Chapter 7 – Presentation of cash flows

TRUE/FALSE

1. Investing all cash to maximise returns to the business is a more effective management
of cash than ensuring cash is available to pay debts as they fall due.

ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: Cash and cash equivalents.

2. The most common classification for interest paid and received on a cash flow
statement is under operating activities.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: Cash flow from operating activities.

3. When calculating the net cash flows from operating activities, an increase in accounts
receivables needs to be subtracted from the profit figure.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: Cash flow from operating activities.

4. An increase in accounts receivables and an increase in inventory will need to be

subtracted from operating profit in the calculation of net cash flows from operating activities.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: Cash flow from operating activities.

5. Depreciation is an arbitrary allocation of the cost of an asset and as such it is not a

cash item and is not reported on the cash flow statement, but it still needs to be deducted from
operating profit in the calculation of net cash flows from operating activities.

ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: Cash flow from operating activities.

6. Dividends received are most commonly classified as an operating activity, but

dividends paid are normally classified as a financing activity on the cash flow statement.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: Interest, dividends and income tax.

7. On a cash flow statement, the payment of taxation is considered an operating activity

and the payment of dividends is normally classified as a financing activity.

ANS: T PTS: 1 AACSB: Knowledge, Analytical

TOP: Interest, dividends and income tax.

8. Instead of paying cash for the purchase of land and buildings, an entity issued shares
in exchange. This transaction would be correctly reflected as an investing activity on the cash flow
statement.

ANS: F PTS: 1 AACSB: Knowledge, Analytical

TOP: Non-cash investing and financing activities.
MULTIPLE CHOICE

1. Which of the following would be considered the least effective management of cash?
A. Protect cash and ensure cash is available to pay debts as they fall due.
B. Protect cash and enable accurate reporting of cash.
C. Enable accurate reporting of cash
D. Ensure cash is available to pay debts as they fall due and allow idle cash to be invested.
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash and cash equivalents.

2. A cashier is employed at the Square Eyes Movie Theatre Complex in downtown

Flatscreen. The cashier is responsible for the collection of cash in return for issuing a movie ticket,
including acceptance of payment for tickets on credit card and by discount vouchers. While credit sales
and full cash payments are recorded on the computer at the time of sale, the vouchers received need to
be cross-checked with the discounted tickets recorded on the computer at the time of sale. This
procedure is carried out at the end of every week by an employee of the company, but not by the
cashier, who has argued that it would be more efficient for the cross-check to be done at the end of
every day by the cashier who has issued the discounted tickets, as that person would be most familiar
with what tickets had been sold. Based on this information, which of the following statements is
correct regarding the current procedure?
A. It is an inefficient use of time and staff resources.
B. It shows a lack of trust of the cashier.
C. It effectively separates individual responsibilities.
D. It prevents the cashier from stealing cash.
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash and cash equivalents.

3. Which of the following bases of accounting measurement recognises revenues when

resources are created as part of an organisation’s operating activities?
A. Cash
B. Financing
C. Investing
D. Accrual
ANS: D PTS: 1 AACSB: Knowledge, Analytical
TOP: Chapter 7.

4. Under accrual-basis accounting, sales made on credit are usually reported as:
A. liabilities.
B. revenue.
C. cash from operating activities.
D. a contra account to sales revenue.
ANS: B PTS: 1 AACSB: Knowledge, Analytical
TOP: Chapter 7.

5. Cash flows from operating activities is a negative amount. From this fact you know
that:
A. the company’s cash balance decreased during this period.
B. the company’s cash flows from operations are less than its net profit.
C. the company’s operations used more cash resources than they generated.
D. the company’s accounts receivable balance is increasing quickly.
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from operating activities.

6. Activities that obtain funds from investors and liabilities to start and sustain a business
are called:
A. reporting activities.
B. investing activities.
C. financing activities.
D. operating activities.
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from financing activities.

7. The methods an organisation uses to obtain financial resources from financial markets
and the ways in which it manages those resources are:
A. operating activities.
B. financing activities.
C. investing activities.
D. marketing activities.
ANS: B PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from financing activities.

