Question
Meridian Manufacturing Ltd. — Statement of Cash Flows
Prepare the Statement of Cash Flows for the year ended 31 December 2024 using the indirect method, based on the information below. Include the reconciliation of cash at the bottom and disclose non-cash investing/financing activities separately.
Income statement extract (2024)
- Net income for the year: 42,000
- Depreciation expense for the year: 9,500
- The company sold old machinery at a loss of 1,200, and long-term investments at a gain of 2,300.
Comparative balance sheet changes during 2024
- Accounts receivable increased by 6,400
- Inventory decreased by 3,100
- Prepaid expenses increased by 900
- Accounts payable increased by 4,800
- Accrued liabilities decreased by 2,100
Additional information
- Purchased new plant and equipment for 35,000 cash.
- The machinery sold at a loss brought cash proceeds of 8,700; the investments sold at a gain brought proceeds of 5,200.
- Lent 4,000 cash to a supplier as a long-term loan.
- Issued ordinary shares for 20,000 cash and repaid borrowings of 12,500.
- Paid cash dividends of 6,000 (the company classifies dividends paid as a financing activity).
- Acquired additional equipment worth 15,000 by issuing notes payable (no cash involved).
- Cash and cash equivalents were 11,700 on 1 January 2024.
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