CMA PART 1 SATURDAY 4/2/23 GMSISUCCESS **3**

TOPIC: FINANCIAL REPORTING WEIGHT 15%

MCQ : 8+ MCQ PLUS IN ESSAY ALSO 2 QUESATIONS
ASK…TOTAL SCALE COVERED 50+ GLEIM TEXTBOOK : UNIT 1
TO 6.

STATEMENT OF CASH FLOWS(2 or 3q in mcq

&1q in essay=scale 20+):
The primary purpose of the statement of cash flows is to
provide relevant information about the cash receipts and cash
payments of an entity during the period.
1) To achieve this purpose, the statement should provide
information about cash inflows and outflows from the
operating, investing, and financing activities of an entity.
This is the accepted order of presentation.
2) The statement of cash flows should help users assess the
entity’s ability to generate positive future net cash flows
(liquidity), its ability to meet obligations (solvency), and its
financial flexibility.
The statement of cash flows explains the change in cash and
cash equivalents during the period. It reconciles the period’s
beginning balance of cash and cash equivalents with the
ending balance

cash & cash equivalent= cash balance+ bank balance less bank
overdraft
The following is an example of the summarized format of the statement of cash
flows (only the headings).
The amounts of cash and cash equivalents at the beginning and end of the
year are taken from the balance sheet.
Entity A’s Statement of Cash Flows for the Year Ended December 31, Year 1
Net cash provided by (used in) operating activities $20,000
Net cash provided by (used in) investing activities (5,000)
Net cash provided by (used in) financing activities 9,000
Net increase (decrease) in cash and cash equivalents during the year $24,000
Cash and cash equivalents at beginning of year (January 1, Year 1) 6,000
Cash and cash equivalents at end of year (December 31, Year 10 $30,00

Operating Activities
a. Operating activities are all transactions and other events that are not
financing or investing activities.
1) Cash flows from operating activities are primarily derived from the
principal revenue producing activities of the entity. They generally
result from transactions and other events that enter into the
determination of net income.
b. The following are examples of cash inflows from operating
activities:
1) Cash receipts from the sale of goods and services (including
collections of accounts receivable)
2) Cash receipts from royalties, fees, commissions, trading debt
securities, and other revenue
3) Cash received in the form of interest or dividends(income
from investment)
c. The following are examples of cash outflows from operating
activities:
1) Cash payments to suppliers for goods and services
2) Cash payments to employees
3) Cash payments to government for taxes, duties, fines, and
other fees or penalties
4) Payments of interest on debt(finance costs)
d. The two acceptable methods of presentation of cash flows
from operating activities are the direct and the indirect methods.
1) The only difference between these two methods is their
presentation of net cash flows from operating activities.
a) The total cash flows from operating, investing, and financing
activities are the same regardless of which method is used.
2) The CMA exam requires candidates to know how to prepare
the statement of cash flows using the indirect method

Investing Activities
a. Cash flows from investing activities represent the extent to
which expenditures have been made for resources intended to
generate future income and cash flows.
b. The following are examples of cash outflows (and inflows)
from investing activities:
1) Cash payments to acquire (cash receipts from sale of)
property, plant, and equipment; intangible assets; and other
long-lived assets
2) Cash payments to acquire (cash receipts from sale and
maturity of) equity and debt instruments (such as held-to-
maturity securities and available-for-sale debt
securities) of other entities for investing purposes
3) Cash advances and loans made to other parties (cash
receipts from repayment of advances and loans made to other
parties)

Financing Activities
a. Cash flows from financing activities generally involve the
cash effects of transactions and other events that relate to the
issuance, settlement, or reacquisition of the entity’s
debt and equity instruments.
b. The following are examples of cash inflows from financing
activities:
1) Cash proceeds from issuing shares and other equity
instruments (obtaining resources from owners).
2) Cash proceeds from issuing loans, notes, bonds, and other
short-term or long-term borrowings.
c. The following are examples of cash outflows from financing
activities:
1) Cash repayments of amounts borrowed
2) Payments of cash dividends
3) Cash payments to acquire or redeem the entity’s own shares
4) Cash payments by a lessee for a reduction of the
outstanding liability relating to a finance lease

