ACCOUNT-Week 3 Collaboration Group Work Question A

Finance and Accounting for
Managers

Week 3 Collaboration Group Work Question A

Equity PLC has the following statements of financial
position and income statements for the years ending 31^st October
20X4 and 20X3.

Equity plc
Statements of Financial Position as at 31st October:
		20X4			20X3
	£ ‘000	£ ‘000	£ ‘000	£ ‘000	£ ‘000	£ ‘000
	Cost	Depn	NBV	Cost	Depn	NBV
Non current asssets
Land & Buildings	58,000	12,000	46,000	40,000	10,000	30,000
Plant & Machinery	32,500	14,500	18,000	30,000	12,000	18,000
	90,500	26,500	64,000	70,000	22,000	48,000
Current Assets:
Inventories		25,000			30,000
Accounts receivable		35,000			28,000
Current Asset Investment	5,000			0
Bank		0			12,000
			65,000			70,000
Total Assets			129,000			118,000
Capital:
Ordinary Share Capital	35,000			30,000
Share Premium Account	10,000			8,000
Revaluation Account		2,000			0
Retained Profits		23,000			20,000
			70,000			58,000
Non Current Liabilities
Loans		20,000			15,000
			20,000			15,000
Current Liabilities
Accounts payable		27,000			32,000
Proposed Dividends		6,600			11,000
Bank overdraft		3,000			0
Taxation		2,400			2,000
			39,000			45,000
Total Equity and Liabilities		129,000			118,000
Equity Plc
Income Statement for the year ending 31st October 20X4:
						£ ‘000
Sales						98,000
Cost of Sales						-48,000
Gross Profit						50,000
Other operating expenses					-35,000
Profit before interest						15,000
Interest						-1,200
Profit before taxation						13,800
Taxation						-2,800
Profit after taxation						11,000

The following additional information is available:

1)
Equity PLC recorded an increase in the value of its
land of £2,000,000 during the year.

2)
The company has proposed dividends of £8,000,000 for
the year.

3)
During the year, an item of machinery that originally
cost £3,000,000 was sold for £500,000 – making a loss on disposal of £1,000,000.
This item is included in the operating expenses.

Required:

a) Prepare a Statement of Cash Flows for
the year ended 31^st October 20X4 in accordance with IAS 7 (revised), using the indirect method.

b) Prepare
a Business Report commenting on the cash position of Equity PLC.

Required length for Business Report = 1,500 words;
please submit your Assignment to the Turnitin Link provided by End Wednesday,
Day 7.

Notes to
assist you:

1. Remember, when you are using the indirect method,
   you need to start with the net profit before interest and tax. Can you see
   what figure this is?
2. In order to reconcile the profit to the net cash
   generated from operations, you need to add back non cash deductions such
   as depreciation for the year and you need to deduct non cash income, such
   as any gain on the disposal of assets. Can you work out the depreciation
   figure for the year? What does note
   3 above tell you about the disposal of the machinery? Are there any other non cash adjustments
   that need including here?
3. The next step is to work out the adjustments for
   the changes in working capital items, namely in accounts receivables,
   accounts payables and inventories. Remember increases in current assets
   represent a cash outflow and should be deducted here. Decreases in current
   assets represent a cash inflow and should be added back. The opposite is
   true for current liabilities.
4. Once these adjustments are done, you have a
   figure that is the net cash flow from operating activities.
5. The next step is to work out the four main
   headings in the cash flow statement, namely net cash from operating
   activities, cash flows from investing activities, cash flows from
   financing activities, net cash movement during the year and finally this
   figure is reconciled back to the total cash and cash equivalents at the
   start and end of the year.
6. In order to work out the net cash from operating
   activities, you need to deduct any interest paid, income tax paid and
   dividends paid. Can you work out the cash paid for these items? Remember, it is not just the amounts
   taken from the financial statements; you need to work out the cash amount,
   by starting with the opening balance, adding what has been allocated
   during the year and deducting any closing balance. Refer to the example in
   the Test Your Knowledge questions relating to taxation for this Week. This
   principle that you have applied to taxation will also need to be applied
   to some of the other items such as dividends here and also other assets
   and liabilities later on. Deduct your taxation, interest and dividend
   figures to arrive at the net cash from operating activities. The next step
   is to calculate the cash flows from investing activities. This section
   deals with the movements in non-current assets. Reading note 3, can you
   work out the actual cash received from the sale of the machinery? Also, by looking at the opening and
   closing cost balances of the non-current assets on the SoFP and also
   taking into account the disposal in note 3, can you work out how much cash
   has actually been paid for non-current assets? This is using the same principle as
   explained in note 6 above relating to taxation, apart from you do not have
   a payment in the year in the income statement, but you do have some
   information in the notes relating to this. The sum of asset movements will
   give you the net cash movement from investing activities.
7. You can now work out the cash flow from financing
   activities. For this you need to work out the changes in share capital and
   premium and also any changes in long term loans. Has the company received
   cash or paid out cash in these two areas?
   You can ascertain this by looking at the SoFP for both years. Add
   all these up to give you the net cash flow from financing activities.
8. All that is left to do is add all your sub totals
   together; this will give you the total cash increase or decrease in the
   year. The final step is to reconcile this cash figure back to the movement
   in cash and cash equivalents for the year. Can you work out the total cash
   movement in the bank and also any cash equivalents the company may have?
9. Good luck!

You may also find the following pro forma helpful:

Using the Indirect
Method

	£’000	£’000
Cash flows from operating activities
Net profit/loss before tax and interest	x
Adjustments for:
Depreciation	x
Investment income	x
Interest expenses	x
– Profit/+ Loss on Sale of Fixed Asset	x
Operating profit before working capital changes	x
Increase/Decrease in trade and other receivables	x
Increase/Decrease in inventories	x
Increase/Decrease in trade payables	x
Cash generated from operations	x
Interest paid	x
Income taxed paid	x
Dividends paid	x
Cash flow before extraordinary items	x
Net cash from operating activities		x
Cash flows from investment activities
Acquisition of subsidiary	x
Payment to acquire tangible fixed assets	x
Receipt from sales of tangible fixed assets	x
Investment income received	x
Dividends received	x
Net cash used in investing activities		x
Cash flows from financing activities
Proceeds from / (Payment) for share capital	x
Proceeds from / repayment of long-term borrowings	x
Payment of finance lease liabilities	x
Net cash flow from financing activities		x
Net increase/decrease in cash and cash equivalents		x
Cash and cash equivalents at the beginning of the period(Cash + Cash Equiv)	x
Cash and cash equivalents at the end of the period (Cash + Cash Equiv)	x