PROBLEM 5: FOR CLASSROOM DISCUSSION

1. D – When evaluating an entity’s ability to generate future cash flows, all of the components of a
complete set of financial statements should be used and not only the statement of cash flows. For
example:
 Receivables and payables in the statement of financial position provide information on expected cash
receipts and cash disbursements in future periods.
 Income and expenses in the statement of profit or loss and other comprehensive income provide
information on the entity’s ability to generate cash flows from its operations.
 Information on issued and unissued shares in the statement of changes in equity provides information
on the availability of equity financing.
 Information on historical changes in cash and cash equivalents in the statement of cash flows helps
users assess future sources and uses of funds.
 The notes to financial statements provides information on the quality of earnings, e.g., whether
income or expenses are realized or unrealized or whether they are recurring or non-recurring.

2. A

3. C – Choices (a) and (b) are operating activities; Choice (d) is financing activity

4. B – Choices (a) and (c) are operating activities; Choice (d) is investing activity

5. A – Choice (b) is investing activity; Choice (c) is financing activity; Choice (d) is not presented
separately in the statement of cash flows because it is a movement between “cash” and “cash
equivalents”

6. D

7. Solution:

 Statement of profit or loss accounts:

(1) Sales:
Accounts receivable
Jan. 1, 20x2 1,260,000
Sales 6,720,000 5,640,000 Collections (squeeze)
2,340,000 Dec. 31, 20x2

(2) Cost of goods sold:

Inventories
Jan. 1, 20x2 2,700,000
Purchases 3,960,000 4,500,000 Cost of goods sold
2,160,000 Dec. 31, 20x2

Accounts payable
1,440, Jan. 1,
000 20x2
Payments 4,500, 3,960,
Purchase
(squeeze) 000 000
s
900,0
Dec. 31, 20x2
00

(3) Operating expenses:

Accrued operating expenses
180,00
Jan. 1, 20x2
0
Payments 2,052, 2,160, Operating
(squeeze) 000 000 expenses
288,0
Dec. 31, 20x2
00

(4) Loss on sale of investment:

o Pro forma entry to record the sale:
Cash (squeeze) 630,000
Loss on sale of investment 90,000
Investment in bonds 720,000
 o Cash inflow from investing activities: 630,000

 Statement of financial position accounts:

All the asset accounts and the accounts payable and accrued operating expenses accounts have been
considered. We’ll start with bonds payable.

(7) Bonds payable:

The bonds are stated at face amount. Therefore, the decrease of ₱360,000 (1,200,000 - 840,000) represents
settlement of the outstanding balance. This represents a cash outflow on financing activities.

(8) Share capital:

There is no change in share capital.

(9) Retained earnings:

Retained earnings
1,800,000 beg.
Loss for the year 30,000
Dividends declared and paid (squeeze) 540,000
End 1,230,00

The ₱540,000 dividends paid are a cash outflow on financing activities.

Foggy May Co.

Statement of cash flows
For the year ended December 31, 20x2

Cash flows from operating activities

Cash receipts from customers 5,640,000
Cash paid to suppliers (4,500,000)
Cash paid for operating expenses (2,052,000)
Net cash used in operating activities (912,000)

Cash flows from investing activities

Cash receipt from sale of investment in bonds 630,000
Net cash from investing activities 630,000

Cash flows from financing activities

Cash payment for settlement of bonds payable (360,000)
Cash payment for dividends (540,000)
Net cash used in financing activities (900,000)

Net decrease in cash and cash equivalents (1,182,000)

Cash and cash equivalents, beginning 1,440,000
Cash and cash equivalents, end 258,000

8. Solution:

Additional information (b):

 Pro-forma entry:
Cash 720,000
Investment in bonds (840K – 138K) 702,000
Gain on sale of investment (squeeze) 18,000

 Consideration of each item in the pro-forma entry:

1) The debit to cash of ₱720,000 is a cash inflow on investing activities.
2) The credit to investment in bonds is already considered.
3) The credit to gain on sale of ₱18,000 will be adjusted to profit.

Additional information (c):

 Pro-forma entry:
Cash 36,000
Accum. depreciation (150K – 30K) 120,000
Equipment 150,000
Gain on sale of equipment (squeeze) 6,000
 Consideration of each item in the pro-forma entry:
1) The debit to cash of ₱36,000 is a cash inflow on investing activities.
2) Debit to accumulated depreciation:

Accumulated depreciation
3,990,000 beg.
Accumulated depreciation of PPE
120,000 600,000 Depreciation expense (squeeze)
sold
end. 4,470,000

 The depreciation expense of ₱600,000 will be adjusted to profit.

3) Credit to equipment:

PPE
beg. 8,700,000
Acquisitions (squeeze) 2,481,000 150,000 Disposals
11,031,000 end.

 The ₱2,481,000 acquisition cost of PPE is a cash outflow on investing activities.

4) The credit to gain on sale of ₱6,000 will be adjusted to profit.

Additional information (d):

The change in notes payable will be included in the adjustment to profit because the notes were issued in
relation to operating activities.

Statement of financial position accounts:

Increase
20x2 20x1
(Decrease)
(1) Cash (Not included in the activities section)
(2) Accts. receivable 720,000 690,000 30,000
(3) Inventories 1,500,000 1,308,000 192,000
(4) Prepaid supplies 9,000 12,000 (3,000)
(5) Invest. in bonds (Already considered)
(6) PPE (Already considered)
(7) Accum. depn. (Already considered)
(8) Accounts payable 1,227,000 1,890,000 (663,000)
(9) Salaries payable 150,000 210,000 (60,000)
(10) Notes payable 300,000 1,200,000 (900,000)

(11) Bonds payable:

The increase of ₱3,000,000 is a cash inflow on financing activities.

(12) Share capital:

There is no change in the account, meaning there were no additional issuances during the period.

(13) Retained earnings:

Retained earnings
beg. 30,000
Dividends paid (squeeze) 180,000 360,000 Profit for the year
end 150,000

The dividends paid of ₱180,000 are a cash outflow on financing activities.

Googly Eyes Co.

Statement of cash flows
For the year ended December 31, 20x2
Cash flows from operating activities
Profit for the year 360,000
Gain on sale of investment (18,000)
Depreciation expense 600,000
Gain on sale of equipment (6,000)
Increase in Accounts receivable – net (30,000)
Increase in Inventories (192,000)
Decrease in Prepaid supplies 3,000
Decrease in Accounts payable (663,000)
Decrease in Salaries payable (60,000)
Decrease in Notes payable (900,000)
Net cash used in operating activities (906,000)

Cash flows from investing activities

Cash receipt from sale of investment 720,000
Cash receipt from sale of equipment 36,000
Cash payment for acquisition of PPE (2,481,000)
Net cash used in investing activities (1,725,000)

Cash flows from financing activities

Cash proceeds from issuance of bonds 3,000,000
Cash payment for dividends (180,000)
Net cash from financing activities 2,820,000

Net increase in cash and cash equivalents 189,000

Cash and cash equivalents, beginning 510,000
Cash and cash equivalents, end 699,000