8. Which of the following is not one of the items reported on a cash flow statement?
A. Reporting activities
B. Operating activities
C. Financing activities
D. Investing activities
ANS: A PTS: 1 AACSB: Knowledge, Analytical
TOP: The statement of cash flows.

9. The cash flow statement is designed to fulfil all of the following purposes except:
A. to predict cash flows.
B. to evaluate employee performance.
C. to relate net profit to changes in cash.
D. to evaluate firm performance.
ANS: B PTS: 1 AACSB: Knowledge, Analytical
TOP: The statement of cash flows.

10. Which of the following best describes the purpose of the cash flow statement?
A. To identify the cash balance at the end of the year
B. To report the inflows and outflows of cash
C. To balance current period revenues with those of the previous period
D. To report assets, liabilities and owners’ equity as of a specific date
ANS: B PTS: 1 AACSB: Knowledge, Analytical
TOP: The statement of cash flows.

11. Which of the following is a fundamental purpose of the cash flow statement?
To report the To report the
inflows of cash outflows of cash
A. Yes Yes
B. Yes No
 C. No Yes
D. No No
ANS: A PTS: 1 AACSB: Knowledge, Analytical
TOP: The statement of cash flows.

12. The cash flow statement is designed to report:

A. how the previous period’s statement of comprehensive income relates to the current
period’s statement.
B. only the sources and uses of cash during the current period.
C. the cash from operating, financing and investing activities of the firm during the current
period.
D. the effects of the current period’s statement of comprehensive income on the current
period’s balance sheet.
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: The statement of cash flows.

13. Which financial statements cover a period of time?

A. Statement of comprehensive income and balance sheet.
B. Balance sheet and cash flow statement.
C. Statement of comprehensive income and cash flow statement.
D. Cash flow statement and statement of assets, liabilities and owners’ equity.
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: General.

14. Joyce Ltd had cash sales of $80 000 in January. Accounts Receivable decreased by
$10 000 during January and there were no credit sales and no bad debts. How much cash was collected
from customers in January?
A. $60 000
B. $70 000
C. $80 000
D. $90 000
ANS: D PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from operating activities.

15. Sales on credit for the year totalled $125 000. The following information is also
available:
Accounts Receivable balance
Beginning of year $25 000
End of year 30 000

Bad debts written off during the year: $10 000

How much cash was collected from customers during the year?
A. $70 000
B. $130 000
C. $110 000
D. $155 000
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from operating activities.
 16. Car Locks Company reported annual sales of $640 000. The following information is
also available:
Accounts Receivable balance
Beginning of year $80 000
End of year 50 000

Bad debts written off during the year: $40 000

On a cash flow statement (direct format), what amount would be reported for ‘Cash collected from
customers’ for the year?
A. $510 000
B. $630 000
C. $610 000
D. $720 000
ANS: B PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from operating activities.

17. Which of the following has a different effect on net profit than it does on cash flow?
A. Payment for wages
B. Cash sale to customer
C. Amortisation of a patent
D. Payment for rent
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: The statement of cash flows.

18. O’Reilly, Inc., had the following transactions during the month of July:
1. Sold merchandise for $50 000 cash
2. Paid wages of $3000
3. Sold equipment for $10 000
4. Paid $6000 cash for utilities

What was the cash flow from operating activities?

A. $51 000
B. $41 000
C. $47 000
D. $54 000
ANS: B PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from operating activities.

19. The following information is given for Ollufsen Co. Ltd for the financial year ending
31 December:
Net profit 30 000
Depreciation expense 4000
Gain on sale of non-current assets 6000
Decrease in inventory 1000
Acquisition of building 4000

Cash received on loan receivable 3500

Increase in loans payable 2000
Increase in accounts payable 800
Loan made to another company 2500
 Proceeds from sale of plant assets 40 000

From this information, what is the net cash inflow from operating activities for the financial year
ending 31 December?
A. $29 800
B. $35 800
C. $43 000
D. $69 000
ANS: A PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from operating activities.

