Accounting Business Reporting for Decision Making

274 Accounting: Business Reporting for Decision Making

ILLUSTRATIVE EXAMPLE 7.9

Statement of cash flows

Teresa’s Carpets and Rugs

Statement of cash flows for the period 1–5 April 2016

Cash inflows

Proceeds from loan

Proceeds from capital (equity) contributed

$50 000

20 000

Total cash inflows 70 000

Cash outflows

Purchase of shop fittings

Lease prepayment

20 000

10 000

Total cash outflows 30 000

Net cash flow 40 000

Beginning cash balance —

Ending cash balance $40 000

Note that the statement of cash flows for the period 1–5 April is the same as for 1–4 April. No cash changed

hands in the inventory transaction. The balance sheet changed to reflect the purchase of carpets (inventory)

but cash did not decrease as we recorded an accounts payable amount equal to the inventory amount. During

April, Teresa sold $20 000 worth of inventory for $40 000. Interest expense was $250 for the month and

depreciation on fittings was $334 ($20 000/5 years/12 months). The monthly rent was $1000. In relation to

the prepaid lease payment of $10 000 for five years, this is an asset as it gives Teresa the right to use the shop

over the next five years. According to the Conceptual Framework recognition criteria (see chapters 5 and 6),

we should account for the proportion of the lease cost that is used each period. Therefore, the cost of the lease

each month is $167 ($10 000/5 years/12 months). The profit for the period is calculated as:

$40 000 (sales) − $20 000 (cost of sales) − $250 (interest) − $334 (depreciation) −

$1000 (lease payment) − $167 (lease amortisation) = $18 249

Teresa’s balance sheet as at 30 April 2016 and statement of cash flows for the month ended 30 April

2016 are shown in illustrative examples 7.10 and 7.11.

ILLUSTRATIVE EXAMPLE 7.10

Balance sheet

Teresa’s Carpets and Rugs

Balance sheet as at 30 April 2016

Assets

Current

Cash

Inventory

$ 78 750

15 000

Liabilities

Current

Accounts payable $ 35 000

Non-current

Non-current Loan 50 000

Shop fittings

Less: Accumulated depreciation

$20 000

334 19 666

Equity

Capital contributed — T Tang

Retained earnings

20 000

18 249

Lease prepayment

Less: Accumulated amortisation

10 000

167 9 833

$ 123 249 $ 123 249