Question Tag: Cash Flow

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  • 10 Marks

FM – Nov 2024 – L2 – Q5a – Management of Receivables

Evaluate the financial implications of different strategies for managing Abaa LTD's accounts receivable.

Abaa LTD, a company that manufactures and sells electronic appliances, has been facing challenges with its accounts receivable management. Currently, the company allows its customers 60 days of credit. Due to the highly competitive market, Abaa LTD has been experiencing an increasing amount of bad debts and delayed payments, which has adversely affected its cash flow and profitability. To address these issues, the company’s Finance Manager is considering several strategic changes:

  1. Reduction in Credit Period: Reducing the credit period from 60 days to 45 days. It is estimated that this change could reduce sales by 5% due to the stricter credit terms, but it would also decrease the bad debt ratio from 4% to 2% of sales.
  2. Offering Early Payment Discounts: Introducing a 2% discount for customers who pay within 30 days. The company anticipates that 30% of its customers will take advantage of this discount, which would improve cash flow and reduce the average collection period by 15 days.
  3. Engagement of a Factor: The company is also considering engaging a factoring company to manage its receivables. The factor would advance 80% of the invoice value upon the sale of goods at 200 basis points below the company’s cost of capital and charge a 3% fee on all sales. The factor is expected to reduce the bad debt ratio to 1% of sales and further reduce the average collection period by 20 days. Engaging the factor will lead to annual administrative savings of GH¢90,000.

Abaa LTD’s current annual sales are GH¢20 million, and the variable cost of sales is 60% of sales. The company’s cost of capital is 12% per annum.

Required:
Evaluate the financial implications of the following:
i) Reduction in Credit Period
ii) Offering Early Payment Discounts
iii) Engagement of a Factor
iv) Recommend the appropriate method to manage the credit sales

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  • 25 Marks

CR – May 2021 – L3 – Q1a – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated cash flow statement for Feedme Limited using the indirect method.

Feedme Limited
Feedme Limited is a company that has been in operations for over two decades producing “Trobomao,” a natural cocoa powder beverage. Five years ago, it acquired 100% interest in Butane Nigeria Limited and 75% interest in Shawama Supermarket Limited in 2019. Draft consolidated financial statements of Feedme Limited are provided below:

Draft Consolidated Statement of Financial Position (December 31, 2019):

Draft consolidated statement of profit or loss and other comprehensive income for the year ended December 31, 2019

Additional information:

i. There had been no acquisition or disposal of freehold buildings during the year.
ii. Information relating to the acquisition of Shawama Supermarket Limited is as follows:

iii. Loan notes were issued at a discount in 2019 and the carrying amount of the loan as at December 31, 2019 included N600,000 representing the finance cost attributable to the discount and allocated in respect of the current reporting period.

Required:
Prepare a consolidated statement of cash flows for Feedme Limited Group for the year ended December 31, 2019 in accordance with IAS 7 using indirect method.

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  • 30 Marks

CR – Nov 2020 – L3 – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare consolidated profit or loss, financial position, cash flow benefits explanation, and share disposal accounting for a group structure.

Statements of financial position as at December 31, 2019

Statement of profit or loss for the year ended December 31, 2019

Statement of changes in equity (extract) for the year ended December 31,
2019

Additional Information:

  1. Haba owns 80% of Suka‘s shares, purchased in 2016 for N20.5 million cash, when Suka’s retained earnings balance was N7 million.
  2. In 2014, Haba purchased 60% of Zara‘s shares by issuing shares with a nominal value of ₦6.5 million at a premium of N6.5 million. At acquisition, Zara‘s retained earnings were N3 million, and the fair value of net assets was N24 million. Any undervaluation was attributed to land still held as of December 31, 2019.
  3. Inventory at December 31, 2019, includes goods Zara and Suka purchased from Haba valued at ₦5.2 million and N3.9 million, respectively. Haba aims for a 30% profit margin on cost. Total sales from Haba to Zara and Suka were N8 million and N6 million, respectively.
  4. Haba and Suka each proposed dividends before year-end of N2 million and N2.5 million, respectively. These have not been accounted for yet.
  5. Haba conducted annual impairment tests on goodwill per IFRS 3 and IAS 36. The estimated recoverable amount of goodwill was N5 million in 2016 and N4.5 million in 2019.

