Chapter 22 - Gripping IFRS ICAP 2008 (Solution of Graded Questions)

Solutions to Gripping IFRS : Graded Questions
Statement of cash flows
Solution 22.1
a) Debenture discount is written off against profit before tax, but has no cash flow implications. Hence, the cash actually received on the issue of the debentures is reflected under financing activities in the year of issue and the amount of debenture discount written off is adjusted for under non-cash items in the notes to the Statement of cash flows every year. b) As for debenture discount written off, the impairment of goodwill must be added back to profit before tax as an adjustment for non-cash flow items. c) Deferred tax is a book entry with no cash flow implications. The tax paid amount per the Statement of cash flows should therefore only consist of the payments made for the year. d) An under-provision of tax in the previous year will have to be made good in the current year. It is therefore normally included in the payments for the year and must be considered when calculating these payments. e) The actual cash flow for the year is C2 000. This is therefore the amount that must be included on the Statement of cash flows.
Kolitz & Sowden-Service, 2009
Chapter 22: Page 1
Solution 22.2
a)
HICKORY LIMITED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 JULY 20X6 C Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Taxation paid Net cash inflow from operating activities
W3 W4 W5
2 950 000 (2 274 500) 675 500 (259 500) 416 000
b)
Profit before tax (from SOCI) Adjusted for non-cash and non-operating items Depreciation Profit on sale of plant Working capital changes Decrease in inventories Increase in accounts receivable Increase in accrued expense Increase in accounts payable Cash generated from operations
W1 W2
650 000 30 000 35 000 (5 000) (4 500) 8 500 (43 000) 15 000 15 000 675 500
or
Profit before tax (from SOCI) Adjusted for non-cash and non-operating items Depreciation Doubtful debt allowance Profit on sale of plant Working capital changes Decrease in inventories Increase in accounts receivable Increase in accrued expense Increase in accounts payable Cash generated from operations
W1 W2
650 000 37 000 35 000 7 000 (5 000) (11 500) 8 500 (50 000) 15 000 15 000 675 500
Workings
W1 Profit before tax C390 000/0.6 = C650 000
Chapter 22: Page 2
Solution 22.2 continued

W2 Plant and equipment ACCUMULATED DEPRECIATION: PLANT AND EQUIPMENT PLANT AND EQUIPMENT Description Balance Cash C Description 450 Disposal...1 90 Balance 540 C 40 500 540 Description Disposal...2 Balance C Description 30 Balance Depreciation 50 80 C 45 35 80
W3.Cash receipts from customers ACCOUNTS RECEIVABLE Description Balance Sales C Description C 2 950 000 450 000 3 400 000
400 000 Bank 3 000 000 Balance 3 400 000
W4 Payments to suppliers and employees Turnover less Profit before tax = COS plus expenses Non-cash items Depreciation Profit on sale Doubtful debts allowance Working capital changes Inventory Trade payables and accruals 2 350 000 (37 000) (35 000) 5 000 (7 000) (38 500) (8 500) (30 000) 2 274 500
or
ACCOUNTS PAYABLE Description Bank C Description C 235 1 991.5 Description Balance Accounts payable INVENTORY C 1 991.5 Balance 2 226.5 2 340 340 2 340 Description 348.5 Cost of sales C 2 000
1 976.5 Balance Inventory 250 2 226.5
Balance
Chapter 22: Page 3

