Page |1

Chapter 6
Statement of Cash Flows

PROBLEM 1: TRUE OR FALSE

1. TRUE
2. FALSE
3. FALSE
4. FALSE – financing
5. FALSE
6. TRUE
7. TRUE
8. TRUE
9. FALSE
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. C
2. D
3. B
4. B
5. B
6. A
7. C
8. D
9. C
10. D

PROBLEM 3: EXERCISES
1. Solutions:

Requirement (a): Direct method

Page |2

Additional information (a): Allowance for doubtful

accounts

Allowance for doubtful accounts

20,000 beg.
Bad debts
Write-offs (a) expense
30,000
(squeeze) (see income
10,000 statement)
end. 40,000

Accounts receivable – gross

beg. (620K net + 640,0
20K allow.) 00
10,000, 10,00
(a)
Sales 000 0 Write-offs
9,830
,000 Collections (squeeze)
800,0
00 end. (760K + 40K allow.)

Additional information (b): Investment in bonds

The Investment in bonds increased but the problem states
that there were no acquisitions or disposals during the year.
Therefore, the increase of ₱10,000 (180,000 – 170,000) must be
due to the amortization of discount.

Interest income 40,000

(10,00
Amortization of discount on investment in bonds 0)
30,00
Collection of interest income 0

Additional information (c): Other expenses and

Depreciation
Accumulated depreciation
400,0
00 beg.
Accumulated
Depreciation
depreciation of PPE ? ?
expense
sold
400,0
end.
00
Page |3

We need the information on the accumulated

depreciation of items sold, so we go to the next
‘additional information’.

Additional information (d): Sale of old building

The pro-forma entry to record the sale is as follows:
20x2 Cash 520,00
Loss on sale of building 0
Accumulated depreciation 80,000
(squeeze) 1,000,0 1,600,0
Building 00 00

Accumulated depreciation
400,00
0 beg.
Accum.
1,000,0 1,000,0 Depreciation
depreciation of
00 00 expense
building sold (squeeze)
400,00
end.
0

2,400,00
Other expenses 0
(1,000,0
Depreciation expense 00)
Impairment loss on Goodwill (180,000 end. -
(20,000)
(b)
200,000 beg.)
1,380,00
Payment of Other expenses 0

Goodwill has decreased, but there was no sale of cash

(b)

generating unit (CGU). Therefore, the decrease must be

impairment loss.

Investing activities:
Consideration of each item on the pro-forma entry above:
1) The debit to Cash of ₱520,000 representing proceeds
from the sale of old building is a cash inflow on
investing activities.
2) The debit to Loss on sale of building does not affect our
computation under the direct method.
3) The debit to Accumulated depreciation is already
considered.
Page |4

4) The ₱1,600,000 credit to Building is considered as

follows:

Building
2,000,00
beg. 0
Acquisitions 4,600,0 1,600,00
(squeeze) 00 0 Disposals
5,000,00
0 end.

 The ₱4,600,000 acquisition cost of building is a cash

outflow on investing activities.

Additional information (e): Held for trading securities

The ₱200,000 acquisition cost of held for trading securities
is a cash outflow on operating activities.

Additional information (f): Issuance of shares

The ₱2,000,000 proceeds on the issuance of shares are a
cash inflow on financing activities.

 Statement of profit or loss accounts:

(1) Sales: We have already considered this.

(2) Cost of Sales:

Inventory
1,800,
beg. 000
Net purchases 5,200,00 6,000,
(squeeze) 0 000 Cost of sales
1,000,
000 end.

Accounts payable
160,00
0 beg.
Payments to suppliers 5,120, 5,200, Net
(squeeze) 000 000 purchases
240,00
end.
0

(3) Rent income:

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Rent receivable/Unearned rent

Rent receivable, 20,00 60,00
beg. 0 0 Unearned rent, beg.
900,0 850, Collections on rent
Rent income 00 000 (squeeze)
Unearned rent, 40,00 50,00
end. 0 0 Rent receivable, end.

(4) Interest income: We have already considered this.

(5) Insurance expense:

Prepaid insurance/Insurance
payable
Prepaid insurance, 80,00 90,00 Insurance payable,
beg. 0 0 beg.
190, 200,0
Payments (squeeze) 000 00 Insurance expense
Insurance payable, 120,0 100,0 Prepaid insurance,
end. 00 00 end.

