Question
The following information relates to Pemberton Group for the year ended December 31, 2026.
| Item | Amount |
|---|
| Net income | $80,000 |
| Depreciation expense | 20,000 |
| Decrease in accounts receivable | 10,000 |
| Increase in inventory | 6,000 |
| Increase in accounts payable | 4,000 |
Additional information:
- Equipment was purchased for $50,000 cash.
- Long-term borrowings of $30,000 were taken out for cash.
- Cash dividends of $25,000 were paid to stockholders (a financing activity under US GAAP).
- Cash and cash equivalents were $22,000 at January 1, 2026.
Required: Prepare a statement of cash flows for 2026 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