explain what is meant by Cash Flow from Operating Activities

Answer 30

Cash derived from the business conducting its day to day trading activities such as buying and selling of stock and paying expenses

Question 31

*Net profit for the quarter was $3650, although Net Cash from Operating Activities was negative, explain giving one example how this can occur

Answer 31

Only cash inflows and outflows related to day to day trading activities are included in the calculation of Net Cash from Operating Activities, whereas the Net Profit is the result of revenues earned minus expenses incurred

Cash flows from operating activities and net profit measure different information.

For example, Credit sales may be greater than Receipts from debtors which could increase net profit more than operating cash flow

Question 32

*Discount Revenue and Sales are both reported as revenues in the income statement

Explain how each meets the definition of revenue

Answer 32

Sales is a revenue as it results in an inflow of economic benefits that increase Bank or Debtors Control and lead to an increase in Owners Equity

Discount Revenue is a revenue as it results in a saving in outflows of economic benefits to creditors. That is a reduction in the payment to creditors that leads to an increase in Owners Equity