Major Statement of Cash Flows Note Disclosures

a. Information about all noncash investing and financing
activities (i.e., investing and financing activities that affect
recognized assets or liabilities but not cash flows) must
be disclosed in the notes.
1) The following are examples of noncash investing and
financing activities:
a) Conversion of debt to equity
b) Acquisition of assets either by assuming directly related
liabilities or by a lessee’s recognition of a finance or operating
lease
c) Exchange of a noncash asset or liability for another
Indirect Method of Presenting Operating Cash Flows
a. Under the indirect method (also called the reconciliation
method), the net cash flow from operating activities is
determined by adjusting the net income of a business for the
effect of the following:
1) Noncash revenue and expenses that were included in net
income, such as depreciation and amortization expenses,
impairment losses, undistributed earnings of equity-method
investments, and amortization of discount and premium on
bonds
2) Items included in net income whose cash effects relate to
investing or financing cash flows, such as gains or losses on
sales of property and equipment (related to investing activities)
and gain or losses on extinguishment of debt (related to
financing activities)
3) All deferrals of past operating cash flows, such as changes
during the period in inventory and deferred income
4) All accruals of expected future operating cash flows, such
as changes during the period in accounts receivable and
accounts payable

The net income for the period as it is reported in the income

statement was calculated using the accrual method of
accounting. Therefore, adjustments must be made to reach
the amount of cash flow from operating activities

The reconciliation of net income to net cash flow from operating

activities must disclose all major classes of reconciling items. At
a minimum, this disclosure reports changes in
1) Accounts receivable and accounts payable related to
operating activities and
2) Inventories
The following rules will help reconcile net income to net cash
flow from operating activities under the indirect method:
Increase in current operating liabilities>> Added to net
income
Decrease in current operating assets>> Added to net income
Increase in current operating assets>> Subtracted from net
income
Decrease in current operating liabilities >> Subtracted from net
income
Noncash losses and expenses included in net income>>
Added to net income
Losses and expenses whose cash effects are related to
investing or financing cash flows >> Added to net income
Noncash gains and revenues included in net income>>
Subtracted from net income
Gains and revenues whose cash effects are related to investing
or financing cash flows >> Subtracted from net income

Illustrration1 compute closing cash & cash equivalent as

on 31 march 2023 , with the help of following data:
Net cash inflow from operating activitiy: 2,00,000$
Net cash outflow from investing activity: 60,000$
Net cashinflow from financing activity: 1,80,000$
Op cash balance 60,000$, op bank balance 80,000$ & op
bank overdraft 30,000$
Answer :
Step 1 Opening cash and cash equivalent = opening cash
balance + opening bank balance - opening bank overdraft =
60000$ + 80000$ - 30000$ = 110000$

Net cash inflow from operating activitiy: +2,00,000

Net cash outflow from investing activity: (60,000)
Net cashinflow from financing activity: +1,80,000
= Net increase (decrease) in cash & cash equivalents during the year +3,20,000
+ Cash and cash equivalents at beginning of year + 1,10,000
= closing cash & cash equivalent =4,30,000
illustration 2 compute opening cash & cash equivalent
as on 1st january 2022 , with the help of following
data:
Net cash inflow from operating activitiy: 12,00,000$
Net cash inflow from investing activity: 1,60,000$
Net cash outflow from financing activity: 80,000$

closing cash balance 1,60,000$, closing bank

balance 80,000$ & closing bank overdraft 1,30,000$
answer :
working note >>closing c & c e = cl cash +cl bank –
cl bank od = 1,60,000+80,000 – 1,30,000=+1,10,000

Net cash inflow from operating activitiy: 12,00,000

Net cash inflow from investing activity: 1,60,000
Net cash outflow from financing activity: ( 80,000)
= Net increase (decrease) in cash & cash equivalents during the year 12,80,000
+op Cash and cash equivalents bal fig (11,70,000)
= closing cash & cash equivalent (given) = 1,10,000

Transactions in cashflow from operation: cash sale s+ , cash purchase -

, collection from customer +, payment to supplier -, wages paid -,
overheads(production/office/distr)paid -, interest paid(finance costs)-,
income received from investment (int/dividend) +, income tax paid –

Transactions in cashflow from investing activity:

purchase/aqisition/construction of tangible/intangible fixed assets -
,sale/disposal of fixed assets + , purchase of investment -, sale of
investments +, aqisition of business - (off the cashflow investing
activity=example business acquisition by issuing equity shares )

Transactions in cashflow from financing activity: issue/sale of equity/prf

stock/debenture/bonds +.receipts of bank loan+,repayment of bank loan
-, redemption of prf stock/deb/bonds -, repurchase of equity
stock(treasury stock) -, cash dividend paid (equity/pref stock)- (off the
cash flow in financing activity=conversion of deb/bonds/pref stock into
equity shares )
*off the cashflow in investing & financing activity are to be shown
as notes/disclosure below the cashflow statement (sure ask in
mcq)

CASHFLOW FROM OPERATING ACTIVITY CAN BE PREPARED

EITHER BY DIRECT METHOD OR BY INDIRECT METHOD :
AS PER US GAAP

DIRECT METHOD : FORMAT:

