The cash flow statements show that Los Huevos Ltd had negative cash flows in 2013 but positive cash flows in 2014. Cash balances increased from $-12720 to $-4200 due to positive operating cash flows of $12220 and financing cash flows of $13300 in 2014. To further improve cash flows, the company could use machinery for longer, reduce drawings, and reduce salary expenses. A cash flow statement serves to evaluate a business's ability to generate cash flows, service debts, and expand operations. It is possible for a business to be profitable but have negative cash flows or vice versa due to the impact of investing and financing activities.

1. Cash flow statement exercise 2
1. The following is the cash account of Los Huevos Ltd. for the years 2013 &
2014:
Cash a / c
Jan 1 13 Balance $2400
Mar 11 Sales $35000
Mar 29 Debtor $24500
Apr 8 Sales $12000
May 14 Capital $5000
Jul 3 Debtors $16250
Aug 16 Computers $9000
Oct 31 Rent revenue $4000
Nov 27 Loan $11400
Dec 31 Balance $12720
$132270
Feb 22 Drawings $7500
Mar 14 Accrued Advertising $2970
Apr 20 Computers $25500
May 10 Inventory $32300
May 25 Office Exp. $4850
Jun 11 Creditors $23900
Aug 7 Salary $16170
Sept 30 Sales Return $1960
Nov 1 Furnitures $7200
Dec 16 Inventory $9920
$132270
Cash a / c
Jan 9 Bank Loan $20000
Feb 13 Rent revenue $3500
Mar 20 Sales $36000
Apr 17 Debtors $12700
May 8 Debtors $8280
Jun 6 Machinery $19000
Jul 14 Inventory $1300
Aug 12 Accrued Rent $500
Sept 2 Sales $27500
Nov 18 Inventory $670
Dec 31 Balance $4200
$133650
Jan 1 14 Balance $12720
Feb 14 Inventory $37820
Mar 23 Machinery $36000
Apr 12 Creditors $10200
May 18 Sales Return $850
Jul 4 Inventory $9400
Aug 26 Interest $1100
Sept 29 Salary $18860
Oct 14 Drawings $5200
Nov 25 Drawings $1500
$133650
a) Prepare a cash flow statement for the business for each year.

2. Cash Flow Statement of Los Huevos Ltd.
For the year ended 31 Dec 2013
a) Cash flow from Operating Activities
Receipts
-cash sales
-rent revenue
-debtors
Payments
-creditors
-inventory
-salary
-sales return
-office exp
-accrued advertising
Net cash flow from operating activities
b) Cash flow from Investing activities
Receipts
-computers
Payments
-computers
-furnitures
Net cash flow from investing activities
c) Cash flow from Financing activities
Receipts
-capital
-loan
Payments
-drawings
Net cash flow from financing activities
Change in net cash flow
Add: opening cash balance
Closing cash balance
47000
4000
40750
23900
42220
16170
1960
4850
2970
9000
25500
7200
5000
11400
7500
91750
(92070)
9000
(32700)
16400
(7500)
(320)
(23700)
8900
(15120)
12720
(12720)

3. Cash Flow Statement of Los Huevos Ltd.
For the year ended 31 Dec 2014
d) Cash flow from Operating Activities
Receipts
-sales
-debtors
-rent revenue
Accrued rent
Inventory
Payments
-creditors
-interest
-inventory
-salary
-sales return
Net cash flow from operating activities
e) Cash flow from Investing activities
Receipts
-machinery
Payments
-machinery
Net cash flow from investing activities
f) Cash flow from Financing activities
Receipts
-bank loan
Payments
-drawings
Net cash flow from financing activities
Change in net cash flow
Add: opening cash balance
Closing cash balance
63500
20980
3500
500
1970
10200
1100
47220
18860
850
19000
36000
20000
6700
90450
(78230)
19000
(36000)
20000
(6700)
(12220)
(17000)
(13300)
8520
(12720)
(4200)

4. b) Comment on the cash balance and net cash flows for both 2013 and 2014.
The cash balance increase from $-12720 to $-4200 due to positive cash flow
of operating activities, $12220 and financing activities, $13300.
c) Suggest 3 ways to improve the cash flow of Los Huevos Ltd in year 2014.
- Use the machinery for a longer period
- Reduce the drawings
- Reduce the salary
2. Explain the 3 main purposes of a cash flow statement
- Know whether the business can generate positive cash flows
- Know whether a business can generate enough cash to service its debts
- Know whether the business has sufficient cash to expand the size of its
operation.
3. It is said that a business can show a profit during an accounting period but
experience negative net cash flow at the same time. How is it possible?
Explain. Discuss also the opposite situation (i.e. showing a loss but having a
positive net cash flow)
Possible, even making profit in P & L, but still can be negative in cash balance
due to the activities from investing and financing activities.
OR
Yes, for example, business make a loss, but still can improve cash balance by
borrowing larger amount of money or by selling the fixed assets.