Requirements:

a. Prepare the consolidated statement of profit or loss for the year ended December 31, 2019.
(10 Marks)

b. Prepare the consolidated statement of financial position as at December 31, 2019.
(10 Marks)

c. Explain the benefits to external users of including a statement of group cash flows in the annual report.
(10 Marks)

d. At December 31, 2019, Hard plc owned 90% of Spark Limited’s shares. The net assets of Spark in Hard Group’s consolidated financial statements amounted to N800 million, with no asset revaluation.

On January 1, 2020, Hard sold 80% of its Spark equity for N960 million cash, and the fair value of Hard’s remaining Spark shares is N100 million.

Required: Explain how the Spark share disposal should be accounted for in Hard Group’s consolidated financial statements.
(10 Marks)

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  • 30 Marks

FM – May 2018 – L3 – SA – Q1 – Investment Appraisal Techniques

Evaluate the NPV of Plateau Plc.'s project, assess sensitivity, discuss political risk, and explore real options for the project.

Plateau Plc. (PT) is a Nigerian company that manufactures and sells innovative products. Following favourable market research that cost N4,000,000, PT has developed a new product. It plans to set up a production facility in Kano, although its board had contemplated setting up the facility in an overseas country. The project will have a life of four years.

The selling price of the new product will be N5,900 per unit, with sales in the first year to December 31, 2019, expected to be 120,000 units, increasing by 5% per annum thereafter. Relevant direct labour and material costs are expected to be N3,400 per unit, and incremental fixed production costs are expected to be N60 million per annum. The selling price and costs are stated in December 31, 2018 prices and are expected to increase at a rate of 3% per annum. Research and development costs to December 31 will amount to N25 million.

Investment in working capital will be N30 million on December 31, 2018, and this will increase in line with sales volumes and inflation. Working capital will be fully recoverable on December 31, 2022.

The company will need to rent a factory during the life of the project. Annual rent of N20 million will be payable in advance on December 31 each year and will not increase over the life of the project.

Plant and machinery will cost N1 billion on December 31, 2018. The plant and machinery are expected to have a resale value of N300 million (at December 31, 2022, prices) at the end of the project. The plant and machinery will attract 20% (reducing balance) capital allowances in the year of expenditure and in every subsequent year of ownership by the company, except in the final year when there will be a balancing allowance or charge.

Assume a corporate tax rate of 20% per annum in the foreseeable future and that tax flows arise in the same year as the cash flows which gave rise to them.

The directors are concerned by rumours in the industry of research by a rival company into a much cheaper alternative product. However, the rumours suggest that this research will take another year to complete, and if successful, it will take a further year before the alternative product comes on the market.

An appropriate weighted average cost of capital for the project is 10% per annum.

Required:

a. Calculate, using money cash flows, the NPV of the project on December 31, 2018, and advise the company whether to proceed with the project or not.
(15 Marks)

b. Calculate and interpret the sensitivity of the project to a change in:

  • (i) The annual rent of the factory (2 Marks)
  • (ii) The weighted average cost of capital (4 Marks)

c. If the board of PT decided to set up the manufacturing facility overseas, advise the board on how political risk could change the value of the project and how it might limit its effects. (4 Marks)

d. Discuss briefly FOUR real options available to PT in relation to the new project. (5 Marks)

(Total 30 Marks)

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  • 20 Marks

FM – Nov 2023 – L3 – SB – Q3 – Investment Appraisal Techniques

Calculate and compare NPV for two proposals involving equipment purchase vs. existing machinery for contract fulfillment.

Niko Plc, a large equity-financed company, has a year-end of December 31. It must fulfill a contract in Abuja and has two proposals to choose from: Proposal A (purchasing new machinery) and Proposal B (using existing machinery).

Proposal A:

  • Outlay of N312,500,000 on December 31, 2023, for new plant and machinery.
  • Projected net cash inflows (before tax, in nominal terms):
    • 2024: N200,000,000
    • 2025: N275,000,000
    • 2026: N350,000,000
  • Scrap value: N25,000,000 at end of 2026.

Proposal B:

  • Uses a machine with a net realizable value of N250 million, with an alternative sale value of N300 million on January 1, 2025, if unused.
  • Cash inflows (in nominal terms):
    • 2024: N350,000,000
    • 2025: N350,000,000
  • Labour costs:
    • 2024: N100 million (replacement staff cost of N110 million)
    • 2025: N108 million (replacement staff cost of N118.8 million)
  • Machine residual value: N0 at project end in 2025.

