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MAKE SURE YOU HAVE A COPY OF THE PROFIT & LOSS STATEMENT & CASH FLOW STATEMENT FOR MURPHY’S CAR PARTS
Revenue: Cash Sale 42000
Credit Sales 10000 52000
Less Cost of Goods Sold
Cost of Sales 10830
Cartage In 250 11080
Gross Profit 40920
Add Stock Gain 150
Adjusted Gross Profit 41070
Less Other Expenses
Insurance 1400
Advertising 4600
Wages 19000
Rent 12000
Depreciation 2480 39480
Net Profit 1590
Operating
Inflows
Cash Sales 42000
Receipts from Debtors 5230
GST Collected 4200 51430
Outflows
GST Paid (5390)
GST Settlement (2400)
Insurance (1400)
Rent (12000)
Cartage In (250)
Wages (18200)
Prepaid Advertising (7600)
Stock (4000)
Payments to Creditors (10500)(61740)
Net Cash Outflow(10310)
Cash Flow Statement Profit & Loss Statement
STEP 1: CAREFULLY READ THE QUESTION
Read the question to determine what is being asked and pay attention to any constraints e.g. even though, but, however. Jane Murphy’s accountant prepared her business
reports. The Profit & Loss statement states there is a profit of $1,590 even though the Cash Flow Statement lists Net Cash Outflows from Operating Activities as ($13,310). Explain how this could have happened.
Notice that the question does not talk about Investing or Financing Activities so you would not refer to Capital, Drawings, Loans or Loan repayments.
STEP 2 WORK OUT WHICH ITEMS AFFECT ONLY THE PROFIT & LOSS STATEMENT OR THE STATEMENT OF RECEIPTS & PAYMENTS OR AFFECT BOTH BUT IN DIFFERENT WAYS? A business makes a Net Profit
Revenue items that only contribute to profit and do not affect cash e.g. Stock Gain will contribute to profit but has no effect on cash.
A business makes a Net Loss Expense items that contribute to the loss but have no
affect on cash e.g. Stock loss will contribute to the loss but will not affect cash.
Cash Sales affects both profit & cash but is not suitable to be used as part of the answer because it affect both by exactly the same amount.
Revenue: Cash Sale 42000
Credit Sales 1000052000
Less Cost of Goods Sold
Cost of Sales 10830
Cartage In 250 11080
Gross Profit 40920
Add Stock Gain 150
Adjusted Gross Profit 41070
Less Other Expenses
Insurance 1400
Advertising 4600
Wages 19000
Rent 12000
Depreciation 2480 39480
Net Profit 1590
Operating
Inflows
Cash Sales 42000
Receipts from Debtors 5230
GST Collected 4200 51430
Outflows
GST Paid (5390)
GST Settlement (2400)
Insurance (1400)
Rent (12000)
Cartage In (250)
Wages (18200)
Prepaid Advertising (7600)
Stock (4000)
Payments to Creditors (10500)(61740)
Net Cash Outflow(10310)
Cash Flow Statement Profit & Loss Statement
STEP 3 LOOK FOR THE APPROPRIATE ITEMS IN THE STATEMENT OF RECEIPTS & PAYMENTS OR PROFIT & LOSS STATEMENT IN THE SCENARIO
Identify receipts that will contribute to the bank balance that will not increase profit. Receipts from Debtors GST Collected
Identify payments that will contribute to the bank balance that will not decrease profit. GST Settlement GST Payments Wages Prepaid Adverting Stock Payments to Creditor
Revenue: Cash Sale 42000
Credit Sales 1000052000
Less Cost of Goods Sold
Cost of Sales 10830
Cartage In 250 11080
Gross Profit 40920
Add Stock Gain 150
Adjusted Gross Profit 41070
Less Other Expenses
Insurance 1400
Advertising 4600
Wages 19000
Rent 12000
Depreciation 2480 39480
Net Profit 1590
Operating
Inflows
Cash Sales 42000
Receipts from Debtors 5230
GST Collected 4200 51430
Outflows
GST Paid (5390)
GST Settlement (2400)
Insurance (1400)
Rent (12000)
Cartage In (250)
Wages (18200)
Prepaid Advertising (7600)
Stock (4000)
Payments to Creditors (10500)(61740)
Net Cash Outflow(10310)
Cash Flow Statement Profit & Loss Statement
STEP 3 LOOK FOR THE APPROPRIATE ITEMS IN THE STATEMENT OF RECEIPTS & PAYMENTS OR PROFIT & LOSS STATEMENT
Identify revenue items that will contribute to profit that will not increase the bank balance. Credit Sales Stock Gain
Identify expense items that will contribute to profit that will not increase the bank balance. Cost of Sales Wages Insurance Depreciation
Revenue: Cash Sale 42000
Credit Sales 1000052000
Less Cost of Goods Sold
Cost of Sales 10830
Cartage In 250 11080
Gross Profit 40920
Add Stock Gain 150
Adjusted Gross Profit 41070
Less Other Expenses
Insurance 1400
Advertising 4600
Wages 19000
Rent 12000
Depreciation 2480 39480
Net Profit 1590
Operating
Inflows
Cash Sales 42000
Receipts from Debtors 5230
GST Collected 4200 51430
Outflows
GST Paid (5390)
GST Settlement (2400)
Insurance (1400)
Rent (12000)
Cartage In (250)
Wages (18200)
Prepaid Advertising (7600)
Stock (4000)
Payments to Creditors (10500)(61740)
Net Cash Outflow(10310)
Cash Flow Statement Profit & Loss Statement
STEP 4: ITEMS ALREADY IDENTIFIED THAT AFFECT PROFIT AND CASH BUT IN DIFFERENT AMOUNTS.
Credit Sales versus Receipts from Debtors Cost of Sales versus Payments to Creditors &
Stock Prepaid Advertising versus Advertising Expense Accrued Wages versus Wages Expense
Revenue: Cash Sale 42000
Credit Sales 1000052000
Less Cost of Goods Sold
Cost of Sales 10830
Cartage In 250 11080
Gross Profit 40920
Add Stock Gain 150
Adjusted Gross Profit 41070
Less Other Expenses
Insurance 1400
Advertising 4600
Wages 19000
Rent 12000
Depreciation 2480 39480
Net Profit 1590
Operating
Inflows
Cash Sales 42000
Receipts from Debtors 5230
GST Collected 4200 51430
Outflows
GST Paid (5390)
GST Settlement (2400)
Insurance (1400)
Rent (12000)
Cartage In (250)
Wages (18200)
Prepaid Advertising (7600)
Stock (4000)
Payments to Creditors (10500)(61740)
Net Cash Outflow(10310)
Cash Flow Statement Profit & Loss Statement
WRITING THE ANSWERGST Settlement increases Operating Outflows
and contributes to Net Cash Outflows but has no effect on Net Profit.
GST Paid is greater than GST Collected and so contributes to Net Cash Outflows but not to Net Profit.
Stock Gain increases Revenue but has no effect on cash.
Credit Sales is greater than Receipts from Debtors and has a greater effect on profit than cash.
Payments to Creditors and purchases of Stock are greater than Cost of Sales and have a greater effect on cash than profit.