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Cash Flow Statement The following information has been extracted from the books of Rodgers Ltd: € Operating Profit 83,000 Interest paid (6,000) Taxation (9,000) Dividends paid (7,000) Retained Profit 55,000 Profit and Loss balance 01/01/2014 67,000 Profit and Loss balance 31/12/2014 122,000 Balance Sheets as at 31/12/2014 31/12/2013 € € Fixed Assets Land and Buildings 400,000 280,000 Less depreciation provision (45,000) (35,000) Current Assets Stock 54,000 49,000 Debtors 32,000 28,000 Bank 104,000 90,000 Less Creditors: amounts falling due within 1 year Creditors (17,000) (11,000) Taxation (8,000) (6,000) Net Current Assets 422,000 311,000 Total Net Assets 422,000 311,000 Financed by: Creditors: amounts falling due after 1 year 7% Debentures 115,000 0 Capital and Reserves Ordinary Share Capital issued 185,000 136,000 Share Premium 12,000 6,000 Profit and Loss Account 122,000 67,000 Required: (a) Reconcile the operating profit to net cash inflow/outflow from operating activities - Leaving Cert Accounting - Question 6 - 2015

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Question 6

Cash-Flow-Statement-The-following-information-has-been-extracted-from-the-books-of-Rodgers-Ltd:--€-Operating-Profit--83,000-Interest-paid--(6,000)-Taxation--(9,000)-Dividends-paid--(7,000)-Retained-Profit--55,000-Profit-and-Loss-balance-01/01/2014--67,000-Profit-and-Loss-balance-31/12/2014--122,000--Balance-Sheets-as-at--31/12/2014-----31/12/2013-€---------------€-Fixed-Assets-Land-and-Buildings--400,000------280,000-Less-depreciation-provision--(45,000)----(35,000)--Current-Assets-Stock--54,000------49,000-Debtors--32,000------28,000-Bank--104,000-----90,000--Less-Creditors:-amounts-falling-due-within-1-year-Creditors--(17,000)--(11,000)-Taxation--(8,000)-----(6,000)--Net-Current-Assets--422,000------311,000-Total-Net-Assets--422,000------311,000--Financed-by:-Creditors:-amounts-falling-due-after-1-year-7%-Debentures--115,000------0--Capital-and-Reserves-Ordinary-Share-Capital-issued--185,000------136,000-Share-Premium--12,000------6,000-Profit-and-Loss-Account--122,000-----67,000--Required:-(a)-Reconcile-the-operating-profit-to-net-cash-inflow/outflow-from-operating-activities-Leaving Cert Accounting-Question 6-2015.png

Cash Flow Statement The following information has been extracted from the books of Rodgers Ltd: € Operating Profit 83,000 Interest paid (6,000) Taxation (9,000) ... show full transcript

Worked Solution & Example Answer:Cash Flow Statement The following information has been extracted from the books of Rodgers Ltd: € Operating Profit 83,000 Interest paid (6,000) Taxation (9,000) Dividends paid (7,000) Retained Profit 55,000 Profit and Loss balance 01/01/2014 67,000 Profit and Loss balance 31/12/2014 122,000 Balance Sheets as at 31/12/2014 31/12/2013 € € Fixed Assets Land and Buildings 400,000 280,000 Less depreciation provision (45,000) (35,000) Current Assets Stock 54,000 49,000 Debtors 32,000 28,000 Bank 104,000 90,000 Less Creditors: amounts falling due within 1 year Creditors (17,000) (11,000) Taxation (8,000) (6,000) Net Current Assets 422,000 311,000 Total Net Assets 422,000 311,000 Financed by: Creditors: amounts falling due after 1 year 7% Debentures 115,000 0 Capital and Reserves Ordinary Share Capital issued 185,000 136,000 Share Premium 12,000 6,000 Profit and Loss Account 122,000 67,000 Required: (a) Reconcile the operating profit to net cash inflow/outflow from operating activities - Leaving Cert Accounting - Question 6 - 2015

Step 1

Reconcile the operating profit to net cash inflow/outflow from operating activities.

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Answer

To reconcile the operating profit to the net cash inflow from operating activities, we start with the operating profit and adjust for non-cash expenses and changes in working capital:

  1. Operating Profit: €83,000
  2. Add Depreciation: This is a non-cash expense which should be added back to the operating profit.
    • Depreciation: €7,000
  3. Increase in Stock: This reduces cash inflow, thus we subtract it from the operating profit.
    • Increase in Stock: €(5,000)
  4. Increase in Debtors: This also reduces cash inflow, so we subtract it as well.
    • Increase in Debtors: €(4,000)
  5. Decrease in Creditors: A decrease in creditors indicates a cash outflow, so we also subtract this amount.
    • Decrease in Creditors: €(4,000)

The formula for net cash inflow from operating activities is:

extNetCashInflow=extOperatingProfit+extDepreciation−extIncreaseinStock−extIncreaseinDebtors−extDecreaseinCreditors ext{Net Cash Inflow} = ext{Operating Profit} + ext{Depreciation} - ext{Increase in Stock} - ext{Increase in Debtors} - ext{Decrease in Creditors}

Now we substitute in:

extNetCashInflow=83,000+7,000−5,000−4,000−4,000=77,000 ext{Net Cash Inflow} = 83,000 + 7,000 - 5,000 - 4,000 - 4,000 = 77,000

Thus, the net cash inflow from operating activities is €77,000.

Step 2

Prepare the Cash Flow Statement of Rodgers Ltd for the year ended 31/12/2014 using the following headings: 1. Operating activities 2. Return on investment and servicing of finance 3. Taxation 4. Capital expenditure and financial investment 5. Equity dividend paid 6. Financing.

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Answer

The Cash Flow Statement for the year ended 31/12/2014 can be structured as follows:

Operating Activities

  • Net cash inflow from operating activities: €77,000

Return on Investment and Servicing of Finance

  • Interest paid: €(6,000)

Taxation

  • Tax paid: €(9,000)

Capital Expenditure and Financial Investment

  • Purchase of Land/Buildings: €(120,000)

Equity Dividend Paid

  • Dividends paid: €(7,000)

Financing

  • Issue of Ordinary Share Capital: €49,000
  • Share Premium: €12,000
  • Debentures: €15,000

Summary

Net cash inflow before liquid resources and financing: €77,000 - €6,000 - €9,000 - €120,000 - €7,000 + €49,000 + €12,000 + €15,000 = €5,000

Thus, for the year ending 31/12/2014, the net cash inflow is €5,000.

Step 3

Reconcile the Net Cash Flow to Movement in Net Debt.

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Answer

To reconcile the net cash flow to movement in net debt, consider the following:

  1. Increase in cash in the period: €5,000
  2. Debentures: €15,000 (increase)
  3. Change in Net Debt: The initial net debt at 01/01/2014 is determined considering cash changes.
    • Starting Net Debt is generally the aggregate of current liabilities minus current assets (as detailed in net assets).
    • We consider the net debt equation:

extNetDebt31/12/2014=extNetDebt01/01/2014+extIncreaseinDebt−extIncreaseinCash ext{Net Debt}_{31/12/2014} = ext{Net Debt}_{01/01/2014} + ext{Increase in Debt} - ext{Increase in Cash}

Thus, adjusting based on calculated cash flows gives the movement in net debt.

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