- 20 Marks
FR – L2 – Q75 – Statement of Cash Flows
Question
(a) Apex Ltd is a wholesaler and retailer of office furniture. Extracts from the company’s financial statements are set out below:
Statement of profit or loss and other comprehensive income for the year ended:
| 31 March 20X9 | 31 March 20X8 | |||
|---|---|---|---|---|
| GH₵’000 | GH₵’000 | GH₵’000 | GH₵’000 | |
| Revenue: | 12,800 | 26,500 | ||
| 53,000 | 65,800 | 28,500 | 55,000 | |
| Cost of sales | (43,800) | (33,000) | ||
| Gross profit | 22,000 | 22,000 | ||
| Operating expenses | (11,200) | (6,920) | ||
| Finance costs: | ||||
| – loan notes | (380) | (180) | ||
| – overdraft | (220) | (600) | – | (180) |
| Profit before tax | 10,200 | 14,900 | ||
| Income tax expense | (3,200) | (4,400) | ||
| Profit for the year | 7,000 | 10,500 | ||
| Other comprehensive income: | ||||
| Gain on property revaluation | 5,000 | 1,200 | ||
| Total comprehensive income | 12,000 | 11,700 |
Statement of changes in equity for the year ended 31 March 20X9
| Stated Capital GH₵’000 | Capital Surplus GH₵’000 | Income Surplus GH₵’000 | Total GH₵’000 | |
|---|---|---|---|---|
| Balances b/f | 8,500 | 2,500 | 15,800 | 26,800 |
| Share issue | 12,900 | 12,900 | ||
| Comprehensive income | 5,000 | 7,000 | 12,000 | |
| Dividends paid | (4,000) | (4,000) | ||
| Balances c/f | 21,400 | 7,500 | 18,800 | 47,700 |
Statements of financial position as at 31 March:
| 20X9 GH₵’000 | 20X9 GH₵’000 | 20X8 GH₵’000 | 20X8 GH₵’000 | |
|---|---|---|---|---|
| Assets | ||||
| Non-current assets | ||||
| Property, plant and equipment | 43,200 | 30,600 | ||
| 43,200 | 30,600 | |||
| Current assets | ||||
| Inventories | 7,800 | 5,600 | ||
| Trade receivables | 8,900 | 4,800 | ||
| Cash and cash equivalents | 600 | 1,200 | ||
| 17,300 | 11,600 | |||
| Total assets | 60,500 | 42,200 | ||
| Equity and liabilities | ||||
| Equity | ||||
| Stated capital | 21,400 | 8,500 | ||
| Capital surplus | 7,500 | 2,500 | ||
| Income surplus | 18,800 | 15,800 | ||
| 47,700 | 26,800 | |||
| Non-current liabilities | ||||
| Loan notes | 5,000 | 3,000 | ||
| Current liabilities | ||||
| Trade payables | 4,800 | 6,900 | ||
| Bank overdraft | 600 | 1,500 | ||
| Taxation | 2,400 | 4,000 | ||
| 7,800 | 12,400 | |||
| Total equity and liabilities | 60,500 | 42,200 |
The following information is also relevant:
(i) During the year, property, plant and equipment costing GH₵2,600,000 was acquired.
(ii) The depreciation charge for the year to 31 March 20X9 was GH₵2,800,000. There were no disposals of non-current assets during the year.
(iii) The increase in loan notes was due to an issue of further notes at par on 1 April 20X8.
Required:
Prepare a statement of cash flows for Apex Ltd for the year ended 31 March 20X9 in accordance with IAS 7, using the indirect method.
(b) In the year to 31 March 20X9, the directors of Apex Ltd decided to source their supplies from a new supplier located in Kumasi. The new supplier offered a 10% reduction in the cost of purchases compared with the previous supplier. However, the new supplier offered a shorter period of credit than the previous supplier (all purchases are on credit). In order to encourage higher sales, Apex Ltd increased its credit period to its customers, and some of the cost savings (on trade purchases) were passed on to customers by reducing selling prices on both cash and credit sales by 5% across all products.
