Accounting in

Organisations and Society

Topic 3: General purpose financial statements
– further consideration of the income statement, the statement of changes
in equity, and the statement of cash flow

Learning Notes

Topic 3: General purpose financial statements – further

consideration of the income statement, the statement of
changes in equity, and the statement of cash flows.

RMIT University
Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Disclaimer
This subject material is issued by RMIT on the understanding that:
1. RMIT, its directors, author(s), or any other persons involved in the preparation of this
publication expressly disclaim all and any contractual, tortious, or other form of liability to any
person (purchaser of this publication or not) in respect of the publication and any
consequences arising from its use, including any omission made, by any person in reliance
upon the whole or any part of the contents of this publication.
2. RMIT expressly disclaims all and any liability to any person in respect of anything and of the
consequences of anything done or omitted to be done by any such person in reliance, whether
whole or partial, upon the whole or any part of the contents of this subject material.
3. No person should act on the basis of the material contained in the publication without
considering and taking professional advice.
4. No correspondence will be entered into in relation to this publication by the distributors,
publisher, editor(s) or author(s) or any other person on their behalf or otherwise.
All details were accurate at the time of printing.
March 2017

RMIT University Page i

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Table of Contents
PART ONE ................................................................................................................. 1
The income statement and the statement of changes in equity. ................................ 1
Overview of this part................................................................................................... 1
Learning objectives .................................................................................................... 1
The income statement ................................................................................................ 2
Our four questions ...................................................................................................... 3
The reporting period ................................................................................................... 4
The use of accrual accounting ................................................................................... 4
Additional Notes on Accrual Accounting..................................................................... 7
Prepayment ................................................................................................................ 8
Income received in advance ....................................................................................... 8
Income receivable ...................................................................................................... 9
Depreciation ............................................................................................................... 9
Many judgments required ........................................................................................... 9
Accounting rules change over time .......................................................................... 10
How we measure assets and liabilities impacts how we measure profits ................. 10
Normal to find a note detailing key policy choices .................................................... 11
When to recognise income and expenses? .............................................................. 11
Do all items of income and expense get included within profit? ............................... 12
The statement of changes in equity ......................................................................... 13
PART TWO .............................................................................................................. 15
The statement of cash flows ..................................................................................... 15
Part Two Overview ................................................................................................... 15
Learning objectives .................................................................................................. 15
The statement of cash flows ..................................................................................... 15
An overview of the relationship between some income/expense items and the related
cash flows ................................................................................................................ 16
Purpose of the statement of cash flows.................................................................... 17
Further consideration of the differences between accrual accounting and cash flows
................................................................................................................................. 17
Classifications of cash flows ..................................................................................... 18
Cash flows from operating activities ......................................................................... 18
Cash flows from investing activities .......................................................................... 18
Cash flows from financing activities ......................................................................... 19
RMIT University Page ii
Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Preparing a statement of cash flows ........................................................................ 22

Usefulness of the statement of cash flows? ............................................................. 24
Cash controls ........................................................................................................... 24
Internal controls for cash .......................................................................................... 24
The bank reconciliation ............................................................................................ 25
Form of the bank reconciliation ................................................................................ 26
References ............................................................................................................... 34

RMIT University Page iii

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

PART ONE
The income statement and the statement of
changes in equity.

Overview of this part

Provide a more in-depth review of the income statement and the statement of changes in
equity, including an investigation of:
• How profit is calculated.
• The need to subdivide the life of an organisation into a number of ‘accounting periods’.
• The role of accrual accounting in determining profits with particular reference to accrued
expenses, prepaid expenses, income received in advance, and income receivable.
• The role of professional judgement in determining expenses, income, and therefore
‘profit’.
• How measurement choices with regards to assets and liabilities has direct implications
for reported profits.
• Recognition criteria for income and expenses.
• The requirement that some items of income that are specifically excluded by accounting
standards from being included within reported profits.
• How to present the income statement.
• The meaning of ‘other comprehensive income’ and the reason for reporting it.
• The statement of profit or loss and other comprehensive income.
• The role of the statement of changes in equity.

Learning objectives
At the completion of this topic, students should:
 Have further knowledge about how income statements are presented.
 Understand the need for accrual accounting and understand why cash flows and
profits can be quite different.
 Understand how professional judgements made by the accountant will impact reported
profits.
 Understand when to recognise items of income and expense.
 Be able to explain why some items of income are not directly included in reported
profits.
 Understand the meaning of ‘other comprehensive income’.

RMIT University Page 1

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

 Understand how income statements, statement of profit or loss and other

comprehensive income, and statement of changes in equity are presented.

The income statement

• The income statement provides details of the income and expenses of an organisation.
• As we learned elsewhere:
– Income is defined as:
Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity participants.
We could also say income increases the value of assets or decreases the value of
liabilities. We exclude contributions from owners such as investing capital.
– Expenses are defined as:
Decreases in economic benefits during the accounting period in the form of outflows
or depletions of assets or incurrences of liabilities that result in decreases in equity,
other than those relating to distributions to equity participants.
We could also say expenses decreases the value of assets or increases the value of
liabilities. We exclude contributions from owners such as withdrawing capital.
• The difference between income and expenses is a profit or a loss.
• Profit increases owners equity.
• Losses decrease owners equity , as:
OE end of period = OE beginning of period + (Income – Expenses) + C - D
• Profit or loss is a key measure of financial performance, and is a focus of media interest.

RMIT University Page 2

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Example
In February 2016, Woolworths reported a loss of $972.7 million for a half
financial year, and this was mainly driven by a $1.9 billion write down in
Masters- the Home Improvement business.
The CEO said exiting Masters and focusing on core businesses are the
top priority for Woolworths in order to earn profits. However, this decision
has left 7700 employees’ jobs in an uncertain condition; despite their hard
working efforts (Pash 2016).
In 2017, Woolworths reported a profit of $725 million for the first half
financial year. Hyam and Janda (2017) explained the main reason for this
profit was due to the shut down of Masters. The following news
addressed the details on the working opportunities of Masters employees:
http://www.abc.net.au/news/2016-08-25/woolworths-ceo-says-most-masters-staff-will-
keep-jobs/7786380

Required:
As you can see by the Woolworth’s example, profits or losses mean more
than getting the numbers right. Think of other ways profits or losses
change the behavior of organisations and society.

