PRINCIPLES OF ACCOUNTING (9593)

PRE-UNIVERSITY TWO (2023)

INTERIM CHECK 1 : CASHFLOW STATEMENT

1. Shown below are the summarized balance sheets of YOLO Ltd:

Balance Sheets as at 31 Mar 2020 31 Mar 2021

$'000 $'000
Non-current Assets
Property 250 450
Equipment, at cost 190 470
Less Accumulated depreciation (110) 80 (185) 285

Current Assets
Inventory 105 137
Trade receivables 70 90
Less: Allowance for impairment (3) 67 (8) 82
of trade receivables
Bank 78 250 - 219

Less Current liabilities

Trade payables 75 91
Bank overdraft - (75) 118 (209)
505 745

Share capital & reserves

Ordinary shares of $1 each 150 400
Revaluation reserve - 100
Retained earnings 185 245
335 745
10% Bonds, repayable 2025 170 -
505 745

Additional Information

a. The property bought some years ago were revalued to $350 000 in December 2020.
b. An item of equipment costing $70 000 and written down to $12 000 was sold at a
loss of $8 000 during the year to 31 Mar 2021.
c. Interim dividends of $15 000 was paid in October 2020.
d. On 1 April 2020, a bonus issue was made of 1 share for every 3 held on that date.
e. Bonds were repurchased on 31 March 2021.

The Bank has told the company that the overdraft must be reduced immediately to no
more than $50 000. The directors think that the bank is being unreasonable and they
point to the substantial increase in reserves over the past year to show that the
company is both profitable and growing.
Required:
a. Prepare a cash flow statement for the year ending 31 Mar 2021.

b. So far as the information permits, comment on the director's financial policies during
the past year and the effects of those policies on the company's working capital
position at the end of the year.

c. Suggest three ways in which the directors might raise sufficient cash to enable the
company to reduce its bank overdraft.
Answer to Interim Check on Statement of Cash Flows

a. Statement of cash flows for the year ended 31 March 2021

$ $
Cash flows from operating activities
Net profit for the year before interest (245 -185 +15 div +50 bs) + 17 int 142 0001
Adjustments for non-cash exp/rev:

Depreciation (185 – (110-58)) 133 0002

Loss on sale of property, plant and equipment (given) 8 000
Increase in allowance for impairment of trade Rec (3 – 8) 5 000
Operating cash flows before movements in working capital 288 000
Increase in inventories (105 - 137) (32 000)
Increase in trade receivables (70 - 90) (20 000)
Increase in trade payables (75 - 91) 16 000
Cash used in operations (36 000)
Net cash generated from operating activities 252 000

Cash flows from investing activities

Purchase of Property (100,000)3
Purchase of Equipment (350,000)4
Proceeds from sale of non-current assets (12 -8) 4 000
Net cash provided by investing activities (446000)

Cash flows from financing Activities

Proceeds from issuance of shares (400-150-50) 200 000
Repayment of borrowings (bonds) (170 - 0) (170 000)
Dividend paid (interim for the year)(given) (15 000)
Interest paid (10% x 170, 000) (17 000)
Net cash provided by financing activities (2 000)

Net decrease in cash and cash equivalents (196 000)

Cash and bank balance at beginning of year (78 + 0) 78 000

Net decrease in cash and cash equivalents (196 000)
Cash and bank balance at end of year (0 + -118) (118 000)
Workings
To arrive at Net Profit
Opening Closing
Net Interim Share
Retained + – – = Retained
Profit Dividends Dividends
Earnings Earnings
$185,000 + ? - $15000 - $50,0002 = $245,000
(given)
Hence Net Profit = $125,000 (after interest)
Net Profit Before Interest = $125,000 + (10% x 170,000) = $142,0001
Calculation for Share Dividends a.k.a Bonus Shares
1 Bonus Share = For every 3 shares held
Shares held = 150,000 shares, therefore Bonus shares = 150,000 / 3 = 50,000 BI shares
50,000 BI shares x $1.00 each = $50,0002
To arrive at Depreciation Expenses for Equipment (Using Accum Depn method)

Disposal of asset’s
Opening Accumulated Annual Closing Accumulated
+ - Accumulated =
Depreciation Depreciation Depreciation
Depreciation
$110,000 + ? - $58,000 = $185,000
2
Therefore, Annual Depreciation = $133,000
As for Equipment That Was Disposed
Cost = $70,000
Less : Accum Depreciation = (?)
Net Book Value or = $12,000
Written Down Value
Therefore, Accum Depreciation of disposed equipment = $58,000
To determine Purchase of Property (Using Cost)
Opening Closing
Purchases Revaluation Disposal
Balance + + - = Balance
(Cost) (Cost) (Cost)
(Cost) (Cost)
$250,000 + ? + $100,000 - $0 nil = $450,000
Therefore, purchase of property = $100,0003
As for Revaluation of Property = $350,000 - $250,000
Disposal of Property is $0, as there is no mention in the question
To determine Purchase of Equipment (Using Cost)
Opening Balance Purchases Disposal Closing Balance
+ - =
(Cost) (Cost) (Cost) (Cost)
$70,000
$190,000 + ? - = $470,000
(given)
Therefore, purchase of equipment = $350,0004
ALTERNATIVELY, To arrive at Depreciation Expenses for Equipment (Using NBV Method)
Opening Disposal of Closing
Annual
Balance + Purchases - - Equipment = Balance
Depreciation
(NBV) (NBV) (NBV)
$80,000 + $350,000 - ? - $12,000 = $285,000
2
Therefore, Annual Depreciation = $133,000 [Same if you were to compute this Accumulated Depreciation method
as shown above]
To determine any issue of shares for cash
Opening + Normal or + Bonus Issue = Closing
Balance Rights issue Balance
$150,000 + ? + $50,0002 = $400,000
5
Therefore issue of shares for cash = $200,000
b. So far as the information permits, comment on the director's financial policies during
the past year and the effects of those policies on the company's working capital position
at the end of the year.

Positive cash flow (252k) from operations indicate that the company is generating healthy cash
flow from its trading activities.
However, there were huge cash outflows due to purchases of non-current assets (100k +
350k) indicate the company is expanding.
This was funded only partly from the proceeds from share issue (200k).
Bank overdraft (118k) was also used to finance the purchase, which is not advisable as
overdrafts are for short term liquidity needs.
The repayment of bonds (170) also resulted in a huge outflow of cash with interest cost
charged for the year as well. Company could have tried to repurchase at the start of the year, if
they intended to carry out this exercise.

Working capital has deteriorated from $175k to $10k. CR has worsened from 3.33:1 to 1.05:1
indicating $2 less current assets to repay each dollar of current liability when due.
The increases in inventories, trade receivables and trade payables may indicate that the
company may be overtrading – overbuying inventories, not collecting from its customers
promptly hence owing more to its creditors.

c. Suggest three ways in which the directors might raise sufficient cash to enable the
company to reduce its bank overdraft.

 Negotiate for later payment to suppliers.

 Speed up collections from trade receivables, give cash discounts to attract payment
 Sell its inventories at discount
 Negotiate for a new bank loan
 Sell and lease back its non-current assets.
 Delay payment of bonds till 2025, which is the maturity date