CHAPTER 5

THE STATEMENT OF CASH FLOWS

PROBLEMS

5-1. (CURRENCY COMPANY)

Cash flows from operating activities

Profit before income tax (780,000 +1,820,000) P2,600,000
Adjustments for
Depreciation expense 750,000
Patent amortization expense 270,000
Income from investment in subsidiary (480,000)
Interest expense 100,000
Operating income before working capital changes P3,240,000
Increase in accounts receivable (340,000)
Decrease in accounts payable ( 26,000)
Cash generated from operations P2,874,000
Interest paid (100,000 – 18,000) (82,000)
Income tax paid (780,000 – 60,000) (720,000)
Net cash from operating activities P2,072,000

5-2. (YEN COMPANY)

Cash flows from operating activities

Collections from customers P983,000
Payments to suppliers and employees (675,000)
Cash generated from operations P308,000
Interest paid (82,000)
Income taxes paid (154,000)
Net cash from operating activities P 72,000

5-3. (PESO COMPANY)

(a) Indirect method

Cash flows from operating activities
Profit before income tax P220,000
Adjustments for
Depreciation expense 80,000
Operating income before working capital changes P300,000
Decrease in accounts receivable 50,000
Increase in inventories (89,000)
Decrease in accounts payable (46,000)
Increase in salaries payable 24,000
Cash generated from operations P239,000
Income tax paid (66,000 – 12,000) (54,000)
Net cash from operating activities P185,000

(b) Direct method

Cash flows from operating activities
Collections from customers P1,050,000
Payments to trade creditors (715,000)
Payments for salaries (96,000)
Cash generated from operations P 239,000
Income taxes paid 54,000
Net cash from operating activities P185,000

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Chapter 5 – The Statement of Cash Flows

Computations:
Collections: 1,000,000 + 50,000 = 1,050,000
Payments to trade creditors: 580,000 + 89,000 + 46,000 = 715,000
Salaries paid:120,000 - 24,000 = 96,000
Income taxes paid: 66,000 - 12,000 = 54,000

5-4. (SWISS FRANC COMPANY)

(a) Direct method

Cash flows from operating activities
Collections from customers P6,220,000
Payments to trade creditors (4,140,000)
Payments for salaries (720,000)
Payments for insurance (560,000)
Cash generated from operations P 800,000
Income taxes paid (252,000)
Interest paid (175,000)
Net cash from operating activities P373,000

Computations:
Collections from customers: 6,100,000 + 120,000 = 6,220,000
Payments to trade creditors: 3,700,000 + 280,000 + 160,000 = 4,140,000
Salaries paid: 820,000 - 100,000 = 720,000
Insurance paid: 380,000 + 180,000 = 560,000
Income taxes paid: 288,000 – 18,000 – 40,000 + 22,000 = 252,000
Interest paid: 120,000 + 30,000 + 25,000 = 175,000

(b) Indirect method

Cash flows from operating activities
Profit before income tax P1,080,000
Adjustments for
Gain on sale of equipment (100,000)
Depreciation expense 220,000
Operating income before working capital changes P1,200,000
Decrease in accounts receivable 120,000
Increase in inventory (280,000)
Decrease in accounts payable (160,000)
Increase in prepaid insurance (180,000)
Increase in salaries payable 100,000
Cash generated from operations P800,000
Income taxes paid (252,000)
Interest paid (175,000
Net cash from operating activities P373,000

5-5. Items that would be reported in the Statement of Cash Flows (indirect method)
1. Under operating activities, depreciation expense of P120,000 is added to profit before
income taxes.
2. Under operating activities, net gain of P5,000 from sale of machine is deducted from
profit before income taxes. (Gain of P9,000 from sale of machine A less loss of P4,000
from sale of machine B).
3. Under investing activities section, P29,000 is reported as a cash inflow of sale of
machine (27,000 from machine A plus P2,000 from machine B).
4. Under investing activities, P250,000 is reported as a cash outflow for purchase of machine.

5-6. (DOLLAR COMPANY)

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Chapter 5 – The Statement of Cash Flows

(Indirect method)
Dollar Company
Statement of Cash Flows
For year ended December 31, 2017

Cash flows from operating activities

Profit before income tax P828,500
Adjustments for
Depreciation expense 290,000
Interest expense 60,000
Operating income before working capital changes P1,178,500
Decrease in accounts receivable 110,000
Increase in inventory (200,000)
Decrease in accounts payable (90,000)
Cash generated from operating activities P998,500
Income taxes paid 223,350
Net cash from operating activities P775,150
Cash flows from investing activities
Purchase of equipment (1,880,000)
Cash flows from financing activities
Issue of ordinary share capital P550,000
Issue of bonds at par 1,000,000
Cash dividends paid (259,950) 1, 290,050
Net increase in cash P185,200
Add cash balance, January 1 42,000
Cash balance, December 31 P227,200

Profit before tax is 828,500, computed as 579,950/70%

Dividends paid is 259,950, computed as 579,950 – 320,000
Income taxes paid is 30% x 828,500 = 248,550 -25,200 = 223,350