(6) Bad debts expense: Ignored.

(7) Interest expense:

200,00
Interest expense 0
Amortization of discount on bonds payable (see
balance sheet) (10,00
(200K, beg. – 190K, end.) 0)
190,
Payment of interest expense 000

(8) Other expenses: We have already considered this.

(9) Loss on building: We have already considered this.

(10) Unrealized gain on investment: We have already

considered this.

(11) Income tax expense:

Income tax expense (accrual) 600,00

Page |6

0
(10,00
Increase in Deferred tax liability 0)
590,00
Current tax expense 0

Income tax payable

70,000 beg.
Payment for tax 630,0 590,00 Current tax
(squeeze) 00 0 expense
end. 30,000

 Statement of financial position accounts:

We have already considered all the asset accounts and the
current liabilities accounts up income tax payable, so we’ll
start with dividends payable.

Dividends payable:
Dividends payable
240,00
0 beg.
Dividends
Dividends paid ? ? declared
end 460,000

We can rework the “Dividends declared” from the retained

earnings account:
Retained earnings
250,00
0 beg.
Dividends declared 840,0 1,470,0
(squeeze) 00 00 Profit for the yr.
880,0
end 00

Now, back to the dividends payable T-account:

Dividends payable
240,0
00 beg.
Dividends paid 620,00 840,0 Dividends
(squeeze) 0 00 declared
end 460,00
Page |7

The ₱620,000 dividends paid are a cash outflow on

financing activities.

Short-term loan payable:

Short-term loan payable decreased by ₱100,000. This
represents repayment of loan, which is a cash outflow on
financing activities.

Bonds payable and related Discount account:

There is no change in the face amount of the bonds.
Therefore, there were no repayments or additional
issuances during the period.

Deferred tax liability: We have already considered this (see

income tax)

Share capital: We have already considered this.

Retained earnings: We have already considered this.

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

Cash flows from operating activities

9,830,00
Cash receipts from customers 0
Cash receipts for rent income 850,000
Cash receipts for interest income 30,000
(5,120,0
Cash paid to suppliers 00)
(190,000
Cash paid for insurance )
(1,380,0
Cash paid for other expenses 00)
4,020,00
Cash generated from operations 0
(190,000
Interest paid )
Income taxes paid (630,000
Page |8

)
Cash paid for the acquisition of held for (200,000
trading securities )
3,000,00
Net cash from operating activities 0

Cash flows from investing activities

Cash receipt from sale of old building 520,000
(4,600,0
Cash payment for acquisition of building 00)
(4,080,0
Net cash used in investing activities 00)

Cash flows from financing activities

2,000,00
Cash proceeds from issuance of share capital 0
(620,000
Cash payment for dividends )
(100,000
Cash payment for short-term loan )
1,280,00
Net cash from financing activities 0

Net increase in cash and cash equivalents 200,000

Cash and cash equivalents, beginning 300,000
Cash and cash equivalents, end 500,000

Requirement (b): Indirect method

Additional information (a): Allowance for doubtful accounts

Ignored.

Additional information (b): Investment in bonds

Profit for the year 1,470,000

Amortization of discount on investment in
bonds (10,000)
Page |9

Additional information (c): Other expenses and

Depreciation
Accumulated depreciation
400,0
00 beg.
Accumulated
Depreciation
depreciation of PPE ? ?
expense
sold
400,0
end.
00

We need the information on the accumulated

depreciation of items sold, so we go to the next
‘additional information’.

Additional information (d): Sale of old building

The pro-forma entry to record the sale is as follows:
20x2 Cash 520,00
Loss on sale of building 0
Accumulated depreciation 80,000
(squeeze) 1,000,0 1,600,0
Building 00 00

Now, back to the accumulated depreciation T-account:

Accumulated depreciation
400,000 beg.
Accum.
1,00,0 1,000,0 Depreciation
depreciation of
00 00 expense
building sold (squeeze)
400,0
end.
00

Profit for the year 1,470,000

Amortization of discount on investment in
bonds (10,000)
Depreciation expense 1,000,000

