9. The following questions involve the Cash Flow Statement

a) Explain why net profit does not necessarily provide a positive cash flow.

b) Distinguish between the direct method and the indirect method for the Cash Flow Statement.

c) Explain why under the indirect method an adjustment needs to be made on net income.

d) Describe the type of adjustment that needs to be made on net income for the indirect method and give TWO (2) examples for each type of adjustment.

e) The Cash Flow Statement classifies the activities of the entity into operating activities, investment activities and financing activities. For each activity, give TWO (2) examples of transactions involving cash inflows and TWO (2) examples involving cash outflows.

f) En. Lazim, the chairman and majority shareholder of Lekorlas Sdn. Bhd., Has requested your assistance in preparing financial statements for his company for the purpose of bank loan application. The following is the Cash Flow Statement of Lekolas Sdn. Bhd. for the year ended 31 December 2017 that you have provided:

Lekorlas Sdn. Bhd.

Cash Flow Statement

for the year ended December 31, 2017

	RM	RM
Cash Flow from Operating Activities
Net profit	150,000
Adjustments to earn cash from operations:
Depreciation	30,000
Gain from sale of machine	(15,000)
Changes in working capital
Decline in trade receivables	8,000
Increase in inventory of merchandise	(16,000)
Decrease in trade payables	14,000
Decrease in accrued spending	(7,000)
Net cash flow from operating activities		164,000
Cash flow from investment activity
Cash receipts from machine sales	75,000
Cash payment for equipment purchase	(45,000)
Net cash flow from investment activities		30,000
Cash flow from financing activities
Payment of cash dividends	(40,000)
Net cash flows are used in financing activities		(40,000)
Net increase in cash and cash equivalents		154,000
Cash balances and cash equivalents as at 1 January 2017		66,000
Cash balances and cash equivalents as at 31 December 2017		220,000

After examining the Cash Flow Statement above, En. Lazim has contacted you to seek clarification on some of the following questions that have confused him:

1. Why is it necessary to attach a Cash Flow Statement when the bank can determine the movement in cash by looking at the difference between the initial cash balance and the final cash balance?

2. What is the difference between operating activities, investment activities and financing activities?

3. Why is it necessary to show cash flows for operating activities, investment activities and financing activities separately when they are all business activities?

4. Why is it necessary to make an adjustment to net income to earn cash from operations when net income already takes into account all cash inflows and outflows?

Be required:

Give an explanation to questions 1 to 4 submitted by En. Common.