Revenue Cost of sales Gross profit Expenses Profit before tax 3 000 000 (2 000 000) 1 000 000 (350 000) 650 000
Net expenses Non-cash items Depreciation Profit on sale Doubtful debt allowance Increase in accured expenses Cash paid for operating expenses
350 000 (35 000) 5 000 (7 000) (15 000) 298 000
Therefore: 1 976.5 (cash paid to suppliers of goods for resale) + 298 (cash paid for operating expenses) = 2 274.5 (cash paid to suppliers and employees) W5 Tax paid CURRENT TAX PAYABLE Description Bank Balance (c/b) C Description C 1 500 *260 000 261 500 Balance (c/b) 2 000
259 500 Balance (o/b) 2 000 Current tax 261 500
*Profit before tax: 650 000 x 40% = 260 000
Chapter 22: Page 4
Solution 22.3
a)
OLBAS LIMITED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 SEPTEMBER 20X7 C Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Investment income received Interest paid Taxation paid Dividends paid Net cash inflow from operating activities Cash flows from investing activities Proceeds from sale of land and buildings Proceeds from sale of investments Purchase of equipment Purchase of vehicles Purchase of investments Net cash outflow from investing activities Cash flows from financing activities Issue of preference shares Repayment of mortgage bond Net cash inflow from financing activities Net increase in cash Cash at beginning of period Cash at end of period
(153 333 + 3 500 000 - 140 990) W1
[(136 268 96 268) + 100 000] [ (6 440) + 177 888 12 888 ] (125 000 + 225 000 150 000) + 25 000
3 512 343 (2 826 183) 686 160 3 200 (140 000) (158 560) (225 000) 165 800
(125 000 + 12 450) (480 000 - 400 000) (250 000 - 125 000 - 370 000)
520 000 137 450 (80 000) (360 000) (245 000) (27 550)
(250 000 + 22 700) (625 000 - 250 000)
272 700 (375 000) (102 300) 35 950 84 300 120 250
Chapter 22: Page 5

Note 1 Non-cash financing and investing activities Profit on sale of land and buildings Profit on sale of investments Depreciation
70 000 12 450 108 000
b)
Profit before tax Adjusted for non-cash and non-operating items Dividend income Finance cost Depreciation expense Profit on sale of land and buildings Profit on sale of investments Operating cash flow before working capital changes Working capital changes Inventory Accounts receivable Prepaid expenses Account payable Cash generated from operations (from SOCI) (from SOCI) (from SOCI) 576 982 158 618 (3 200) 136 268 108 000 (70 000) (12 450) 735 600 (49 440) (14 800) 11 850 (340) (46 150) 686 160
Workings
W1 Payments to suppliers and employees Revenue less profit before tax = COS + net expenses Non- operating items Finance costs Dividend income Non-cash items : Depreciation Profit on sale of land & buildings Profit on sale investments Decrease in doubtful debts allowance Working capital changes Inventory (increase) Prepaid expenses (increase) Accounts payable (decrease)
(3 500 000 -576 982)
2 923 018 (133 068) (136 268) 3 200 (108 000) 70 000 12 450 493 14 800 340 46 150 2 826 183
(168 000 - 120 000 + 60 000)
(6 133 - 5 640) (146 000 - 131 200) (6 300 - 5 960) (142 500 - 96 350)
Chapter 22: Page 6

Alternative workings: Payments to suppliers for goods for resale = Opening accounts payable + purchases - closing accounts payable opening inventory + purchases * closing inventory = cost of sales Operating expenses paid Operating expenses per the Statement of comprehensive income Non-cash items: Depreciation Profit on sale of land & buildings Profit on sale investments Doubtful debts allowance Increase in prepayments
2 510 950 (142 500 + 2 464 800* - 96 350) (131 200 + 2 464 800 146 000 = 2 450 000)
315 233 339 950
(168 000 - 120 000 + 60 000 - 0) (520 000 450 000) (also the transfer to NDR) (6 133 - 5 640) (6 300 - 5 960)
(108 000) 70 000 12 450 493 340 2 826 183
Following not required as part of answer: Amortisation table Date 1/10/X5 1/10/X6 1/10/X7 1/10/X8 1/10/X9 1/10/Y0 1/10/Y1 Nominal interest Effective interest Premium balance 30 000 26 845 23 113 18 699 13 478 7 303 -
Premium
PV 530 000 526 844 523 112 518 698 513 478 507 303 500 000
100 000 100 000 100 000 100 000 100 000 100 000
96 844 96 268 95 586 94 779 93 825 92 697
3 155 3 732 4 414 5 221 6 175 7 303
Cash flow 1/10/X5 1/10/X6 1/10/X7 1/10/X8 1/10/X9 1/10/Y0 1/10/Y1 530 000 (100 000) (100 000) (100 000) (100 000) (100 000) (600 000)
(500 000) + (100 000)
Effective interest rate = 18.2725377
Chapter 22: Page 7

c) Return on assets (ROA/ROI)
Profit for period + interest expense (1 tax rate) Average total assets x 100 399 094 + (136 268 X.65) (3 139 900 + 3 105 100)/2 = 15.6%
Return on equity (ROE)

