FR – May 2024 – SK – SA – Q1 – Statement of Cash Flows

Prepare Badary Plc's cash flow statement for year ended March 31, 2021 using direct method per IAS 7, and discuss profitability, gearing, and investors' stake with strategies.

Question

Badary PLC statement of financial position as at March 31, 2021

Assets:

	31-03-21	31-03-20
	N’000	N’000
Non-current assets:
Property, plant and equipment	350,000	110,000
Investments	60,000	30,000
	410,000	140,000
Current assets:
Inventories	295,000	120,000
Trade receivables	90,000	60,000
Bank	15,000	40,000
	400,000	220,000
Total assets	810,000	360,000
Equity and liabilities
Ordinary share capital of 80 kobo per share	220,000	120,000
Share premium	60,000	30,000
Retained earnings	280,000	119,000
	560,000	269,000
Non-current liabilities:
10% Redeemable loan notes	50,000	10,000
Current liabilities:
Trade payables	65,000	14,000
Taxation	70,000	12,000
Bank overdraft	25,000	5,000
Accrued expenses	40,000	50,000
	200,000	81,000
Total liabilities	250,000	91,000
Total equity and liabilities	810,000	360,000

Statement of profit or loss for the year ended March 31, 2021

	N’ 000
Revenue	490,000
Cost of sales	(222,000)
Gross profit	268,000
Administrative expenses	(90,000)
Distribution cost	(40,000)
Finance cost	(5,000)
Dividend received	153,500
	18,500
Profit before taxation	286,500
Income tax expense	(70,000)
Profit for the year	216,500

Additional Information

(i) During the year ended March 31, 2021 plant and equipment with a carrying amount of N40,000,000 was 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 which cost N12,500,000 some years ago was disposed for N20,000,000. The profit or loss on disposal was charged to administrative expenses. (v) Dividends received were from investment in shares and immediate disposal of rights issue from the investment in shares in a blue-chip company.

You are required to:

a. Prepare statement of cash flows of Badary Plc for the year ended March 31, 2021 using direct method in accordance with IAS 7. (20 Marks)

b. Discuss the profitability, gearing and investors‟ stake in Badary Plc and recommend strategies for improving or sustaining them. (10 Marks)

Answer

Badary Plc Statement of Cash flows for the year ended March 31, 2021

Operating activities:	N‟000	N‟000
Cash received from customers (Wk 3)		460,000
Cash paid to suppliers (Wk 11)		(346,000)
Cash paid for other operating expenses (Wk 9)		(122,500)
Cash flow from operation		(8,500)
Finance cost paid		(5,000)
Taxation paid (Wk 1)		(12,000)
Net cash flows from operating activities		(25,500)
Investing activities:
Dividend received	153,500
Purchase of plant and machinery by cash (Wk 4)	(320,000)
Proceeds from disposal of investment (Wk 10)	20,000
Proceeds from disposal of plant (Wk 5)	55,000
Purchase of investment by cash (Wk 6)	(42,500)
Net cash flows from investing activities		(134,000)
Financing activities:
Proceeds from issue of shares (50,000 + 30,000)	80,000
Proceeds from issue of 10% Redeemable loan notes	40,000
Dividends paid by cash	(5,500)
Net cash flows from financing activities		114,500
Net increase in cash and cash equivalents for the year		(45,000)
Cash and cash equivalents at the beginning		35,000
Cash and cash equivalents at the end		(10,000)

Working notes

Wk 1: Taxation paid

	N’000
Opening balance	12,000
Income tax expense (SOPL)	70,000
Expected closing balance	82,000
Actual closing balance	70,000
Taxation paid	12,000

Wk 2: Proceeds from issue of shares

	N’000
Opening balance (120,000 + 30,000)	150,000
Closing balance (220,000 + 60,000)	280,000
Proceeds from issue of shares	130,000
Less: Bonus issue	(50,000)
	80,000

