- 15 Marks
Question
Dongo Limited statement of profit or loss for the year ended December 31, 2020:
| Item | N’000 |
|---|---|
| Revenue | 420,000 |
| Cost of goods sold | (99,000) |
| Gross profit | 321,000 |
| Administrative cost | (140,800) |
| Operating profit | 180,200 |
| Investment income | 8,100 |
| Interest paid | (17,120) |
| Profit before taxation | 171,180 |
| Income tax expense | (37,000) |
| Profit for the year | 134,180 |
Dongo Limited statement of financial position as at December 31,
Additional information:
(i) During the year ended December 31, 2020; other comprehensive income was nil.
(ii) A dividend of N85,870,000 was paid during the year ended December 31, 2020.
(iii) There was no disposal of non-current assets during the year.
You are required to:
a. Prepare the statement of cash flows using the indirect method under IAS 7. (10 Marks)
b. Calculate the company’s current ratio as at the year ended December 31, 2019 and 2020. (2 Marks)
c. State THREE technical reasons which accounted for the company’s rise in overdrafts for the TWO years.
Answer
Dongo Limited
Statement of cashflows for the year ended December 31, 2020
(b) Computation of current ratio for the year ended December 31,
c. Three Technical Reasons for the Company’s Rise in Overdrafts for the Two Years
- Increased Operating Costs:
The increase in administrative costs and interest expenses may have put pressure on cash flows, resulting in a reliance on overdrafts to meet short-term obligations. - Lower Sales Receivables Turnover:
A significant increase in bill receivables indicates that the company may be taking longer to collect debts, leading to cash flow shortages and the need for overdrafts. - Dividend Payments:
The high dividend payout of N85,870,000 may have reduced available cash reserves, making the company dependent on overdrafts to cover operational expenses.
- Tags: Cash Flows, Current Ratio, Financial Statements, Overdraft Analysis
- Level: Level 2
- Topic: Statement of Cash Flows (IAS 7)
- Series: NOV 2021
- Uploader: Kwame Aikins