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The following are the balance sheets of Jackson plc as at 31/12/2017 and 31/12/2018 - Leaving Cert Accounting - Question 7 - 2019
Question 7
The following are the balance sheets of Jackson plc as at 31/12/2017 and 31/12/2018. Balance Sheets as at Intangible Assets Goodwill € 55,000 € 66,000 Fi... show full transcript
Worked Solution & Example Answer:The following are the balance sheets of Jackson plc as at 31/12/2017 and 31/12/2018 - Leaving Cert Accounting - Question 7 - 2019
Step 1
Prepare an abridged profit and loss account to ascertain the operating profit for the year ending 31/12/2018.
Answer
To compute the operating profit for the year ending 31/12/2018, we start with the relevant figures from the available data:
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Operating profit:
The operating profit can be calculated as:
Operating Profit = Investment Income + (Profit Before Tax - Debenture Interest - Taxation)
Substituting in values:
Operating Profit = 0 + (x - 7,800 - 47,200)
Where x is the profit before tax calculated from the statement.
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Operating Profit Calculation:
Also noting that Taxation = 51,000 Cash flow from operations = 140,350 Dividends paid = 30,600
Thus, Transparency yields: Operating Profit = 79,750 €
Therefore, the operating profit for Jackson plc for the year ending 31/12/2018 amounts to €79,750.
Equations enumerated:
- Total Dividend Paid - = €30,600
- Retained Profit - = (62,650 - 60,950) = €1,700
- Net profit equivalent = Operating Profit - Investment Income = €79,750 - 2,100
Step 2
Prepare the cash flow statement of Jackson plc for the year ended 31/12/2018 including reconciliation statements.
Answer
To prepare the cash flow statement:
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Cash Flows from Operating Activities:
- Start with net cash inflow from operating activities = €140,350
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Calculation of Cash Flows:
- Interest Paid = €7,800
- Taxation Paid = €47,200
Gathering all cash adjustments leads: Cash flow from operations = 140,350 - 7,800 - 47,200 + 2,100
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Capital Expenditure and Financial Investment:
- Cash payments made for fixed assets = €41,300
- Payments to acquire tangible fixed investments = €170,000
Substituting gives total outflows from investments = (41,300 + 170,000) = €211,300
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Equity Dividends Paid:
- Total dividends paid = €30,600
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Management of Liquid Resources:
- Payments for acquisition of government securities = €27,000
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Summary of the Cash Flow Statement:
Operating Activities €140,350 Return on Investment and Servicing of Finance €37,900 Taxation €47,200 Capital Expenditure and financial investment €211,300 Equity Dividends Paid €30,600 Management of Liquid Resources €27,000 Financing (issue of debentures and receipts from share issues) = €40,000 + €12,000 = €52,000
Cash Flow Reconciliation under Net Deals:
- Increase in cash = 22,150
- Cash received from debentures = €40,000
Settlement of Net Debt calculated gives:
Opening Net Debt Capital = (104,150 - 104,000) Closing Net Debt Cap = (104,000)
Final Amount totaled as prescribed in balance: €(104,000 - 104,150) Conclusion, monitoring status maintains framework consistent with cash flow principles in balance.
Step 3
Explain what is meant by a non-cash item.
Answer
A non-cash item refers to expenses or revenues that are recorded in the financial statements but do not involve an actual cash transaction occurring during the period. Examples include depreciation, amortization, and provisions. These items affect the reported profit of a company but do not impact the cash flow directly. For instance, while depreciation reduces the book value of an asset, the actual cash spent on acquiring the asset does not change. Thus, non-cash items are critical in familiarizing stakeholders with the company's financial position without affecting the cash balance.
Step 4
Explain two items that affect cash but not profit.
Answer
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Drawings: Amounts withdrawn by owners from a business for personal use reduce the available cash. However, they do not affect the profit of the business as they are not considered expenses incurred for operational purposes. Therefore the net profit remains intact while cash reduces.
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Sale of Fixed Assets: When a business sells fixed assets, it can generate cash inflows. However, if the liquidation value is less than the book value, the entity may incur a loss, thus affecting profit, but the cash received from the sale positively impacts cash flow. If the sale incurs no loss, profit remains unaffected, even though cash increases.