Profit for period preference dividends Average ordinary shareholders equity x 100 399 094 25 000 ((2 007 549 272 700) + (1 585 755))/2 = 22.5%
The return on equity exceeds the return on investment, which indicates that the company is effectively geared. The after tax cost of debt is less than the return on investment.
Chapter 22: Page 8
Solution 22.4
MT GRACE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 20X5 C Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Interest paid Dividends paid Taxation paid Net cash inflow from operating activities
W1 W2
5 057 000 (4 263 922) 793 078 (24 000) (30 000) (252 043) 487 035
W3 W4 W5
Workings W1 Cash received from customers

Accounts receivable Description Balance Sales C Description C ^18 000 5 057 000 845 000 5 920 000 Balance 71 500 71 500 71 500 Description Doubtful debts allowance C Description Balance Bad debts C 34 000 37 500
720 000 Bad debts 5 200 000 Cash Balance 5 920 000
^(55 500 37 500)

W2 Cash paid to suppliers and employees
Revenue from sales Profit before tax Net expenses (including COS) Items shown separately on face of CFS Interest expense Non-cash items Bad debts Increase in doubtful debts allowance Depreciation Accrual basis of accounting Increase in inventory Increase in accounts payable
5 200 000 680 000 (4 520 000) 25 578 18 000 37 500 100 000 (4 338 922) 95 000 (170 000) (4 263 922)
Debit
Debit
Chapter 22: Page 9

W3 Interest Effective interest rate = 12.621908%
Premium balance 1 244 2 645 4 223
Date 01/07/X2 30/06/X3 30/06/X4 30/06/X5
Interest 25 241 25 401 25 578
Dividend 24 000 24 000 24 000
Premium 1 244 1 401 1 578
PV 200 000 201 244 202 645 204 223
W4 Ordinary dividend Ordinary dividend liability

Description Bank Balance
Description
C
30 000 35 000 65 000
30 000 Balance Dividend 35 000 65 000
W5 Taxation
X 0.29 197 200
Profit before tax Permanent differences Interest on preference shares Temporary differences Depreciation Tax allowances Taxable income
680 000 25 578 705 578 (60 000) 100 000 (160 000) 645 578
204 618 17 400
Dr TE Cr DT
187 218
Cr CTP
Taxation expense
Description Current tax payable Deferred tax
Current tax payable C

204 618 Description Bank
Description
Description
C
190 000 187 218
187 218 Retained earnings 17 400
252 043 Balance Tax expense (NT)
Balance 204 618 204 618
125 175 377 218 377 218
Deferred tax
Description
Description Balance Tax expense
C
81 200 17 400 98 600
* (35 000 + 24 000) X 0,125
Balance
98 600 98 600
Chapter 22: Page 10
Solution 22.5
SHINE LIMITED EXTRACT FROM STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 20X4 Cash in/ (out)flows from operating activities Cash receipts from customers (102 + 48.5 ) Cash paid to suppliers and employees Cash generated from operations Taxation paid [15.784 (64.716 x 11.255% - 60.000 x 10%)] Interest paid Dividends paid Cash in/ (out)flows from financing activities Redemption of preference shares C (28 550) 180 500 150 500 30 000 (19 050) (14 500) (25 000) (66 000) (66 000)
Workings: Figure in 000 s

Accounts receivable Inventory
Balance Sales
20 *252 272
Bad debts Cash Balance
1.5 180.5 90 272
Balance Purchases
131.5 Cost of sales 100 Balance 231.5 Administration expenses accrued
120 111.5 231.5
Accounts payable
Cash Balance
102 8 110
Balance Purchases
10 100 110 Balance 2
Balance 2 Expenses
2 2
Preference share liability
Distribution expenses prepaid
Cash Balance
66 66
Balance Finance cost
64.716 ^1.284 66
Balance Cash
2 1 Balance 3
3 3
* (120 X 210 / 100) ^ ((64 716 X 0.11255) 6 000]
Chapter 22: Page 11

