AUDITING PROBLEMS .

STATEMENT OF CASH FLOW

PROBLEM 1 – CASH FLOWS FROM OPERATING ACTIVITIES – DIRECT

METHOD

The December 31, 2020 income statement of Garcia Company contained

the following condensed information

Revenue 2,520,000

Operating expenses (including depreciation) 1,872,000

Depreciation expense 180,000

Loss on sale of equipment 78,000

2,130,000

Income before income taxes 390,000

Income tax expense 120,000

Net income 270,000

GARCIA COMPANY’s comparative statements of financial position at

December 31, 2020and 2019 contained the following data :

2020 2019

Accounts receivable 111,000 162,000

Accounts payable * 123,000 93,000

Income taxes payable 12,000 25,500

 Pertains to operating expenses

1. How much was received from customers ?
 a. 2,469,000
b. 2,520,000
c. 2,601,000
d. 2,571,000

Solution

Revenue 2,520,000

Add; decrease in A/R

(162,000 – 111,000) 51,000

Cash receipts from customers 2,571,000 d

2. How much was paid for operating expenses ?

a. 1,872,000
b. 1,791,000
c. 1,842,000
d. 1,902,000

Solution :

Operating expenses ( excluding depreciation) 1,872,000

Less ;increase in A/P

(123,000-93,000) 30,000

Cash payment for operating expenses 1,842,000 c

3. What is the net cash provided by operating activities (use the

direct method )

a.622,500

b. 595,500

c. 625,500

d.592,500
Solution ;

Cash receipts from customers see no. 1 2,571,000

Cash payments for operating expenses (see no2) ( 1,842,000 )

Cash payment for income taxes ( 133,500)

Net cash provided by operating activities 595,500 b

 Income tax expense 120,000

Add; Decrease in income tax payable
(25,500-12,000) 13,500

Cash payment for income taxes 133,500

PROBLEM 2 CASH FLOW FROMOPERATRING, INVESTING AND FINANCING
ACTIVITIES

The worksheet below presents the comparative statement of financial

position items of NORA COMPANY as at December 31, 2020 and 2019, with
a column that shows the increase (decrease ) from 2019 to 2020

2020 2019 INC./DEC.

CASH 4,037,500 3,500,000 537,500

Accounts Receivable 5,640,000 5,840,000 (200,000)

Inventories 9,250,000 8,575,000 675,000

PPE 16,535,000 14,835,000 1,700,000

Accumulated depreciation ( 5,825,000) ( 5,200,000) ( 625,000)

Investment in associate 1,525,000 1,375,000 150,000

Loan receivable 1,312,500 1,312,500

Total assets 32,475,000 28,925,000 3,550,000

Accounts payable 5,075,000 4,775,000 300,000

Income taxes payable 150,000 250,000 ( 100,000)

Dividends payable 400,000 500,000 ( 100,000)

Liability under finance lease 2,000,000 2,000,000

Ordinary share 10 par 2,500,000 2,500,000

Share premium 7,500,000 7,500,000

Retained earnings 14,850,000 13,400,000 1,450,000

Total liabilities and equity 32,475,000 28,925,000 3,550,000

ADDITIONAL INFORMATION:

1.On December 31, 2019 NORA acquired 25% of OCAMPO’s ordinary

shares for 1,375,000 . On that date , the book value of Ocampo’s assets
and liabilities, which approximated their values was 5,500,000. Only
reported income of 600,000 for the year ended December 31, 2020 . No
dividend was paid on OCAMPO’s ordinary shares during the year .

2.During 2020, NORA loaned 1,500,000 to ARNEL COMPANY , as unrelated

company. ARNEL made the first semi annual principal repayment of
187,500. , plus interest at 10% , on December 31, 2020. .

3. On January 2, 2020 Nora sold equipment costing 300,000, with a

carrying amount of 175,000 for 200,000 cash.

4. On December 31, 2020, Nora entered into a finance lease for an office
building. The present value of the annual rental payments is 2,000,000
which equals the fair value of the building. Nora made the first rental
payment of 300,000 when due on January 2, 2021.

5. net income for 2020 was 1,850,000.

6. Nora declared and paid cash dividends for 2020 and 2019 as follows

Declared Paid Amount

2019 Dec. 15, 2019 February 20,2020 500,000

2020 Dec. 15, 2020 February 20,2021 400,000

Based on the preceding information, determine the following

1. Net cash provided by operating activities

a. 2,025,000
b. 2,150,000
c. 2,175,000
d. 2,000,000

Solution:
Net income 1,850,000

Depreciation 750,000

Gain on sale of equipment ( 25,000)

Share of income –equity method ( 150,000)

Decrease in accounts receivable 200,000

Increase in inventories ( 675,000)

Increase in accounts payable 300,000

Decrease in income taxes payable ( 100,000)

NET CASH PROVIDED BY OPERATING ACTIVITIES 2,150,000 b

Schedules

a.

Add; Accumulated depreciation

On equipment sold cost 300,000

Carrying value (175,000) 125,000

Depreciation for 2018 750,000

b. proceeds from sale of equipment 200,000

carrying value 175,000

gain on sale of equipment 25,000

c. share of income equity method (600,000 x 25%) 150,000

2.net cash used in investing activities

a. 962,500

b. 1,300,000

c. 1,262,500

d. 1,112,500

solution

proceeds from sale of equipment 200,000

loan to ARNEL (1,500,000)

Principal payment of loan receivable 187,500

Net cash used in investing activities 1,112,500 b

2. Cash flows from financing activities

Net cash used in financing activities dividends paid (500,000) a