HTM Limited is a young and growing producer of electronic measurement

HTM Limited is a young and growing producer of electronic measurement instruments and technical equipment. You have been retained by HTM to advise it in preparing a statement of cash flows using the indirect method. For the fiscal year ended October 31, 2011, you have obtained the following information about certain HTM events and transactions. The company reports under IFRS.

1. Earnings reported for the fiscal year were $800,000.

2. Depreciation expense of $315,000 was included in the earnings reported.

3. Uncollectible accounts receivable of $40,000 were written off against the allowance for doubtful accounts. Also,

$51,000 of bad debt expense was included in determining income for the year and was added to the allowance for doubtful accounts.

4. A gain of $9,000 was realized on the sale of a machine; it originally cost $75,000, of which $30,000 was depreciated to the date of sale.

5. The company has investments that are recorded at FV through OCI. The increase in the value of these investments that was included in other comprehensive income for the year was $30,000.

6. The company has an investment property, which is measured at fair value. At October 31, 2011, it was determined that the fair value of the building had declined by $45,000 and the appropriate adjustment was made.

7. On July 3, 2011, equipment was purchased for $700,000; HTM gave in exchange a payment of $75,000 cash, previously unissued common shares with a $200,000 market value, and a $425,000 mortgage note payable for the remain der.

8. On August 3, 2011, $800,000 in face value of HTM's 10% convertible debentures were converted into common shares. The bonds were originally issued at face value.

9. Bonds payable with a par value of $100,000, on which there was an unamortized bond discount of $2,000, were redeemed at 99.5.

10. On September 21, 2011, a new issue of $500,000 par value, 8% convertible bonds was issued at 101. Without the conversion feature, the bonds would have been issued at 99.

11. HTM's employees accrue benefits related to the company's unfunded post-retirement medical plan each year. At October 31, 2011, HTM recognized $49,000 of accrued expense for the current year.

Instructions

(a) Explain whether each of the 11 numbered items is a source of cash, a use of cash, or neither.

(b) Explain how each item that is a source or use of cash should be reported in HTM's statement of cash flows for the fiscal year ended October 31, 2011, assuming HTM uses the indirect approach for the Operating Activities section. For items that are neither a source nor use of cash, explain why this is true, and indicate the disclosure, if any, that should be made of the item in the company's statement of cash flows for the year ended October 31, 2011.

1.	(a)	The earnings are treated as a source of cash and should be reported as part of the net cash flow from operating activities in the statement of cash flows.
	(b)	There should be $800,000 of income shown in operating activities as the first item on the statement of cash flows.
2.	(a)	Neither.
	(b)	Because depreciation is an expense it was deducted in the computation of net income. Accordingly, the $315,000 must be added back to income in the operating section. This is because it was deducted in determining earnings, but it was not a use of cash.
3.	(a)	Neither.
	(b)	An adjustment to income is only necessary if the net receivable amount increases or decreases. Because the net receivable amount is the same before and after the write-off, an adjustment to income would not be made. Although bad debt expense is not usually treated as a separate item to be added back to income from operations, it is accounted for by analyzing the accounts receivable at the net amount and then making the necessary adjustment to income based on the change in the net amount of receivables.
4.	(a)	The $9,000 gain realized on the sale of the machine is a gain to be reported on the income statement.  The gain itself does not involve any cash flows, but the proceeds from the sale do involve cash inflows.
	(b)	This $9,000 gain must be deducted from net income to arrive at net cash provided by operations. The proceeds of $54,000 ($75,000 – $30,000 + $9,000) are shown as a cash inflow from investing activities.
5.	(a)	The change in fair value is a non-cash event so it is neither a source nor use of cash.
	(b)	This is no adjustment required to the net income in the statement of cash flows since this unrealized gain was allocated to OCI and not net earnings.
6.	(a)	Neither.  The $45,000 loss in value is not a cash transaction.
	(b)	Because the loss in fair value for investment properties is an expense it was deducted in the computation of net income. Accordingly, the $45,000 must be added back to income in the operating section. This is because it was deducted in determining earnings, but it was not a use of cash.

7.	(a)	$75,000 use of cash should be reported as a cash outflow from investing activities.
	(b)	The $200,000 issuance of common shares and the $425,000 issuance of the mortgage note, neither of which affects cash, should be reported as non-cash financing and investing activities. Note disclosure is required to explain this transaction detailing the asset purchased and the nature and total of consideration paid.
8.	(a)	Neither.
	(b)	The conversion is a significant non-cash financing activity and should be reported in a separate schedule or note.
9.	(a)	This redemption is a use of cash in the amount of the redemption price of 99.5 or $99,500.
	(b)	The redemption will be reported under the operating activities section of the statement as an adjustment to income for the loss experienced on the conversion of $1,500 ($100,000 less balance of discount $2,000 compared to the redemption price of $99,500). The loss will be added back to income as that portion of the transaction does not involve cash. In the financing activities section of the statement, the outflow of $99,500 will appear.
10.	(a)	The proceeds from issuing bonds are a source of cash.
	(b)	The proceeds of $505,000 should be reported as a cash inflow from financing activities.
11.	(a)	Neither.
	(b)	$49,000 of accrued expense will be added back to income because it was deducted in determining earnings, but it was not a use of cash.