PARTICULARS AMOUNT$
CASH SALE ********
COLLECTION FROM CUSTOMERS *****
CASH PURCHASE (******)
PAYMENT TO SUPPLLIERS (********)
WAGES PAID (*****)
OVERHEADS PAID (******)
PRODUCTION/OFFICE/DISTRIBUTIONOH
INCOME RECEIVED FROM INVESTMENT ********
FINANCE COSTS PAID (INT ON BANK LOAN/BONDS) (*******)
INCOME TAX PAID (*****)
= CASHFLOW FROM OPERATING ACTIVITY = +/- ******

DIRECT METHOD ANOTHER TYP>>>

SALES ******
LESS COST OF GOOD SOLD (******) EXCL DEPRECIATION
LESS OPERATING EXPS (******) EXCL DEPRE,AMORTIZ
ADD INCOMERECEIVED FROM INVESTMENT *****
LESS FINANCE COST PAID (******)
LESS INCOME TAX PAID (*****)
CASHFLOW AFTER TAX (CFAT) +/* *****
ADD/LESS:INCREASE/DECREASE IN CA/CL,EXCL CASH & CASH
EQUIVALENT:
INCREASE IN TR RECEIVABLE (*****)
DECREASE IN TR RECEIVABLE *****
INCREASE IN TR PAYABLE ******
DECREASE IN TR PAYABLE (*****)
INCREASE IN INVENTORY (****)
DECREASE IN INVENTORY *****
INCREASE IN ACCRUAL ******
DECREASE IN ACCRUAL (****)

= CASHFLOW FROM OPERATION = +/- *****

INDIRECT METHOD :

NET INCOME ( PROFIT AFTER TAX) ******

ADD: NON CASH EXPENSES :
LIKE DEPRECIATION/AMORTIZATION/IMPAIREMENT LOSSES +******
ADD: NON OPERATING EXPENSES :
LOSS ON SALE/DISPOSAL OF FIXED ASSETS/INV ***
WRITE OFF OF DEBTORS,PAST LOSSES ETC *****
INCOME TAX EXPS ***
INTEREST ON DEB/BONDS/BANK LOAN **** +******

LESS: NON OPERATING INCOME :

GAIN ON DISPOSAL/SALE OF FA/INV *****
INCOME FROM INVESTMENT ***** (*******)

CASH PROFIT FROM OPERATION *******

ADD: INCOME RECEIVED FROM INVESTMENT +****
LESS FINANCE COSTS PAID (*****)
LESS INCOME TAX PAID (*******)
=CASHFLOW AFTER TAX CFAT *********
ADD/LESS: INCREASE /DECREASEIN CA/CL ,
EXCL CASH & CASH EQUIVALENT:

INCREASE IN TR RECEIVABLE (*****)

DECREASE IN TR RECEIVABLE *****
INCREASE IN TR PAYABLE ******
DECREASE IN TR PAYABLE (*****)
INCREASE IN INVENTORY (****)
DECREASE IN INVENTORY *****
INCREASE IN ACCRUAL *********
DECREASE IN ACCRUAL (********)

= CASHFLOW FROM OPERATION CFO +/- *****

ILLUSTRATION:
INCOME STATEMENT FOR THE YEAR ENDED 31ST MARCH 2023

PARTICULARS AMOUNT (IN MILLION$)

SALES 120
COGS ( Incl depre 2) ( 60)
Gross profit 60
Operating exps (incl depre 6 & amortization 4) (30)
Loss on sale of machinery (3)
Income from investment 10 (received 8)
Impairement losses (2)
Finance costs (5) (paid 6 )
Income tax exps (actual paid 12) (10)
Net income ( profit after tax ) 20

Further info : op debtors 100 cl debtor 90 , op creditor 60 cl

creditors 70, op inventory 10 cl inventory 12, op accrual 8 cl accrual
10 , op deferred income 5 cl deffrrd inc 6 , op prepayment 4 cl
prepayment 5.
Accrual= o/s exps ….current liab
Deferred income = income received in advance=current liab
Prepayment= prepaid exps = current assets

Cashflow from operation( direct method)

Particulars amount(million$)
SALES 120
Cash COGS ( 58)
Cash Operating exps (20)
Income from investment recived 8
Finance costs paid (6)
Income tax exps (12)
Cash operating profit + 32
Add/less: inc/decr in ca/cl, excl c & ce:
Decrease in debtors +10
Increase in creditors +10
Increase in inventory (2)
Increase in accrual +2
Increase in deferred inc +1
Increase in prepayment (1)

= cashflow from operation +52

Cashflow from operation ( indirect method):

