How to tackle Cash Flow Statement Exam Question A Suggestion of Approach PDF

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HowtotackleCashFlowStatementExamQuestion–ASuggestionofApproach “Your45MinutesStartsNow”!   SetuptheT‐Accountsfullyandcorrectly  1.

2.

 3.  4.

 5.  

Setup T‐Accounts for ALL the balance sheet accounts immediately (except for Cash) before you start workingonthecashflowitems.  SettingupT‐Accounts“asyougo”whileworkingthroughcashflowitemsandinformationmayNOTbea good strategy and may interrupt your train‐of‐thoughts when applying transaction’s information with multipleG/Laccountimpact.Youmight accidentallyforgettomapanumber toaT‐Accountbecauseof theaccountwasn’tsetupfirstbeforeyoustart;thatcouldcausemistakesandtimewasting. Copytherespectiveopeningbalances(o/b)andclosingbalances(c/b)fromthebalancesheetcarefully. Checktoensurethatthey’recopycorrectly–bothnumericallyandtheirDebitversusCreditsides! Makesureyoursetupofo/bandc/b areontheCORRECTDebit&Creditssides. Pay attentiontocontra accounts (e.g. Provision for Doubtful Debts, Accumulated Depreciation/Amortisation, and Provision for StockObsolescenceshouldhaveCreditBalancesetc.) GetaquicksenseofthenetincreaseordecreasedirectionsofeachGLc/bversustheo/b

WhatAreYouAimingAt?  1.

2.

Inyouranswer,theSUMofyour(A)Operating,(B)Investingand(C)FinancingCashFlowsMUSTBEequal tothenetchangeoftheCASHBalanceinyourfinalCashFlowStatementanswerspresentation.  First,reviewalltheIncomeStatementItems,andmakesurethateachandsingleonesaremappedtoa correspondingbalancesheetT‐Account,typically:

 a. b.

Sales/Revenue>>Dr.AccountsReceivables(asset)  BadDebtsExpenses>>Cr.ProvisionforDoubtfulDebts(contraasset).



Your Cr. Bad Debt Expenses to Provision for Doubtful Debts in order to find the balance figure of Dr. Provision for Doubtful Debt from the Bad Debt Written‐Offs; then use the Write‐Offs figure to Cr. Accounts Receivables to find the balancingfigureofCr.AccountsReceivablesduetoCashReceivedfromCustomers.

 c.

CostofGoodsSold>>Cr.Inventory(asset),NOTCr.AccountsPayable!! 

You Cr. COGS to inventory in order to find the balancing figure of Dr. Inventory from Purchases; and then use the Purchases figure to Cr. Accounts Payable to find the balancing figure of Dr. Accounts Payable due to Cash Paid to Suppliers.

 d.

Insurance Expense >> Cr. Prepaid Insurance (asset), (if there is such BS Account, otherwise assumethewholeamountispaidascash)

e.

OtherExpenses>>Cr.AccruedExpenses(liability).

 

Becarefulthatifthere isnoseparatelineitemintheincomestatement for DepreciationExpense,theOtherExpenses totalmayhaveincludedalsotheDepreciationExpenses,andyouwouldbeexpectedtosolvethepuzzleofsplittingthem correctly(suchasinyourSeminarExercise).Asuggested approach istoworkonDepreciationExpenses firstbyisolating the movements from Fixed Assets Disposal, Fixed Assets Revaluation, then Depreciation Expenses movement to the Accumulated Depreciation Accounts; and finally apply the remaining balance as Other Expenses to Cr. to the Accrued Expenses(liability)Account.

 f.

Interest Expenses  >> Cr. Interest Payable (liability), (if there is such BS Account, otherwise assumethewholeamountispaidascash.  Becarefulifthequestionsay“AccruedInterestsarecreditedtotheunderlyingBorrowings/Loans/Mortgage LiabilityAccount”thenusethoseaccountstomaptheincomestatementitem.

LeonardLau,ACCT1511Semester22015

 g.

h.

i. j.

