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Chapter 16 – Exercises & Cases

Multiple Choice Questions​

  1. The statement of cash flows shows: a) Only profit b) Cash receipts and payments c) Only assets d) Only liabilities Answer: b) Statement of cash flows shows cash receipts and payments.

  2. Operating activities include: a) Purchase of equipment b) Cash from customers c) Issuing shares d) Paying dividends Answer: b) Operating activities include cash from customers.

  3. The indirect method starts with: a) Cash balance b) Net income c) Revenue d) Expenses Answer: b) Indirect method starts with net income.

Questions​

  1. What is the purpose of the statement of cash flows?

  2. How do operating, investing, and financing activities differ?

  3. How is the indirect method used to calculate cash from operations?

  4. What information is needed to prepare a statement of cash flows?

  5. What are the Luxembourg requirements for cash flow statements?

Problems Set A​

Problem A-1: Operating Activities - Indirect Method

Calculate cash from operating activities:

  • Net Income: €40,000
  • Depreciation: €8,000
  • Accounts Receivable increased: €3,000
  • Inventory decreased: €2,000
  • Accounts Payable increased: €2,000
  • Salaries Payable decreased: €1,000

Problem A-2: Investing Activities

Record investing activities:

  • Purchased equipment: €20,000 cash
  • Sold equipment: €5,000 cash (cost €8,000, accumulated depreciation €3,000, book value €5,000)
  • Purchased vehicle: €15,000 cash

Problem A-3: Financing Activities

Record financing activities:

  • Borrowed €30,000
  • Repaid loan principal: €10,000
  • Paid interest: €2,000
  • Paid dividends: €5,000

Problem A-4: Complete Operating Section

Calculate cash from operating activities:

  • Net Income: €60,000
  • Depreciation: €12,000
  • Amortization: €2,000
  • Gain on Sale of Equipment: €3,000
  • Accounts Receivable: +€5,000
  • Inventory: -€4,000
  • Prepaid Expenses: +€1,000
  • Accounts Payable: +€6,000
  • VAT Payable: -€2,000

Problem A-5: Net Change in Cash

Calculate net change in cash:

  • Cash from Operating: €50,000
  • Cash from Investing: (€30,000)
  • Cash from Financing: €20,000

Problems Set B​

Problem B-1: Complete Statement of Cash Flows

From the following information, prepare a complete statement of cash flows:

Income Statement:

  • Net Income: €75,000
  • Depreciation: €15,000
  • Loss on Sale: €2,000

Balance Sheet Changes:

  • Accounts Receivable: +€8,000
  • Inventory: -€3,000
  • Accounts Payable: +€5,000
  • Salaries Payable: -€2,000

Investing Activities:

  • Purchased Equipment: €25,000
  • Sold Equipment: €8,000

Financing Activities:

  • Borrowed: €30,000
  • Repaid Loan: €15,000
  • Paid Dividends: €10,000

Cash:

  • Beginning: €20,000
  • Ending: ?

Problem B-2: Operating Activities with Multiple Adjustments

Calculate cash from operating activities:

  • Net Income: €100,000
  • Depreciation: €20,000
  • Amortization: €3,000
  • Gain on Sale: €5,000
  • Accounts Receivable: +€10,000
  • Inventory: +€5,000
  • Prepaid: -€2,000
  • Accounts Payable: +€8,000
  • VAT Payable: +€2,000
  • Salaries Payable: -€3,000
  • Interest Payable: +€1,000

Problem B-3: Cash Flow Analysis

A business has:

  • Cash from Operating: €80,000
  • Cash from Investing: (€50,000)
  • Cash from Financing: €20,000

Analyze: a) Net change in cash b) Is the business generating enough cash from operations? c) What are the cash flow implications?

Problem B-4: Reconciliation

Reconcile net income to cash from operating activities:

  • Net Income: €90,000
  • Depreciation: €18,000
  • Accounts Receivable: +€12,000
  • Inventory: -€4,000
  • Accounts Payable: +€7,000
  • Other adjustments: €3,000

Comprehensive Problem​

Comprehensive Problem 16: Complete Statement of Cash Flows

Le Petit Bistro needs to prepare a statement of cash flows for 2024.

Income Statement (2024):

  • Net Income: €120,000
  • Depreciation Expense: €25,000
  • Amortization Expense: €3,000
  • Loss on Sale of Equipment: €2,000
  • Interest Expense: €5,000

Balance Sheet Changes (2023 to 2024):

Assets:

  • Cash: €30,000 → €45,000
  • Accounts Receivable: €40,000 → €50,000
  • Inventory: €60,000 → €55,000
  • Prepaid Expenses: €5,000 → €7,000
  • Equipment: €200,000 → €230,000
  • Accumulated Depreciation: (€50,000) → (€65,000)

Liabilities:

  • Accounts Payable: €25,000 → €30,000
  • VAT Payable: €8,000 → €10,000
  • Salaries Payable: €12,000 → €10,000
  • Long-Term Loan: €100,000 → €80,000

Equity:

  • Share Capital: €150,000 → €150,000
  • Retained Earnings: €90,000 → €162,000

Additional Information:

  • Equipment purchased: €50,000 cash
  • Equipment sold: Cost €20,000, Accumulated Depreciation €10,000, Cash received €8,000
  • Loan repayment: €20,000 principal
  • Dividends paid: €48,000
  • Interest paid: €5,000

Required:

  1. Calculate cash from operating activities using the indirect method.

  2. Calculate cash from investing activities.

  3. Calculate cash from financing activities.

  4. Prepare complete statement of cash flows.

  5. Reconcile beginning and ending cash balances.

  6. Analyze cash flow: a) Is the business generating positive operating cash flow? b) What are the main uses of cash? c) How is the business financing its activities? d) What are the cash flow implications?

  7. Explain Luxembourg requirements: a) PCN format requirements b) When statement of cash flows is required c) RCS filing requirements d) Disclosure requirements

Cases​

Case 16-1: Cash Flow vs. Profit

Marie's restaurant shows a profit of €50,000, but her bank account only increased by €10,000. She's confused about the difference.

Questions for Analysis:

  1. Why is there a difference between profit and cash flow?

  2. What items on the income statement don't affect cash?

  3. How can a business have profit but negative cash flow?

  4. What adjustments are needed to reconcile net income to cash from operations?

  5. How should Marie analyze her cash flow statement?

  6. What actions should Marie take to improve cash flow?

Case 16-2: Cash Flow Management

A Luxembourg SME is experiencing cash flow problems despite being profitable. The business needs to:

  • Understand cash flow patterns
  • Improve cash collection
  • Manage cash payments
  • Plan for cash needs

Questions for Analysis:

  1. How can the statement of cash flows help identify cash flow problems?

  2. What are common causes of cash flow problems?

  3. How can operating cash flow be improved?

  4. What are the implications of negative operating cash flow?

  5. How should the business plan for cash needs?

  6. What are the Luxembourg requirements for cash flow reporting?

Solutions are published in supplementary/instructor/solutions/chapter_16_solutions.md.