Figure in 000 s
Retained earnings Shareholders for dividends
CRRF Dividends Balance
60 23 30.741 113.741
Balance Profit and loss (profit)
80 33.741
Cash Balance
Balance 25 Dividends 25
2 23
113.741
25
Deferred tax asset

Balance Tax expense 20 2.5 Balance 22.5 22.5 22.5 Cash Balance
Current tax payable

Balance 19.050 Tax expense 12.925 31.975 31.975 10 ~ 21.975
~ (19.475 TE + 2.5DT)
Calculation of Supplier operating costs Sales (COS: 120 000 + Mark-up: 120 000 x 110%) Cost of sales (Given) Gross profit Operating costs (balancing figure) Profit before tax (given)
252 000 (120 000) 132 000 (78 784) 53 216
Operating costs (above) Adjusted for non-cash items included: Profit on sale of plant Bad debts Depreciation Adjusted for items shown separately on face of statement of cash flows Finance charges Adjusted for related accruals and prepayments: Admin expenses accrued Distribution expenses prepaid Cash operating expenses relating to suppliers
78 784 3 000 (1 500) (15 000) (15 784) (2 000) 1 000 48 500
Profit before tax Less: profit on sale of plant Add: bad debts Add: depreciation Add: finance costs Changes in Working Cap: Less increase in trade and other receivables Add decrease in inventory Increase/ (decrease) in trade/ other payables Cash generated from operations
53 216 (3 000) 1 500 15 000 15 874 82 500 (71 000) 20 000 0 31 500 Chapter 22: Page 12
Solution 22.6
a)
MEADOWVALE MANUFACTURERS LIMITED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 SEPTEMBER 20X7 C000 Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Investment income received Interest paid Taxation paid Dividends paid Net cash inflow from operating activities Cash flows from investing activities Purchase of land and buildings Proceeds on sale of land and buildings Purchase of plant and machinery Proceeds on sale of plant and machinery Purchase of investments Net cash outflow from investing activities Cash flows from financing activities Redemption of preference shares Issue of ordinary shares Long-term loan raised Net cash inflow from financing activities Net increase in cash Cash at beginning of period Cash at end of period
W1 W2
4 625 (4 484) 141 18 (92) (670) (325) (928)
Given Given (470 + 800 600 ) (180 + 295 150 )
W3 W3 W6: 71 + 279 W6 W5: 20 + 12
(265) 140 (350) 144 (32) (363)
100 000 x C1 x 1.04 W4 970 - 180
(104) 125 790 811 (480) 620 140
NOTE TO THE STATEMENT OF CASH FLOWS Non-cash financing and investing activities 1. 2. Land and buildings were revalued by C20 000 during the year. An amount of C100 000 was transferred during the year to the capital redemption reserve fund as a result of the redemption of preference shares. A capitalisation issue to the value of C125 000 was made out of the capital redemption reserve fund. The company acquired plant and machinery of C100 000 during the year, of which C29 000 was financed by the trade-in of old plant and machinery.
3.
4.
Chapter 22: Page 13

b) Figure in 000 s
Reconciliation Profit before tax (from SOCI) Adjusted for non-cash and non-operating items Investment income (from SOCI) Interest expense (from SOCI) Depreciation plant Profit on sale of land and buildings Profit on sale of plant and machinery Writedown of listed investments Goodwill Loss on trade-in of plant and machinery Operating cash flow before working capital changes Working capital changes Accounts receivable Inventory Accounts payable Cash generated from operations
1 519 223 (18) 92 90 (50) (4) 7 100 6 1 742 (1601) (370) (1 591) 360 141
Workings
W1. Cash receipts from customers Opening accounts receiveable Sales Closing accounts receivable Bad debts 500 000 5 000 000 (870 000) (5 000) 4 625 000
W2. Cash paid to suppliers and employees Sales Profit before tax Net expenses for year Elimination of items shown separately on face of Statement of cash flows Dividends received Interest Elimination of non-cash items Bad debts Depreciation Profit - sales of land and buildings Profit - sale of plant and machinery Write down of investment Goodwill Loss on trade - in of plant & machinery Elimination of the effects of accrual accounting Increase inventory Increase in accounts payable 5 000 000 (1 519 000) 3 481 000 18 000 (92 000) (5 000) (90 000) 50 000 4 000 (7 000) (100 000) (6 000) 3 253 000 1 591 000 (360 000) 4 484 000
Chapter 22: Page 14

