Pato Aluworks Group (Pato) is an aluminium processing and casting entity that supplies high quality aluminum coils to both local and foreign markets. Pato has 3 subsidiaries namely Asanka, Jaritan and Topoya and one associate Dosi all of which it acquired several years ago. The Group’s Consolidated Statement of Profit or Loss Account for the year ended 31 December 2024 and Consolidated Statement of Financial Position as that date are set out below:

Consolidated Statement of Profit or Loss for the year ended 31 December (extract)

2024 2023
GH¢ GH¢
Profit from operations 651,150 640,496
Impairment reversal/(loss) 2,500 (1,250)
Finance costs (52,000) (40,825)
Share of profits of associate 127,575 108,439
Profit before tax 729,225 706,860
Income tax expense (145,800) (123,930)
Profit for the year (continuing operations) 583,425 582,930
Profit for the year (discontinued operations) 102,375
Profit for the year 685,800 582,930
Attributable to:
Owners of Pato 571,725 485,966
Non-controlling interest 114,075 96,964
685,800 582,930

Consolidated Statement of Financial Position as at 31 December

ASSETS 2024 2023
Non-current assets GH¢ GH¢
Property, plant and equipment 2,283,350 2,212,875
Intangible assets 22,000
Investment in associate 418,275 404,550
2,723,625 2,617,425
Current assets
Trade and other receivables 170,325 200,025
Cash and cash equivalents 46,125 32,625
216,450 232,650
Total assets 2,940,075 2,850,075
EQUITY AND LIABILITIES
Equity
Ordinary share capital (GH¢0.50 shares) 495,000 315,000
Share deals account 112,500 45,000
Retained earnings 1,491,750 1,518,975
Attributable to the equity holders of Pato 2,099,250 1,878,975
Non-controlling interest 315,450 339,300
2,414,700 2,218,275
Non-current liabilities
Lease Liabilities 239,100 300,000
Employee benefit obligations 42,150 37,500
Current liabilities
Trade and other payables 90,000 118,800
Due to related parties 1,125
Income tax payable 153,000 175,500
244,125 294,300
Total equity and liabilities 2,940,075 2,850,075

Additional information:
i) Pato owns 60% in Jaritan. The goodwill attributable to Pato arising on acquisition was GH¢67,500. The carrying value of Jaritan’s identifiable net assets (excluding goodwill arising on acquisition) in the group consolidation financial statements is GH¢180,000 at 31 December 2024. The recoverable amount of Jaritan is expected to be GH¢230,000 and no impairment loss had been recorded up to 31 December 2023.
ii) Pato sold all of its 75% shareholding in Asanka for cash during the year end December 31, 2024. As at December 31, 2023, all of the goodwill acquired in the business combination with Asanka had been written off. The profit from discontinued operations in the consolidated income statement above relates wholly to the sale of the shares in Asanka and can be analysed as follows:

GH¢
Profit before tax 93,150
Income tax expense (14,400)
Profit on disposal 23,625
102,375

The net assets of Asanka at the date of disposal were as follows:

GH¢
Property, plant and equipment 421,875
Trade and other receivables 31,275
Cash and cash equivalents 3,375
Trade and other payables (19,012)
437,512

iii) On 31 March 2024 Pato issued 100,000 ordinary shares for cash. This was followed by a bonus issue on 30 September 2024, utilising the share deals account. The consolidated statement of changes in equity for the year shows that all group companies paid ordinary dividends during the year.
iv) Depreciation of GH¢395,100 was recognised during the year ended 31 December 2024. In addition to the property, plant and equipment disposed of through the sale of Asanka, plant with a carrying amount of GH¢126,000 was sold for cash of GH¢135,000.
v) Trade and other payables include GH¢11,250 (2023: GH¢6,750) of unpaid interest due on the bank loan.

Required:
Prepare a consolidated statement of cash flows for Pato for the year ended 31 December 2024, including a note reconciling profit before tax to cash generated from operations, using the indirect method. (A note showing the effects of the disposal of Asanka is not required).

Consolidated statement of cash flows for the year ended 31 December 2024

GH¢ GH¢
Cash flows from operating activities
Cash generated from operations (Note) 1,082,812
Impairment in Jaritan (W7) 37,500
Impairment reversal 2,500
Interest paid (W1) (47,500)
Income tax paid (W2) (182,700)
Net cash inflow from operating activities 892,612
Cash flows from investing activities
Purchase of property, plant and equipment (W3) (1,013,450)
Purchase of intangible asset (22,000)
Proceeds from sale of property, plant and equipment 135,000
Dividends received from associate (W4) 113,850
Disposal of Asanka Ltd net of cash disposed of ((437,512 × 75%) + 23,625) – 3,375) 348,384
Net cash outflow from investing activities (438,216)
Cash flows from financing activities
Proceeds from share issues (495,000 + 112,500) – (315,000 + 45,000) 247,500
Financing of Lease obligations (300,000 – 239,100) (60,900)
Dividends paid (W5) (598,950)
Dividends paid to non-controlling interest (W6) (28,547)
Net cash outflow from financing activities (440,897)
Net increase in cash and cash equivalents during the year 13,500
Cash and cash equivalents at beginning of the year 32,625
Cash and cash equivalents at end of the year 46,125

