Question

CASE STUDY Solve the case based on the following information: The comparative statements of financial position for Cactus Ltd, which is a merchandising business selling indoor plants, follows.

Cactus Ltd Comparative Statement of Financial Position As at 31 December 2019 and 2018

	2019	2018
Assets	€	€
Current assets:
Cash	195 800	15 000
Trade receivables	58 400	72 000
Inventory	59 800	53 000
Prepayments	2 300	5 000
Total current assets:	316 300	145 000
Non-current assets:
Land	65 500	90 000
Buildings and equipment	156 000	90 000
Less Accum. depreciation	(54 100) 101 900	(40 000) 50 000
Total property, plant and equipment	167 400	140 000
Long-term investments	0	36 400
Total non-current assets	167 400	176 400
Total assets	483 700	321 400

Liabilities and equity	2019	2018
Current liabilities:
Trade payables	49 400	28 000
Salary payable	20 000	18 500
Accruals	18 700	22 200
Total current liabilities	88 100	68 700
Non-current liabilities
Long-term notes payable	85 000	65 000
Bank loan payable	22 600	0
Total non-current liabilities	107 600	65 000
Total liabilities	195 700	133 700
Equity:
Ordinary share capital	150 000	100 000
Share premium	75 000	0
Retained profits	63 000	87 700
Total equity	288 000	187 700
Total liabilities and equity	483 700	321 400

The following data is also available for Cactus Ltd for the year ended 31 December 2019

€

Cost of sales 56,500

Depreciation expense 14,100

Other operating expenses 17,700

Loss on sale of investments 1,400

Gain on sale of land 7,200

Sales revenue 97,300

Interest revenue 4,100

Dividend revenue 3,600

Salary expense 24,000

Interest expense 5,900

Insurance expense 2,300

It is known in addition that:

• A building was purchased for €46,000 and paid for immediately.

• Equipment was purchased by signing a note payable for €20,000.

• A plot of land was sold, no new plots of land were purchased.

• Ordinary shares have the nominal value of €1 per share

Required:

1. Prepare the classified statement of profit or loss (i.e. show also gross profit and operating profit) for Cactus Ltd for the year ended 31 December 2019.

2. Find answers to the following questions: a) Did Cactus Ltd issue any new shares during 2019? If yes, how many shares were issued and how much did the share issue raise? b) Did Cactus Ltd take out any loans in 2019 (in addition to the note payable for the purchase of equipment)? c) Were any dividends paid? If yes, how much? d) How much cash was received from the sale of land? e) How much cash was received from the sale of investments?

3. Prepare the statement of cash flows for Cactus Ltd for the year ended 31 December 2019 in the indirect method.

4. Write your comments on the following aspects for Cactus Ltd. based on its performance in the year ended 31 December 2019: a) Bring out the main factors that have affected the profit or loss differently from the cash flows. b) Is the cash generated from operations sufficient to cover interest and dividends that have been paid? c) How were the investments in non-current assets financed? d) Calculate the level of gearing as at 31 December 2019 and as at 31 December 2018. Comment on how risky you consider the capital structure of Cactus Ltd. e) What recommendations would you like to give the company manager(s) for the following period(s)?

i Loss on sale of non-current assets (including financial assets, e.g. investments) will lower the profit for the year – this effect will have to be eliminated in the section of operating activities in the statement of cash flows as the full amount of cash received will have to be shown under investing activities.

ii Gain on sale of non-current assets (including financial assets, e.g. investments) will increase the profit for the year – this effect will have to be eliminated in the section of operating activities in the statement of cash flows as the full amount of cash received will have to be shown under investing activities.

Please provide your answer in several comments if the answers are going to be too wide. Thank you! And note: I have posted this question before but I could not understand his hand writing and I also noticed that he didnt provide me the answers what was asked so that is why I needed to post this again. Thank you in advance!

