Question

 

Consolidated statement of cash flows for the GM Group for the year ended 31 December 2019

 

Cash flows from operating activities	$000	$000
Profit before tax Adjust for: Depreciation Share of profit of associate Finance costs Changes in working capital: Decrease in inventories Decrease in receivables Increase in payables Cash generated from operations Less interest paid Less tax paid Net cash from operating activities	5,200 3,400 (900) 400 800 1,400             600 10,900 (200) (1,700)	9,000
Cash flows from investing activities
Acquisition of property, plant and equipment Acquisition of subsidiary, net of cash acquired (1,350 – 200) Dividend received from associate Net cash used in investing activities	(7,600) (1,150) 300	(8,450)
Cash flows from financing activities
Proceeds of share issue Dividend paid to shareholders of parent Dividend paid to non-controlling interest Net cash from financing activities	9,000 (2,150) (300)	9,550
Net increase in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December 2019		10,100          1,800 11,900

Required:

Analyse the consolidated statement of cash flows for the GM Group for the year ended 31 December 2019. In your elaboration please provide SEVEN main point to support your answer.

 

Answer 1

Based on the information contained in the table, it can be concluded that the company's cash balance has increased at the end of the year. This is indicated by the amount of "Net Increase in Cash and Cash Equivalents" of $10,100. The seven points that support this analysis are given as below:

1) A decrease in accounts receivable and inventory indicates that the company is able to convert its goods/services into cash quickly, thereby, causing an overall increase in the cash balance. The overall effect of this would be an increase in cash flow from operating activities.

2) An increase in payables indicates that the company is able to negotiate better terms with its creditors or is able to delay payments to its suppliers. This results in a delay in outflow of cash which would consequently help in either increasing or maintaining the cash balance at the same level. The overall effect of this would be an increase in cash flow from operating activities.

3) Depreciation is a non-cash expense. It is deducted while calculating the profit. Therefore, it is added back to the figure of profit before tax ($5,200) in the given case which would result in an increase in cash flow from operating activities.

4) Cash flow from investing activities has a negative figure because of investment in property, plant and equipment and acquisition of subsidiary. The only amount of cash inflow from investing activities is the dividend of $300 received from the associate. The overall effect of these three transactions would be a decrease in cash.

5) Any amount of proceeds realized from issue of shares/bonds is treated as a cash inflow from financing activity . This inflow would have a positive effect on the amount of cash balance. In the given case, the proceeds realized from share issue has resulted in an overall increase in net cash and cash equivalents by an amount of $9,000.

6) Any amount of dividend paid by the company is treated as a cash outflow from financing activity. Payment of dividends would result in a decrease in the amount of cash available with the company at the end of the year. in the given case, payment of dividends has caused a reduction in overall cash by an amount of $2,450 (2,150+300).

7) The total amount of net cash provided by operating ($9,000) and financing activities ($9,550) is greater than the net amount of cash used in investing activities ($8,450). This excess of $10,100 (9,000+9,550-8,450) has resulted in an increase in the cash balance at the end of the year.