Question

Bright Star Sdn Bhd. has the following information for 2012: Statement of comprehensive income for the year ended June 30, 2012 S 550,000 320.000 230,000 Sales revenue Less: Cost of goods sold Gross margin Less: Operating expenses Salaries expense Depreciation expense Insurance expense 165,000 21,000 19.000 205.000 25,000 3.000 28.000 Gain on sale of non-current assets Statement of financial position at June 30 2012 (5) 28,000 26,000 30,000 84,000 90,000 2011 (5) 33,000 Accounts payable 15,000 Salaries payable 42,000 90,000 Long-tem liabilities 74,500 2012 (5) 20,000 10,000 2011 (5) 23,000 8,000 Cash Accounts receivable Prepaid insurance 40,000 50,000 Furniture, net Share capital Retained earnings 4,000 100,000 174,000 3,500 80,000 164,500 174,000 164,500 During 2012, the company: 1. Sold furniture with a book value of $15,000 for cash. New funiture amounting to $51,500 was purchased for cash. 2. Repaid long-term liabilities with a principal value of $22,000. Took new long-term loans for cash amounting to $12,000. 3. Issued shares for cash $500. 4. Paid cash dividends $8,000. Required: a. Prepare a statement of cash flows for the year ended June 30, 2012 using the indirect method. b. Could there be circumstances under which a company could have net loss on the income statement and still have an increase in the cash balance?

Answer 1

a. The cash Flow statement using indirect method is as follows:

Bright Star Sdn Bhd.

Cash Flow statement for the year ended 30 June 2012

Particulars	$	$	Notes
Cash flow from operating activities
Net income	28,000
Add: Depreciation	21,000		A
Less: Gain on sale of non-current assets	(3,000)		B
		46,000
Add/(Less): Adjustments for changes in working capital
Accounts Payable	(3,000)		C
Salaries Payable	2,000		C
Prepaid Insurance	12,000		C
Accounts Receivable	(11,000)		C
Cash generated from Operations		46,000
Cash Flow from Investing activities
Proceeds from sale of furniture	18,000		D
Purchase of furniture	(51,500)		D
Net cash used in investing activities		(33,500)
Cash Flow from Financing activities
Fresh issue of shares	500		E
Dividends paid	(8,000)		E
Repayment of long term liabilities	(22,000)		F
Fresh loans borrowed	12,000		F
Net cash used in financing activities		(17,500)
Net increase/ (decrease) in cash and cash equivalents		(5,000)
Cash and cash equivalents at the beginning of the year		28,000
Cash and cash equivalents at the end of the year		33,000

Notes:

A Cash Flow statement explains the sources and applications of cash in the business under the heads "operating activities', 'investing activities' and 'financing activities'. Specific notes are as below:

A. The depreciation amount as given is a non-cash expenditure, hence it is added to the net income to arrive at cash generated from operating activities.

B. Sale of non-current assets is a non-operational activity. Hence, the gain arising from this activity is deducted from net income to arrive at cash generated from operating activities.

C. The cash from operations before changes to working capital has to be adjusted for changes in working capital. Any increase in a current liability or decrease in current assets generates cash, while any increase in current assets or decrease in current liabilities uses cash. Hence, the change in accounts receivable and the change in account payable, have been both shown as uses of cash, while the decrease in prepaid insurance and increase in salaries payable have been shows as sources of cash to arrive at net cash generated from operating activities.

D. Furniture, with a book value of 15,000 has been sold during the year. The gain on the sale is 3,000. hence the gross sale value is 18,000 (15000 + 3000). The purchase of furniture of 51,500 has been shown as use of cash.

E and F. Dividends paid during the year and repayment of long term loans are shown as uses of cash, while fresh issue of shares and fresh loans borrowed are shown as sources of cash.

b. Yes, there could be a situation wherein an enterprise has a net loss, but an increase in the cash balance. This is because net income or loss is only one part of the gross cash generation by the enterprise. There could be a positive cash generation from working capital changes, or from financing and investing activities, which could result into a cash surplus. Similarly, if non-cash expense like depreciation is more than the loss incurred, that by itself would mean the enterprise would have a cash surplus in spite of having incurred a loss, without anything else changing.