Question

QUESTION FOUR                                                                                                                             [20]

The following cash flow statement of Friedrich Limited is presented to you:

Friedrich Limited

Cash flow statement for the year ended 31 June 2019

	R
Cash flow from operating activities	(255 000)
Operating loss	(280 000)
Adjustments
Depreciation	100 000
Profit before working capital changes	( 180 000)
Working capital changes	55 000
Increase in inventory	(200 000)
Increase in receivables	(175 000)
Increase/decrease in payables	?
Dividends paid	(60 000)
Interest paid	(70 000)
Cash flow from investing activities	(300 000)
Acquisition of plant and equipment	(300 000)
Cash flow from financing activities	450 000
Increase in long term loan (25%)	450 000
Net decrease/increase in cash	?
Cash balance (1 July 2018)	?
Cash balance (30 June 2019)	(160 000)

Required:

4.2.3 cash balance on 1 July 2018                                                                                         (2)

4.3       Based on the cash flow information provided above, discuss Friedrich Limited’s performance. Refer to at least five (5) items appearing on the cash flow statement within your discussion.

(5)

4.4       The long term loan was increased during the financial year. Explain whether or not this was a wise decision clearly stating your reasons.                                                                            (3)

4.5       Comment on the dividend policy of the company.                                                                 (2)

4.6       Suggest two ways in which the company can improve its liquidity.                                      (2)

Answer 1

FRIEDRICH LIMITED
CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST JUNE 2019
CASH FLOW FROM OPERATING ACTIVITIES (A+B+C+D)	-255000
OPERATING LOSS	-280000
ADJUSTMENTS
DEPRECIATION	100000
A.PROFIT BEFORE WORKING CAPITALCHANGES	-180000
B. WORKING CAPITAL CHANGES	55000
INCREASE IN INVENTORY	-200000
INCREASE IN RECEIVABLE	-175000
INCREASE IN PAYABLES (55000-(-200000-175000)	430000
C. DIVIDEND PAID	-60000
D.INTEREST PAID	-70000
CASH FLOW FROM INVESTING ACTIVITIES	-300000
ACQUIASITION OF PLANT AND EQUIPMENT	-300000
CASH FLOW FROM FINANCING ACTIVITIES	450000
INCREASE IN LONG TERM LOAN (25%)	450000
NET DECREASE IN CASH	-105000
ADD: CASH BALANCE 1ST JULY 2018	-55000
CASH BALANCE 30TH JUNE 2019	-160000

1. CALCULATION OF INCEREASE IN PAYABLES

To reconcile net income to cash flow from operating activities, add increases in current liabilities.

TOTAL CHANGES IN WORKING CAPITAL = 55000

OTHER ADJUSTMENTS ( INCREASE IN INVENORY INCREASE IN RECEIVABLE) = (-375000)

IN ORDER TO GET AMOUNT OF CURRENT LIABILITY CHANGES = 55000-(-375000) = 430000 HENCE ITS POSITIVE WHICH MEANS CURRENT LIABILIES INCREASE

2. CALCULATION OF NET DCERASE IN CASH

TOTAL OF OPERATING ACTIVITIES, INVESTING ACTIVITIES AND FINANCIAL ACTIVITIES

(-255000)+(-300000)+450000 = (-105000)

3. CALCULATION OF CASGH AT THE BEGINING

CASH AT THE END = DECEREASE IN CASH FLOW + CASH AT THE BEGINING HERE

(-160000) = (-105000) + CASH AT BEGINING

(-160000)+105000= (-55000)

The statement of cash flows is prepared by following these steps:

Step 1: Determine Net Cash Flows from Operating Activities

Using the indirect method, operating net cash flow is calculated as follows:

• Begin with net income from the income statement.
• Add back noncash expenses, such as depreciation, amortization, and depletion.
• Remove the effect of gains and/or losses from disposal of long-term assets, as cash from the disposal of long-term assets is shown under investing cash flows.
• Adjust for changes in current assets and liabilities to remove accruals from operating activities.
• INCREASE IN CURRENT ASSETS AND DECEREASE IN CURRENT LIABILITIES MUST BE DEDUCTED AND INCREASE IN CURRENT LIABILITIES AND DECERASE IN CURRENT ASSETS SHOUL BE ADDED

Step 2: Determine Net Cash Flows from Investing Activities

Investing net cash flow includes cash received and cash paid relating to long-term assets.

Step 3: Present Net Cash Flows from Financing Activities

Financing net cash flow includes cash received and cash paid relating to long-term liabilities and equity.

Step 4: Reconcile Total Net Cash Flows to Change in Cash Balance during the Period

To reconcile beginning and ending cash balances:

• The net cash flows from the first three steps are combined to be total net cash flow.
• The beginning cash balance is presented from the prior year balance sheet.
• Total net cash flow added to the beginning cash balance equals the ending cash balance.

Step 5: Present Noncash Investing and Financing Transactions

Transactions that do not affect cash but do affect long-term assets, long-term debt, and/or equity are disclosed, either as a notation at the bottom of the statement of cash flow, or in the notes to the financial statements