Cash Flow Solutions

Question 1

Cash flows from operating activities

Profit before taxation and interest 132 2

Adjust for non cash items
Depreciation 39 2
Gain on Disposal (7) 2
32
164
Adjusted Profit
Increase in Inventory (6) 1
Increase in Trade R (2) 1
Increase in Trade P 5 1
Cash generated from operations (3)
161
Interest Paid (19) 2
Tax Paid (32) 2
Dividends paid (31) 1

Net cash inflow from operating activities 79

Cash flows from investing activities

Purchase of vehicles (90) 1
Proceeds from sales 20 1
Investments acquired (20) 1
Interest received 5 1
Net cash used in investing activities (85)

Cash flows from financing activities

Proceeds from share capital 35 1
Proceeds from long term borrowing 8 1
Net cash from financing activities 43
Increase/Decrease in cash 37
Cash and Cash equivalents at start of the period 6
Cash and Cash equivalents at end of the period 43

Workings

Operating profit before taxes and interest 137

Less Int. Rec 5
Operating Profit 132

Interest Paid 20 + 7 8= 19
Tax Paid 35+ 7 -10 = 32

Stock 20- 26 = 6 Increase -ve

Debtors 23 -21 = 2 Increase -ve
Creditors 18- 13 5 Increase +ve

Vehicles = 130 +90 -25 = 195

Gain on Sale (25 -12) = 13m Value Sold 20m 7m gain

Share capital gain + share premium = 32+ 3 = 35

20marks

5 marks

Cash flow shows relationship of liquidity, working capital management , rate

of investment in assets and changes in gearing etc.

Question 2

Cash flows from operating activities

Profit before interest 19,480

Depreciation 1,058
Total Adjusted Profit 20,538

Increase in Stock (inventories) (54)

Decrease in Trade receivables (Debtors) 276
Increase in Trade payables (Creditors) 1,920
Increase/Decrease due to working Capital changes 2,142
Total Cash generated from operations 22,680

Interest Paid (4,280)

Tax Paid (1,750)
Net cash inflow from operating activities 16,650
Cash flows from investing activities
Purchase of non-current assets 7,600
Proceeds from sales of non-current assets
Total Net cash used in investing activities 9,050

Cash flows from financing activities

Proceeds from share capital 1,064
Proceeds from long term borrowing 1,824
*Dividends paid (3,800)
Total Net cash from financing activities (912)
Increase/Decrease in cash 8,138

Cash and Cash equivalents at end of the period 9,838

Cash and Cash equivalents at start of the period 1,700
Shows where cash spent, indicates strategic intentions (acquisitions , assets
purchases etc). Ratio of funding by financing to operating funding.

Question 3

Expenses excluding interest paid = 627,340 9,630 = 617,710

Operating profit = gross profit expenses = 1,118,430 617,710 =
500,720

Cash flow statement 2006

Operating profit 500,720
Add back: depreciation 48,200
548,920

Changes in working capital

Stock increase (367,600 310,040) (57,560)
Debtors decrease 21,880
Creditors decrease (34,340)
Net cash inflow from operating activities 478,900

Explain why the effect of purchasing a fixed asset for cash is not the
same in the cash flow statement as in the profit and loss account

The purchase of a fixed asset for cash involves a cash outflow from
the business for the whole purchase price. This will be reflected as
capital expenditure in the cash flow statement for the year.
However, the fixed asset remains in use in the business.
Depreciation is over the period of its useful life. The original
purchase of the fixed asset has no impact on the profit and loss
account, but the periodic charges for depreciation do have an
impact, in that they reduce profit. The effect of the fixed asset
purchase, therefore, is reflected in a single transaction in one year
in the cash flow statement. However, the profit and loss account is
affected throughout the assets useful life because of the
depreciation charge.