DepreciationExpenses>>Cr.AccumulatedDepreciation i. YouareusuallyrequiredtoallocatetheTotalDepreciationExpenses(i.e.Onenumberin theincomestatement)tomorethanoneaccumulateddepreciationaccount. ii. Make sure you apply the other related movements to Accumulated Depreciation Accountfrom(a)FixedAssetsDisposalstransaction,and(b)FixedAssets Revaluation transaction FIRST, BEFORE YOU ASSUME (or balancing) what is the Depreciation ExpensescreditedtoeachAccumulatedDepreciationAccount. iii. OnceyouhaveallocatedtheimpactofFixedAssetsDisposalandAsset Revaluation(i.e. both are Dr. Accum. Depreciation), you can calculate the balancing movement as the Depreciationnumber.  Gain or Loss from Sale of Fixed Assets >> You will almost always sure to find Additional InformationinrelationtoGainorLossfromSaleofFixedAssets. i. Use theAdditional Information for(a) Original Costs of the asset and(b)Accumulated Depreciation of the asset disposed to map the numbers to the corresponding by Cr. AssetandDr.Acc.Deprec.GLAccount. ii. Calculate the Cash Received (Proceeds) From Disposal of Fixed Assets with these 3 numbers(GainorLoss/OriginalCostsDisposed /Accumulated Depreciationdisposed). There is no T‐account entry required for the Cash received from fixed assets disposal (i.e.noCr.EntrytofixedassetsrelatedT‐accountrequired). iii. Also, the gain or loss on disposal amount has already been accounted by the current yearprofitentryintheRetainedProfitaccount(justlikeotherincomestatemententries suchasrevenue,CoGSandetc),SothereisnoseparateT‐accountentryrequiredforthe gain/lossondisposal.  IncomeTaxExpenses>>Cr.IncomeTaxPayable  Dividend Received >> Usually assume as Cash Received from Investment (But operating cash flow)unlessthereisa“DividendReceivable”accounttomapformovement.

 Therewillneverbe“DividendPaid”informationontheincomestatementbecauseDividendisadistribution ofRetainedProfits,NOTan incomestatementitem. YoucanworkoutDividendPaymentinformation(i.e. Last year Final, This Year Interim, This Year Final) information from the Dividend Payable account, movementofRetainedProfitAccountsandotherinformationprovidedtoyou).  

3. 

ReviewallADDITIONALINFORMATIONItems,Typically a. b. c. d. e.

FixedAssetsRevaluationinformation FixedAssetsDisposalinformation FixedAssetsadditionfinancedbynon‐cash such as taking upliability(i.e. issuanceof long term note) ShareCapitalchangeinformationsuchasBonusShareIssuefromRevaluationReserve TransfertoandfromReserveaccounts

 4.

MakeCertainSmartAssumptions a. DividendPayableOpeningBalance:Usuallyassumepaidduringtheyear. b. Dividend Payable Closing Balance: Unpaidatendofyear,with T‐AccountmovementbeingDr. RetainedProfit,Cr.DividendPayable. c. General Reserve: Increase in balance, when no other information is provided, is assumed to comefromDr.RetainedProfit,Cr.GeneralReserve. d. RetainedProfits:After accounting for themovements from (1) Income Statement, (2) Transfer toReserve,(3)FinalDividendDeclared,itissafetoassumethatanyremainingmovementisfrom (4)InterimDividenddeclaredandpaid. e. RevaluationReserve: Afteraccounting forthe movements from(1) AssetRevaluationadditional information,(2)BonusShare Issue,it is safetoassumethatanyremainingmovement isfrom (3) Other Asset Revaluation movement, where you are expected to calculate the corresponding impact to the Asset cost account. For example, for a revaluation transaction, you may only be

LeonardLau,ACCT1511Semester22015

given the Dr. Accumulated Depreciation amount, but not the Dr./Cr. Asset amount. Once you havethefinalAssetRevaluationmovementamountderived,youcancompletetheDr./Cr.Asset amountbeingtherevaluationincrement/decrementimpact.  

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LeonardLau,ACCT1511Semester22015...