Question

a) Mike Corporation. Accounts Department have compiled the following data for the year ended December 31st, 2019: 35,000 40,000 Payment of dividends Proceeds from issuance of common shares Sales revenue Increase in operating current assets other than cash.. Repurchase of common shares. Cost of goods sold $ 6,000 Other operating expenses.. Purchase of equipment.... 20,000 Decrease in operating current 224,000 liabilities... Payment of note payable 30,000 Proceeds from sale of land. 5,000 Depreciation expense. $100,000 5,000 30,000 60,000 8,000 ended Prepare the operating activities section of Mike's statement of cash flows for the year December 31st, 2019. Please uses the indirect method for operating cash flows. I Answer: Mike Corporation. Statement of Cash flow For Year Ended December 31, 2019

Answer 1

A cash flow statement is divided into three parts on the basis of cash inflows and outflows from :

1. Operating activities : Where the cash receipts and payments on account of operating activities is considered. Operating activities are those which are directly related to earning of revenue .

Example : Purchases, sales etc

2. Investing Activities : These account for the cash flows on the basis of investments or capital expenditures made or assets & investments sold during the year.

Example: Purchase of bonds , Sale of Plant & machinery.

3. Financing activities: These relate to the activities which involve financing of the company. Such as Issue of common stock or debentures , payments of dividends and interest etc.

Under Indirect method of preparing cash flow statement, the changes in the current assets and liabilities are adjusted in the net income from statement of income.

(a)	Mike Corporation
	Statement showing operating cash flows for the year ended 31.12.2019
	Particulars	$	$
	Net income as per Income Statement		$   75,000.00
	Add: Non operating and non cash items
	Depreciation ( non cash)	$ 8,000.00
	Dividends ( Non operating)	$ 6,000.00	$   14,000.00
	Net income before adjustment of changes in working capital		$   89,000.00
	Less: Increase in operating current assets	-30000
	Less: Decrease in operating current liabilities	-5000
			$ (35,000.00)
	Cash inflow from operating activities		$   54,000.00
	The cash generated from oeprating activities is $ 54,000
	Income Statement for the year ended 31.12.2019
	Particulars	$	$
	Sales Revenue		$       224,000
	Less: Cost of goods sold		$       100,000
	Gross profit		$       124,000
	Less: Other operating expenses	$     35,000
	Depreciation	$        8,000	$         43,000
	Operating Margin		$         81,000
	Less : Dividends		$            6,000
	Net Income before taxes		$         75,000

Note :

1. Payments of dividend is a kind of financing activity , hence excluded from the operating cash flows.

2.Issuance of common shares is also a financing activity.

3.Repurchase of common shares is not a financing activity, hence excluded .

4. Purchase of Equipments is an investing activity.

5. Payment of note payable is again a financing activity.

6.Proceeds from sale of land is a kind of cash generation from investing activity.

7. Depreciation is excluded as it is a non cash expenditure , though operating in nature.

8. Increase in operating assets , reduces cash flows as the money is not received but stuck up. Ex: Increase in Debtors i.e the closing balance of debtors is more than opening balance and hence it means recoveries are not made . Rather money is invested in the working capital.

9. Reduction in operating liabilities also reduces the cash balance as money has been paid . Ex: Closing account payables are less than opening account payables.

(b)

The statement of cash flow shows the requirement of the cash by a business. It also indicates the utilisation and generation of cash under the different activities. For the management as well as the outsiders such as creditors and investors , it helps to predict the future as well as evaluate the management decisions.

Predict cash flows: For the investors they can see the payments of dividends and other benefits paid under the financing activities. It will help them to understand whether the company ploughs back its profits or distributed to its investors. Also the timely repayment of debt and interest can be verified by the lenders.

Evaluate management decisions: It helps the creditors and investors to analyse whether the cash generated is being used aptly or not. For examples creditors for materials can identify whether there is a decease in the Operating liabilities or increase . In case cash is generated from operating activities but there is an increase in the liabilities, it means the company does not utilize the money for payment to its creditors. It may happen that the surplus generated from one activity is utilized for another activity . For ex: Surplus of operating activity is used in the procurement of new machinery. Thus the ideology of the company can be understood and the decisions of the company can be easily predicted from the  cash flow statements.