Investing activities:
Consideration of each item on the pro-forma entry above:
1. The debit to Cash of ₱520,000 representing proceeds
from the sale of old building is a cash inflow on
investing activities.
P a g e | 10

2. The ₱80,000 debit to Loss on sale of building decreased

the profit, but sale of building is an investing activity.
The loss is added back to the profit as follows:

Profit for the year 1,470,000

Amortization of discount on investment in
bonds (10,000)
Depreciation expense 1,000,000
Loss on sale of building 80,000

3. The debit to Accumulated depreciation is already

considered.
4. The ₱1,600,000 credit to Building is considered as
follows:

Building
2,000,00
beg. 0
Acquisitions 4,600,0 1,600,00
(squeeze) 00 0 Disposals
5,000,00
0 end.

 The ₱4,600,000 acquisition cost of building is a cash

outflow on investing activities.

Additional information (e): Held for trading securities

The ₱200,000 acquisition cost of held for trading securities
is a cash outflow on operating activities.
Held for trading securities are measured at FVPL.
Therefore, we also need to adjust the profit for any
unrealized gains or losses.

Profit for the year 1,470,000

Amortization of discount on investment in
bonds (10,000)
Depreciation expense 1,000,000
Loss on sale of building 80,000
Acquisition cost of held for trading
securities (200,000)
Unrealized gain (see income (40,000)
P a g e | 11

statement)

Additional information (f): Issuance of shares

The ₱2,000,000 proceeds on the issuance of shares are a
cash inflow on financing activities.

 Statement of profit or loss accounts:

We have already considered all items.

 Statement of financial position accounts

Increase
/
(Decreas
20x2 20x1 e)
(1) Cash and cash (Not included in the activities
equivalents section)
(2) Held for trading We have already considered
securities this.
(3) Accounts receivable
– net 760,000 620,000 140,000
(4) Rent receivable 50,000 20,000 30,000
1,000,00 1,800,0 (800,00
(5) Inventory 0 00 0)
(6) Prepaid insurance 100,000 80,000 20,000
We havealready considered
(7) Investment in bonds this.
We have already considered
(8) Buildings this.
(9) Accumulated We have already considered
depreciation this.
(10) Goodwill See below:

Goodwill has decreased by ₱20,000 (200,000 – 180,000),

but there was no sale of cash generating unit (CGU).
Therefore, the decrease must be impairment loss. Profit is
adjusted as follows:

Cash flows from operating activities

Profit for the year 1,470,000
Amortization of discount on investment in
bonds (10,000)
Depreciation expense 1,000,000
Loss on sale of building 80,000
P a g e | 12

Acquisition cost of held for trading

securities (200,000)
Unrealized gain (40,000)
Impairment loss on goodwill 20,000
Increase in Accounts receivable – net (140,000)
Increase in Rent receivable (30,000)
Decrease in Inventory 800,000
Increase in Prepaid insurance (20,000)
Let’s continue on the balance sheet accounts:

Increas
e/
(Decrea
20x2 20x1 se)
(11) Accounts payable 240,000 160,000 80,000
(20,000
(12) Unearned rent 40,000 60,000 )
(13) Insurance payable 120,000 90,000 30,000
(14) Income tax (40,000
payable 30,000 70,000 )

(15) Dividends payable

Dividends payable
240,00
0 beg.
Dividends
Dividends paid ? ? declared
end 460,000

We can rework the “Dividends declared” from the retained

earnings account:
Retained earnings
250,00
0 beg.
Dividends declared 840,0 1,470,0
(squeeze) 00 00 Profit for the yr.
880,0
end 00

Now, back to the dividends payable T-account:

Dividends payable
240,0 beg.
P a g e | 13

00
Dividends paid 620,00 840,0 Dividends
(squeeze) 0 00 declared
460,00
end 0

The ₱620,000 dividends paid are a cash outflow on

financing activities.

(16) Short-term loan payable

Short-term loan payable decreased by ₱100,000. This
represents repayment of loan, which is a cash outflow on
financing activities.