Our four questions

1. Why report?
Both internal and external users need information about financial performance. Investors
need the information in order to determine such things as likely dividend payments.
Managers need to know profits being generated from activities so as to determine if
various facets of the organisation are viable. Lenders want to know whether an
organisation is likely to be able to repay amounts due. Employees and unions might be
interested in knowing whether it appears that an organisation is likely to be able to keep
paying wages and also if it could pay more to employees. For many organisations, it is a
legal requirement to report profits.
2. To whom are we reporting?
From the above, we can see that there are many different stakeholders who might have
an interest in an organisation’s profitability – investors, creditors, employees, employee
unions, customers, government, news media, and so on.
3. What are we reporting?
We will be reporting various items of income and expense (together with comparatives
for prior periods) which we will discuss shortly.
4. How/where are we reporting?
For larger organisations, the information will generally be prepared in accordance with
accounting standards and the information will often be provided within an ‘annual report’

RMIT University Page 3

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

which also provides a balance sheet (also called a statement of financial position), a
statement of cash flows, a statement of changes in equity, and supporting notes.
However, a profit objective is not relevant for all organisations – for example, not-for-
profit entities.
• Such entities might be more concerned with other objectives such as fulfilling
particular social and or environmental needs (nevertheless they would need to
monitor some aspects of financial performance including cash flows).
• Also, we need to appreciate that even for ‘for profit’ organisations, there are also
many important aspects of performance that are not financial:
– That is, we must always remember that financial measures such as ‘profits’ are
not comprehensive measures of organisational performance.

The reporting period

• ‘Profit’ is calculated for a period of time.
• Even though an organisation might be expected to last indefinitely (it is a ‘going concern’)
financial accounting breaks the life up into discreet (and somewhat artificial) time periods.
• This requires various items of income and expense to be allocated to the time periods
which in itself often requires a deal of professional judgement.
• Organisations typically report their results for a year. They can also do it for six month
periods, or even monthly.
• In Australia the financial year is typically from July 1 to June 30 whereas in other
countries it is typically January 1 to December 31. Other financial years are allowed.

The use of accrual accounting

• Financial statements are typically prepared on an ‘accruals basis’.
• This means that income is recognised when it is earned and expenses are recognised
when the expense is incurred – this is not necessarily the same as when the related
cash movement occurs. For example, in August, a professional accounting firm provides
a service on credit which allows the client to pay us in 30 days’ time. The revenue is
recognised on the date of service, not when the cash is received. Also, we may contract
an advertising agency to market our services, the expense is recorded when the
advertising occurs, not when we pay them 30 days later.
• Therefore, ‘profit’ – which is the difference between ‘income’ and ‘expenses’, might be
very different to the net cash flows for the same period Using the example above, profit
in August would be:
Revenue: Service Fees $1000
Less Expenses Advertising 450
Profit $550

RMIT University Page 4

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

• However the cash received would be in September and cash paid for advertising would
also be in September.
• Indeed, a very profitable organisation might nevertheless fail because of poor cash
management.

Reflection
As stated above, a key issue in the measurement of profit is when income
should be recognised.
Assume you want buy a mobile phone, but this is a very popular phone,
and the shop does not have the stock. So you paid $100 as deposit while
placing the order and the phone can be picked up one month later. The
bills will be paid within 15 days after you receive your mobile phone. The
critical issue is when the seller can recognise revenue:
 When you place the order?
 when you receive the the mobile phone?
 When you pay the bills?

Further consideration on Accrual Accounting

Income receivable (asset)
Ted Accounting coaching school runs courses on advanced taxation. The
school offered a special two days’ intensive course on 15th and 16th
February, 2017 for ABC Pty Ltd during the semester break. The coaching
school invoiced $1000 to ABC Pty Ltd and the payment will be made on
15th March 2017. The coaching school’s reporting date is 30 March 2017.
In this transaction, Ted Accounting coaching school has rendered
coaching services in February, it is appropriate to recognize $1000 as
revenue even though the cash has not been received yet. Accounts
receivable (asset) will increase by $1000 and tuition fee (income) will also
increase by $1000, therefore as a consequence profit and equity
increase. The accounting equation is affected as follows:
Assets = Liabilities + Equity
+$1000 +$1000
When the school receives payment in March, cash received (asset)
increases and a decrease in accounts receivable (asset) will be recorded.
The accounting equation will be affected as follows:
Assets = Liabilities + Equity
+$1000
-$1000

RMIT University Page 5

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Further consideration on Accrual Accounting

Prepaid expenses (asset)
Ted Accounting coaching school paid $24000 for 24-month property
insurance on 1 January 2017, therefore insurance expense for each
month will be $1000.
Under the accrual accounting approach, the coaching school should
increase prepaid insurance (asset) and decrease cash (asset) on 1
January 2017. The accounting equation is affected as follows:
Assets = Liabilities + Equity
-$24,000
+$24,000
The coaching school’s reporting date is 30 March 2017. At the end of the
reporting period, the school should increase insurance expense $3000
(3/24 * $24 000 = $3 000), as insurance for three months has been used
and therefore decrease prepaid insurance (asset). The accounting
equation is affected as follows:
Assets = Liabilities + Equity
-$3000 -$3000
Now the balance of prepaid insurance (asset) in the Balance sheet as at
30th March 2017, after the above adjustment will be $24 000 - $3 000 =
$21 000.