W3
Figure in 000 s
DISPOSAL LAND AND BUILDINGS LAND AND BUILDINGS Description Balance C Description 2 405 Disposal C 90 Description Land and buildings Profit on sale of land and buildings C Description 90 Bank C 140
NDR / DT Bank
20 265 Balance 2 690 2 600 2 690
50 140 140
W4
ORDINARY SHARE CAPITAL Description C Description C CAPITAL REDEMPTION RESERVE FUND Description Ordinary share capital (Cap issue) C Description C
Balance
450
CRRF (Cap issue) Balance Bank (issued 700 shares) 700
125 125 700 Balance
125 Balance Retained earnings (Redemption of preference shares) 25 150
50
100
150
W5
UNLISTED INVESTMENTS Description Balance Bank C 44 20 Balance 64 64 64 96 Description C Description Balance Bank LISTED INVESTMENTS C 12 Balance 89 96 Description 84 Writedown C 7
Chapter 22: Page 15

W6
Figure in 000 s
ACCUMULATED DEPRECIATION PLANT AND MACHINERY PLANT AND MACHINERY Description Balance Disposal (trade in) Bank
(100 29)
Description 426 Disposal (machine) 29 Disposal (plant)

(140 + 15)
C 60 155
Description Disposal (machine) Disposal (plant)
Description 25 Balance 15 Depreciation
C 180 90
71 279 Balance 805 590 805 Balance 230 270 270
Bank (purchases)
DISPOSAL: PLANT AND MACHINERY Description Plant and machinery C Description Accumulated 60 depreciation: plant and machinery Loss on trade in Plant and machinery (trade in) 60 Plant and machinery...1 155 Accumulated depreciation: plant and machinery Bank2 C
25 6
29 60
15 144 159
Profit on sale of plant and machinery
4 159
W7
NON DISTRIBUTABLE RESERVE Description C Description Balance Retained earnings Balance 164,2 Land & buildings 164,2 C 120 30 14,2 164,2
Chapter 22: Page 16