(17) & (18) Bonds payable and Discount on bonds

There is no change in the face amount of the bonds.
Therefore, there were no repayments or additional
issuances during the period. However, the discount has
decreased by ₱10,000 (200,000 – 190,000). This represents
the amortization for the period. The adjustment is as
follows:

Cash flows from operating activities

Profit for the year 1,470,000
Amortization of discount on investment in
bonds (10,000)
Depreciation expense 1,000,000
Loss on sale of building 80,000
Acquisition cost of held for trading
securities (200,000)
Unrealized gain (40,000)
Impairment loss on goodwill 20,000
Increase in Accounts receivable – net (140,000)
Increase in Rent receivable (30,000)
Decrease in Inventory 800,000
Increase in Prepaid insurance (20,000)
Increase in Accounts payable 80,000
Decrease in Unearned rent (20,000)
Increase in Insurance payable 30,000
Decrease in Income tax payable (40,000)
Amortization of discount on bonds payable 10,000
P a g e | 14

Let’s continue:
Increase/
20x2 20x1 (Decrease)
(19) Deferred tax
liability 30,000 20,000 10,000
(20) Share capital We have already considered this.
Notice that the increase in Share
capital is equal to the ₱2M
proceeds from issuance.
(21) Retained
earnings We have already considered this.

We can now complete the draft of our statement of cash

flows under the indirect method:

Cash flows from operating activities

Profit for the year 1,470,000
Amortization of discount on investment in
bonds (10,000)
Depreciation expense 1,000,000
Loss on sale of building 80,000
Acquisition cost of held for trading
securities (200,000)
Unrealized gain (40,000)
Impairment loss on goodwill 20,000
Increase in Accounts receivable – net (140,000)
Increase in Rent receivable (30,000)
Decrease in Inventory 800,000
Increase in Prepaid insurance (20,000)
Increase in Accounts payable 80,000
Decrease in Unearned rent (20,000)
Increase in Insurance payable 30,000
Decrease in Income tax payable (40,000)
Amortization of discount on bonds payable 10,000
Increase in Deferred tax liability 10,000
Net cash from operating activities 3,000,000

Cash flows from investing activities

Cash receipt from sale of old building 520,000
P a g e | 15

Cash payment for acquisition of building (4,600,000)

Net cash used in investing activities (4,080,000)

Cash flows from financing activities

Cash proceeds from issuance of share
capital 2,000,000
Cash payment for dividends (620,000)
Cash payment for short-term loan (100,000)
Net cash from financing activities 1,280,000

Net increase in cash and cash equivalents 200,000

Cash and cash equivalents, beginning 300,000
Cash and cash equivalents, end 500,000

2. Solution:
 Additional information:
Operating expenses 384,000
Depreciation expense (91,000)
Amortization expense (13,000)
Cash paid for operating
280,000
expenses

 Statement of profit or loss accounts:

(1) Sales:
Accounts receivable
Jan. 1,
20x2 312,000
3,083,00 3,042,00 Collections
Sales 0 0 (squeeze)
353,000 Dec. 31, 20x2

(2) Cost of goods sold:

Inventories
Jan. 1,
20x2 793,000
2,398,00
Purchases 0 2,450,000 Cost of goods sold
741,000 Dec. 31, 20x2

Accounts & Trade notes payable

P a g e | 16

455,0 1/1 (255K +

00 200K)
Payments 2,450, 2,398,0
(squeeze) 000 00 Purchases
12/31 (195K + 403,0
208K) 00

 Statement of financial position accounts:

All the given asset and liability accounts have been
considered.

Payday Corporation
Statement of cash flows
For the year ended December 31, 20x2
Cash flows from operating activities
3,042,00
Cash receipts from customers 0
(2,450,00
Cash paid to suppliers 0)
(280,000
Cash paid for operating expenses )
312,00
Net cash from operating activities 0

3. Solution:

Additional information (b):

 Pro-forma entry:
Cash 180,000
Investment in bonds (120K – 0)
120,000
Gain on derecognition of investment (squeeze)
60,000

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

1) The debit to cash of ₱180,000 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 ₱60,000 will be adjusted
to profit.

Additional information (c):

P a g e | 17

 Pro-forma entry (new equipment):

Equipment 336,000
Cash 336,000

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

1) Debit to equipment:

Equipment
1,224,00
beg. 0
Disposals
Acquisitions 336,000 120,000 (squeeze)
1,440,00
0 end.

2) The credit to cash of ₱336,000 is a cash outflow on

investing activities.

