You are on page 1of 10

Page |1

Question No. 1

Izhar Builders
Manufacturing account for the year ended 31 March 2018
Opening stock of raw materials 65,000
Add purchase of raw materials 242,000
Add custom duties paid on raw materials 2,500
Less Returns outwards (of raw materials) (14,550)
Less Closing stock of raw materials (51,400)
Cost of Direct Materials 243,550
Add Direct wages 106,600
Add Direct expenses 80,900
Prime Cost 431,050
Add Factory overhead expenses
Electricity (1/4th of Total) 4,750
Other Factory overheads 14,500
Machine repairs 13,200
Rents & rates 11,500
Factory maintenance 9,700
Indirect Factory wages 16,000
Loose Tools 2,000
Depreciation on plant & machinery 7,800
Loss on Raw Material 16140
Loss on Disposal 17,000
Administration expenses (1/4h of total) 5,500
Factory cost of Production 549,140
Add Opening stock of work in progress 52,500
Less Closing stock of work in progress (41,000)
Factory cost of goods completed 560,640
Page |2

Izhar Builders
Statement of comprehensive income the year ended 31 March 2018
Sales revenue 930,000
Cost of sales:
Finished Goods 1 April 2014 48,000
Plus Cost of Goods Manufactured 560,640
Cost of Goods available for sale 608,640
Less Finished Goods 31 March 2015 88,800
Cost of Sales (519,840)
Gross profit 410,160
Other Income (Dividend) 17,340
Administrative expenses (16,500)
Selling and Distribution (41,700)
Electricity (14,250)
Directors remuneration (40,000)
Provision for Audit fee (3,000)
Finance costs (8,750)
Profit before tax 303,300
Income tax expense (75,825)
Other Comprehensive Income:
Surplus on revaluation of Land and Building 225,000
Total Comprehensive Income for the year 452,475
Page |3

Izhar Builders
Statement of Retained Earnings for the year ended 31 March
Beginning balance of Retained earnings 175,000
Add Profit after Tax 227,475
Less Interim Dividend Paid (55,000)
Less Balance Preference Share Dividend (15,000)
Less Transfer to General Reserves (20,000)
Ending Balance Retained Earnings 312,475
Page |4

Izhar Builders
Statement of financial position at 31 March 2018

Non-current assets
Land and Building 1,125,000
Plant & Machinery 298,000
Less Accumulated Depreciation (Plant & Equipment) 74,800 223,200
Fixtures and Fitting 150,000
Less Accumulated Depreciation (Fixtures & Fittings) 45,000 105,000
Investments 500,000

Current assets
Raw Materials 35,260
Work in Progress 41,000
Finished Goods 88,800
Loose tools 21,000 186,060
Account Receivables 386,350
Deferred Tax Asset 9,175
Cash and cash equivalents 59,340
Total assets 2,594,125
Page |5


Ordinary Share capital at RM0.50 each fully paid up 1,000,000
8% Preference share capital at RM1 250,000
Share premium 325,000
General Reserves 120,000
Retained earnings 312,475
Surplus on Re-valuation of Land & Building 225,000
Non-current liabilities
7% Debentures 250,000
Current liabilities
Account Payable 80,450
Dividend Payable 15,000
Expenses Payable 13,200
Audit fee payable 3,000
Total liabilities 361,650

Total equity & liabilities 2,594,125

Page |6


Closing Stock of Raw material 51,400 Total Purchases 250,000

Less wastage due to flood (15,000) Less Cost of Loose Tools (8,000)
36,400 242,000
Carrying value of Raw material 32,760
Plus remaining inventory 2,500 Direct Wages 100,000
Closing Stock of Raw material 35,260 Arrears 6,600
Returns outward 13,000 106,600
Add Credit note received 1,550 Loose tools beginning 15,000
14,550 Plus purchases 8,000
Machine repairs beg 11,500 Less Loose tools ending (21,000)
Arrears 1,700 2,000
Accumulated Depreciation
250,000 75,000
Plant & Machinery beg.
30,000 Accumulated Depreciation
Less machine sold for machine sold 8,000
Net Accumulated
Net cost of Plant and machinery 220,000 Depreciation 67,000
Add Depreciation Exp.
Cost of new machine 78,000 New machine 7,800
Total accumulated
Depreciation 74,800
Net Plant and Machinery 223,200

Selling and Distribution

Book Value of Old machine beg. 36,800
Selling Price 5,000 Add arrears 4,900
Loss on disposal (17,000) 41,700
Page |7