Further consideration on Accrual Accounting

Income received in advance (liability)
During March 2017, the coaching school received $20000 tuition fee for
the coming semester (the semester will be from April to July).
Under the accrual accounting system, the tuition fee should not be
recognized by the school in March, since the school has not provided
training services to the students yet. At the end of the reporting period, 30
March 2017, tuition fee will be recorded as income received in
advance/unearned revenue (liability) of $20000 during March, and
increase cash (asset). The accounting equation is affected as follows:
Assets = Liabilities + Equity
+$20 000 +20 000
By the end of July, when coaching has been provided their tuition fee,
should now be recorded as income and income received in advance
(liability) should be reduced. The accounting equation will be affected as
follows:
Assets = Liabilities + Equity
-$20 000 +$20 000

RMIT University Page 6

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Further consideration on Accrual Accounting

Accrued expense (liability)
The coaching school received electricity bills of $800 for March 2017. The
bills will be paid on 25 April.
The electricity expense should be recognised by the school in March
when the electricity has been consumed. To record this transaction at the
end of reporting period 30 March 2017, electricity expense (expense
account) will be increased by $800 reducing profit, and accrued electricity
expense (liability account) will be increased by $800.
The accounting equation is affected as follows:
Assets = Liabilities + Equity
+$800 -$800
When the bills are paid in April, the accrued electricity expense (liability)
will be decreased, and the cash (asset) will be decreased as well. The
accounting equation will be affected as follows:
Assets = Liabilities + Equity
-$800 -$800

Additional Notes on Accrual Accounting

• Remember, we recognise expenses when they are incurred, which is not necessarily
when they are paid.
• Because we have to determine which expenses have been incurred in a particular
accounting period (which might be 12 months), we have to determine whether any
expenses have been incurred, but not yet paid.
• These are called accrued expenses.
• Examples would include:
• Accrued wages
• Accrued electricity
• Accrued interest

Example
 Boris Ltd has a 5 day work week and a total wages bill of $10,000 per
week.
 The wages are paid, in arrears (after service provide), on Friday.
 The end of the financial period (the date we need to prepare financial
reports) is 30 June, which is a Thursday.
 What amount of accrued wages needs to be recognised on 30 June,

RMIT University Page 7

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

and what accounts will be affected? Also show how these accounts
will affect the accounting equation.

Prepayment
• Occurs when a payment for a good or service is made in advance of receiving the good
or service.
• Is considered to be an asset as it provides us with a right to a future economic benefit.

Example
• Bobby Ltd paid one year’s rent in advance on 1 January 2017 for an
amount of $120,000.
• The end of the financial year is 30 June 2017.
• How much of the advance payment of $120,000 would be disclosed
as an asset (and what would it be called?) at 30 June and how much
will be rent expense for the year ended 30 June 2017?
• Justify why the amount calculated for prepaid rent is an ‘asset’.

Income received in advance

• This occurs when an organisation is paid for a good or service in advance of it being
provided to the customer.
• For example, a lawn mowing business might be paid 6 months mowing fees in advance
of actually doing the mowing.
• This would be considered to be a liability.

Example
• Insurance Co offers motor vehicle insurance and invoices its clients
12 months in advance.
• On 1 May 2017 it invoiced a customer, $1,200 for one year’s motor
vehicle insurance.
• Its financial year ends on 30 June 2017.
• Out of the $1,200 received by Insurance Co, how much would be
treated as income and how much would be treated as income
received in advance (liability) as at 30 June 2017?
• Explain why the income received in advance should be disclosed as a
liability.

RMIT University Page 8

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Income receivable
• This arises when an organisation performs a service, but has not been paid for it.
• For example, Fastbooks Accounting services might have completed some work for a
client and has not received payment.

Example
• On 28 June 2017, Torquay Surf School provided surfing lessons to a
group of aged pensioners.
• The fee was $1,000 but has not been paid by the group of pensioners
as at the end of the financial year, which is 30 June 2017.
• What accounts would be affected by recognising this income?
• How much of the fee would be disclosed as an asset at 30 June 2017
and how much will be the income for the year ended 30 June 2017?
Explain the reason for this treatment.

Depreciation
(see Module 3 Topic 2)
• Depreciation represents another expense which is recognised in a period that generally
differs from when the underlying asset was acquired (and therefore when the related
cash flow occurred).
• For example, Lina Ltd bought a truck on 1 July 2015 for $100,000 cash. It is expected to
have a useful life of ten years and to have no residual value at the end of its useful life.
• How much expense would be recognised in the year to 30 June 2017?

Many judgments required

• The practice of accounting requires many judgements to be made.
• For example, we just had a question about depreciation. A judgement needed to be
made about its useful life and residual value. Many such judgements need to be made.
• Also, in measuring income and expenses we need to determine whether the recognition
criteria based on ‘probability’ and ‘measurability’ have been satisfied
• In relation to liabilities judgements need to be made about the probability of payment and
in some cases estimates have to be made of the actual obligation.
• For example, an organisation might have been given an order to clean up a
contaminated site.

RMIT University Page 9

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

– Many judgements need to be made.

• In relation to assets, judgement needs to be made as to whether the item will actually
generate future economic benefits. If it won’t, then it needs to be expensed;
• For example, a mining company closes down a mine site in a remote location. Is the
employee housing still an ‘asset’?
• The point to be made is that throughout the process of financial accounting many
judgements must be made. The implication of this is that it is very unlikely that different
accountants would derive the same ‘profits’, ‘assets’ and ‘liabilities’.
• Would you think that most people would realise the extent to which financial
accounting is affected by professional judgement?

Accounting rules change over time

• Apart from professional judgement influencing assets, liabilities, income, and expenses
(and therefore profits), as new accounting standards are issued these can also impact
the profit that is calculated.
• For example a new accounting standard might be issued that:
• Prohibits goodwill amortisation (not allowed to write off as expense).
• Requires research expenditure do be expensed rather than capitalised.
• Requires us to place a cost on share options provided to managers.
• Requires us to expense (rather than capitalise) all expenditure on internally
generated intangible assets.
• The point to be made is that the rules of financial accounting are not static, which means
that it is problematic to compare current period reported profits with previous year profits
– the ‘rules of the game’ might have changed.
• This is a fact that is often ignored by people comparing current year financial
performance with previous years’ financial performance.

How we measure assets and liabilities impacts

how we measure profits
• Following on from previous slides, how we measure assets and liabilities also impacts
reported profits. For example:
• If we revalue our property, plant and equipment to fair value then this will increase
depreciation expense which will therefore decrease profits (depreciation expense is
based on the ‘carrying amount’ of the asset so if the carrying amount is increased
then so is depreciation expense).
• If we measure provisions – such as provisions for warranty or provisions for site
remediation - at their present value this will mean there will be less expense than if
we had measured them at their undiscounted value.