 Pro-forma entry (old equipment):

Accumulated depreciation (equal to historical cost) 120,000
Equipment (see T-account above)
120,000

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

1) Debit to accumulated depreciation:

Accumulated depreciation
456,00
0 beg.
Accumulated
120,00 Depreciation
depreciation of 84,000
0 expense (squeeze)
PPE sold
420,00
end.
0

 The depreciation expense of ₱84,000 will be adjusted

to profit.

2) Credit to equipment – already considered.

Additional information (d):

P a g e | 18

The ₱240,000 decrease in bonds payable represents the

retirement price. This is a cash outflow in financing
activities.

Additional information (e):

20x2 20x1 Increase
Share capital (₱12 120,000
par) 1,080,000 960,000
Share premium 168,000 120,000 48,000
Total 168,000

The total increase in the share capital and share premium

accounts of ₱168,000 represents the issuance price of the
shares issued above par. This is a cash inflow in financing
activities.

Statement of financial position accounts:

Increase
20x2 20x1 (Decreas
e)
(1) Cash & cash (Not included in the activities
equiv. section)
(2) Accounts
(17,040)
receivable 196,560 213,600
(3) Inventories 493,200 468,000 25,200
(4) Investment in
bonds (Already considered)
(5) Equipment (Already considered)
(6) Accum.
depreciation (Already considered)
(7) Accounts
46,800
payable 215,400 168,600
(8) Bonds payable (Already considered)
(9) Share capital (Already considered)
(10) Share
premium (Already considered)

(11) Retained earnings

Retained earnings
213,0
00 beg.
Dividends paid 144,0 327,3 Profit for the
(squeeze) 00 60 year
end 396,3
P a g e | 19

60

The dividends paid of ₱144,000 are a cash outflow on

financing activities.

Stormy Co.
Statement of cash flows
For the year ended December 31, 20x2
Cash flows from operating activities
Profit for the year 327,360
Gain on derecognition of investment (60,000)
Depreciation expense 84,000
Decrease in Accounts receivable 17,040
Increase in Inventories (25,200)
Increase in Accounts payable 46,800
Net cash from operating activities 390,000

Cash flows from investing activities

Cash receipt from derecognition of
investment 180,000
Cash payment for acquisition of PPE (336,000)
Net cash used in investing activities (156,000)

Cash flows from financing activities

Cash payment on settlement of bonds (240,000)
Cash receipt from issuance of shares 168,000
Cash payment for dividends (144,000)
Net cash used in financing activities (216,000)

Net increase in cash and cash equivalents 18,000

Cash and cash equivalents, beginning 132,000
Cash and cash equivalents, end 150,000
P a g e | 20

4. Solutions:

Requirement (a): Direct method

Additional information (a):

Pro-forma entry:
Accumulated depreciation 48,000
Equipment 48,000

Consideration for each item on the pro-forma entry:

1) Debit to accumulated depreciation:

Accumulated depreciation
432,000 beg.
Accum. 48,000 176,000 Depreciation
P a g e | 21

depn. of expense
equipt. (squeeze)
retired
end. 560,000

2) Credit to equipment:

PPE
beg. 1,968,000
208,000 48,000
Acquisition Disposal
2,128,000 end.

Additional information (b):

Share capital, end. 3,248,000

Share capital, beg. (2,608,000)
Increase in share capital 640,000
Stock dividends (160,000)
Shares issued for cash 480,000

Retained earnings
624,000 beg.
Stock
dividends 160,000
Cash Profit for the
64,000 352,000
dividends year
752,000

Statement of profit or loss accounts:

1) Sales

Accounts receivable
76
beg.
8,000

Sales 4,288,000 3,952,000 Collection

s
1,104,000 end.
P a g e | 22

2) Cost of sales

Inventories
1,344,0
beg. 00
Purchases 3,472, 3,168,0
(squeeze) 000 00 Cost of sales
1,648
,000 end.