20. The following information is given for Ollufsen Co. Ltd for the financial year ending
31 December:
Net profit 30 000
Depreciation expense 4000
Gain on sale of non-current assets 6000
Decrease in inventory 1000
Acquisition of building 4000
Payment of dividends 1200
Cash received on loan receivable 3500
Increase in loans payable 2000
Increase in accounts payable 800
Loan made to another company 2500
Proceeds from sale of plant assets 40 000

From this information and assuming dividends paid are treated in financing, what is the net cash
inflow from financing activities for the financial year ending 31 December?
A. $2000
B. $1800
C. $1200
D. $800
ANS: D PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from financing activities.

21. In the financial year ending 31 December, Price Pty Ltd collected $80 000 from
customers, paid wages to employees of $10 000, and received dividends of $12 000. What was the net
cash flow from operating activities for the financial year ending 31 December?
A. $58 000
B. $70 000
C. $80 000
D. -$12 000
ANS: B PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from operating activities.

22. The following information is extracted from a set of financial statements:

Opening balance Closing balance
Cash $16 000 $20 000
Accounts receivable 10 000 15 000
Accounts receivable 24 000 25 000
Inventory 30 000 35 000
 Sales 0 50 000
Cost of goods sold 0 30 000

The net cash flow from operating activities based only on the above information is:
A. $11 000
B. $20 000
C. $29 000
D. $33 000
ANS: A PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from operating activities.

23. The Hambone Soup Store reported the following information for its most recent fiscal
year:
Accounts payable increased by $39 000; inventory decreased by $27 000; net profit was $66 000; and
depreciation expense was $15 000.

On the cash flow statement, net cash flow from operating activities should be reported at:
A. $15 000.
B. $69 000.
C. $117 000.
D. $147 000.
ANS: D PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from operating activities.

24. Which of the following is subtracted from net profit to arrive at cash from operations?
A. Depreciation
B. An increase in wages payable
C. An increase in prepaid rent
D. A decrease in accounts receivable
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from operating activities.

25. Use the following information to calculate the cash from operating activities:
Net profit $3308
Depreciation expense 712
Increase in accounts receivable 500
Decrease in inventory 640
Increase in accounts payable 132
Decrease in wages payable 75
Decrease in income tax payable 140

A. $2797
B. $4077
C. $4243
D. $5077

ANS: B PTS: 1 AACSB: Knowledge, Analytical

TOP: Cash flow from operating activities.

26. At the end of April, the Blue Water Company sent out statements to customers for
April charges totalling $100 000. During April, the company received $85 000 from customers for
water bills incurred during March. Blue’s employees earned $35 000 during April, but by month end
only
$30 000 had been paid. Determine the net cash flow from operations and net profit from operations for
the month of April.
Net profit Net cash flow
A. $65 000 $85 000
B. $70 000 $55 000
C. $65 000 $55 000
D. $50 000 $70 000
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from operating activities.

27. Which of the following would be considered a cash inflow or outflow from investing
activities?
A. Purchase of shares in another company
B. Payment of an overdue creditors account
C. Interim dividend declared and paid
D. Loan interest paid
ANS: A PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from investing activities.

28. You are considering starting a new business. In general, which of the following types
of activities would have to occur before operating activities could begin?
Investing activities Financing activities
A. Yes Yes
B. Yes No
C. No Yes
D. No No
ANS: A PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from investing activities; Cash flow from financing activities.

29. Which of the following statements is correct concerning investing activities?

A. They involve obtaining and managing financial resources.
B. They use financial resources to acquire items to sell in the normal course of activities.
C. They use financial resources to acquire the assets a company needs to produce and sell its
products.
D. They involve buying and selling a company’s own shares.
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from investing activities.

30. The receipt of dividends on an investment will be reported in a cash flow statement as:
A. a cash outflow for financing activities.
B. a cash inflow for investing activities.
C. a cash inflow from operating activities.
D. either B or C.
ANS: D PTS: 1 AACSB: Knowledge, Analytical
TOP: Interest, dividends and income tax.

31. Which of the following events is properly classified as an investing activity?

A. Purchase of equipment
 B. Borrowing money from creditors
C. Selling goods to customers
D. Running the factory
ANS: A PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from investing activities.

32. Which of the following is a cash flow from an investing activity?

A. Payment for advertising
B. Cash receipt from a customer for a previous credit sale
C. Cash received from sale of equipment
D. Payment of dividends
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from investing activities.

