Question
The comparative statements of financial position for Zenith Industries Ltd include the following information.
| December 31 |
|---|
| 2025 | 2024 |
| Cash | 84,100 | 22,000 |
| Accounts Receivable | 30,500 | 25,000 |
| Inventory | 26,000 | 30,000 |
| Equity Investments | 0 | 12,000 |
| Buildings | 35,000 | 60,000 |
| Machinery | 63,000 | 48,000 |
| Patents | 8,000 | 10,000 |
| 246,600 | 207,000 |
| Accumulated Depreciation - Buildings | 9,000 | 15,000 |
| Accumulated Depreciation - Machinery | 13,500 | 14,000 |
| Accounts Payable | 19,500 | 16,000 |
| Accrued Salaries Payable | 2,800 | 4,000 |
| Income Taxes Payable | 6,800 | 6,000 |
| Long-term Notes Payable | 21,000 | 28,000 |
| Share Capital - Ordinary | 107,000 | 80,000 |
| Retained Earnings | 67,000 | 44,000 |
| 246,600 | 207,000 |
Additional data related to 2025 are as follows.
- Depreciation expense for the year was $11,500 ($4,000 on buildings and $7,500 on machinery). Patent amortization was $2,000.
- Machinery that had cost $20,000, with accumulated depreciation of $8,000, was sold for $9,200 cash.
- On March 1, 2025 a warehouse building that had cost $25,000 (accumulated depreciation $10,000) was completely destroyed by fire. Insurance proceeds of $24,000 were received in cash.
- All equity investments were sold during the year for $14,200; they had cost $12,000.
- Machinery was purchased for $35,000: $21,000 was paid in cash and the balance was financed by issuing a long-term note payable of $14,000.
- Long-term notes of $12,000 were retired by issuing ordinary shares, and a further $9,000 of long-term notes was repaid in cash.
- Ordinary shares were issued for $15,000 cash.
- Cash dividends of $8,000 were declared and paid.
- Interest of $2,600 and income taxes of $7,400 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