Accounts payable
544,0
beg.
00
Payments 3,296, 3,472,0
Purchase
(squeeze) 000 00
s
720,0
end.
00

3) Operating expenses
Operating expenses 624,000
Depreciation expense (see above) (176,000)
Payments for operating expenses 448,000

4) Income tax expense

Income tax payable
160,00
0 beg.
Payment for tax 176,0 144,00 Current tax
(squeeze) 00 0 expense*
128,00
end. 0

* equal to the reported income tax expense because there

are no deferred taxes

Statement of financial position accounts: (All considered)

Sweetwater Inc.
Statement of cash flows
For the year ended December 31, 20x2
P a g e | 23

Cash flows from operating activities

3,952,00
Cash receipts from customers 0
(3,296,0
Cash paid to suppliers 00)
(448,000
Cash paid for operating expenses )
(176,000
Cash paid for income taxes )
Net cash from operating activities 32,000

Cash flows from investing activities

(208,000
Cash payment for acquisition of equipment )
(208,00
Net cash used in investing activities 0)

Cash flows from financing activities

Cash receipt from issuance of shares 480,000
Cash payment for dividends (64,000)
416,00
Net cash from financing activities 0

Net increase in cash and cash equivalents 240,000

Cash and cash equivalents, beginning 288,000
528,00
Cash and cash equivalents, end 0

Requirement (b): Indirect method

Additional information (a):

Pro-forma entry:
Accumulated depreciation 48,000
Equipment 48,000
P a g e | 24

Consideration for each item on the pro-forma entry:

1) Debit to accumulated depreciation:

Accumulated depreciation
432,000 beg.
Accum. Depreciation
depn. of expense
48,000 176,000
equipt. (squeeze)
retired
end. 560,000

2) Credit to equipment:
PPE
beg. 1,968,000
208,000 48,000
Acquisition Disposal
2,128,000 end.

Additional information (b):

Share capital, end. 3,248,000

Share capital, beg. (2,608,000)
Increase in share capital 640,000
Stock dividends (160,000)
Shares issued for cash 480,000

Retained earnings
624,000 beg.
Stock
dividends 160,000
Cash Profit for the
64,000 352,000
dividends year
752,000

Statement of profit or loss accounts: (All considered)

Statement of financial position accounts:

Increase
20x2 20x1
(Decrease)
Cash (Not reported in the activities section)
Accounts 1,104,0 768,000 336,000
P a g e | 25

receivable 00
1,648,0 1,344,00
Inventories
00 0 304,000
PPE (Already considered)
Accum. dep’n. (Already considered)
Accounts 720,00
544,000
payable 0 176,000
Income tax 128,00
160,000
payable 0 (32,000)
Share capital (Already considered)
Retained
(Already considered)
earnings

Sweetwater Inc.
Statement of cash flows
For the year ended December 31, 20x2
Cash flows from operating activities
Profit for the year 352,000
Depreciation expense 176,000
Increase in Accounts receivable (336,000)
Increase in Inventories (304,000)
Increase in Accounts payable 176,000
Decrease in Income tax payable (32,000)
Net cash from operating activities 32,000

Cash flows from investing activities

Cash payment for acquisition of equipment (208,000)
Net cash used in investing activities (208,000)

Cash flows from financing activities

Cash receipt from issuance of shares 480,000
Cash payment for dividends (64,000)
Net cash from financing activities 416,000

Net increase in cash and cash equivalents 240,000

Cash and cash equivalents, beginning 288,000
Cash and cash equivalents, end 528,000
P a g e | 26
P a g e | 27

PROBLEM 4: MULTIPLE CHOICE –

COMPUTATIONAL
1. C

Cash receipts from customers 340,000

Cash receipts from dividends on long-term
51,000
investments
(204,00
Cash payments to suppliers
0)
(68,000
Cash payments for operating expenses
)
(17,000
Cash payments for taxes
)
102,00
Net cash flow from operating activities 0

Cash receipts from repayment of loan

374,000
receivable
(136,00
Cash payment to acquire equipment
0)
238,00
Net cash flow from investing activities 0

Cash receipts from the issuance of ordinary

680,000
shares
(34,000
Cash payments for dividends
)
646,00
Net cash flow from financing activities 0
986,00
Net increase in cash 0

2. A
3. B
4. A
Accounts receivable
Jan. 1,
20x2 912,000
5,092,00 4,693,00 Collections
Sales 0 0 (squeeze)
1,311,000 Dec. 31, 20x2