Figure in 000 s
DEFERRED TAXATION Description C Description Balance Land & buildings Balance 5,8 5.8 5.8 C 0 5.8
c) The companys cash management does not appear satisfactory. Cash from operating activities was negative (an amount of C603 000 after investment income, interest and tax), yet the company still paid out dividends of C250 000 to the ordinary shareholders during the year. These dividends appear to have been financed by the long term loan raised during the year, which is not good business practice. The companys gearing increased from 6% to 28% over the two years. Although the level is not excessive, the purpose for which the loan was used, namely to finance operations and pay dividends is concerning. Purchases of non-current assets only amounted to C331 000 after recoveries from sales, which means that C480 000 of the long term financing (borrowings plus share capital issued) financed the dividends and the shortfall from operations. There has been a substantial increase in inventory holdings in 20X7. This increase has not been accompanied by similar increases in accounts receivable and payable, which would appear to indicate excessive inventory holdings, tying up cash resources. The increase in accounts receivable has also been greater than the increase in accounts payable, which is further aggravating the cash outflow from operating activities. It appears from the above that the company needs to address its working capital management. It is also interesting to note that the provisional payments made for the year (C200 000) are very low in comparison to the previous years provision for tax (C470 000). This probably resulted in penalties being incurred, which were an unnecessary drain on resources.
Chapter 22: Page 17
Solution 22.7
SPENDEE LIMITED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 20Y0 20Y0 C 102 344 1 760 000 (1 561 856) 198 144 (20 000) (38 800) (37 000) (212 144) (183 644) 30 000 (58 500) 68 356 8 356 60 000 (41 444) 900 (40 544)
Cash effects of operating activities Cash receipts from customers (30+1750-20) Cash Payments to suppliers and employees W1 Cash generated from operations See part (b) Interest paid [39 800 - (DT: 45 000 37 000) + (Current tax Tax paid Dividends paid Cash effects of investing activities Plant purchased for expansion Proceeds from sale of machinery Development costs paid
payable: 19 000 12 000)] (12 000 + 30 000 5 000)
W3 or (300 000 75000 22000 + 15 000 400 000 1 644) (22 000 + 8 000)
W2
Cash effects of financing activities Proceeds from issue of debentures Proceeds from issue of ordinary shares (50 000 + 10 000) Net cash outflow Opening cash and cash equivalents Closing cash and cash equivalents
SPENDEE LIMITED NOTES TO THE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 20Y0 Non cash investing and financing activities Revaluation of land and buildings
C 15 000
b)
Reconciliation between cash generated from operations and profit before tax Profit before tax Add finance costs Less profit on sale of machinery Add depreciation on plant Add amortisation of development costs 70000/10*6/12 Add depreciation on equipment Increase in trade accounts payable Increase in inventories Decrease in accounts receivable 20Y0 C 106 000 20 000 (8 000) 75 000 3 500 1 644 198 144 10 000 (20 000) 10 000 198 144
Chapter 22: Page 18

Workings
W1
Accounts payable Description Balance C Description 1 402 Balance Inventory 52 1 454 1 454 1 462 C 42 1 412 Description Balance Accounts payable C 1 412 Balance 70 1 462
Figures in 000s
Inventory Description 50 COS C 1 392
Balance
Current tax payable Description Bank Balance C Description 38.8 Balance Tax expense 12 50.8 C 19 31.8 50.8 Description Balance
Deferred tax C Description 45 Balance Tax expense 45 C 37 8 45
Tax expense Description Balance Deferred tax Current tax payable C 0 8 31.8 Balance 39.8 39.8 39.8 Description C
Cash paid to suppliers and employees Cash paid to suppliers for goods for resale Cash paid for other operating expenses
C *1 402 000 159 856 1 561 856
(240 75 1.644 -3.5)
W2 Development costs A 20 000 50 000 70 000 3 500 66 500 B 30 000 8 500 38 500 38 500 Total 50 000 58 500 108 500 3 500 105 000
Opening balance Incurred during year Total Less amortisation /10*6/12 Closing balance
Chapter 22: Page 19

W3 Property, plant and equipment Opening balance Sale Revaluation of land Depreciation - plant Depreciation - equip Purchase of machinery Closing balance 300 000 given (22 000) given 15 000 given (75 000) given (1 644) given 183 644 balancing 400 000 given
Chapter 22: Page 20
Solution 22.8
BIG FOOT LIMITED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20X8
20X8
Cash effect of operating activities Cash receipts from customers Cash payments to suppliers and employees Cash generated from operations Interest paid Tax paid Dividends paid Cash effects of investing activities Expansion/ purchase of land and buildings Purchase of plant and machinery Sale of plant and machinery Development costs paid Cash effects of financing activities Proceeds from issue of shares Repayments of long-term loan Proceeds from raising of long-term loan Net cash in/ (out) flow Opening cash and cash equivalents Closing cash and cash equivalents
45 000 + 654 000 - 110 000 Balancing or W2 W1 9 000 + 17 000 - 4 500 [5 000 + (3 000 + 21 000 15 000) 12 000] 29 000 + 10 000 - 17 500
C (41 130) 589 000 585 130 3 870 (21 500) (2 000) (21 500) (283 834) (10 000) (249 700) 35 866 (60 000) 297 036 40 000 (80 000) 337 036 (27 928) 159 000 131 072
(320 000 - 300 000)/2 (312 964 + 15 866 + 20 222 + 10 648 110 000) 15 866+20 000
(32 000 X 1.25)
given
(527 036 260 000 + 80 000 10 000)
Chapter 22: Page 21