Wk 3: Cash received from customers

	N‟000
Opening balance	60,000
Revenue for the year	490,000
Expected closing balance	550,000
Actual closing balance	90,000
Cash received from customers	460,000

Wk 4: Plant and machinery

	N‟000
Opening balance	110,000
Disposal	(40,000)
Depreciation (10,000 + 30,000)	(40,000)
Expected closing balance	30,000
Actual closing balance	350,000
Acquisition by cash	(320,000)

Wk 5: Disposal of plant

	N’000
Carrying amount	(40,000)
Proceeds from disposal	55,000
Profit on disposal of plant	15,000

Wk 6: Investments

	N’000
Opening balance	30,000
Disposal	(12,500)
Expected closing balance	17,500
Actual closing balance	60,000
Acquisition by Cash	(42,500)

Wk 7: Cash and cash equivalents

	2021	2020
	N‟000	N‟000
Bank	15,000	40,000
Bank overdraft	(25,000)	(5,000)
Cash and cash equivalent	(10,000)	35,000

Wk 8: Retained earnings/bonus issue

	N’000
Opening balance	119,000
Profit for the year	216,500
Expected closing balance	335,500
Actual closing balance	280,000
	55,500
Dividend declared and paid	(5,500)
Bonus issue	50,000

Wk 9: Cash paid for other operating expenses

	N’000	N’000
Accrued expenses b/f		50,000
Administrative expenses		90,000
Distribution cost		40,000
		180,000
Add(Less):
Profit of disposal	15,000
Depreciation on furniture	(10,000)
Depreciation on plant and equipment	(30,000)
Profit on disposal of Investment	7,500
Accrued expenses c/d	(40,000)	(57,500)
Cash paid		122,500

Wk 10: Disposal of investment

	N‟000
Carrying amount	12,500
Proceeds from disposal	20,000
Profit on disposal of plant	(7,500)

Wk 11: Cash paid to suppliers

	N’000
Cost of sales	222,000
Closing inventories	295,000
Opening inventories	(120,000)
Purchases for the year	397,000
Opening balance of trade payables	14,000
Expected closing balance	411,000
Actual closing balance of trade payables	65,000
Cash paid to suppliers	346,000

Wk 12: Dividend paid Ordinary share capital = N 220,000,000 = 275,000,000 shares 0.8

= 275,000,000 shares × 0.02

= N 5,500,000

b. Analysis of the profitability, gearing and investor‟s stake in Badary Plc and recommended strategies for improving or sustaining them Profitability: The profit for the year is N216,500,000, indicating strong profitability.

i) The company has a high gross profit margin of 54.7% (₦268,000/ ₦490,000);

ii) A net profit margin of 44.2% (N216,500/₦490,000) to sustain the profitability level;

iii) Badary Plc should continue to focus on cost control, particularly in administrative and distribution expenses; and

iv) The company should explore new revenue streams and maintain its investment in profitable ventures

Gearing: The gearing ratio, measured as non-current liabilities to equity:

i) Is relatively low at 8.9% (₦50,000/₦560,000);

ii) Indicates low financial leverage and a conservative capital structure; and

iii) The company can consider taking an additional debt if needed for expansion, given its low gearing ratio. However, it should ensure that any new debt is manageable and contributes to revenue growth.

Investors’ Stake: The investors’ stake is:

i) well-represented with a substantial share capital of N220,000,000 and retained earnings of N280,000,000;

ii) The company paid dividends, indicating good returns for shareholders, thus enhancing investors‟ confidence; and

iii) Badary Plc should maintain a consistent dividend policy and provide transparent financial reporting.

Tags: Cash Flows, Direct Method, Financial Position, Gearing, IAS 7, Investor's Stake, Profit or Loss, Profitability analysis
Level: Level 2

Topic: Statement of Cash Flows (IAS 7)
Series: MAY 2024

Uploader: Samuel Duah