Inventories
P a g e | 28

Jan. 1, 1,596,00
20x2 0
4,123,00
Purchases 0 3,762,000 Cost of goods sold
1,957,000 Dec. 31, 20x2

Accounts payable
646,00 Jan. 1,
0 20x2
Payments 3,914, 4,123,
Purchase
(squeeze) 000 000
s
855,0
Dec. 31, 20x2
00

Collections from customers 4,693,000

Payments for purchases (3,914,000)
Payments for salaries (a) (209,000)
Payments for other expenses (532,000)
Net cash flows from operating
38,000
activities

Salaries payable
190,0
Jan. 1, 20x2
00
(a)
Payments 209,0 171,0 Salaries
(squeeze) 00 00 expense
152,0
Dec. 31, 20x2
00

5. B

Pro-forma entry:
Cash 800,000
Accumulated depreciation (squeeze) 170,000
Equipment 900,000
Gain 70,000

Accumulated depreciation
360,00
0 beg.
Accumulated 170,00 390,00 Depreciation
P a g e | 29

depreciation of expense
0 0
PPE sold (squeeze)
580,00
end.
0

PPE
1,250,0
beg. 00
Acquisitions 3,150,
(squeeze) 000 900,000 Disposals
3,500,0
00 end.

6. D
Prepaid asset/Accrued payable
39
Prepaid asset, beg. 0 - Accrued payable, beg.
42 1,22 Operating expenses
Payments (squeeze) 0 0 (accrual)
Accrued payable, 41
end. 0 - Prepaid asset, end.

7. A

Sales 4,410,000
(3,150,000
COGS )
(270,000
Depreciation )
(855,00
Other expenses (squeeze) 0)
Profit 135,000

Accounts receivable
2,340,00
beg. 0
4,410,00 4,788,00 Collections
Sales 0 0 (squeeze)
1,962,000 end.
P a g e | 30

Inventories
beg. 855,000
3,060,00
Purchases 0 3,150,000 Cost of goods sold
765,000 end.

Accounts payable
1,215, Jan. 1,
000 20x2
Payments 3,330, 3,060,
Purchase
(squeeze) 000 000
s
945,0
Dec. 31, 20x2
00

Collections from customers 4,788,000

Payments for purchases (3,330,000)
Payments for other expenses (855,000)
Net cash flows from operating
603,000
activities

 Optional reconciliation using indirect method:

13
Profit 5,000
27
Depreciation expense 0,000
378,0
Decrease in A/R 00
90,0
Decrease in Inventory 00
(270,0
Decrease in A/P 00)
Net cash flows from operating 603,
activities 000

8. B

Income tax expense 1,300,000

(600,000
Increase in DTL (900,000 - 300,000)
)
500,00
Increase in DTA
0
Current tax expense 1,200,000
P a g e | 31

Income tax payable

- Jan. 1
Payments 1,000, 1,200,0
(squeeze) 000 00 Current tax expense
200,0
Dec. 31 00

9. C
Accumulated depreciation
190,00
0 beg.
Disposals Depreciation
- 95,000
(squeeze) expense
285,00
end.
0

PPE
beg. 760,000
Acquisitions 475,00
(squeeze) 0 - Disposals
1,235,0
00 end.

20x2 20x1 Issuance

Ordinary
shares 1,140,000 760,000
Share
premium 152,000 -

Totals 1,292,000 760,000 532,000

Retained earnings
76,000 beg.
Cash Profit for the
152,000 190,000
dividends year
114,000

Cash flows from investing activities

P a g e | 32

Cash payment for acquisition of equipment (475,000)

Net cash used in investing activities (475,000)

Cash flows from financing activities

Cash receipt from issuance of shares 532,000
Cash payment for dividends (152,000)
Net cash from financing activities 380,000

10. C

270,00
Profit
0
(10,440
Increase in accounts receivable, net
)
7,56
Decrease in prepaid rent
0
5,40
Increase in accounts payable
0
272,52
Cash flow from operating activities
0

11. D

Profit 528,000
Depreciation expense 264,000
Increase in accounts receivable (504,000)
Increase in inventories (456,000)
Increase in accounts payable 264,000
Decrease in provision for warranty (48,000)
Net cash flows from operating
activities 48,000

12. D

Profit 418,600
Depreciation expense 127,400
Amortization expense 18,200
Loss on sale of intangible asset (35K – 56K) 21,000
Unrealized gain on held for trading sec. (862K (91,000
– 771K) )
(57,400
Increase in accounts receivable
)
P a g e | 33

Decrease in inventories 72,800

(84,000
Decrease in accounts payable
)
Increase in trade notes payable 11,200
436,80
Net cash flows from operating activities
0

 The unrealized gain on the FVOCI equity securities is

ignored because the gain is recognized in other
comprehensive income (OCI), and therefore did not
affect the reported profit.