RMIT University Page 10

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

• We could come up with many more such examples, but the point to be made is that
choosing between different measurement bases for assets and liabilities will in turn
impact profits.

Normal to find a note detailing key policy

choices
• Because organisations make various choices in relation to revenue and expense
recognition, asset and liability measurement, and so forth, there is a general requirement
that the financial statements be accompanied by a note that explains significant
accounting policies.
• Before we compare the financial position and financial performance of different
organisations, it is important to understand whether they are using the same accounting
policies.
• As an example, BHP Billiton does not have a practice of revaluing its property, plant
and equipment to fair value whereas many other diversified mining companies do. If
revaluations are not undertaken this tends to mean reported assets are lower (with
implications for gearing measures and return on asset measures), and depreciation
expense is lower (with obvious implications for reported profits).

When to recognise income and expenses?

• As already indicated, there is much judgement involved when determining whether to
recognise income and expenses.
• For example, according to the Conceptual Framework for Financial Reporting, an item
that meets the definition of an element (and the elements are assets, liabilities, income,
expenses and equity) should be recognised if:
(a) it is probable that any future economic benefit associated with the item will flow to or
from the entity; and
(b) the item has a cost or value that can be measured with reliability
• Issues of ‘probability’ and ‘measurability’ can be rather subjective at times and different
accountants will frequently make different judgements (so again, they would not all
record the same profits, assets, and/or liabilities)

Web resource
Harvey Norman 2016 annual report notes to the financial statements p.75
explains the different categories of revenue, and the annual report can be
accessed via the following link:
http://www.harveynormanholdings.com.au/pdf_files/2016-Annual-Report.pdf

Qantas 2016 annual report notes to the financial statements p.93 explains
the different categories of revenue, and the annual report can be

RMIT University Page 11

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

accessed via the following link:

http://investor.qantas.com/FormBuilder/_Resource/_module/
doLLG5ufYkCyEPjF1tpgyw/file/annual-reports/2016AnnualReport.pdf

Required
a) Identity how Harvey Norman and Qantas classify their revenue.
b) Demonstrate revenue recognition for each category.

Reflection
Under the accrued accounting system, can the following transactions be
recognized as the income?
 Sales of goods on credit for $1000
 Received $200 cash in advance for the service to be delivered in next
reporting period
 Received $300 cash for the services provided in the previous
reporting period.
 Received a bank loan $10000
 Received owner’s cash contribution $2300

Do all items of income and expense get

included within profit?
• No they do not.
• Some accounting standards specifically exclude some items from being included within
profits despite the fact they might which seem to fit the definition of income
• As we know, income is defined as:
Increases in economic benefits during the accounting period in the form of inflows
or enhancements of assets or decreases of liabilities that result in increases in
equity, other than those relating to contributions from equity participants
• As an example, when we revalue an item of property, plant and equipment upwards
(because the fair value has increased), this would increase assets, and equity and would
not be a contribution from owners.
• Hence it would fit the definition of income.
• However, our accounting standard pertaining to property plant and equipment has a
general requirement that increases in fair value shall not be included in profits (as
income) but rather shall be included directly in equity (specifically in an equity reserve
account).

RMIT University Page 12

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

• Whilst the revaluation increase would not be included in income it would be included
within a measure of financial performance known as ‘other comprehensive income’
which is defined in our accounting standards as:
Other comprehensive income comprises items of income and expense (including
reclassification adjustments) that are not recognised in profit or loss as required
or permitted by other Australian Accounting Standards.
• So just be aware that we have a measure called profits, another measure called ‘other
comprehensive income, and the total of the two which is referred to as ‘total
comprehensive income’.

The statement of changes in equity

• As we know, equity is the residual interest in the assets of the entity after deducting its
liabilities.
• In organisations, total equity might be comprised of a number of accounts.
• For a company, equity might be made up of number of components, for example:
• Share capital
• Retained earnings
• reserves
• In addition to having to present a
• statement of financial position, also known as the balance sheet
• a statement of profit or loss and other comprehensive income, also known as
the income statement .
• a statement of cash flows and supporting notes to its financial statements,
an entity is also required to produce a statement of changes in equity.
• The role of the statement of changes in equity is to provide a reconciliation of opening
and closing equity, and also to provide details of the various equity accounts that are
impacted on by the period’s total comprehensive income.
• It also provides information about the effects of transactions with owners in their capacity
as owners (distributions and capital contributions).

Web resource
JB Hi-Fi is one of the Australia and New Zealand major retail
companies of consumer goods with its headquarter in Melbourne
Australian, specialising in DVDs, video games, electronics, software,
hardware, etc..
The following is JB Hi-Fi’s statement of changes in equity:

RMIT University Page 13

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

This table is extracted JB Hi-Fi annual report 2016 p.57.

RMIT University Page 14

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

PART TWO
The statement of cash flows

Part Two Overview

Provide a more in-depth review of the statement of cash flows as well as an overview of
cash controls, including an investigation of:
• The purpose of a statement of cash flows.
• Examples of the differences between profits and cash flows.
• The format of the statement of cash flows.
• How to prepare a statement of cash flows.
• Cash controls including a bank reconciliation.

Learning objectives
At the completion of this topic, students should:
 Understand the purpose of the statement of cash flows and how it provides
information not otherwise available in other financial statements.
 Have further insights into the differences between profits and cash flows.
 Be able to describe the way the statement of cash flows is typically presented.
 Have some knowledge about how to prepare a statement of cash flows.
 Understand the meaning of ‘cash controls’ and understand the function of a bank
reconciliation.

The statement of cash flows

• The purpose of the statement of cash flows is to provide details of the cash inflows (cash
receipts) and outflows (cash payments) of an organisation.
• Effectively, the statement of cash flows provides a reconciliation of opening and closing
‘cash’.
• It provides information that is not directly available from the balance sheet or the income
statement. Without a statement of cash flows users of financial statements would only
know what opening and closing cash was (from the balance sheet). This would not be
terribly useful.
• Organisations require cash to operate and therefore the statement of cash flows is an
important document.

