Three sections to one net change that reconciles to the balance sheet; then the four questions

The whole statement

Haliburton Paddle Works Ltd.
Cash Flow Statement
For the year ended 31 December, year 2

Operating activities
  Net income                                        72,000
  Amortization                                      34,000
  Loss on disposal of equipment                      2,000
  Increase in accounts receivable                   (6,000)
  Decrease in inventory                              7,000
  Increase in prepaid insurance                     (1,000)
  Increase in accounts payable                       5,000
  Decrease in salaries payable                      (2,000)
  Increase in income tax payable                     1,000
  Net cash provided by operating activities        112,000
Investing activities
  Purchase of equipment                           (110,000)
  Proceeds on disposal of equipment                 26,000
  Net cash used in investing activities            (84,000)
Financing activities
  Repayment of bank loan                           (20,000)
  Proceeds from issue of common shares              20,000
  Dividends paid                                   (15,000)
  Net cash used in financing activities            (15,000)
Net increase in cash                                13,000
Cash, beginning of year                             28,000
Cash, end of year                                   41,000

112,000 − 84,000 − 15,000 = 13,000; 28,000 + 13,000 = 41,000, and the balance sheet says 41,000. The statement reconciles. If it had not, the answer is not to force it: a fact has been missed or a sign flipped, and the T-accounts of L13.4 and L13.5 are where to look. An unreconciled statement earns the method marks for what is right and nothing for the total.

The balance-change worksheet

A second check uses nothing but the two balance sheets. List every line except cash, its change, and the section the change lands in. Because assets equal liabilities plus equity on both dates, the changes in every non-cash account must together explain the change in cash: liabilities and equity up 5,000 − 2,000 + 1,000 + 3,000 + 0 − 20,000 + 30,000 + 54,000 = 71,000; non-cash assets up 6,000 − 7,000 + 1,000 + 80,000 − 22,000 = 58,000; 71,000 − 58,000 = 13,000 ✓. Every change has been assigned somewhere — the figure shows where — and none has been used twice.

Two disclosures

Because the indirect method never shows them, ASPE s.1540 requires interest paid and income taxes paid to be disclosed. Each is the expense adjusted by the change in its payable. Haliburton has no interest payable, so interest paid = 6,000. Income tax expense 18,000 less the 1,000 rise in income tax payable = 17,000 paid. A learner who writes “taxes paid 18,000” has copied the expense; the disclosure is a cash figure.

Reading it for the bank

Four questions, answered from the statement, in the sentences the paper wants:

1. Is operating cash positive, and larger than net income? Yes — 112,000 against 72,000. The business funds itself, and the gap is mostly the non-cash amortization.
2. Did operating cash cover investing? Yes — 84,000 of equipment spending against 112,000, with 28,000 to spare. The negative investing total is growth, not distress.
3. Is financing filling a hole? No — the section is negative: Haliburton repaid 20,000 and paid 15,000 of dividends, and the 20,000 of shares issued did not exceed what went out. A positive financing total would mean new money was needed; here it was not.
4. Were the dividends covered? Yes — after investing, 28,000 remained; dividends paid were 15,000; cash still rose 13,000.

The one caution a full-marks answer adds: one year is not a trend. Receivables rose 6,000 (collections lagging sales), and 110,000 of equipment buying may recur or may have been a one-off. Say which numbers you would watch.