Answer 1

STATEMENT OF PROFIT AND LOSS

SALES REVENUE			97300
LESS COST OF GOODS SOLD		56500
GROSS PROFIT			40800
OTHER INCOME
INTEREST REVENUE		4100
DIVIDEND REVENUE		3600	7700
OPERATING EXPENSES
SALARY EXPENSE		24000
INTEREST EXPENSE		5900
INSURANCE EXPENSE	2300
DEPRECIATION		14100
OTHER OPERATING EXPENSES	17700	64000
NET LOSS BEFORE NON OPERATING ITEMS		-15500
GAIN ON SALE OF LAND		7200
LOSS ON SALE OF INVESTMENTS		-1400
NET LOSS				-9700

WORKING NOTES
CALCULATION OF AMOUNT RECEIVED ON SALE OF LAND
LAND OPENING	90000
LESS LAND CLOSING	65500
SALE OF LAND(COST PRICE)	24500
ADD GAIN ON SALE OF LAND	7200
SALE PROCEEDS OF LAND	31700
CALCULATION OF AMOUNT RECEIVED ON SALE OF INVESTMENTS
INVESTMENTS OPENING	36400
LESS CLOSING BALANCE OF INVESTMENTS	0
COST OF INVESTMENTS SOLD	36400
LESS LOSS ON SALE OF INVESTMENTS	1400
SALE PROCEEDS OF INVESTMENTS	35000
CALCULATION OF LONS ANY RAISED BESIDES NOTES ISSUED
BANK LOAN PAYABLE OPENING	0
BANK LOAN PAYABLE CLOSING	22600
BANK LOAN RAISED	22600
CALCULATION OF SHARES ISSUED DURING 2019
SHARE CAPITAL OPENING	100000
SHARE CAPITAL CLOSING	150000
INCREASE IN SHARE CAPITAL	50000
SHARE PREMIUM OPENING	0
SHARE PREMIUM CLOSING	75000
INCREASE IN SHARE PREMIUM	75000
AMOUNT COLLECTED THROUGH NEW ISSUE
INCREASE IN SHARE CAPITAL	50000
INCREASE IN SHARE PREMIUM	75000
		125000
FACE VALUE OF ONE SHARE 1 EURO
NUMBER OF SHARES ISSUED
50000/1		50000
PREMIUM PER SHARE
75000/50000	1.5
SHARE ISSUE PRICE
FACE VALUE PER SHARE	1
SHARE PREMIUM PER SHARE	1.5
TOTAL		2.5
CALCULATION OF DIVIDEND PAID DURING 2019
RETAINED PROFITS OPENING	87700
RETAINED PROFITS CLOSING	63000
DECREASE IN RETAINED PROFITS	24700
FALL IN RETAINED PROFITS DUE TO NET LOSS	9700
FALL IN RETAINED PROFITS DUE TO DIVIDEND PAID	15000

CASH FLOW STATEMENT
CASH FLOW FROM OPERATING ACTIVITIES
NET LOSS FOR THE YEAR	-9700
ADD NON CASH AND NON OPERATING EXPENSES
DEPRECIATION	14100
LOSS ON SALE OF INVESTMENTS	1400
ADD NON CASH AND NON OPERATING INCOME
PROFIT ON SALE OF LAND	-7200
OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES	-1400
LESS INCREASE IN CURRENT ASSETS
INVENTORY	-6800
ADD DECREASE IN CURRENT ASSETS
TRADE RECEIVABLES	13600
PREPAYMENTS	2700
ADD INCREASE IN CURRENT LIABILITIES
TRADE PAYABLES	21400
SALARY PAYABLE	1500
LESS DECREASE IN CURRENT LIABILITIES
ACCRUALS	-3500
NET CASH FLOW FROM OPERATING ACTIVITIES (A)	27500
CASH FLOWS FROM INVESTING ACTIVITIES
SALE OF LAND	31700
PURCHASE OF BUILDING	-46000
SALE OF INVESTMENTS	35000
NET CASH FLOWS FROM INVESTING ACTIVITIES (B)	20700
CASH FLOWS FROM FINANCING ACTIVITIES
CASH RAISED FROM SHARES ISSUE	125000
BANK LOANS RAISED	22600
DIVIDEND PAID	-15000
NET CASH FLOWS FROM FINANCING ACTIVITIES (C)	132600
NET CASH FLOWS FROM ALL ACTIVITIES(A)+(B)+©	180800
ADD OPENING CASH AND CASH EQUIVALENTS	15000
CLOSING CASH AND CASH EQUIVALENTS	195800