Additional Details:

  • Working capital: 10% of year-end cash inflows, released upon project completion.
  • Expected annual inflation rates: 2024 – 10%, 2025 – 8%, 2026 – 6%, 2027 – 5%.
  • Real cost of capital: 10%.
  • Income tax: 40%, payable one year after the accounting period.
  • Capital allowances: 20% reducing balance for Proposal A’s plant and machinery.

Required:

  • a. Calculate the NPV at December 31, 2023, for each proposal. (17 Marks)
  • b. State any reservations about making an investment decision based on these NPV figures. (3 Marks)

Answer:

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  • 20 Marks

CR – Nov 2018 – L3 – SB – Q4 – Statement of Cash Flows (IAS 7)

Preparation of Happy Plc’s statement of cash flows and analysis of revaluation and financing adjustments.

Happy is a publicly listed company. Its financial statements for the year ended July 31, 2017, including comparatives, are shown below:

Notes:

  1. On November 1, 2016, Happy acquired an additional plant under a finance lease with a fair value of ₦3 million. The property was also revalued upward by ₦4 million, with ₦1.3 million of the revaluation reserve transferred to deferred tax. No disposals occurred during the period.
  2. Depreciation on property, plant, and equipment amounted to ₦1.8 million, and amortization of deferred development expenditure was ₦0.4 million.

Required:

Prepare the statement of cash flows of Happy Plc for the year ended July 31, 2017, in accordance with IAS 7, using the indirect method. (20 Marks)

 

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  • 20 Marks

CR – Nov 2023 – L3 – SB – Q2 – Consolidated Financial Statements (IFRS 10)

Analyze the profitability, cash flow, and investor ratios of Mama-Kitchen PLC and discuss dividend policy and EPS limitations.

Mama-Kitchen PLC owns a number of subsidiaries that operate standard fast-food eateries in all the six geopolitical zones of the country. You are the financial analyst of your Bank (Pam-Pam Bank Nigeria Limited) which owns 10% of the issued share capital of Mama-Kitchen PLC.

You are provided with the following financial and background information on Mama-Kitchen PLC.

Mama-Kitchen PLC

Consolidated statement of profit or loss for the year ended September 30

2023 2022
Revenue 188,900 145,850
Cost of sales (141,700) (110,400)
Gross profit 47,200 35,450
Admin expenses (31,200) (22,400)
Profit from operations 16,000 13,050
Finance cost (2,050) (2,100)
Profit before taxation 13,950 10,950
Income tax expense (3,050) (2,300)
Profit for the year 10,900 8,650
Earnings per share – basic 26.8k 21.3k
Earnings per share – diluted 21.2k 19.2k

Mama-Kitchen PLC

Consolidated statement of cash flows for the year ended September 30

2023 2022
Cash flows from operating activities:
Profit before taxation 13,950 10,950
Finance cost 2,050 2,100
Depreciation and amortisation 15,300 11,050
Loss on disposal of PPE 150 50
(Increase)/decrease in inventories (200) 50
Increase/decrease in receivables (1,250) (100)
Increase in trade payables 2,250 650
Total 32,250 24,750
Interest paid (2,050) (2,200)
Tax paid (1,600) (1,300)
Net cash flows from operating activities 28,600 21,250
Cash flows from investing activities:
Purchase of PPE (29,850) (28,950)
Proceed from sale of PPE 100 150
Net cash used in investing activities (29,750) (28,800)
Cash flows from financing activities:
Proceeds from issues of shares 1,200 100
Borrowings 3,250 10,000
Net cash flow from financing activities 4,450 10,100
Net increase in cash and cash equivalents 3,300 2,550
Cash and cash equivalents at beginning 12,400 9,850
Cash and cash equivalents at year end 15,700 12,400

Details of revenue, fast food outlets profits, and new fast food outlets openings for the year ended September 30

2023 2022
Revenue per fast food outlets:
At September 30 1,770 1,715
Opened in the current financial year 1,290 –
Gross profit per outlet opened
At September 30 435 415
In the current financial year 345

Note:

  • 30 new outlets were opened during the year ended September 30, 2023, bringing the total to 115 fast food outlets.