RMIT University Page 15

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

• As we know, there is a difference between ‘profits’ and ‘cash flows’. A profitable

organisation might nevertheless fail because of poor cash flows.
- Remember, profits are determined by way of accrual accounting and not by changes
in cash.
• We need to fully understand the difference between such things as:
- Sales (which creates income and might also create another asset, debtors) and the
subsequent receipt of cash from debtors (which substitutes one asset – cash, for
another asset, debtors).
- Purchases of inventory (which might increase an asset (inventory) and a liability
(creditors) and payments for that inventory (which decreases both cash (asset) and
creditors (liability).

An overview of the relationship between some

income/expense items and the related cash
flows

Reflection
Identify the impact of the following events on cash and profit (increase,
decrease or no change). Briefly state the reason explaining the impact of
the events.
 Issue of shares worth $10,000.
 Repayment of bank loan of $5,000.
 Purchase of inventory on credit for $3,000.
 Purchase of a machinery for cash $2,000.
 Sales on credit for $1000.
 Depreciation of the equipment for $500.
 Receive payment from credit sales for $1000.

RMIT University Page 16

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Purpose of the statement of cash flows

Assists in assessing the ability of the company or economic entity to:
• Generate cash flows.
• Meet financial commitments as they fall due, including servicing of borrowings and
payment of dividends.
- Organisations can cease to operate if they cannot pay their debts as and when they
fall dues.
• Fund changes in the scope and/or nature of its activities.
• Obtain external finance.
By having knowledge of both cash flows and accrual of profits/losses, investors are likely to
be better able to assess the performance and viability of the reporting entity.

Further consideration of the differences

between accrual accounting and cash flows
Items that might cause a difference between profits and cash flows include:
• depreciation and amortisation (these impact profits but not cash)
• increases/decreases in accounts receivable and payable, interest payable and
receivable, accrued expenses, income tax payable, deferred taxes payable, prepaid
expenses, inventories
• loss/gain on sale of plant and equipment or loss of stock through stock obsolescence or
theft

Illustration of a possible reconciliation between profits and cash

flows

Profit/loss after tax XX

Add:
Depreciation expense XX
Amortisation expense XX
Increase in interest payable XX
Increase in accrued expenses XX
Increase in accounts payable XX
Subtract:
Increase in accounts receivable (XX)
Increase in prepaid expenses (XX)
Increase in interest receivable (XX)
Increase in inventories (XX)
Net cash flows for the period XXX

RMIT University Page 17

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Classifications of cash flows

It is common for the cash flows to be divided into those that relate to:
• operating activities:
- The principal revenue-producing activities of the entity and other activities that are
not investing and financing activities, that is, relate to the provision of goods and
services, and other activities that are neither financing nor investing activities (refer to
definitions of financing and investing).
• investing activities:
- The acquisition and/or disposal of long-term assets (including property, plant and
equipment) and other investments (such as securities) not included in cash
equivalents.
• financing activities:
- Relating to changing the size and/or composition of the financial structure of the
entity, including equity and borrowings not falling within the definition of cash.

Cash flows from operating activities

• Cash flows from operating activities include:
- receipts from customers
- payments to suppliers and employees
- interest received
- cash generated from operations
- interest paid
- income taxes paid
• Across time it would be hoped that cash flows from operations provides a large
proportion of the total cash being required by the organisation.
• In the early years the cash flows from operations might be negative as the organisation
establishes itself, but a business organisation cannot persist with negative cash flows
from operations.
• This is an important measure of financial performance.

Cash flows from investing activities

• Cash flows from investing activities include:
- acquisition of subsidiary X, net of cash acquired
- purchase of property, plant and equipment
- proceeds from sale of equipment

RMIT University Page 18

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

- dividends received
• An organisation in a ‘growth phase’ might be expected to have negative cash flows from
‘investing activities’. Positive cash flows from investing activities might be reflective of an
organisation ‘selling down’ its assets.

Cash flows from financing activities

• Cash flows from financing activities include:
- proceeds from issue of shares
- proceeds from borrowings
- repayment of borrowings
- dividends paid
- share buybacks

Guided Activity
Lin and Tony formed a partnership to sell electric devices, and has been
operating the business for three years. The bank account balance at the
beginning of the year 1 July 2016 is $130000.
The followings are the business transactions occurred during this year (1
July 2016 to 30 June 2017):
Equity injection (issue of shares) 10 000
Credit sales to customers 245 000
Payments to suppliers 100 000
Purchase of a truck 20 000
Owner’s cash withdrawal 5 000
Payment of interest 3 000
Receipt of interest 6 000
Income taxes paid 13 000
Payments for utilities 2 500
Loan proceeds 4 000
Cash receipt from disposal of a motor vehicle 10 000
Loss from disposal of the motor vehicle 5 00
Required:
Prepare a statement of cash flows

Statement of cash flows for the year ended 30 June 2017

RMIT University Page 19

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Cash from operating activities

Interest received 6 000
Payment to suppliers (10 0000)
Payments for utilities (2 500)
Payment of interest (3 000)
income taxes paid (13 000) (112 500)
Cash from investing activities
Proceeds from disposal of a motor vehicle 10 000
Purchase of a truck (20 000) (10 000)
Cash from financing activities
Proceeds of borrowings (loan) 4 000
Proceeds from issue of equity 10 000
Owner’s cash withdrawal (5 000) 9 000
Net increase(decrease) in cash held (113 500)
Cash at the beginning 130 000
Cash at the end of 16 500

Some examples of calculating cash flows

(Note: this is an additional illustration that is not assessable).
Bam Ltd had the following transactions and account balances for the year
ending 30 June 2017:
• Sales of $250,000 of which $200,000 were on credit terms
• Opening debtors (accounts receivable) of $180,000 (as at 1 July
2016)
• Closing debtors (accounts receivable) of $160,000 (as at 30 June
2017)

How much cash was actually received from customers in 2017?

(answer $270,000)

Further example of calculating cash flows

(Note: this is an additional illustration that is not assessable).
Bam Ltd had the following transactions and account balances for the year
ending 30 June 2017:
• Inventory purchases of $200,000 all of which were on credit terms
• Opening trade creditors (accounts payable) of $220,000 (as at 1 July

RMIT University Page 20

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

2016)
• Closing trade creditors (accounts payable) of $230,000 (as at 30 June
2017)

How much cash was actually paid to trade creditors in 2017?