Required:
(i) Calculate the gross profit margin that you would have expected Apex Ltd to achieve for the year ended 31 March 20X9 based on the selling and purchase price changes described by the directors. (2 marks)
(ii) Comment on the directors’ surprise at the unchanged gross profit and suggest what other factors may have affected gross profit for the year ended 31 March 20X9.
Answer
(a). Apex Ltd – Statement of Cash Flows for the year ended 31 March 20X9
(GH₵’000)
| Cash flows from operating activities | |
|---|---|
| Profit before tax | 10,200 |
| Adjustments for: | |
| Depreciation | 2,800 |
| Finance costs | 600 |
| Increase in inventories (7,800 – 5,600) | (2,200) |
| Increase in trade receivables (8,900 – 4,800) | (4,100) |
| Decrease in trade payables (6,900 – 4,800) | (2,100) |
| Cash generated from operations | 5,200 |
| Interest paid | (600) |
| Income taxes paid (W1) | (4,800) |
| Net cash from operating activities | (200) |
| Cash flows from investing activities | |
|---|---|
| Purchase of property, plant and equipment | (2,600) |
| Net cash used in investing activities | (2,600) |
| Cash flows from financing activities | |
|---|---|
| Proceeds from issue of share capital | 12,900 |
| Proceeds from issue of loan notes (5,000 – 3,000) | 2,000 |
| Dividends paid | (4,000) |
| Net cash from financing activities | 10,900 |
| Net increase in cash and cash equivalents | 8,100 |
| Cash and cash equivalents at beginning of year (1,200 – 1,500) | (300) |
| Cash and cash equivalents at end of year (600 – 600) | 0 |
Workings:
W1: Income taxes paid
| GH₵’000 | |
|---|---|
| Opening tax liability | 4,000 |
| Charge for the year | 3,200 |
| Closing tax liability | (2,400) |
| Taxes paid | 4,800 |
(b) (i) Taking the figures for the year ended 31 March 20X8 and applying the 10% reduction in purchase costs and the 5% discount to customers, the directors would have expected the gross profit to be as follows:
| GH₵’000 | |
|---|---|
| Revenue (55,000 × 95%) | 52,250 |
| Cost of sales (33,000 × 90%) | (29,700) |
| Gross profit | 22,550 |
| Gross profit % (22,550 / 52,250 × 100) | 43.2% |
The actual gross profit % for the year ended 31 March 20X9 is:
(22,000 / 65,800 × 100) = 33.4%
(ii) The directors should not be surprised at the unchanged gross profit as cost of sales has increased by the same amount as revenue, wiping out any possible increase in gross profit. In fact, the actual gross profit margin has fallen from 40% in 20X8 to 33.4% in 20X9, so despite the 10% reduction in the cost of purchases, the company was trading less profitably.
Possible reasons for this could be:
- Shipping costs involved in importing goods having to be borne by the recipient;
- Import duties;
- Currency exchange losses, perhaps exacerbated by having to pay within a shorter period;
- Inventory losses – uninsured by damage, obsolescence, etc.;
- Selling a larger proportion of goods on which the gross profit % is lower than the average mark-up;
- Perhaps sales or special offers to customers, which will have to lower the average mark-up;
- The foreign supplier may have increased his prices at some point during the year;
- Also, there may have been changes in accounting policy during the year – perhaps depreciation or distribution costs which were treated as expenses in 20X8 and have been charged to cost of sales in 20X9. If this has happened, it will require retrospective restatement so that 20X8 and 20X9 can be correctly compared.
- Tags: Cost of Sales, Financial analysis, Financial Reporting, Gross Profit Margin, IAS 1, Revenue
- Level: Level 2
- Uploader: Samuel Duah