Accounting Business Reporting for Decision Making

CHAPTER 7 Statement of cash flows 277

ILLUSTRATIVE EXAMPLE 7.15

Balance sheet

Teresa’s Carpets and Rugs

Balance sheet as at 31 May 2016

Assets

Current

Cash

Accounts receivable

Inventory

$ 117 500

20 000

10 000

Liabilities

Current

Accounts payable $ 50 000

Non-current

Loan 50 000

Non-current

Shop fittings

Less: Accumulated depreciation

20 000

668

19 332

Equity

Capital contributed

Retained earnings

20 000

56 498*

Lease prepayment

Less: Accumulated amortisation

$ 10 000

334 9 666

$ 176 498 $ 176 498

*Retained earnings comprises profit for April 2016 ($18 249) plus the profit for May 2016 ($38 249).

Note that to be accurate we should split the loan into its current and non-current components. The first

$5000 is payable by the end of the year, so should be listed as current, with the remaining $45 000 listed

as non-current. This gives the user more information about when the loan is payable.

In the above example, we presented the cash flows in the statement of cash flows under two headings:

cash inflows and cash outflows. In practice, it would be cumbersome to present every individual cash

inflow and outflow as we have done above. To ensure that the statement of cash flows does not become

too lengthy, generally the cash inflows and outflows are grouped into activities: operating activities,

investing activities and financing activities. Grouping the cash flows in this way means that we can easily

differentiate cash flows from normal operations from cash flows associated with investment and cash

flows associated with financing the business. Teresa’s statement of cash flows for the months of April

and May is presented in this grouped format in illustrative example 7.16 to show the various categories

of cash flows and the activities they relate to.

ILLUSTRATIVE EXAMPLE 7.16

Statement of cash flows

Teresa’s Carpets and Rugs

Statement of cash flows for the period April–May 2016

Cash from operating activities

Receipts from customers ($40 000 + $80 000)

Payments to suppliers and employees ($35 000 + $2000 + $5000)

Dividends received

Interest received

Interest paid

Income taxes paid

$ 120 000

(42 000

—

—

(500

—

)

)

Net cash from operating activities 77 500

Cash from investing activities

Payments for lease rights and property, plant and equipment ($10 000 + $20 000)

Proceeds from sale of property, plant and equipment

(30 000

—

)

Net cash from investing activities (30 000)