5-7. (RIYAL COMPANY)

Riyal Company
Statement of Cash Flows
For year ended December 31, 2017

Cash flows from operating activities

Profit for the year P 860,000
Adjustments for
Depreciation expense 600,000
Loss on sale of equipment 80,000
Amortization of patents 100,000
Interest expense 530,000
Gain on sale of long-term investments (30,000)
Increase in accounts receivable (511,500)
Decrease in inventory 150,000
Increase in accounts payable 300,000
Increase in financial assets at FVPL (100,000)
Cash generated from operations P1,978,500
Income taxes paid (268,500)
Interest paid (480,000) P1,230,000

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Chapter 5 – The Statement of Cash Flows

Cash flows from investing activities

Sale of equipment P420,000
Purchase of property and equipment (1,900,000)
Sale of long-term investment 280,000
Net cash flows from investing activities (1,200,000)

Cash flows from financing activities

Receipts from issuance of ordinary share capital P1,000,000
Payments for dividends (750,000)
Net cash flows from financing activities 250,000
Increase in cash P 280,000
Add cash balance, beginning 620,000
Cash balance, end P 900,000

Profit before tax: 1,122,000 + 750,000 – 1,270,000 = 602,000; 602,000/70% = 860,000

Depreciation expense: 2,200,000 + 400,000 – 2,000,000 = 600,000
Income taxes paid: 30% x 860,000 = 258,000; 258,000 +45,000 – 34,500 = 268,500
Interest paid: 12% x 4M = 480,000 or 530,000 – 50,000 amort of disc = 480,000

5-8. (EURO COMPANY)

Euro Company
Statement of Cash Flows
For year ended December 31, 2017

Cash flows from operating activities

Profit before income taxes P2,955,000
Adjustments for
Depreciation expense 750,000
Gain on sale of plant assets (300,000)
Interest expense 100,000
Income before working capital changes P3,505,000
Increase in accounts receivable (600,000)
Increase in inventories (150,000)
Increase in prepaid rent (6,000)
Decrease in accounts payable (285,000)
Increase in salaries payable 120,000
Cash generated from operations P2,584,000
Interest paid ( 80,000)
Income taxes paid (281,800) P2,222,200

Cash flows from investing activities

Proceeds from sale of plant assets P 800,000
Payments for purchase of plant assets (7,600,000)
Payments for purchase of investment in associate (4,000,000) (10,800,000)

Cash flows from financing activities

Receipts from issuance of ordinary share capital P5,000,000
Receipts from issuance of notes 6,000,000
Payments for dividends (1,200,000) 9,800,000
Increase in cash P1,222,200
Add cash balance, beginning 430,000
Cash balance, end P1,652,200
(Direct method) Euro Company
Statement of Cash Flows

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Chapter 5 – The Statement of Cash Flows

For year ended December 31, 2017

Cash flows from operating activities:

Cash receipts from customers P8,600,000
Cash payments for merchandise purchases (3,635,000)
Cash payments for salaries (1,980,000)
Cash payments for rent (131,000)
Cash payments for miscellaneous expenses (270,000)
Cash generated from operations P2,584,000
Interest paid ( 80,000)
Income taxes paid (281,800)
Net cash from operating activities P2,222,200

Cash flows from investing activities

Proceeds from sale of plant assets P 800,000
Payments for purchase of plant assets (7,600,000)
Payments for purchase of investment in associate (4,000,000) (10,800,000)

Cash flows from financing activities

Receipts from issuance of ordinary share capital P5,000,000
Receipts from issuance of notes 6,000,000
Payments for dividends (1,200,000) 9,800,000
Increase in cash P1,222,200
Add Cash balance, beginning 430,000
Cash balance, end P1,652,200

5-9. (RUPIAH COMPANY)

Purchase of treasury shares (1,000,000)

Increase in long-term debt 5,000,000
Depreciation expense 1,000,000
Amortization of intangibles 500,000
Loss on sale of equipment 300,000
Gain on sale of land (200,000)
Proceeds from issue of ordinary share 4,500,000
Purchase of equipment (6,000,000)
Proceeds from sale of equipment 1,000,000
Proceeds from sale of land 1,800,000
Payment of cash dividend (2,000,000)
Profit 5,950,000
Increase in accounts receivable (2,000,000)
Decrease in inventory 2,400,000
Increase in trade payables 4,200,000
Increase in income tax payable 1,300,000
Decrease in interest payable (700,000)
Impairment loss on equipment 300,000
Increase in cash and cash equivalents 16,350,000
Cash balance, January 1, 2017 2,000,000
Cash balance, December 31, 2017 18,350,000

A properly prepared statement of cash flows may also be done, as follows:

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Chapter 5 – The Statement of Cash Flows

