1. Preparing a statement of cash flow

This is a company’s financial reports that gives a description of the sources of funds and bow such funds have been spent. In coming up with a company’s statement of cash flow using the direct-method one just reports the main classes of the cash receipts and the payments only. It starts with the cash received then less the cash spent for one to come up with the net cash flow. In this case, depreciation is excluded because although it is an expense that has an effect on the net profit, it is not money neither spent nor received (Hogget, 2009). Therefore, depreciation is not included in the cash flow statement.


otor vehicle accountslving problem (very hard cash flow statement) 1slving problem (very hard cash flow statement)M

Balance brought down 84,000

Disposal 3,000

Purchase 3,000 Balance carried down 90,000

90,000 90,000

Disposal of motor vehicle account

Original cost of motor vehicle 10,000

Loss on disposal of motor vehicle 7,000

Cash in hand or at bank 3,000

nventory accountslving problem (very hard cash flow statement) 3slving problem (very hard cash flow statement) 2I

Balance brought down 40,000

Increase in inventory 12,000 Balance carried down 52,000

52,000 52,000

ccounts receivableslving problem (very hard cash flow statement) 5slving problem (very hard cash flow statement) 4A

Balance brought down 16,400 Decrease in accounts receivable 1,400

Balance carried down 15,000

16,400 16,400

ccounts payableslving problem (very hard cash flow statement) 7slving problem (very hard cash flow statement) 6A

Increase in accounts payable 6,000 Balance brought down 20,000

Balance carried down 14,000

20,000 20,000

repaid insurance accountslving problem (very hard cash flow statement) 9slving problem (very hard cash flow statement) 8P

Balance brought down 600

Increase in prepaid insurance 100 Balance carried down 700

K and L hardware

Statement of cash flow

As at 30th June 2011

Cash from operating activities

Operating profit 63,000

Add loss on disposal of motor vehicle 7,000

Add accounts payable 6,000

Add interest on disposal of motor vehicle 1750

Less increase in inventory (12,000)

Les accounts receivable (1,400)

Less total expenses paid (50,175)

14,175 14,175

Cash from investing activities

Sale of motor vehicle 3,000

Purchase of motor vehicle (16,000)

Purchase of inventory (12,000)

Less purchase of motor vehicle (3,000)

Less prepaid insurance 100

(27,900) (27,900)

Cash form financing

Retained earnings: ken 23,350

Len 1,975

Income from long-term investment (6,000)

Less repayment of loan (10,000)

9,325 9,325

Change in cash (4,400)

Analysis for the change in cash

Cash at the beginning 18,400

Change in cash (4,400)

Cash at the end 14,000

  1. Comment on the Statement of Cash Flow

Operating activities

These are the cash spent to do activities for which the business was established to perform. The hardware’s operating activities cash is 14,175 this is the amount of cash that remains to the business after deducting daily operations. This means that this business is trying to minimize operation expenditure of which this is positive to the business.

Investing activities

This is money spent to buy assets or equipment needed by a business for operation. At K and L hardware, cash from investing activities is (27,900) this is the extra money that partners incur in acquiring the assets needed for business operation. The partners have to struggle their best to ensure an increase in cash from investing activities. This is because, in the long run, the cash from investments can be used to repay existing debts.

Financing activities

This is the money acquired to carry out it operation in the form of loan, retained earnings or shares. At K and L hardware, this has been on a positive trend of 9,325 this means that the business spends reasonable amount of money to resettle debts. This could have a positive impact on the business operation in the long run.


Hogget, J. R. (2009). Financial Accounting: 7th edition. Camberwell: John Wiley & Sons

Australia Ltd.