Additional financial information

2023 2022
Gross profit margin 25% 24.3%
Debt equity ratio 35.2% 44.4%
Current ratio 0.56:1 0.48:1
Trade payables payment period 86 days 103 days
Return on capital employed 20% 19.1%
Cash return on capital employed 40.2% 36.3%
Earnings before Interest, tax, depreciation and amortisation (N‟m) 31,300 24,100
Non-current assets turnover 1.68 times 1.49 times
Share price (at September 30) 302k 290k

Background information

i. Mama-Kitchen PLC has a reputation of depreciating its assets more slowly than others in the industry.

ii. The strategy of the group is to fund new fast food outlets capital expenditure from existing operating cash flows without needing to raise new borrowings.

iii. Revenue growth in the industry is estimated at 4.1% per annum.

iv. It is the company’s policy to increase promotional and advertising spending on new outlets to encourage strong initial sales.

v. The board has accused the management of concentrating on new outlet openings to the detriment of existing outlets.

vi. One of your colleagues, a financial analyst, stated that the company has not been able to pay dividends because of the debit balance on its consolidated retained earnings.

Required:

a. Draft a report addressed to the Managing Director of Pam-Pam Bank Limited analyzing the profitability, cash flows, and investor ratios of Mama-Kitchen PLC. You should also identify and justify matters that you consider will require further investigations.
(13 Marks)

b. Explain the validity or otherwise of your colleague financial analyst’s statement that Mama-Kitchen PLC was unable to pay dividends because of the debit balance on consolidated retained earnings.
(4 Marks)

c. Explain the usefulness and limitations of diluted earnings per share information to investors.
(3 Marks)

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  • 20 Marks

FM – May 2015 – L2 – SB – Q2 – Introduction to Performance Management

Prepare profitability and cash flow statements, and compute liquidity and gearing ratios for Ozoigbondu Nigeria Limited.

Ozoigbondu Nigeria Limited is a company that is into buying and selling of plastic containers. The company is financed by a capital of ₦15 million inclusive of reserves in a mix of 30% and 70% of debt and equity respectively.

The Company has been in trading business for the past six years and has consistently adhered to its corporate policy on sales, purchases, and inventory management.

The company’s policy on sales is to ensure that sales are collected as follows: (i) Cash sales is 40% of the monthly sales. (ii) The balance of the month’s sales is to be collected in the month following sales.

The policy on purchases is in agreement with the supplier’s policy which is to pay for all supplies in the month following. The company’s stock policy is to reserve 30% of the month’s purchases as closing inventory.

The following information is available for the five years 2010 to 2014:

2010 2011 2012 2013 2014
Monthly Sales 3,400,000 3,600,000 4,200,000 4,800,000 7,200,000
Monthly Purchases 2,000,000 2,400,000 2,800,000 3,200,000 4,800,000
Monthly Salaries 350,000 350,000 430,000 430,000 480,000
Monthly Rent 100,000 100,000 100,000 100,000 100,000
Monthly Cash Expenses 200,000 220,000 240,000 280,000 360,000

Additional Information: (i) The company purchased a motor vehicle in July 2013 which was paid for in September 2013. The cost of the motor vehicle was ₦5,000,000.
(ii) Annual depreciation for the motor vehicle is 20%.
(iii) The Cash Balance as at 31st December 2011 was ₦4,000,000.
(iv) The company’s salaries, rent, and expenses were paid in the month they were due.

Required: a. Prepare a Profitability Statement for 2012, 2013, and 2014. (10 Marks)
b. Prepare a Cash Flow Statement for 2012, 2013, and 2014. (7 Marks)
c. Determine and comment on the liquidity ratio (current ratio) for 2014. (2 Marks)
d. Compute the gearing ratio. (1 Mark)

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  • 15 Marks

PM – May 2017 – L2 – SA – Q6 – Standard Costing and Variance Analysis

Advise on optimal replacement timing for AL Limited's machine based on cost-benefit analysis.

AL Limited, a manufacturing company based in Aba, produces a popular mortar coloring agent called Hadtone. Hadtone is packaged in five-litre cartons, sold at ₦300 each. Estimated maximum annual demand is 300,000 cartons, justifying one processing machine, replaced every three years though it has a four-year productive life.

  • Machine Details: Initial productive capacity aligns with maximum demand, decreasing by 15,000 units per annum. Maintenance costs in year one are ₦300,000, rising by ₦50,000 each subsequent year. Variable costs per carton (excluding maintenance) are ₦200.
  • Machine Depreciation: Straight-line method. Sale proceeds after one year are ₦8,000,000, reducing by ₦3,000,000 each following year.
  • Machine Cost Increase: Recent machine cost rise to ₦12,000,000 prompts reconsideration of replacement policy to optimize cash flow. Assume all costs/revenues except initial payment occur year-end; initial cost paid at purchase.

