Stormy Waters 20 MARKS

Ignore value-added tax (VAT) and dividend withholding tax.

Stormy Waters (Pty) Ltd (‘Stormy’) is a company incorporated in 1995. Stormy has five
fishing trailers and a frozen fish processing plant situated in Lambertsbaai. Catching fish has
become much more difficult over the last few years due to climate changes and illegal fishing
activities. The financial year end of the entity is 31 August.

As a result of difficult trading conditions, as well as old equipment and boats, cash resources
are under severe pressure. Mr Flipper, the managing director, is a good friend of your
parents and he has requested your assistance in evaluating the way that cash resources are
utilised in the company. The statement of financial position and statement of profit or loss
and other comprehensive income was provided to you by the company’s accountant. You
decided to use these statements to draft a statement of cash flow in order to comment on
the utilisation of cash funds.

The accountant, Mrs Prawn, has been working for Stormy since 2005. She is extremely
diligent and her work is reliable. She provided you with the following information:

1. Extract from the trial balance as at 31 August:

2018 2017
R R
Trading inventory 31 400 28 600
Trade receivables 74 890 52 950
Trade payables 46 810 52 700
Shareholders for dividends 20 000 15 000
Profit after tax 680 900 735 680

2. The closing balance of trade debtors at the end of the 2018 financial year included an
amount of R12 400 which was received from a debtor whose account was already
been written off as irrecoverable in the 2016 financial year. Actual credit losses of
R10 200 was incurred and written off in the current financial year.

3. Total sales for the year was R2 879 240 which include cash sales of R367 400 and
exclude settlement discounts granted of R46 700. The company does not make use of
allowance accounts, neither for settlement discounts, nor for credit losses.

4. Profit after tax was calculated after an income item ‘Profit on the sale of a fishing
trailer’ of R15 800 was taken into account.
5. At the beginning of the current financial year Mr Flipper instructed the plant manager to
gain expert advice on the remaining estimated life time of the processing plant. The
accounting policy stated that the plant will be written off over a ten year estimated
useful life on the straight line method. The report issued after the investigation by the
experts indicated that the remaining useful life of the plant is five years as from
31 August 2018 and the residual value will be R80 000 at the end of the plant’s
economic life. The plant was initially taken into production on 1 September 2010 at a
cost of R3 500 000, with an estimated residual value of R115 000. Mrs Prawn has not
passed the depreciation on the plant according to the new estimate, but still provided
depreciation based on the old estimate. She asked you to assist her in rectifying the
accounting entry to reflect depreciation based on the new estimate by making use of
the re-allocation method.

6. Cash paid to suppliers and employees amounted to R1 550 233 for the year ended
31 August 2018.

7. Stormy has to pay income tax at a rate of 28% on taxable income. The South African
Revenue Services (SARS) has agreed to allow them a deduction for wear and tear
equal to the depreciation expense in the company’s books. Provisional tax payments
made during the year amounted to R285 000. There was no outstanding balance on
the SARS account at the beginning of the current financial year.

8. The issued share capital of Stormy consists out of 100 000 ordinary shares. An interim
dividend of 10 cents per share was declared and paid in February 2018. At
31 August 2018 the shareholders approved a final dividend payment of 20 cents per
share.

Marks
REQUIRED Sub- Total
total
(a) Prepare the ‘Net cash from operating activities’ section of the 19
statement of cash flow of Stormy Waters (Pty) Ltd for the year
ended 31 August 2018 by using the direct method. The
reconciliation note to the ‘Cash generated by operations’ is also
required.
Communication skills – presentation and layout 1 20

TOTAL MARKS 20