(answer $190,000)

RMIT University Page 21

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Preparing a statement of cash flows

(Note: this is an additional section for accounting major students that is not
assessable)
You are provided with the following information for No Hui Ltd for the month ending 30 June
2017:
• Cash balance at the beginning of the month was $4,000
• Cash balance at the end of the month was $9,000
• Details of the cash receipts and cash payments were recorded in the cash receipts
journal and cash payments journal which follow
You are required to produce a statement of cash flows for the month ending 30 June 2017

Cash Receipts journal

RMIT University Page 22

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Cash Payments journal

No Hui Ltd
Statement of cash flows for the month ending 30 June 2017
Cash flows from operating activities
Receipts from customers 12,000
Payments to suppliers (4,000)
Payments to employees (6,000)
Interest received 1,000 3,000
Cash flows from investing activities
Acquisition of computer (2,000)
Cash flows from financing activities
Contribution from owner 4,000
Loan 3,000
Repayment of loan (2,000)
Payments to owners (1,000) 4,000
Net increase in cash held 5,000
Cash at the beginning of the month 4,000
Cash at the end of the month 9,000

RMIT University Page 23

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Usefulness of the statement of cash flows?

• Why would the statement of cash flows – such as the one just prepared - be useful?
• Useful to whom?

Importance of cash flow management

Many investors believe profit is important to give an indication on the
performance of a business in their business investments. However, the
importance of cash has been significantly ignored by some investors.
(White, 2014; Howell, 2014).
A good cash management system could ensure the company is able to
pay their stakeholders, such as suppliers, creditors, and shareholders on
time. Entrepreneur (2017) provided some tips on how to manage cash
flow for small businesses, and this paper can be accessed via the
following link:
https://www.entrepreneur.com/article/66008

Required:
Summarise the different approaches that have been provided in this
article to better manage small business cash flow.

Cash controls
Internal controls.
• We have various ‘internal controls’ for cash.
• Internal controls are systematic measures put in place by an organisation to:
– conduct its business in an orderly and efficient manner,
– safeguard its assets and resources,
– deter and detect errors, fraud, and theft,
– ensure accuracy and completeness of its accounting data,
– produce reliable and timely financial and management information, and
– ensure adherence to its policies and plans.

Internal controls for cash

Some internal controls for cash could include:
• All payments should have required authorisation and documentation.

RMIT University Page 24

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

• All payments and receipts should be evidenced by pre-numbered documents which can
later be reconciled.
• Payments should not be made directly from cash takings (tills).
• Cash in tills shall regularly be verified against internal cash register records.
• Cash should not be kept within the organisation overnight, other than ‘petty-cash’.
• Regular bank reconciliations should be conducted to ensure that what the organisation
thinks it has in cash actually reconciles to what the bank records indicate.

The bank reconciliation

• Allows comparison of the organisations records with those held by the bank.
• Involves comparing the organisation’s cash journals with the bank statement provided by
the bank.
• As a result of doing a bank reconciliation the organisation will typically be required to
make entries in its cash journals.
• The records held by the organisation and by the bank should be the same, other than:
• There might be some transactions that the bank knows about, but the organisation
does not which might require the organisation to make adjustments in its own
journals. For example
– Direct deposits
– Interest earned
– Direct payments
– Interest expense/bank charges
– Dishonoured cheques
• There might be some transactions the organisation knows about, but the bank does
not (but would typically know about them subsequently)
– Deposits not yet recorded
– Un-presented cheques

RMIT University Page 25

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Form of the bank reconciliation

(Note: this is an additional section for accounting major students that is not
assessable)

Cash balance as per bank statement xx

Add:
Un-presented deposits xx
Direct payments of expenses by bank* xx
Interest charged by the bank* xx
Deduct:
Un-presented cheques (xx)
Payments made directly by customer to the bank* (xx)
Cash balance as per organisation’s accounts (xx)
* These reconciling items require the organisation to make adjustments to their accounts

Guided Activity
(Note: this is an additional illustration that is not assessable)
You are an accountant working in Computer Pty Ltd. You have identified
cash balance of your bank statement is different from the accounting
book’s cash account on 31 May 2012. On the bank statement, the
balance is $8000, whereas the balance for the Cash at Bank account is
only $7000. After a careful investigation, you have identified the following
issues which could have been responsible for the difference:
Un-presented deposit: $900
Expense charged by bank: $600
Un-presented cheques: $2500

Required:
Prepare a Bank Reconciliation Statement for Computer Pty Ltd.
Computer Pty Ltd
Bank Reconciliation Statement 31 May 2012
Cash balance as per bank statement $8000
Add: Un-presented deposit 900
Direct payment of expense by the bank 600 1500
9500
Less: Un-presented cheques (2500)

Cash balance as per organisation’s accounts $7000

RMIT University Page 26

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Case Study

DC Surf Co.
Download Video:
https://smoovivideov1.s3.amazonaws.com/11fce144-8af0-e234_7452.mp4

Background
De and Claire studied a business course together 5 year ago. De majored in
Marketing and Claire majored in International Business. They met through
the University Surfing Club.
De works full-time as a marketing Assistant for a major retailer. On the
weekends he shapes surfboards in his shed. It started out as a hobby but he
has now started selling his boards in a few local surf shops. Claire works
part-time for a graphic design firm. She also designs her own t-shirts and
sells them online. She currently ships her t-shirts to 7 different countries
throughout South East Asia as well as the US.
De and Claire surf together a couple of times a month and often talk about
starting a business together. Finally, they have decided to take the plunge
and have set up ‘DC Surf Co’ with the vision of supplying high quality surfing
equipment and apparel. They have decided to start small but have plans to
grow quickly. For now, they are operating from a small home office in De’s
lounge room.
De and Claire decided to set up their business as a partnership. They
employed De’s neighbour Johnny on a part-time basis to assist with setting
up the website and other administrative tasks so that De and Claire can
focus on growing the business. De already had a relationship with a few of
the local surf shops and they have agreed to stock the full range of DC Surf
Co boards and apparel. They have also started selling their goods online
through their website. They have made a few bulk purchases of materials
(fibreglass, cotton, fabric) and are storing these in De’s lounge room. They
realise that they are quickly running out of space and expect to either rent or
purchase commercial premises within the next 6 months.
De and Claire considered restructuring the business from a partnership to a
company. They initially set up the business as a partnership because it
seemed to be the easiest and least expensive option but they then
wondered if perhaps they made the decision in haste and should have
researched business structures more thoroughly before making their choice.
After further consideration, they restructured the partnership into a company.

