Question

Sigma plc’s income statement for the year ended 31 March 2020 and the statements of financial position as at 31 March 2019 and 2020 are provided below.

Income Statement for the year ended 31 March 2020
	£m
Revenue	600
Cost of Sales	(360)
Gross Profit	240
Administrative expenses	(90)
Distribution expenses	(60)
Operating Profit (PBIT)	90
Interest income	12
Interest expense	(36)
Profit before Tax	66
Taxation	(15)
Profit for the year	51

Statements of Financial Position as at 31 March:
	2019		2020
	£m		£m
Non-Current Assets
Property, Plant & Equipment (PPE)	600		648
Current Assets
Inventories	144		122
Trade Receivables	85		258
Bank	75		-
Total Current Assets	304		380
Total Assets	904		1,028
Equity
Ordinary Share Capital of £1 each	500		600
Share Premium	-		50
Retained Earnings	40		66
Total Equity	540		716
Non-Current Liabilities
Borrowings - loan notes	240		150
Current Liabilities
Trade payables	80		96
Bank	-		18
Interest payable	24		30
Taxation	20		18
Total Current Liabilities	124		162
Total Equity & Liabilities	904		1,028

Additional information for the year ended 31 March 2020 were as follows:

1. During the year, Sigma plc sold an item of plant for £25m. This item of plant was purchased several years ago for £50m and at the date of disposal, its accumulated depreciation amounted to £30m.
2. Sigma plc also purchased additional equipment to be used in its usual operations. The amount paid for the purchase was £120m.
3. Except for the above, there were no other non-current acquisitions or disposals. The company policy is to charge a full year’s depreciation in the year of acquisition and no depreciation on disposed assets in the year of disposal.   
4. A dividend of £25m was paid on ordinary shares during the year.
5. The interest income of £12m was equal to the actual cash inflow for the year.

REQUIRED

1. Prepare the statement of cash flows for the year-ended 31 March 2020 for Sigma plc using the indirect method.
2. Analyse and discuss Sigma plc’s statement of cash flows (prepared in part (a)) from a potential investor's perspective, highlighting any material items of interest or concern.   

Answer 1

(a)		For the year ended 31 March 2020
	Cash flows from operating activities
	Profit before tax	66
	Interest income	(12)
	Interest expenses	36
	Depreciation (Refer note 2)	52
	Capital Gain on disposal of PPE (Refer note 1)	(5)
		137
	Changes in assets and liabilities:
	(Increase)/ decrease in Accounts Receivable	(173)
	(Increase)/ decrease in Inventories	22
	Increase/ (decrease) in trade payable	16
	Cash generated/ (used) from operating activities	2
	Income tax paid (net)	(17)
	Net cash from/ (used) in operating activities (A)	(15)
	Cash flows from investing activities
	Purchase of property, plant and equipment	(120)
	Proceed from the sale of capital assets	25
	Interest received	12
	Net cash used in investing activities (B)	(83)
	Cash flows from financing activities
	Proceeds from issue of equity share capital (Refer note 3)	150
	Repayment from borrowings	(90)
	Dividend Paid	(25)
	Interest Paid (Refer note 4)	(30)
	Net cash flow from financing activities (C)	5
	Net increase/ (decrease) in cash and cash equivalents (A+B+C)	(93)
	Cash and cash equivalents at the beginning of the year	75
	Cash and cash equivalents at the end of the year	(18)
	Notes to Statement of cash flows:
	i. Cash and cash equivalents	As at 31 March 2020
	Components of cash and cash equivalents:-
	Cash on hand	-
	Balances with banks on current accounts	(18)
	Total cash and cash equivalents	(18)
	Notes :-
	Note 1:- Gain on disposal of PPE
	Purchase Cost	50
	Less :- Accumulated Depreciation	30
	WDV	20
	Sale Price	25
	Gain on disposal of PPE	5
	Note 2:- Depreciation
	Opening WDV	600
	Add:- Purchases/ Additions	120
	Less :- Disposal	20
		700
	Closing WDV	648
	Depreciation	52
	Note 2:- Proceeds from Issue of Equity Shares
	Closing Balance of Ordinary Share Capital	600
	Opening Balance of Ordinary Share Capital	500
		100
	Add :- Closing Balance of Share Premium	50
		150
	Note 4:- Interest Paid
	Opening balance of Interest Payable	24
	Closing balance of Interest Payable	(30)
	Interest Expense	36
	Interest Paid	(30)
	Note 5:- Income Tax Paid
	Income Tax Payable- Opening	20
	Income Tax Payable- Closing	(18)
	Income Tax Expenses	15
		(17)
(b)	From above Cashflow, it can be observed that there is negative cashflow from operating activities and Company needs to issue Equity Shares to meet the negative cashflow from operating activities mainly to meet income taxes paid and also Company's bank balance gone negative during the year ended March 31, 2020