Question

The following statement was prepared by Maloney Corporation’s accountant.

MALONEY CORPORATION STATEMENT OF SOURCES AND APPLICATION OF CASH FOR THE YEAR ENDED SEPTEMBER 30, 2017
Sources of cash
	Net income		$111,000
	Depreciation and depletion		70,000
	Increase in long-term debt		179,000
	Changes in current receivables and inventories, less current    liabilities (excluding current maturities of long-term debt)		14,000
			$374,000
Application of cash
	Cash dividends		$ 60,000
	Expenditure for property, plant, and equipment		214,000
	Investments and other uses		20,000
	Change in cash		80,000
			$374,000

The following additional information relating to Maloney Corporation is available for the year ended September 30, 2017.

1.		Salaries and wages expense attributable to stock option plans was $25,000 for the year.
2.		Expenditures for property, plant, and equipment		$250,000
		Proceeds from retirements of property, plant, and equipment		36,000
		Net expenditures		$214,000
3.		A stock dividend of 10,000 shares of Maloney Corporation common stock was distributed to common stockholders on April 1, 2017, when the per share market price was $7 and par value was $1.
4.		On July 1, 2017, when its market price was $6 per share, 16,000 shares of Maloney Corporation common stock were issued in exchange for 4,000 shares of preferred stock.
5.		Depreciation expense	$ 65,000
		Depletion expense	5,000
			$ 70,000
6.		Increase in long-term debt	$620,000
		Less: Redemption of debt	441,000
		Net increase	$179,000

1. In general, what are the objectives of a statement of the type shown above for Maloney Corporation? Explain.

2. Identify the weaknesses in the form and format of Maloney Corporation’s statement of cash flows without reference to the additional information. (Assume adoption of the indirect method.)
3.For each of the six items of additional information for the statement of cash flows, indicate the preferable treatment and explain why the suggested treatment is preferable.

Answer 1

1)

The main purpose of the statement of cash flows are : -

a) To show the change in cash from one period to the next

b) To summarize the financing and investing activities of the entity

c) To complete the disclosure of changes in financial position during the period

d) To depict  the information in such a way that statement is useful to a variety of users of financial statements in making economic decisions regarding the company.

2)

The following are weaknesses in form and format of Maloney Corporation’s Statement of Sources and Application of Cash :

1. The title of the statement should be Statement of Cash Flows.

2. The statement should add back to (or deduct from) net income certain items that did not use (or provide) cash during the period under the heading "adjustment to reconcile to cash ". The resulting total should be described as net cash provided by operating activities.

3. The format used should separate the cash flows into investing, financing, and operating activities. Non-cash investing and financing activities should be shown in a note to the financial statements

4. Increased and decreeased of current assets and current liabilities are shown under heading " changes in current accounts "

3)

The preferable treatment for each of the six items are:

1) The $25,000 option plan wage and salary expense should be included in the statement as an amount added back to net income, an expense not requiring the outlay of cash during the period.

There is no reference made to the $25,000 payroll expense, it appears the expense was not recorded or that there is an offsetting error elsewhere in the statement.

2) The expenditures for plant asset acquisitions should not be reported net of the proceeds from plant asset retirements. Both the outlay for acquisitions and the proceeds from retirements should be reported as investing activities.

3) Share dividends or share splits need not be disclosed in the statement because these transactions do not significantly affect financial position.

4) The issuance of the 16,000 ordinary shares in exchange for the preference shares should be shown as a non-cash financing activity.

5) The total of depreciation and depletion should be added back to net income in the computation of the net cash flow from operating activities.

6) The details of changes in long-term debt should be shown separately. Payments should not be netted against increases in long-term borrowings. The long-term borrowing of $620,000 should be shown as cash provided and the retirement of $441,000 of debt should be shown as use of cash from financing activities.