Question

The following information was extracted on 31 December 2021 from the records of Koekashop (Pty) Ltd, after the gross profit was determined for the year: Additional information: 1. The long term loan was acquired on 1 June 2021. The interest was paid on 31 December 2021, but no entry has been made for it yet. 2. On 31 December 2021 a vehicle, with a cost of N$25000 (accumulated depreciation balance N\$20 000), was sold for N\$10 000 cash to Win-Win Motors. No entry has been made for this transaction yet. 3. The correct amount paid to suppliers and employees can be accepted as N\$2 671926. 4. The GP\% for the year was 25% on cost price. REQUIRED: Prepare the statement of cash flows for the year ended 31 December 2021 in accordance with IAS 7: Statement of Cashflows. Make use of the direct method and show the following two notes: - Reconciliation of profit before tax to cash flow from operations - Cash \& Cash equivalents

Answer 1

Main answer:The statement of cash flows shows how cash and cash equivalents moved through the entity during the reporting period, sorted into operating, investing, and financing activities. As a result, cash flows from operating, investing, and financing activities must be shown in the statement of cash flows. The direct method is used in the preparation of the statement of cash flows under IAS 7. The direct method is used to report cash inflows and outflows from operating activities.Explanation:The following are the steps to prepare a statement of cash flows for the year ended December 31, 2021 for Koekashop (Pty) Ltd. using the direct method:STEP 1: Determine the net profit before tax of Koekashop (Pty) Ltd:GP percentage = 25% on cost price.The cost price of the product was N$3 743 089 (100/125*4 678 861).Therefore, Gross Profit = 25% of cost price = N$935 772Therefore, net profit before tax = Gross profit - other expenses = N$935 772 - N$71 890 = N$863 882STEP 2: Prepare a reconciliation of profit before tax to cash flow from operations for Koekashop (Pty) Ltd:The reconciliation of profit before tax to cash flow from operations is as follows:Reconciliation of profit before tax to cash flow from operations PARTICULARS AMOUNT (N$) Net profit before tax 863 882 Adjustments: Depreciation 40 000 Gain on disposal of vehicle (15 000) Cash paid to suppliers and employees (2 671 926) Interest paid on long term loan 12 500 Increase in accounts receivable (256 139) Increase in inventories (338 216) Decrease in accounts payable (70 413) Cash flow from operating activities (2 414 412)STEP 3: Prepare a cash and cash equivalents note for Koekashop (Pty) Ltd:The cash and cash equivalents note for Koekashop (Pty) Ltd is as follows:Cash and Cash Equivalents PARTICULARS AMOUNT (N$) Cash at bank 314 090 Petty cash 50 Cash flow from operating activities (2 414 412) Cash and cash equivalents at beginning of year 151 448 Cash and cash equivalents at end of year (1 949 824)STEP 4: Prepare a statement of cash flows for Koekashop (Pty) Ltd:The statement of cash flows for Koekashop (Pty) Ltd is as follows:Statement of Cash Flows for the year ended 31 December 2021 PARTICULARS AMOUNT (N$) CASH FLOWS FROM OPERATING ACTIVITIES Net profit before tax 863 882 Adjustments: Depreciation 40 000 Gain on disposal of vehicle (15 000) Cash paid to suppliers and employees (2 671 926) Interest paid on long term loan 12 500 Increase in accounts receivable (256 139) Increase in inventories (338 216) Decrease in accounts payable (70 413) Cash flow from operating activities (2 414 412) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of vehicle 10 000 CASH FLOWS FROM FINANCING ACTIVITIES Long term loan received 150 000 CASH AND CASH EQUIVALENTS Net increase in cash and cash equivalents (2 254 412) Cash and cash equivalents at beginning of year 151 448 Cash and cash equivalents at end of year (1 949 824)The statement of cash flows is complete after the figures for cash flows from operating activities, investing activities, and financing activities have been combined with the changes in cash and cash equivalents.