A large surfboard manufacturer has recently received negative media

attention for importing their surfboards into Australia from China where the
workers are subject to unsafe working and poor wage conditions. DC Surf

RMIT University Page 27

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Co have noticed that a lot of potential customers are now enquiring as to

how and where DC Surf Co makes their boards. De is still manufacturing his
boards locally and has now employed one experienced staff member and
one trainee to assist him. Prior to the recent media attention, no-one really
asked about the origins of the boards and De has never made an effort to
voluntarily provide this information.
De decided to label his locally made boards with a sticker which says
“designed and made locally in Australia”. Since promoting his boards as
locally made, De has noticed a significant increase in sales but is finding that
most of this extra money is being used to purchase materials and pay staff
wages. De isn’t sure how well the business is performing and how he should
best go about improving the performance of the business. He came across
this article about how to make a living as a surfboard maker and has decided
that he and Claire should develop a business plan for their business. De also
thinks that they should hire an accountant to assist them in their business
but Claire isn’t convinced that this is necessary and is worried about the
extra cost. They decide on a compromise which is to advertise a position for
a part-time accountant to work in the business 2-3 days per week.
Congratulations, you got the job!
With your help De and Claire have prepared and implemented a business
plan which they hope will increase sales, reduce costs and help their
business to perform better overall. Their vision is to become an emerging
leader in the surfing industry with a reputation for high quality products and
great service. It has now been six months since the plan was put into place
and from De and Claire’s perspective, the business seems to be going well.
DC Surf Co’s surfboards are currently stocked by 22 different surf shops. In
order to keep up with the demand, De and Claire have hired an additional
two trainees and one experienced staff member to assist with the surfboard
manufacturing. A great deal of time has gone into training the new trainees
and while they were learning they made some mistakes in the manufacturing
process that were not detected until the boards were purchased and used by
customers. In total, out of 192 board produced, 16 boards were returned to
DC Surf Co. The business replaced 12 of these boards and issued refunds
for the remaining 4 boards. DC Surf Co. retained the faulty boards so that
the current and any future trainees could use these boards to practice their
board shaping skills.
The apparel line is also growing. The business produces t-shirt which are
also stocked by the 22 surf-shops and are sold online both in Australia and
overseas. A celebrity was recently photographed in one of the t-shirts and
since then the t-shirts sales have tripled and the business has temporarily
sold out of some of the most popular styles and has been unable to fulfil
some customer orders. Whilst customer reviews on Facebook initially spiked
at 4.8 stars, since running out of stock, some customers have become
frustrated and their current rating has decreased to 4.1.
In order to leverage from the popularity of their t-shirts, De is keen to add
board shorts to their apparel line. Claire is not convinced that this is a good
idea and is concerned that board shorts are a very seasonal item and that
people do not buy shorts all year round. T-shirts on the other hand are

RMIT University Page 28

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

purchased by customers even during the winter time to wear underneath

warmer clothing. Before taking a risk on the new board short line, De and
Claire want to have a clear understanding of how the business is currently
performing.
With your help De and Claire make the decision to proceed with the board
short line and it is a huge success. It is now 3 years on and the business
now stocks a full range of both men’s and women’s apparel including
hoodies, tracksuit pants and hats. They have also decided to expand their
line into beach towels which they will manufacture themselves.
After preparing an analysing a number of budgets, De and Claire discovered
that they would be unable to continue growing at such a rapid rate without
obtaining the additional funds necessary to expand. They considered
borrowing funds from the bank but did not feel comfortable taking on such a
substantial amount of debt. Instead, they decide to list DC Surf Co on the
Australian Stock Exchange. They are now a publicly listed company and
have raised several million dollars through the initial public offering (IPO) in
order to further expand the business.
During the month of April 2017 they DC Surf Co experienced the following
transactions and events:

3 April 2017 DC Surf Co paid staff wages of $13,000

5 April 2017 DC Surf Co purchased $18,000 of materials to

manufacture their beach towels. Payment is not due for
14 days.

7 April 2017 Johnny resigned from DC Surf Co in order to take up a

new job opportunity in Canada. His final day will be 21
April 2017. Due to operating efficiencies, De and Claire
decided that they will not need to replace Johnny and
so expect to save $36,000 in wages per year.

13 April 2017 DC Surf Co made a large sale worth $85,000 to a new

retailer who has agreed to stock their entire range. This
new customer is required to make payment in 14 days.

19 April 2017 DC Surf Co make the payment of $18,000 related to

the materials purchase on 5 April 2017.

19 April 2017 De discovers that the one of the surfboard shapers has
been incorrectly disposing of potentially hazardous
waste. The employee has been storing the waste
behind an old shed and after recent storms, much of
this waste has been washed into the nearby waterways
and estuaries.

RMIT University Page 29

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

24 April 2017 DC Surf Co was named in a damaging post on

Facebook and had to apply to Facebook to have the
review removed. On 26 April the post was removed.
During the period 24 April -26 April, 3 retailers
contacted DC Surf Co to advise that they will not
purchase any further goods from the company. These
lost future sales are estimated to total $100,000 per
year.

26 April 2017 DC Surf Co is temporarily running low on cash and

takes out a small bank loan of $30,000 in order to pay
the warehouse rent for the month.

26 April 2017 Claire decides to switch cotton suppliers after learning

that the offshore supplier they had been using was not
providing safe working conditions for staff. It has been
reported that 3 cotton-pickers died from heat
exhaustion in the past 4 weeks.

27 April 2017 DC Surf Co receive the $85,000 from the sale made on
13 April 2017. They use $30,000 of this money in order
to pay back their bank loan.