33. Which of the following is an investing activity?

A. Purchase of a patent
B. Payment of cash dividends
C. Payment of interest
D. Purchase of inventory
ANS: A PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from investing activities.

34. Cash received from the sale of long-term assets is reported as:
A. operating activities.
B. financing activities.
C. an adjustment to shareholders’ equity.
D. investing activities.
ANS: D PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from investing activities.

35. Activities that involve the production or delivery of goods for sale or the providing of
services for sale should be listed under which classification on a cash flow statement?
A. Operating activities
B. Investing activities
C. Financing activities
D. Refunding activities
ANS: A PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from operating activities.

36. Activities that obtain funds from investors and lenders to start and sustain a business
are called:
A. reporting activities.
B. investing activities.
C. financing activities.
D. operating activities.
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from financing activities.

37. What type of activity is the paying off of a bank loan?

 A. Operating
B. Financing
C. Investing
D. Either A or B
ANS: B PTS: 1 AACSB: Knowledge
TOP: Cash flow from financing activities.

38. Which item would be included in cash flows from financing activities?
A. Payments to suppliers
B. Receipts from customers
C. Repayment of loan
D. Purchase of a non-current asset
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from financing activities.

39. Which item would not be included in cash flows from operating activities?
A. Salaries paid
B. Cash proceeds from disposal of a non-current asset
C. Cash sales
D. Receipts from customers
ANS: B PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from operating activities.

40. Which of the following would not normally be classified as an operating activity on a
cash flow statement?
A. Dividends received
B. Interest received
C. Dividends paid
D. Interest paid
ANS: C PTS: 1 AACSB: Knowledge, Analytical
TOP: Interest, dividends and income tax.

41. Payments to employees would be classified on the cash flow statement as a(n):
A. operating activity.
B. investing activity.
C. financing activity.
D. operating expense.
ANS: A PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from operating activities.

42. In the year ending 31 December, North Lakes Co. Ltd purchased machinery for $20
000, loaned $8000 to another company, borrowed $4000, and sold investments for $10 000. What was
the net cash flow from investing activities for the year ending 31 December?
A. ($20 000)
B. ($28 000)
C. ($24 000)
D. ($18 000)
ANS: D PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from investing activities.
 43. Big Deals, Inc., had the following cash flows during March:
Paid for inventory $2000
Paid wages to employees 4000
Received from cash sales 10 000
Paid for equipment 6000
Received a loan 7000

What was the cash flow from investing activities?

A. $5000 inflow
B. $8000 outflow
C. $12 000 outflow
D. $6000 outflow
ANS: D PTS: 1 AACSB: Knowledge, Analytical
TOP: Cash flow from investing activities.

SHORT ANSWER

1. What is accrual accounting?

ANS:
Under accrual accounting, an entity records its revenues and related expenses in the same accounting
period that it provides the goods or services to a customer. That is, it records the revenue and related
expense in the same period that it earns the revenue. The collection or payment of cash does not
impact the determination of when to recognise the revenue or expense.

PTS: 1 AACSB: Knowledge, Analytical, Communication

TOP: Chapter 7.

2. Briefly describe what information is contained in the Statement of Cash Flows.

ANS:
The cash flows from operating activities section lists the cash received and paid in selling products or
performing services. The cash flows from investing activities section lists the cash received and paid
for assets such as property, plant and equipment. The cash flows from financing activities section lists
the cash received and paid for borrowings and owners’ equity. This information is combined to show
the net change in cash for the period.

PTS: 1 AACSB: Knowledge, Analytical, Communication

TOP: The statement of cash flows.

3. Why is the statement of cash flows important?

ANS:
It shows the changes in a company’s cash during an accounting period by listing the cash inflows and
outflows from its operating, investing, and financing activities during the period. The statement
provides information about a company’s ability to remain solvent, and pay its bills. It summarises the
cash activities during the period, and provides information that cannot be obtained from the statement
of comprehensive income or the balance sheet. It is possible for an entity to have a profit and yet have
cash flow problems which are highlighted in the statement of cash flows. Conversely an entity may
have incurred a loss but still have cash available.
PTS: 1 AACSB: Knowledge, Analytical, Communication
TOP: The statement of cash flows.

