Question
The following information is available for Crescent Bay Marine for the year ended December 31, 2025.
| Item | Amount |
|---|
| Net income | $42,000 |
| Depreciation expense | 11,000 |
| Increase in accounts receivable | 6,000 |
| Decrease in inventory | 3,500 |
| Increase in accounts payable | 4,200 |
Additional information:
- Equipment that cost $20,000 (accumulated depreciation $13,000) was sold for $9,000 cash.
- New equipment was purchased for $28,000 cash.
- Ordinary shares were issued for $10,000 cash.
- Cash dividends of $12,000 were paid.
- Cash and cash equivalents were $14,300 at January 1, 2025.
Required: Prepare a statement of cash flows for 2025 using the indirect method (IAS 7), reconciling to cash and cash equivalents at December 31, 2025. Watch the direction of the gain on disposal.
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