Question

The income statement and additional data of Bayleaf Pty Ltd are as follows:

Income statement for the year ended 31 December 2016

Revenue:

Service Revenue R225 000

Dividend Revenue R6 300 (231 300)

Expenses:

Cost of goods sold R100 000

Salary Expense R52 000

Depreciation Expense R23 000

Advertising Expense R2 300

Interest Expense R2 400

Income tax expense R5 000 (R184 700)

Net income R46 600

Additional Data:

a) Acquisition of PPE was R170 000. Of this amount , R140 000 was paid in cash and R30 000 by signing a note payable

b) Proceeds from the sale of land totalled R48 000

c) Proceeds from issuance of shares totalled R31 000

d) Payment of long-term note payable was R16 000

e) Payment of dividends was R10 000

From the Balance Sheet:

Balance sheet as at 31 December

Currents Assets 2016 2015

Cash R32 000 R13 300

Accounts Receivable R41 000 R57 000

Inventory R48 000 R87 000

Prepaid expenses R9 100 R8 200

Current Liabilities

Accounts Payable R32 000 R17 000

Accrued liabilities R14 000 R43 000

Required:

1. Prepare Bayleaf 's statement of cash flow for year ended 31 December 2016, using indirect Method.

2. Evaluate Bayleaf's cash flow for the year ended 31 December 2016, including its free cash flow and cash realization ratio. In your evaluation, review all three categories of cash flows and give the reason for your evaluation.

3. When analyzing the cash flow patterns of the Company, what other three (3) important indicators of the health of the company 's cash flows do you look at?

Answer 1

Cash Flow Statement of Bay Leaf - Indirect Method
Profit after Tax	46,600
Add: Provision for Tax	5,000
Add Non Cash/\non operating expenses
Depreciation Expense	23,000
Interest Expense	2,400
Less Non Cash/Non Operating Income
Dividend Revenue	(6,300)
Net Cash Operating Profit	70,700
Changes in Working Capital
Decrease in Accounts receivable	16,000
Decrease in Inventory	39,000
Increase in Prepaid Expenses	(900)
Increase in Accounts Payable	15,000
Decrease in Accrued Liablities	(40,000)
	29,100
Net Cash Flow from Operating Activity	99,800
Dividends Received	6,300
Proceeds from Sale of Land	48,000
Acquisation of PPE	(170,000)
Net Cash flow from Investing Activity	(115,700)
Proceeds from Issuance of Shares	31,000
Dividend Payment	(10,000)
Interest expense	(2,400)
Net cash flow for Notes Payable	16,000
Net Cash flow from Financing Activity	34,600
Total Cash flows	18,700
Add : Opening Cash flow	13,300
Net Closing Cash	32,000
Closing Cash and Cash Equivalents	32,000

Part B

Free cash flow is most often defined as operating cash flow minus capital expenditures, which, in analytical terms, are considered to be an essential outflow of funds to maintain a company's competitiveness and efficiency. Here FCF is 99800-170000 = 70200

cash-realization ratio is calculated by dividing cash flow from operating activities by net income. It measures how close a company's net income is to being realized in cash. Here the ratio would be 99800/46600 = 2.14

On the perusal of the CFS it is observed that company has good operating efficiency and financing activities. However, company made a big purchase of PPE which affected their investing section. Howerver inspite of that company was able to show a positive cash flows in the year

C) Other Three Important indicators are

Debt Equity Ratio

Interest Coverage Ratio

Capital Gearing Ratio