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The income statement


Part A…………………………..

Answer the following questions:

1.An organisation owes �300,000 tax at 1.7.X4 and �450,000 at 30.6.X5. Its income statement for the
year to 30.6.X5 includes a tax charge of �400,000. How much tax was actually paid in the year to


2.An organisation buys a tangible non-current asset for �200,000. It has an estimated scrap value of

�20,000 and an expected useful economic life of 10 years.

o What depreciation will be shown in the income statement for year 3?

o How would the non-current asset be shown in the statement of financial position at the end of year 3?

o If the asset is sold for �120,000 in year 4, how will this affect:


a) the income statement for year 4?
b) the statement of financial position at the end of year 4?

o How will the sale of the tangible non-current asset affect the firm�s statement of cash flows?

Be sure to demonstrate your numerical workings.
Part B…………………………..

The income statement and the statement of cash flows, in addition to the statement of financial position,
are the three financial statements that organisations cannot do without. The statement of cash flows was
the last one to be instituted but is now regarded as a necessity in the accounting field. The following
exercise takes a closer look at the statement of cash flows and allows time for your thoughts and

consideration of its role.

In formulating your Key Concept Exercise, consider the following questions:

�What type of information does the statement of cash flows provide investors?

�How do changes in liquidity affect an organisation?
Cash is the lifeblood of any business, and without it survival is very unlikely.

Do you agree or disagree? Explain what information a statement of cash flows provides to supplement a
statement of financial position and an income statement. Why is there still some controversy surrounding
published statements of cash flows? How important are such statements in terms of the financial

reporting requirements within YOUR country?

Base your answer upon your reading, further research and your own experiences.

BSC Implementation & the Internal Business Process Perspective 3

Part A
Question 1
Taxation Tax due £      
1.7.X 4 300,000      
30.06. X 5 450,000      
Tax due 750,000      
Tax paid 400,000 For

Tax Paid 300,000 For 1.7.X4    
Total paid 700,000      
Please note taxes are paid as per the total        
that’s being owed. The entries in the income        
statement reflect the income for expenses        
for the period only. Owings for taxes for that

would amount to £ 50 (part of Owings)        

The total tax paid in 30.06.X5 is £700,000
Question 2
Depreciation £    
Cost of the Asset 200,000    
Less Scrap value 20,000    
Useful life 180,000    
Years 10 yrs (depreciation/year) 18,000    
a) Third yr depreciation 18,000    
  Cost Dep NBV
b) Non-current Assets 200,000 54,000 146,000

Income Statement yr 4      
Total depreciation – 4yrs 72,000    
NBV (200,000-72,000) 128,000    
Disposal 120,000    
Loss 8,000    
c) The income statement would report a loss of

d) The financial statement would not have a report      
of the asset if it’s sold. It would be removed      
from the financial statement.      

(Kieso, Weygandt & Warfield, 2007)
Part B
Cash flows reflect the changes in the balance sheet and also the income statement. It calculates
and arrives at cash and cash equivalents through an analysis that breaks down all the business
operations into three processes; financing, operating and investing activities. The cash flow
statement includes all the current financial operations as per the balance sheet as well as all the
changes that took place during the financial year. The cash flow is utilized to determine a
company’s short term financial viability especially its liquidity. The investors would be
interested in knowing the cash generated from operations, the taxes and interest paid together
with the dividends that were paid to the owners of the company (Bodie, Z., Kane, A., & Marcus,
A. J. 2008).
The cash flow reveals all the net cash flows from the investing, financing and operating
activities. It also indicates the net increase in the company’s cash & cash equivalents. The
investors are mostly interested in profitability of the company but the company has to be liquid.
The company must be able to maintain its financial obligations by having a reasonable working
capital. Investors are mostly interested in cash flow statements because they shade some light on

BSC Implementation & the Internal Business Process Perspective 5
the company’s liquidity. The income statement is based on the accrual system; transactions are
recognized when they have occurred and not when cash is paid or received by the company.
Because of these systems, it’s possible for a company to register some profits but actually
collapse after a few days due to liquidity problems. The amounts recorded and expected from
debtors may not arrive on time or may turn out to be bad debts.
Yes i agree with the statement as without liquid cash for operations a business unit cannot
function. Large businesses collapse because of investing huge amounts of money in stock.
Operating cash flow is crucial to the survival of a business as most operations like payment of
salaries, sales allowances and maintenance of vehicles must be paid for business operations and
processes to function effectively.
The statement of cash flow reveals the company’s liquidity position. The total cash paid and the
remaining cash and cash equivalent (Vance, 2003).
The controversies surrounding the cash flow suggest that the financial statement is difficult to
understand for average citizens and it becomes even more complex for large corporations that
have complex business operations like acquisitions, mergers or disposals of subsidiaries. Most
companies rank liquidity in companies as more important and critical than actual profitability of
the company. The income statement and the balance sheet reveal only the profitability of the
company but the cash flow reveals even the liquidity status of the company.
However, the major limitation of the cash flow statement is that it only indicates the amounts
spent on acquisition of fixed or non-current assets in a particular financial period but it does not
reveal whether the transaction were profitable or not and if it was necessary in the first place.
The cash flow may also reveal if the company registered some increment in stock since the last
financial period but it does not reveal if the increment was a result of poor work by salesmen,

error in stock taking or a strategy to make extra income on anticipation of price increment or fear
of shortages (Garrison, R., Noreen, W. & Brewer, 2009).
The cash flow also does not reveal why debtors may have increased and the reasons behind the
increment. It could be possible that the debtors may be having financial challenges or the
company has extended its credit period or the credit controller is inefficient in collecting the
debts due. These questions makes it necessary to have other financial statements that have more
details on financial issues and which may be needed to clear certain reports. Hence the cash flow
cannot be of much use if it’s presented on its own and without the income statement and the
balance sheet or the statement of financial position of a company. All the three financial
documents have their own contribution in providing complete financial accounting information.

BSC Implementation & the Internal Business Process Perspective 7
Bodie, Z., Kane, A., & Marcus, A. J., 2008, Investments (7th International Ed.) Boston:
McGraw-Hill. 303
Garrison, R., Noreen, W. & Brewer, P., 2009, Managerial Accounting , New York, NY:
McGraw-Hill Irwin. 65 -70
Kieso, D. E., Weygandt, J. J., & Warfield, T. D., 2007, Intermediate Accounting (12th Ed.).
Hoboken, NJ: John Wiley & Sons,
Vance, D., 2003, Financial analysis and decision making: tools and techniques to solve financial
problems and make effective business decisions. New York, NY: McGraw-Hill.

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