Note: Reconciliation of profit before tax to cash generated from operations

GH¢
Profit before tax (729,225 + 93,150) 822,375
Impairment reversal (2,500)
Impairment in Jaritan (W7) (37,500)
Share of profits of associate (127,575)
Finance cost 52,000
Profit on disposal of property, plant and equipment (135,000 – 126,000) (9,000)
Depreciation charge 395,100
Increase in trade and other receivables ((170,325 + 31,275) – 200,025) (1,575)
Employee benefit obligations (42,150 – 37,500) 4,650
Due to related parties 1,125
Decrease in trade and other payables ((118,800 – 6,750) – (90,000 + 19,012 – 11,250)) (14,288)
Cash generated from operations 1,082,812

(1) Interest paid

GH¢ GH¢
Cash (β) 47,500 B/d 6,750
C/d 11,250 CIS 52,000
58,750 58,750

(2) Income tax

GH¢ GH¢
Cash (β) 182,700 B/d 175,500
C/d 153,000 CIS (145,800 + 14,400) 160,200
335,700 335,700

(3) Property, plant and equipment

GH¢ GH¢
B/d 2,212,875 Disposal of sub 421,875
Other disposals 126,000
Additions (β) 1,013,450 Depreciation charge 395,100
C/d 2,283,350
3,226,325 3,226,325

(4) Investment in associate

GH¢ GH¢
B/d 404,550 Cash received (β) 113,850
CIS 127,575 C/d 418,275
532,125 532,125

(5) Retained earnings

GH¢ GH¢
Dividends in SCE (β) 598,950 B/d 1,518,975
C/d 1,491,750 CIS 571,725
2,090,700 2,090,700

(6) Non-controlling interest

GH¢ GH¢
Cash (β) 28,547 B/d 339,300
Disposal (437,512 × 25%) 109,378
C/d 315,450 CIS 114,075
453,375 453,375

W7 Impairment of Goodwill – Jaritan

Goodwill GH¢ Net assets GH¢ Total GH¢
Carrying amount 67,500 180,000 247,500
Unrecognized non-controlling interest (67,500 × 40/60) 45,000 45,000
112,500 180,000 292,500
Recoverable amount 230,000

Impairment loss = 292,500 – 230,000 = 62,500
Goodwill will be reduced by 60% of 62,500, i.e. 37,500.
Profit or loss will be charged with 37,500.

Note on Adjustment of Impairment of Goodwill in Jaritan
Additional information (i) of the question indicated that: “Pato owns 60% in Jaritan. The goodwill attributable to Pato arising on acquisition was GH¢67,500. The carrying value of Jaritan’s identifiable net assets (excluding goodwill arising on acquisition) in the group consolidation financial statements is GH¢180,000 at 31 December 2024. The recoverable amount of Jaritan is expected to be GH¢230,000 and no impairment loss had been recorded up to 31 December 2023”.

Based on this information, goodwill in Jaritan is impaired by GH¢37,500 given the lower recoverable amount of the subsidiary (GH¢230,000) as against the carrying value (GH¢292,500) of the subsidiary at the reporting date, 31 December 2024.

This means the consolidated profit or loss was debited (most likely operating expenses), and goodwill account also credited. To adjust, for the purpose of estimating operating net cash flow, we add back (i.e. credit) this impairment loss to profit before tax as it is a non-cash item.

However, the statement of financial position as at the end of 2024 and 2023, have goodwill conspicuously missing, even though it is said that goodwill at the reporting date of 2024 was even GH¢62,500 before the impairment review of Jaritan (which was purchased several years ago).

No account on the statement of financial position can therefore be identified to have been reduced by the impairment loss of GH¢37,500 in the absence of goodwill. The earlier impairment loss of GH¢37,500 initially expected to have been recognised is therefore added back to reflect the fact that no impairment loss of goodwill has been recognized in the accounts for the year 2024.

EXAMINER’S COMMENTS

This question on consolidated cashflow statement was very unpopular and unexpected although the question was very straightforward. Few candidates could identify the effect of group transactions on the consolidated cashflow statement. Candidates appeared unprepared, and that reflected in the relatively poor responses to the question. Some candidates deviated from the question and produced format akin to consolidated statements of financial position rather than consolidated cash flow statements. Candidates who appeared on track struggled with the workings, and that impacted unfavourably on their mark scores. It is recommended that the topic on cash flow statement be treated thoroughly by tutors and candidates. Candidates are advised to prepare adequately and solve past questions before taking the paper.