Statements of financial position of Trot plc have been prepared as follows:
Statements of financial position
as at 30th June 2015 2014
£'000 £'000 £'000 £'000
Non current assets:
Property, plant and equipment at cost 1,240 890
Accumulated depreciation (396) (288)
844 602
Brand name 380 420
Investments 340 220
Current assets:
Inventory 512 485
Trade receivables 396 562
Cash and bank balance 34 11
942 1,058
2,506 2,300
Equity and reserves:
Ordinary shares of £1 each 900 600
Share premium account 75 30
Retained earnings 860 730
1,835 1,360
Non current liabilities:
8% Convertible Loan Notes 100 300
Deferred tax 54 32
154 332
Current liabilities:
Trade payable 398 496
Taxation 74 48
Bank overdraft - 34
Dividend declared 45 30
517 608
2,506 2,300
Income Statement Extract for the year end 30 June 2015 is shown below:
£'000
Operating profit 250
Dividend received 16
Finance cost (8)
Profit before taxation 258
Taxation (63)
Profit after tax 195
You are informed as follows:
a) On 1st April 2015 £200,000 of the Convertible Loan Notes were converted as agreed
on the basis of 43 Ordinary shares of £1 each for every £50 Loan Note.
b) £74,000 was received during the year upon disposal of equipments acquired several years
earlier at a cost of £180,000. The accumulated depreciation on the date of disposal was
£60,000.
c) Amortisation of brand names and depreciation amounting to £40,000 and £168,000 have
been accounted for within cost of sales.
d) An interim dividend of £20,000 was paid in March 2015
Required:
a) Prepare a Statement of Cash Flow for the year ended 30 th June 2015 using the
format stated in IAS 7 ‘Statement of cash flow’. ( 20 marks)
b) Based on the information available on the Statement of cash flow comment on any
change in the liquidity position of Trot plc during the year ended 30 th June 2015.
( 5 marks)
Total 25 marks
Statement of cash flow
year ended 30 June 2015 £'000 £'000
Operating activities:
Operating profit 250
Loss on disposal (180 - 60 [Link] - 74 proceeds 46
Amortisation 40
Depreciation 168
Cash flow from operating activities 504
Working capital management:
Inventory (27)
Receivables 166
Payables (98)
545
Dividend paid 20 + 30 (50)
Interest paid (8)
Tax paid see workings (15)
472
Investing activities:
Property, plant & equip. See workings (530)
Disposal of Property Plant and Equipment 74
Investments 340 – 220 (120)
Dividend received 16
(560)
Financing activities:
Share issue See workings 145
Cash inflow in the year 57
Cash and cash equivalent at start of year (23)
Cash and cash equivalent at end of year 34
workings
PPE: Cost Depn Carrying
Start of year 890 288 602
Sold (180) (60) (120)
Bought β530 530
Depreciation for year nil 168 (168)
End of year 1,240 396 844
Sales proceeds 74
Less carrying amount180 - 60 120
Loss on sale 46
Share capital Share Premium
Start of year 600 30
Loan conversion 200/50 x 43 172 28*
Issue for cash β 128 β17 (total cash = 145)
End of year 900 75
*The double entry to record the conversion of the loan is:
Dr convertible loan 200
Cr: share capital 200/50 x 43 172
Cr share premium β 28
Dividend payable:
Start of year 30
Payment of previous year div (30)
Declare interim div 20
Payment of interim div (20)
Declare final div 45
End of year liability 45
Tax liability:
Start of year 32 + 48 = 80
Tax expense for year = 63
Tax paid = β15
End of year 54 + 74 = 128
Comments on the changes in liquidity during the year
1. Overall position:
Cash flow has improved in the year because:
There has been an inflow of £57,000 in the year
Adverse balance at bank has been converted in to a favourable balance
2. Cash flow ratio
Cash inflow from operating activity (£504,000), though good, is not adequate for paying in full the
year-end current liabilities. The cash flow ratio of £504,000 / 517,000 x 100 is 97%
3. Working capital management
Overall the working capital management is satisfactory because it has improved the cash flow
from £504,000 to £545,000. However the following observations are relevant:
a) Additional inventory holding has tied down £27,000 of cash. This could have been necessary
either in fear of price rises, scarcity or to get ready for a sales push.
b) Stricter credit control has facilitated a cash inflow of £166,000. Care needs to be exercised to
ensure that overly severe credit control does not alienate customers.
c) There has been a cash outflow of £98,000 on settlement of payables. This could be a sign of
improved liquidity position or to conform with credit terms agreed with suppliers.
4. Investing activities
Significant amount of cash outflow (£576,000) has been on investing activities and this augurs well
for the company because:
(a) it improves the asset base of the business and
(b) enhances its revenue earning capacity
5. Financing activities:
By converting two third of its loan notes to share capital the company improves its gearing level
and hence its share market standing.