Scribd
Upload
113 views5 pages

Suggested Solution To Tutorial On SOCF

The statement of cash flows provides information about a business's cash generation and usage that is not available from the statement of financial position or statement of financial performance. It details the sources and uses of cash, showing how the entity obtained cash and what cash was used for within the period. While accrual accounting provides useful information about financial performance and position, the statement of cash flows complements this by focusing specifically on an entity's liquidity and cash flows.

Uploaded by

Liyendra Fernando
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
113 views5 pages

Suggested Solution To Tutorial On SOCF

The statement of cash flows provides information about a business's cash generation and usage that is not available from the statement of financial position or statement of financial performance. It details the sources and uses of cash, showing how the entity obtained cash and what cash was used for within the period. While accrual accounting provides useful information about financial performance and position, the statement of cash flows complements this by focusing specifically on an entity's liquidity and cash flows.

Uploaded by

Liyendra Fernando
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 5

SUGGESTED SOLUTION

Measuring and reporting cash flows - SOCF


Discussion questions
6.7 What information does the cash flow statement provide that is not
available from the statement of financial position or the statement of
financial performance?
The statement tells us how the business has generated cash during the
period and where that cash has gone. It provides details of the sources
and uses of cash that cannot be determined from the other financial
statements.
6.9 As a first-year accounting student, Irene is confused. She thought she
was learning that accrual accounting provided more useful
information about the financial performance and position of an
organisation than the statement of cash flows. The statement of cash
flows is a step in the wrong direction in her opinion. Help Irene with
her dilemma.
There is a belief that, despite their usefulness, the income statement
and the balance sheet do not concentrate sufficiently on liquidity. The
‘accrual-based’ nature of the income statement tends to obscure the
question of how and where a company is generating the cash it needed
to continue its operations. The cash flow statement fills the gap.

Additional questions

AQ1
“We made a profit of $130,000, so why is there only $3,000 in the bank?”, exclaimed Mr.
Smith, the owner of Medley Pty Ltd. Explain to Mr Smith the relationship between profit
and cash flow, to help him understand the reason why there is such a big difference
between profit and cash in the bank.
Profit as shown in the statement of financial performance is determined using the accrual
accounting basis. Whereas the amount of cash in the statement of financial position is
determined using the cash accounting basis.

The main difference between accrual and cash basis accounting is the timing of when


revenue and expenses are recognized. The cash method accounts for revenue only when
the money is received and for expenses only when the money is paid out. On the other
hand, the accrual method accounts for revenue when it is earned and expenses goods and
services when they are incurred. The revenue is recorded even if cash has not been
received or if expenses have been incurred but no cash has been paid.
As a consequent, the profit and cash in the bank reported in the financial statements
oftentimes are different.
AQ2
For each of the items listed below, classify the cash flows into operating, investing or
financing activities:
a. Payment of income taxes (O)
b. Cash lent to borrowers (I)
c. Payment of the electricity account (O)
d. Money received from a customer (O)
e. The purchase for cash of some equipment (I)
f. The payment of a long-term liability (F)
g. Payment of interest (O/F)
h. The receipt of money from newly acquired loan (F)

AQ3 Note: Emphasize on the correct presentation of this statement


PEORIA CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
(IN RM THOUSANDS)

Cash Flows from Operating Activities


Cash collections from customers RM1,200
Cash payments for:
Inventory (748)
Operating expenses (85)
Interest (25)
Income taxes (170)
Total cash payments (1,028)
Net cash provided by operating activities 172

Cash Flows from Investing Activities


Acquisition of land (150)
Acquisition of plant and equipment (200)
Net cash used by investing activities (350)

Cash Flows from Financing Activities


Additional long-term borrowings 50
Issuance of common stock 150
Net cash provided by financing activities 200

Net increase in cash 22


Cash balance, January 1, 2016 90
Cash balance, December 31, 2016 RM 112

AQ4

(a)
Cash Basis Accrual Basis
$ $
Service Revenue 66,000 78,000
- Operating Expenses 40,500 45,000
- Insurance Expense 6,500            -
Profit $19,000 $33,000

(b) Both accrual basis and cash basis provide useful information. However, it can
be argued that the accrual basis of accounting provides more useful
information about performance for decision makers because it recognises the
impact of accounting transactions or events on specific accounting periods.
The cash basis of accounting only recognises cash transactions. The accrual
basis of accounting provides a more comprehensive picture of the business
activities in the records. For example, accrued basis profit takes account of all
revenues and expenses for a period whether or not cash is received or paid
(provided recognition criteria are met). It also takes account of internal events,
such as the consumption of supplies or the depreciation of plant assets.

However, cash basis accounting is also useful. For example, the statement of
cash flows shows how much cash is generated from ordinary operating
activities (which will invariably be greater or less than accrual basis profit).
AQ5

Accrual accounting Cash accounting


Transactions RM RM

1 10,000 (expense) 10,000 (outflow)

2 200,000 (revenue) 160,000 (inflow)

3 18,000 (expense) 21,000 (outflow)

4 55,000 (expense) 0

5 1,000 (expense) 2,000 (outflow)

6 1,200 (expense) 800 (outflow)

7 1,000 (revenue) 2,000 (inflow)

Profit(Loss)/
Net cash 115,800 (profit) 128,200 (net cash inflow)

You might also like