Business Studies Sample Paper on Cash Flow Statements

Cash Flow Statements

XYZ Company Limited

Statement of cash flows

For the year ended 2×12

                                                                                    $                                              $

Net income                                                                                                                  1,250,000

Adjustment for;

Depreciation and amortization                                    243,000

Gain on revaluation of land                                        (400,000)                                 (157,000)

                                                                                                                                    1,093,000

Increase in trade receivables                                       0

Increase in inventories                                                (42,500)

Decrease in trade payables                                          0                                             

cash generated from operations                                                                                  (42,500)

From Investment Activities

Purchase of property, plant and equipment                0

Proceeds from the sale of equipments                        0

Net cash from the investment activities                                                                                    0

Financing activities

Proceeds from issue of common stock                       150,000

Proceeds from issuance of long term debt                  360,000

Dividends paid                                                           (15,000)                                  

Net cash from financing activities                                                                               495,000                                                                      

Net increase in cash and cash equivalents                                                               1,545,500

Cash and cash equivalents at beginning of period                                                 30,000

Cash and cash equivalents at end of period                                                           1,575,500

Assumptions

 The net income for the year                           =                      1,250,000

Depreciation amortization                               =                      243,000

The analysis of the financial income statement visa vie the statement of cash flows

From the statement of cash flow above the net income recorded is lower than the cash equivalents for the year; this is simply because of the various reasons that are outlines below.

Increase in long term debt

 From the cash flow statement has increases by 360,000/= this is recorded in the cash flow statement as an increase this does not affect the income because the long term debt is a liability and not an expense. For this matter, it is only recorded in the balance sheet which is deemed to show the financial position of the firm. To this effect 9the long item debt has an invariable effect of 0increasing the company leverage ratio and hence the debt equity ratio has to increase. Furthermore it also accentuates that the company will be at a risk of takeover or higher external control if at all the leverage of the company is considerably increased to this stance (Bomber, Matt, and Simon 697).

Issuance of common stock

 It is important to note that as the number of shareholder increase their subscription to the company, they buy the shares that bring more money to the company, to this end there is a cash inflow to which the equity of the company is increased accordingly. This is actually not recorded in the financial income statement because it does not entail any consideration for profit. The increase in the shareholders through has must be included in the statement of cash flow [because it is in itself a realization of actual cash into the company (Bomber, Matt, and Simon 650). The increase in the common stock has a direct impact of increasing the equity of the company and hence it is and astounding fact that the debt equity ratio will have been reduced considerably. Thus an increase of the common stock 150,000/= is an increase that is depicted by the statement of cash flow and the income statement.

The depreciation amortization

We all know according to the accrual concept of the accounting principles that the depreciation is amortized is usually expensed at the very period on which the expense would occur. The amortization and the exposition occur but in the real sense there is no money in cash that is floated from one party to the other (Brodersen, Stig, and Preston 445). This expensing is deemed to cater for the sunk costs that are already incurred. Hence they do not entail any cash flow. Since in the income statement according to the principles of accounting co notates that we should expense this depreciation amortization in the income statement, it is quite imperative add back the depreciation expense because in as much as it was removed from the income statement, it is not an object of cash flow so it should be added back hence it increases the cash balances (Bomber, Matt, and Simon 651).

Additionally there are those items that reduce the cash balances that are not included in the income stamen and yet they affecting the cash balance, they are instinctively discussed below.

Gain on revaluation of land. ;

As the land is revaluated, it increases in value and this is recorded as a gain on the income statement when has not been actually realized in terms of cash this has the effect of inflating the income for the year considerably (Brodersen, Stig, and Preston 445). For this matter, the perceived gain is subtracted from the income in order to get the cash balances. The main reason for this is because it has not been realized in terms of cash. In the statement of cash flow above, the gain on revaluation on land which amounts to 400,000 is subtracted from the income realized for the year (Brodersen, Stig, and Preston 465).

Dividends paid

 Since the dividend paid co notates an outflow of cash it should be removed from the cash equivalents and since it does not affect the income statement it is included in the statement of cash flow with an effect of reducing the cash balances. In the income statement, the dividend allocated for payment are the ones recorded and not the dividend that is actually paid so the dividend paid must be removed from the cash balances (Bamber, Matt, and Simon.657) 

Works Cited

Top of Form

Bamber, Matt, and Simon Parry. Accounting and Finance for Managers: A Decision-Making Approach. , 214. Internet resources

Brodersen, Stig, and Preston Pysh. Warren Buffett Accounting Book: Reading Financial Statements for Value Investing. S.l.: Pylon Publishing, 2014.

Print.Bottom of Form

Feldman, Dorothy, and Timothy J. Rupert. Advances in Accounting Education Teaching and Curriculum Innovations: Volume 15. , 2014. Internet resource.

Qfinance: The Dictionary of Accounting and Finance. Place of publication not identified: Bloomsbury, 2014. Print.