De and Claire have decided to purchase new equipment that will allow them
to manufacture surfboards more efficiently and with fewer faults. The
equipment cost $180,000 with a further $15,000 of installation costs. It was
fully installed and ready to use on 1 July 2017. The useful life of the
equipment is 10 years with a residual value of $25,000.

Additional Information:
It is now the end of the 2017 financial year and after a number of years
working for DC Surf Co you have been promoted to a senior accounting role.
Well done! An assistant accountant named Megan is helping with the
preparation of the 2017 financial statements and has asked you some
questions in relation to the rent and administrative wage expenses at DC
Surf Co. In response you have asked Megan to send you through the regular
rent and administrative wage figures so you can take a look at this
information. You receive the following email:

RMIT University Page 30

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Megan Cheng
to me

Hello,

As discussed, I am not sure if I need to include any accrued or prepaid expenses in

the financial statements. I remember that you said I should take a look at the rent
and wages and so I have collected the following information:

Rent:
The warehouse/factory rent is $60,000 per calendar month and is paid in advance
on the 10th day of each month. So for example, we paid $60,000 on 10 June 2017
and that was for rent for the period from 11 June 2017 to 10 July 2017. The rent will
be increasing to $70,000 per calendar month from 11 September 2017.

Wages:
The admin staff work Monday to Friday and wages are usually $65,000 per fortnight
and are paid in arrears. The last pay run for the year was processed on Tuesday 27
June 2017 and related to the fortnightly pay period which ended on Friday 23 June.

I look forward to receiving your response. If you require any further information,
please just let me know.

Regards,

Megan Cheng
Assistant Accountant
DC Surf Co

RMIT University Page 31

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Activity 1:
Respond to Megan’s email and advise of the amount of any prepaid
and/or accrued expenses related to rent and/or administrative wages for
the year ended 30 June 2017. Include calculations in your email so that
Megan will be able to see how you have determined these figures.

Activity 2:
Due to the upcoming rental increase, DC Surf Co are considering shifting
premises and either renting a warehouse elsewhere or else borrowing
funds from the bank to purchase their own premises. They know that
either a prospective landlord or the bank will be keen to assess the
profitability of the business before entering into a lease with them or
before loaning them funds. De and Claire are keen to make sure that the
profit has not been understated and so have asked you to undertake a
review of the draft income statement prepared by Megan below and to
identify and explain at least one area where professional judgment may
have impacted their reported profitability.

DC Surf Co
Draft Income Statement
Year ended 30 June 2017
$ '000
Sales 6,555
Less Cost of Goods Sold 2,680
Gross profit 3,875

Less operating expenses

Admin wages 780

Admin superannuation 74
Bad and doubtful debts 125
Consultants fees 80
Depreciation 82
Interest 50
Lease expenses 350
Marketing expenses 300
Rent 720
Utilities 50
2,611
Net profit (before tax) 1,264

RMIT University Page 32

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

Activity 3:
De and Claire have asked you to meet with them to discuss the cash flow
of the business during the month of June 2017. They are surprised to see
that the bank balance has decreased by $170,000 in one month despite
the business exceeding all sales and profit targets for the month. You ask
Megan to send you across the draft cash flow statement for the month so
you can take a look at it ahead of your meeting with De and Claire.

Review the draft cash flow statement below and provide De and Claire
with an explanation as to the key reason why the cash has decreased
during the month of June. Provide De and Claire with the two ways that
they could have avoided the decrease in cash during the month of June.

DC Surf Co
Draft Cash Flow Statement
Month ended 30 June 2017
$ '000
Cash flows from operating activities
Receipts from customers 700
Payments to suppliers (320)
Payments to employees (240) 140

Cash flows from investing activities

Purchase of equipment (250)
Sale of equipment 20 (230)

Cash flows from financing activities

Repayment of loan (20)
Dividends paid (60) (80)

Net decrease in cash held (170)

Cash at the beginning of the month 350
Cash at the end of the month 180

RMIT University Page 33

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow
Accounting in Organisations and Society

References

Entrepreneur 2017, how to better manage your cash flow, Entrepreneur,

viewed on 21 March 2017, https://www.entrepreneur.com/article/66008.

Harvey Norman 2016, Annual Report, Harvey Norman, viewed on 10

March
2017,<http://www.harveynormanholdings.com.au/pdf_files/2016-
Annual-Report.pdf>

Howell R 2014, Why companies Need to focus on cash Flow, The Wall
Street Journal, 20 Oct, viewed on 19 Mar 2017,
<http://blogs.wsj.com/experts/2014/10/20/why-companies-need-to-focus-
on-cash-flow/>

Hyam R and Janda M 2017, Woolworths bounces back to profit after

Masters disaster, ABC News, viewed on 10 March
2017,<http://www.abc.net.au/news/2017-02-22/woolworths-bounces-
back-to-profit-after-masters-disaster/8292126>

JB Hi-Fi 2016, Annual Report, JB Hi-Fi, viewed on 10 March

2017,<https://www.jbhifi.com.au/Documents/2016%20JB%20Hi-
Fi%20Annual%20Report_ASX.pdf>

Lasker P, Morgan E, and Janda M, Woolworths CEO says most Masters

staff will get new jobs within company, viewed on 16 March 2017, <
http://www.abc.net.au/news/2016-08-25/woolworths-ceo-says-most-
masters-staff-will-keep-jobs/7786380>.
module/doLLG5ufYkCyEPjF1tpgyw/file/annual-
reports/2016AnnualReport.pdf>

Pash C, 2016, Woolworths shuts Masters, sells the property, and now
7700 jobs are on the line， viewed on 16 March, 2017, <
https://www.businessinsider.com.au/woolworths-is-about-to-
announce-a-deal-on-its-masters-business-2016-8>.

Qantas 2016, Annual Report, Qantas, viewed on 10 March

2017,<http://investor.qantas.com/FormBuilder/_Resource/_

White G 2014, Cash flow is king when judging a company’s prospects, 3

May, viewed on 19 Mar 2017,
<http://www.telegraph.co.uk/finance/comment/10806302/Cash-flow-is-
king-when-judging-a-companys-prospects.html>

RMIT University Page 34

Accounting in Organisations and Society
Topic3: General purpose financial statements – further consideration of the income statement, the statement of changes in
equity, and the statement of cash flow