Question 4

Cash flows from operating activities

Profit before interest and tax 22,040

Depreciation 1,289
Total Adjusted Profit 23,329

Increase in Stock (inventories) (36)

Decrease in Trade receivables (Debtors) 268
Increase in Trade payables (Creditors) 2,100
Increase/Decrease due to working Capital changes 2,332
Total Cash generated from operations 25,661

Interest Paid (5,240)

Tax Paid (1,750)
Net cash inflow from operating activities 18,671

Cash flows from investing activities

Purchase of non-current assets
Proceeds from sales of non-current assets 8,400
Investments acquired/Interest Received
Total Net cash used in investing activities 27,071

Cash flows from financing activities

Proceeds from share capital 1,176
Proceeds from long term borrowing (2,016)
*Dividends paid (4,200)
Total Net cash from financing activities (5,040)
Increase/Decrease in cash 22,031

Cash and Cash equivalents at start of the period 23,731

Cash and Cash equivalents at end of the period 1,700

Question 5

Cash flows from operating activities

m m
Profit before taxation 101
Adjust for non cash items
Depreciation 30
Gain on Disposals (5)
25
Total Adjusted Profit 126

Increase in Stock (inventories) (5)

Increase in Debtors (trade receivables) (2)
Increase in Creditors ( trade payables) 1
Increase/Decrease due to Working Capital (6)
Total Cash generated from operations 120

Interest Paid (16)

Tax Paid (29)
Net cash inflow from operating activities 75

Cash flows from investing activities

Purchase of non-current assets (80)
Proceeds from sales of non-current assets 25
Interest Received 4
Total Net cash used in investing activities (51)

Cash flows from financing activities

Proceeds from share capital 12
Proceeds from long term borrowing 5
*Dividends paid (14)
Total Net cash from financing activities 3
Increase/Decrease in cash 27

Cash and Cash equivalents at start of the period 5

Cash and Cash equivalents at end of the period 32

Adjust profits for interest 105 becomes 101

Question 6

Cash flows from operating activities

Profit before taxation (13)

Depreciation 5
Gain on Disposals (1)
Total Adjusted Profit (9)

Increase in Stock (inventories) 20

Increase in Debtors (trade receivables) 13
Increase in Creditors ( trade payables) 8
Increase/Decrease due to working Capital changes 41
Total Cash generated from operations 32

Interest Paid 0
Tax Paid 0
Net cash inflow from operating activities 32

Cash flows from investing activities

Purchase of non-current assets 0
Proceeds from sales of non-current assets 3
Investments acquired/Interest Received 0
Total Net cash used in investing activities 3

Cash flows from financing activities

Proceeds from share capital 0
Proceeds from long term borrowing 0
*Dividends paid 0
Total Net cash from financing activities
Increase/Decrease in cash 35

Cash and Cash equivalents at start of the period 10

Cash and Cash equivalents at end of the period 45

15 marks

Suitable answers will address a range of issues and may include:

Stock Management, Costs of holding (interest, insurance obsolescence),
overproduction, Debtor Management Costs of allowing credit, cost of denying
credit, require policies, monitoring of credit worthiness, bad debts, use of
discounts. Naturally Cash Management Interest loss, policies on cash flow,
overdraft use, limiting the length of OCC Creditor Management Cost of credit,
use of free credit, etc (10 marks)

Question 7

Cash flow statement for the year ended 30 June 2008

Reconciliation of operating profit to net cash inflow from operating
activities
000
Operating profit 115
Depreciation charges 35
Loss on sale of vehicle 3
Decrease in stocks 10
Increase in trade receivables (19)
Decrease in trade payables (7)
Net cash inflow from operating activities 137
Tax paid (52)
85
Cash flows from investing activities
Payments to acquire tangible fixed assets (75)
Receipts from sales of tangible fixed assets 12
(63)
22
Cash flows from financing activities
Proceeds from share capital 0
Proceeds from long term borrowing 0
*Equity dividends paid (20)
Increase in cash 2

Indicates the use of funds during the period.

Should note the changes in working capital, reduced stock levels but
management of debtors and creditors indicative of poor control?

Note these can written along with the tax and interest payments higher
up