Question
The comparative statements of financial position for Orion Trading PLC include the following information.
| December 31 |
|---|
| 2025 | 2024 |
| Cash | 42,000 | 15,000 |
| Accounts Receivable | 14,000 | 18,000 |
| Inventory | 20,000 | 14,000 |
| Prepaid Insurance | 1,500 | 2,000 |
| Land | 45,000 | 30,000 |
| Equipment | 62,000 | 45,000 |
| Trademarks | 7,000 | 8,000 |
| 191,500 | 132,000 |
| Accumulated Depreciation - Equipment | 9,500 | 12,000 |
| Accounts Payable | 8,500 | 11,000 |
| Dividends Payable | 5,000 | 3,000 |
| Long-term Notes Payable | 12,000 | 0 |
| Bonds Payable | 35,000 | 20,000 |
| Share Capital - Ordinary | 75,000 | 50,000 |
| Retained Earnings | 46,500 | 36,000 |
| 191,500 | 132,000 |
Additional data related to 2025 are as follows.
- Equipment that had cost $15,000, with accumulated depreciation of $9,000, was sold for $8,500 cash.
- Depreciation expense for the year was $6,500. Trademark amortization was $1,000.
- A parcel of land carried at $10,000 was expropriated by the government. Compensation of $16,500 was received in cash.
- Additional land was acquired during the year by issuing ordinary shares valued at $25,000.
- Equipment was purchased for $32,000: $20,000 was paid in cash and a long-term note payable was issued for the remaining $12,000.
- Bonds payable of $15,000 were issued at face value for cash.
- Cash dividends paid were $10,000.
- Interest of $2,400 and income taxes of $5,600 were paid in cash.
Instructions: Prepare a statement of cash flows using the indirect method. Include the reconciliation of cash and cash equivalents and a schedule of significant non-cash investing and financing activities (IAS 7).
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