- 20 Marks
FA – L1 – Q102 – Statement of cash flows
Question
The statements of financial position for the last two years for ZA Ltd are shown below. ZA Ltd implemented an expansion programme during the year ended 31st May 20X9.
| 20X8 | 20X9 | |||
|---|---|---|---|---|
| GH¢ | GH¢ | GH¢ | GH¢ | |
| Non-current assets (net) | 380,000 | 530,000 | ||
| Current assets | ||||
| Inventory | 80,000 | 108,000 | ||
| Receivables | 32,000 | 37,000 | ||
| Bank | 13,000 | – | ||
| Cash | 1,000 | 3,000 | ||
| Total assets | 506,000 | 678,000 | ||
| Current liabilities | ||||
| Payables | 26,000 | 30,000 | ||
| Corporation Tax | 22,000 | 28,000 | ||
| Overdraft | – | 5,000 | ||
| Dividends | – | 21,000 | ||
| Accruals | – | 4,000 | ||
| Total liabilities | 68,000 | 88,000 | ||
| Capital and Reserves | ||||
| Ordinary shares | 350,000 | 490,000 | ||
| General reserve | 62,000 | 62,000 | ||
| Revaluation reserve | – | 10,000 | ||
| Retained earnings | 26,000 | 28,000 | ||
| Total capital and liabilities | 506,000 | 678,000 |
Additional information:
(i) The total depreciation provision incorporated in the statements of financial position was GH¢48,000 at 31st May 20X8 and GH¢122,000 at 31st May 20X9.
(ii) During the year ended 31st May 20X9 a non-current asset costing GH¢22,000 with a carrying amount of GH¢6,000 was sold for GH¢1,000. No other disposals took place.
(iii) The revaluation surplus represents a revaluation of premises during the year ended 31st May 20X9.
Required:
(a) Prepare a statement of cash flows for ZA Ltd for the year ended 31st May 20X9 in accordance with IAS 7. (Use the indirect method).
(b) State the effects of the expansion policy on ZA Ltd.
Answer:
Answer
(a) Statement of cash flows for ZA Ltd for the year ended 31 May 20X9
| GH¢ | GH¢ | |
|---|---|---|
| Cash flows from operating activities | ||
| Net profit for the year (W1) | 33,000 | |
| Depreciation (122,000 + 16,000 – 48,000) | 90,000 | |
| Loss on sale | 5,000 | |
| Increase in inventory | (28,000) | |
| Increase in receivables | (5,000) | |
| Increase in payables | 4,000 | |
| Increase in accruals | 4,000 | |
| Cash generated from operations | 103,000 | |
| Dividends paid | (18,000) | |
| Tax paid | (22,000) | |
| Net cash flow from operating activities | 61,000 | |
| Cash flows from investing activities | ||
| Proceeds of sale of a non-current asset | 1,000 | |
| Purchase of non-current assets (W2) | (218,000) | |
| Net cash used in investing activities | (217,000) | |
| Cash flows from financing activities | ||
| Issue of shares | 140,000 | |
| Net cash flow from financing activities | 140,000 | |
| Decrease in cash and cash equivalents | (16,000) | |
| Cash and cash equivalents at start of year | 14,000 | |
| Cash and cash equivalents at end of year | (2,000) |
WORKINGS
W1 Net profit for the year
| GH¢ | GH¢ | |
|---|---|---|
| Retained earnings b/d | 26,000 | |
| Net profit before tax | 41,000 | |
| Taxation | (8,000) | |
| 33,000 | ||
| Dividends | (31,000) | |
| Retained earnings c/d | 28,000 |
W2 Purchase of non-current assets
| GH¢ | GH¢ | |
|---|---|---|
| Non-current assets c/d (530,000 + 122,000) | 652,000 | |
| Cost of non-current asset disposed of | (22,000) | |
| Non-current assets b/d (380,000 + 48,000) | (428,000) | |
| Revaluation of premises | (10,000) | |
| Purchase of non-current assets | 218,000 |
(b)
The liquidity position has fallen as evidenced by the decrease in cash. The current ratio has fallen from 1.85:1 to 1.68:1.
The acid test for both years is below 1:1 which could indicate that the company may have a problem in paying short-term debts.
The company has large amounts of cash invested in inventory and the inventory holding has increased by GH¢28,000. Inventory is not a liquid asset and it will take time to convert into cash.
Investment in non-current assets has increased and the total cost of the investment in non-current assets was GH¢218,000. The increased investment may increase future profits and increase the return on capital employed and returns for the shareholders.
The company has taken a risk with a large investment and if income does not increase, then it may make a lower return for shareholders.
The equity share capital has increased due to the issue of shares of GH¢140,000. More shares are available for purchase on the stock market. Although this increases equity, the control factor could change because of the increase in the number of votes by ordinary shareholders.
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