Workshop 10 Questions

Question 16.8 The reconstruction of accounts approach

The statements of financial position of Allthrough Ltd as at 30 June 2017 and 30 June 2016
are presented below.
ALLTHROUGH LTD
Statements of Financial Position
as at 30 June
2017 2016
Current assets
Cash at bank $ — $ 74 600
Accounts receivable 127 200 111 300
Inventory 275 000 221 200
Prepayments   22 800   23 000
Non-current assets
Buildings 639 000 339 000
Accumulated depreciation – buildings (111 400 ) (97 600 )
Equipment 361 200 331 200
Accumulated depreciation – equipment (89 900 ) (67 000 )
Land   168 000      39 00
Long-term investments     70 000 0
Total assets 1 461 90 $    160 00
0 0
1 134 70
0
Current liabilities
Bank overdraft $ 16 700 $ —
Accounts payable 215 000 218 000
Accrued expenses 10 500 14 000
Current tax liability     26 000     24 000
Non-current liabilities
Loan payable $ 240 000 $ 150 000
Debentures due 1/9/21   300 000   200 000
Total liabilities   808 200   606 000
Net assets   653 700   528 700
Equity
Share capital $ 502 100 $ 388 100
Retained earnings   151 600   140 600
Total equity $   653 700 $   528 700
Examination of the company’s general ledger accounts revealed the following:
(a) Depreciation expense was recorded during the year as follows: buildings $13 800; and
equipment $22 900.
(b) An extension was added to the building at a cost of $300 000 cash.
(c) Long-term investments with a cost of $90 000 were sold for $125 000.
(d) Vacant land next to the company’s plant was purchased for $129 000 with payment
consisting of $39 000 cash and a loan payable for $90 000 due on 31 July 2018.
(e) Debentures of $100 000 were issued for cash at nominal value.
(f) Thirty thousand shares were issued at $3.80 per share.
(g) Equipment was purchased for cash.
(h) Sales for the period were $875 600; cost of sales amounted to $525 300; other expenses
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(excluding depreciation, carrying amount of investments sold, interest, and bad debts)
amounted to $149 400.
(i) Bad debts of $3500 were written off.
(j) Income tax paid during the year amounted to $73 700.
(k) Interest expense and interest paid amounted to $40 000.
(l) The bank overdraft is integral part of the company’s cash management function.

Required
A. Prepare the statement of cash flows of Allthrough Ltd for the year ended 30 June 2017
using the direct method of presentation.
B. Prepare a note disclosure to reconcile net cash flows from operating activities with the
profit for the year and also prepare any other notes required by AASB 107.

A.
ALLTHROUGH LTD
Statement of Cash Flows
for the year ended 30 June 2017

Cash flows from operating activities

Cash receipts from customers $856 200
Cash paid to suppliers, employees and other (734 800)
Cash generated from operations 121 400
Interest paid (40 000)
Income taxes paid (73 700)
Net cash from operating activities $7 700

Cash flows from investing activities

Payment for equipment (30 000)
Payments for property (339 000)
Proceeds from sale of investments 125 000
Net cash used in investing activities (244 000)

Cash flows from financing activities

Proceeds from issue of shares 114 000
Proceeds from issue of debentures 100 000
Dividends paid (69 000)
Net cash provided by financing activities 145 000

Net decrease in cash and cash equivalents (91 300)

Cash and cash equivalents at beginning of period 74 600

Cash and cash equivalents at end of period $(16 700)

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B.

Note 1: Cash and cash equivalents

Cash and cash equivalents included in the statement of cash flows are comprised of the
following amounts included in the statement of financial position:

2017 2016
Cash at bank $       –   $ 74 600
Bank Overdraft (16 700)        –  
Cash and cash equivalents $(16 700) $ 74 600

The bank overdraft is integral to the company’s cash management function.

Note 2: Non-cash Financing and Investing Activities

During the period, property was acquired for $129 000, part of the purchase consideration
amounting to $90 000 is deferred until July 2018

Note 3: Reconciliation of Net Cash from Operating Activities with Profit

Profit for the year $80 000

Depreciation 36 700
Gain on sale of investments (35 000)
Change in assets and liabilities
Increase in accounts receivable (15 900)
Increase in inventory (53 800)
Decrease in prepayments 200
Decrease in accounts payable (3 000)
Decrease in accrued expenses (3 500)
Increase in current tax liability  2 000
Net cash from operating activities $7 700
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Workings

Receipts from customers

Accounts Receivable
Balance b/d 111 300 Bad debts expense 3 500
Sales 875 600 Cash (from customers) 856 200
Balance c/d 127 200
986 900 986 900

Payments to suppliers, employees and other

Inventory
Balance b/d 221 200 Cost of sales 525 300
A/c Payable (purchases)* 579 100 Balance c/d 275 000
800 300 800 300
*balancing item for reconstruction

Accounts Payable
Cash (paid to suppliers) 582 100 Balance b/d 218 000
Balance c/d 215 000 Inventory (purchases) 579 100
797 100 797 100

Prepayments and Accrued Expenses Liability (Net)

Balance b/d 9 000 Other operating expenses 149 400
Cash (paid employees/other) 152 700 Balance c/d 12 300
161 700 161 700

Cash payments to suppliers and employees = $582 100 + $152 700 = $734 800

Income tax paid

Current Tax Liability

Cash (income tax paid) 73 700 Balance b/d 24 000
Balance c/d 26 000 Income tax expense* 75 700
99 700 99 700
*balancing item for reconstruction
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Dividends paid

Profit or Loss Summary

Cost of sales 525 300 Sales revenue 875 600
Other operating expenses 149 400 Proceeds from sale of invest 125 000
Depn expense - buildings 13 800
Depn expense - equipment 22 900
Cost of investments sold 90 000
Bad debts expense 3 500
Interest expense 40 000
Income tax expense 75 700
Profit for the year* 80 000
1 000 600 1 000 600
*balancing item for reconstruction

Retained Earnings
Dividends paid 69 000 Balance b/d 140 600
Balance c/d 151 600 Profit 80 000
220 600 220 600