Cash flows from operating activities

Profit before income tax P8,500,000
Adjustments for
Depreciation expense 1,000,000
Interest expense 875,000
Amortization of intangibles 500,000
Loss on sale of equipment 300,000
Gain on sale of land (200,000)
Increase in accounts receivable (2,000,000)
Decrease in inventory 2,400,000
Increase in trade payable 4,200,000
Impairment loss on equipment 300,000
Cash generated from operations P15,875,000
Income taxes paid (1,250,000)
Interest paid (1,575,000) P13,050,000
Cash flows from investing activities
Sale of equipment P1,000,000
Sale of land 1,800,000
Purchase of equipment (6,000,000)
Net cash flows from investing activities (3,200,000)
Cash flows from financing activities
Issue of shares P4,500,000
Issue of long term debt 5,000,000
Purchase of treasury shares (1,000,000
Payment of cash dividends (2,000,000)
Net cash flows from financing activities 6,500,000
Increase in cash P 16,350,000
Add cash balance, January 1, 2017 2,000,000
Cash balance, December 31, 2017 P 18,350,000

5-10. (BAHT COMPANY)

Baht Company
Statement of Cash Flows
For the Year Ended December 31, 2017

Cash flows from operating activities

Profit (loss) for the year P (20,000)
Adjustments for
Depreciation expense 35,000
Amortization of premium on bonds (5,000)
Gain on equipment sale (4,000)
Gain on bond retirement (10,000)
Dividends on investment in associate 40,000
Income from associates (65,000)
Increase in accounts payable 18,000
Increase in revenue received in advance 7,000
Increase in accounts receivable (20,000)
Decrease in prepayments 6,000
Decrease in inventory 5,000 P(13,000)
Cash flows from investing activities
Purchase of property and equipment (30,000)

Cash flows from financing activities

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Chapter 5 – The Statement of Cash Flows

Retirement of bonds (80,000)

Issue of share capital 60,000
Purchase of treasury shares (16,000)
Payment of dividends (25,000) (61,000)
Decrease in cash P(104,000)
Add cash balance, beginning 204,000
Cash balance, end P 100,000

MULTIPLE CHOICE QUESTIONS

Theory
MC1 D MC7 A MC13 A MC19 B
MC2 C MC8 A MC14 B MC20 C
MC3 C MC9 D MC15 C MC21 D
MC4 A MC10 C MC16 D MC22 D
MC5 D MC11 C MC17 C MC23 A
MC6 C MC12 A MC18 D MC24 A

Problems
MC25 D 870,000 + 10,000 – 510,000 – 110,000 = 260,000
MC26 C 4,380,000 + 216,000 – 304,000 = 4,292,000
MC27 C 550,000 –500,000 + 125,000 = 175,000
MC28 B 250,000 + 550,000 – 600,000 – 450,000 = 250,000
MC29 B 200,000 + 500,000 – 250,000 = 450,000
MC30 D 750,000 – 29,000 + 21,000 + 15,000 = 757,000
MC31 C 260,000+40,000=300,000; 400,000–300,000=100,000; 100,000 +120,000-102,000 = 280,000
MC32 D 3,200,000 + 400,000 – 2,500,000 = 1,100,000
MC33 D 690,000+10,000=700,000;
700,000-80,000+250,000+10,000+25,000+80,000=985,000
MC34 C 1,000,000 – 150,000 = 850,000
MC35 A 220,000 + 325,000 – 240,000 = 305,000
MC36 C 5,130,000 – 4,700,000 =430 ,000;1,820,000+80,000-1,700,000=200,000;
430,000–200,000=230,000+30,000 = 260,000
MC37 A 149,000-17,000+13,000=145,000; 840,000-53,000+32,000=819,000
MC38 B 3,600,000 + 2,500,000 – 1,550,000 – 2,910,000 = 1,640,000
MC39 D 910,000-40,000+70,000+50,000 = 990,000
990,000 – 60,000 – 50,000 – 90,000 + 30,000 = 820,000
MC40 C 30,000 – 5,000 = 25,000
MC41 A 264,000 + 25,000 = 289,000
MC42 D 820,000 – 25,000 -289,000 = 506,000
MC43 B 8,000,000 – (7,200,000 +-150,000 - 20,000) = 970,000
MC44 C 240,000-120,000= 120,000; 120,000 + 280,000 = 400,000
MC45 A 3M+960,000–400,000=3,560,000;1M+300,000–280,000=1,020,000;
3,560,000 – 1,020,000 = 2,540,000
MC46 B 380,000 + 160,000 = 540,000
MC47 C 1,200,000 + 1,000,000 – 300,000 = 1,900,000
MC48 B 1.3M + 740,000 + 610,000 – 125,000 = 2,525,000
MC49 C 975,000 + 48,000 – 72,000 = 951,000
MC50 A Acc. Depreciation of equipment sold = 300,000 + 74,000 – 25,000 – 283,000 = 66,000
Cost of equipment sold = 66,000 + 100,000 = 166,000
Equipment purchased = 925,000 + 166,000 – 780,000 = 311,000
MC51 D Dividends declared = 500,000 + 1,000,000 – 710,000 – 20,000 = 770,000
Dividends paid = 22,000 + 770,000 – 34,000 = 758,000

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