Draft financial statements of Dane plc have been prepared as follows:
Dane plc Income Statement Extract for the year end 31 March 2020
£'000
Operating profit 875
Finance cost (20)
Profit before taxation 855
Taxation (294)
Profit after tax 561
Dane plc Statements of Financial Position
as at 31 March 2020 2019
£'000 £'000 £'000 £'000
Non current assets:
Property, plant and equipment 2,560 2,200
Financial Asset Investments 643 780
Current assets:
Held for sale plant 510 0
Inventory 810 750
Trade receivables 645 620
Cash and bank balance 710 990
2,675 2,360
5,878 5,340
Equity and reserves:
Ordinary shares of £1 each 3,200 3,000
Share premium account 550 400
Retained earnings 323 776
4,073 4,176
Non current liabilities:
7% Loan Notes 388 380
Government Grants 475 210
Deferred tax 166 135
1,029 725
Current liabilities:
Trade payable 300 100
Government Grants 135 107
Taxation 341 232
776 439
5,878 5,340
You are informed as follows:
a) A factory was correctly classified as held for sale in April 2019 at which time it had a
fair value less costs to sell of £240,000 lower than its carrying value. Depreciation of
property, plant and equipment for the year was £330,000. There were no sales or
revaluations of property, plant and equipment during the year.
b) To help towards the purchase of new plant, Dane received a government grant of
£410,000 during the year.
c) Financial assets which had cost £95,000 in 2017, were sold for £140,000 in March
2020. Other financial assets had suffered impairment during the current year. No financial
assets were bought during the year.
d) The loan notes are reported at amortised cost and had been reported at an effective
rate of interest, which was greater than the coupon rate of interest. No loans had been
received or repaid in the year.
e) Corporations tax for the year end March 2019 had been overestimated by £40,000.
This had been correctly dealt with in the year end March 2020 reports in accordance with
IAS 12 Taxation.
f) Dane pays dividends before the end of each year.
Required:
a) Prepare a Statement of Cash Flow for the year ended 31 st March 2020 using
the format stated in IAS 7 ‘Statement of cash flow’.
b) Based on the information available on the Statement of cash flow, comment
on any change in the liquidity position of Dane plc during the year ended 31 st
March 2020.
Answer:
Statement of cash flow
year ended 31 March 2020 £'000 £'000
Operating activities:
Profit before tax 855
Loss on factory becoming held for sale 240
Grant Income (117)
Profit on sale of financial asset (45)
Impairment of financial assets 42
Depreciation 330
Finance Cost expense 20
Cash flow from operating activities 1,325
Working capital management:
Inventory 750 to 810 (60)
Receivables 620 to 645 (25)
Payables 100 to 300 200
1,440
Dividend paid (1,014)
Interest paid (12)
Tax paid (154)
260
Investing activities:
Purchase of Property, plant & equip. (1,440)
Proceeds from sale of investment 140
Grant received 410
(890)
Financing activities:
Share issue 350
350
Cash outflow in the year (280)
Cash and cash equivalent at start of year 990
Cash and cash equivalent at end of year 710
Workings – all figures in £’000
PPE: Carrying
Start of year 2,200
Transferred to Held for sale 510 + 240 (750)*
Bought β 1,440
Depreciation for year (330)
End of year 2,560
*IFRS 5 requires held for sale assets to be recorded at the lower of carrying value and fair
value less costs to sell. Hence the figure in current assets of 510 must be 240 lower than the
original carrying value figure in non-current assets.
Financial Assets:
Start of year 780
Investments sold (95)*
Investments bought 0
Impairment β (42)
End of year = 643
*Sales proceeds = 140
Investment sold = (95)
Profit on Sale 45
Grant Liability:
Start of year 210 + 107 = 317
New grant received 410
Grant income (non cash) β (117)
End of year 475 + 135 = 610
Loan notes reported at amortised cost:
Start of year 380
Effective interest expense (per PL) 20
Interest paid β (12)
End of year 388
Tax liability:
Start of year 135 + 232 = 367
Tax expense for year = 294
Tax paid = β (154)
End of year 166 + 341 = 507
IAS 12 and IAS 8 require corrections of misestimates in previous years to be reported in the
current year’s profit report. So in this example during the current year Dane would record:
Cr: tax expense 40
Dr: tax liability 40
This decreases the current year expense in order to compensate for last year’s expense
being too large. It also reduces last year tax liability which would also have been too large.
As Dane has properly recorded this correction then the current year expense of 424 has
already had the 40 removed from it and the year end liability of 166 has also already had the
40 removed from it. Thus no further adjustments are required to the above figures.
Retained Earnings:
Start of year 776
Profit after tax for year 561
Dividends paid for year β (1,014)
End of year 323
Share capital Share Premium
Start of year 3,000 400
Issue for cash β 200 β150 (total cash = 350)
End of year 3,200 550
Comments on change in liquidity position within the year
There has been a drop of £280,000 in the cash held by Dane, which is a significant decrease
of almost 33%.
Operating profits have been converted well into cash flows, strongly aided by the removal of
the non cash depreciation expense and loss due to impairment of financial investments. A
healthy level of cash from operating, however, was greatly reduced by a very high level of
dividends relative to profits, cash flows and interest payments. This level of dividend would
seem to be difficult to repeat in future years and is the main cause of the decreasing cash
balance in the business. Thus the decision to pay this level of dividends should be
questioned. Perhaps this apparent over payment of dividends had some effect on Dane not
paying all of last year’s tax liability, which would be a concern.
The other major cause of the decrease in cash flows is the large purchase of plant and
equipment by Dane. This purchase had a short fall of funding raised for it with the purchase
costing £1,440,000 but funds raised from a grant and new shares only raising £760,000. It
would seem that Dane had scope to have raised further funds from loans which appear to be
at a low level compared to shareholder funds and have a particularly low cost of £20,000
compared to the high dividend of over £1m.