Requirements:

a. Calculate replacement frequency based on maximum capacity usage, including supporting calculations. Assume a 10% cost of capital. (12 Marks)

b. Itemize key assumptions made in the calculations. (3 Marks)

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  • 30 Marks

FR – May 2024 – L2 – SB – Q1 – Statement of Cash Flows

Prepare a statement of cash flows for Badary Plc using the direct method and discuss profitability, gearing, and investor's stake in Badary Plc.

Additional Information:

(i) During the year ended March 31, 2021, plant and equipment with a carrying amount of N40,000,000 were sold for N55,000,000. The profit or loss on disposal was charged to distribution expenses.
(ii) Dividend of 2 kobo per share was paid in the year ended March 31, 2021, and there were also bonus issues.
(iii) Depreciation charged for the year was N10,000,000 on furniture and N30,000,000 on plant and equipment.
(iv) During the year, an investment that cost N12,500,000 some years ago was disposed of for N20,000,000. The profit or loss on disposal was charged to administrative expenses.
(v) Dividends received were from investments in shares and the immediate disposal of rights issues from the investment in a blue-chip company.

You are required to:
a. Prepare the statement of cash flows of Badary Plc for the year ended March 31, 2021, using the direct method in accordance with IAS 7. (20 Marks)
b. Discuss the profitability, gearing, and investor’s stake in Badary Plc and recommend strategies for improving or sustaining them. (10 Marks)

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  • 1 Marks

FA – Nov 2019 – L1 – SA – Q5 – Financial Statements Preparation

Identify what a cash flow statement cannot reveal.

Which of the following information CANNOT be revealed by a statement of cash flow?

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  • 1 Marks

FA – May 2016 – L1 – SA – Q20 – Regulatory Environment of Accounting

Identifying which activity is not an investing activity under IAS 7.

Which of the following will NOT be regarded as an investing activity in relation to IAS 7 statement of cash flows?
A. Dividend received
B. Cash paid to acquire property, plant and equipment
C. Cash paid to acquire equities in other entities
D. Cash payment to supplier of goods and services
E. Proceeds from sale of property, plant and equipment

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  • 15 Marks

MA – Nov 2019 – L2 – Q4a – Introduction to capital budgeting

Select the appropriate plant for Pagsana Company using Payback Period and NPV analysis.

a) Pagsana Company plans to introduce a new product line for production of its local drink in Walewale. The company, therefore, decided to acquire either a semi-automated plant or an automated plant. The relevant data for the two proposed plants are as follows:

Required:
i) Select the appropriate plant on the basis of:

  • Payback Period (4 marks)
  • Net Present Value

(7 marks)

ii) Explain TWO (2) advantages of discounted cashflow method of investment appraisal. (4 marks)

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  • 4 Marks

FR – Nov 2018 – L2 – Q3b – Financial Statement Analysis

Explanation of four benefits of cash flow information to users of financial statements.

An entity shall prepare a statement of cash flows in accordance with the requirements of IAS 7: Statement of Cash Flows and shall present it as an integral part of its financial statements for each period for which financial statements are presented.

Required:
Explain FOUR (4) benefits of cash flow information to users of financial statements.
(4 marks)

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  • 16 Marks

FR – Nov 2018 – L2 – Q3a – Preparation of Financial Statements

Preparation of the statement of cash flows using the indirect method based on the financial statements of Conso Bank Ghana Ltd.

The following financial statements relate to Conso Bank Ghana Limited for the year ended 31 December 2017:

Statement of Comprehensive Income for the year ended 31 December 2017

Description Note GH¢’000
Interest income (iii) 364,524
Interest expense (iv) (107,571)
Net interest income 256,953
Fees and commission income 132,374
Fees and commission expense (24,183)
Net fees and commission income 108,191
Other income (v) 9,727
Operating income 374,871
Impairment charge on loans and advances (93,492)
Operating expenses (vi) (169,317)
Profit before tax 112,062
Income tax expense (33,617)
Profit for the year 78,445