13. C

Additional information (a):

Issuanc
20x2 20x1 e
1,320,00
Share capital 960,000
0
Share premium 240,000 -
1,560,00
600,000
Totals 0 960,000

Acquisiti
20x2 20x1 on
Property, plant & 1,560,00
960,000 600,000
equipt. 0

 The increase in share capital and share premium

resulting from the issuance of shares in exchange for
equipment tallies with the increase in PPE. Therefore,
there were no other acquisitions of PPE for cash
during the period. Since the acquisition is non-cash,
it will be excluded from the statement of cash flows.

Additional information (b):

Retained earnings
96,000 beg.
Cash Profit
192,000 240,000
dividends (squeeze)
144,000
P a g e | 34

Cash flows from operating activities

Profit for the year (see above) 240,000
Depreciation expense (360K – 240K accum.
dep’n.) 120,000
Increase in Accounts receivable (38,400)
Decrease in Inventories 62,400
Decrease in Accounts payable (48,000)
Net cash from operating activities 336,000

Cash flows from investing activities

Net cash used in investing activities 0

Cash flows from financing activities

Cash payment for dividends (192,000)
Net cash used in financing activities (192,000)

Net increase in cash and cash equivalents 144,000

48,00
Cash and cash equivalents, beginning 0
Cash and cash equivalents, end 192,000

14. D
15. C
P a g e | 35

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
P a g e | 36

Jan. 1, 1,260,00
20x2 0
6,720,00 5,640,00 Collections
Sales 0 0 (squeeze)
2,340,000 Dec. 31, 20x2

(2) Cost of goods sold:

Inventories
Jan. 1, 2,700,00
20x2 0
3,960,00
Purchases 0 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

P a g e | 37

 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.
30,00
Loss for the year 0
Dividends declared 540,
and paid (squeeze) 000
1,230,
end 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

5,640,00
Cash receipts from customers 0
(4,500,00
Cash paid to suppliers 0)
(2,052,0
Cash paid for operating expenses 00)
(912,00
Net cash used in operating activities 0)

Cash flows from investing activities

P a g e | 38

Cash receipt from sale of investment in bonds 630,000

Net cash from investing activities 630,000

Cash flows from financing activities

(360,000
Cash payment for settlement of bonds payable )
(540,000
Cash payment for dividends )
(900,00
Net cash used in financing activities 0)

(1,182,0
Net decrease in cash and cash equivalents 00)
1,440,00
Cash and cash equivalents, beginning 0
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
P a g e | 39

 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
3,990,0
00 beg.
Accumulated
120,00 600,00 Depreciation
depreciation of
0 0 expense (squeeze)
PPE sold
4,470,0
end.
00

 The depreciation expense of ₱600,000 will be

adjusted to profit.

3) Credit to equipment:

PPE
8,700,00
beg. 0
Acquisitions 2,481,0
(squeeze) 00 150,000 Disposals
11,031,0
00 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 (Decreas
e)
(1) Cash (Not included in the activities
P a g e | 40

section)
(2) Accts. 720,00
30,000
receivable 0 690,000
1,500,0
(3) Inventories 192,000
00 1,308,000
(4) Prepaid
(3,000)
supplies 9,000 12,000
(5) Invest. in
bonds (Already considered)
(6) PPE (Already considered)
(7) Accum. depn. (Already considered)
(8) Accounts 1,227,0
(663,000)
payable 00 1,890,000
(9) Salaries 150,00
(60,000)
payable 0 210,000
(10) Notes 300,00
(900,000)
payable 0 1,200,000

(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
30,00
beg. 0
Dividends paid 180,0 360,0 Profit for the
(squeeze) 00 00 year
150,0
end 00

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
P a g e | 41

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