1 Question No. 2

1.1 Evaluation of purpose of preparing statement of cash flows

The primary purpose that a statement of cash flows (SCF) serves is that it provides the users with
relevant information about the cash receipts and cash payments of an entity during a specific
period. The information that a statement of cash flows provides has to be used with related
disclosures as well as the other financial statements in order to obtain useful information that in
turn is helpful for the concerned parties (investors, creditors, and others) to make informed
decisions. The cash is like blood flowing in the system and no company can survive without
inclusion of cash in the system in regular intervals. The statement of cash flows gives a detailed
account of cash inflows and outflows and gives a detailed account of cash related activities in
order to explain an entity’s liquidity, profitability, stability and flexibility position.

It is important to understand that a business may be earning accounting profit but practically
facing bankruptcy due to weak cash collection. A SCF keeps the users aware of any such dangers
and they can make decisions in a better manner.

1.2 Advantages of preparing statement of cash flows

There are following five advantages of preparing of this statement (Van Horne, 2002):-

1. It is helpful in assessing ability of an enterprise to generate positive future net cash flows
2. It gives an idea about the enterprise's ability to meet its obligations towards its creditors and
shareholders i.e. whether it has enough cash to pay interest and dividends
3. It explains the cash funding sources of a company i.e. whether it generates cash from
operations to meet its commitments or needs for external financing in shape of investments
and financing to achieve this goal.
4. It elaborates the reasons for differences arising between net income as well as cash receipts
and payments associated with it.
5. It gives a detailed account of the effects that both cash and noncash investing and financing
transactions have on an enterprise's financial position during the period.
Page |8

1.3 Statement of Cash Flows

Cash flows from operating activities
Profit before taxation 54
Adjustments for:
Depreciation 58
Interest expense 8
Provision for Bad Debts 22
Loss on the sale of property, plant & equipment 6
Working capital changes:
Increase in trade and other receivables (125)
Increase in inventories (113)
Increase in Prepayments (1)
Increase in trade payables 5
Increase in accruals 1
Increase in liability re – non-current assets 20
Interest paid (8)
Income taxes liability paid (47)
Dividends paid (100)
Net cash used in operating activities (220)

Cash flows from investing activities

Purchase of property, plant and equipment (70)
Proceeds from sale of equipment 10
Sale of investments (non-current) 21
Net cash used in investing activities (39)

Cash flows from financing activities

Proceeds from issue of share capital 80
Proceeds from long-term borrowings (12% Debenture) 30
Net cash from financing activities 110

Net increase in cash and cash equivalents (149)

Cash and cash equivalents at beginning of period 109

Change in Bank Overdraft 40

Cash and cash equivalents at end of period -

Page |9

1.4 Significance of the information provided by statement of cash flows

There are many important details and information that a statement of cash flows is capable of

i. A cash flow statement reflects the liquidity position of a company and shows whether it has
earned adequate cash from its profitable operations. The figure of Profit after Tax does not
show, on the other hand, how much money business has collected and how much is tied in
ii. It shows the amount of cash drawings by owners and makes it easier for the users to analyse
the owners’ interest in the business.
iii. It shows the amount spent on capital expenditure by the company and helps the users to
identify whether company is allocating cash resources wisely or else. The Depreciation
sometimes masks the true impact.
iv. A cash flow statement is useful in identifying the amount of cash available to pay off the
liabilities. It can also explain the impact of loan on the overall financial position of the

For example, it is evident from the above company’s statement of cash flows that it has negative
operating cash flows and also negative investing cash flows. The above activities are financed
with financing activities like issuance of shares and bank borrowings. The bank overdraft is also
used to resolve liquidity issues. The major shortfall in operating cash flows is a result of cash tied
in Inventories and Account receivables. It has also made a big purchase last year. As a result, it
has huge cash outflows.
P a g e | 10

Calculations Qs. 2
Calculation of Profit before Tax
The increase in Retained Earnings (55)
Add: Dividends Paid 100
Net Income After Tax 45
Add: Taxation 9
Profit Before Taxation 54
Total Depreciation for the year
Change in Accumulated Depreciation 40
Depreciation for equipment sold 18
Total Depreciation for the year 58
Total Loss on Fixed Assets Disposal
Loss on Sale of Equipment (2)
Loss on Sale of Investments (4)
Total Loss (6)

Shares Issuance 80
Total value of new Equipment
Equipment 2009 490
Equipment 2008 450
Difference 40
Price of Old Sold 30
Total value of new Equipment 70