Statement of Financial Position as at 31 December 2017

Description Note 2017 (GH¢’000) 2016 (GH¢’000)
Assets
Cash and cash equivalents 577,767 752,303
Government securities 2,037,292 1,857,337
Advances to banks 214,875 107,407
Loans and advances to customers 1,190,782 1,145,133
Property and equipment (vii) 139,889 123,936
Intangible assets (viii) 18,131 12,162
Income tax asset 6,626 5,778
Total assets 4,185,362 4,004,056
Liabilities
Deposits from customers 3,368,406 3,078,071
Other liabilities and provisions 171,718 359,192
Total liabilities 3,540,124 3,437,263
Equity
Stated capital 100,000 100,000
Retained earnings 545,238 466,793
Total equity 645,238 566,793
Total liabilities and equity 4,185,362 4,004,056

Required:
Using the indirect method, prepare a statement of cash flows for the year ended 31 December 2017, in accordance with IAS 7: Statement of Cash Flows.
(16 marks)

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  • 8 Marks

AFM – Nov 2017 – L3 – Q5a – Treasury and Advanced Risk Management Techniques

Calculate the impact of undertaking multilateral netting for Paakro Ltd and its subsidiaries using expected exchange rates.

Paakro Limited, based in Ghana, is the parent company of a group that contains three subsidiaries: Mangoase Limited based in Munich, Germany; Asaman Limited based in Atlanta, USA; and Nsawam Limited based in Tokyo, Japan. The following cash flows are due in three months’ time between Paakro Limited and its subsidiaries:

Owed by Owed to Amount
Paakro Ltd Nsawam Ltd ¥3 million
Paakro Ltd Asaman Ltd $5 million
Mangoase Ltd Asaman Ltd $4 million
Mangoase Ltd Nsawam Ltd ¥7 million
Asaman Ltd Nsawam Ltd ¥2 million
Asaman Ltd Paakro Ltd $6 million
Nsawam Ltd Mangoase Ltd €12 million
Nsawam Ltd Paakro Ltd ¥5 million

The mid-rate exchange rates in three months’ time are expected to be:

  • GH¢4.0 = $1
  • GH¢3.0 = €1
  • GH¢3.5 = ¥1

Required:
Calculate, using a tabular format (transaction matrix), the impact of undertaking multilateral netting by Paakro Limited and its three subsidiary companies for the cash flows due in three months. (8 marks)

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  • 15 Marks

CR – May 2019 – L3 – Q4 – Analysis and interpretation of financial statements

The question requires calculation of financial ratios and analysis of the financial performance and cash position of Madina Ltd for the year ended 30 September 2018.

Below are the recently issued financial statements of Madina Ltd, a listed company, for the year ended 30 September 2018, together with comparatives for 2017.

Statement of Profit or Loss for the year ended 30 September:

Details 2018 (GH¢’000) 2017 (GH¢’000)
Revenue 125,000 90,000
Cost of Sales (100,000) (75,000)
Gross Profit 25,000 15,000
Operating Expenses (13,000) (11,000)
Finance Costs (4,000) –
Profit before Tax 8,000 4,000
Tax (at 25%) (2,000) (1,000)
Profit for the year 6,000 3,000

Statement of Financial Position as at 30 September:

Details 2018 (GH¢’000) 2017 (GH¢’000)
Non-Current Assets
Property, Plant, and Equipment 105,000 45,000
Goodwill 5,000 –
Total Non-Current Assets 110,000 45,000
Current Assets
Inventory 12,500 7,500
Receivables 6,500 4,000
Bank – 7,000
Total Current Assets 19,000 18,500
Total Assets 129,000 63,500
Equity and Liabilities
Equity
Share Capital 50,000 50,000
Retained Earnings 7,000 6,000
Total Equity 57,000 56,000
Non-Current Liabilities
8% Loan Notes 50,000 –
Current Liabilities
Bank Overdraft 8,500 –
Trade Payables 11,500 6,500
Current Tax Payable 2,000 1,000
Total Current Liabilities 22,000 7,500
Total Equity and Liabilities 129,000 63,500

Additional Information:

  • On 1 October 2017, Madina Ltd acquired 100% of the net assets of Aboabu Ltd for GH¢50 million. In order to finance this transaction, Madina Ltd issued GH¢50 million 8% loan notes on the acquisition date.
    Aboabu Ltd’s results for the year ended 30 September 2018 are shown below:

Aboabu Ltd’s Statement of Profit or Loss for the year ended 30 September:

Details GH¢’000
Revenue 35,000
Cost of Sales (20,000)
Gross Profit 15,000
Operating Expenses (4,000)
Profit before Tax 11,000
Tax (at 25%) (2,750)
Profit for the year 8,250
  • Aboabu Ltd has not paid any dividend during the year, but Madina Ltd paid a dividend of GH¢0.05 per share.
  • The following ratios have been calculated for Madina Ltd for the year ended 30 September 2017:
    • Return on capital employed: 7.1%
    • Gross profit margin: 16.7%
    • Net profit (before tax) margin: 4.4%

Required:

a) Calculate the equivalent ratios for Madina Ltd for 2018:
i) Including the results of Aboabu Ltd acquired during the year. (3 marks)
ii) Excluding all effects of the purchase of Aboabu Ltd. (3 marks)

b) Analyse the performance of Madina Ltd for the year ended 30 September 2018. (5 marks)

c) Analyse the cash position of Madina Ltd as at 30 September 2018. (4 marks)

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  • 4 Marks

CR – May 2018 – L3 – Q4a – IAS 7: Statement of cash flows

Explain four arguments against the view that historical cash flow is more useful than historical profit in appraising a company.

It is often argued that historical cash flow is more useful in appraising a company than historical profit, particularly because cash flows are factual and do not involve the exercise of judgment.

Required:
Explain FOUR arguments against this view. (4 marks)

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  • 6 Marks

CR – May 2019 – L3 – Q2b – IAS 38: Intangible assets

The question requires the accounting treatment for the impairment of development costs in line with IAS 36 for Alabar Ltd, with cash flow projections and a discount rate.

The trial balance of Alabar Ltd extracted from the company’s general ledger as at 31 December 2017 showed a development costs balance of GH¢12.8 million. The development costs consist of amounts capitalized in 2015 and 2016 relating to a new product development. No additional development expenditure was incurred in the year ended 31 December 2017. The product began commercial production on 1 July 2017, and the company estimated at that date that, the product’s useful life was four years due to its technological nature.

Sales of the product did not achieve the amount expected during the second half of 2017, and so, at 31 December 2017, management performed an impairment test on the development expenditure. The estimated net cash flows are (at 31 December 2017 prices):

  • Year to 31 December 2018: GH¢3.2 million
  • Year to 31 December 2019: GH¢3.4 million
  • Year to 31 December 2020: GH¢1.6 million
  • 6 months to 30 June 2021: GH¢0.8 million

All cash flows occur on the final day of each period mentioned. An appropriate annual discount rate (adjusted to exclude the effects of inflation) is 5%. The fair value of the development expenditure asset was expected to be less than the sum of the discounted cash flows.

The company recognizes amortization and impairment losses on development expenditure in cost of sales.

Required:
Set out the accounting treatment as the above information permits in the financial statements of Alabar Ltd for the year 31 December 2017. (6 marks)

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  • 15 Marks

CR – Nov 2018 – L3 – Q4 – Consolidated Financial Statements

Calculate key financial ratios for TGG and analyze its financial performance and cash flow based on the data provided for the year ended 30 September 2018.

The Gandi Group (TGG) operates in the farming industry and has operated a number of 100% owned subsidiaries for many years. The Gandi group has its operations in the Brong-Ahafo Region of Ghana. Its financial statements for the last two years are shown below.

Additional Information:

  1. TGG has become increasingly worried about two major areas in its business environment: reliance on large supermarkets (which demand long payment terms), and the increase in fuel prices, which raises the cost of distribution.
  2. To address these concerns, TGG purchased 80% of Asida Ltd on 1 October 2017. This was TGG’s first acquisition of a subsidiary without owning 100% of it. Asida Ltd operates two luxury hotels in the Ashanti Region.
  3. TGG raised finance by disposing of GH¢5.5 million in investments (with a GH¢2.25 million gain on disposal, included in administrative expenses) and by taking a GH¢10 million loan.
  4. Asida Ltd opened a third hotel in Accra in March 2018. Initial reviews were poor, but feedback improved after the appointment of a new marketing director in May 2018.
  5. Ratios for the year ended 30 September 2017:
    • Gross profit margin: 59.1%
    • Operating margin: 8.5%
    • Return on capital employed: 7.4%
    • Inventory turnover period: 60 days
    • Receivables collection period: 83 days

Required: a) Prepare the equivalent ratios for the year ended 30 September 2018.
(5 marks)

b) Analyze the financial performance and cash flow of TGG for the year ended 30 September 2018, making specific reference to any concerns or expectations regarding future periods.
(10 marks)

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