Question
The comparative statements of financial position for Northfield SA include the following information.
| December 31 |
|---|
| 2027 | 2026 |
| Investments | 0 | 3,600 |
| Buildings | 0 | 35,700 |
| Equipment | 54,000 | 24,000 |
| Patents | 6,000 | 7,500 |
| Inventory | 14,400 | 10,800 |
| Accounts Receivable | 14,700 | 12,000 |
| Cash | 40,200 | 15,600 |
| 129,300 | 109,200 |
| Share Capital - Ordinary | 51,600 | 39,600 |
| Retained Earnings | 24,900 | 7,200 |
| Allowance for Doubtful Accounts | 3,600 | 5,400 |
| Accumulated Depreciation - Equipment | 2,400 | 5,400 |
| Accumulated Depreciation - Buildings | 0 | 7,200 |
| Accounts Payable | 6,000 | 3,600 |
| Dividends Payable | 0 | 6,000 |
| Long-term Notes Payable | 37,200 | 30,000 |
| Notes Payable, Short-term (non-trade) | 3,600 | 4,800 |
| 129,300 | 109,200 |
Additional data related to 2027 are as follows.
- Equipment that had cost $13,200 and was 40% depreciated at the time of disposal was sold for $3,000.
- $12,000 of the long-term note payable was paid by issuing ordinary shares.
- Cash dividends paid were $6,000.
- On January 1, 2027, the building was completely destroyed by a flood. Insurance proceeds on the building were $38,400.
- Equity investments were sold at $2,040 above their cost.
- Cash was paid for the acquisition of equipment.
- A long-term note for $19,200 was issued for the acquisition of equipment.
- Interest of $2,400 and income taxes of $7,800 were paid in cash.
Instructions: Prepare a statement of cash flows using the indirect method.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 7 — Statement of Cash Flows
Start from profit, then undo everything in it that was not cash. Add back non-cash charges such as depreciation and amortisation, remove gains and losses that belong to investing activities, and then adjust for the movement in each working-capital account. The reconciliation is finished only when the closing cash figure agrees with the balance sheet.
Common mistakes
- Getting the sign of a working-capital movement backwards — a rise in a current asset consumes cash, a rise in a current liability provides it.
- Leaving a gain on disposal inside operating cash flow as well as showing the full proceeds under investing, which counts it twice.
- Classifying the purchase of non-current assets as operating rather than investing.
IFRS vs US GAAP: IFRS permits interest and dividends paid to be shown as operating or financing; US GAAP fixes interest paid in operating.
Further readingDirect vs indirect method cash flow