HI5020 Corporate Accounting – Cash Flows Statements – Individual Assignment


Assessment Details

Trimester: T2 2021
Unit Code:
Unit Title:
Corporate Accounting
Assessment Type:
Individual Assignment

Assessment Title: Cash flows statements
Purpose of the assessment (with ULO Mapping)

This assignment aims at developing an understanding of students on different aspects of a cash flows statement as well as what information can be derived from the cash flows statement.
Students will learn how to prepare the statement of cash flows using direct and indirect method, understand why a company may have reported profit but negative cash flows, and form the ability to look into the profit figure in conjunction with the cash flows information so as to get a complete picture. Hence this assignment helps students to learn how to prepare, present, analyse and synthesise cash flow related data and information for a company or for a corporate
Weight: 35 % of the total assessments (35 marks)
Total Marks :
35 % in a written report
Word limit :
3000 words ±500 words

Assessment tasks:

Question 1

Aggressive Corporation approaches Matt Taylor, a loan officer for Oklahoma State Bank, seeking to
increase the company’s borrowings with the bank from $100,000 to $150,000. Matt has an uneasy
feeling as he examines the loan application from Aggressive Corporation, which just completed its
first year of operations. The application included the following financial statements.

Income Statement

For the year ended December 31, 2018

Net sales
Cost of goods sold $110,000

Operating expenses

Depreciation expense

Total expenses
Net income
$ 30,000

The income statement submitted with the application shows a net income of $30,000 in the first year
of operations. Referring to the balance sheet, this net income represents a morethanacceptable
15% rate of return on assets of $200,000.

Matt’s concern stems from his recollection that the $100,000 note payable reported on the balance
sheet is a threeyear loan from his bank, approved earlier this year. He recalls another promising new
company that, just recently, defaulted on its loan due to its inability to generate sufficient cash flows
to meet its loan obligations.

Seeing Matt’s hesitation, Larry Bling, the CEO of Aggressive Corporation, closes the door to the
conference room and shares with Matt that he owns several other businesses. He says he will be
looking for a new CFO in another year to run Aggressive Corporation along with his other businesses,
and Matt is just the kind of guy he is looking for. Larry mentions that as CFO, Matt would receive a
significant salary. Matt is flattered and says he will look over the loan application and get back to
Larry concerning the $50,000 loan increase by the end of the week


(a) Prepare a statement of cash flows for Aggressive Corporation.

(b) Explain how Aggressive Corporation can have positive net income but negative operating
cash flows.

(c) How does the finding of negative operating cash flows affect your confidence in the
reliability of the net income amount?

(d) Why do you think Larry mentioned the potential employment position? Should the potential
employment position with Aggressive Corporation have any influence on the loan decision?

Question 2

Why cant we pay our shareholders a dividend? shouts your new boss at Polar Opposites. This
income statement you prepared for me says we earned $5 million in our first year! You recently
prepared the financial statements below.

Income Statement

For the year ended December 31, 2018

($ in millions)
:Net sales $65
Cost of goods sold :
Depreciation expense :
Operating expenses :
Net income:
$ 5

Balance Sheet

December 31, 2018

Cash: $1
Accounts receivable (net) :
Merchandise inventory :
Machinery (net)
Total assets:
Accounts payable:
Accrued expenses payable :
Notes payable :
Common stock :
Retained earnings:
Total liabilities and stockholders equity:

Although net income was $5 million, cash flow from operating activities was a negative $5 million. This just didnt make any sense to your boss.

Prepare a memo explaining how net income could be positive and operating cash flows is negative. Include in your report the calculation of operating cash flows of negative $5 million using the indirect method.

Question 3

Bryan Eubank began his accounting career as an auditor for a Big 4 CPA firm. He focused on clients in the hightechnology sector, becoming an expert on topics such as inventory writedowns, stock options, and business acquisitions. Impressed with his technical skills and experience, General Electronics, a large consumer electronics chain, hired Bryan as the company controller responsible
for all of the accounting functions within the corporation. Bryan was excited about his new positionfor about a week until he took the first careful look at General Electronics financial statements.

The cause of Bryans change in attitude is the set of financial statements hes been staring at for the past few hours. For some time prior to his recruitment, he had been aware that his new employer had experienced a long trend of moderate profitability. The reports on his desk confirm the slight but steady improvements in net income in recent years. The disturbing trend Bryan is now noticing, though, is a decline in cash flows from operations. Bryan has sketched out the following comparison ($ in millions):

Profits? Yes. Increasing profits? Yes. So what is the cause of his distress? The trend in cash flows from operations, which is going to the opposite direction of net income. Upon closer review, Bryan noticed a couple events that, unfortunately, seem related:

  1. The companys credit policy has been loosened, credit terms relaxed, and payment periods extended. This has resulted in a large increase in accounts receivable.
  2. The salaries of the CEO and CFO, are calculated based on reported net income.

What is likely causing the increase in accounts receivable? How does an increase in accounts
receivable affect net income differently than operating cash flows?

Explain why executive compensations for officers, such as the CEO and CFO, might increase
the risk of earnings management.

Why is the trend of cash flows from operations, combined with the additional events, such a
concern for Bryan?

What course of action, if any, should Bryan take?

Assignment Structure should be as the following:
Abstract One paragraph

List of Content


Body of the assignment with detailed answer on each of the required tasks


List of references