4. How is the statement of cash flows structured?

ANS:
The statement is structured into three sections: operating activities, investing activities, and financing
activities. Operating activities include buying, selling, and delivering goods for sale, as well as
providing services. Investing activities include lending money and collecting on the loans, investing in
other companies, and buying and selling property, plant and equipment. Financing activities include
obtaining capital from the owner and providing the owner with a return on the investment, as well as
obtaining capital from creditors and repaying the creditors.

PTS: 1 AACSB: Knowledge, Analytical, Communication

TOP: The statement of cash flows.

5. Which duties associated with handling and accounting for cash should ideally be
separated in order to promote the internal control of the asset?

ANS:
• The duties of receiving and paying cash.
• The duties of recording cash receipts and cash payments
• Handling cash and recording cash.
• The approval of cash payments and the authorisation of the payments.

PTS: 1 AACSB: Knowledge, Analytical

TOP: Cash and cash equivalents.

PROBLEM

1.
(a) Classify the following transactions according to whether they relate to operating,
investing or financing activities or none of those categories for the purposes of
preparing a statement of cash flows.

1. Received cash of $14 000 from the sale of equipment previously used in carrying
out the entity’s operations.
2. Paid cash of $11 000 to accounts payable for inventory previously purchased on
credit.
3. Received $45 000 cash from accounts receivable.
4. Paid cash dividends to shareholders $54 000.
5. Issued shares in exchange for land $105 000.
6. Paid insurance in advance $9000 cash.
7. Purchased vehicles for use in the business for $48 000 cash.
8. Deposited $12 000 into a short-term deposit, redeemable at call.
9. Issued $85 000 in shares in exchange for cash.
10. Borrowed $40 000 in cash repayable in five years.

(b) Calculate the cash flow from operating activities based on the foregoing 10
transactions.

ANS:
(a)
Operating Investing Financing Non-cash invest- Movement
ing and financing within cash
transaction and cash
equivalents
2. 3. 6. 1. 7. 4. 9. 10. 5. 8

(b)
Cash inflow
Accounts receivable 45 000

Cash outflow
Accounts payable 11 000
Insurance 9000

Net cash flow from operating activities 25 000

PTS: 1 AACSB: Knowledge, Analytical

TOP: Cash flow from operating activities.

2. The following information about Thompson Corp. applies to the entity for the year
ended 30 June.
Payment to suppliers $150 000
Receipts from owners 405 000
Receipts from long-term borrowing 250 000
Payment of rates 130 000
Payment of wages 125 000
Purchase of other companies’ shares 80 000
Retirement of long-term borrowing 165 000
Receipts from customers 500 000
Payment for equipment 190 000
Depreciation on equipment 90 000
Average total assets 1 200 000

(a) What was Thompson Corp.’s cash flow from operating activities?
(b) What was Thompson Corp.’s cash flow from investing activities?
(c) What was Thompson Corp’s cash flow from financing?

ANS:
(a)
Cash flow from operations:
Receipts from customers $500 000
Payment to suppliers (150 000)
Payment of rates (130 000)
Payment of wages (125 000)
$95 000
(b)
Cash flow from investing:
Purchase of other companies’ shares ($80 000)
Payment for equipment (190 000)
($270 000)
(c)
Cash flow from financing:
Receipts from owners $405 000
Receipts from long-term borrowing 250 000
Retirement of long-term borrowing (165 000)
$490 000

PTS: 1 AACSB: Knowledge, Analytical

TOP: The statement of cash flows.

3. Pele runs a soccer coaching school. During the year ended 30 June, coaching fees of
$54 800 were received in cash. Fees due but not received or recorded at 30 June totalled $1000. Fees
received in advance at 30 June totalled $800. Cash expenses paid during the year ended 30 June
totalled
$32 000. Accrued expenses due but not paid at 30 June totalled $2850.

(a) Calculate the profit for the year ended 30 June using both the cash and accrual approach-
es.

(b) Explain why the accrual approach to measuring profit is considered to be better than the
cash approach.