Workings
W1. Cash generated by operations Profit before tax Adjust for non-cash flow and separately disclosable items: Add interest expense Add depreciation Add write-down on plant and machinery Less profit on sale of P&M (100000+20000) x 6 / 24 Add amortisation of Dev Costs Adjust for changes in working capital Less increase in inventories Less increase in debtors Add increase in creditors Cash generated by operations 20X8 C 16 000 17 000 20 222 10 648 (20 000) 30 000 73 870 (40 000) (65 000) 35 000 3 870
(-120 000 + 80 000) (-110 000 + 45 000) (55 000 20 000)
W2 Cash payments to suppliers and employees: Payments to suppliers of goods for resale = Opening accounts payable + purchases closing accounts payable *Purchases = COS + CI - OI Operating expenses paid Operating expenses Non-cash items: Depreciation Write down on plant and machinery Amortisation of development costs Cash payments to suppliers and employees 299 000
(20 000 + 334 000* - 55 000) (294 000 + 120 000 80 000 = 334 000)
286 130 347 000 (20 222) (10 648) (30 000) 585 130
Chapter 22: Page 22
Solution 22.9 a)
SAURON STEEL EXTRACT FROM NOTES TO THE FINANCIAL STATEMENTS C Taxation expense Normal income tax Current tax o Current year o Over-provision in prior year Deferred normal tax Tax expense Tax rate reconciliation C Normal tax at applicable rate Exempt item: Dividend income [taxed @ 10% (5 000 x 20%)] Overprovision in prior year Income tax expense at effective rate 24 000 (1 000) (2 000) 22 375 % 30.0 (1.25) (2.5) 26.25 21 000 6 000 8 000 (2 000) 15 000 21 000
Deferred tax liability Revaluation surplus Plant Machinery 45 000 40 500 10 500 96 000
Chapter 22: Page 23
Solution 22.9 continued b)

SAURON STEEL LIMITED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20X2 Profit before tax +/- Non cash items Depreciation +/- Non operating items Dividends received Interest paid +/- Changes in working capital Increase in accounts receivable Decrease in inventories Decrease in accounts payable Cash generated from operations Dividends received Interest paid Normal tax paid Dividends paid Cash generated from operating activities Cash flows from investing activities Purchase of land and buildings Purchase of investments in listed companies Purchase of Machinery Cash flows from financing activities Issue of ordinary shares at a premium Movements in cash and cash equivalents for the year Balance in cash and cash equivalents at the beginning of the year Balance in cash and cash equivalents at the end of the year
(110 000 5 000)
80 000
(65 000+15 000+5 000)
85 000 115 000 (5 000) 120 000 95 625 (90 000) 145 000 (150 625) 184 375 5 000 (120 000) (13 000) (20 000) 36 375
(800 000 x 15%)
(300 000 - 55 000 - 100 000)
(7 000 2 000 + 8 000)
(50 000) (60 000) (20 000)
105 000 11 375
55 000 66 375
Chapter 22: Page 24
Solution 22.9 continued . . .

