Accounting Business Reporting for Decision Making

288 Accounting: Business Reporting for Decision Making

been paid for in advance (such as prepaid insurance). This is a little more complicated than calculating

payments for inventory as we are dealing with two accounts from the balance sheet. Using logic you

can deduce that:

1. if the balance of prepayments increases, then we have paid more for expenses, thus decreasing cash flow


2. if the balance of accruals increases, then we have a greater amount owing and have therefore paid
   less, thus increasing cash flow.
   For our example:

Other expenses (from the statement of profit or loss, excluding interest)

Manufacturing overhead

Warehouse

Distribution

Sales and marketing

Administrative

122 500

48 000

18 000

131 000

109 500

Deduct depreciation expense included in Other expenses

$ 429 000

30 000

Other expenses (excluding depreciation)

Prepayments (from the balance sheet):

Opening balance prepaid expenses

Closing balance prepaid expenses

$ 1 000

4 500

399 000

+ Increase (− decrease) in prepayments 3 500

Accruals (from the balance sheet):

Opening balance accruals

Closing balance accruals

700

7 500

+ Decrease (− increase) in accruals (6 800)

= Cash paid to other suppliers $ 395 700

Cash paid to other suppliers = Other expenses +/− Increase (decrease) in prepayments

+/− Decrease (increase) in accruals

Remember that depreciation is not a cash item. So if the ‘other expenses’ contains an amount for

depreciation (as in our example), this will need to be subtracted prior to the adjustment for prepayments

and accruals.

Payments to inventory suppliers

Payments for other expenses

Payments to employees

$ 610 800

395 700

245 000

Total $1 251 500

Step 1c: Calculate other payments for expenses and receipts for income

There are other cash flow items — in addition to receipts from customers and payments to suppliers

and employees — that need to be included in operating activities. Other outflows include interest paid

and income tax, and inflows include dividends and interest received. Although interest paid, and interest

and dividends received, are normally classified as operating cash flows, there may be instances where

they are classified as financing or investing cash flows.

In our example:

•   there were borrowing costs in the form of interest paid of $14 000

•   there was income tax payable in 2016 of $45 000, which would be paid in 2017. (Generally income

tax paid lags one year behind when it is payable.)

•   there were no dividends received

•   there was no interest received, and there were no bill discounts.

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