ANS:
(a) Cash profit: $54 800 – 32 000 = $22 800. Accrual profit: ($54 800 + 1000 – 800)
– ($32 000 + 2850) = $20 150.

(b) The accrual approach to measuring profit provides a better measure of operating perfor-
mance (and financial position) within a given accounting period, and promotes compara-
bility across time and between entities.

PTS: 1 AACSB: Knowledge, Analytical TOP: Chapter 7.

CASE

1. The following financial statements have been prepared for Clearview for the month of
June. The financial statements have been prepared using accrual accounting, except to the extent
evident in the information provided. The business is a sole proprietorship. Trading commenced on 1
June. The business offers a window cleaning service on both cash and credit terms. Forty per cent of
the work completed in June was on credit. Customers are given 30 days to pay. The proprietor invested
cash of $2500 and a vehicle valued at $27 000 at 1 June.

Clearview
Statement of comprehensive income
For the month of June

Cleaning fees $1405

Expenses
Vehicle expenses -180
Wages for casual employee -500
Advertising fees -50
Various insurances -100
Cleaning supplies -85
 Discount expense -10
Lease on premises -450
Total expenses -$1375
Net profit 30
Other comprehensive income 0
Total comprehensive income 30

Clearview
Balance sheet
As at 30 June

Current assets
Cash $385
Accounts receivable 325
Supplies 470
Prepayments 350
Total current assets 1530

Non-current assets
Plant and equipment at cost 27 800
Total non-current assets 27 800

TOTAL ASSETS 29 330

Current liabilities
Accrued wages 300
Total current liabilities 300
TOTAL LIABILITIES 300

Net assets 29 030

Owners’ equity
Contributed equity $29 500 =
Retained profits ($30 profit – $500 draw- -470
ings)
29 030

Discuss the performance of the business for the period as revealed by the foregoing financial
statements, paying particular attention to the entity’s profitability and cash position.

ANS:
Key issues for discussion:
• Profitability and solvency are key determinants of business success.
• The profit for the month is 2% of revenue. This figure is low given the small
scale of the business (lack of volume in turnover). The figure for revenue is
disproportionately low relative to expenses. The figures suggest that the problem
may lie with revenue and/or the magnitude of certain expenses i.e., wages and the
lease on the premises.
• Wages: The figure is high relative to revenue – 57% of revenue. If the rates for
the casual employee are appropriate, then what of the individual’s level of
productivity regarding the turnover in cleaning hours (jobs) and, therefore,
revenue earned.
 • Lease on premises: Given the nature and size of the business, one might question
whether such an item of expenditure is necessary at all.
• Vehicle expenses: Despite the reference to accrual accounting, the information
provided suggests that the figure does not include depreciation. Plant and
equipment is reported at cost. Therefore, profit is in fact lower, probably a loss in
fact.
• Revenue: Is the rate charged for the window cleaning service appropriate? The
whole question of the relation between revenue and cost structure is in question.
Note, the proprietor may be undercutting the market vis-a-vis competitors, given
the recent entry into the market.
• Cash position: the business closed the month with a surplus cash balance.
However, this is attributable to the cash contribution of the owner at the com-
mencement of the month. The figures provided suggest that if the current trend
continues the cash surplus may not be sustained into the future. The net cash flow
from operating activities for the month was negative:

Cash flow from operating activities

Cash from customers (1405 – 325) $1080
Operating expenses ($1375 – $300 (wages)) -1075
Prepaid supplies -470
Prepayments -350
Net cash outflow -$815

• There may be more cash tied up in cleaning supplies than is necessary – a just-in-time policy
may assist the cash position in the future. Further, there are no accounts payable at 30 June,
suggesting that supplies are paid for in cash. The cash position may also be assisted in the
future by arranging credit terms for the materials, involving a time frame that is compatible
with the operating cycle of the business vis-a-vis the credit terms offered to customers.

The collection of accounts receivable would appear to be reasonable to date. Total credit sales for
month ($1405) (0.4) = $562. Balance outstanding $352.

PTS: 1 AACSB: Knowledge, Analytical, Communication

TOP: Chapter 7.