Workings
Depreciation and deferred tax Plant 01/01/X0 01/01/X0 31/12/X1 31/12/X1 01/01/X2 31/12/X2 Cost Depreciation / W&T Balance Revaluation Depreciation / W&T CA 600 000 (100 000) 500 000 150 000 (65 000) 585 000 65 000 TB 600 000 (200 000) 400 000 (100 000) 300 000 100 000 TD DT
100 000 150 000 35 000 285 000
30 000Cr 45 000Cr 10 500Cr 85 500Cr
Depreciation / W&T
Machinery 01/01/X0 31/12/X1 30/06/X2 31/12/X2 Cost Depreciation/ W&T Balance Acquisition Depreciation/ W&T (10 000 + 5 000) (20 000 + 10 000) CA 120 000 (20 000) 100 000 120 000 15 000 TB 120 000 (40 000) 80 000 120 000 30 000 TD DT
20 000 15 000
6 000Cr 4 500Cr
205 000 Depreciation / W&T Furniture Depreciation W&T Total depreciation / W&T 5 000 85 000 15 000
170 000 30 000
35 000
10 500Cr
5 000 135 000
Deferred tax Opening balance Revaluation Taxable TD on plant Taxable TD on machinery
36 000 45 000 10 500 4 500 96 000
Chapter 22: Page 25
Prior year tax Amount assessed Amount provided Over provision Amount assessed Amount paid Amount owing to taxation authorities
60 000 62 000 2 000 60 000 55 000 5 000
Tax calculation 20X2 Profit before tax Dividends received Temporary differences + depreciation - wear and tear Taxable profit Dividends (taxed @ 10%) 80 000 (5 000) 75 000 (50 000) 85 000 (135 000) 25 000 5 000
X 0.30 24 000 22 500 (15 000)

Dr TE Cr DT
7 500 500 8 000
Cr CTP
c)
Interest cover Interest cover measures the amount of times the profit exceeds the interest payment, and this provides information to lenders of money regarding the companys ability to repay interest from profits. The interest-cover of Sauron Steel Limited is calculated as follows: Interest cover = (80 000 + 120 000) / 120 000 = 1.67 This is a relatively healthy interest cover as the company does generate enough profits to cover its interest payments.
Chapter 22: Page 26

Chapter 22 - Gripping IFRS ICAP 2008 (Solution of Graded Questions)

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Chapter 22 - Gripping IFRS ICAP 2008 (Solution of Graded Questions)

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Solutions to Gripping IFRS : Graded Questions

Statement of cash flows

Kolitz & Sowden-Service, 2009

Chapter 22: Page 1

Solutions to Gripping IFRS : Graded Questions

Statement of cash flows

Kolitz & Sowden-Service, 2009

Chapter 22: Page 2

Solutions to Gripping IFRS : Graded Questions

Statement of cash flows

Solution 22.2 continued

400 000 Bank 3 000 000 Balance 3 400 000

1 976.5 Balance Inventory 250 2 226.5

Kolitz & Sowden-Service, 2009

Chapter 22: Page 3

Solutions to Gripping IFRS : Graded Questions

Statement of cash flows

Solution 22.2 continued

259 500 Balance (o/b) 2 000 Current tax 261 500

*Profit before tax: 650 000 x 40% = 260 000

Kolitz & Sowden-Service, 2009

Chapter 22: Page 4

Solutions to Gripping IFRS : Graded Questions

Statement of cash flows

(250 000 + 22 700) (625 000 - 250 000)

Kolitz & Sowden-Service, 2009

Chapter 22: Page 5

Solutions to Gripping IFRS : Graded Questions

Statement of cash flows

Solution 22.3 continued

70 000 12 450 108 000

(168 000 - 120 000 + 60 000)

Kolitz & Sowden-Service, 2009

Chapter 22: Page 6

Solutions to Gripping IFRS : Graded Questions

Statement of cash flows

Solution 22.3 continued

315 233 339 950

(108 000) 70 000 12 450 493 340 2 826 183

96 844 96 268 95 586 94 779 93 825 92 697

3 155 3 732 4 414 5 221 6 175 7 303

(500 000) + (100 000)

Effective interest rate = 18.2725377

Kolitz & Sowden-Service, 2009

Chapter 22: Page 7

Solutions to Gripping IFRS : Graded Questions

Statement of cash flows

Solution 22.3 continued

Return on equity (ROE)

Kolitz & Sowden-Service, 2009

Chapter 22: Page 8

Solutions to Gripping IFRS : Graded Questions

Statement of cash flows

Workings W1 Cash received from customers

^(55 500 37 500)

Kolitz & Sowden-Service, 2009

Chapter 22: Page 9

Solutions to Gripping IFRS : Graded Questions

Statement of cash flows

Solution 22.4 continued

Date 01/07/X2 30/06/X3 30/06/X4 30/06/X5

Interest 25 241 25 401 25 578

Dividend 24 000 24 000 24 000