Particulars amount(million$)
Net income 20
Add: non cash exps
Depreciation( 2+6) 8
Amortization loss 4
Impairement loss 2 +14

Add: non op exps:

Loss on sale of machinery 3
Finance costs 5
Income tax exps 10 +18

Less non op income :

Income from investment 10 (10)
Cash profit from operation +42
+ income received fr investment +8
(-) finance cost paid (6)
(-) income tax paid (12)
Cashflow after tax cfat +32
Add/less : inc /decr in ca /cl, exl c & ce:
Decrease in debtors +10
Increase in creditors +10
Increase in inventory (2)
Increase in accrual +2
Increase in deferred inc +1
Increase in prepayment (1)
=cashflow from operation CFO +52

ILLUSTRATION
PARTICULARS PREVIOUS YEAR CURRENT YEAR
BALANCES AMT IN MILLION$
TR RECEIVABLE 120 150
TR PAYABLE 80 90
ACCRUAL(WAGES) 20 15
PREPAYMENTS 10 12 OVERHEADS
INVENTORY 40 30
TAX PAYABLE 30 40
FURTHER INFO: CURRENT YEAR TRANSACTION: TOTAL SALES
300( CASH SALES 40%), TOTAL PURCHASES 150( CASH
PURCHASES 50%), WAGES EXPENSES CHARGED TO I/S 40,
OVERHEADS EXPS CHARGED TO I/S 25, INCOME TAX CHARGED
TO I/S 60.INCOME RECEIVED FROM INVESTMENT 5, FINANCE
COST PAID 10
PREPARE STATEMENT SHOWING CFO BY DIRECT METHOD
ANSWER :
WN 1: CASH SALES & COLLECTION FROM CUSTOMERS:
TOTAL SALES = 300
CASH SALE 40% 120 CR SALE 60% 180

TR RECEIVABLE A/C
OP BAL 120 BANK(COLL FR DEBTOS) 150
CR SALES 180 CL BAL 150

CASH SALE 120 & COLLECTION FR CUSTOMERS 150

WN 2 CASH PURCHASE & PAYMENT TO SUPPLIER :
Total purchases – 150
Cash purchse 50% - 75 Credit purchse 50% - 75

TR PAYABLE A/C
Payment to supplier = 65 Op bal 80
Cl bal. 90 . Credit purchse 75

CASH PURCHASES 75 & PAYT TO SUPPLIER 65

WN 3 ACCRUAL
ACCRUAL(O/S WAGES ) A/C
BANK (WAGES PD) 45 OP BAL 20
CL BAL 15 WAGES EXPS(I /S) 40

WAGES PAID =45

WN4 OVERHEADS PREPAYMENT A/C

OP BAL 10 OH EXPS(I/S) 25
BANK PREPAI D OH27 CL BAL 12
DURING THE YEAR OVERHEAD PAID =27

WN INCOME TAX PAID

WN5 INCOME TAX PAYABLE A/C
BANK TAX PAID 50 OP BAL 30
CL BAL 40 CURRENT TAX (I/S) 60
INCOME TAX PAID IN CURRENT YEAR = 50

STATEMENT SHOWING CASHFLOW FR OPERATION: DIRECT

METHOD
PARTICULARS AMOUNT ( M$)
CASH SALE WN1 120
COLL FR CUSTOMERS WN 1 150
CASH PURCHASES WN2 (75)
PAYT TO SUPPLIER WN2 (65)
WAGES PAID WN3 (45)
OVERHEADS PAID WN4 (27)
INCOME RECD FR INV 5
FINANCE COST PAID (10)
INCOME TAX PAID WN5 ( 50)
= CASHFLOW FROM OPERATION CFO +3
STUDENT’S ASSIGNMENT :
1. The following information was taken from the accounting
records of Oak Corporation for the year ended December 31:
Proceeds from issuance of preferred stock F $4,000,000 Dividends
paid on preferred stock F 400,000 Bonds payable converted to
common stock 2,000,000 Payment for purchase of machinery 500,000
Proceeds from sale of plant building 1,200,000 2% stock dividend on
common stock 300,000 Gain on sale of plant building 200,000 The
net cash flows from investing and financing activities that
should be presented on Oak’s statement of cash flows for the
year ended December 31 are, respectively ******& *****

2. The net income for Cypress, Inc., was $3,000,000 for the
year ended December 31. Additional information is as follows:
Depreciation on fixed assets $1,500,000 Gain from cash sale of land
200,000 Increase in accounts payable 300,000 Dividends paid on
preferred stock 400,000 The net cash provided by operating
activities in the statement of cash flows for the year ended
December 31 should be*****